Management’s Discussion and Analysis and Financial Statements December 31, 2010 ONEX AND ITS OPERATING BUSINESSES Onex is a public company whose shares trade on the Toronto Stock Exchange under the symbol OCX. Onex’ businesses generate annual revenues of $36 billion, have assets of $42 billion and employ more than 238,000 people worldwide. The investment in The Warranty Group is split almost equally between Onex Partners I and II. The investment in Husky is split approximately 20%/80% between Onex Partners I and II, respectively. The investment in ResCare is split almost equally between Onex Partners I and III. Table of Contents 3 Management’s Discussion and Analysis IBC Shareholder Information 76 Consolidated Financial Statements CHAIRMAN’S LETTER Dear Shareholders, Though 2010 started much like 2009 ended, by mid-year we began to see signs of improvement across almost all of our operating businesses. That improvement continued through the third and fourth quarters, and has restored our optimism both for our existing businesses and the opportunities to acquire new businesses for Onex. While clear challenges still face the North American economy in sectors like housing (particularly in the United States), we once again marvel at the resilience of North American businesses, capital markets and their remarkable regenerative capability. Quite literally hit with everything, Canadians and Americans across the continent tightened their belts and withstood the storm. We’re proud that our operating businesses did their part as well. Not only perse- vering but in many cases also strengthening their competitive position. This was due to their tremendous efforts to manage costs while still investing in new technologies. The results are tangible – as you’ll see below our businesses grew their earnings, reduced debt and in some cases paid meaningful distributions to shareholders. We take this opportunity to thank our operating businesses and the more than 238,000 men and women who work for them. They have demonstrated remarkable leadership, confidence and creativity during a difficult time. We had a reasonably busy year in 2010 and would like to share some of the highlights: (cid:129) Onex Partners III acquired Tomkins, in partnership with Canada Pension Plan Investment Board, in a transaction valued at about US$5 billion. The Tomkins acquisition was the largest completed by any firm since the financial meltdown; (cid:129) Onex Partners III acquired the remaining interest in ResCare not owned by Onex Partners I; (cid:129) ONCAP II sold CSI Global Education for net proceeds of $126 million, of which Onex’ share was $50 million. Including prior amounts received, total proceeds were $146 million, generating an impressive 5.8 multiple on invested capital and a 57 percent gross IRR; (cid:129) We raised over $340 million for the new Onex Credit Partners Senior Credit Fund, our second publicly traded Canadian retail fund, and increased Onex Credit Partners’ assets under management by approximately 40 percent – demonstrating confidence in our credit team and its track record; (cid:129) The value of our private investments in the Onex Partners Funds, including distributions, increased 37 percent to US$2.1 billion in 2010; (cid:129) Our businesses retired approximately US$775 million of debt and distributed US$505 million as a result of strong cash flow generation; and (cid:129) Taking advantage of the improving capital markets, Onex’ operating businesses raised or refinanced approximately US$4.7 billion. Our operating businesses today are among the best we’ve ever owned. As well, with US$3.1 billion of third-party uncalled capital and our own $690 million of cash and cash-like investments, we’re well positioned to respond to interesting acquisition opportunities. As always, we remain debt-free. We work hard to build and maintain a culture that rewards curiosity and challenge of accepted wisdom. We encourage broad discussion among our investment professionals and hope that everyone speaks their mind – from our newest associate to our seasoned veterans. We all have a lot invested in Onex and in our operating businesses, and we want them to succeed and be the best in their markets. On behalf of the Onex team, thank you for your continued support. [signed] Gerald W. Schwartz Chairman & CEO, Onex Corporation Onex Corporation December 31, 2010 1 ONEX CORPORATION Over 26 Years of Successful Investing Founded in 1984, Onex is one of North America’s oldest and most successful investment firms committed to acquiring and building high-quality businesses. Onex has completed more than 290 acquisitions with a total value of approximately $49 billion. Employing a value-oriented and active ownership approach in acquiring and building industry-leading businesses in partnership with talented management teams, Onex has generated 3.6 times the capital it has invested and managed, and a 29 percent compound IRR on realized and publicly traded investments. Onex has an experienced management team and significant financial resources to continue to acquire and build businesses. Onex is in excellent financial condition, with ample cash on hand for new invest- ments and no debt at the parent company. As an investor first and foremost, Onex invests its $4.4 billion of proprietary capi- tal largely through its two private equity platforms: Onex Partners (for larger trans- actions) and ONCAP (for mid-market transactions). Onex also invests through Onex Real Estate Partners and Onex Credit Partners. Onex is entrusted with third-party capital from institutional investors from around the world. The Company currently man- ages approximately US$10.0 billion of in - vested and committed capital on behalf of its investors and partners. The manage- ment of third-party capital provides two significant benefits to Onex. First, Onex receives a committed stream of annual management fees on US$8.7 billion of cap ital, offsetting ongoing operating ex - penses. Second, Onex is entitled to a share of the profits on this capital, which is com- monly referred to as carried interest. Onex has received US$172 million of carried interest to the end of 2010. Further amounts of carried interest, if realized, could signifi- cantly enhance Onex’ investment returns. How Onex’ $4.4 billion of Capital is Deployed at December 31, 2010 Large-cap Private Equity 74% Private 57% Public 17% Cash and Near-cash Items 16% Mid-cap Private Equity 4% Onex Credit Partners 3% Onex Real Estate 3% Investments are valued at fair value as at December 31, 2010 with the exception of a limited number of Onex direct investments held at cost of $360 million. The Components of Onex’ US$10.0 billion of Third-Party Assets under Management at December 31, 2010 Onex Partners III 38% Onex Partners II 28% Onex Partners I 19% Onex Credit Partners 10% ONCAP 3% Other 2% 2 Onex Corporation December 31, 2010 Assets under management include capital managed on behalf of co-investors and Onex management. MANAGEMENT ’S DISCUSSION AND ANALYSIS Throughout this report, all amounts are in Cana dian dollars unless otherwise indicated. The Management’s Discussion and Analysis (“MD&A”) provides a review of how Onex Corporation (“Onex”) performed in 2010 and assesses future prospects. The financial condition and results of operations are analyzed, noting the significant factors that impacted 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 consolidated basis and should not be considered as providing sufficient information to make an investment or lending decision in regard to any particular Onex operating company. The following MD&A is the responsibility of management and is as of February 24, 2011. Preparation 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 Corporate Governance Committee, comprised exclusively of independent directors. The Audit and Corporate 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 10 13 13 40 45 54 63 68 69 71 Our Business, Our Objective and Our Strategies 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 2010 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 results preceded by, followed by or that include words such as “believes”, “expects”, “anticipates”, “estimates”, “intends”, “plans” and words of similar connotation, which would constitute forward-looking statements. Forward-looking statements are not guarantees of future performance. They involve risks and uncertainties that may cause actual performance or results to be materially different from those anticipated in these forward-looking statements. Onex is under no obligation to update any forward- looking statements contained herein should material facts change due to new information, future events or other factors. These cautionary statements expressly qualify all forward-looking statements in this MD&A. 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 performance because it eliminates interest charges, which are a function of the operating company’s particular financing structure, as well as any unusual or non-recurring charges. Onex’ method of determining operating earnings may differ from other companies’ methods and, accordingly, operating 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, 2010 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 OUR BUSINESS, OUR OBJECTIVE AND OUR STRATEGIES OUR BUSINESS: For over 26 years, Onex has employed a value-oriented and active ownership investment approach in acquiring and building industry-leading businesses. The Company has generated 3.6 times the capital it has invested and managed on realized and publicly traded invest- ments. Onex has generated a 29 percent rate of return on its investments over those same 26 years. Value-oriented active ownership approach Throughout our history, we have developed a value-oriented approach to acquiring, transforming and building high-quality businesses. We are disciplined investors with a focus on: (i) carve-outs of subsidiaries and mission-critical supply divisions from multinational corporations; (ii) operational restructurings; and (iii) build-ups in a wide variety of industries. We acquire high-quality businesses while employing prudent financial leverage and main- taining purchase price discipline. We focus on businesses with considerable cost-saving opportuni- ties to generate EBITDA growth as well as strong free-cash-flow characteristics to pay down debt. Our goal is to build market leaders and ultimately create value for our investors. Typically, Onex acquires 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 businesses. Experienced team with significant depth Onex’ investment team of professionals is led by nine Managing Directors with an average of 15 years of working together at the Company. Onex’ stability results from its ownership culture, rig- orous recruiting standards and highly collegial environment. The investment team is supported by professionals who are dedicated to the taxation, financial control, audit, legal and reporting matters of Onex, its Funds and their operating businesses. Substantial financial resources available for future growth Onex is in excellent financial condition with no debt and approximately $690 million of cash and near-cash items at December 31, 2010. In addition, we have US$3.1 billion of uncalled committed third-party capital in the Onex Partners and ONCAP Funds available for investment in Onex-sponsored acquisitions. 4 Onex Corporation December 31, 2010 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 Strong alignment of interests We believe in the alignment of interests among our various stakeholders, including Onex, its share- holders, the third-party limited partners and Onex management. The Company is the largest limited partner in each of its funds, which aligns Onex’ interests with those of its third-party investors. Onex’ distinctive ownership culture requires each member of the management team to have a significant ownership in Onex and to invest meaningfully in each operating business we acquire. Onex’ manage- ment team: (cid:129) Is the largest shareholder in Onex, with a combined holding of over 26 million shares or 22 percent; (cid:129) Invested approximately US$40 million in the transactions completed in 2010, bringing the total cash investment by Onex management in Onex’ current operating businesses to approximately US$230 million; and (cid:129) Is required to reinvest 25 percent of all gross carry and Management Investment Plan distributions into Onex shares until they individually have an ownership of at least one million shares and hold these shares until retirement. We believe that our superior track record is a direct result of this strong alignment. 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. Our strategies to deliver value to share - holders and partners are concentrated on investing and asset management. We believe that Onex has the operating philosophy, human resources, financial resources, track record and structure to continue to deliver on its objective. The discussion that follows outlines Onex’ strategies to achieve its objective and how we performed against those strategies during 2010. OUR STRATEGIES: INVESTING AND ASSET MANAGEMENT INVESTING: Acquire, build and grow high-quality businesses Our investing strategy focuses on our value-oriented and active ownership approach of acquiring and building industry-leading businesses in partnership with talented management teams. We also maintain Onex as a financially strong parent company to support our businesses. Onex Corporation December 31, 2010 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 2010 performance 1) Acquire attractive businesses The acquisition market can be divided into four sourcing segments: public-to-private transactions; corporate dispositions; bankruptcies and restructurings; and secondary sales from private equity firms. In 2010, Onex completed three acquisitions, all of which were public-to-private transactions, for a total equity investment of US$2.5 billion, of which Onex’ share was US$385 million. Company Tomkins ResCare Sector Fund Transaction Size ($ millions) Total Equity Invested (including Onex) ($ millions) Onex’ Equity ($ millions) Industrial Products Onex Partners III US$ 5,000 US$ 2,185 US$ 315 Healthcare Onex Partners III US$ 630 US$ 238 US$ 41(1) Sport Supply Group Sporting Goods Distribution ONCAP II US$ 200 US$ 92 US$ 29 Total US$ 2,515 US$ 385 (1) Includes Onex’ investment in ResCare made through Onex Partners I at its original cost. (cid:129) Onex, Onex Partners III and Onex management, in partnership with Canada Pension Plan Investment Board, acquired Tomkins plc in a transaction valued at approximately US$5.0 billion. Tomkins is an industrial company that operates a number of businesses serving the general industrial, auto motive and building products markets around the world. Annual revenues are US$4.9 billion. Onex, Onex Partners III, Onex management, certain limited partners and others invested US$1.2 billion in the equity of the business, of which Onex’ share was US$315 million. (cid:129) Onex, Onex Partners III and Onex management acquired all of the outstanding common shares of ResCare not owned at that time by Onex or its affiliates through a tender offer and mandatory share exchange at a price of US$13.25 per share. ResCare is a leading U.S. provider of residential, training, educational and support services for people with disabilities and special needs. Onex, Onex Partners III and Onex management invested US$120 million in the business, of which Onex’ portion was US$22 million. (cid:129) ONCAP II completed the acquisition of Sport Supply Group, a leading manufacturer and distribu- tor of sporting goods and branded team uniforms to the institutional and team sports market in the United States; Onex, ONCAP II and Onex management invested US$56 million in the equity of the business, of which Onex’ share was US$29 million. 6 Onex Corporation December 31, 2010 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 2) Build our businesses into industry leaders Today, most of Onex’ operating businesses are leaders in their respective industries. As the economic downturn that began in 2008 lingered globally in 2010, our businesses continued to face difficult operating environments and therefore remained focused on realigning their cost structures. The strong cash flow characteristics of our operating businesses enabled a number of them to complete follow-on acquisitions in 2010. Carestream Health, Celestica, Emer gency Medical Services, Skilled Healthcare Group, TMS International and RSI Home Products completed acquisi- tions collectively valued at approximately $370 million. We believe that our operating businesses have the management expertise, quality of products or services and financial capital to continue as industry leaders. By design, most of Onex’ operating businesses are conservatively capitalized. During 2010, a number of Onex operating businesses raised or refinanced a total of approximately US$4.7 billion of debt. In addition, several of our operating businesses paid down a total of approximately US$775 million of debt. This included Celestica, which repurchased all of its outstanding 2013 senior subordinated notes for US$232 million. Celestica is now debt-free. 3) Grow the value of our businesses The value of our private investments in the Onex Partners Funds, including distributions received, grew 37 percent to US$2.1 billion in 2010. These values are those reported to our third-party investors in the Onex Partners Funds. Our ONCAP Fund reported a 22 percent increase in value of its invest- ments to $184 million in 2010. The value growth of our private investments this year included US$505 million of distributions to shareholders, of which Onex’ share was US$140 million. This demonstrates the value that has been created. 4) Maintain substantial financial strength Onex’ financial strength comes from both its own capital, as well as that of its third-party limited partners in the Onex Partners Funds and ONCAP Funds. At December 31, 2010, Onex had: (cid:129) Approximately $690 million of cash and near-cash items and no debt. Our policy is to maintain a debt-free parent company and not guarantee the debt of our operating businesses. (cid:129) US$3.0 billion of third-party uncalled capital available for future Onex Partners investments. (cid:129) $90 million of third-party uncalled capital available for future ONCAP investments. Onex Corporation December 31, 2010 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 ASSET MANAGEMENT: Manage and grow third-party capital In addition to the $4.4 billion of Onex proprietary capital, we manage third-party capital, which provides value for Onex shareholders through management fees and the carried interest opportu- nity on this capital. We will grow assets under management where we believe we can leverage our investment philosophy and superior track record. ($ millions) At December 31 Funds Third-Party Capital Under Management Total Change in Total Fee Generating Uncalled Commitments 2010 2009 2010 2009 2010 2009 Onex Partners US$ 8,473 US$ 7,411 ONCAP II $ 312 $ 331 Onex Credit Partners US$ 995 US$ 564 14 % (6)% 76 % US$ 7,441 US$ 6,702 US$ 2,978 US$ 3,766 $ 276 $ 288 US$ 995 US$ 564 $ 90 n/a $ 127 n/a 2010 performance 1) Growth in third-party capital under management (cid:129) Onex Credit Partners, Onex’ credit investing platform, raised over $340 million of third-party capital through the initial public offering of OCP Senior Credit Fund (TSX: OSL.UN) during 2010. (cid:129) Early in 2011, ONCAP, Onex’ mid-market private equity platform, began fundraising for ONCAP III, with a target fund size of $700 million. As with each of its Funds, Onex will be the largest limited partner in ONCAP III. (cid:129) In our large-cap private equity platform, Onex is restricted in raising additional third-party capi- tal until such time that Onex Partners III is 75 percent invested. At December 31, 2010, Onex Partners III was 25 percent invested (US$1.1 billion). (cid:129) Subsequent to the closing, US$314 million of the equity of Tomkins held by the Onex investors and Canada Pension Plan Investment Board was sold to co-investors, a portion of which is subject to carried interest. 8 Onex Corporation December 31, 2010 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 2) Predictable and meaningful management fees (cid:129) Onex earned US$113 million in management and transaction fees in 2010. (cid:129) At December 31, 2010, there was approximately US$49 million of unrealized carried interest allocable to Onex based on the public companies held at market value in the Onex Partners I Fund. There is a further US$84 million of unrealized carried interest on its private businesses in the Onex Partners Funds based on the fair values determined at December 31, 2010. The ultimate amount of carried interest realized is dependent upon the performance of each Fund. 2010 performance Have value creation reflected in Onex’ share price Onex’ Subordinate Voting Shares closed 2010 at $30.23, a 28 percent increase from the end of 2009. This compares to an 18 percent increase in the Toronto Stock Exchange and an 11 percent increase in the Dow Jones Industrial Average. The improvement in the market value of certain of our public companies and the results of many of our private operating businesses, combined with investors’ growing appreciation of the value of our asset management activities, all contributed to the share price increase. Onex Corporation December 31, 2010 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, 2010, 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: 17.8 million Onex’ Economic/ Voting Ownership Onex Manages(a) – 8%(b)/71% Aerostructures Spirit AeroSystems, Inc. (NYSE: SPR), the world’s largest independent designer and 23% 6%(b)/74% 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 emergency medical services in the United States (website: www.emsc.net). 31% 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 radiology services (website: www.cdiradiology.com). 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). Onex shares held: 3.5 million Onex Partners I shares subject to a carried interest: 10.7 million Carestream Health, Inc., a global provider of medical and dental imaging and healthcare information technology solutions (website: www.carestream.com). Total Onex, Onex Partners II and Onex management investment at cost: $462 million (US$418 million), after a $59 million (US$53 million) return of capital Onex portion: $183 million (US$165 million) Onex Partners II portion subject to a carried interest: $292 million (US$266 million) 81% 19%/100% 40% 9%/89% 97% 38%/100% Res-Care, Inc. , a leading U.S. provider of residential, training, educational and support services for people with disabilities and special needs (website: www.rescare.com). 98% 20%/100% Total Onex, Onex Partners I, Onex Partners III and Onex management investment at cost: $237 million (US$204 million) Onex portion: $49 million (US$41 million) Onex Partners I portion subject to a carried interest: $83 million (US$61 million) Onex Partners III portion subject to a carried interest: $96 million (US$94 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. 10 Onex Corporation December 31, 2010 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). 92% 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). – 68%/88% Onex investment at cost: $340 million (US$251 million) TMS International Corp., a leading provider of outsourced industrial services to steel mills globally (website: www.tubecityims.com). 91% 36%/100% Total Onex, Onex Partners II and Onex management investment at cost: $277 million (US$235 million), after a $20 million (US$14 million) return of capital Onex portion: $109 million (US$93 million) Onex Partners II portion subject to a carried interest: $156 million (US$133 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%/–(b) Total Onex, Onex Partners II and Onex management investment at cost: $620 million (US$537 million) Onex portion: $244 million (US$212 million) Onex Partners II portion subject to a carried interest: $350 million (US$303 million) • Commercial Vehicles Allison Transmission, Inc. (b), the world leader in the design and manufacture of automatic transmissions for on-highway trucks and buses, off-highway equipment and military vehicles (website: www.allisontransmission.com). 49% 15%/–(b) 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) • Industrial Products Tomkins Limited(b), an engineering and manufacturing company that manufactures a variety of products for the industrial, automotive and building products markets worldwide (www.tomkins.co.uk). 56% 14%/50%(b) Total Onex, Onex Partners III, certain limited partners, Onex management and others investment at cost: $1,250 million (US$1,219 million) Onex portion: $323 million (US$315 million) Onex Partners III and others portion subject to a carried interest: $706 million (US$688 million) • Injection Molding Husky International 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: $527 million (US$524 million), after a $99 million (US$98 million) return of capital Onex portion: $191 million (US$189 million) Onex Partners I portion subject to a carried interest: $97 million (US$96 million) Onex Partners II portion subject to a carried interest: $278 million (US$276 million) (a) “Onex manages” represents the economic ownership collectively held by Onex and the third-party limited partners of the Onex Partners Funds. (b) Onex has certain contractual rights and protections, including the right to appoint members to the Board of Directors, in respect of these entities, which are equity-accounted investments in Onex’ audited annual consolidated financial statements. Onex Corporation December 31, 2010 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) • Gaming Companies Tropicana Las Vegas, Inc., located directly on the Las Vegas Strip, is one of the best-known casinos in Las Vegas (www.troplv.com). Total Onex, Onex Partners III and Onex management investment at cost: $270 million (US$250 million) Onex portion: $59 million (US$54 million) Onex Partners III portion subject to a carried interest: $190 million (US$176 million) Onex’ Economic/ Voting Ownership Onex Manages(a) 74% 16%/74% • Building Products 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). 50% 20%/50%(b) Total Onex, Onex Partners II and Onex management investment at original cost: $338 million (US$318 million) Onex portion: $82 million (US$78 million) Onex Partners II portion subject to a carried interest: $190 million (US$179 million) • Mid-cap Opportunities ONCAP, a private equity fund focused on acquiring and building the value of mid-capitalization companies based in North America (website: www.oncap.com). ONCAP II actively manages investments in EnGlobe Corp., Mister Car Wash, CiCi’s Pizza, Caliber Collision Centers and Sport Supply Group. Total Onex, ONCAP II and Onex management investment at cost: $298 million Onex portion: $136 million ONCAP II portion: $143 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: $288 million (US$273 million) (c) • Credit Securities Onex Credit Partners specializes in managing credit-related investments, including event-driven, long/short and market dislocation strategies. Onex investment in Onex Credit Partners’ funds at market: $254 million (US$255 million), of which $156 million (US$157 million) is in an Onex Credit Partners’ unleveraged senior secured loan portfolio that purchases assets with greater liquidity. – – – 46%/100% 86%/100% 60%(d)/50%(d) (a) “Onex manages” represents the economic ownership collectively held by Onex and the third-party limited partners of the Onex Partners Funds. (b) Onex has certain contractual rights and protections, including the right to appoint members to the Board of Directors, in respect of these entities, which are equity-accounted investments in Onex’ audited annual consolidated financial statements. (c) Investment at cost in Onex Real Estate excludes Onex’ investment in Town and Country properties as Town and Country has been substantially realized and has returned all of Onex’ invested capital. (d) This represents Onex’ share of the Onex Credit Partners’ platform. 12 Onex Corporation December 31, 2010 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, 2010 compared to those for the year ended December 31, 2009 and, in selected areas, to those for the year ended December 31, 2008. 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, 2010 and 2009 was recorded by the operating companies. Good - with Canadian generally accepted accounting principles will is not amortized, but is assessed for impairment at the (“GAAP”). The preparation of these financial statements in reporting unit level annually, or sooner if events or changes conformity with Canadian GAAP requires management of in circumstances or market conditions indicate that the Onex and management of the operating companies to carrying amount could exceed fair value. The test for good- make estimates and assumptions that affect the reported will impairment used by our operating companies is to amounts of assets and liabilities, disclosures of contingent assess the fair value of each reporting unit within an oper- assets and liabilities, and the reported amounts of rev- ating company and determine if the goodwill asso ciated enues and expenses for the period of the consolidated with that unit is less than its carrying value. This assess- financial statements. Significant accounting policies and ment takes into consideration several factors, including, methods used in the preparation of the financial state- but not limited to, future cash flows and market conditions. ments are described in note 1 to the December 31, 2010 If the fair value is determined to be lower than the carrying audited annual consolidated financial statements. Onex value at an individual reporting unit, then goodwill is and its operating companies evaluate their estimates and considered to be impaired and an impairment charge must assumptions on a regular basis based on historical expe - be recognized. Each operating company has developed its rience and other relevant factors. Included in Onex’ own internal valuation model to determine fair value. consolidated financial statements are estimates used in These models are subjective and require management of determining the allowance for doubtful accounts, inven- the particular operating company to exercise judgement tory valuation, the valuation of deferred taxes, intangible in making assumptions about future results, including assets and goodwill, the useful lives of property, plant and revenues, operating expenses, capital expenditures and equipment and intangible assets, revenue recognition discount rates. under contract accounting, pension and post-employment The impairment test for intangible assets and long- benefits, losses and loss adjustment expenses reserves, lived assets with limited lives is similar to that of goodwill. restructuring costs and other matters. Actual results could There were impairments in goodwill, intangible differ materially from those estimates and assumptions. assets and long-lived assets recorded by certain operating The assessment of goodwill, intangible assets and companies in 2010 and 2009. These are reviewed on page 36 long-lived assets for impairment, the determination of and in note 20 to the audited annual consolidated finan- income tax valuation allowances, contract accounting and cial statements. 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, 2010 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 analyses. These estimates are subject to the effects of An income tax valuation allowance is recorded against trends in loss severity and frequency and claims reporting future income tax assets when it is more likely than not patterns of The Warranty Group’s third-party adminis - that some portion or all of the future income tax assets rec- trators. While there is considerable variability inherent ognized will not be realized prior to their expiration. The in these estimates, management of The Warranty Group reversal of future income tax liabilities, projected future believes the reserves for losses and loss adjustment ex - taxable income, the character of income tax assets, tax penses are adequate and appropriate, and it continually planning strategies and changes in tax laws are some of the reviews and adjusts those reserves as necessary as experi- factors taken into consideration when determining the val- ence develops or new information becomes known. uation allowance. A change in these factors could affect the estimated valuation allowance and income tax expense. Note 13 to the audited annual consolidated financial state- ments provides additional disclosure on income taxes. Contract accounting Variability of results Onex’ audited annual consolidated operating results may vary substantially from year to year for a number of reasons, including some of the following: the current eco- nomic environment; acquisitions or dispositions of busi- The aerostructures segment recognizes revenue using nesses by Onex, the parent company; the volatility of the the contract method of accounting since a significant por- exchange rate between the Canadian dollar and certain tion of Spirit AeroSystems, Inc.’s (“Spirit AeroSystems”) foreign currencies, primarily the U.S. dollar; the change in revenues is under long-term volume-based contracts re - market value of stock-based compensation for both the quiring delivery of products over several years. Revenues parent company and its operating companies; changes in from each contract are recognized in accordance with the market value of Onex’ publicly traded operating com- the percentage-of-completion method of accounting, panies; changes in tax legislation or in the application of using the units-of-delivery method. As a result, contract tax legislation; and activities at Onex’ operating com - ac counting uses various estimating techniques to project panies. These activities may include the purchase or sale costs to completion and estimates of recoveries asserted of businesses; fluctuations in customer demand, mate- against the customer for changes in specifications. These rials and employee-related costs; changes in the mix of estimates involve assumptions of future events, including products and services produced or delivered; changes the quantity and timing of deliveries and labour perfor - in the financing of the business, impairments of good- mance and rates, as well as projections relative to material will, intangible assets or long-lived assets; litigation; and and overhead costs. Contract estimates are re-evaluated charges to restructure operations. periodically and changes in estimates are reflected in the current period. U.S. dollar to Canadian dollar exchange rate movement Since most of Onex’ operating companies report in U.S. Losses and loss adjustment expenses reserves dollars, the upward or downward movement of the U.S. The Warranty Group, Inc. (“The Warranty Group”) records dollar to Canadian dollar exchange rate for the year com- losses and loss adjustment expenses reserves, which repre- pared to last year will affect Onex’ reported consolidated sent the estimated ultimate net cost of all reported results of operations. During 2010, the average U.S. dollar and unreported losses on warranty contracts. The reserves to Canadian dollar exchange rate was 1.0301 Canadian for unpaid losses and loss adjustment expenses are esti- dollars, approximately 10 percent lower compared to mated using individual case-basis valuations and statistical 1.1415 Canadian dollars for 2009. 14 Onex Corporation December 31, 2010 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 Tropicana Las Vegas second rights offering Acquisition of Sport Supply Group In April 2010, Tropicana Las Vegas, Inc. (“Tropicana Las In March 2010, ONCAP II entered into an agreement Vegas”) completed a second rights offering of US$50 mil- with Sport Supply Group, Inc. (“Sport Supply Group”) to lion. Onex, Onex Partners III and Onex management in - acquire the company in a transaction valued at approxi- vested an additional US$45 million in Tropicana Las Vegas, mately US$200 million. Sport Supply Group is a leading of which Onex’ share was US$10 million. This was com- manufacturer and distributor of sporting goods and pleted through an issue of preferred shares that have branded team uniforms to the institutional and team sports sim ilar terms to the 2009 rights offering, accrue dividends market in the United States. This company was quoted on at a rate of 12.5 percent and are convertible into common the NASDAQ. On August 5, 2010, the acquisition was com- shares of Tropicana Las Vegas at a fixed ratio including pleted following approval by the common shareholders of accrued and unpaid dividends. After giving effect to the Sport Supply Group. Onex and ONCAP II invested approxi- offering, Onex, Onex Partners III and Onex management mately US$56 million of equity in this business, of which own, on an as-converted basis at December 31, 2010, Onex’ portion was US$29 million. Onex and ONCAP II have approximately 74 percent of Tropicana Las Vegas, of which a 62 percent equity ownership and 93 percent voting inter- Onex’ share was 16 percent. est in Sport Supply Group. The operations of Sport Supply Group have been consolidated from its acquisition date and Consolidation of Flushing Town Center reported in Onex’ other segment along with other current In the first quarter of 2010, a subsidiary of Onex became ONCAP II investments. the managing partner of Flushing Town Center, at which point Onex began consolidating its interest. Previously, Acquisition of Tomkins Onex accounted for its interest in Flushing Town Center In late September 2010, Onex, in partnership with Canada using the equity method. Flushing Town Center is a mixed- Pension Plan Investment Board (“CPPIB”), acquired Tomkins use development located in New York City. The development plc at a cash price of £3.25 per share for a total transaction is being constructed in two phases and will consist of value, including the assumption of debt, of approximately approximately 800,000 square feet of retail space, a 2,500- US$5.0 billion. Onex Partners III and CPPIB split equally space parking structure and approximately 1,100 condo- the initial equity investment of US$2.1 billion. Manage - minium units. Acquisitions and dispositions The following paragraphs describe the significant acquisi- tion and dispositions in 2010. ment of Tomkins also became investors in the business. The newly acquired business is operating as Tomkins Limited (“Tomkins”). Onex, Onex Partners III, Onex man- agement, certain limited partners and others invested approximately US$1.2 billion in the business. Onex’ por- tion of that investment was US$315 million. Onex, Onex Skilled Healthcare Group acquisition Partners III, Onex management, certain limited partners In May 2010, Skilled Healthcare Group, Inc. (“Skilled and others have a 56 percent economic interest and a Health care Group”) acquired five U.S. Medicare-certified 50 percent voting interest in Tomkins. The company is hospice companies and four U.S. Medicare-certified home accounted for on an equity basis in Onex’ audited annual health companies located in Arizona, Idaho, Montana and consolidated financial statements. Nevada. The total purchase price for these companies was Tomkins is an industrial company that operates US$63 million. Skilled Healthcare Group funded approxi- a number of businesses serving the general industrial, mately US$46 million in cash, of which US$30 million was automotive and building products markets around the drawn from the company’s term loan and the balance globe. Its well-known brands include Gates, the largest funded from its revolving credit facility. The remainder of global manufacturer of belts and hoses for the automotive the total purchase price was in the form of certain deferred and industrial aftermarkets; Schrader, the world’s largest and/or contingent payments payable over a three- to five- designer and manufacturer of remote tire pressure mon - year period. itoring systems; Titus and Hart & Cooley, the largest man - ufacturers of grilles, registers and diffusers serving the Onex Corporation December 31, 2010 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 North American commercial and residential construction ONCAP II sale of CSI Global Education industries; and Ruskin, the largest manufacturer of In November 2010, ONCAP II sold its operating company, dampers and louvres for the North American commercial CSI Global Education, Inc. (“CSI”). ONCAP II received construction industry. Carestream Health acquisition net proceeds of $126 million on this sale, of which Onex’ share was $50 million. This brings total proceeds from CSI to $146 million compared to ONCAP II’s $25 million In September 2010, Carestream Health, Inc. (“Carestream investment made in 2006. Included in Onex’ audited Health”) acquired Quantum Medical Imaging, LLC, a manu- annual consolidated results is a pre-tax gain of approxi- facturer of high-quality digital and conventional x-ray sys- mately $88 million recorded in the fourth quarter of 2010, tems used by hospitals, imaging centres and health clinics. of which Onex’ share was $40 million. The total purchase price was US$99 million. With this acqui- sition, Carestream Health expanded its x-ray imaging, pro- viding a broad portfolio of conventional and digital x-ray systems for healthcare providers worldwide. Carestream Review of December 31, 2010 Consolidated Financial Statements The discussions that follow identify those material factors Health funded the entire purchase in cash. that affected Onex’ operating segments and Onex’ audited Onex Partners III acquisition of remaining interest in ResCare In mid-November 2010, Onex, Onex Partners III and Onex annual consolidated results for 2010. We will review the major line items to the consolidated financial statements by segment. management acquired the outstanding common shares of Res-Care, Inc. (“ResCare”) not currently owned by Consolidated revenues and cost of sales Consolidated revenues were $24.4 billion in 2010, down Onex, Onex Partners I and Onex management through 2 percent from $24.8 billion in 2009 and down 9 percent a tender offer and mandatory share exchange at a price of from $26.9 billion in 2008. Consolidated cost of sales was US$13.25 per share. Onex, Onex Partners III and Onex $19.3 billion in 2010, a decrease management’s investment was US$120 million, of which of 1 percent from $19.5 billion Onex’ portion was US$22 million. Following this trans - in 2009 and down 11 percent action, Onex began to consolidate ResCare, which it pre - from $21.7 billion in 2008. viously accounted for on an equity basis. At December 31, The reported revenues 2010, Onex held a 20 percent economic interest and a and cost of sales of Onex’ U.S.- 100 percent voting interest in ResCare. based operating companies ResCare is a leading U.S. provider of in-home in Canadian dollars may not care, job training and education support services to indi- re flect the true nature of the viduals with developmental and intellectual disabilities. In operating results of those oper- June 2004, Onex, Onex Partners I and Onex management ating companies due to the acquired a 25 percent interest in ResCare for US$84 mil- translation of those amounts T O TA L R E V E N U E S A N D C O S T O F S A L E S ($ millions) 26,881 21,719 24,366 24,831 19,258 19,468 lion, or US$9.86 per share. and the associated fluctuation of the U.S. dollar to Can adian dollar ex change rate. 10 09 08 Revenues Cost of Sales 16 Onex Corporation December 31, 2010 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S In table 1 below, revenues and cost of sales by industry segment are presented in Canadian dollars as well as in the functional currency of the companies for the years ended December 31, 2010, 2009 and 2008. The percentage change in revenues and cost of sales in Canadian dollars and in the functional currency of the companies for these pe riods is also shown. The discussions of revenues and cost of sales by industry segment that follow are in the companies’ functional currencies in order to eliminate the impact of foreign currency translation on those revenues and cost of sales. Revenues and Cost of Sales by Industry Segment for the Years Ended December 31, 2010 and 2009 Revenues TABLE 1 ($ millions) Canadian Dollars Functional Currency Year ended December 31 2010 2009 Change (%) 2010 2009 Change (%) Electronics Manufacturing Services $ 6,717 $ 6,909 Aerostructures Healthcare Financial Services Customer Support Services Metal Services Other (a) Total 4,293 6,548 1,199 1,381 2,091 2,137 4,641 6,590 1,359 1,780 1,472 2,080 $ 24,366 $ 24,831 (3)% (7)% (1)% (12)% (22)% 42 % 3 % (2)% US$ 6,526 US$ 4,170 US$ 6,364 US$ 1,163 US$ 1,340 US$ 2,030 C$ 2,137 US$ 6,092 US$ 4,080 US$ 5,795 US$ 1,192 US$ 1,559 US$ 1,298 C$ 2,080 7 % 2 % 10 % (2)% (14)% 56 % 3 % Cost of Sales ($ millions) Canadian Dollars Functional Currency Year ended December 31 2010 2009 Change (%) 2010 2009 Change (%) Electronics Manufacturing Services $ 6,173 $ 6,319 Aerostructures Healthcare Financial Services Customer Support Services Metal Services Other (a) Total 3,578 4,866 563 882 1,914 1,282 3,946 4,766 656 1,140 1,329 1,312 $ 19,258 $ 19,468 (2)% (9)% 2 % (14)% (23)% 44 % (2)% (1)% US$ 5,997 US$ 3,475 US$ 4,730 US$ 546 US$ 856 US$ 1,858 C$ 1,282 US$ 5,572 US$ 3,474 US$ 4,188 US$ 574 US$ 999 US$ 1,173 C$ 1,312 8 % – 13 % (5)% (14)% 58 % (2)% Results are reported in accordance with Canadian generally accepted accounting principles. These results may differ from those reported by the individual operating companies. (a) 2010 other includes Flushing Town Center, Husky, Tropicana Las Vegas, ONCAP II and the parent company. 2009 other includes CEI (up to May 2009), Husky, Tropicana Las Vegas, ONCAP II and the parent company. Onex Corporation December 31, 2010 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 TABLE 1 ($ millions) Canadian Dollars Functional Currency Year ended December 31 2009 2008 Change (%) 2009 2008 Change (%) Revenues 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 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)% (16)% 17 % 7 % (2)% (4)% (53)% (5)% (8)% Cost of Sales ($ 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. Electronics Manufacturing Services Celestica Inc. (“Celestica”) delivers innovative supply chain pared to 2009. Par tially offsetting E L E C T R O N I C S these increases was a 10 percent M A N U FA C T U R I N G S E R V I C E S (US$ millions) solutions to original equipment manufacturers in the con- decline in revenues in Celestica’s sumer, enterprise computing, communications, industrial, telecom mu nications end market, aerospace and defence, healthcare and green technology driven pri marily by de clines in markets. These solutions include design, manufacturing, demand and program losses. In 7,678 7,061 6,526 5,997 6,092 5,572 engineering, order ful fillment, logistics and aftermarket addition, Celestica’s consumer services. During 2010, Celes tica reported a 7 percent, or end market decreased US$30 mil- US$434 million, increase in revenues from 2009. Celestica’s lion, or 2 percent, due primarily revenue growth in 2010 was in the following end markets: to the dis engagement of a pro- servers (18 percent); industrial, aerospace and defence, gram in the gaming console busi- and health care (18 percent); enterprise communications ness, which more than offset the (16 percent); and storage (12 percent). These increases were increased revenues from new pro- pri mar ily from new program wins and increased demand gram wins in that end market. resulting from an improving economic environment com- 10 09 08 Revenues Cost of Sales 18 Onex Corporation December 31, 2010 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 had a similar increase of 8 percent, Spirit AeroSystems’ revenues were up 2 percent, or US$425 million in 2010. Gross profit for the year ended or US$90 million, in 2010. Much of this increase was due to December 31, 2010 increased US$9 million from 2009. a 3 percent increase in ship set deliveries to Boeing, pri- Gross margin as a percentage of revenues decreased marily for the Boeing B737 and B787, compared to 2009. slightly to 8 percent in 2010 (2009 – 9 percent) due primar - Partially offsetting the revenue increase were: (i) lower ily to changes in product mix and higher variable compen- revenues from Spirit Europe (US$8 million) due to the sation costs. strength ening of the U.S. dollar relative to the euro; During 2009, Celestica reported a 21 percent, or and (ii) lower volume-based pricing adjustments in 2010 US$1.6 billion, decline in revenue compared to 2008. This (US$5 million) compared to 2009 (US$38 million). Vol - was driven by the slower economic environment in 2009 ume-based pricing adjustments are recorded in revenues compared to 2008, which resulted in lower production vol- to adjust the pricing of ship sets depending on the total umes in all of Celestica’s end markets. Celestica’s revenue number of ship sets delivered in a given year. Approxi - and operating results vary from year to year depending on mately 94 percent of 2010 revenues were from Boeing the level of demand and seasonality in each of its end mar- and Airbus. kets, the mix and complexity of the products being manu- Cost of sales was up factured, as well as the impact associated with program US$1 million in 2010 from last A E R O S T R U C T U R E S (US$ millions) wins or losses with new, existing or disengaging customers, year. Cost of sales as a percentage 4,170 4,080 among other factors. of revenues was 83 percent in 2010 Cost of sales declined 21 percent, or US$1.5 bil- compared to 85 percent in 2009. lion, in 2009 compared to 2008. This is consistent with The improvement in cost of sales the decline in rev enues. Gross profit for 2009 declined as a percentage of revenues was 16 percent to US$520 million (2008 – US$617 million). substantially due to US$104 mil- However, gross margin as a percentage of revenues lion of unusual charges recorded improved in 2009 compared to 2008 due primarily to in 2009 primarily related to a 3,475 3,474 3,772 3,055 continued operational improvements. Aerostructures Spirit AeroSystems is an aircraft parts designer and man- forward loss charge on the com- pany’s Gulfstream G-250 contract, including unfavourable cumu- lative catch-up adjustments of 10 09 08 Revenues Cost of Sales ufacturer of commercial aerostructures. Aero structures US$59 million on program costs. are structural com ponents, such as fuselages, propulsion During 2009, Spirit AeroSystems’ revenues were systems and wing systems, for commercial, military and up 8 percent, or US$308 million, from 2008. The increase business jet aircraft. The company’s revenues are pri - was primarily attributable to increased ship set deliveries marily derived from long-term volume-based pricing for large commercial aircraft, driven by reduced deliveries contracts, primarily with Boeing and Airbus. The long- in 2008 that resulted from a strike at Boeing. Ship set deliv- term financial health of the commercial airline industry eries to Boeing were up 13 percent in 2009 over 2008. Ship has a direct and significant effect on Spirit AeroSystems’ set deliveries to Airbus were up 10 percent in 2009 over commercial aircraft programs. The global industry rev- 2008. Approximately 96 percent of 2009 revenues were enue rebounded sharply in 2010 for both passenger air from Boeing and Airbus. traffic and cargo freight, after a significant contraction in Cost of sales, however, was up 14 percent, or 2008 and 2009. US$419 million, in 2009 compared to 2008. A significant portion of the increase was due to the higher sales volume. In addition, there were certain unusual charges, as dis- cussed above. Onex Corporation December 31, 2010 19 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Healthcare The healthcare segment revenues and cost of sales Table 2 provides rev- enues and cost of sales by oper - H E A LT H C A R E (US$ millions) consist of the operations of Emer gency Medical Services ating company in the healthcare 6,364 Cor poration (“EMSC”), Center for Diag nos tic Imaging, segment for the years ended De - 5,795 5,758 Inc. (“CDI”), Skilled Healthcare Group and Carestream cember 31, 2010, 2009 and 2008 Health. During the fourth quarter of 2010, Onex began to in both Canadian dollars and the consolidate ResCare, which was previously accounted companies’ functional currencies. for on an equity basis, following the acquisition of a con- The results of ResCare are con - trolling ownership interest in the business in November solidated for the period from 2010. The healthcare segment reported a 10 percent, or No vem ber 16, 2010, the date when 4,730 4,188 4,219 US$569 million, increase in consolidated revenues in 2010 from 2009. Cost of sales increased 13 percent, or US$542 million, in 2010 compared to last year. Onex, Onex Partners III and Onex management acquired the re - maining interest in the business, to December 31, 2010. Res Care’s results prior to this date were accounted for on an equity basis. 10 09 08 Revenues Cost of Sales Healthcare Revenues and Cost of Sales for the Years Ended December 31, 2010 and 2009 Revenues TABLE 2 ($ millions) Canadian Dollars Functional Currency Year ended December 31 2010 2009 Change (%) 2010 2009 Change (%) Emergency Medical Services $ 2,945 $ 2,928 Center for Diagnostic Imaging Skilled Healthcare Group Carestream Health ResCare(a) 148 845 2,412 198 160 868 2,634 – Total $ 6,548 $ 6,590 1 % (8)% (3)% (8)% – (1)% US$ 2,860 US$ 143 US$ 820 US$ 2,344 US$ 197 US$ 2,570 US$ 141 US$ 760 US$ 2,324 US$ – US$ 6,364 US$ 5,795 11 % 1 % 8 % 1 % – 10 % Cost of Sales ($ millions) Canadian Dollars Functional Currency Year ended December 31 2010 2009 Change (%) 2010 2009 Change (%) Emergency Medical Services $ 2,545 $ 2,530 Center for Diagnostic Imaging Skilled Healthcare Group Carestream Health ResCare(a) 46 697 1,403 175 52 728 1,456 – Total $ 4,866 $ 4,766 1 % (12)% (4)% (4)% – 2 % US$ 2,470 US$ 45 US$ 677 US$ 1,363 US$ 175 US$ 2,220 US$ 46 US$ 639 US$ 1,283 US$ – US$ 4,730 US$ 4,188 11 % (2)% 6 % 6 % – 13 % Results are reported in accordance with Canadian generally accepted accounting principles. These results may differ from those reported by the individual operating companies. (a) ResCare’s financial results are from the date when Onex, Onex Partners III and Onex management acquired the remaining interest in the business (November 16, 2010 to December 31, 2010). 20 Onex Corporation December 31, 2010 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, 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 Group Carestream Health 160 868 2,634 144 784 2,650 Total $ 6,590 $ 6,152 14 % 11 % 11 % (1)% 7 % US$ 2,570 US$ 141 US$ 760 US$ 2,324 US$ 2,410 US$ 135 US$ 733 US$ 2,480 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 Group Carestream Health 52 728 1,456 48 638 1,583 Total $ 4,766 $ 4,504 13 % 8 % 14 % (8)% 6 % US$ 2,220 US$ 46 US$ 639 US$ 1,283 US$ 2,094 US$ 44 US$ 597 US$ 1,484 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. Emergency Medical Services During 2010, EMSC’s revenues increased EMSC is the leading provider of emergency medical ser - US$290 million, or 11 percent, from 2009. EmCare gener- vices in the United States. The company operates its busi- ated 87 percent, or US$253 million, of the revenue growth ness and markets its services under the American Medical due primarily to an increase in patient visits from net new Response (“AMR”) and EmCare brands. AMR provides hospital contracts and net revenue increases in existing ambulance transport services and EmCare provides out- contracts. AMR generated 13 percent, or US$37 million, sourced hospital emergency department staffing and management services, as well as facility-based services of the revenue growth in 2010 due primarily to a 3 percent increase in net revenue per weighted transport. Net revenue for hospitalist/inpatient, radiology and anesthesiology per weighted transport increased due to rate in creases and depart ments. EMSC’s operating results are affected by growth in AMR’s managed transportation business. Cost of the number of patients the company treats and transports, sales at EMSC grew 11 percent, or US$250 million, in 2010 as well as by the costs incurred to provide the necessary compared to 2009, consistent with the revenue growth care and transportation for each patient. In addition, in the year. AMR’s results may be affected year-over-year by revenues During 2009, revenues at EMSC were up generated under the company’s Federal Emergency Man - US$160 million, or 7 percent, from 2008. EmCare reported agement Agency (“FEMA”) national contract. This contract US$218 million of revenue growth due primarily to 53 net provides ambulance, para-transit, and rotary and fixed- new hospital contracts as well as higher patient visits to wing ambulance transportation services to supplement hospitals with existing contracts. During the second half federal and military responses to disasters, acts of terror- of 2009, part of the increase in volume of patient visits ism and other public health emergencies. to hospitals year-over-year was driven by the H1N1 flu Onex Corporation December 31, 2010 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 pandemic. Partially offsetting EmCare’s revenue growth managed care providers, insurers, private pay and other was lower reported revenues at AMR of US$58 million. services, while revenues from its assisted living facilities Much of the decline year-over-year at AMR was due to a are generated primarily from private pay sources, with a comparatively higher level of revenues earned from the small portion earned from Medicaid or other state-specific company’s FEMA contract in 2008 (US$107 million). programs. To increase its revenues, Skilled Healthcare Excluding the impact of the 2008 FEMA hurricane revenues, Group focuses on acquiring new facilities, developing AMR reported a 7 percent, or US$82 million, in crease in net existing facilities and improving its occupancy rate and revenues per weighted transport from in creased reimburse- skilled mix, which is the percentage of its skilled nursing ment rates that became effective January 1, 2009 and patient population that typically require a greater level of growth in the company’s managed transportation business. care and service and thus command higher fees. Cost of sales was up 6 percent, or US$126 million, During 2010, Skilled Healthcare Group reported in 2009 from 2008. This was in line with the growth in rev- an 8 percent, or US$60 million, increase in revenues. enues in 2009. Cost of sales as a percentage of revenues Revenues from the long-term care services segment were was 86 percent in 2009 (2008 – 87 percent). up 4 percent, or US$28 million, primarily from acquisitions Center for Diagnostic Imaging completed in 2010 and 2009 (US$14 million), as well as US$17 million in revenues from higher weighted average CDI operates 57 diagnostic imaging centres in 12 markets per patient day rate from Medicare, Medicaid and man- in the United States, providing imaging services such as aged care pay sources. Partially offsetting these increases magnetic resonance imaging (“MRI”), computed tomogra- was a US$3 million decrease due to a decline in occupancy phy (“CT”), diagnostic and therapeutic injection proce- rates. Hospice and home health services revenues were dures and other procedures such as PET/CT, conventional up 256 percent, or US$33 million, in 2010 due primarily to x-ray, mammography and ultrasound. Skilled Healthcare Group’s acquisition of five U.S. Medi - During 2010, CDI reported a 1 percent, or care-certified hospice companies and four U.S. Medicare- US$2 million, increase in revenues compared to last year, certified home health companies located in Arizona, Idaho, due primarily to higher revenues from existing centres Montana and Nevada in May 2010. Cost of sales at Skilled and new centres. Cost of sales decreased 2 percent, or Healthcare Group had a similar increase of 6 percent, US$1 million, in 2010. or US$38 million, in 2010 from 2009, driven primarily by CDI reported a 4 percent, or US$6 million, in crease higher revenues in the year. in revenues in 2009 from 2008 due primarily to higher rev- Skilled Healthcare Group’s revenues grew 4 per- enues from existing centres and new centres acquired in cent, or US$27 million, in 2009 compared to 2008, due 2008. Cost of sales increased 3 percent, or US$2 million, in primarily to the US$24 million growth in revenues from 2009, which was slightly lower than revenues. the long-term care services resulting primarily from higher Skilled Healthcare Group rates from Medicare, Medicaid and managed care pay sources, as well as revenues from acquisitions completed Skilled Healthcare Group has three reportable revenue in 2008. Partially offsetting these increases was the effect segments: long-term care services, therapy services and of a decline in occupancy. hospice and home health services. Long-term care ser - During 2009, cost of sales at Skilled Healthcare vices include the operation of skilled nursing and assisted Group increased 7 percent, or US$42 million, from 2008. living facilities. Therapy services include the company’s This compared to a 4 percent increase in revenues in the rehabilitation services. Hospice and home health services year. Included in cost of sales for 2009 was a one-time include hospice and home health businesses. charge of US$14 million associated with a restatement During 2010, approximately 82 percent of Skilled from prior periods of the company’s reserves for accounts Healthcare Group’s revenues were generated from skilled receivable. The net after-tax effect of this charge was nursing facilities, including integrated rehabilitation ther- US$8 million. Excluding that one-time charge, cost of sales apy services at these facilities. Revenues from its skilled was up 5 percent, slightly above the increase in revenue. nursing facilities are generated from Medicare, Medicaid, 22 Onex Corporation December 31, 2010 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Carestream Health and dental imaging procedures to digital technologies, Carestream Health provides products and services for the compounded by the movement in foreign exchange rates capture, processing, viewing, sharing, printing and storing on revenues from outside the United States. The decline of images and information for medical and dental applica- in Medical Film and Printing Solutions was 13 percent, tions. The company also has a non-destructive testing or US$167 million, while Dental declined 1 percent, business, which sells x-ray film and digital radiology prod- or US$5 million. Included in the revenue decline was ucts to the non-destructive testing market. Carestream US$62 mil lion due to lower foreign exchange rates on its Health sells digital products, including printers and non-U.S.-dollar-denominated revenues compared to 2008, media, computed radiography and digital radiography with most of that decline from a weakening of the euro. equipment, picture archiving and communication sys- Partially offsetting the revenue decline in the Medical tems, information management solutions, dental practice Film and Printing Solutions and Dental segments was a management software and services, as well as traditional US$20 million increase in revenues from the Digital Med - medical products, including x-ray film, equipment, chem- ical Solutions segment due to new product launches in istry and services. Carestream Health has three reportable 2009, as well as the shift from traditional film business as segments: Medical Film and Printing Solutions, Dental previously discussed. and Digital Medical Solutions. Cost of sales was down 14 percent, or US$201 mil- During 2010, revenues at Carestream Health in - lion, in 2009 compared to 2008, a greater percentage than creased 1 percent, or US$20 million, from 2009. The revenue the decline in revenue in 2009. Gross profit in 2009 was up growth was primarily from: (i) higher product sales in the slightly to US$1,041 million (2008 – US$996 million) due to Digital Medical Solutions segment of US$53 million driven the favourable impact of lower materials cost, primarily primarily by new products launched in late 2009; and silver and polyester, and increased productivity across (ii) growth in the Dental segment of US$31 million driven by Carestream Health’s businesses. the digital business. Partially offsetting the growth in these segments was the anticipated revenue decline in the Medi - ResCare cal Film and Printing Solutions segment of US$64 million ResCare is a human service company that provides residen- due to lower volumes. In addition, included in the revenue tial, therapeutic, job training and educational support to increases was approximately US$13 million from favourable people with developmental or other disabilities, to elderly foreign exchange rates on its non-U.S.-dollar-denominated people who need in-home care assistance, to youth with revenues compared to 2009. special needs and to adults who are experiencing barriers to Cost of sales was up 6 percent, or US$80 mil- employment. ResCare offers services to some 60,000 persons lion, in 2010 compared to 2009. Gross profit in 2010 was daily in 41 states, Washington, D.C., Puerto Rico, Canada and US$981 million compared to US$1,041 million in 2009. certain international locations in Europe. ResCare operates Gross profit decreased compared to last year due to higher under three reportable operating segments: Community raw material costs of US$85 million for polyester and Services, Job Corps Training Services and Employment silver used in the production of film. These increased Training Services. costs were partially offset by the favourable impact of for- During 2010, ResCare contributed US$197 million eign exchange and productivity improvements across the in revenues and US$175 million in cost of sales. This repre- businesses (US$18 million). sents the company’s results from mid-November 2010, the Carestream Health reported a 6 percent, or date when Onex, Onex Partners III and Onex management US$156 million, decrease in revenues in 2009 compared to acquired the remaining interest in the business, to De - 2008. The decrease was anticipated as revenue declined in cember 31, 2010. ResCare’s results prior to this date were its Medical Film and Printing Solutions segment due to the accounted for on an equity basis. ongoing transition from traditional film used in medical Onex Corporation December 31, 2010 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 Financial Services The Warranty Group’s revenues consist of warranty decline in consumer spending and confidence. In addition, net investment income was lower in 2009 compared to 2008 revenues, insurance premiums and administrative and due to a decline in short-term interest rates. Cost of sales marketing fees earned on warranties and service contracts was down 8 percent, or US$50 million, in 2009 compared to for manufacturers, retailers and distributors of consumer 2008, in line with the decrease in revenues. F I N A N C I A L S E R V I C E S (US$ millions) electronics, appliances, homes and autos, as well as credit card enhancements and travel and Customer Support Services Sitel Worldwide Corporation (“Sitel Worldwide”) is 1,302 leisure programs through a glo- one of the world’s largest and most diversified providers 1,163 1,192 546 574 624 bal organization. The Warranty of cus tomer care outsourcing Group’s cost of sales consists pri- services. The company offers its marily of the change in reserves clients a wide array of services, for future warranty and insurance including customer service, claims, current claims payments technical support and customer and underwriting profit-sharing acquisition, retention and rev- 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 1,559 payments. enue generation. Sub stan tially 1,340 The Warranty Group re - all of Sitel Worldwide’s customer ported a 2 percent, or US$29 mil- care services are inbound and 856 1,129 999 10 09 08 Revenues Cost of Sales lion, decrease in revenues in 2010 delivered over the phone. In compared to 2009. The revenue addition, the company offers decline was due primarily to a outbound services, usually for US$33 million one-time reduction to revenues recorded short-term marketing cam- in the fourth quarter of 2010. This reduction was due to paigns and selected back office 10 09 08 the reclassification of certain policy benefits to reve- services, such as receivables nues related to a United Kingdom insurance client that management and payment and Revenues Cost of Sales the company had previously expensed in cost of sales. order processing. The company’s solutions en com pass the Excluding the impact of this reduction, revenues remained entire customer lifecycle, from the acquisition of its consistent with the prior year with increases in earned clients’ customers to the service, growth and retention of premiums from international operations, largely offset by those customers. Sitel Worldwide’s clients include many anticipated lower earned warranty premiums stemming large and well-known brands. Sitel Worldwide’s operating from the lower level of U.S. auto sales in prior periods. Cost results are affected by the demand for the products of of sales was down 5 percent, or US$28 million, in 2010 com- its customers. pared to last year due primarily to the reclassification During 2010, Sitel Worldwide’s revenues declined of policy benefits as discussed above. Excluding the im pact 14 percent, or US$219 million, from 2009. Sitel Worldwide of the reclassification, cost of sales had a corre sponding continued to experience lower call volumes and revenues increase to revenue growth in the year. from its customers as the impact of the economic slow- For the year ended December 31, 2009, revenues at down continued to affect its results in 2010. The slowdown The Warranty Group declined 8 percent, or US$110 million, also caused certain customers to bring services back in- from 2008. The decline was due primarily to lower earned house to fill internal capacity while others shifted their premiums and administrative fees attributable to higher business between customer support service providers credit and underwriting standards in Europe, currency based on pricing concessions. Cost of sales had a similar translation of European revenues with a weakening in the decline of 14 percent, or US$143 million, from 2009. This value of both the British pound and the euro relative to the decline resulted from the company adjusting its cost struc- U.S. dollar, a decline in U.S. auto sales and an overall ture to correspond with decreased activity. 24 Onex Corporation December 31, 2010 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 at Sitel Worldwide declined 11 percent, or Revenues at TMS International were up 56 per- US$189 million, in 2009 from 2008 while cost of sales had a cent, or US$732 million, in 2010 from 2009. The vast major- corresponding decline of 12 percent, or US$130 million. ity of the increase was attributable to higher levels of steel During 2009, the strengthening of the U.S. dollar against production, which drove increased demand for raw mate- other currencies contributed approximately US$86 million rials and resulted in significantly higher sales volume in the of the revenue decline in the year. Through out 2009, Sitel raw materials procurement business. The higher levels of Worldwide’s customers were affected by the economic slow- steel production also directly affected TMS Inter na tional’s down, which resulted in lower call volumes, delays in out- ser vice revenues, which are typically charged to customers sourcing decisions and ramping up of new programs, as well based on tons of steel produced. The increase in steel pro- as some selective customer disengagements, particularly in duction activity resulted in a 29 percent increase in TMS Sitel World wide’s European operations. Lower cost of sales Inter national’s service revenues. Cost of sales was up was primarily driven by the lower revenues, as well as the 58 percent, or US$685 million, in 2010 from last year. Al - benefit of restructuring programs initiated in 2008 and 2009 though raw materials procurement activities increased in response to lower call volumes. Metal Services TMS International Corp. (“TMS International”), formerly by approximately 46 percent as demand increased, the margins derived from certain activities declined as some of the increase in volume had lower margins. During 2009, economic conditions resulted in a Tube City IMS Corporation, has two revenue categories: sharp decline in the volume of steel produced worldwide. service revenue and revenue from the sale of materials. In 2009, North American steel production capacity utiliza- Service revenue is generated from scrap management, tion averaged 51 percent, compared to 81 percent in 2008. scrap preparation, raw materials optimization, metal re - For the year ended December 31, 2009, TMS Inter national covery and sales, material handling or product handling, reported a 56 percent, or US$1.7 billion, decline in rev- slag or co-product processing, and metal recovery services enues from 2008. Cost of sales had a similar decline of and surface conditioning. Rev- 58 percent, or US$1.6 billion, in 2009. The vast majority of M E TA L S E R V I C E S (US$ millions) enue from the sale of materials is the decline in 2009 was attributable to lower sales in the mainly generated by the com- raw materials business, where the cost of sales is passed 2,983 2,813 pany’s raw materials procurement through to TMS International’s customers. The balance was business, but also includes rev- attributable to lower levels of steel production affecting the 2,030 1,858 1,298 1,173 10 09 08 Revenues Cost of Sales enue from two locations of TMS services business. Cost of sales for the raw materials busi- International’s materials handling ness decreased 63 percent in 2009 from 2008. The decline business. During 2010, improving in cost of sales for the raw materials business in 2009 was economic conditions resulted in generally consistent with the decline in raw materials rev- a significant increase in steel pro- enues since the vast majority of raw materials purchased duction and capacity utilization by TMS International is sold to its customers on a pass- over 2009. North American steel through basis. production capacity utili zation, a In the services business, management responded key statistic used to mea sure steel swiftly to the decline in steel production in 2009 by reduc- production, aver aged 70 percent ing variable site-level costs by approximately 22 percent in 2010, compared to 51 percent from the level experienced in 2008, which is slightly better in 2009. than the reduction in service revenues. Onex Corporation December 31, 2010 25 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Other Businesses The other businesses segment primarily consists of the revenues of Husky International Ltd. (“Husky”), Tropicana Las Vegas, the ONCAP II companies – EnGlobe Corp. (“En Globe”), Mister Car Wash, CiCi’s Pizza, Caliber Collision Centers (“Caliber Collision”), Sport Supply Group and CSI (up to November 2010) – and Flushing Town Center. Table 3 provides revenues and cost of sales by operating company in the other businesses segment for the years ended December 31, 2010 and 2009 in both Canadian dollars and the companies’ functional currencies. Other Businesses Revenues and Cost of Sales for the Years Ended December 31, 2010 and 2009 Revenues TABLE 3 ($ millions) Canadian Dollars Functional Currency Year ended December 31 2010 2009 Change (%) 2010 2009 Change (%) Husky ONCAP II companies(a) Tropicana Las Vegas(b) Other(c) Total $ 1,127 $ 1,137 935 56 19 839 36 68 $ 2,137 $ 2,080 (1)% 11 % 56 % (72)% 3 % US$ 1,095 US$ 908 US$ 54 C$ 19 US$ 994 US$ 734 US$ 34 C$ 68 10 % 24 % 59 % (72)% ($ millions) Canadian Dollars Functional Currency Cost of Sales 2009 Change (%) 2010 2009 Change (%) Year ended December 31 Husky ONCAP II companies(a) Tropicana Las Vegas(b) Other(c) Total 2010 $ 723 549 5 5 $ 781 483 4 44 $ 1,282 $ 1,312 US$ 702 US$ 534 US$ 5 C$ 5 US$ 681 US$ 423 US$ 3 C$ 44 3 % 26 % 67 % (89)% (7)% 14 % 25 % (89)% (2)% Results are reported in accordance with Canadian generally accepted accounting principles. These results may differ from those reported by the individual operating companies. (a) 2010 ONCAP II companies include CSI (up to November 2010), EnGlobe, Mister Car Wash, CiCi’s Pizza, Caliber Collision and Sport Supply Group (from August 5, 2010). 2009 ONCAP II companies include CSI, EnGlobe, Mister Car Wash, CiCi’s Pizza and Caliber Collision. (b) 2009 Tropicana Las Vegas’ financial results are from the date of acquisition on July 1, 2009 to December 31, 2009. (c) 2010 other includes Flushing Town Center and the parent company. 2009 other includes CEI (up to May 2009) and the parent company. 26 Onex Corporation December 31, 2010 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, 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(a) Tropicana Las Vegas(b) Other(c) 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(a) Tropicana Las Vegas(b) Other(c) 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) 2009 and 2008 ONCAP II companies include CSI, EnGlobe, Mister Car Wash, CiCi’s Pizza and Caliber Collision. (b) Tropicana Las Vegas’ financial results are from the date of acquisition on July 1, 2009 to December 31, 2009. (c) 2009 other includes CEI (up to May 2009) and the parent company. 2008 other includes CEI, Radian and the parent company. Husky in 2010 due to ongoing cost savings achieved by Husky Husky provides highly engineered manufacturing systems under the company’s transformation plan initiatives, as and services for the plastics injection molding equipment well as a one-time reduction in cost of sales of US$28 mil- industry. The company engineers and manufactures com- lion associated with investment tax credits that were recog- plete system solutions that are comprised of injection nized in the fourth quarter of 2010. molding machines, molds, hot runners, temperature con- For the year ended December 31, 2009, revenues trollers and auxiliary equipment. Husky’s revenues are de - at Husky declined 19 percent to US$1.0 billion (2008 – rived from the sale of machines and complete systems, hot US$1.2 billion) due primarily to the effect of the economic runners for systems and parts and aftermarket services. downturn in 2009 on the demand for the company’s prod- Husky’s revenues increased 10 percent, or ucts. Revenues were down in North America (23 percent), US$101 million, to US$1.1 billion for the year ended De - Europe (31 percent) and Asia Pacific (3 percent), partially cember 31, 2010 compared to 2009. The revenue growth was offset by a 13 percent increase in sales in Latin America. driven by higher sales in Latin America (US$50 million), In addition, revenues at Husky in 2009 were affected by Asia Pacific (US$42 million) and Europe (US$11 million), un favour able foreign currency changes on euro-denomi- partially offset by lower sales in North America (US$2 mil- nated revenues (US$18 million) and the company’s decision lion) and unfavourable foreign currency changes on euro- to discontinue certain product lines (US$20 million). Cost denominated revenues (US$9 million). Cost of sales at of sales at Husky declined 30 percent, or US$294 million, Husky increased 3 percent, or US$21 million, in 2010 from to US$681 million in 2009 (2008 – US$975 million). The last year. Cost of sales did not increase as much as revenues decline in cost of sales in 2009 was more than the decrease Onex Corporation December 31, 2010 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 in revenues, due primarily to an approximate US$91 million Tropicana Las Vegas one-time charge recorded by Husky in 2008 originating from Tropicana Las Vegas is one of the best-known and most the acquisition accounting step-up in value of inventory on storied casinos in Las Vegas, located directly on the the company’s balance sheet at the date of the company’s Las Vegas Strip. Tropicana Las Vegas reported revenues of Decem ber 2007 acquisition. This has the effect of reducing US$54 million in 2010. This compared to US$34 million in margins on the subsequent sale of inventory on hand at the 2009. For the year ended December 31, 2010, cost of sales date of acquisition. was US$5 million compared to US$3 million for 2009. Tropicana Las Vegas records most of its operating costs in ONCAP II companies selling, general and administrative expenses. The ONCAP II companies – EnGlobe, Mister Car Wash, CiCi’s The increase in revenues and cost of sales was Pizza, Caliber Collision, Sport Supply Group and CSI (up to primarily due to the inclusion of a full year of revenues November 2010) – reported a 24 percent, or US$174 million, and cost of sales in 2010 compared to six months of rev- increase in revenues in 2010. Cost of sales was up 26 percent, enues and cost of sales in 2009 following Onex’ acquisition or US$111 million, in 2010. The growth in revenues and cost of this business on July 1, 2009. of sales was due primarily to the inclusion of the results of Sport Supply Group, acquired in August 2010. In addition, Other most of the ONCAP II companies reported higher revenues Flushing Town Center accounted for US$13 million and in 2010 compared to last year as those businesses benefitted US$4 million, respectively, of revenues and cost of sales from improved economic activity. in 2010. In the first quarter of 2010, a subsidiary of Onex For the year ended December 31, 2009, the became the managing partner of Flushing Town Center, ONCAP II companies reported a 31 percent, or US$175 mil- at which point Onex began consolidating its interest in lion, increase in revenues from 2008. Cost of sales had a cor- Flushing Town Center. Therefore, there are no comparative responding increase of 27 percent, or US$89 million, in 2009. revenues and cost of sales in Onex’ audited an nual consoli- Essentially all of the revenue and cost of sales growth in the dated results for the year ended December 31, 2009. year resulted from the inclusion of the operations of Caliber Included in other in 2009 were revenues and cost Collision following ONCAP II’s purchase of this business in of sales of US$44 million and US$35 million, respectively, October 2008. of Cosmetic Essence, Inc. (“CEI”), which represents the operations of that business prior to Onex’ disposition of its ownership interest in May 2009. 28 Onex Corporation December 31, 2010 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Operating earnings Management at Onex reviews the performance of individual operating companies based on an operating earnings mea - Operating Earnings Reconciliation TABLE 4 ($ millions) 2010 2009 sure. Onex uses operating earnings as a measure to evaluate Earnings before the undernoted items $ 2,509 $ 2,544 each operating company’s performance because it elimi- Amortization of property, plant nates interest charges, which are a function of the operating and equipment company’s particular financing structure, as well as certain Interest income (524) 38 (636) 53 non-cash charges including stock-based compensation, amortization of intangible assets and any unusual or non- Operating earnings $ 2,023 $ 1,961 recurring charges. Operating earnings is not a defined mea - Amortization of intangible assets sure under Canadian GAAP. The term operating earnings, as and deferred charges used here, is defined as earnings before interest expense, amortization of intangible assets and deferred charges, and income taxes. Onex also excludes from operating earnings accounting measures that do not reflect the actual operating performance of the business, such as loss from equity- accounted investments, foreign exchange loss, stock-based compensation expense, non-recurring items such as gains on dispositions of operating investments, acquisition and restructuring expenses, other income, writedown of good- Interest expense of operating companies Loss from equity-accounted investments Foreign exchange loss Stock-based compensation expense Other income Gains on dispositions of operating investments (332) (420) (250) (69) (176) 35 122 (364) (495) (497) (90) (161) 97 783 (219) Acquisition, restructuring and other expenses (233) Writedown of goodwill, intangible assets and long-lived assets (15) (370) will, intangible assets and long-lived assets, as well as non- Earnings before income taxes and controlling interests. non-controlling interests $ 685 $ 645 Table 4 provides a reconciliation of the audited annual consolidated statements of earnings to operating earnings for the years ended December 31, 2010 and 2009. Table 5 provides operating earnings by industry segment in Canadian dollars and the companies’ functional currencies for the years ended December 31, 2010 and 2009. Operating Earnings by Industry Segment TABLE 5 ($ millions) Canadian Dollars Functional Currency Year ended December 31 2010 2009 Change ($) 2010 2009 Change ($) Electronics Manufacturing Services $ 247 $ 280 $ (33) Aerostructures Healthcare Financial Services Customer Support Services Metal Services Other (a) Total 420 811 174 89 71 211 374 860 181 97 29 140 46 (49) (7) (8) 42 71 $ 2,023 $ 1,961 $ 62 US$ 241 US$ 408 US$ 789 US$ 169 US$ 87 US$ 69 C$ 211 US$ 252 US$ 324 US$ 760 US$ 160 US$ 85 US$ 26 C$ 140 US$ (11) US$ 84 US$ 29 US$ 9 US$ 2 US$ 43 C$ 71 Results are reported in accordance with Canadian generally accepted accounting principles. These results may differ from those reported by the individual operating companies. (a) 2010 other includes Husky, Tropicana Las Vegas, ONCAP II, Flushing Town Center and the parent company. 2009 other includes CEI (up to May 2009), Husky, Tropicana Las Vegas, ONCAP II and the parent company. Onex Corporation December 31, 2010 29 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Consolidated operating earnings were up 3 percent, (cid:129) Tropicana Las Vegas, which reported a higher operating or $62 million, in 2010 compared to 2009. The growth in loss of US$19 million, as the company’s renovation pro- operating earnings was negatively impacted by a lower gram had a large portion of the resort unavailable for use average U.S. dollar to Canadian dollar exchange rate in in 2010; and 2010 compared to 2009. Excluding the impact of foreign (cid:129) an operating loss of US$11 million at Flushing Town exchange fluctuations, operating earnings were up due to Center, which Onex began to consolidate in the first quar- the following factors: ter of 2010. (cid:129) Spirit AeroSystems reported a US$84 million increase in operating earnings as 2009 included several unusual charges in cost of sales recorded in that year, partially off- Interest expense of operating companies New investments are structured with the acquired com- set by lower volume-based pricing adjustments, as dis- pany having sufficient equity to enable it to self-finance cussed under revenues and cost of sales; a significant portion of its acquisition cost with a prudent (cid:129) higher operating earnings at Husky of US$81 million pri- amount of debt. The level of debt is commensurate with marily from higher revenues and cost savings achieved the operating company’s available cash flow, including under that company’s transformation plan, as well as consideration of funds required to pursue growth oppor- the US$28 million one-time reduction in cost of sales as tunities. It is the responsibility of the acquired operating discussed under revenues and cost of sales; company to service its own debt obligations. (cid:129) improved operating earnings of US$43 million at TMS Consolidated interest expense totalled $420 mil- International resulting from the company reporting lion, a decrease of $75 million from $495 million last year. higher revenues, as discussed under revenues and cost The effect of foreign currency translation on U.S.-dollar- of sales; denominated interest costs was a significant component (cid:129) the healthcare segment reported a US$29 million in crease of the decrease in 2010. Excluding the impact of foreign in operating earnings; much of the increase was driven by exchange, Carestream Health recorded a US$47 million higher revenues at EMSC and Skilled Healthcare Group, decline in interest expense in 2010 due primarily to lower which contributed US$37 million and US$13 million, debt as well as lower interest rates in the year compared respectively, of the operating earnings growth; and the to last year. In addition, Celestica recorded a $24 million inclusion of US$16 million of operating earnings from decline in interest expense due primarily to debt extin- ResCare, which Onex began to consolidate from its acqui- guished in 2009 and the company’s repurchase of its out- sition date in mid-November 2010. Partially offsetting standing 2013 senior subordinated notes in the first quarter these increases was an operating earnings reduction of of 2010. Other companies also benefitted from lower inter- US$38 million at Carestream Health due to lower gross est rates on the floating rate portion of their debt. profit in the company’s Medical Film and Printing Solu - EMSC entered into a new senior credit agreement tions segment from higher polyester and silver costs and in April 2010, with the proceeds of the new debt facilities lower volumes in the year; and being used to repay and terminate its previous term loan (cid:129) a US$24 million increase in operating earnings from the and redeem its senior subordinated notes that had an out- ONCAP II companies driven primarily by the inclusion of standing balance of US$250 million in the second quarter the operating earnings of Sport Supply Group, acquired in of 2010. EMSC reported a US$18 million decline in interest August 2010. expense, which was essentially offset by the write-off of US$19 million of deferred financing charges asso ciated Partially offsetting the increases in operating earnings were: with the company’s previous debt. (cid:129) Celestica’s operating earnings, which decreased in 2010 Skilled Healthcare Group reported a US$11 mil- compared to 2009. The 2009 operating earnings reported lion increase in interest expense in 2010 over 2009, due by Onex included a US$24 million recovery of damages primarily to the US$7 million writedown of deferred related to prior years. Excluding that recovery, Celestica’s fi nancing charges recorded in the second quarter of 2010 2010 operating earnings were up US$13 million over 2009 associated with the company entering into new credit due to increased revenues; facilities in April 2010. The proceeds were used to repay the prior loans and to fund acquisitions. 30 Onex Corporation December 31, 2010 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 reported a US$15 million in - and Country and NY Credit; and Onex Credit Part ners. 2009 crease in interest expense in 2010 due primarily to the inter- included Cineplex Galaxy Income Fund (“Cine plex Enter - est costs on the senior unsecured notes issued in 2009. tainment”) (up to March 2009) and Onex Real Estate’s invest- In addition, the consolidation of Flushing Town ment in Flushing Town Center. Center in 2010 contributed US$8 million in interest expense During the first three months of 2010, a subsidiary in the year. Loss from equity-accounted investments Loss from equity-accounted investments for the year of Onex Real Estate became the managing partner of the Flushing Town Center joint venture. As a result, in the first quarter of 2010, Onex began consolidating its interest in Flushing Town Center. Up to December 31, 2009, Onex ended December 31, 2010 was $250 million (2009 – loss of accounted for its interest in Flushing Town Center using $497 million). This represents Onex’ and Onex Partners’ the equity method. portion of the earnings (loss) of Allison Transmission, Inc. In mid-November 2010, Onex, Onex Partners III (“Allison Transmission”); Hawker Beechcraft Corporation and Onex management acquired all of the outstanding (“Hawker Beechcraft”); ResCare (up to mid-November common shares of ResCare not previously owned by Onex, 2010); RSI Home Products, Inc. (“RSI”); Tomkins (from late Onex Partners I and Onex management. As a result, Onex September 2010); Cypress Insurance Group (“Cypress”); began consolidating its interest in ResCare in mid-Novem - Onex Real Estate Partners’ (“Onex Real Estate”) investments ber 2010. Prior to this purchase, Onex accounted for its in the Camden properties, Urban Housing Platform, Town interest in ResCare on an equity basis. Table 6 details the earnings (loss) from equity-accounted investments by company, as well as Onex’ share of these earnings (loss) for 2010 and 2009. Earnings (Loss) from Equity-accounted Investments TABLE 6 ($ millions) Allison Transmission Hawker Beechcraft Onex Real Estate Tomkins(b) Other (c) Total 2010 2009 Net Earnings (Loss)(a) Onex’ Share of Net Earnings (Loss) Net Earnings (Loss)(a) Onex’ Share of Net Earnings (Loss) $ 17 $ 5 $ (181) $ (58) (151) (13) (128) 25 (61) (11) (34) 18 (237) (97) – 18 (95) (82) – 12 $ (250) $ (83) $ (497) $ (223) (a) The net earnings (loss) represents Onex’ and/or Onex Partners’ share of the net earnings (loss) in those businesses. (b) The operating results of Tomkins are included from its late September 2010 acquisition date. (c) 2010 other includes Cypress, Onex Credit Partners, Onex Real Estate (Camden properties, Urban Housing Platform, Town and Country and NY Credit), ResCare (up to mid-November 2010) and RSI. 2009 other includes Cypress, Cineplex Entertainment (up to March 2009), Onex Credit Partners, Onex Real Estate (Camden properties, Urban Housing Platform, Town and Country, Flushing Town Center and NY Credit), ResCare and RSI. Onex Corporation December 31, 2010 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 Allison Transmission These charges were the result of the company’s updated Allison Transmission is a designer, manufacturer and seller expectations as to the timing of a general aviation market of commercial-duty automatic transmissions, hybrid pro - recovery, the resulting reduced production volumes and pulsion systems and related parts and services for on-high- pricing pressure on new aircraft sales. way trucks and buses, off-highway equipment and military Partially offsetting these charges was a US$352 mil- vehicles. The improvement in earnings at Allison Trans - lion gain in 2009 by Hawker Beechcraft on its purchase mission in 2010 was due in part to a general improvement of US$497 million of its debt securities at a significant in the revenues and profits of the business during the year discount. compared to 2009. The more significant factor was that 2009 included a US$190 million writedown of certain intan- Onex Real Estate gible assets, as well as a US$37 million writedown of certain Onex Real Estate’s investments in the Camden properties, long-term receivables and other matters that the company Urban Housing Platform, Town and Country and NY had with General Motors Corporation (“GM”) as a result of Credit contributed $13 million of the loss on equity- the GM bankruptcy. Hawker Beechcraft accounted investments in 2010. This compared to a $97 million loss in 2009, which included Flushing Town Center. Onex’ share of Onex Real Estate’s losses was Hawker Beechcraft is a leading business, special-mission $11 million in 2010 compared to $82 million in 2009. and trainer aircraft manufacturer, designing, marketing and The majority of the 2009 loss in Onex Real Estate resulted supporting aviation products and services for businesses, from provisions established against the carrying value of a governments and individuals worldwide. Onex’ and Onex number of Onex Real Estate investments due to the eco- Partners II’s share of Hawker Beechcraft’s loss was $151 mil- nomic conditions that existed at the time. lion in 2010. Onex’ share of the loss was $61 million. This compares to a loss of $237 million in 2009, of which Onex’ Tomkins share was $95 million. The company continued to be ad - Tomkins is an industrial holding company that operates versely affected by the downturn in the market for business a number of businesses serving the general industrial, aircraft in 2010. As a result, Hawker Beechcraft recorded automotive and building products markets around the impairment charges of US$115 million, which were primarily world. Onex’ and Onex Partners’ portion of the Tomkins loss related to an increase of reserves for losses on certain air- was $128 million for the period from its late September 2010 craft programs. The higher 2009 loss was due primarily to the company recording significant impairment charges related to goodwill and intangible and other assets, primar - acquisition date to December 31, 2010, of which Onex’ share was $34 million. The loss was due to purchase accounting and other charges directly associated with the acquisition. ily in Hawker Beechcraft’s business and general aviation seg- Tomkins recorded a US$144 million one-time charge in the ment. During the third quarter of 2009, Hawker Beech craft fourth quarter of 2010 origi nating from the acquisition completed a review of the carrying value of its business and accounting step-up in value of inventory on Tomkins’ open- general aviation segment compared to its fair value in light ing balance sheet at the date of its acquisition. This increase of the decline in demand for new business aircraft at that in the value of inventory has the effect of reducing margins time. The company recorded a total of US$726 million in on the subsequent sale of inventory following the date of impairment and other charges in that quarter. A com ponent acquisition. Ac counting principles for acquisitions require of these charges was a US$521 million impairment charge that inventory be stepped up in value to the selling price of for its business and general aviation segment, which in - the inventory less the direct cost to complete and sell the cluded an impairment charge of US$340 million for the full product. In addition, the Tomkins loss included a US$81 mil- amount of the goodwill associated with this segment. The lion stock-based compensation ex pense related to the other component was additional charges of US$205 million issuance of options to Tomkins management investing in the that were necessary to reduce the carrying value of other business. Excluding the impact of these one-time charges, assets in this segment, as well as increase reserves for losses Tomkins performed in line with our expectations for 2010. on certain aircraft programs and potential supplier claims. 32 Onex Corporation December 31, 2010 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 Stock-based compensation expense During 2010, Onex recorded a consolidated stock-based in foreign currency exchange rates. A consolidated foreign compensation expense of $176 million compared to an exchange loss of $69 million was recorded for the year expense of $161 million in 2009. Table 8 provides a break- ended December 31, 2010 compared to a consolidated down of and the change in stock-based compensation by foreign exchange loss of $90 million in 2009. Table 7 pro- industry segment for the years ended Decem ber 31, 2010 vides a breakdown of and the change in foreign currency and 2009. gains (loss) by industry segment for the years ended December 31, 2010 and 2009. Foreign Exchange Gains (Loss) by Industry Segment TABLE 7 ($ millions) 2010 2009 Change ($) Electronics Manufacturing Services Aerostructures Healthcare Financial Services Customer Support Services Metal Services Other (a) Total $ (2) $ (2) $ – (5) (5) (1) (5) 1 (52) 3 (6) 1 (10) (1) (75) (8) 1 (2) 5 2 23 Stock-based Compensation Expense by Industry Segment TABLE 8 ($ millions) 2010 2009 Change ($) Electronics Manufacturing Services Aerostructures Healthcare Financial Services Other (a) Total $ 43 $ 43 $ – 30 12 – 91 12 7 1 98 18 5 (1) (7) $ 176 $ 161 $ 15 $ (69) $ (90) $ 21 Results are reported in accordance with Canadian generally accepted accounting principles. These results may differ from those reported by the individual operating companies. Results are reported in accordance with Canadian generally accepted accounting (a) 2010 other includes Husky, ONCAP II and the parent company. 2009 other includes principles. These results may differ from those reported by the individual CEI (up to May 2009), Husky, ONCAP II and the parent company. operating companies. (a) 2010 other includes Husky, ONCAP II and the parent company. 2009 other includes CEI (up to May 2009), Husky, ONCAP II and the parent company. The decline in the value of the euro relative to the U.S. dollar in 2010 resulted in a foreign exchange loss being re corded at Carestream Health (US$2 million). Sitel Worldwide also reported a US$5 million foreign exchange loss due primar ily to the decline in the value of the euro and the Philippine peso. Spirit AeroSystems recorded a US$5 million foreign ex change loss due primarily to the decline in value of the British pound. Onex, the parent company, recorded a $43 million foreign exchange loss in 2010 on U.S.-dollar- denominated cash held with the depreciation in the value of the U.S. dollar relative to the Canadian dollar to 0.9946 Canadian dollars at December 31, 2010 from 1.0510 Canadian dollars at December 31, 2009. Onex, the parent company, accounted for $86 million of the expense in 2010 due primarily to the required revaluation of the liability for stock options and deferred share units based on changes in the market value of Onex shares. The increase in Onex’ share price to $30.23 per share at De cember 31, 2010 from $23.60 per share at December 31, 2009 resulted in an upward revaluation of the liability for stock options. This compares to a $93 million stock-based compensation ex - pense recorded in 2009 due to the 30 percent increase in the market value of Onex shares at December 31, 2009 from $18.19 per share at December 31, 2008. Onex Corporation December 31, 2010 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 Consolidated other income totalled $35 million in 2010 Onex obtained a tax ruling from Canada Revenue Agency, and Deloitte & Touche LLP, an independent accounting firm compared to $97 million in 2009. Included in other income retained by Onex’ Audit and Corporate Governance Com - in 2010 was a gain of $8 million from the sale of certain mittee, provided an opinion that the value received by Onex tax losses in the second quarter of 2010 as discussed below for the tax losses was fair. The transaction was unanimously and US$22 million of other income recorded by The War - approved by Onex’ Audit and Corporate Governance Com - ranty Group as a result of net investment gains in its invest- mittee, all the members of which are independent directors. ment portfolio. During 2009, Onex, the parent company, ac - In April 2010, Onex sold an entity, the sole assets counted for $103 million of other income due primarily to of which were certain tax losses, to a public company a $92 million favourable mark-to-market and foreign ex - controlled by Mr. Gerald W. Schwartz, who is also Onex’ con- change adjustment on the Tropicana Las Vegas debt held trolling shareholder. Onex received approximately $8 mil- by Onex and Onex Partners III. Onex’ share of this income lion in cash for tax losses of approximately $70 million. The was $21 million. This adjustment was necessary to bring the entire $8 million was recorded as a gain in 2010. Onex has carrying value of the Tropicana Las Vegas investment to significant Canadian non-capital and capital losses available the fair value of the equity received in Tropicana Las Vegas and valuation allowances have been established against the on July 1, 2009. Partially offsetting the other income in 2009 benefit of these losses in the audited annual consolidated was approximately $16 million of other expense recorded by financial statements. As such, Onex does not expect to gen- Carestream Health due to the settlement with Kodak of erate sufficient taxable income to fully utilize these losses in acquisition-related working capital adjustments. the foreseeable future. In connection with this transaction, Gains on dispositions of operating investments Gains on dispositions of operating investments totalled $122 million in 2010 (2009 – $783 million). Table 9 details the nature of these gains. Gains on Dispositions of Operating Investments Total Gains 2010 Onex’ Share of Gains 2010 Total Gains 2009 Onex’ Share of Gains 2009 $ 88 $ 40 $ 32 27 – – – – 2 – – – – 2 – – 160 20 595 6 2 $ – – 160 20 194 6 2 $ 122 $ 69 $ 783 $ 382 TABLE 9 ($ millions) Gains on: Sale of CSI Flushing Town Center Sale of Cineplex Entertainment Disposition of CEI Sale of shares of EMSC Sale of shares of Celestica Other, net Total 34 Onex Corporation December 31, 2010 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 CSI Sale of shares of EMSC In November 2010, ONCAP II sold its operating company, In August 2009, EMSC completed a secondary public offer- CSI Global Education. ONCAP II received net proceeds of ing. Onex, Onex Partners I and certain limited partners $126 million on this sale, of which Onex’ share was sold 9.2 million shares in the offering for net proceeds of $50 million. This brings total ONCAP II proceeds received $381 million. Onex’ portion of the shares sold was 3.5 mil- from CSI to $146 million compared to ONCAP II’s invest- lion shares for net proceeds of $148 million. A $275 million ment of $25 million. The pre-tax gain on this sale was pre-tax gain on the sale of EMSC shares was recorded approximately $88 million recorded in the fourth quarter in the third quarter of 2009, of which Onex’ portion was of 2010, of which Onex’ share was $40 million. There were $90 million. This included Onex’ net carried interest of no cash taxes payable by Onex on the sale. $5 million on the realized gain on EMSC by third-party Flushing Town Center In December 2010, Flushing Town Center amended and limited partners. Onex’ share of the carried interest received reflected an $8 million reduction as a result of the loss on the CEI investment realized by the third-party restated its senior construction loan and mezzanine loan, limited partners. which is discussed under consolidated long-term debt on In November 2009, EMSC completed an additional page 48 of this report. In conjunction with these amend- secondary public offering of 9.2 million shares. EMSC did ments, Onex, the parent company, purchased at a discount not issue any shares in this offering. All the shares sold US$56 million and US$38 million principal amounts of the in the offering were by Onex, Onex Partners I and certain senior construction loan and mezzanine loan, respectively, limited partners of Onex Partners I for net cash proceeds of from third-party lenders. The loans were purchased for a $446 million. Onex sold 3.5 million of the total shares sold total cash cost of US$62 million. As a result of this transac- in the offering for net proceeds of $183 million. A pre-tax tion, the loans purchased by Onex, the parent company, gain on the sale of EMSC shares of $320 million was were extinguished with the original third-party lenders. As a result, Flushing Town Center recorded a net gain of $32 million (US$32 million) on the debt extinguishment. recorded in the fourth quarter of 2009. Onex’ share of the pre-tax gain was $104 million, which included $15 million of carried interest on the realized gain by third-party limited partners of Onex Partners I. Sale of Cineplex Entertainment In April 2009, Onex sold its remaining approximately Sale of shares of Celestica 13 million trust units of Cineplex Galaxy Income Fund. In early October 2009, Onex completed the sale of 11 mil- Onex received approximately $175 million of net proceeds lion subordinate voting shares of Celestica, which included on this sale and recorded a $160 million pre-tax gain on shares held under the Management Investment Plan, to a this transaction in the second quarter of 2009. syndicate of underwriters at a gross price of $10.30 per share. Onex realized $104 million of net proceeds and Disposition of CEI recorded a pre-tax gain of $6 million. At the end of 2008, CEI was in violation of certain of its debt covenants. In 2009, CEI discussed a restructuring of its debt with its lenders but was not able to reach an agree- ment. As a result, in early May 2009, Onex contributed its ownership in securities of CEI to an entity controlled by CEI’s lenders that agreed to provide additional liquidity to CEI. As a result of this transfer, Onex and Onex Partners I ceased to have an equity ownership in the business. Onex’ investment in the company had a negative carrying value of $20 million due to previously recorded losses of CEI. Therefore, Onex recorded a non-cash accounting gain of $20 million in the second quarter of 2009 on the disposi- tion of CEI. Onex Corporation December 31, 2010 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 Acquisition, restructuring and other expenses Acquisition, restructuring and other expenses are consid- Skilled Healthcare Group In July 2010, Skilled Healthcare Group announced that a ered to be costs incurred by the operating companies to jury had returned a verdict against the company in a realign organizational structures or restructure manufac- California state court related to a complaint filed more turing capacity to obtain operating synergies critical to than four years ago. In the complaint, the plaintiffs alleged, building the long-term value of those businesses. Acqui - among other matters, that certain California-based facili- sition, restructuring and other expenses totalled $233 mil- ties operated by Skilled Healthcare Group’s wholly owned lion in 2010, up from $219 million in 2009. Table 10 operating companies failed to provide a prescribed num- provides a breakdown of and the change in acquisition, ber of qualified personnel to care for their residents. In restructuring and other expenses by operating company the first phase of deliberations, the jury awarded the plain- for the years ended December 31, 2010 and 2009. tiffs more than US$650 million in damages. During the Acquisition, Restructuring and Other Expenses settlement agreement on this complaint and recorded third quarter of 2010, Skilled Healthcare Group came to a 2009 Change ($) US$53 million of other expense. The settlement contains no admission or concession of wrongdoing by Skilled $ 92 $ (35) Healthcare Group. Writedown of goodwill, intangible assets and long-lived assets Writedown of goodwill, intangible assets and long-lived assets totalled $15 million in 2010 (2009 – $370 million). Table 11 provides a breakdown of the writedown of good- will, intangible assets and long-lived assets by operating company for the years ended December 31, 2010 and 2009. Writedown of Goodwill, Intangible Assets and Long-lived Assets TABLE 11 ($ millions) Celestica CiCi’s Pizza Skilled Healthcare Group Sitel Worldwide TMS International Other(a) Total 2010 $ 8 3 – – – 4 2009 $ 14 44 180 64 62 6 $ 15 $ 370 (a) 2010 other includes The Warranty Group and Husky. 2009 other includes Husky. TABLE 10 ($ millions) Celestica Carestream Health Husky Sitel Worldwide Skilled Healthcare Group Other Total Celestica 2010 $ 57 35 25 39 55 22 44 42 25 – 16 (9) (17) 14 55 6 $ 233 $ 219 $ 14 Restructuring expenses at Celestica were lower by $35 mil- lion in 2010. Many of the costs, which were spread over several reporting periods, were recorded in connection with Celestica’s restructuring plans to improve capacity utilization principally in Celestica’s North American and European regions. Husky Restructuring expenses at Husky declined $17 million in 2010 due to lower costs associated with the company’s transformation plan. Sitel Worldwide Sitel Worldwide reported a $14 million increase in restruc- turing expenses in 2010 due to the company’s restructuring initiatives to improve capacity utilization. These actions include a reduction in workforce and the closure of certain facilities. Sitel Worldwide expects that its overall utiliza- tion and operating efficiency should improve as the com- pany completes these restructuring activities. 36 Onex Corporation December 31, 2010 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 Celestica TMS International Celestica conducted its annual impairment assessment During the second quarter of 2009, TMS International per- of goodwill and long-lived assets during the fourth quarter formed an analysis of the carrying value of its goodwill of 2010 and concluded that some of its long-lived assets compared to its fair value by reporting unit. The company were im paired. Celestica recorded $8 million in write- determined that the goodwill in one of its reporting units downs against computer software assets and property, was impaired due to changes in the long-term outlook for plant and equipment in the Americas and Europe, in the certain customers and contracts. As a result, the company fourth quarter of 2010. This compares to $14 million of recorded a $62 million goodwill impairment charge in 2009. writedowns in the fourth quarter of 2009, primarily to impair property, plant and equipment in Japan. CiCi’s Pizza ONCAP II’s operating company, CiCi’s Pizza, recorded a Income taxes Onex reported a consolidated income tax provision of $362 million in 2010 compared to a $172 million consoli- dated income tax provision in 2009. During 2009, Onex, non-cash impairment charge of $3 million to its intangible the parent company, reduced its future income tax liability assets in the fourth quarter of 2010. This compares to a by $146 million and recorded a corresponding amount $44 million writedown of goodwill in 2009 due primarily to as a recovery in income tax. This reduction in 2009 was the an increase in the discount rate used in 2009 in the calcu- result of lower enacted income tax rates being applied to lation of fair value as a result of market risks associated future income tax liabilities to bring the liability in line with with the 2009 economic environment. current income tax rates. There was not a similar adjustment Skilled Healthcare Group of rates in 2010. In addition, Celestica and TMS International recorded higher income tax provisions in 2010 due to higher During the fourth quarter of 2009, Skilled Healthcare earnings this year compared to last year. As well, Celestica Group completed its impairment analysis at the reporting increased its income tax provision in 2010 associated with a unit level. Due to a reduction in the expected future growth proposed settlement of a foreign tax audit. rates for Medicare and Medicaid and their effect on expected future cash flows, the company revised its esti- mates with respect to net revenues and gross margins, which negatively affected the cash flow forecasted for its Non-controlling interests in net earnings of operating companies In the audited annual consolidated statements of earnings, long-term care reporting unit. As a result, the company the non-controlling interests amount represents the inter- recorded a goodwill impairment charge for that reporting ests of shareholders other than Onex in the net earnings or unit of $180 million in 2009. Sitel Worldwide losses of Onex’ operating companies. During 2010, the non- controlling interests share of Onex’ operating companies’ net earnings was $374 million compared to a share of net During 2009, Sitel Worldwide reported a $64 million write- earnings of $361 million in 2009. down of goodwill. The writedown was associated primarily The consolidated non-controlling interests amount with Sitel Worldwide’s European operations due to rev- exceeded the consolidated net after-tax earnings. This rela- enue erosion driven by the economic downturn, especially tionship occurred as there are different levels of non- among telecom customers. Sitel Worldwide completed a controlling ownership interests in each of the businesses. review of its goodwill for the European reporting unit and The non-controlling interests have a greater participation determined that the fair value was less than its carrying in the companies generating net earnings, such as the pub- value. Therefore, Sitel Worldwide wrote down the goodwill lic companies, than those companies currently generating associated with that reporting unit to its fair value in the accounting net losses. The information by industry segment second quarter of 2009. in note 27 to the audited annual consolidated financial statements shows those relationships. Onex Corporation December 31, 2010 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 Table 12 shows the net earnings (loss) by industry The other segment reported a $248 million change in non- segment attributable to non-controlling shareholders controlling interests. The significant components of the in Onex’ operating companies for the years ended De - change are detailed in table 13. cem ber 31, 2010 and 2009. Non-controlling Interests in Net Earnings (Loss) in Net Earnings (Loss) of Operating Companies by Industry Segment TABLE 13 ($ millions) 2010 2009 Change ($) TABLE 12 ($ millions) 2010 2009 Change ($) Net earnings (loss) of non-controlling Other Businesses Non-controlling Interests Net earnings (loss) of non-controlling interests in: Electronics Manufacturing Services Aerostructures Healthcare Financial Services Customer Support Services Metal Services Other(a) $ 76 204 166 78 – 4 (154) $ 54 192 $ 3 76 1 (59) 94 22 12 163 2 (1) 63 (248) interests in: Husky Allison Transmission Hawker Beechcraft Tomkins Gains on sales of operating companies by limited partners Other Total $ 48 12 (90) (94) 48 (78) $ 10 (123) (142) – 401 (52) $ 38 135 52 (94) (353) (26) $ (154) $ 94 $ (248) Total $ 374 $ 361 $ 13 The $248 million decline in earnings from non-controlling interests in the other segment was due to: (cid:129) the share of the loss reported by Tomkins of the limited partners of Onex Partners III, certain limited partners and others ($94 million); and (cid:129) the inclusion in 2009 of the third-party limited partners’ portion of the gain on the EMSC shares sold in the third and fourth quarters of 2009 ($401 million). Partially offsetting these declines were: (cid:129) the third-party limited partners’ share of the gain on the sale of CSI in the fourth quarter of 2010 ($48 million); (cid:129) improved earnings in 2010 for Hawker Beechcraft and Allison Transmission that contributed an increase of $52 million and $135 million, respectively, in non-con- trolling interests. In 2009, these companies recorded significant writedowns of goodwill and intangible assets as discussed under loss from equity-accounted invest - ments; and (cid:129) the $38 million increase in non-controlling interests’ share of Husky’s earnings in 2010 as the company re - corded improved earnings in 2010. (a) 2010 other includes Husky, Hawker Beechcraft, Allison Transmission, RSI, Tropicana Las Vegas, Tomkins, ONCAP II, Onex Real Estate, Flushing Town Center and the parent company. 2009 other includes Cineplex Entertainment (up to March 2009), CEI (up to May 2009), Husky, Hawker Beechcraft, Allison Transmission, RSI, Tropicana Las Vegas, ONCAP II, Onex Real Estate and the parent company. The $13 million increase in the non-controlling interests amount in 2010 was due primarily to: (cid:129) Celestica, in the electronics manufacturing services seg- ment, which represented $22 million of the increase in 2010 due primarily to lower restructuring expenses in 2010, as well as a higher portion of earnings attributable to non-controlling interests due to Onex’ sale of a por- tion of its investment in the fourth quarter of 2009; (cid:129) Skilled Healthcare Group, reported in the healthcare segment, represented a US$133 million increase in the non-controlling interests due primarily to lower earn- ings in 2009 primarily from the goodwill impairment charge of $180 million in that year; and (cid:129) TMS International, in the metal services segment, which accounted for $63 million of the increase due to a loss in 2009 driven primarily by a writedown of goodwill of $62 million in that year. 38 Onex Corporation December 31, 2010 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Consolidated net earnings (loss) A consolidated net loss of $51 million ($0.43 per share) was Table 15 presents the earnings (loss) per share from con- tinuing operations, discontinued operations and net reported in 2010 compared to consolidated net earnings earnings (loss). of $112 million ($0.92 per share) in 2009 and a net loss of $283 million ($2.30 per share) in 2008. Earnings (Loss) per Subordinate Voting Share Table 14 shows the net earnings (loss) by industry segment before discontinued operations for 2010, 2009 TABLE 15 ($ per share) 2010 2009 2008 and 2008. Basic and Diluted: Consolidated Net Earnings (Loss) by Industry Segment Discontinued operations – – Net earnings (loss) $ (0.43) $ 0.92 TABLE 14 ($ millions) 2010 2009 2008 Continuing operations $ (0.43) $ 0.92 $ (2.37) $ 0.07 $ (2.30) Earnings (loss) from continuing operations: Electronics Manufacturing Services Aerostructures Healthcare Financial Services Customer Support Services Metal Services Other(a) (b) Total consolidated net earnings $ 7 $ 15 39 32 (52) 2 (94) 6 14 36 32 (126) (31) 181 $ (119) 17 (62) 40 (170) (2) 13 (loss) $ (51) $ 112 $ (283) (a) 2010 other includes Husky, Hawker Beechcraft, Allison Transmission, RSI, Tropicana Las Vegas, Tomkins, ONCAP II, Onex Real Estate, Onex Credit Partners, Flushing Town Center and the parent company. 2009 other includes Cineplex Entertainment (up to March 2009), CEI (up to 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. (b) Includes discontinued operations in 2008. Onex Corporation December 31, 2010 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 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, 2010 and 2009. 2010 $ 6,544 (5,168) (672) $ 704 (133) 13 $ 584 (87) (96) (148) (37) (48) 6 122 (76) (13) $ 207 (106) (104) $ (3) 2009 $ 6,153 (4,823) (673) $ 657 (153) 9 $ 513 (83) (97) (68) (17) (9) 7 323 (49) (255) $ 265 (69) (156) $ 40 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 Operating earnings Amortization of intangible assets and deferred charges Interest expense of operating companies Loss from equity-accounted investments Foreign exchange loss Stock-based compensation expense Other income Gains on dispositions of operating investments Acquisition, restructuring and other expenses Writedown of goodwill, intangible assets and long-lived assets Earnings before income taxes and non-controlling interests Provision for income taxes Non-controlling interests Earnings (Loss) for the Period 40 Onex Corporation December 31, 2010 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 17 provides a breakdown of the 2010 and 2009 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 2010 2009 Change ($) 2010 2009 Change ($) Electronics Manufacturing Services $ 1,897 Aerostructures Healthcare Financial Services Customer Support Services Metal Services Other(a) Total 1,081 1,863 274 349 459 621 $ 1,758 1,139 1,624 330 415 379 508 $ 139 (58) 239 (56) (66) 80 113 US$ 1,876 US$ 1,067 US$ 1,842 US$ 270 US$ 344 US$ 453 C$ 621 US$ 1,664 US$ 1,079 US$ 1,539 US$ 312 US$ 394 US$ 358 C$ 508 US$ 212 US$ (12) US$ 303 US$ (42) US$ (50) US$ 95 C$ 113 $ 6,544 $ 6,153 $ 391 ($ 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 2010 71 114 227 43 28 15 86 2009 Change ($) 2010 2009 Change ($) $ 95 $ (24) 92 248 44 19 13 2 22 (21) (1) 9 2 84 US$ 71 US$ 112 US$ 225 US$ 42 US$ 28 US$ 15 C$ 86 US$ 91 US$ 86 US$ 234 US$ 41 US$ 19 US$ 11 C$ 2 US$ (20) US$ 26 US$ (9) US$ 1 US$ 9 US$ 4 C$ 84 $ 584 $ 513 $ 71 Results are reported in accordance with Canadian generally accepted accounting principles. These results may differ from those reported by the individual operating companies. (a) 2010 other includes Husky, Tropicana Las Vegas, ONCAP II, Flushing Town Center and the parent company. 2009 other includes Husky, Tropicana Las Vegas, ONCAP II and the parent company. Fourth-quarter revenues ResCare contributed US$197 million in revenues Fourth-quarter consolidated revenues were $6.5 billion, up during the fourth quarter of 2010. This represents the com- 6 percent, or $391 million, from the same quarter of 2009. pany’s results from mid-November 2010, the date when Celestica reported a 13 percent, or US$212 mil- Onex, Onex Partners III and Onex management acquired lion, increase in fourth-quarter revenues in 2010 for most the remaining interest in the business, to December 31, of its end markets. The increases were driven by an 2010. ResCare’s results prior to this date were accounted for improved economic environment and new programs. on an equity basis. During the fourth quarter of 2010, EMSC’s rev- TMS International reported a 27 percent, or enues grew 12 percent, or US$80 million, from the same US$95 million, increase in revenues for the fourth quarter quarter last year. The revenue growth in the quarter was ended December 31, 2010. The revenue growth in the quar- driven primarily by increases in rates and volumes on net ter was driven by the overall increase in steel production. new contracts. Onex Corporation December 31, 2010 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 Revenues at Husky grew 20 percent, or US$55 mil- Partially offsetting the increases in operating earnings were: lion, in the fourth quarter of 2010 compared to the same (cid:129) a US$36 million decline in operating earnings at Care - quarter last year as the company reported higher revenues stream Health, reported in the healthcare segment, due in all of its geographic segments. The most significant primarily to higher commodity costs for polyester and revenue growth came from the company’s Latin America silver used in the production of film (US$20 million); (US$18 million), Asia Pacific (US$17 million) and Europe and (US$11 million) segments. (cid:129) a US$20 million decline in 2010 fourth-quarter oper - Partially offsetting the growth in fourth-quarter ating earnings at Celestica due to the inclusion of revenues were (i) a 13 percent, or US$50 million, decrease US$24 million in recovery of damages in the fourth quar- in revenues at Sitel Worldwide and (ii) a 13 percent, or ter of 2009. US$42 million, decline in revenues at The Warranty Group in the quarter compared to the same period last year. The same factors that contributed to the full-year decline in Fourth-quarter loss from equity-accounted investments The 2010 fourth-quarter loss from equity-accounted invest- revenues at these businesses, as discussed under revenues ments was $148 million compared to a loss of $68 million and cost of sales on page 24 of this report, were the drivers for the fourth quarter of 2009. Tomkins was $128 million of for the fourth quarter. the loss in the quarter, of which Onex’ share was $34 mil- lion. This represents three months of results of Tomkins Fourth-quarter operating earnings from its late September 2010 acquisition date. The loss was Fourth-quarter operating earnings were $584 million, due to acquisition accounting related charges including a up 14 percent, or $71 million, from the fourth quarter of US$144 million one-time charge recorded in the fourth 2009. Excluding the impact of foreign currency, oper- quarter of 2010 originating from the accounting step-up in ating earnings were up in the quarter due to the fol- value of inventory on Tomkins’ balance sheet at the date of lowing factors: its acquisition. This reduces operating earnings in the (cid:129) Spirit AeroSystems reported a US$26 million increase in period following the acquisition when the inventory is sold. operating earnings resulting from lower cost of sales, In addition, the loss in the quarter included a US$81 mil- which included a US$10 million unfavourable cumula- lion stock-based compensation expense related to the tive catch-up adjustment on the production contract issuance of options to Tomkins management investing in accounting in the 2010 fourth quarter compared to the business. US$34 million in 2009; (cid:129) higher operating earnings at Husky of US$55 million Fourth-quarter foreign exchange loss due primarily to higher revenues and cost savings A net foreign exchange loss of $37 million was recorded for achieved under the company’s transformation plan, as the quarter compared to a $17 million foreign exchange previously discussed, as well as a one-time reduction in loss for the fourth quarter last year. The loss in the quarter cost of sales of US$28 million associated with invest- was due primarily to a 3 percent depreciation of the U.S. ment tax credits that were recognized in the fourth dollar relative to the Canadian dollar on U.S.-dollar- quarter of 2010, as discussed under revenues and cost of denominated cash and near-cash items that Onex, the sales on page 27 of this report; parent company, holds. The value was 0.9946 Canadian (cid:129) the inclusion of US$16 million of operating earnings dollars at December 31, 2010, down from 1.0290 Canadian from ResCare, which Onex began to consolidate from its dollars at September 30, 2010. For the fourth quarter of acquisition date in mid-November 2010; 2009, the value of the U.S. dollar relative to the Canadian (cid:129) a US$11 million increase in EMSC’s operating earnings dollar decreased 2 percent to 1.0510 Canadian dollars at in the quarter driven by higher revenues; and December 31, 2009 compared to 1.0707 Canadian dollars (cid:129) a US$9 million increase in operating earnings at Sitel at September 30, 2009. Worldwide resulting primarily from the cost savings achieved under the company’s restructuring initiatives. 42 Onex Corporation December 31, 2010 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 Fourth-quarter stock-based compensation expense Fourth-quarter writedown of goodwill, During the fourth quarter of 2010, Onex recorded a consoli- intangible assets and long-lived assets dated stock-based compensation expense of $48 million During the fourth quarter of 2010, there was $13 million of compared to a stock-based compensation expense of writedowns of goodwill, intangible assets and long-lived $9 million for the same quarter of 2009. Included in that assets recorded by Onex’ operating companies compared amount was Onex, the parent company, which recorded to $255 million for the three months ended December 31, a stock-based compensation expense of $22 million for the 2009. A discussion of these writedowns by company is pro- three months ended December 31, 2010 due to the change vided on page 36 of this report. in its stock-based compensation liability. Onex is required to revalue the liability for stock options and deferred share Fourth-quarter cash flow units based on changes in the market value of Onex shares. Table 18 presents the major components of cash flow for The increase in Onex’ share price to $30.23 per share at the fourth quarter. December 31, 2010 from $28.91 per share at Sep tember 30, 2010 resulted in the upward revaluation of the liability for TABLE 18 ($ millions) 2010 2009 stock options and a corresponding expense. In addition, Cash from operating activities Celestica recorded a US$15 million stock-based compensa- Cash from (used in) financing activities $ 465 $ 562 $ 562 $ (685) tion expense in the fourth quarter of 2010. Cash from (used in) investing activities $ (496) $ 129 Included in the fourth-quarter 2009 stock-based Consolidated cash and short-term compensation expense was an $18 million expense re corded by Celestica, partially offset by a stock-based compensation investments – continuing operations $ 2,518 $ 3,206 recovery of $12 million recorded by Onex, the parent com- Cash from operating activities totalled $465 million in the pany. During the fourth quarter of 2009, Onex’ share price fourth quarter of 2010 compared to cash from operating decreased to $23.60 per share at December 31, 2009 from activities of $562 million in 2009. The decrease in cash from $26.24 per share at September 30, 2009, which resulted in the operating activities compared to the fourth quarter of last downward revaluation of the liability for stock options and year was due primarily to higher operating earnings at many the recovery in stock-based compensation. of Onex’ operating companies, as shown in table 17, offset by higher working capital investments in the fourth quarter of Fourth-quarter gains on dispositions 2010 driven by increased activity levels. of operating investments Cash from financing activities was $562 million in During the fourth quarter of 2010, gains on dispositions of the fourth quarter of 2010 compared to cash used in operating investments totalled $122 million compared to financing activities of $685 million in 2009. $323 million for the three months ended December 31, Cash from financing activities in the quarter 2009. The 2010 fourth-quarter gains included: included $294 million of cash received primarily from the (cid:129) an $88 million pre-tax gain on the sale of CSI by limited partners of Onex Partners III and other shareholders, ONCAP II (of which Onex’ share was $40 million); and other than Onex, for the purchase and interim financing of (cid:129) a $32 million pre-tax gain recorded by Flushing Town the remaining interest in ResCare. In addition, during the Center on debt extinguishment, as previously discussed fourth quarter of 2010, Onex and CPPIB equally sold a on page 35 of this report. portion of their investment in Tomkins to certain limited partners and others. The Tomkins investment held by those The fourth-quarter 2009 gains on dispositions of operating certain limited partners and others is in an entity controlled investments included: by Onex and therefore, the cash from financing activities (cid:129) a $320 million pre-tax gain on the sale of a portion of includes $161 million of cash received from those certain shares in EMSC by Onex, Onex Partners I and certain limited partners and others in the quarter. Partially off - limited partners in that company’s secondary offering in setting the cash from financing activities was $76 million of November 2009 (of which Onex’ portion was $104 mil- distributions to the limited partners of ONCAP II, other than lion); and Onex, from the sale of CSI in November 2010. (cid:129) a $6 million pre-tax gain on the sale of a portion of Celestica shares by Onex. Onex Corporation December 31, 2010 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 Included in the $685 million of cash used in financ- received from an Onex Partners II investment in 2010, which ing activities in the fourth quarter of 2009 were primarily: was distributed to the limited partners of Onex Part ners II (i) $263 million of cash distributed by Onex Partners I to its in January 2011. limited partners, other than Onex, for their portion of the Consolidated cash at December 31, 2010 totalled proceeds from the sale of EMSC shares in that company’s $2.5 billion. Onex, the parent company, accounted for November 2009 secondary offering; and (ii) US$346 million $530 million of the cash on hand. Table 19 provides a rec- of cash used by Celestica in November 2009 to redeem its onciliation of the change in cash at Onex, the parent com- remaining 7.875 percent senior subordinated notes. pany, from Sep tember 30, 2010 to December 31, 2010. Cash used in investing activities totalled $496 mil- lion in the fourth quarter of 2010 compared to cash from Change in Cash at Onex, the Parent Company investing activities of $129 million in 2009. Included in the cash used in investing activities in 2010 were: TABLE 19 ($ millions) (cid:129) $161 million of cash invested by certain limited partners Cash on hand at September 30, 2010 $ 442 and others in Tomkins; CSI proceeds (cid:129) $283 million of cash spent on the purchase and interim Distributions from operating companies financing of ResCare; Management fees received (cid:129) $61 million of cash used for acquisitions in the quarter Tomkins return of capital from sale to co-investors primarily by EMSC; and (cid:129) $231 million of cash used for the purchase of property, plant and equipment by Onex’ operating companies. Investment in Onex Real Estate, net Investment in ResCare Exchange loss on value of US$ cash held Other, net, including dividends 50 72 35 31 (53) (22) (24) (1) Partially offsetting the cash used in investing activities in Cash on hand at December 31, 2010 $ 530 2010 were: (i) $126 million of cash proceeds received by ONCAP II for the sale of CSI; and (ii) US$121 million of cash S U M M A R Y Q U A R T E R L Y I N F O R M A T I O N Table 20 summarizes Onex’ key consolidated financial information for the last eight quarters. TABLE 20 ($ millions except per share amounts) 2010 2009 Dec. Sept. June Mar. Dec. Sept. June Mar. Revenues $ 6,544 $ 5,981 $ 6,041 $ 5,800 $ 6,153 $ 6,078 $ 6,131 $ 6,469 Net earnings (loss) $ (3) $ (44) $ 80 $ (84) $ 40 $ (180) $ 83 $ 169 Earnings (loss) per Subordinate Voting Share Net earnings (loss) $ (0.03) $ (0.37) $ 0.67 $ (0.70) $ 0.33 $ (1.48) $ 0.68 $ 1.38 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 dol- lar; and varying business activities and cycles at Onex’ operating companies. 44 Onex Corporation December 31, 2010 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 (cid:129) $120 million in assets added primarily from Carestream Health’s September 2010 acquisition of Quantum Medi - This section should be read in conjunction with the au - cal Imaging, LLC, a privately-held manufacturer of high- dited annual consolidated balance sheets and the corre- quality digital and conventional x-ray systems used by sponding notes thereto. hospitals, imaging centres and health clinics; (cid:129) $160 million in assets from acquisitions completed by Consolidated assets Consolidated assets totalled $27.1 billion at December 31, EMSC in 2010; (cid:129) $63 million in assets added from Skilled Healthcare 2010 compared to $25.3 billion at December 31, 2009 and Group’s May 2010 purchase of five Medicare-certified $29.7 billion at December 31, 2008. Onex’ consolidated assets hospice companies and four Medicare-certified home at December 31, 2010 grew from December 31, 2009 due to: health companies in Arizona, Idaho, Montana and (cid:129) the September 2010 investment of US$1.2 billion by Nevada; and Onex, Onex Partners III, Onex management and others (cid:129) $42 million in assets primarily from Celestica’s acquisi- in Tomkins, which increased equity-accounted invest- tion in August 2010 of Allied Panels Entwicklungs-und ments. The US$315 million in vested by Onex reduced Produktions GmbH, a leading medical engineering and the parent company’s cash; manufacturing service provider with a core focus on (cid:129) the consolidation of Flushing Town Center in 2010, diagnostic imaging products. which added approximately $685 million in assets at December 31, 2010; Partially offsetting the increases discussed above was the (cid:129) the additional investment in ResCare, which resulted in effect of currency translation on U.S.-based assets from the the consolidation of the company in 2010, added ap - weakening of the U.S. dollar compared to the Canadian dol- proximately $950 million in assets at December 31, 2010. lar. The underlying currency for most of Onex’ consolidated The US$22 million invested by Onex reduced the parent assets is the U.S. dollar. The closing U.S. dollar to Canadian company’s cash; dollar exchange rate decreased 5 percent to 0.9946 Canadian (cid:129) $278 million in assets from ONCAP II’s August 2010 dollars at December 31, 2010 from 1.0510 Canadian dollars at acquisition of Sport Supply Group, a leading manufac- December 31, 2009. In addition, approximately $61 million turer and distributor of sporting goods and branded of the decline in assets from December 31, 2009 was due to team uniforms to the institutional and team sports mar- the sale of CSI in the fourth quarter of 2010. ket in the United States; Asset Diversification by Industry Segment CHART 1 ($ 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 S E R V I C E S 5,055 4,612 4,685 4,821 6,146 F I N A N C I A L S E R V I C E S 6,660 6,095 5,616 5,206 4,900 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 1,026 891 836 O T H E R (a) T O TA L 6,385 5,498 4,937 29,732 27,078 25,345 3,265 3,087 745 669 10 09 08 10 09 08 10 09 08 10 09 08 10 09 08 10 09 08 10 09 08 10 09 08 (a) 2010 other includes Allison Transmission, Flushing Town Center, Hawker Beechcraft, Husky, RSI, ONCAP II, Onex Real Estate, Tropicana Las Vegas, Tomkins and the parent company. 2009 other includes Allison Transmission, Hawker Beechcraft, Husky, RSI, ONCAP II, Onex Real Estate, Tropicana Las Vegas and the parent company. 2008 other includes Allison Transmission, CEI, Hawker Beechcraft, Husky, Radian, RSI, ONCAP II, Onex Real Estate and the parent company. Onex Corporation December 31, 2010 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 The pie charts below show the percentage breakdown of total consolidated assets by industry segment as at December 31, 2010, 2009 and 2008. Segmented Total Consolidated Assets Breakdown 2010 20 09 2 0 0 8 a. 11% b. 19% c. 23% d. 18% e. 2% f. 3% x. 24% a. 13% b. 19% c. 22% d. 20% e. 3% f. 4% x. 19% a. Electronics Manufacturing Services b. Aerostructures c. Healthcare d. Financial Services e. Customer Support Services f. Metal Services x. Other (1) a. 16% b. 16% c. 23% d. 20% e. 3% f. 3% x. 19% (1) 2010 other includes Allison Transmission, Flushing Town Center, Hawker Beechcraft, Husky, RSI, ONCAP II, Onex Real Estate, Tropicana Las Vegas, Tomkins and the parent company. 2009 other includes Allison Transmission, Hawker Beechcraft, Husky, RSI, ONCAP II, Onex Real Estate, Tropicana Las Vegas and the parent company. 2008 other includes Allison Transmission, CEI, Hawker Beechcraft, Husky, Radian, RSI, ONCAP II, Onex Real Estate and the parent company. Consolidated long-term debt, without recourse to Onex It has been Onex’ policy to preserve a financially strong companies that have outstanding debt must meet certain financial covenants. Changes in business conditions rele- vant to an operating company, including those resulting parent company that has funds available for new acquisi- from changes in financial markets and economic condi- tions and to support the growth of its operating compa- tions generally, may result in non-compliance with certain nies. This policy means that all debt financing is within the covenants by that operating company. operating companies and each company is required to Total long-term debt (consisting of the current support its own debt without recourse to Onex or other and long-term portions of long-term debt, net of deferred Onex operating companies. charges) was $6.6 billion at December 31, 2010 compared The financing arrangements of each operating to $5.9 billion at December 31, 2009 and $7.7 billion at company typically contain certain restrictive covenants, Decem ber 31, 2008. Table 21 summarizes consolidated which may include limitations or prohibitions on addi- long-term debt by industry segment in Canadian dollars tional indebtedness, payment of cash dividends, redemp- and the functional currency of the operating companies tion of capital, capital spending, making of investments, and for 2010, 2009 and 2008. ac qui sitions and sales of assets. In addition, the operating Consolidated Long-term Debt, Without Recourse to Onex TABLE 21 ($ 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 2010 2009 2008 $ – 1,138 2,972 190 660 375 1,216 6,551 – (242) $ 234 902 2,792 203 660 401 738 5,930 – (425) $ 892 697 3,367 237 796 519 1,167 7,675 (138) (394) Total $ 6,309 $ 5,505 $ 7,143 46 Onex Corporation December 31, 2010 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 U.S. Dollars 2010 2009 2008 $ – 1,144 2,988 191 664 377 1,223 6,587 – (243) $ 223 858 2,657 193 628 381 702 5,642 – (404) $ 732 572 2,764 195 654 426 958 6,301 (113) (323) Total $ 6,344 $ 5,238 $ 5,865 (a) 2010 other includes Husky, Radian, ONCAP II, Flushing Town Center and Onex Credit Partners. 2009 other includes Husky, Radian and ONCAP II. 2008 other includes CEI, Husky, Radian, ONCAP II and Onex Partners. Celestica (Electronics Manufacturing Services segment) EMSC (Healthcare segment) In the first quarter of 2010, Celestica repurchased all of its In April 2010, EMSC entered into new senior secured credit outstanding 2013 senior subordinated notes. These had a facilities. The new facilities consist of a US$425 million principal amount of US$223 million and were repurchased term loan and a US$150 million revolving credit facility. at a premium of approximately US$9 million. Celestica no The term loan and credit facility mature in April 2015. longer has any outstanding debt. Substantially all of EMSC’s domestic assets are pledged as collateral under the new senior secured credit facilities. Spirit AeroSystems (Aerostructures segment) The proceeds of the new facilities were used to repay and In October 2010, Spirit AeroSystems amended its credit terminate the previous US$200 million senior secured term agreement. The new agreement increased the company’s loan and redeem its senior subordinated notes with an out- revolving credit facility from US$409 million to US$650 mil- standing balance of US$250 million. At December 31, 2010, lion. It also extended the maturity of US$650 million of the US$420 million and nil were outstanding under the term revolving credit facility from June 2012 to September 2014. loan and revolving credit facility, respectively. In addition, Spirit AeroSystems extended the maturity date of US$437 million of its term loan to September 2016, with Skilled Healthcare Group (Healthcare segment) US$130 million of the term loan remaining due in Septem - In April 2010, Skilled Healthcare Group entered into a new ber 2013. At December 31, 2010, US$566 million and nil were US$330 million term loan and a US$100 million revolving outstanding under the term loan and revolving credit facil- credit facility. The term loan matures in 2016 and the ity, respectively. revolving credit facility matures in 2015. The term loan In November 2010, Spirit AeroSystems completed availability was increased by an additional US$30 million an offering of US$300 million in aggregate principal to fund acquisitions completed in the second quarter of amount of 6.75 percent senior notes due in 2020. The net 2010. Substan tially all of Skilled Healthcare Group’s assets proceeds were used to repay US$150 million in borrowings are pledged as collateral under the term loan and revolv- under its existing revolving credit facility without any ing credit facility. The proceeds from the new term loan reduction of the lenders’ commitment, with the remainder were used to repay the amounts outstanding under the to be used for general corporate purposes. Interest is former term loan and revolving credit facility. At Decem - payable semi-annually beginning in June 2011. The 2020 ber 31, 2010, US$355 million and US$26 million were out- senior notes may be redeemed prior to maturity at various standing under the term loan and revolving credit facility, premiums above face value. respectively. Onex Corporation December 31, 2010 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 ResCare (Healthcare segment) Sitel Worldwide (Customer Support Services segment) In December 2010, ResCare amended and restated its Sitel Worldwide’s long-term debt increased to US$664 mil- senior secured revolving credit facility to extend the matu- lion at December 31, 2010 from US$628 million at Decem - rity of the facility from July 2013 to December 2015 as well ber 31, 2009 due primarily to the company’s issuance of as maintain the size of the facility at US$275 million new 2018 senior unsecured notes, with a principal amount through July 2013 before stepping down to US$240 million of US$300 million, in the first quarter of 2010. The pro- through December 2015. Borrowings under the senior ceeds of the issue were primarily used to repay other out- secured revolving credit facility bear interest at LIBOR standing debt. plus a margin of 4.50 percent. At December 31, 2010, nil was outstanding under the senior secured revolving credit Flushing Town Center (Other segment) facility. The amount available under the facility is reduced As previously discussed, in the first quarter of 2010, Onex by US$68 million of standby letters of credit outstanding began consolidating Flushing Town Center. Flushing Town at Decem ber 31, 2010. Center’s long-term debt consists primarily of a senior In December 2010, ResCare completed the fi - construction loan and a mezzanine loan, both of which nancing of a new US$170 million senior secured term loan were scheduled to mature in April 2011. and US$200 million of senior subordinated notes. The In December 2010, Flushing Town Center amended proceeds were used primarily to repay a portion of Res - and restated its senior construction loan and mezzanine Care’s existing indebtedness of US$150 million of senior loan, increasing the total amount available under the con- unsecured notes, complete the acquisition of all the pub- struction loan to US$642 million, including US$25 million licly held shares of ResCare and for general corporate pur- of letters of credit, and extending the maturity to Decem- poses. The senior secured term loan bears interest at ber 2013. The loans have two one-year extension options. LIBOR plus a margin of 5.50 percent and with principal The loans bear interest at LIBOR plus a margin that ranges balance due in December 2016. The senior subordinated between 1.55 percent and 3.65 percent. In conjunction with notes bear interest at a rate of 10.75 percent and are these amendments, Onex, the parent company, purchased repayable at maturity in January 2019. At December 31, at a discount US$56 million and US$38 million principal 2010, US$170 million and US$200 million were outstanding amount of the senior construction loan and mezzanine under the senior secured term loan and senior subordi- loan, respectively, from third-party lenders. The loans were nated notes, respectively. purchased for a cash cost of US$62 million. As a result of ResCare has additional capacity of US$175 million this transaction, the loans purchased by Onex, the parent available under its debt agreements to increase the senior company, were extinguished with the original third-party secured term loan or the senior secured revolving credit lenders. Substantially all of Flushing Town Center’s assets facility, subject to certain limitations and conditions. are pledged as collateral under the senior construction and ResCare is required under its debt agreements to maintain mezzanine loans. The company’s long-term debt is without certain financial covenants and substantially all of ResCare’s recourse to Onex. assets are pledged as collateral under its debt agreements. As at December 31, 2010, US$560 million and US$38 million of principal were outstanding under the senior construction and mezzanine loans, respectively. In addition, letters of credit of US$25 million were outstand- ing, which partially reduce the amount available to be drawn under the senior construction loan. 48 Onex Corporation December 31, 2010 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 Tropicana Las Vegas (Other segment) De cem ber 2012 to December 2014. Changes to the credit In March 2010, Tropicana Las Vegas entered into a new agreement were also made that lessened the restrictions for credit agreement. This agreement consists of a US$50 mil- capital expenditures and acquisitions, restruc turing and lion revolving credit facility and a delayed draw US$10 mil- integration costs. lion term loan. The revolving credit facility and term loan bear interest at a fixed annual rate of 4 percent and 6 per- Note 9 to the audited annual consolidated financial state- cent, respectively, and mature in March 2014. The proceeds ments provides further disclosure of the long-term debt at from the revolving credit facility, when drawn, will be used each of our operating companies. to finance current ongoing capital improvement projects and for other general corporate purposes. At December 31, Table 22 details the aggregate debt maturities for Onex’ 2010, US$27 million and nil were outstanding under the consolidated operating companies and equity-accounted revolving credit facility and the term loan, respectively. operating companies for each of the years up to 2015 and Substantially all of Tropi cana Las Vegas’ assets are pledged in total thereafter. As equity-accounted businesses are as collateral under the agreement. Husky (Other segment) included in the table, the total amount is in excess of the reported consolidated debt. The table is presented in U.S. dollars as the debt of most of Onex’ operating companies is In July 2010, Husky amended and restated the secured credit denominated in U.S. dollars. Below that, we have converted agreement governing its term loan and revolving credit facil- the amounts to Canadian dollars at the December 31, 2010 ity to extend the maturity date of the facility. The amend- exchange rate. As the following table illustrates, most of the ments extended the maturity date of the facility from maturities occur in 2014 and thereafter. Debt Maturity Amounts by Year TABLE 22 ($ millions) U.S. Dollars Consolidated operating companies(a) $ 243 $ 424 $ 2,431 $ 1,175 $ 471 $ 2,195 $ 6,939 Equity-accounted operating companies(a) 243 105 113 4,067 1,833 2,887 9,248 Total $ 486 $ 529 $ 2,544 $ 5,242 $ 2,304 $ 5,082 $ 16,187 2011 2012 2013 2014 2015 Thereafter Total ($ millions) Above Table Converted to Canadian Dollars Consolidated operating companies(a) $ 242 $ 422 $ 2,418 $ 1,169 $ 468 $ 2,183 $ 6,902 Equity-accounted operating companies(a) 242 104 112 4,045 1,823 2,872 9,198 Total $ 484 $ 526 $ 2,530 $ 5,214 $ 2,291 $ 5,055 $ 16,100 2011 2012 2013 2014 2015 Thereafter Total (a) Includes debt amounts of subsidiaries held by Onex, the parent company, and are gross of deferred financing fees. The total amount of debt reported for equity-accounted operating companies in table 22 included approximately US$3.1 billion of debt of Tomkins, acquired in late September 2010. Onex Corporation December 31, 2010 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 Warranty reserves and unearned premiums Warranty reserves and unearned premiums represent The Non-controlling interests The non-controlling interests liability in Onex’ audited Warranty Group’s gross warranty and property and casualty annual consolidated balance sheet as at December 31, 2010 reserves, as well as gross warranty unearned premiums. At primarily represents the ownership interests of share - December 31, 2010, gross warranty reserves and unearned holders, other than Onex, in Onex’ consolidated operating premiums (consisting of the current and long-term por- companies and equity-accounted investments. At Decem- tions) totalled $3.1 billion compared to $3.4 billion at ber 31, 2010, the non-controlling interests balance increased December 31, 2009. Gross warranty and property and to $7.5 billion from $6.4 billion at December 31, 2009. casualty reserves are approximately $761 million (2009 – Table 23 details the change in the non-controlling interests $936 million) of the total, which represent the estimated balance from December 31, 2009 to December 31, 2010. and incurred but not reported reserves on warranty con- tracts and property and casualty insurance policies. The Change in Non-controlling Interests Warranty Group has ceded 100 percent of the property and casualty reserves component of $550 million (2009 – TABLE 23 ($ millions) $716 million) to third-party re-insurers, which therefore has Non-controlling interests as at December 31, 2009 $ 6,370 created a ceded claims recoverable asset. A subsidiary of Non-controlling interests in 2010 operating companies’ Aon Corporation, the former parent of The Warranty net earnings Group, was the primary re-insurer for 44 per cent of the Investments by shareholders other than Onex in: non-warranty property and casualty reserves and provided Onex Partners and ONCAP II guarantees on all of those reserves at December 31, 2008. Onex operating companies In August 2009 the subsidiary was sold to National Indem - Distributions to limited partners nity Company. As part of the sale, National Indem nity Other, including repurchases of shares by Onex 374 1,378 139 (217) (195) (366) Company became the primary re-insurer for 42 percent of the non-warranty property and casualty reserves and pro- vided guarantees on all of those reserves at December 31, 2010 and 2009. The Warranty Group’s liability for gross warranty and property and casualty unearned premiums totalled $2.3 billion in 2010 (2009 – $2.5 billion). All of the unearned premiums are related to warranty business and represent the portion of the revenue received that has not yet been earned as revenue by The Warranty Group on extended warranty products sold through multiple distribution channels. Typically, there is a time delay between when the warranty contract starts to earn and the contract effective date. The contracts generally commence earning after the original manufacturer’s warranty on a product expires. Note 11 to the audited annual consolidated finan- cial statements provides details of the gross warranty and property and casualty reserves for loss and loss adjust- ment expenses and warranty unearned premiums as at December 31, 2010 and 2009. 50 Onex Corporation December 31, 2010 operating companies Other comprehensive loss Non-controlling interests as at December 31, 2010 $ 7,483 The increase in the non-controlling interests balance was driven primarily by: (cid:129) $910 million provided by limited partners of Onex Part - ners III, Onex management, certain limited partners and others, other than Onex, for the investment in Tomkins in late September 2010; (cid:129) $38 million provided by limited partners of Onex Part - ners III and other shareholders, other than Onex, in Tropi cana Las Vegas’ second rights offering completed in April 2010; (cid:129) $101 million provided by limited partners of Onex Part - ners III and other shareholders, other than Onex, for the purchase of the remaining approximate 75 percent in - terest in ResCare, acquired in mid-November 2010; (cid:129) $193 million provided by the limited partners of Onex Partners III and other shareholders, other than Onex, for the interim financing associated with the ResCare acqui- sition that was subsequently repaid in January 2011; 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) $37 million provided by limited partners of Onex Change in Shareholders’ Equity Partners II, other than Onex, primarily for their share of the investment in Hawker Beechcraft debt in the first TABLE 24 ($ millions) quarter of 2010; Shareholders’ equity as at December 31, 2009 $ 1,659 (cid:129) $65 million provided by limited partners of ONCAP II and Regular dividends declared other shareholders, other than Onex, for their share of the Shares repurchased and cancelled investment in Sport Supply Group in August 2010; and Net loss (cid:129) $374 million of non-controlling interests’ share of the Other comprehensive income for 2010 (13) (52) (51) (62) operating companies’ net earnings in 2010. Shareholders’ equity as at December 31, 2010 $ 1,481 Partially offsetting these increases were: (cid:129) $17 million in distributions to the limited partners of Onex Partners I, other than Onex, for their share of The Warranty Group dividend distributed in 2010; Onex’ audited annual consolidated statements of share- holders’ equity and comprehensive loss also show the changes to the components of shareholders’ equity for the (cid:129) $59 million in distributions to the limited partners of years ended December 31, 2010 and 2009. Onex Partners I and II, other than Onex, for their share of the Husky distribution paid in July 2010; (cid:129) $64 million in distributions to the limited partners of Onex Partners II, other than Onex, for their share of: (i) TMS International’s early redemption of a portion of the company’s promissory notes; (ii) The Warranty Group’s dividend distributed in the first quarter of 2010; Shares outstanding At January 31, 2011, Onex had 118,280,332 Subordinate Voting Shares issued and outstanding. Table 25 shows the change in the number of Subordinate Voting Shares out- standing from December 31, 2009 to January 31, 2011. and (iii) the Carestream Health distribution in Septem - Change in Subordinate Voting Shares Outstanding ber 2010; (cid:129) US$167 million of share purchases by Celestica in the TABLE 25 open market; and Subordinate Voting Shares outstanding (cid:129) a 5 percent decrease in the value of the U.S. dollar rela- at December 31, 2009 tive to the Canadian dollar, which contributed $380 mil- Shares repurchased and cancelled under Onex’ lion of the decrease. The value of the U.S. dollar was Normal Course Issuer Bids 0.9946 Canadian dollars at December 31, 2010 compared to 1.0510 Canadian dollars at December 31, 2009. This amount is included in other comprehensive earnings. Shareholders’ equity Shareholders’ equity totalled $1.5 billion at December 31, 2010 compared to $1.7 billion at December 31, 2009. The $52 million of shares repurchased by Onex, the parent company, in 2010, and the $51 million net loss accounted for much of the change in shareholders’ equity in the year. Table 24 provides a reconciliation of the change in shareholders’ equity from December 31, 2009 to Decem- ber 31, 2010. 120,317,445 (2,040,750) 3,637 Issue of shares – Dividend Reinvestment Plan Subordinate Voting Shares outstanding at January 31, 2011 118,280,332 Onex also has 100,000 Multiple Voting Shares outstanding, which have a nominal paid-in value reflected in Onex’ audited annual consolidated financial statements. There was no change in the Multiple Voting Shares during 2010. During the fourth quarter of 2010, the issued and outstanding Series 1 Senior Preferred Shares were can- celled. These Series 1 Preferred Shares had no paid-in amount. Note 14 to the audited annual consolidated finan- cial statements provides additional information on Onex’ share capital. Onex Corporation December 31, 2010 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 Cash dividends During 2010, Onex declared dividends of $0.11 per Sub - At December 31, 2010, Onex had 13,889,600 options outstanding to acquire Subordinate Voting Shares, of which ordinate Voting Share, which were paid quarterly at a rate 11,788,350 options were vested, and 11,166,100 of those of $0.0275 per Subordinate Voting Share. The dividends are vested options were exercisable. Table 26 provides informa- payable on or about January 31, April 30, July 31 and Octo - tion on the activity during 2010 and 2009. ber 31 of each year. The dividend rate remained unchanged from that of 2009 and 2008. Total payments for dividends Change in Stock Options Outstanding have decreased with the repurchase of Subor dinate Voting Shares under the Normal Course Issuer Bids. 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 market-related price at the time of reinvestment. During 2010, Onex issued 3,088 Subordinate Voting Shares at an average cost of $27.68 per Subordinate Voting Share, creating a cash savings of less than $1 million. During 2009, Onex issued 3,060 Subordinate Voting Shares at an average cost of $20.61 per Subordinate Voting Share, creating a cash savings of less than $1 mil- lion. During 2008, Onex issued 6,279 Subordinate Voting Shares under the Plan at an average cost of $29.48 per Subordinate Voting Share, creating cash savings of less than $1 million. In January 2011, Onex issued an additional 549 Sub - ordinate Voting Shares under the Plan at an average cost of $32.34 per Subordinate Voting Share. 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 employees 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 772,500 remaining 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 preceding the day of the grant. Vested options are not exercisable 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. 52 Onex Corporation December 31, 2010 TABLE 26 Number of Options Outstanding at December 31, 2008 12,931,450 Granted Surrendered Expired 727,500 (197,900) (11,000) Outstanding at December 31, 2009 13,450,050 Granted Surrendered Expired 625,000 (173,100) (12,350) Weighted Average Exercise Price $ 18.07 $ 23.35 $ 20.20 $ 20.76 $ 18.33 $ 29.29 $ 18.98 $ 26.69 Outstanding at December 31, 2010 13,889,600 $ 18.80 In December 2010, 625,000 options were granted with an exercise price of $29.29 and which vest over five years. In addition, 173,100 options were surrendered in 2010 at a weighted average exercise price of $18.98 for aggregate cash consideration of $2 million, and 12,350 options expired. 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 consideration of $1 million, and 11,000 options expired. During 2008, 702,500 options were granted with an exercise price of $15.95 and which vest over five years. In addition, 538,550 options were surrendered in 2008 at a weighted average exercise price of $14.97 for aggregate cash consideration of $9 million, and 10,000 options expired. Normal Course Issuer Bids Onex had Normal Course Issuer Bids (the “Bids”) in place during 2010 that enable it to repurchase up to 10 percent of its public float of Subordinate Voting Shares during the period of the relevant Bid. Onex believes that it is advanta- geous to Onex and its shareholders to continue to repur- chase Onex’ Subordinate Voting Shares from time to time when the Subordinate Voting Shares are trading at prices that reflect a significant discount to their intrinsic value. M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S On April 14, 2010, Onex renewed its Normal Other Comprehensive Earnings (Loss) Course Issuer Bid (“NCIB”) following the expiry of its pre- vious NCIB on April 13, 2010. Under the new NCIB, Onex is TABLE 27 ($ millions) 2010 2009 permitted to purchase up to 10 percent of its public float in Other comprehensive earnings (loss), its Subordinate Voting Shares, or 9,100,636 Subordinate net of taxes: Voting Shares. Onex may purchase up to 53,830 Subor - Currency translation adjustments $ (75) $ (74) dinate Voting Shares during any trading day, being 25 per- Change in fair value of derivatives cent of its average daily trading volume for the six-month designated as hedges period ended March 31, 2010. Onex may also purchase Other 7 6 109 13 Subordinate Voting Shares from time to time under the Toronto Stock Exchange’s block purchase exemption, if available, under the new NCIB. The new NCIB com- menced on April 14, 2010 and will conclude on the earlier of the date on which purchases under the NCIB have been Other comprehensive earnings (loss) $ (62) $ 48 Management of capital Onex considers the capital it manages to be the amounts it completed and April 13, 2011. A copy of the Notice of has in cash, short-term and near-cash investments, and Intention to make the Normal Course Issuer Bid filed with the investments made by it in the operating businesses, the Toronto Stock Exchange is available at no charge to Onex Real Estate and Onex Credit Partners. Onex also shareholders by contacting Onex. manages the third-party capital invested in the Onex Under the previous NCIB that expired on April 13, Partners and ONCAP Funds. 2010, Onex repurchased 1,878,200 Subordinate Voting Shares at a total cost of $43 million, or an average pur- Onex’ objectives in managing capital are to: chase price of $23.11 per share. (cid:129) preserve a financially strong parent company with During 2010, Onex, the parent company, repur- appropriate liquidity and no, or a limited amount of, chased 2,040,750 Subordinate Voting Shares under its debt so that it has funds available to pursue new acqui- Normal Course Issuer Bids at an average cost per share of sitions and growth opportunities, as well as support the $25.44 for a total cost of $52 million. Under similar Bids, building of its existing businesses. Onex does not gener- Onex repurchased 1,784,600 Subordinate Voting Shares at a ally have the ability to draw cash from its operating total cost of $41 million during 2009 and 3,481,381 Sub - businesses. Accordingly, maintaining adequate liquidity ordinate Voting Shares at a total cost of $101 million in 2008. at the parent company is important; Accumulated other comprehensive earnings (loss) Accumulated other comprehensive earnings (loss) repre- (cid:129) achieve an appropriate return on capital invested com- mensurate with the level of risk taken on; (cid:129) build the long-term value of its operating businesses; (cid:129) control the risk associated with capital invested in any sents the accumulated unrealized gains or losses, all net of particular business or activity. All debt financing is income taxes, related to certain available-for-sale securi- within the operating businesses and each company is ties, cash flow hedges and foreign exchange gains or losses required to support its own debt. Onex does not guar - on the net investment in self-sustaining operations. antee the debt of the operating businesses and there At December 31, 2010, the accumulated other are no cross-guarantees of debt between the operating comprehensive loss balance was $175 million compared businesses; and to an accumulated loss of $113 million at the end of 2009. (cid:129) have appropriate levels of committed third-party capital The change in the year was a comprehensive loss of available to invest along with Onex’ capital. This enables $62 million. Table 27 provides a breakdown of other com- Onex to respond quickly to opportunities and pursue prehensive earnings (loss) for 2010 compared to 2009. acquisitions of businesses of a size 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 interest on the profits of third-party participants. Onex Corporation December 31, 2010 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 At December 31, 2010, Onex, the parent company, had $530 million of cash on hand and $156 million of near-cash items at market value. Cash from operating activities Table 29 provides a breakdown of cash from operating activities by cash generated from operations and non-cash Onex, the parent company, has a conservative working capital items, warranty reserves and unearned cash management policy that limits its cash investments premiums and other liabilities for the years ended Decem - to short-term high-rated money market instruments. This ber 31, 2010 and 2009. policy is driven toward maintaining liquidity and pre - serving principal in all money market investments. Components of Cash from (used in) Operating Activities At December 31, 2010, Onex had access to US$3.1 billion of uncalled committed third-party capital TABLE 29 ($ millions) 2010 2009 for acquisitions through the Onex Partners and ONCAP Cash generated from operations $ 1,592 $ 1,715 Funds. This includes approximately US$2.6 billion of committed third-party capital for Onex Partners III and $90 million from ONCAP II. The strategy for risk management of capital did not change in 2010. L I Q U I D I T Y A N D C A P I T A L R E S O U R C E S This section should be read in conjunction with the au - dited annual consolidated statements of cash flows and the corresponding notes thereto. Table 28 summarizes the major consolidated cash flow components. Changes in non-cash working capital items: Accounts receivable Inventories Other current assets (175) (604) (360) 381 (166) 58 Accounts payable, accrued liabilities and other current liabilities 652 (225) Increase (decrease) in cash due to changes in non-cash working capital items $ (487) $ 48 Decrease in warranty reserves and unearned premiums and other liabilities (188) (423) Cash from operating activities $ 917 $ 1,340 Major Cash Flow Components Cash generated from operations excludes changes in TABLE 28 ($ millions) 2010 2009 non-cash working capital items, warranty reserves and Cash from operating activities Cash from (used in) financing activities $ 917 $ 1,106 $ 1,340 $ (857) Cash from (used in) investing activities $ (2,565) $ 223 Consolidated cash and short-term un earned premiums and other liabilities. The cash gener- ated from operations for the year ended December 31, 2010 was due primarily to strong operating earnings at many of Onex’ operating companies, as discussed on page 29 of investments – continuing operations $ 2,518 $ 3,206 this MD&A. The significant changes in non-cash working cap- ital items in 2010 compared to last year were: (cid:129) a $175 million overall increase from accounts receivable, the largest contributor being Celestica, due primarily to higher year-over-year revenue at Celestica; (cid:129) a $604 million increase in inventory in 2010 driven by higher inventory balances at Spirit AeroSystems, which continues to build up inventory associated with its vari- ous programs, as well as inventory growth at Celestica associated with increased activity; 54 Onex Corporation December 31, 2010 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S (cid:129) a $360 million increase in other current assets primarily due to restricted cash representing the limited partners’ Cash from (used in) investing activities Cash used in investing activities totalled $2.6 billion in net share of distributions received in the fourth quarter 2010 compared to cash from investing activities of $223 mil- of 2010 from operating companies and the return of lion in 2009. Included in the cash used in investing activi- interim financing from ResCare. These amounts were ties in 2010 were: distributed to the limited partners in early January 2011; (cid:129) US$1.2 billion of cash invested by Onex, Onex Partners III, and Onex management, certain limited partners and others (cid:129) a $652 million increase in accounts payable, accrued lia- in Tomkins; and bilities and other current liabilities primarily at Spirit (cid:129) $605 million of cash spent on acquisitions completed AeroSystems and Celestica, consistent with the increase primarily by Carestream Health, EMSC, Skilled Health - in inventory and activity levels at those businesses. care Group, ONCAP II’s purchase of Sport Supply Group Cash from (used in) financing activities Cash from financing activities totalled $1.1 billion in 2010 compared to cash used in financing activities of $857 mil- and Celestica, as well as the acquisition and interim financing of ResCare, and the investment in Flushing Town Center by Onex, the parent company, in 2010. lion in 2009. Cash from financing activities in 2010 was pri- In addition, there was $870 million of cash used for the pur- marily due to: chase of property, plant and equipment by Onex’ operating (cid:129) $1.2 billion of cash received from the limited partners of companies (2009 – $613 million). Table 30 details property, Onex Partners III and other shareholders, other than plant and equipment expenditures by industry segment. Onex, for the investment in Tomkins, the acquisition and interim financing of the remaining interest in Res - Property, Plant and Equipment Expenditures Care in the fourth quarter and the second Tropicana by Industry Segment Las Vegas rights offering completed in the second quar- ter of 2010; and TABLE 30 ($ millions) (cid:129) $28 million of cash received from the limited partners of Electronics Manufacturing Services ONCAP II, other than Onex, for its acquisition of Sport Supply Group. Aerostructures Healthcare Financial Services Partially offsetting these were: Customer Support Services (cid:129) $140 million of distributions to the limited partners of Metal Services Onex Partners, other than Onex, for their portion of the distributions made by TMS International, Carestream Health, Husky and The Warranty Group; Other(a) Total 2010 $ 64 308 167 10 30 42 249 2009 $ 69 235 163 12 25 43 66 $ 870 $ 613 (cid:129) $76 million of distributions to the limited partners of (a) 2010 and 2009 other includes Husky, ONCAP II, Onex Real Estate, ONCAP II, other than Onex, from the sale of CSI in Tropicana Las Vegas and the parent company. November 2010; (cid:129) US$232 million of cash used by Celestica to repurchase its remaining 2013 senior subordinated notes. This compares to US$496 million of cash used by Celestica in 2009 for the repurchase of its 2011 senior subordinated notes; During 2010, Spirit AeroSystems invested $308 million in property, plant and equipment primarily associated with the construction of the company’s new manufac - turing site in North Carolina as well as to sustain existing (cid:129) $52 million of cash spent by Onex, the parent company, production capacity. on the repurchase of 2,040,750 Subordinate Voting Shares under the Company’s Normal Course Issuer Bid; (cid:129) US$82 million of net long-term debt repayment by Care - stream Health in 2010; and Flushing Town Center incurred US$120 million for the continued construction of the project. Tropicana Las Vegas invested approximately US$69 million in 2010 primarily associated with the refur- (cid:129) US$167 million of cash used by Celestica for purchases bishment project for the resort. of its shares in the open market. Onex Corporation December 31, 2010 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 Partially offsetting the cash used in investing activities in Change in Cash at Onex, the Parent Company 2010 was $126 million of net cash proceeds received by ONCAP II for the sale of CSI. TABLE 31 ($ millions) Consolidated cash resources At December 31, 2010, consolidated cash was $2.5 billion, Cash on hand at December 31, 2009 Management and transaction fees received CSI proceeds compared to $3.2 billion at December 31, 2009. The major Distributions from operating companies components at December 31, 2010 were: (cid:129) $530 million of cash on hand at Onex, the parent com- pany; and (cid:129) $630 million 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 $530 million of cash Investment in Tomkins Investment in Sport Supply Group Investment in Hawker Beechcraft debt Investment in Tropicana Las Vegas Investment in ResCare Investment in Onex Real Estate, net Investment managed by Onex Credit Partners Onex share repurchases Exchange loss on value of US$ cash held Other, net, including dividends $ 890 116 50 141 (323) (30) (22) (10) (22) (83) (21) (52) (43) (61) at the parent company at December 31, 2010, there was Cash on hand at December 31, 2010 $ 530 approximately $156 million of near-cash items that are investments in a segregated unlevered fund managed by Onex Credit Partners. The investments are focused on li - quid senior debt securities. Table 31 provides a reconcilia- tion of the change in cash at Onex, the parent company, from December 31, 2009 to December 31, 2010. A D D I T I O N A L U S E S O F C A S H Contractual obligations The following table presents the contractual obligations of Onex’ operating companies as at December 31, 2010: Contractual Obligations TABLE 32 ($ 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 Capital and operating leases Purchase obligations Pension plan obligations(a) $ 6,902 1,278 394 35 $ 242 $ 2,840 $ 1,637 $ 2,183 291 218 35 410 90 – 230 31 – 347 55 – Total contractual obligations $8,609 $ 786 $ 3,340 $ 1,898 $ 2,585 (a) The pension plan obligations are those of the Onex operating companies with significant defined benefit pension plans. 56 Onex Corporation December 31, 2010 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 provided in table 21. In addition, notes 9 and 10 to the Onex’ commitment to the Funds Onex, the parent company, is the largest limited partner in audited annual consolidated financial statements provide the Onex Partners and ONCAP Funds. Table 33 presents further disclosure on long-term debt and lease commit- Onex’ commitment and uncalled committed capital in ments. Our operating companies currently believe they these Funds at December 31, 2010: have adequate cash from operations, cash on hand and borrowings available to them to meet anticipated debt service requirements, capital expenditures and working TABLE 33 ($ millions) Fund Size Onex’ Commit- ment Uncalled Committed Capital capital needs. There is, however, no assurance that our operating companies will generate sufficient cash flow from operations or that future borrowings will be available to enable them to grow their business, service all indebt- edness or make anticipated capital expenditures. Onex Partners I Onex Partners II Onex Partners III ONCAP II US$ 1,655 US$ 400 US$ 23 US$ 3,450 US$ 1,407 US$ 170 US$ 4,300 US$ 800 US$ 580 C$ 574 C$ 252 C$ 100 Commitments At December 31, 2010, Onex and its operating companies Pension plans Five of Onex’ operating companies have defined benefit had total commitments of $674 million (2009 – $527 mil- pension plans, of which the more significant plans are those lion). Commitments by Onex and its operating companies of Spirit AeroSystems, Celes tica and Carestream Health. provided in the normal course of business include com- At December 31, 2010, the defined benefit pension plans of mitments for corporate investments and letters of credit, the five Onex operating companies had combined assets of letters of guarantee and surety and performance bonds. $1.4 billion against combined obligations of $1.3 billion, Approximately $568 million of the total commit- with a net surplus of $93 million. A surplus in any plan is ments in 2010 (2009 – $467 million) were for contingent not available to offset deficiencies in others. liabilities in the form of letters of credit, letters of guarantee, Spirit AeroSystems has several U.S. defined bene - and surety and performance bonds provided by certain fit pension plans that were frozen at the date of Onex’ operating companies to various third parties, in cluding acquisition of Spirit AeroSystems, with no future service bank guarantees. These guarantees are without recourse benefits being earned in these plans. Pension assets are to Onex. placed in a trust for the purpose of providing liquidity As part of the Carestream Health purchase from sufficient to pay benefit obligations. Therefore, required Kodak in 2007, the acquisition agreement provided that if and discretionary contributions to those plans are not Onex and Onex Partners II realize an internal rate of return expected in 2011. In addition, Spirit AeroSystems has a in excess of 25 percent on their investment in Carestream U.K. defined benefit pension plan with expected contribu- Health, Kodak will receive payment equal to 25 percent of tions of US$8 million in 2011. Spirit AeroSystems’ defined the excess return up to US$200 million. There is no liabil- benefit pension plans remained overfunded by approxi- ity recorded for this as of December 31, 2010. mately $172 million at December 31, 2010 despite the volatility in the equity markets in 2009 and 2010. At December 31, 2010, Celestica’s defined benefit pension plans were in a net unfunded position of $30 mil- lion. Celestica’s pension funding policy is to contribute amounts sufficient to meet minimum local statutory fund- ing requirements that are based on actuarial calculations. The company may make additional discretionary contribu- tions based on actuarial assessments. Celes tica estimates US$24 million of contributions for its defined benefit pen- sion plans in 2011 based on the most recent actuarial valua- tions. A significant deterioration in the asset values could Onex Corporation December 31, 2010 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 lead to higher than expected future contributions; however, At December 31, 2010, the third-party limited Celestica does not expect this will have a material adverse partners in the Onex Partners and ONCAP Funds had impact on its cash flows or liquidity. remaining commitments to provide funding for future Carestream Health’s defined benefit pension plans Onex-sponsored acquisitions as follows: were in an unfunded position of approximately $39 million at December 31, 2010. The company’s pension plans are Private Equity Funds Uncalled Third-party broadly diversified in equity and debt securities, as well as Committed Capital other investments. Carestream Health expects to contribute approximately US$3 million in 2011 to its defined benefit TABLE 34 ($ millions) pension plans, and it does not believe that future pension contributions will materially impact its liquidity. Onex, the parent company, has no pension plan and has no obligation to the pension plans of its operating companies. Onex Partners I Onex Partners II Onex Partners III ONCAP II Available Uncalled Committed Capital (excluding Onex)(a) US$ 76 US$ 255 US$ 2,647 C$ 90 A D D I T I O N A L S O U R C E S O F C A S H Proposed sale of Emergency Medical Services In early February 2011, Onex announced that it had agreed to vote in favour of a definitive merger agreement pro viding for the sale of EMSC to an affiliate of Clayton, Dubilier & Rice LLC. Under the terms of the agreement, EMSC share- holders, including Onex, would receive US$64.00 in cash per share at closing. Under the proposed transaction, Onex, Onex Part ners I, Onex management and certain co-investors will sell their remaining 13.7 million EMSC shares for net proceeds of US$878 million. Onex’ share of the net proceeds would be US$339 million including carried interest. This transaction is expected to close in the second quarter of 2011 and is subject to certain customary closing conditions. Including prior realizations, this would bring Onex’ total proceeds on EMSC to US$630 million compared to Onex’ initial investment of $80 million. Private equity funds Onex has additional sources of cash from its private equity funds. Private equity funds provide capital to Onex-spon- sored acquisitions that are not related to Onex’ operating companies that existed prior to the formation of the Funds. The Funds provide a substantial pool of committed funds, which enables Onex to be flexible and timely in responding to investment opportunities. (a) Includes committed amounts from Onex management and directors, calculated based on the assumption that all of the remaining limited partners’ commitments are invested. The committed amounts by the third-party limited part- ners are not included in Onex’ consolidated cash and will be funded as acquisitions are made. During 2003, Onex raised its first large-cap Fund, Onex Partners I, with US$1.655 billion of committed capital, including committed capital from Onex of US$400 million. Since 2003, Onex Partners I has completed 10 in vest ments or acquisitions with US$1.5 billion of equity being put to work. While Onex Partners I has concluded its investment period, the Fund still has uncalled third-party committed capital of US$76 million, which is largely reserved for possible future funding of acquisitions by any of Onex Partners I’s existing businesses. During 2006, Onex raised its second large-cap Fund, Onex Partners II, a US$3.45 billion private equity fund, including committed capital of US$1.4 billion from Onex. Onex Partners II has completed seven investments or acquisitions, investing US$2.9 billion of equity in those transactions. At December 31, 2010, Onex Partners II has uncalled third-party committed capital of US$255 million, which is largely reserved for possible future funding for any of Onex Partners II’s existing businesses. 58 Onex Corporation December 31, 2010 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 completed fundraising for its to approximately US$1.5 billion at the option of Onex. third large-cap private equity fund, Onex Partners III, a Onex Partners III has completed three investments or US$4.3 billion private equity fund. Onex had initially com- acquisitions, investing US$1.1 billion of equity in those mitted US$1.0 billion to this Fund, which could be either transactions. increased or decreased by US$500 million with six months’ Onex’ mid-cap private equity Fund, ONCAP II, notice to the third-party limited partners. On December 31, has total committed capital of $574 million, of which Onex 2008, Onex had notified its limited partners in Onex Part ners has committed $252 million. ONCAP II has completed six III that it would be reducing its commitment to the Fund acquisitions, putting $323 million of equity to work. At to approximately US$500 million effective July 1, 2009. December 31, 2010, this Fund has uncalled committed third- Any transaction completed prior to July 1, 2009 was funded party capital of $90 million available for future acquisitions. 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 invest- Related party transactions Related party transactions are primarily investments by ment commitment to Onex Partners III. In December 2009, the management of Onex and of the operating companies Onex notified its limited partners in Onex Partners III that in the equity of the operating companies acquired. it would be increasing its commitment up to US$800 mil- The various investment programs are described lion. This became effective for new acquisitions completed in detail in the following pages and certain key aspects are after June 16, 2010. This commitment may be increased up summarized in table 35. Investment Programs TABLE 35 Management Investment Plan Minimum Stock Price Appreciation/ Return Threshold Vesting Associated Investment by Management 15% Compounded Return 6 years (4 years prior to November 2007) • personal “at risk” equity investment required • 25% of gross proceeds on the 7.5 percent gain allocated under the MIP to be reinvested in Subordinate Voting Shares or Management DSUs until 1,000,000 shares or DSUs owned Carried Interest Participation 8% Compounded Return 4 years (Onex Partners I) 5 years (Onex Partners II) 6 years (Onex Partners III) • 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 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 Onex Corporation December 31, 2010 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 Management Investment Plan Carried interest participation Onex has a Management Investment Plan (the “MIP”) that The General Partners of the Onex Partners Funds, which requires its management members to invest in each of the are controlled by Onex, are entitled to a carried interest of operating companies acquired by Onex. Management’s 20 percent on the realized gains of third-party limited required cash investment is 1.5 percent of Onex’ interest in partners in each Fund, subject to an 8 percent compound each acquisition. An amount invested in an Onex Partners annual preferred return to those limited partners on all acquisition under the Fund’s 1 percent investment require- amounts contributed in each particular Fund. Onex, as ment (discussed below) also applies toward the 1.5 percent sponsor of the Onex Partners Funds, is entitled to 40 per- investment requirement under the MIP. cent of the carried interest and the Onex management In addition to the 1.5 percent participation, man- team is entitled to 60 percent. Under the terms of the part- agement is allocated 7.5 percent of Onex’ realized gain nership agreements, Onex may receive carried interest as from an operating company investment, subject to certain realizations occur. The ultimate amount of carried interest conditions. In particular, Onex must realize the full return earned will be based on the overall performance of each of of its investment plus a net 15 percent internal rate of Onex Partners I, II and III, independently, and includes return from the investment in order for management to be typical catch-up and clawback provisions within each allocated the additional 7.5 percent of Onex’ gain. The plan Fund, but not between Funds. has other limitations and voting requirements. During 2010, there was no carried interest earned During 2010, management invested $2 million by Onex, the parent company. During 2009, Onex, the par- (2009 – $1 million) under the MIP for investments outside ent company, earned carried interest on the two realiza- of Onex Partners but including Onex Real Estate and tions on the sale of shares of EMSC by third-party limited ONCAP. These amounts are in addition to amounts partners. Table 36 shows a reconciliation of carried inter- invested under the Onex Partners’ 1 percent investment est earned by Onex, the parent company, and recognized requirement. Management received $4 million under the into income by year. MIP in 2010 (2009 – $20 million). Notes 1 and 23 to the audited annual consolidated financial statements provide Carried Interest additional details on the MIP. Onex Partners Funds TABLE 36 (US$ millions) The structure of the Onex Partners Funds requires Onex Carried interest – 2003 management to invest a minimum of 1 percent in all acqui- Carried interest – 2004 sitions. This structure applies to Onex Partners I, II and III. Carried interest – 2005 Onex Partners I completed its investment period in 2006. Carried interest – 2006 For Onex Partners II and III, Onex management and direc- Carried interest – 2007 tors have committed to invest 3 percent and 4 percent, respectively, of the total capital invested by those Funds for the commitment periods beginning in 2011. Carried interest – 2008 Carried interest – 2009 Carried interest – 2010 The total amount invested in 2010 by Onex Total management and directors on acquisitions and invest- Cash Carried Interest Received Carried Interest Recognized in Income $ 1 $ 1 4 16 55 77 – 19 – 4 7 11 76 – 19 – $ 172 $ 118 ments completed through the Onex Partners Funds was US$31 million (2009 – US$5 million). At December 31, 2010, 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 balance sheet and is included in Other liabilities (note 12). 60 Onex Corporation December 31, 2010 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 There is also US$49 million of unrealized carried shares associated with the MDSU Plan, the Company enters interest to Onex based on the market value of its public into forward agreements with a counterparty financial company holdings in Onex Partners I. In addition, Onex institution for all grants under the MDSU Plan. The costs of has the potential to earn a further US$84 million of carried those arrangements are borne entirely by participants in interest on its private companies in the Onex Partners the MDSU Plan. MDSUs are redeemable only for cash and Funds based on their fair value at December 31, 2010. no shares or other securities of Onex will be issued on the These values of unrealized carried interest are not recog- exercise, redemption or other settlement thereof. In early nized in Onex’ consolidated financial statements. 2010, 119,967 MDSUs were issued to management having an Stock Option Plan aggregate value, at the date of grant, of $3 million in lieu of cash compensation for the Company’s 2009 fiscal year. Onex, the parent company, has a Stock Option Plan in In early 2011, 47,477 MDSUs were issued to management, place that provides for options and/or share appreciation having an aggregate value, at the date of grant, of $2 million rights to be granted to Onex directors, officers and em - in lieu of cash compensation for the Company’s 2010 fiscal ployees for the acquisition of Subordinate Voting Shares year. Forward agreements were entered into to hedge Onex’ of the Company for a term not exceeding 10 years. The exposure to changes in the value of the MDSUs. options vest equally over five years with the exception of the options granted in December 2007, which vest over six Director Deferred Share Unit Plan years. The price of the options issued is at the market value Onex, the parent company, established a Director Deferred of the Subordinate Voting Shares on the business day pre- Share Unit Plan (“DSU Plan”) in 2004, which allows Onex ceding the day of the grant. Vested options are not exercis- directors to apply directors’ fees to acquire Deferred Share able unless the average five-day market price of Onex Units (“DSUs”) based on the market value of Onex shares Subordinate Voting Shares is at least 25 percent greater at the time. Grants of DSUs may also be made to Onex than the exercise price at the time of exercise. Table 26 on directors from time to time. Holders of DSUs are entitled page 52 of this MD&A provides details of the change in the to receive for each DSU, upon redemption, a cash pay- stock options outstanding at December 31, 2010 and 2009. ment equivalent to the market value of a Subordinate Voting Share at the redemption date. The DSUs vest imme- Management Deferred Share Unit Plan diately, are only redeemable once the holder retires from Effective December 2007, a Management Deferred Share the Board of Directors and must be redeemed by the end Unit Plan (“MDSU Plan”) was established as a further of the year following the year of retirement. Additional means of encouraging personal and direct economic inter- units are issued equivalent to the value of any cash divi- ests by the Company’s senior management in the perfor - dends that would have been paid on the Subordinate mance of the Subordinate Voting Shares. Under the MDSU Voting Shares. Onex, the parent company, has recorded a Plan, the members of the Company’s senior management liability for the future settlement of DSUs at the balance team are given the opportunity to designate all or a por- sheet date by reference to the value of underlying shares at tion of their annual compensation to acquire MDSUs that date. The liability is adjusted up or down for the based on the market value of Onex shares at the time in change in the market value of the underlying Subordinate lieu of cash. MDSUs vest immediately but are redeemable Voting Shares, with the corresponding amount reflected in by the participant only after he or she has ceased to be the consolidated statements of earnings. an officer or employee of the Company or an affiliate for During 2010, Onex granted 40,000 DSUs to its a cash payment equal to the then current market price directors at a cost of approximately $1 million (2009 – of Subordinate Voting Shares. Additional units are issued 40,000 DSUs at a cost of approximately $1 million) equivalent to the value of any cash dividends that would recorded as stock-based compensation expense. In addi- have been paid on the Subordinate Voting Shares. To hedge tion, 20,346 additional DSUs (2009 – 31,662 DSUs) were Onex’ exposure to changes in the trading price of Onex issued to directors in lieu of cash directors’ fees and cash Onex Corporation December 31, 2010 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 dividends and 38,705 DSUs were redeemed in 2010 (2009 – nil) for cash consideration of approximately $1 million (2009 – nil). Table 37 reconciles the changes in the DSUs outstanding at December 31, 2010 from Decem ber 31, 2008. Change in Outstanding Deferred Share Units TABLE 37 Outstanding at December 31, 2008 Granted Additional units issued in lieu of compensation and cash dividends Outstanding at December 31, 2009 Granted Redeemed Additional units issued in lieu of compensation and cash dividends Outstanding at December 31, 2010 Director DSU Plan Management DSU Plan Number of DSUs Weighted Average Price Number of DSUs Weighted Average Price 297,357 40,000 31,662 369,019 40,000 (38,705) 20,346 390,660 $ 22.98 $ 20.01 $ 28.40 $ 26.38 $ 28.38 202,902 – 69,978 272,880 – – 121,394 394,274 $ – $ 18.62 $ – $ – $ 24.59 Investment in Onex shares and acquisitions Management fees In 2006, Onex adopted a program designed to further align Onex receives management fees from Onex Partners I, II the interests of the Company’s senior management and and III. other investment professionals with those of Onex share- Onex Partners I completed its investment period holders through increased share ownership. Under this pro- in 2006, and for the remainder of the life of this Fund, gram, members of senior management of Onex are required Onex will receive a 1 percent annual management fee to invest at least 25 percent of all amounts received on the based on third-party invested capital. During the invest- 7.5 percent gain allocated under the MIP and carried inter- ment period of Onex Partners II, Onex received a manage- est in Onex Sub ordinate Voting Shares and/or Management ment fee of 2 percent on the committed capital of the DSUs until they individually hold at least 1,000,000 Onex Fund provided by third-party investors. Toward the end of Subor dinate Voting Shares and/or Management DSUs. Under 2008, the initial fee period for Onex Partners II was con- this program, during 2010 Onex management reinvested less cluded when Onex began to receive a management fee than $1 million (2009 – $2 million) in the purchase of Sub or - from Onex Partners III. Onex, therefore, earns a 1 percent dinate Voting Shares. management fee on Onex Partners II’s third-party invested Members of management and the Board of Direc - capital. The management fee on Onex Partners I and II will tors of Onex can invest limited amounts in partnership decline over time as realizations occur. with Onex in all acquisitions outside the Onex Partners Funds at the same time and cost as Onex and other outside investors. During 2010, approximately $12 million in invest- ments (2009 – $8 million) was made by Onex management and Onex Board members. 62 Onex Corporation December 31, 2010 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 is now entitled to a management fee of 1.75 percent on the committed capital of the third-party limited partners of Onex Partners III. This management fee 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 will be earned during the investment period of Onex In February 2008, the Canadian Accounting Standards Partners III for a period of up to five years. Thereafter, a Board confirmed that the use of International Financial 1 percent management fee is payable to Onex based on Reporting Standards (“IFRS”) would be required for Cana - third-party invested capital. dian publicly accountable enterprises for years beginning Management fees earned by Onex on the Onex on or after January 1, 2011. Onex is working to adopt IFRS Partners and ONCAP Funds totalled approximately as the basis for preparing its consolidated financial state- US$97 million in 2010 (2009 – US$88 million). Debt of operating companies Onex does not guarantee the debt on behalf of its operat- ments effective January 1, 2011. For the first quarter ended March 31, 2011, Onex will issue its financial results prepared on an IFRS basis with comparative data on an IFRS basis. During 2010, Onex continued to work on its tran- ing companies, nor are there any cross-guarantees be - sition plan to IFRS. The implementation of a new financial tween operating companies. Onex may hold debt as part reporting system to accommodate IFRS reporting is pro- of its investment in certain operating companies, which ceeding as planned. Included in Onex’ December 31, 2009 amounted to $213 million at December 31, 2010 compared Management’s Discussion and Analysis were the account- to $197 million at December 31, 2009. Note 9 to the audited ing policies selected under IFRS by Onex, the parent com- annual consolidated financial statements provides infor- pany, and its operating companies. While these IFRS mation on the debt of operating companies held by Onex. accounting policies have been approved by management and the Audit Committee, such approval is contingent upon those standards being effective at the time of transi- tion. Conse quently, Onex is unable to make a final deter- mination of the full or exact impact of conversion until all of the IFRS standards applicable at the conversion date of December 31, 2010 are known. Detailed on the following pages is the Company’s preliminary quantitative impact on its January 1, 2010 opening balance sheet for the transi- tion to IFRS. Upon adoption of IFRS, the Company will adopt the U.S. dollar as its functional reporting currency. Onex Corporation December 31, 2010 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 IFRS 1 (First-time adoption of IFRS) IFRS 1 requires that an entity apply all IFRS effective at the end of its first IFRS reporting period retrospectively. However, IFRS 1 does provide certain mandatory exceptions and limited optional exemptions in specific areas of certain standards that will not require retroactive application of IFRS. The following are the exemptions and exceptions under IFRS 1 that are signifi cant to Onex and that will be applied in preparing our first financial statements under IFRS: AREAS OF IFRS SUMMARY OF EXEMPTIONS AND EXCEPTIONS Business combinations IFRS 1 allows for the guidance under IFRS 3 (revised), Business Combinations, to be applied either retrospec- tively or prospectively. Onex has elected to adopt IFRS 3 (revised) prospectively. Accordingly, all business combinations on or after January 1, 2010 will be accounted for in accordance with IFRS 3 (revised). Employee benefits Cumulative translation differences Borrowing costs Leases Hedge accounting Transition impact: None. IFRS 1 provides the option to retrospectively apply either the “corridor” approach under International Accounting Standard (“IAS”) 19, Employee Benefits, for the recognition of actuarial gains and losses, or recog- nize all cumulative gains and losses deferred under Canadian GAAP in opening retained earnings at the date of transition. Onex will elect to recognize all cumulative actuarial gains and losses that existed at the date of transition in opening retained earnings for all employee benefit plans at the operating companies. Transition impact: Opening equity is expected to decrease by approximately US$135 million. IAS 21, The Effects of Changes in Foreign Exchange Rates, requires an entity to determine the translation dif- ferences in accordance with IFRS from the date on which a subsidiary was formed or acquired. IFRS 1 allows cumulative translation differences for all foreign operations to be deemed zero at the date of transition to IFRS, with future gains or losses on subsequent disposal of any foreign operations to exclude translation dif- ferences arising from periods prior to the date of transition to IFRS. Onex will deem all cumulative transla- tion differences to be zero on transition to IFRS. Transition impact: No impact to opening equity is expected since amounts are transferred between opening retained earnings and accumulated other comprehensive earnings, which are both within equity. IAS 23, Borrowing Costs, requires an entity to capitalize the borrowing costs related to all qualifying assets. Onex plans to adopt IAS 23 prospectively. Accordingly, borrowing costs related to qualifying assets on or after January 1, 2010 will be capitalized. Transition impact: No expected impact. International Financial Reporting Interpretations Committee (“IFRIC”) 4, Determining Whether an Arrangement Contains a Lease, requires a company to assess all arrangements to determine if they are, or contain, a lease. Onex will elect to use the IFRS 1 exemption such that IFRIC 4 need only be applied to those arrangements that had not previously been assessed under similar Canadian GAAP requirements. Transition impact: No expected impact. IFRS 1 requires hedge accounting to be applied prospectively from the date of transition to transactions that satisfy the hedge accounting criteria at that date in accordance with IAS 39, Financial Instruments: Recognition and Measurement. Only hedging relationships that satisfy the hedge accounting criteria as of the date of transition (January 1, 2010) will be reflected as hedges in Onex’ results under IFRS. Any derivatives not meeting the IAS 39 criteria for hedge accounting will be recorded at fair value in the consolidated balance sheet as a non-hedging derivative financial instrument. Transition impact: No expected impact. 64 Onex Corporation December 31, 2010 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 to Canadian GAAP differences In addition to the exemptions and exceptions discussed above, the following discussion explains the significant accounting policy differences between Canadian GAAP and IFRS as they apply to Onex’ consolidated financial statements. ACCOUNTING POLICY AREAS Business combinations and non- controlling interests IMPACT OF POLICY ADOPTION Canadian GAAP – Under Onex’ application of Canadian GAAP, transaction costs are capitalized as part of the cost of the acquisition, when applicable. In addition, the non-controlling interests’ share of net assets is rec- ognized as a separate line item on the balance sheet, outside of equity, and the non-controlling interests’ share of earnings is recorded on the statement of earnings, above net earnings. Additionally, when Onex divests a portion of an operating company but retains control, a gain or loss is recorded in the statement of earnings for the difference between the carrying value of the portion sold and the proceeds. IFRS – Under IFRS, all transaction costs relating to acquisitions are expensed as incurred. In addition, the non-controlling interests’ share of the net assets is considered a component of equity. As a result, the non- controlling interests’ share of earnings is recorded as an allocation after arriving at net earnings. Also, when a divestiture is made on a portion of a subsidiary and control is retained, the resulting change is recorded as a transfer of equity in the statement of equity, outside of the statement of earnings. Transition impact: Opening equity is expected to increase by approximately US$3.5 billion due to the reclas- sification of non-controlling interests to equity. 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 records its proportionate share of earnings or loss from the investment. Actuarial gains and losses IFRS – For certain investments over which Onex holds significant influence but not control, IFRS allows the investments to be recorded at fair value. As a result, changes in the fair value of the investments will be recorded in the statement of earnings. Onex expects to record at fair value certain of its non-controlled investments, including Hawker Beechcraft, Allison Transmission, RSI, Tomkins and ResCare (prior to November 2010). Transition impact: Opening equity is expected to increase by approximately US$330 million with a corre- sponding increase to long-term investments. Canadian GAAP – Actuarial gains and losses that arise in calculating the present value of the defined benefit obligation and the fair value of plan assets are recognized on a systematic and consistent basis, subject to a minimum required amortization based on a “corridor” approach. The “corridor” is 10 percent of the greater of the accrued benefit obligation at the beginning of the year and the fair value of plan assets at the beginning of the year. This excess of 10 percent is amortized as a component of pension expense on a straight-line basis over the expected average service life of active participants. Actuarial gains and losses below the 10 percent corridor are deferred. IFRS – Onex will elect to recognize all actuarial gains and losses immediately in a separate statement of com- prehensive income without recognition to the income statement in subsequent periods. As a result, actuarial gains and losses are not amortized to the income statement but rather are recorded directly to comprehen- sive income at the end of each reporting period. Onex’ operating companies will adjust their pension expense to remove the amortization of actuarial gains and losses. Transition impact: No expected impact. Onex Corporation December 31, 2010 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 ACCOUNTING POLICY AREAS Cash-settled share-based payments IMPACT OF POLICY ADOPTION Canadian GAAP – A liability for cash-settled share-based payments is accrued based on the intrinsic value of the award, with changes recognized in the statement of earnings each period. IFRS – An entity must measure the liability incurred at fair value by applying an option pricing model. Until the liability is settled, the fair value of the liability is remeasured at each reporting date, with changes in fair value recognized as the awards vest. Changes in fair value of vested awards are recognized immediately in earnings. As a result, Onex and its operating companies will adjust expenses associated with cash-settled share-based payments to reflect the changes of the fair values of these awards. Transition impact: Opening equity is expected to decline by approximately US$55 million with a corre - sponding increase in other non-current liabilities. Impairments of intangible and long-lived assets, excluding goodwill (recoverable amount) Canadian GAAP – A recoverability test is performed by first comparing the undiscounted expected future cash flows to be derived from the asset to its carrying amount. If an asset’s undiscounted expected future cash flows do not exceed its carrying value, an impairment loss is calculated as the excess of the asset’s carrying amount over its fair value. 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 carrying amount over its recoverable amount. The recoverable 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-use calculation, the expected future cash flows from the asset are dis- counted to their net present value. As a result of the change in measurement methodology, impairments under IFRS may be recognized sooner than under Canadian GAAP and the impairment amounts may differ. Reversal of impairments of intangible and long-lived assets, excluding goodwill Income taxes (deferred tax assets not previously recognized) Transition impact: No expected impact. Canadian GAAP – Reversal of impairment losses is not permitted. IFRS – Reversal of impairment losses is required if the circumstances that led to the impairment no longer exist. Transition impact: The expected impact is not significant. Canadian GAAP – Previously unrecognized deferred tax assets of an acquired company are recognized as part of the cost of the acquisition when such assets are more likely than not to be realized as a result of a business combination. If an unrecognized deferred tax asset becomes realizable subsequent 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 acquisition as part of the cost of the acquisition. IFRS – Previously unrecognized deferred tax assets of an acquired company are recognized as part of the cost of the acquisition if realization is more likely than not as a result of the business combination. If an unrecog- nized deferred tax asset becomes realizable subsequent to the acquisition date, such benefit is recognized in the consolidated statement of earnings and a corresponding amount of goodwill is recognized as an operat- ing expense. The acquirer recognizes deferred tax assets of its own that become realizable as a result of the acquisition through earnings. As a result, Onex will recognize deferred tax assets that become realizable as a result of future acquisitions in earnings. Transition impact: No expected impact. 66 Onex Corporation December 31, 2010 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 ACCOUNTING POLICY AREAS Accounting for uncertainty in income taxes in business combinations IMPACT OF POLICY ADOPTION Canadian GAAP – Changes to provisions for uncertain tax positions relating to pre-acquisition periods are adjusted through the purchase price allocation, first reducing goodwill and intangible assets associated with the business combination and, only after exhausting those amounts, reducing income tax expense. IFRS – Changes to pre-acquisition provisions for uncertain tax positions beyond 12 months of the acquisition date are recorded in the income statement. As a result, Onex may be required to adjust its tax expense to reflect this difference. Transition impact: No expected impact. Limited Partners’ Interests Canadian GAAP – The Limited Partners’ Interests of net assets are recognized as a component of the overall non-controlling interests, which is disclosed as a separate line item on the balance sheet, outside of equity. The Limited Partners’ share of earnings, including any gains on sale of investments, is recorded in the state- ment of earnings as non-controlling interests, above net earnings. IFRS – The Limited Partners’ Interests are classified as a financial liability due to the limited life of the Onex Partners and ONCAP Funds. The Limited Partners’ Interests will be recorded at fair value. Adjustments to the future expected cash flows of the underlying investments would result in a corresponding adjustment to the Limited Partners’ Interests and a gain or loss in net earnings. Transition impact: Opening equity is expected to decline by approximately US$1.1 billion with a corre - sponding increase to liabilities. The above table is intended to highlight those areas the Company believes to be the most significant and it should not be considered a comprehensive list of all changes that Information technology systems and internal controls During 2009, Onex, the parent company, began to identify will result from the transition to IFRS. and assess IFRS differences that will require changes to its The Company expects that the transition to IFRS financial systems. During 2010, Onex, the parent company, will have no significant impact on its business activities. implemented an information technology solution that Based on the work completed to date, the Com - accommodates accounting under IFRS for 2010 and going pany expects that a material change to its Internal Con - forward. In addition, Onex began documenting its internal trols over Financial Reporting (“ICFR”) will be required, control processes surrounding IFRS reporting concur- with the addition of new key controls to accommodate the rently with the implementation in 2010. adoption of IFRS reporting for share-based payments and Limited Partners’ Interests. Onex has updated its systems and processes as required in preparation for transition. Onex Corporation December 31, 2010 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 D I S C L O S U R E C O N T R O L S A N D P R O C E D U R E S A N D I N T E R N A L C O N T R O L S O V E R F I N A N C I A L R E P O R T I N G Disclosure controls and procedures National Instrument 52-109, “Certification of Disclosure in Internal controls over financial reporting National Instrument 52-109 also requires CEOs and CFOs to certify that they are responsible for establishing and maintaining internal controls over financial reporting for the issuer, that those internal controls have been designed and are effective in providing reasonable assurance Issuers’ Annual and Interim Filings”, issued by the Cana - regarding the reliability of financial reporting and the dian Securities Administrators, requires Chief Execu tive preparation of financial statements in accordance with Officers (“CEOs”) and Chief Financial Officers (“CFOs”) to Canadian generally accepted accounting principles, and certify that they are responsible for establishing and main- that the issuer has disclosed any changes in its internal taining disclosure controls and procedures for the issuer, controls during its most recent interim period that have that disclosure controls and procedures have been materially affected, or are reasonably likely to materially designed and are effective in providing reasonable assur- affect, its internal control over financial reporting. ance that material information relating to the issuer is During 2010, Onex management evaluated the made known to them, that they have evaluated the effec- Company’s internal controls over financial reporting to tiveness of the issuer’s disclosure controls and procedures, ensure that they have been designed and are effective in and that their conclusions about the effectiveness of those providing reasonable assurance regarding the reliability of disclosure controls and procedures at the end of the financial reporting and the preparation of financial state- period covered by the relevant annual filings have been ments in accordance with Canadian generally accepted disclosed by the issuer. accounting principles. While no changes occurred during Under the supervision of and with the participa- the last quarter of 2010 that, in the view of Onex manage- tion of management, including the Chief Executive Officer ment, have materially affected or are reasonably likely to and Chief Financial Officer, we have evaluated the design materially affect Onex’ internal controls over financial and effectiveness of the Company’s disclosure controls reporting, the Company regularly acquires new busi- and procedures as at December 31, 2010 and have con- nesses, many of which were privately owned or were divi- cluded that those disclosure controls and procedures were sions of larger organizations prior to their acquisition by effective in ensuring that information required to be dis- Onex. The Company continues to assess the design and closed by the Company in its corporate filings is recorded, effectiveness of internal controls over financial reporting processed, summarized and reported within the required in its most recently acquired businesses. On an ongoing time period for the year then ended. basis, we continue to work with our privately held oper - A control system, no matter how well conceived ating companies to enhance controls, particularly in com- and operated, can provide only reasonable, not absolute, plex and judgmental areas. assurance that its objectives are met. Due to inherent limi- Under the supervision of and with the participation tations in all such systems, no evaluations of controls can of management, including the Chief Executive Officer and provide absolute assurance that all control issues, if any, Chief Financial Officer, we have evaluated the internal con- within a company have been detected. Accordingly, our trols over financial reporting as at December 31, 2010 and disclosure controls and procedures are effective in pro - have concluded that those internal controls were effective in viding reasonable, not absolute, assurance that the objec- providing reasonable assurance regarding the reliability of tives of our disclosure control system have been met. financial reporting and the preparation of financial state- ments in accordance with Canadian generally accepted accounting principles. 68 Onex Corporation December 31, 2010 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 Reflecting upon 2010, we are pleased with the overall sales from private equity firms have been the most active performance of our businesses particularly given the diffi - segment of the market. We have looked at many of these cult operating environment faced over the past few years. businesses, but haven’t been able to justify price expecta- Most of our companies generated earnings growth and tions. While carve-out opportunities and corporate disposi- their cash flow characteristics enabled some to reduce tions have been quite slow, we are hopeful that improving debt levels and pay meaningful distributions. This is a tes- macroeconomic conditions and operating performance as tament to the quality of these industry-leading companies, well as stable debt markets will persuade owners that this is their management teams and their conservative balance an opportune time to sell subsidiaries or mission-critical sheets. Looking ahead, we will continue to monitor the supply divisions. This segment of the market has repre- credit markets and opportunistically refinance credit facil- sented some of our best investments. ities and extend maturities. While it is difficult to predict our investment pace, Not surprisingly, Hawker Beechcraft’s perfor - Onex is well positioned to respond to the right opportu - mance continues to be affected by the depressed state of nities. Onex had approximately $690 million in cash and the general aviation market; however, the company’s sig- near-cash items, no debt at the parent company and approx- nificant aftermarket, military and government businesses imately US$3.1 billion of third-party uncalled capital for have somewhat offset the reduced demand for business acquisitions through the Onex Partners and ONCAP Funds. jets. During this challenging period, the company contin- If the February 2011 announced sale of the remaining shares ues to aggressively reduce costs, improve its sales effec- in EMSC is completed, this would provide an additional tiveness, conserve cash and further develop its military US$339 million in cash to Onex. and government businesses. The balance of our portfolio Onex’ asset management business continues to continues to operate effectively in line with expectations add value through the significant and predictable manage- and is poised to benefit should the U.S. and world eco no - ment fees it earns on third-party capital and through the mies continue to strengthen. meaningful carried interest opportunity on that capital. There is much anticipation in the market of a del- The current annualized rate of total management fees uge of initial public offerings this year. If the equity mar- received is approximately US$97 million, which offsets kets are receptive and do reward high-quality businesses, Onex’ operating costs. we have several private operating companies that would Onex will continue to evaluate opportunities to be appropriate candidates for the public markets. However, grow its asset management platforms – private equity, there is no urgency to move any of them forward given the credit investing and real estate. Following on the success strength of their balance sheets, and therefore we can wait of Onex Credit Partners’ first Canadian closed-end fund for what we believe is an opportune time to participate in in 2009, we were pleased with the tremendous interest in the equity markets. the new OCP Senior Credit Fund. This second Canadian The acquisition market continues to improve. fund was launched in November 2010 through an initial While our investment pipeline activity has not yet returned public offering that raised over $340 million. to pre-recession levels, we are much busier than we have In February 2011, ONCAP began fundraising for been in the past few years. Public-to-private transactions ONCAP III, with a target fund size of $700 million. As with provided the best opportunity for us in 2010, with all three each of its Funds, Onex will be the largest limited partner acquisitions coming from this source. Lately, secondary in ONCAP III. Onex Corporation December 31, 2010 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 We continue to believe that our success in For over 26 years, we have employed a value-ori- building companies and our record of capital preservation ented and active ownership investment approach in and superior returns – a 3.6 multiple on invested capital acquiring and building industry-leading businesses. We and a 29 percent gross IRR – are direct results of the strong believe our current portfolio of companies consists of alignment of interests between Onex shareholders, our many of the best businesses we have ever owned and we limited partners and the Onex management team. In addi- are excited about their potential. We remain focused on tion to Onex being the largest limited partner in every enhancing their productivity and profitability with the fund, Onex’ distinctive ownership culture requires each goal of creating long-term value for Onex and its investors. member of the management team to have a significant ownership in Onex stock and to invest meaningfully in each operating company acquired. At December 31, 2010, the team had approximately $1.3 billion invested in Onex shares and its businesses. 70 Onex Corporation December 31, 2010 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 Operating companies are encouraged to reduce risk and/or expand opportunity by diversifying their cus- apply common-sense business principles to the manage- tomer bases, broadening their geographic reach or product ment of the Company, the ownership of its operating com- and service offerings and improving productivity. In certain panies and the acquisition of new businesses. Each year, instances, we may also encourage an operating company detailed reviews are conducted of many opportunities to to seek additional equity in the public markets in order to purchase either new businesses or add-on acquisitions for continue its growth without eroding its balance sheet. One existing businesses. Onex’ primary interest is in acquiring element of this approach may be to use new equity invest- well-managed companies with a strong position in growing ment, when financial markets are favourable, to prepay industries. In addition, diversification among Onex’ oper- existing debt and absorb related penalties. Some of the ating companies enables Onex to participate in the growth strategies and policies to manage business risk at Onex and of a number of high-potential industries with varying busi- its operating companies are discussed in this section. ness cycles. As a general rule, Onex attempts to arrange as many factors as practical to minimize risk without ham- Business cycles Diversification by industry and geography is a deliberate pering its opportunity to maximize returns. When a pur- strategy at Onex to reduce the risk inherent in business chase opportunity meets Onex’ criteria, for example, cycles. Onex’ practice of owning companies in various typically a fair price is paid, though not necessarily the industries with differing business cycles reduces the risk lowest price, for a high-quality business. Onex does not of holding a major portion of Onex’ assets in just one or commit all of its capital to a single acquisition and does two industries. Similarly, the Company’s focus on building have equity partners with whom it shares the risk of own- industry leaders with extensive international operations ership. The Onex Partners and ONCAP Funds streamline reduces the financial impact of downturns in specific Onex’ process of sourcing and drawing on commitments regions. Onex is well diversified among various industry from such equity partners. segments, with no single industry representing more than An acquired company is not burdened with more 16 percent of its net asset base and no single business rep- debt than it can likely sustain, but rather is structured so resenting more than 11 percent of its net asset base. that it has the financial and operating leeway to maximize long-term growth in value. Finally, Onex invests in finan- cial partnership with management. This strategy not only Operating liquidity It is Onex’ view that one of the most important things gives Onex the benefit of experienced managers but also Onex can do to control risk is to maintain a strong parent is designed to ensure that an operating company is run company with an appropriate level of liquidity. Onex entrepreneurially for the benefit of all shareholders. needs to be in a position to support its operating com - Onex maintains an active involvement in its oper- panies when, and if, it is appropriate and reasonable for ating companies in the areas of strategic planning, finan- Onex, as an equity owner with paramount duties to act in cial structures and negotiations and acquisitions. In the the best interests of Onex shareholders, to do so. Main - early stages of ownership, Onex may provide resources for taining liquidity is important because Onex, as a holding business and strategic planning and financial reporting company, generally does not have guaranteed sources while an operating company builds these capabilities in- of meaningful cash flow. The approximate US$97 million house. In almost all cases, Onex ensures there is oversight in annualized management fees that Onex expects to earn of its investment through representation on the acquired in 2011 as the general partner of the Onex family of private company’s board of directors. Onex does not get involved equity funds will be used to offset the costs of running the in the day-to-day operations of acquired companies. parent company. Onex Corporation December 31, 2010 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 A large portion of the purchase price for new often establishes a relatively short timeframe for Onex to acquisitions is generally funded with debt provided by re spond definitively. third-party lenders. This debt, sourced exclusively on the In order to improve the efficiency of Onex’ inter- strength of the acquired company’s financial condition nal processes on both auction and exclusive acquisition and prospects, is a debt of the acquired company at clos- pro cesses, and so reduce the risk of missing out on high- ing and is without recourse to Onex, the parent company, quality acquisition opportunities, during 2003 we created or to its other operating companies or partnerships. The Onex Partners LP (“Onex Partners I”), a US$1.655 billion foremost consideration, however, in developing a financ- pool of capital raised from Onex and major institutional ing structure for an acquisition is identifying the appropri- co-investors. The investment period for Onex Partners I ate amount of equity to invest. In Onex’ view, this should was substantially completed in 2006. Onex raised a second be the amount of equity that maximizes the risk/reward fund, Onex Partners II LP (“Onex Partners II”), in 2006, equation for both shareholders and the acquired company. a US$3.45 billion pool of capital. Onex determined that In other words, it allows the acquired company to not only Onex Partners II was effectively fully invested in December manage its debt through reasonable business cycles but 2008. In late 2009, Onex raised its third fund, Onex Part - also to have sufficient financial latitude for the business to ners III LP (“Onex Partners III”), a US$4.3 billion pool vigorously pursue its growth objectives. of capital. Onex’ largest acquisitions over the period from 2005 to 2007 were purchased at an average purchase price multiple of 6.4 times EBITDA, which was notably less than Financial risks In the normal course of business, Onex and its operating the industry average of more than 9.3 times EBITDA. Over companies may face a variety of risks related to financial the same timeframe, the leverage associated with those management. In dealing with these risks, it is a matter of acquisitions was 3.6 times, while the industry average was Company policy that neither Onex nor its operating com- 5.6 times. This shows that Onex generally paid less for busi- panies engages in speculative derivatives trading or other nesses and applied less leverage than the industry norm. speculative activities. While Onex seeks to optimize the risk/reward Default on known credit As previously noted, new equation in all acquisitions, there is the risk that the ac - investments generally include a meaningful amount of quired company will not generate sufficient profitability or third-party debt. Those lenders typically require that the cash flow to service its debt requirements and/or meet acquired company meet ongoing tests of financial perfor - related debt covenants or provide adequate financial flexi- mance as defined by the terms of the lending agreement, bility for growth. In such circumstances, additional invest- such as ratios of total debt to operating income (“EBITDA”) ment by the equity partners, including Onex, may be and the ratio of EBITDA to interest costs. It is Onex’ practice appropriate. In severe circumstances, the recovery of Onex’ to not burden acquired companies with levels of debt that equity and any other investment in that operating com- might put at risk their ability to generate sufficient levels of pany is at risk. Timeliness of investment commitments Onex’ ability to create value for shareholders is dependent 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 in part on its ability to successfully complete large acqui - satisfied their debt covenants. sitions. Our preferred course is to complete acquisitions Financing risk The volatility in the global credit on an exclusive basis. However, we also participate in markets has created some unpredictability whether busi- large acquisitions through an auction or bidding process nesses, even creditworthy businesses, will be able to obtain with multiple potential purchasers. Bidding is often very new loans. This represents a risk to the ongoing viability competitive for the large-scale acquisitions that are Onex’ of many otherwise healthy businesses whose loans or oper- primary interest, and the ability to make knowledgeable, ating lines of credit are up for renewal in the short term. timely investment commitments is a key component None of Onex’ operating companies has any significant in successful purchases. In such instances, the vendor refinancing requirements until 2013, by which time Onex 72 Onex Corporation December 31, 2010 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 believes that the credit markets will have resumed to more as the investments are reinvested, a 0.25 percent increase normal levels of liquidity and cost. The major portion of in the interest rate would increase the annual interest Onex’ operating companies’ refinancing will take place income recorded by The Warranty Group by US$5 million. in 2014 and thereafter. Table 22 on page 49 of this MD&A Currency fluctuations The majority of the activi- provides the aggregate debt maturities for Onex’ consoli- ties of Onex’ operating companies were conducted outside dated operating companies and equity-accounted oper - Canada during 2010, primarily in the United States. Approx - ating companies for each of the years up to 2015 and in i mately 36 percent of consolidated revenues were from out- total thereafter. side North America; however, a substantial portion of that Interest rate risk As previously noted, new invest- business is actually based on U.S. currency. This makes the ments generally include a meaningful amount of third- value of the Canadian dollar relative to the U.S. dollar the party debt taken on by the acquired operating company. primary currency relationship affecting Onex’ operating An important element in controlling risk is to manage, to results. Onex’ operating companies may use currency deriv- the extent reasonable, the impact of fluctuations in interest atives in the normal course of business to hedge against rates on the debt of the operating company. adverse fluctuations in key operating currencies but, as pre- Onex’ operating companies generally seek to fix viously noted, speculative activity is not permitted. the interest on some of their term debt or otherwise mini- Onex’ results are reported in Canadian dollars, and mize the effect of interest rate increases on a portion of fluctuations in the value of the Canadian dollar relative to their debt at the time of acquisition. This is achieved by tak- other currencies can have an impact on Onex’ reported ing on debt at fixed interest rates or entering into interest results and consolidated financial position. During 2010, rate swap agreements or financial contracts to control the shareholders’ equity reflected a $75 million decrease in the level of interest rate fluctuation on variable rate debt. value of Onex’ net equity in its operating companies and At December 31, 2010, approximately 56 percent (2009 – equity-accounted investments that operate in U.S. currency 66 percent) of Onex’ operating companies’ long-term debt (2009 – a decrease of $74 million). had a fixed interest rate or the interest rate was effectively Onex holds a substantial amount of cash and mar- fixed by interest rate swap contracts. The risk inherent in ketable securities in U.S.-dollar-denominated securities. such a strategy is that, should interest rates decline, the The portion of securities held in U.S. dollars is based on benefit of such declines may not be obtainable or may only Onex’ view of funds it will require for future investments in be achieved at the cost of penalties to terminate existing the United States. Onex does not speculate on the direction arrangements. There is also the risk that the counterparty of exchange rates between the Canadian dollar and the U.S. on an interest rate swap agreement may not be able to meet dollar when determining the balance of cash and mar- its commitments. Guidelines are in place that specify the ketable securities to hold in each currency, nor does it use nature of the financial institutions that operating compa- foreign exchange contracts to protect itself against transla- nies can deal with on interest rate contracts. tion loss. A 5 percent strengthening (5 percent weakening) Onex, the parent company, has some exposure to of the Canadian dollar relative to the U.S. dollar at Decem - interest rate changes primarily through its cash and short- ber 31, 2010 would result in a $23 million decrease ($23 mil- term investments, which are held in short-term deposits lion increase) in net earnings of Onex, the parent company. and commercial paper. A 0.25 percent increase (0.25 per- In addition, there are two Onex operating companies, cent decrease) in the interest rate, assuming no significant Celes tica and Husky, that have significant exposure to the changes in the cash balance at the parent company, would U.S. dollar/Canadian dollar foreign currency exchange result in a $1 million increase ($1 million decrease) in rate. Net earnings at Celestica would increase US$9 million annual interest income. In addition, The Warranty Group, (decrease US$9 million) with a 5 percent strengthening which holds substantially all of its investments in interest- (5 percent weakening) of the Canadian dollar relative to the bearing securities, would also have some exposure to inter- U.S. dollar at December 31, 2010. A 5 percent strengthening est rate changes. A 0.25 percent increase in the interest rate (5 percent weakening) of the Canadian dollar relative would decrease the fair value of the investments held by to the U.S. dollar at December 31, 2010 would result in a The Warranty Group by US$13 million, with a correspon- US$23 million increase (US$23 million decrease) in other ding decrease in other comprehensive earnings. However, comprehensive earnings of Husky. Onex Corporation December 31, 2010 73 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 Capital commitment risk The limited partners in Silver is a significant commodity used in Care - the Onex Partners family of funds comprise a relatively stream Health’s manufacturing of x-ray film. The com- small group of high-quality, primarily institutional, in - pany’s management continually monitors movement and vestors. To date, each of these investors has met its com- trends in the silver market and enters into forward agree- mitments on called capital, and Onex has received no ments when considered appropriate to mitigate some of indi cations that any investor will be unable to meet its the risk of future price fluctuations for periods generally capital commitments in the future. While Onex’ experience up to a year. with its limited partners suggests that commitments will be honoured, there is always the concern that a limited part- ner may not be able to meet its entire commitment over the Integration of acquired companies An important aspect of Onex’ strategy for value creation is life of the fund. to acquire what we consider to be “platform” companies. Insurance claims The Warranty Group underwrites Such companies often have distinct competitive advan- and administers extended warranties and credit insurance tages in products or services in their respective industries on a wide variety of consumer goods including automo- that provide a solid foundation for growth in scale and biles, consumer electronics and major home appliances. value. In these instances, Onex works with company man- Unlike most property insurance risk, the risk associated agement to identify attractive add-on acquisitions that may with extended warranty claims is non-catastrophic and enable the platform company to achieve its goals more short-lived, resulting in predictable loss trends. The pre- quickly and successfully than by focusing solely on the dictability of claims, which is enhanced by the large volume development and/or diversification of its customer base, of claims data in the company’s database, enables The which is known as organic growth. Growth by acquisition, Warranty Group to appropriately measure and price risk. however, may carry more risk than organic growth. While as many of these risks as possible are considered in the Commodity price risk Certain Onex operating companies are vulnerable to price acquisition planning, operating companies under taking these acquisitions also face such risks as unknown ex - fluctuations in major commodities. Individual operating penses related to the cost-effective amalgamation of opera- companies may use financial instruments to offset the tions, the retention of key personnel and customers, the impact of anticipated changes in commodity prices related future value of goodwill, intangible assets and intellectual to the conduct of their businesses. Aluminum, titanium property. There are also risk factors associated with the and raw materials such as carbon fibre used to manufac- industry and combined business more generally. Onex ture composites represent the principal raw materials used works with company management to understand and in Spirit AeroSystems’ manufacturing operations. Spirit attempt to mitigate such risks as much as possible. AeroSystems has entered into long-term supply contracts with its key suppliers of raw materials, which limits the company’s exposure to rising raw materials prices. Most of Dependence on government funding Since 2005, Onex has acquired businesses, or interests in the raw materials purchased are based on a fixed pricing or businesses, in various segments of the U.S. healthcare at reduced rates through Boeing’s or Airbus’ high-volume industry. Certain of the revenues of these companies are purchase contracts. partially dependent on funding from federal, state and local Diesel fuel is a key commodity used in TMS Inter na - government agencies, especially those responsible for U.S. tional’s operations. The company consumes approximately federal Medicare and state Medicaid funding. Budgetary 11 million gallons of diesel fuel annually. To help mitigate the pressures, as well as economic, industry, political and other risk of price fluctuations in fuel, TMS Inter na tional incorpo- factors, could influence governments to not increase or, in rates into substantially all of its contracts pricing escalators some cases, to decrease appropriations for the services based on published price indices that would generally off- offered by Onex’ operating subsidiaries, which could reduce set some portion of the fuel price changes. their revenues materially. Future revenues may be affected by changes in rate-setting structures, methodologies or interpretations that may be proposed or are under consid- eration. While each of Onex’ operating companies in the 74 Onex Corporation December 31, 2010 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 U.S. healthcare industry is subject to reimbursement risk on current and upcoming environmental regulations that directly related to its particular business segment, it is may be applicable. unlikely that all of these companies would be affected by Many of the operating companies are involved in the same event, or to the same extent, simultaneously. the remediation of particular environmental situations, Ongoing pressure on government appropriations is a nor- such as soil contamination. In almost all cases, these situ- mal aspect of business for these companies, and all seek to ations have occurred prior to Onex’ acquisition of those minimize the effect of possible funding reductions through companies, and the estimated costs of remedial work and productivity improvements and other initiatives. It is not related activities are managed either through agreements known what impact, if any, proposed healthcare reform in with the vendor of the company or through provisions the United States will have on the companies. established at the time of acquisition. Manufacturing activities carry the inherent risk that changing environ- Significant customers Some of Onex’ major acquisitions have been divisions of mental regulations may identify additional situations requiring capital expenditures or remedial work and asso- large companies. As part of these purchases, the acquired ciated costs to meet those regulations. company has often continued to supply its former owner through long-term supply arrangements. It has been Onex’ policy to encourage its operating companies to quickly Income taxes The Company has investments in companies that operate in diversify their customer bases to the extent practical in a number of tax jurisdictions. Onex provides for the tax on order to manage the risk associated with serving a single undistributed earnings of its subsidiaries that are not per- major customer. manently reinvested based on the expected future income Certain Onex operating companies have major tax rates that are substantively enacted at the time of the customers that represent more than 10 percent of annual income/gain recognition events. Changes to the expected revenues. Spirit AeroSystems primarily relies on two major future income tax rate will affect the provision for future tax, customers, Boeing and Airbus. The table in note 22 to the both in the current year and in respect of prior year amounts audited annual consolidated financial statements provides that are still outstanding, either positively or negatively, information on the concentration of business the operat- depending on whether rates decrease or increase. Changes ing companies have with major customers. to tax legislation or the application of tax legislation may affect the provision for future tax and the taxation of Environmental considerations Onex has an environmental protection policy that has deferred amounts. been adopted by its operating companies; many of these operating companies have also adopted supplemental Other contingencies Onex and its operating companies are or may become policies appropriate to these industries or businesses. parties to legal claims arising in the ordinary course of busi- Senior officers at each of these companies are ultimately ness. The operating companies have recorded liability pro- responsible for ensuring compliance with these policies. visions based upon their consideration and analysis of their They are required to report annually to their company’s exposure in respect of such claims. Such provisions are board of directors and to Onex regarding compliance. reflected, as appropriate, in Onex’ consolidated financial Environmental management by the operating statements. Onex, the parent company, has not currently companies is accomplished through the education of recorded any further liability provision and we do not employees about environmental regulations and appropri- believe that the resolution of known claims would reason- ate operating policies and procedures; site inspections by ably be expected to have a material adverse impact on environmental consultants; the addition of proper equip- Onex’ consolidated financial position. However, the final ment or modification of existing equipment to reduce or outcome with respect to outstanding, pending or future eliminate environmental hazards; remediation activities as actions cannot be predicted with certainty, and therefore required; and ongoing waste reduction and recycling pro- there can be no assurance that their resolution will not have grams. Environmental consultants are engaged to advise an adverse effect on our consolidated financial position. Onex Corporation December 31, 2010 75 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 Committee of three non-management independent Directors is appointed by the Board. The Audit and Corporate Governance Committee reviews the consolidated financial statements, adequacy of internal controls, audit process and financial reporting with management and with the external auditors. The Audit and Corporate Governance Committee reports to the Directors prior to the approval of the audited consolidated financial statements for publication. PricewaterhouseCoopers LLP, the Company’s external auditors, who are appointed by the holders of Subordinate Voting Shares, audited the consolidated financial statements in accordance with Canadian generally accepted auditing standards to enable them to express to the shareholders their opinion on the consolidated financial statements. Their report is set out on the following page. [signed] [signed] Donald W. Lewtas Chief Financial Officer February 24, 2011 Christine M. Donaldson Vice President Finance 76 Onex Corporation December 31, 2010 INDEPENDENT AUDITORS’ REPORT To the Shareholders of Onex Corporation: We have audited the accompanying consolidated financial statements of Onex Corporation, which comprise the consolidated balance sheets as at December 31, 2010 and 2009 and the consolidated statements of earnings, shareholders’ equity and comprehensive earnings and cash flows for the years then ended, and the related notes including a summary of significant accounting policies. Management’s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Canadian generally accepted accounting principles, and for such internal control as management determines is neces- sary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s responsibility 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 comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consoli- dated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assess- ments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriate- ness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Onex Corporation as at December 31, 2010 and 2009 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, 2011 Onex Corporation December 31, 2010 77 CONSOLIDATED BALANCE SHEETS As at December 31 (in millions of dollars) 2010 2009 $ 2,518 $ 3,206 711 3,397 3,614 1,695 11,935 4,101 3,754 2,436 2,233 2,619 636 3,062 3,085 1,384 11,373 3,623 3,255 2,696 2,086 2,312 $ 27,078 $ 25,345 $ 4,307 $ 3,819 1,165 242 13 1,306 7,033 6,309 42 1,770 1,871 1,089 18,114 7,483 1,481 992 425 21 1,410 6,667 5,505 41 2,034 1,832 1,237 17,316 6,370 1,659 $ 27,078 $ 25,345 Assets Current assets Cash and cash equivalents Marketable securities Accounts receivable Inventories (note 3) Other current assets (note 4) Property, plant and equipment (note 5) Investments (note 6) Other long-term assets (note 7) Intangible assets (note 8) 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 9) Current portion of obligations under capital leases, without recourse to Onex (note 10) Current portion of warranty reserves and unearned premiums (note 11) Long-term debt of operating companies, without recourse to Onex (note 9) Long-term portion of obligations under capital leases of operating companies, without recourse to Onex (note 10) Long-term portion of warranty reserves and unearned premiums (note 11) Other liabilities (note 12) Future income taxes (note 13) Non-controlling interests Shareholders’ equity Commitments and contingencies are reported in notes 10 and 23. Signed on behalf of the Board of Directors [signed] Director [signed] Director 78 Onex Corporation December 31, 2010 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 15) Interest income Loss from equity-accounted investments (note 16) Foreign exchange loss Stock-based compensation expense (note 17) Other income Gains on dispositions of operating investments (note 18) Acquisition, restructuring and other expenses (note 19) Writedown of goodwill, intangible assets and long-lived assets (note 20) Earnings before income taxes and non-controlling interests Provision for income taxes (note 13) Non-controlling interests Net Earnings (Loss) for the Year Net Earnings (Loss) per Subordinate Voting Share (note 21) Basic and Diluted: Net earnings (loss) 2010 $ 24,366 (19,258) (2,599) 2,509 (524) (332) (420) 38 (250) (69) (176) 35 122 (233) (15) 685 (362) (374) 2009 $ 24,831 (19,468) (2,819) 2,544 (636) (364) (495) 53 (497) (90) (161) 97 783 (219) (370) 645 (172) (361) $ (51) $ 112 $ (0.43) $ 0.92 Onex Corporation December 31, 2010 79 CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE EARNINGS (in millions of dollars except per share data) 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 Balance – December 31, 2009 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 Share Capital (note 14) $ 515 Accumulated Other Comprehensive Earnings (Loss) Total Shareholders’ Equity $ (161)(b) $ 1,553 Retained Earnings $ 1,199 – (7) – – – – 508 – (8) – – – – (13) (34) 112 – – – – – – (74) 109 13 (13) (41) 112 (74) 109 13 1,264 (113)(c) 1,659 (13) (44) (51) – – – – – – (75) 7 6 (13) (52) (51) (75) 7 6 Balance – December 31, 2010 $ 500 $ 1,156 $ (175)(d) $ 1,481 (a) Dividends declared per Subordinate Voting Share during 2010 totalled $0.11 (2009 – $0.11). In 2010, shares issued under the dividend reinvestment plan amounted to less than $1 (2009 – less than $1). (b) 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. (c) 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. (d) Accumulated Other Comprehensive Earnings (Loss) as at December 31, 2010 consisted of currency translation adjustments of negative $164, unrealized losses on the effective portion of cash flow hedges of $26 and unrealized gains on available-for-sale financial assets and other of $15. Income taxes did not have a significant effect on these items. 80 Onex Corporation December 31, 2010 CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31 (in millions of dollars) 2010 2009 Operating Activities Net earnings (loss) for the year 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 16) Foreign exchange loss Stock-based compensation expense Gains on dispositions of operating investments, net (note 18) Non-cash component of restructuring (note 19) Writedown of goodwill, intangible assets and long-lived assets (note 20) Non-controlling interests Future income taxes (note 13) 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 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 Decrease due to other financing activities Investing Activities Acquisition of operating companies, net of cash in acquired companies of $58 (2009 – $108) (note 2) Purchase of property, plant and equipment Proceeds from sales of operating investments Investment in Tomkins Limited Decrease due to other investing activities Increase (Decrease) in Cash for the Year Decrease in cash due to changes in foreign exchange rates Cash and cash equivalents, beginning of the year $ 1(51) $ 112 524 332 67 250 43 163 (122) 1 15 374 86 (90) 1,592 (175) (604) (360) 652 (487) (188) 917 2,805 (2,625) (13) (52) 1,412 (236) (185) 1,106 (605) (870) 127 (1,208) (9) (2,565) (542) (146) 3,206 636 364 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 Cash and Cash Equivalents $ 2,518 $ 3,206 Onex Corporation December 31, 2010 81 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. 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 23). 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, 2010 December 31, 2009 Investments made through Onex Celestica Inc. (“Celestica”) Sitel Worldwide Corporation (“Sitel Worldwide”) Investments made through Onex and Onex Partners I Center for Diagnostic Imaging, Inc. (“CDI”) Emergency Medical Services Corporation (“EMSC”) Skilled Healthcare Group, Inc. (“Skilled Healthcare Group”) 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”) TMS International Corp. (“TMS International”) Investments made through Onex, Onex Partners I and Onex Partners II Husky International Ltd. (“Husky”) The Warranty Group, Inc. (“The Warranty Group”) Investments made through Onex and Onex Partners III Tomkins Limited (“Tomkins”) Tropicana Las Vegas, Inc. (“Tropicana Las Vegas”) Investments made through Onex, Onex Partners I and Onex Partners III Res-Care, Inc. (“ResCare”) Other investments ONCAP II L.P. Onex Real Estate Partners (“Onex Real Estate”) Onex Ownership Voting Onex Ownership 9% 68% 19% 12% 9% 7% 15% 38% 19% 20% 36% 36% 29% 14% 16% 20% 46% 86% 71% 88% 100% 82% 89% 74% (a) 100% (a) 50%(a) 100% 100% 100% 50%(a) 74% 100% 100% 100% 8% 66% 19% 12% 9% 7% 15% 38% 19% 20% 36% 36% 29% – 15% 6% 44% 86% Voting 69% 88% 100% 82% 89% 76% (a) 100% (a) 50%(a) 100% 100% 100% – 71% (a) 100% 100% (a) Onex exerts significant influence over these equity-accounted investments through its right to appoint members to the Board of Directors of these entities. The ownership percentages are before the effect of any potential through multiple voting rights attached to particular shares. dilution relating to the Management Investment Plans (the “MIP”) In certain circumstances, the voting arrangements give Onex as described in note 23(g). The voting interests include shares that the right to elect the majority of the board of directors. Onex has the right to vote through contractual arrangements or 82 Onex Corporation December 31, 2010 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 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 During the year ended December 31, 2010, $13,301 of inventory (2009 – $12,736) was expensed in cost of sales. In In February 2008, the Canadian Accounting Standards Board addition, inventory writedowns of $31 (2009 – $71) were recorded, confirmed that the use of International Financial Reporting partially offset by inventory provision reversals of $21 (2009 – $70) Standards (“IFRS”) would be required for Canadian publicly for a net provision of $10 (2009 – $1). accountable enterprises for years beginning on or after January 1, 2011. Onex is working to adopt IFRS as the basis for preparing its Property, plant and equipment consolidated financial statements effective January 1, 2011. For the Property, plant and equipment are recorded at cost less accumu- quarter ending March 31, 2011, Onex will issue its financial results lated amortization and provision for impairments, if any. For sub- prepared on an IFRS basis with comparative data on an IFRS basis. stantially all property, plant and equipment, amortization is pro- Signifi cant IFRS policies and expected transition impacts are vided for on a straight-line basis over the estimated useful lives of described in Management’s Discussion and Analysis. the assets: two to 45 years for buildings and up to 20 years for S I G N I F I C A N T A C C O U N T I N G P O L I C I E S Foreign currency translation machinery and equipment. Leasehold improvements are amortized over the terms of the leases. The Company’s operations conducted in foreign currencies, other Leases that transfer substantially all the risks and benefits than those operations that are associated with investment-holding of ownership are recorded as capital leases. Buildings and equip- subsidiaries, are considered to be self-sustaining. Assets and liabili- ment under capital leases are amortized over the shorter of the term ties of self-sustaining operations conducted in foreign currencies of the lease or the estimated useful life of the asset. Amortization of are translated into Canadian dollars at the exchange rate in effect at assets under capital leases is on a straight-line basis. the balance sheet date. Revenues and expenses are translated at average exchange rates for the year. Unrealized gains or losses on translation of self-sustaining operations conducted in foreign cur- Costs incurred to develop computer software for internal use rencies are shown as currency translation adjustments, a compo- The Company capitalizes the costs incurred during the application nent of other comprehensive earnings. development stage, which include costs to design the software The Company’s integrated operations, including invest- configuration and interfaces, coding, installation and testing. ment-holding subsidiaries, translate monetary assets and liabili- Costs incurred during the preliminary project stage, along with ties denominated in foreign currencies at exchange rates in effect post-implementation stages of internal use computer software, are at the balance sheet date and non-monetary items at historical expensed as incurred. rates. Revenues and expenses are translated at average exchange rates for the year. Gains and losses on translation are included in Impairment of long-lived assets the income statement. Cash and cash equivalents Property, plant and equipment and intangible assets with limited life are reviewed for impairment whenever events or changes in circumstances suggest that the carrying amount of an asset may Cash and cash equivalents includes liquid investments such as not be recoverable. An impairment is recognized when the car - term deposits, money market instruments and commercial paper rying amount of an asset to be held and used exceeds the projected that mature in less than three months from the balance sheet undiscounted future net cash flows expected from its use and date. The investments are carried at cost plus accrued interest, disposal, and is measured as the amount by which the carrying which approximates fair value. amount of the asset exceeds its fair value. Inventories Assets must be classified as either held-for-use or held- for-sale. Impairment losses for assets held-for-use are measured Inventories are recorded at the lower of cost and replacement cost based on fair value, which is calculated by discounted cash flows. for raw materials, and at the lower of cost and net realizable value Held-for-sale assets are carried at the lower of carrying value and for work in progress and finished goods. For inventories in the expected proceeds less direct costs to sell. aerostructures segment, certain inventories in the healthcare seg- In addition, equity-accounted investments are assessed ment and certain inventories in the metal services segment, for impairment whenever events or changes in circumstances inventories are stated using an average cost method. For substan- suggest a decline in value. Equity-accounted investments are tially all other inventories, cost is determined on a first-in, first- written down when there is evidence of an other-than-temporary out basis. or significant decline in value. Inventories include real estate assets that are available or under development for sale. Real estate assets held-for-sale are recorded at the lower of cost and net realizable value. Onex Corporation December 31, 2010 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 Deferred financing charges 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 ) Deferred financing charges consists of costs incurred by the oper- Other assets Acquisition costs relating to the financial services segment and amortized over the term of the related debt or as the debt is retired, if earlier. These deferred financing charges are recorded Certain costs of acquiring warranty business, principally commis- against the carrying value of the long-term debt, as described ating companies relating to the issuance of debt and are deferred sions, underwriting and sales expenses that vary, and are primar - in note 9. ily related to the production of new business, are deferred and amortized as the related premiums and contract fees are earned. Losses and loss adjustment expenses reserves The possibility of premium deficiencies and the related recover- Losses and loss adjustment expenses reserves relate to The ability of deferred acquisition costs is evaluated annually. Man - Warranty Group and represent the estimated ultimate net cost of age ment considers the effect of anticipated investment income in all reported and unreported losses incurred and unpaid through its evaluation of premium deficiencies and the related recover- December 31, 2010. The company does not discount losses and ability of deferred acquisition costs. loss adjustment expenses reserves. The reserves for unpaid losses Certain arrangements with producers of warranty con- and loss adjustment expenses are estimated using individual tracts include profit-sharing provisions whereby the underwriting case-basis valuations and statistical analyses. Those estimates are profits, after a fixed percentage allowance for the company and an subject to the effects of trends in loss severity and frequency and allowance for investment income, are remitted to the producers claims reporting patterns of the company’s third-party adminis- on a retrospective basis. Unearned premiums subject to retro- trators. Although considerable variability is inherent in such esti- spective commission agreements were approximately US$500 at mates, management believes the reserves for losses and loss Decem ber 31, 2010 (2009 – US$500). Goodwill and intangible assets adjustment expenses are reasonable. The estimates are continu - ally reviewed and adjusted as necessary as experience develops or new information becomes known; such adjustments are included Goodwill represents the cost of investments in operating com - in current operations. panies in excess of the fair value of the net identifiable assets acquired. Essentially all of the goodwill and intangible asset Warranty liabilities amounts that appear on the consolidated balance sheets were Certain operating companies offer warranties on the sale of prod- recorded by the operating companies. The recoverability of good- ucts or services. A liability is recorded to provide for future war- will and intangible assets with indefinite lives is assessed annually ranty costs based on management’s best estimate of probable or whenever events or changes in circumstances indicate that the claims under these warranties. The accrual is based on the terms carrying amount may not be recoverable. Impairment of goodwill of the warranty, which vary by customer and product or service is tested at the reporting unit level by comparing the carrying and historical experience. The appropriateness of the accrual value of the reporting unit to its fair value. When the carrying is evaluated at each reporting period. value exceeds the fair value, an impairment exists and is mea - sured by comparing the carrying amount of goodwill to its fair Pension and non-pension post-retirement benefits value determined in a manner similar to a purchase price alloca- The operating companies accrue their obligations under employee tion. Impairment of indefinite-life intangible assets is determined benefit plans and related costs, net of plan assets. The costs by comparing their carrying values to their fair values. of defined benefit pensions and other post-retirement benefits Intangible assets, including intellectual property, are earned by employees are accrued in the period incurred and are recorded at their allocated cost at the date of acquisition of the actuarially determined using the projected benefit method pro- related operating company. Amortization is provided for intan - rated on length of service, based on management’s best estimates gible assets with limited life, including intellectual property, of items, including expected plan investment performance, salary on a straight-line basis over their estimated useful lives of up to escalation, retirement ages of employees and expected healthcare 25 years. The weighted average initial period of amortization at costs. Plan assets are valued at fair value for the purposes of calcu- December 31, 2010 was 11 years (2009 – 10 years). lating expected returns on those assets. Past service costs from plan amendments are deferred and amortized on a straight-line basis over the average remaining service period of employees active at the date of amendment. 84 Onex Corporation December 31, 2010 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 Actuarial gains (losses) arise from the difference be - Aerostructures tween the actual long-term rate of return on plan assets and the A significant portion of Spirit AeroSystems’ revenues is under expected long-term rate of return on plan assets for a period or long-term volume-based pricing contracts requiring delivery of from changes in actuarial assumptions used to determine the products over several years. Revenue from these contracts is rec- benefit obligation. Actuarial gains (losses) exceeding 10% of the ognized under the contract method of accounting. Revenues and greater of the benefit obligation or the fair market value of plan profits are recognized on each contract in accordance with the assets are amortized on a straight-line basis over the average percentage-of-completion method of accounting, using the units- remaining service period of active employees. of-delivery method. The contract method of accounting involves Defined contribution plan accounting is applied to the use of various estimating techniques to project costs at com- multi-employer defined benefit plans, for which the operating pletion and includes estimates of recoveries asserted against the companies have insufficient information to apply defined benefit customer for changes in specifications. These estimates involve accounting. various assumptions and projections relative to the outcome of The average remaining service period of active employ- future events, including the quantity and timing of product deliv- ees covered by the significant pension plans is 14 years (2009 – eries. Also included are assumptions relative to future labour 15 years) and for those active employees covered by the other performance and rates, and projections relative to material and significant post-retirement benefit plans, the average remaining overhead costs. These assumptions involve various levels of ex - service period is 14 years (2009 – 16 years). pected performance improvements. Income taxes The company periodically reevaluates its contract esti- mates and reflects changes in estimates in the current period, and Income taxes are recorded using the asset and liability method of uses the cumulative catch-up method of accounting for revisions income tax allocation. Under this method, assets and liabilities in estimates of total revenue, total costs or extent of progress on are recorded for the future income tax consequences attributable a contract. to differences between the financial statement carrying values of For revenues not recognized under the contract method assets and liabilities and their respective income tax bases. These of accounting, Spirit AeroSystems recognizes revenues from the sale future income tax assets and liabilities are recorded using sub- of products at the point of passage of title, which is generally at the stantively enacted income tax rates. The effect of a change in time of shipment. Revenues earned from providing maintenance income tax rates on these future income tax assets or liabilities is services, including any contracted research and development, are included in income in the period in which the rate change occurs. recognized when the service is complete or other contractual Certain of these differences are estimated based on the current milestones are attained. tax legislation and the Company’s interpretation thereof. The Company records a valuation allowance when it is more likely Healthcare than not that the future tax assets will not be realized prior to Revenue in the healthcare segment consists primarily of EMSC’s their expiration. Revenue recognition Electronics Manufacturing Services service revenue related to its healthcare transportation and hospi- tal-based physician services businesses, CDI’s patient service and healthcare provider management service revenue, Skilled Health - care Group’s patient service revenue, Carestream Health’s product Revenue from the electronics manufacturing services segment sales revenue and ResCare’s client service revenue. Service revenue consists primarily of product sales, where revenue is recognized is recognized at the time of service and is recorded net of provi- upon delivery or when received by the customer, when title passes sions for contractual discounts and estimated uncompensated to the customer, receivables are reasonably assured of collection care. Revenue from product sales is recognized when the following and customer specified test criteria have been met. Celestica has criteria are met: persuasive evidence of an arrangement exists; contractual arrangements with certain customers that require the delivery has occurred; the sales price is fixed or determinable; and customer to purchase unused inventory that Celestica has acquired collectibility is reasonably assured. to fulfill forecasted manufacturing demand provided by that cus- tomer. Celestica accounts for raw material returns to such cus- tomers as reductions in inventory and does not record revenue on these transactions. Onex Corporation December 31, 2010 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 Reinsurance premiums, commissions, losses and loss 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 ) adjustment expenses are accounted for on bases consistent with Financial Services those used in accounting for the original policies issued and the terms of the reinsurance contracts. Premiums ceded to other The financial services segment revenue consists of revenue on companies have been reported as a reduction of revenue. Expense The Warranty Group’s warranty contracts primarily in North reimbursement received in connection with reinsurance ceded America and Europe. The company records revenue and asso - has been accounted for as a reduction of the related acquisition ciated un earned revenue on warranty contracts issued by North costs. Reinsurance receivables and prepaid reinsurance premium Ameri can obligor companies at the net amount remitted by the amounts are reported as assets. selling dealer or retailer “dealer cost”. Cancellations of these con- tracts are typically processed through the selling dealer or retailer, Customer Support Services and the company refunds only the unamortized balance of the The customer support services segment generates revenue pri - dealer cost. However, the company is primarily liable on these mari ly through its customer contact management services by contracts and must refund the full amount of customer retail providing customer service and technical support to its clients’ price if the selling dealer or retailer cannot or will not refund its customers through phone, e-mail, online chat and mail. These portion. The amount the company has historically been required services are generally charged by the minute or hour, per employee, to pay under such circumstances has been negligible. The poten- per subscriber or user, or on a per item basis for each transaction tially refundable excess of customer retail price over dealer cost at processed and revenue is recognized at the time services are per- December 31, 2010 was approximately US$1,800 (2009 – US$1,800). formed. A portion of the revenue is often subject to performance The company records revenue and associated unearned standards. Revenue subject to monthly or longer performance revenue at the customer retail price on warranty contracts issued standards is recognized when such performance standards are met. by statutory insurance companies domiciled in Europe. The The company is reimbursed by clients for certain pass- difference between the customer retail price and dealer cost through out-of-pocket expenses, consisting primarily of telecom- is recognized as commission and deferred as a component of munication, postage and shipping costs. The reimbursement and deferred acquisition costs. related costs are reflected in the accompanying consolidated state- The company has dealer obligor and administrator ments of earnings as revenue and cost of services, respectively. obligor service contracts with the dealers or retailers to facilitate the sale of extended warranty contracts. Dealer obligor service Metal Services contracts result in sales of extended warranty contracts in which The metal services segment generates revenue primarily through the dealer/retailer is designated as the obligor. Administrator raw materials procurement and slag processing, metal recovery obligor service contracts result in sales of extended warranty and metal sales. contracts in which the company is designated as the obligor. For Revenue from raw materials procurement represents both dealer obligor and administrator obligor, premium and/or sales to third parties whereby the company either purchases scrap contract fee revenue is recognized over the contractual exposure iron and steel from a supplier and then immediately sells the pe riod of the contracts or historical claim payment patterns of the scrap to a customer, with shipment made directly from the contracts. Unearned premiums and contract fees on single-premi- supplier to the third-party customer, or the company earns a um insurance related to warranty agreements are calculated to con tractually determined fee for arranging scrap shipments for result in premiums and contract fees being earned over the period a customer directly with a vendor. The company recognizes at risk. Factors are developed based on historical analyses of claim revenue from raw materials procurement sales when title and risk payment patterns over the duration of the policies in force. All of loss pass to the customer. other unearned premiums and contract fees are determined on Revenue from slag processing, metal recovery and metal a pro rata method. 86 Onex Corporation December 31, 2010 sales is derived from the removal of slag from a furnace and pro- cessing it to separate metallic material from other slag com - ponents. Metallic material is generally returned to the customer or sold to other end users and the non-metallic material is gener- ally sold to third parties. The company recognizes revenue from slag processing and metal recovery services when it performs the services and revenue from co-product sales when title and risk of loss pass to the customer. N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S Other The third type of plan is the Director Deferred Share Other segment revenues consist of product sales and services. Unit Plan. A Deferred Share Unit (“DSU”) entitles the holder to Product sales revenue is recognized upon shipment, when title receive, upon redemption, a cash payment equivalent to the mar- passes to the customer. Service revenue is recorded at the time ket value of a subordinate voting share at the redemption date. the services are performed. The Director DSU Plan enables Onex directors to apply directors’ Depending on the terms under which the operating fees earned to acquire DSUs based on the market value of Onex companies supply product, they may also be responsible for some shares at the time. Grants of DSUs may also be made to Onex or all of the repair or replacement costs of defective products. The directors from time to time. The DSUs vest immediately, are companies establish reserves for issues that are probable and redeemable only when the holder retires and must be redeemed estimable in amounts management believes are adequate to cover within one year following the year of retirement. Additional units ultimate projected claim costs. The final amounts determined to are issued for any cash dividends paid on the subordinate voting be due related to these matters could differ significantly from shares. The Company has recorded a liability for the future settle- recorded estimates. Research and development ment of the DSUs by reference to the value of underlying subordi- nate voting shares at the balance sheet date. On a quarterly basis, the liability is adjusted up or down for the change in the market Costs incurred on activities that relate to research and development value of the underlying shares, with the corresponding amount are expensed as incurred unless development costs meet certain reflected in the consolidated statement of earnings. criteria for capitalization. During 2010, $202 (2009 – $234) of The fourth type of plan is the Management Deferred research and development costs were expensed and $29 (2009 – Share Unit Plan (“Management DSU Plan”). The Management $44) of development costs were capitalized. Capitalized develop- DSU Plan enables Onex management to apply all or a portion of ment costs re lating to the aerostructures segment are included in their annual compensation earned to acquire DSUs based on the deferred charges. The costs are amortized over the anticipated num- market value of Onex shares at the time. The DSUs vest immedi- ber of production units to which such costs relate. ately, are redeemable only when the holder retires and must be Stock-based compensation redeemed within one year following the year of retirement. Additional units are issued for any cash dividends paid on the The Company follows the fair value-based method of accounting, subordinate voting shares. The Company has recorded a liability which is applied to all stock-based compensation payments. for the future settlement of the DSUs by reference to the value of There are five types of stock-based compensation plans. the underlying subordinate voting shares at the balance sheet The first is the Company’s Stock Option Plan (the “Plan”) described date. On a quarterly basis, the liability is adjusted up or down for in note 14(e), which provides that in certain situations the Com - the change in the market value of the underlying shares, with the pany has the right, but not the obligation, to settle any exercisable corresponding amount reflected in the consolidated statement of option under the Plan by the payment of cash to the option holder. earnings. To hedge the Company’s exposure to changes in the The Company has recorded a liability for the potential future settle- trading price of Onex shares associated with the Management ment of the value of vested options at the balance sheet date by DSU Plan, the Company enters into forward agreements with reference to the value of Onex shares at that date. The liability is a counterparty financial institution for all grants under the adjusted up or down for the change in the market value of the Management DSU Plan. As such, the change in value of the for- underlying shares, with the corresponding amount reflected in the ward agreements is recorded to offset the amounts recorded as consolidated statement of earnings. stock-based compensation under the Management DSU Plan. The The second type of plan is the MIP, which is described in costs of those arrangements are borne entirely by participants note 23(g). The MIP provides that exercisable investment rights in the plan. Management DSUs are redeemable only for cash and may be settled by issuance of the underlying shares or, in certain no shares or other securities of the Corporation will be issued on situations, by a cash payment for the value of the investment the exercise, redemption or other settlement thereof. rights. Under the MIP, once the targets have been achieved for the The fifth type of plan is employee stock option and exercise of investment rights, a liability is recorded for the value of other stock-based compensation plans in place for employees at the investment rights by reference to the value of the underlying various operating companies, under which, on payment of the investments, with a corresponding expense recorded in the con- exercise price, stock of the particular operating company is solidated statement of earnings. issued. The Company records a compensation expense for such options based on their fair value over the vesting period. Onex Corporation December 31, 2010 87 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 1. B A S I S O F P R E PA R AT I O N A N D a) Held-for-trading 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 ) Financial assets and financial liabilities that are purchased and Government assistance incurred with the intention of generating profits in the near term are classified as held-for-trading. Other instruments may be des- The operating companies may receive government assistance in ignated as held-for-trading on initial recognition. These instru- the form of grants or investment tax credits for the acquisition of ments are accounted for at fair value with the change in the fair capital assets and other expenditures. Government assistance is value recognized in earnings. recognized when there is reasonable assurance that the operating During 2010, gains of $7 (2009 – gains of $23, which companies will realize the benefits. Government assistance re - exclude the impact of the debt investment in Tropicana Las Vegas, lating to the acquisition of capital assets is deducted from the a consolidated operating company), were recorded in the consoli- costs of the related assets and amortization is calculated on the dated statement of earnings related to financial assets designated net amount. Other forms of government assistance relating to as held-for-trading. oper ating expenditures are recorded as a reduction of the expense at the time the expense is incurred. b) Available-for-sale Earnings per share Financial assets classified as available-for-sale with a quoted price in an active market are carried at fair value with changes in fair Basic earnings per share is based on the weighted average number value recorded in other comprehensive earnings. Securities that are of Subordinate Voting Shares outstanding during the year. Diluted classified as available-for-sale and which do not have a quoted earnings per share is calculated using the treasury stock method. price in an active market are recorded at cost. Available-for-sale Use of estimates securities are written down to fair value through earnings when - ever it is necessary to reflect an other-than-temporary impairment. The preparation of consolidated financial statements in conformity Gains and losses realized on disposal of available-for-sale securi- with Canadian generally accepted accounting principles requires ties, which are calculated on an average cost basis, are recognized management of Onex and its operating companies to make esti- in earnings. Other-than-temporary impairments are determined mates and assumptions that affect the reported amounts of assets based upon all relevant facts and circumstances for each invest- and liabilities, the disclosure of contingent assets and liabilities at ment and recognized when appropriate. the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. c) Held-to-maturity This includes the liability for claims incurred but not yet reported Securities that have fixed or determinable payments and a fixed for the Company’s healthcare and financial services segments. maturity date, which the Company intends and has the ability to Actual results could differ from such estimates. hold to maturity, are classified as held-to-maturity and accounted Comparative amounts for at amortized cost using the effective interest rate method. Investments classified as held-to-maturity are written down to fair Certain amounts presented in the prior year have been reclas - value through earnings whenever it is necessary to reflect an sified to conform to the presentation adopted in the current year. other-than-temporary impairment. Other-than-temporary impair- ments are determined based upon all relevant facts and circum- Financial assets and financial liabilities stances for each investment and recognized when appropriate. Financial assets and financial liabilities are initially recognized at fair value and are subsequently accounted for according to their Derivatives and hedge accounting classification as described below. The classification depends on At the inception of a hedging relationship, the Company documents the purpose for which the financial instruments were acquired the relationship between the hedging instrument and the hedged and their characteristics. Except in very limited circumstances, item, its risk management objectives and its strategy for undertak- the classification is not changed subsequent to initial recognition. ing the hedge. The Company also requires a documented assess- Financial assets purchased and sold, where the contract requires ment, both at hedge inception and on an ongoing basis, of whether the asset to be delivered within an established time frame, are or not the derivatives that are used in the hedging transactions are recognized on a trade-date basis. highly effective in offsetting the changes attributable to the hedged risks in the fair values or cash flows of the hedged items. 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- solidated statement of earnings. 88 Onex Corporation December 31, 2010 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 When derivatives are designated as hedges, the Com pany recognized in other comprehensive earnings. The gain or loss classifies them either as: (i) hedges of the change in fair value of relating to the ineffective portion is recognized immediately in the recognized assets or liabilities or firm commitments (fair value consolidated statement of earnings. Gains and losses accumulated hedges); (ii) hedges of the variability in highly probable future cash in other comprehensive earnings are included in the consolidated flows attributable to a recognized asset or liability or a forecasted statement of earnings upon the reduction or disposal of the invest- transaction (cash flow hedges); or (iii) hedges of a net investment ment in the foreign operation. in a foreign self-sustaining operation (net investment hedges). Capital disclosures a) Fair value hedges Onex considers the capital it manages to be the amounts it has in The Company’s fair value hedges principally consist of interest cash, cash equivalents and near-cash investments, the invest- rate swaps that are used to protect against changes in the fair ments made by it in the operating companies, Onex Real Estate value of fixed-rate long-term financial instruments due to move- and Onex Credit Partners. Onex also manages the third-party cap- ments in market interest rates. ital invested in the Onex Partners and ONCAP funds. Changes in the fair value of derivatives that are desig- nated and qualify as fair value hedging instruments are recorded Onex’ objectives in managing capital are to: in the statement of earnings, along with changes in the fair value (cid:129) preserve a financially strong parent company with substantial of the assets, liabilities or group thereof that are attributable to liquidity and no, or a limited amount of, debt so that it can have the hedged risk. b) Cash flow hedges funds available to pursue new acquisitions and growth oppor- tunities as well as support the growth of its existing businesses. Onex does not generally have the ability to draw cash from The Company is exposed to variability in future interest cash its operating companies. Accordingly, maintaining adequate flows on non-trading assets and liabilities that bear interest at liquidity at the parent company is important; variable rates or are expected to be reinvested in the future. (cid:129) achieve an appropriate return on capital commensurate with The effective portion of changes in the fair value of the level of risk taken on; derivatives that are designated and qualify as cash flow hedges is (cid:129) build the long-term value of its operating companies; recognized in other comprehensive earnings. Any gain or loss in (cid:129) control the risk associated with capital invested in any particu- fair value relating to the ineffective portion is recognized immedi- lar business or activity. All debt financing is within the oper - ately in the consolidated statement of earnings in other income. ating companies and each operating company is required to Amounts accumulated in other comprehensive earnings support its own debt. Onex does not normally guarantee the are transferred to the consolidated statement of earnings in the debt of the operating companies and there are no cross-guar- period in which the hedged item affects income. However, when antees of debt between the operating companies; and the forecasted transaction that is hedged results in the recogni- (cid:129) have appropriate levels of committed third-party capital avail- tion of a non-financial asset or a non-financial liability, the gains able to invest along with Onex’ capital. This enables Onex to and losses previously deferred in other comprehensive earnings respond quickly to opportunities and pursue acquisitions of are transferred from other comprehensive earnings and included businesses it could not achieve using only its own capital. The in the initial measurement of the cost of the asset or liability. management of third-party capital also provides management When a hedging instrument expires or is sold, or when fees to Onex and the ability to enhance Onex’ returns by earn- a hedge no longer meets the criteria for hedge accounting, any ing a carried interest on the profits of third-party participants. cumulative gain or loss existing in other comprehensive earnings at that time remains in other comprehensive earnings until the At December 31, 2010, Onex, the parent company, had approxi- forecasted transaction is eventually recognized in the consolidated mately $530 of cash and cash equivalents on hand and $156 of statement of earnings. When a forecasted transaction is no longer near-cash items in a segregated unleveraged fund managed by expected to occur, the cumulative gain or loss that was reported in Onex Credit Partners. Onex, the parent company, has a conser - other comprehensive earnings is immediately transferred to the vative cash management policy that limits its cash investments to statement of earnings. c) Net investment hedges short-term high-rated money market products. At December 31, 2010, Onex had access to US$3,068 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. This includes US$2,647 of committed third-party capital in a manner similar to cash flow hedges. Any gain or loss on the for Onex Partners III and $90 for ONCAP. hedging instrument relating to the effective portion of the hedge is The strategy for risk management of capital has not changed significantly since December 31, 2009. Onex Corporation December 31, 2010 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 2 . A C Q U I S I T I O N S During 2010 and 2009 several acquisitions, which were accounted for as purchases, were completed either directly by Onex or through sub- sidiaries of Onex. Any third-party borrowings in respect of acquisitions are without recourse to Onex. 2 010 A C Q U I S I T I O N S Details of the 2010 acquisitions are as follows: Cash Other current assets Intangible assets with limited life Intangible assets with indefinite life Goodwill Property, plant and equipment and other long-term assets Current liabilities Long-term liabilities Flushing Town Center(a) $ 24 131 – – – 348 503 (29) (465) Non-controlling interests in net assets Interests previously held Interest in net assets acquired $ 9 – – 9 Skilled Healthcare Carestream Group(b) ONCAP II(c) Health(d) ResCare(e) EMSC(f) Other(g) Total $ – – – 5 57 1 63 – – 63 – – $ 13 $ 92 25 55 91 8 284 (52) (130) 102 (37) – 5 11 38 – 66 – 120 (5) (1) 114 – – $ 16 $ 317 98 233 239 111 1,014 (194) (569)(1) 251 (5) (115) – 9 69 2 78 2 160 (24) (15) 121 – – $ – 13 17 – 11 1 42 (18) (7) 17 – – $ 58 573 247 295 542 471 2,186 (322) (1,187) 677 (42) (115) $ 63 $ 65 $ 114 $ 131 $ 121 $ 17 $ 520 (1) Included in long-term liabilities of ResCare is $160 of interim acquisition financing provided by Onex and Onex Partners III, which was repaid during the fourth quarter of 2010. a) In the first quarter of 2010, a subsidiary of Onex became man - aging partner of Flushing Town Center, a mixed-use development c) In August 2010, ONCAP II completed the acquisition of Sport Supply Group, Inc. (“Sport Supply Group”). Sport Supply Group located in New York City. As a result, it began consolidating its is a leading marketer, manufacturer and distributor of proprietary interest in the first quarter of 2010. Previously, Onex accounted for and third-party sporting goods equipment and branded team its interest in Flushing Town Center using the equity method. uniforms to the institutional and team sports market in the United Flushing Town Center’s long-term debt, which is described in States. Onex and ONCAP II have a 62% equity ownership in Sport note 9, is without recourse to Onex. Supply Group. Onex and ONCAP II’s total equity investment in During the remainder of 2010, Onex invested $21 of equity Sport Supply Group was $58, of which Onex’ share was $30. into Flushing Town Center. In addition, Onex purchased long-term In addition, ONCAP II includes acquisitions made by debt of Flushing Town Center from third-party lenders with princi- Caliber Collision Centers (“Caliber Collision”), Mister Car Wash and pal amounts totalling $94, for a cash cost of $62, resulting in a gain Sport Supply Group. of $32 as described in note 18. b) In May 2010, Skilled Healthcare Group completed the acqui - sitions of substantially all the assets of five Medicare-certified d) In September 2010, Carestream Health completed the acquisition of Quantum Medical Imaging, LLC (“Quantum Medical Imaging”). Quantum Medical Imaging is a manufacturer of digital and con- hospice companies and four Medicare-certified home health com- ventional x-ray systems used by hospitals, imaging centres and panies in the United States, operating in Arizona, Idaho, Montana health clinics. In addition, Carestream Health completed one other and Nevada. The total purchase price of these acquisitions was acquisition during 2010. The total purchase price of these acquisi- $63, which was financed by Skilled Healthcare Group, of which $17 tions was $114, which was financed by Carestream Health. was in the form of certain deferred and/or contingent payments. 90 Onex Corporation December 31, 2010 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 mid-November 2010, Onex and Onex Partners III acquired all of the outstanding common shares of ResCare previously not owned by Onex and its affiliates. Onex, Onex Partners III and Onex g) Other includes acquisitions made by Celestica and TMS Inter national. management’s equity investment was $123 (US$120), of which The purchase prices of the acquisitions described above were Onex’ share was $22 (US$22). Including Onex and Onex Partners I’s allocated to the net assets acquired based on their relative fair 2004 investments in ResCare, the combined investment of Onex, values at the dates of acquisition. In certain circumstances where Onex Partners I, Onex Partners III and Onex management was $237 estimates have been made, the companies are obtaining third- (US$204), of which Onex’ share was $49 (US$41). party valuations of certain assets, which could result in further As a result of this transaction, Onex and its affiliates refinement of the fair-value allocation of certain purchase prices control ResCare and began consolidating ResCare in the fourth and accounting adjustments could be recorded at that time. The quarter of 2010. results of operations for all acquired businesses are included in In addition, ResCare completed an acquisition in De cem - the consolidated statement of earnings and the consolidated ber 2010 for total consideration of $8. statement of shareholders’ equity and comprehensive earnings of the Company from their respective dates of acquisition. f) During 2010, EMSC completed seven acquisitions located in the United States for total consideration of $121. 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 property. In addition, as part of the reorganization, creditors were given the opportunity to subscribe to a US$75 rights offering of Chapter 11 of the U.S. Bankruptcy Code. After Tropicana’s filing, preferred shares, with the funds to be used to renovate the Tropi - Onex and Onex Partners III acquired a majority of the principal of cana Las Vegas facilities. Upon emergence from bankruptcy, a Tropicana’s US$440 term loan secured against its Las Vegas prop- valuation was performed that assigned an enterprise value of erty. The debt was purchased at various discounts to par value US$230 to Tropicana Las Vegas, exclusive of the rights offering. and financed through a credit facility established for the pur - As Onex had previously written down the value of the chases. Amounts then outstanding on the credit facility were investment in Tropicana Las Vegas based on transaction values at repaid in May 2009 using the equity capital contributed by Onex the time, the investment was written up to fair value determined and Onex Partners III. at the time of emergence from bankruptcy, and non-cash income In May 2009, the U.S. Bankruptcy Court confirmed of $92, including the effect of foreign exchange, has been included Tropi cana’s plan of reorganization, which became effective July 1, in other income. Onex’ share of the income was $21. 2009. The new company now operates as Tropicana Las Vegas, Inc. During the year ended December 31, 2009, Onex, Onex (“Tropicana Las Vegas”). Onex began consolidating Tropicana Las Partners III and Onex management purchased investments in Tropi - Vegas as of the effective date. Under the plan, the secured credi- cana Las Vegas at a cash value of $107, of which Onex’ share was $22. tors received 100% of the equity in the Las Vegas property, and In April 2010, Tropicana Las Vegas completed a preferred Alex Yemeni d jian, former President of MGM Mirage and Onex’ share rights offering of US$50. Onex, Onex Partners III and Onex partner, was appointed the new Chief Executive Officer of the management invested an additional US$45 in the preferred share Onex Corporation December 31, 2010 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 2 . A C Q U I S I T I O N S ( c o n t ’d ) 3 . I N V E N T O R I E S rights offering, of which Onex’ share was US$10. The preferred shares have similar terms to the 2009 preferred share rights offering and accrue dividends at an annual rate of 12.5% and are convert- ible into common shares of Tropicana Las Vegas at a fixed ratio in cluding accrued and unpaid dividends. After giving effect to the additional investment, Onex, Onex Partners III and Onex manage- ment’s ownership, on an as-converted basis, at December 31, 2010, was 74%, of which Onex’ share was 16%. b) In December 2009, EMSC completed the acquisitions of Pin nacle Consultants Mid-Atlantic and the management services company of Pinnacle Anesthesia Consultants, P.A., anesthesiology services providers in the United States. The total purchase price of this acquisition was $79, which was financed by EMSC. In addition, EMSC completed two other acquisitions for total consideration of $1. c) Other includes acquisitions made by Skilled Healthcare Group and Caliber Collision. The purchase prices of these acquisitions were allocated to the net assets acquired based on their relative fair values at the dates of acquisition. In certain circumstances where estimates had been made, a further refinement of the fair-value allocation of certain purchase prices and accounting adjustments was recorded subse- quent to the acquisition. The results of operations for all acquired businesses are included in the consolidated statement of earnings and the consolidated statement of shareholders’ equity and com- prehensive earnings of the Company from their respective dates of acquisition. Inventories comprised the following: As at December 31 Raw materials Work in progress Finished goods Real estate held for sale 2010 2009 $ 1,037 1,943 431 203 $ 920 1,785 380 – $ 3,614 $ 3,085 4 . O T H E R C U R R E N T A S S E T S Other current assets comprised the following: As at December 31 2010 2009 Current portion of ceded claims recoverable held by The Warranty Group (note 11) $ 208 $ 275 Current portion of prepaid premiums of The Warranty Group Current portion of deferred costs of The Warranty Group (note 7) Current deferred income taxes (note 13) Other(a) 276 179 240 792 218 187 262 442 $ 1,695 $ 1,384 a) Other includes $265 of restricted cash that was distributed to the lim ited partners of the Onex Partners’ funds in January 2011. The restricted cash represents the limited partners’ net share of distri- butions received in the fourth quarter of 2010. 92 Onex Corporation December 31, 2010 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 5 . 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 2010 Cost Accumulated Amortization $ 465 $ 1,879 3,994 307 – 405 2,139 – Net Cost 2009 Accumulated Amortization $ 465 $ 398 $ 1,474 1,855 307 1,467 3,825 361 – 399 2,029 – Net $ 398 1,068 1,796 361 $ 6,645 $ 2,544 $ 4,101 $ 6,051 $ 2,428 $ 3,623 The above amounts include property, plant and equipment under capital leases of $118 (2009 – $100) and related accumulated amortization of $72 (2009 – $52). As at December 31, 2010, property, plant and equipment included $60 (2009 – $49) of assets held-for-sale. 6 . I N V E S T M E N T S Investments comprised the following: As at December 31 2010 2009 Equity-accounted investment in Tomkins(a) Equity-accounted investment in RSI(b) Equity-accounted investment in Hawker Beechcraft(c) Equity-accounted investment in Allison Transmission(d) Equity-accounted investment in ResCare(e) Other equity-accounted investments(f) EMSC insurance collateral(g) Long-term investments held by The Warranty Group(h) Investment in Onex Credit Partners funds(i) Other $ 1,044 $ 216 71 355 – 130 138 1,468 254 78 – 334 159 358 129 157 166 1,658 229 65 $ 3,754 $ 3,255 US$314 of their investment to certain limited partners and others. The Tomkins investment held by certain limited partners and oth- ers is in an entity controlled by the Company and therefore includ- ed in the investment of Tomkins. The Company’s investment of $1,250 (US$1,219) was made by Onex, Onex Partners III, certain limited partners, Onex management and others. Onex’ net invest- ment in the acquisition was $323 (US$315) for a 14% equity owner- ship interest. 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. At December 31, 2010, Tomkins had total assets of approx- imately US$7,700 and total liabilities of approximately US$5,200, which includes approximately US$3,100 of long-term debt. b) In October 2008, the Company acquired an interest in RSI. Headquartered in Anaheim, Cali fornia, RSI is a leading manu - facturer of cabinetry for the residential marketplace in North Amer ica. The Company’s investment of $338 was in the form of convertible preferred shares and was made by Onex, Onex Part - a) In late September 2010, the Company, together with Canada Pension Plan Investment Board (“CPPIB”), acquired Tomkins plc. ners II and Onex management. The shares have a liquidation preference to the common shares and earn a preferred 10% return. The newly acquired business is operating as Tomkins Limited The preferred shares are convertible into 50% of the outstanding (“Tomkins”). Tomkins is a global engineering and manufacturing common shares of RSI. Onex’ net investment in the acquisition group that produces a variety of products for the industrial, auto- was $133, for an initial 20% equity ownership interest on an motive and building products markets across North America, as-converted basis. As a result of Onex’ significant influence over Europe and Asia. The equity investment of US$2,125 was initially RSI, the investment is accounted for using the equity-accounting split equally between the Company and CPPIB. Management of method. In accordance with equity accounting, the carrying value Tomkins also became inves tors in the business. During the fourth of this U.S. dollar investment has been adjusted to account for the quarter of 2010, the Company and CPPIB equally sold a total of change in the foreign exchange rate since its acquisition. Onex Corporation December 31, 2010 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 6 . I N V E S T M E N T S ( c o n t ’d ) c) In March 2007, the Company, together with GS Capital Partners, an affiliate of The Goldman Sachs Group, Inc., completed the acqui- share of Allison Transmission’s loss, 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. sition of Hawker Beechcraft. The equity investment of US$1,040 was split equally between the Company and GS Capital Partners. The e) In June 2004, Onex and Onex Partners made an initial $114 equity investment in ResCare. Onex’ portion of the investment was approx- Company’s investment of $605 was made by Onex, Onex Partners II imately $27. In accordance with equity accounting, in addition to and management. Onex’ net investment in the acquisition was Onex and Onex Partners’ share of ResCare’s earnings, the carrying $238. In accordance with equity accounting, in addition to Onex and value of this U.S. dollar investment has been adjusted to account for Onex Partners’ share of Hawker Beechcraft’s loss, the carrying value the change in the foreign exchange rate since its acquisition. of this U.S. dollar investment has been adjusted to account for the In mid-November 2010, Onex and Onex Partners III change in the foreign exchange rate since its acquisition. ac quired all of the outstanding common shares of ResCare not In March 2010, Onex, Onex Partners II and management previously owned by Onex or its affiliates. Onex, Onex Partners III made an additional US$52 investment in Hawker Beechcraft’s and Onex management’s equity investment was $123, of which publicly traded debt. Onex’ share of that investment was US$20. Onex’ share was $22. As a result of this transaction, Onex and its The debt is recorded at amortized cost and included as part of the affil iates control ResCare and began consolidating ResCare in the Company’s investment in Hawker Beechcraft. fourth quarter of 2010, as described in note 2. d) In August 2007, the Company, together with The Carlyle Group, completed the acquisition of Allison Transmission. The equity f) Other equity-accounted investments include Cypress Insurance Group (“Cypress”), Onex Credit Partners and certain real estate investment of US$1,525 was split equally between the Company and partnerships. The Carlyle Group. The Company’s investment of $805 was made by Onex, Onex Partners II, certain limited partners and management. Onex’ net investment in the acquisition was $250. In accordance g) EMSC insurance collateral consists primarily of government and investment grade securities and cash deposits with third par- with equity accounting, in addition to Onex and Onex Partners’ ties, and supports its insurance program and reserves. h) 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 2010 2009 Amortized Cost(1) Fair Value Amortized Cost(1) Fair Value $ 71 60 408 719 347 62 $ 1,667 (260) $ 1,407 $ 72 60 427 752 360 64 $ 1,735 (267) $ 1,468 $ 85 168 345 928 215 114 $ 1,855 (252) $ 1,603 $ 86 177 357 959 218 117 $ 1,914 (256) $ 1,658 (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. 94 Onex Corporation December 31, 2010 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 Fair values generally represent quoted market value prices for 7. O T H E R L O N G - T E R M A S S E T S securities traded in an active market or estimated using a valua- tion technique. Management believes that all unrealized losses on indi - vidual securities are the result of normal price fluctuations due to market conditions and are not an indication of other-than- temporary impairment. Management further believes it has the intent and ability to hold these securities until they fully recover in value. These determinations are based upon an in-depth analy- sis of individual securities. Other long-term assets comprised the following: As at December 31 2010 2009 Deferred development charges Future income taxes (note 13) Deferred pension (note 24) Long-term portion of ceded claims recoverable held by The Warranty Group (note 11) Long-term portion of prepaid premiums $ 543 204 366 389 415 236 283 $ 507 435 347 479 382 302 244 The amortized cost and fair value of fixed-maturity of The Warranty Group securities owned by The Warranty Group at December 31, 2010, by Long-term portion of deferred costs contractual maturity, are shown below: of The Warranty Group(a) Other Years to maturity: One or less After one through five After five through ten After ten Mortgage-backed securities Other Amortized Cost Fair Value $ 2,436 $ 2,696 $ 260 639 272 87 347 62 $ 267 664 292 88 360 64 $ 1,667 $ 1,735 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, 2010, $415 (2009 – $489) of costs were deferred, of which $179 (2009 – $187) have been Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. recorded as current (note 4). 8 . I N TA N G I B L E A S S E T S At December 31, 2010, certificates of deposit, money Intangible assets comprised the following: market funds and available-for-sale fixed-maturity securities with a carrying value of $38 (2009 – $36) were on deposit with various As at December 31 2010 2009 insurance departments and regulators to satisfy various regulatory Intellectual property with limited life, requirements. net of accumulated amortization of $275 (2009 – $103) $ 243 $ 301 i) The investments in Onex Credit Partners funds are classified as held-for-trading and are recorded at fair value. Intangible assets with limited life, net of accumulated amortization of $1,785 (2009 – $1,588) Intangible assets with indefinite life 1,473 517 1,528 257 $ 2,233 $ 2,086 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. Onex Corporation December 31, 2010 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 9. 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) 7.625% senior subordinated notes due 2013 Center for Diagnostic Imaging(c) Revolving credit facility and term loan due 2013 Other Emergency Medical Services(d) Revolving credit facility and term loan due 2015 Revolving credit facility and term loan due 2011 and 2012 Subordinated secured notes due 2015 Other Flushing Town Center(e) Senior construction loan due 2013 Mezzanine loan due 2013 Husky(f) ResCare(g) Sitel Worldwide(h) Skilled Healthcare Group(i) Spirit AeroSystems(j) The Warranty Group(k) TMS International(l) Tropicana Las Vegas(m) ONCAP II companies (n) Revolving credit facility and term loan due 2014 Revolving credit facility and term loan due 2015 and 2016 Senior unsecured notes due 2013 Senior subordinated notes due 2019 Other Revolving credit facility and term loans due 2013 and 2014 Senior unsecured notes due 2018 Mandatorily redeemable preferred shares Revolving credit facility and term loan due 2015 and 2016 Revolving credit facility and term loan due 2012 Subordinated notes due 2014 Other Revolving credit facility and term loan due 2014 and 2016 Senior subordinated notes due 2017 Senior subordinated notes due 2020 Other Term loan due 2012 Revolving borrowings and senior secured term loan due 2013 and 2014 Senior subordinated notes due 2015 Subordinated notes due 2020 Other Revolving credit facility and term loan due 2014 Revolving credit facility and term loans due 2012 to 2015 Subordinated notes due 2012 to 2016 Other Other 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 2010 $ 1,212 438 8 1,658 – 33 1 34 417 – – 1 418 538 25 563 362 166 30 199 9 404 352 291 99 742 379 – 129 9 517 563 293 298 19 1,173 191 158 222 43 1 424 27 314 59 6 379 10 (213) 6,689 (138) 6,551 (242) 2009 $ 1,359 462 15 1,836 234 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 (197) 6,039 (109) 5,930 (425) Consolidated long-term debt of operating companies, without recourse to Onex $ 6,309 $ 5,505 96 Onex Corporation December 31, 2010 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 Onex does not guarantee the debt of its operating companies, nor b) Celestica are there any cross-guarantees between operating companies. At December 31, 2009 and 2010, Celestica had a US$200 revolving The financing arrangements for each operating com pany credit facility which was due to mature in April 2011. No amounts typically contain certain restrictive covenants, which may include were drawn on the facility at December 31, 2009 and 2010. limitations or prohibitions on additional indebtedness, payment of The facility has restrictive covenants relating to debt cash dividends, redemption of capital, capital spending, making of incurrence and the sale of assets and also contains financial cove - investments and acquisitions and sale of assets. In addition, certain nants that require Celestica to maintain certain financial ratios. financial covenants must be met by the operating companies that Celestica also has uncommitted bank overdraft facilities available have outstanding debt. for intraday operating requirements that total US$65 at Decem- Future changes in business conditions of an operating ber 31, 2010. company may result in non-compliance with certain covenants In January 2011, Celestica renewed its revolving credit by the company. No adjustments to the carrying amount or classi - facility on generally similar terms and conditions, increased its size fi cation of assets or liabilities of any operating company have from US$200 to US$400 and extended its maturity to January 2015. been made in the consolidated financial statements with respect In March 2009, Celestica paid US$150, excluding ac crued to any possible non-compliance. a) Carestream Health interest, to repurchase a portion of its notes due in 2011 and a car- rying value of US$159. In November 2009, Celestica paid US$346, excluding ac crued interest, to repurchase the remaining 2011 notes In April 2007, Carestream Health entered into senior secured first with a carrying value of US$356. Celestica recognized a gain of and second lien term loans with an aggregate principal amount of US$9 in the first quarter of 2009 and a gain of US$10 in the fourth US$1,510 and US$440, respectively. Additionally, as part of the first quarter of 2009 on the repurchase of the 2011 notes. Celestica also lien term loan, Carestream Health obtained a senior revolving terminated interest rate swap agreements in the amount of US$500 credit facility with available funds of up to US$150. The first and related to the 2011 notes. In connection with the termination of the second lien term loans bear interest at LIBOR plus a margin of swap agreements, Celestica discontinued fair value hedge account- 2.00% and 5.25%, respectively, or at a base rate plus a margin of ing on the notes due in 2011 and recorded an expense of US$16. The 1.00% and 4.25%, respectively. The senior revolving credit facility net gain of US$3 is recorded against interest expense in the consoli- bears interest at LIBOR or a base rate plus a margin of up to dated statement of earnings. 1.75%, payable quarterly. In March 2010, Celestica redeemed all of its outstanding The first lien term loan matures in April 2013, with quar- 7.625% notes due in 2013. Celestica paid US$232 to repurchase terly instalment payments of US$18. The second lien term loan notes with a carrying value of US$223. Celestica recognized a matures in October 2013, with the entire balance due upon matu- charge of US$9 in the first quarter of 2010 on the repurchase of the rity. The senior revolving credit facility, with nil outstanding at 2013 notes, which is included in interest expense in the consoli- December 31, 2009 and 2010, matures in April 2012. dated statement of earnings. At December 31, 2010, US$1,218 and US$440 (2009 – US$1,293 and US$440) were outstanding under the senior secured c) Center for Diagnostic Imaging first and second lien term loans, respectively. In July 2009, CDI entered into a new credit agreement. The new Substantially all of Carestream Health’s assets are pledged agreement consists of a US$55 term loan and a US$15 revolving as collateral under the term loans. credit facility. Both the term loan and revolving credit facility bear In connection with the term loans, Carestream Health interest at LIBOR, plus a margin of 4.25%, and mature in July 2013. has an interest rate swap agreement that swaps the variable rate The term loan requires quarterly principal repayments beginning for a fixed rate of 1.55%. The agreement, with a notional amount in March 2010. The proceeds of the term loan were used to repay totalling US$800, expires in December 2011. and terminate the previous credit agreement. At December 31, 2010, US$33 was outstanding under the term loan and nil was out- standing under the revolving credit facility. CDI has entered into an interest rate swap agreement that effectively fixes the interest rate on a portion of the bor - rowings under the credit agreement. In November 2009, CDI entered into a two-year interest rate cap agreement for a notional amount of US$27 in order to hedge its exposure to fluctuations in three-month LIBOR rates above 3.5%. The cap agreement began in April 2010 and terminates in September 2012. Onex Corporation December 31, 2010 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 9. L O N G - T E R M D E B T O F O P E R AT I N G C O M PA N I E S , 1.55% and 3.65%. In conjunction with these amendments, the 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 ) Company purchased US$56 and US$38 of the senior construction d) Emergency Medical Services loan and mezzanine loan, respectively, from third-party lenders. As at December 31, 2010, US$560 and US$38 of principal In February 2005, EMSC issued US$250 of senior subordinated were outstanding under the senior construction and mezzanine notes and executed a US$450 credit agreement. The senior sub - loans, respectively, of which a total of US$94 was held by the Com - ordinated notes had a fixed interest rate of 10%, payable semi- pany. In addition, letters of credit of US$25 were outstanding, which annually, and were scheduled to mature in February 2015. partially reduce the amount available to be drawn under the senior The credit agreement consisted of a US$350 senior construction loan. secured term loan and a US$100 senior secured revolving credit Substantially all of Flushing Town Center’s assets are facility. The senior secured term loan was scheduled to mature in pledged as collateral under the senior construction and mezza- February 2012. The revolving facility required the principal to be nine loans. repaid at maturity in February 2011. As at December 31, 2009, US$200 and nil were outstanding under the senior secured term f) Husky loan and the senior secured revolving credit facility, respectively. In December 2007, Husky entered into a US$520 committed, In April 2010, EMSC completed the financing of new secured credit agreement comprised of a US$410 term loan and a senior secured credit facilities consisting of a US$425 term loan US$110 revolving credit facility originally maturing in December and a US$150 revolving credit facility. The term loan bears interest 2012. In July 2010, Husky amended and restated its secured credit at LIBOR plus a margin of 3.00% and requires quarterly principal agreement that governs its term loan and revolving credit facility. repayments until maturity in 2015. The revolving credit facility The amendments included extending the maturity date of the bears interest at LIBOR plus a margin of 3.00% and is repayable term loan and revolving credit facility from December 2012 to at maturity in 2015. The senior secured credit facilities can be December 2014. In addition, the credit agreement was amended to expanded and the interest rate margins stepped down to 2.75% lessen the restrictions for capital expenditures and acquisitions, upon achieving certain leverage ratios. restructuring and integration costs. Borrowings under the credit The proceeds from the new facilities were used to repay agreement bear interest at LIBOR plus a margin of 3.25% or 3.50% the US$200 senior secured term loan and US$250 senior subordi- as determined by a consolidated leverage ratio. Addi tionally, 25% nated notes, described above. EMSC recognized a loss of US$19 on or 50% of excess cash flows (as defined in the credit agreement and the repurchase of the senior subordinated notes, which is included determined by a consolidated leverage ratio), if any, must be used in interest expense in the consolidated statement of earnings. to prepay the loan annually. As a result, in 2011, Husky will be At December 31, 2010, US$420 and nil were outstanding required to repay an additional US$39 of its term loan. under the term loan and revolving credit facility, respectively. The revolving credit facility is available to Husky’s sub- Substantially all of EMSC’s domestic assets are pledged as sidiaries in Canada. At December 31, 2010, there were US$8 in collateral under the new senior secured credit facilities. letters of credit issued under the credit facility, leaving US$102 in available borrowing capacity. e) Flushing Town Center At December 31, 2010, US$364 and nil (2009 – US$394 In February 2010, Onex began consolidating Flushing Town and nil) were outstanding under the term loan and revolving Center, as described in note 2. As a result, at December 31, 2010 credit facility, respectively. The term loan has annual mandatory Onex’ consolidated long-term debt includes the long-term debt of principal repayments of US$21 in 2011 to 2013 with the outstand- Flushing Town Center. ing principal balance due in 2014. Flushing Town Center’s long-term debt consisted pri - The credit agreement has restrictions on new debt mar ily of a senior construction loan and a mezzanine loan, both incurrence, the sale of assets, capital expenditures and the main- of which were scheduled to mature in April 2011. tenance of certain financial ratios. Substantially all of Husky’s In December 2010, Flushing Town Center amended and assets are pledged as collateral under the credit agreement. restated its senior construction loan and mezzanine loan, increasing Husky has entered into interest rate swap agreements the total amount available under the construction loan to US$642, that effectively fixed the interest rate on a portion of the bor - including US$25 of letters of credit, and extending the maturity to rowings under the credit agreement. Outstanding agreements, December 2013. The loans have two one-year extension options. The with notional amounts of US$289, expire between 2011 and 2012. loans bear interest at LIBOR plus a margin that ranges between 98 Onex Corporation December 31, 2010 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S g) ResCare contains certain additional requirements, including limitations or In December 2010, ResCare amended and restated its senior prohibitions on additional indebtedness, payment of cash divi- secured revolving credit facility to extend the maturity of its dends, redemption of stock, capital spending, investments, acquisi- revolving credit facility from July 2013 to December 2015 as well as tions and asset sales. maintain the size of the facility at US$275 through July 2013 before In March 2010, Sitel Worldwide completed an offering of stepping down to US$240 through December 2015. Borrowings US$300 in aggregate principal amount of senior unsecured notes under the senior secured revolving credit facility bear interest due in 2018. The notes bear interest at an annual rate of 11.50% at LIBOR plus a margin of 4.50%. At December 31, 2010, nil was with no principal payments due until maturity. Proceeds from the outstanding under the senior secured revolving credit facility. offering were used to repay a portion of the indebtedness out- The amount available under the revolver is reduced by US$68 standing under the existing senior secured term loan and all of standby letters of credit outstanding at December 31, 2010. of the outstanding balance under the revolving credit facility. In December 2010, ResCare completed the financing of In conjunction with this repayment, the debt covenants of the a new US$170 senior secured term loan and US$200 of senior senior secured credit facility were amended to reduce the mini- subordinated notes. The proceeds were used to repay a portion of mum adjusted EBITDA to interest ratio requirement and to ResCare’s existing indebtedness of US$150 of senior unsecured change the total debt to adjusted EBITDA covenant to a senior notes, complete the acquisition of all the publicly held shares of secured debt to adjusted EBITDA covenant. At December 31, 2010, ResCare and for general corporate purposes. ResCare repaid the the 2018 senior notes with US$300 outstanding were recorded net remainder of its US$150 senior unsecured notes in January 2011. of the unamortized discount of US$7. The senior secured term loan bears interest at LIBOR Included in other long-term debt at December 31, 2010 plus a margin of 5.50% with the principal balance due in Decem - is US$58 (2009 – US$52) of mandatorily redeemable Class B pre- ber 2016. The senior subordinated notes bear interest at a rate of ferred shares, of which US$38 (2009 – US$34) was held by Onex. 10.75% and are repayable at maturity in January 2019. The mandatorily redeemable Class B preferred shares accrue At December 31, 2010, US$170 and US$200 were out- annual dividends at a rate of 12% and are redeemable at the standing under the senior secured term loan and senior subordi- option of the holder on or before July 2018. Also included in other nated notes, respectively. The senior secured term loan is recorded long-term debt at December 31, 2010 is US$42 (2009 – US$36) of net of the unamortized discount of US$3. mandatorily redeemable Class C preferred shares, of which US$31 ResCare has additional capacity of US$175 available (2009 – US$27) is held by Onex. The mandatorily redeemable under its debt agreements to increase its senior secured term loan Class C preferred shares accrue annual dividends at a rate of 16% or the senior secured revolving credit facility, subject to certain and are redeemable at the option of the holder on or before July limitations and conditions. ResCare is required under its debt 2018. Outstanding amounts related to preferred shares at Decem - agreements to maintain certain financial covenants and substan- ber 31, 2010 include accrued dividends. tially all of ResCare’s assets are pledged as collateral under its debt agreements. h) Sitel Worldwide i) Skilled Healthcare Group In December 2005, Skilled Healthcare Group issued unsecured senior subordinated notes in the amount of US$200 due in In December 2008, Sitel Worldwide amended its credit facility. 2014. In June 2007, using proceeds from its May 2007 initial public The amendment included increases to the applicable interest offering, Skilled Healthcare Group redeemed US$70 of the notes. rates and changes to the financial covenants. The notes bear interest at a rate of 11.0% per annum and are Sitel Worldwide’s credit facility, as amended in 2008, re deemable at the option of the company at various premiums consists of a US$675 term loan maturing in January 2014, and a above face value beginning in 2009. At December 31, 2010, US$130 US$85 revolving credit facility maturing in January 2013. As a (2009 – US$130) was outstanding under the notes. result of repayments and repurchases made in 2007 and 2008, no At December 31, 2009, Skilled Healthcare Group’s first lien quarterly payments are due under the term loan until maturity. credit agreement consisted of a US$260 term loan and a US$135 The term loan and revolving credit facility bear interest at a rate of revolving loan. The term loan was originally due in 2012, with annu- LIBOR plus a margin of up to 5.5% or prime plus a margin of 4.5%. al principal instalments of US$3. In April 2009, Skilled Healthcare Bor rowings under the facility are secured by substantially all of Group amended its credit agreement to extend the maturity of the Sitel Worldwide’s assets. revolving loan commitment from June 2010 to June 2012, while At December 31, 2010, US$353 and nil (2009 – US$592 maintaining existing interest rates. The revolving loan has a capacity and US$16) were outstanding under the term loan and revolving of US$135 up to June 2010, reducing to US$124 until maturity. At credit facility, respectively. December 31, 2009, US$248 and US$72 were outstanding under the Sitel Worldwide is required under the terms of the facil- term loan and revolving loan, respectively. ity to maintain certain financial ratio covenants. The facility also Onex Corporation December 31, 2010 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 9. 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 , Sep tember 2014 as well as increase the amount available under W I T H O U T R E C O U R S E T O O N E X ( c o n t ’d ) the facility to US$650 from US$409. In addition, Spirit AeroSys - tems extended the maturity date with respect to US$437 of its In April 2010, Skilled Healthcare Group completed the term loan to September 2016, with US$130 of the term loan remain- financing of a new US$330 term loan and US$100 revolving credit ing due in September 2013. At December 31, 2010, US$566 and nil facility. The term loan bears interest at LIBOR (subject to a floor of (2009 – US$572 and nil) were outstanding under the term loan and 1.50%) plus a margin of 3.75%, and requires quarterly principal revolving credit facility, respectively. The senior secured term loan repayments of US$1 until maturity in 2016. The revolving credit maturing in 2013 requires equal quarterly principal instalments of facility bears interest at LIBOR (subject to a floor of 1.50%) plus a US$32 beginning in December 2012. The senior secured term loan margin of 3.75%, and is repayable at maturity in 2015. The term maturing in 2016 requires equal quarterly principal instalments of loan was increased by an additional US$30 to fund acquisitions US$1, with the balance due upon maturity. The revolving credit completed in the second quarter of 2010. Substantially all of facility requires the principal to be repaid at maturity. Skilled Healthcare Group’s assets are pledged as collateral under The borrowings under the agreement bear interest the term loan and revolving credit facility. based on LIBOR plus an interest rate margin of up to 4.0%, The proceeds from the new term loan were used to repay payable quarterly. In connection with the term loan, Spirit Aero - the amounts outstanding under the former term loan and revolving Systems entered into interest rate swap agreements on US$400 of credit facility, described above. Skilled Healthcare Group recog- the term loan. The agreements, which mature in 2011, swap the nized a loss of US$7 on the repurchase of the term loan and floating interest rate with a fixed interest rate that ranges between re volving credit facility, which is included in interest expense in 3.2% and 4.3%. the consolidated statement of earnings. Substantially all of Spirit AeroSystems’ assets are At December 31, 2010, US$355 and US$26 were outstand- pledged as collateral under the credit agreement. ing under the term loan and revolving credit facility, respectively. In September 2009, Spirit AeroSystems completed an In June 2010, Skilled Healthcare Group entered into an offering of US$300 in aggregate principal amount of 7.5% senior interest rate cap agreement and an interest rate swap agreement. notes due in 2017. The offering price was 97.804% of par to yield The interest rate cap agreement is for a notional amount of 7.875% to maturity. The net proceeds were used to repay US$200 US$70 in order to hedge its exposure to fluctuations in one-month in borrowings under its existing revolving credit facility without LIBOR rates above 2.0% from July 2010 to December 2011. The any reduction of the lenders’ commitment, with the remainder interest rate swap agreement is for a notional amount of US$70 used for general corporate purposes. Interest is payable semi- and swaps the variable rate for a fixed rate of 2.3% from January annually beginning in April 2010. The 2017 senior notes may be 2012 to June 2013. j) Spirit AeroSystems redeemed prior to maturity at various premiums above face value. At December 31, 2010, the 2017 senior notes with US$300 out- standing were recorded net of the unamortized discount of US$6. In June 2005, Spirit AeroSystems executed a US$875 credit agree- In November 2010, Spirit AeroSystems completed an ment that consists of a US$700 senior secured term loan and offering of US$300 in aggregate principal amount of 6.75% senior a US$175 senior secured revolving credit facility. In November notes due in 2020. The net proceeds were used to repay US$150 2006, Spirit AeroSystems used a portion of the proceeds from its in borrowings under its existing revolving credit facility without initial public offering to permanently repay US$100 of the senior any reduction of the lenders’ commitment, with the remainder secured term loan and amended its credit agreement. In March to be used for general corporate purposes. Interest is payable 2008, Spirit AeroSystems amended the agreement to increase the semi-annually beginning in June 2011. The 2020 senior notes may amount available under the senior revolving credit facility to be redeemed prior to maturity at various premiums above face US$650 and add a provision allowing additional indebtedness of value. At December 31, 2010, US$300 of senior notes due in 2020 up to US$300. In June 2009, Spirit AeroSystems further amended were outstanding. its credit agreement to extend the maturity of the revolving credit If a change in control of Spirit AeroSystems occurs, the facility from June 2010 to June 2012 as well as increase the size holders of the 2017 and 2020 senior notes have the right to require of the facility to US$729 from US$650 through June 2010 before Spirit AeroSystems to repurchase the senior notes at a price of 101% stepping down to US$409 through June 2012. In October 2010, plus accrued and unpaid interest. The 2017 and 2020 senior notes Spirit AeroSystems amended its credit agreement to extend rank equal in right of payment and are subordinate to the senior the maturity of the revolving credit facility from June 2012 to secured credit facility. 100 Onex Corporation December 31, 2010 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 k) The Warranty Group In connection with the senior secured term loan credit In November 2006, The Warranty Group entered into a US$225 facility, TMS International entered into rate swap agreements that credit agreement consisting of a US$200 term loan and up to swap the variable rate portion of the interest for a fixed rate of US$25 of revolving credit loans and swing line loans. The amounts 2.3% to March 2012. The agreements have total notional amounts outstanding on the credit agreement bear interest at LIBOR plus of US$80. a margin based on The Warranty Group’s credit rating. The term In addition, TMS International issued US$225 of unse- loan requires annual payments of US$2, with the balance due cured senior subordinated notes in 2007. The notes bear interest in 2012. Revolving credit and swing line loans, if outstanding, are at a rate of 9.75% and mature in February 2015. The notes are due 2011. At December 31, 2010, US$192 and nil (2009 – US$194 redeemable at the option of the company at various premiums and nil) were outstanding on the term loan and revolving and above face value, beginning in 2011. At December 31, 2010, notes swing loans, respectively. of US$223 (2009 – US$223) were outstanding. The debt is subject to various terms and conditions, In December 2008 and the first quarter of 2009, TMS including The Warranty Group maintaining a minimum credit rat- International issued subordinated notes in the amount of US$51, ing and certain financial ratios relating to minimum capitaliza- of which US$49 were held by the Company. The notes are due tion levels. l) TMS International in 2020 and bear interest at a rate of 15.0% in the first year, 17.5% in the second year and 20.0% in the third year and beyond. In December 2010, TMS International amended the agreement gov- In January 2007, TMS International entered into a senior secured erning the subordinated notes to reduce the interest rate to 8.0%, asset-based revolving credit facility with an aggregate principal effective January 1, 2011. Cash interest payments are required amount of up to US$165, a senior secured term loan credit facility beginning in 2014. TMS International may prepay the notes, in with an aggregate principal amount of US$165 and a senior whole or in part, without premium penalty or discount, at any secured synthetic letter of credit facility of US$20. The credit facil- time. In March 2010, TMS International paid US$23, including ities bear interest at a base rate plus a margin of up to 2.50%. accrued interest of US$9, to repurchase a portion of its notes due The senior secured asset-based revolving credit facility in 2020, of which US$23, including accrued interest of US$9, was is available through to January 2013. The maximum availability paid to the Company. At December 31, 2010, US$43 (2009 – US$59) under the revolving credit facility is based on specified percent- was outstanding, including accrued interest, of which US$41 ages of eligible accounts receivable and inventory. As at Decem- (2009 – US$56) was held by the Company. ber 31, 2010, nil (2009 – US$4) was outstanding under the revolving credit facility. The obligations under the senior secured asset- m) Tropicana Las Vegas based lending facility are secured on a first-priority lien basis by In March 2010, Tropicana Las Vegas entered into a credit agree- TMS Interna tional’s accounts receivable, inventory and cash pro- ment that consists of a US$50 revolving credit facility and a ceeds therefrom and on a second-priority lien basis by substan - delayed draw US$10 term loan. The revolving credit facility and tially all of TMS International’s other property and assets, subject term loan bear interest at a fixed annual rate of 4.00% and to certain exceptions and permitted liens. 6.00%, respectively, and mature in March 2014. The proceeds from The senior secured term loan credit facility and senior the revolving credit facility, when drawn, will be used to finance secured synthetic letter of credit facility are repayable quarterly, current ongoing capital improvement projects and for other with annual payments of US$2, and mature in January 2014. The general corporate purposes. The proceeds from the term loan, facilities require TMS International to prepay outstanding amounts when drawn, will be used to finance the completion of a capital under certain conditions. At December 31, 2010, US$159 (2009 – improvement project, which includes the construction of a night US$160) was outstanding under the term loan and there were club. For so long as any amount remains outstanding under the US$18 (2009 – US$13) of letters of credit outstanding relating to the term loan, Tropicana Las Vegas is required upon each quarterly synthetic letter of credit facility. The obligations under the senior payment date to use the net income from the night club for pre- secured term loan facility and senior secured synthetic letter of payment of the term loan. At December 31, 2010, US$27 and nil credit facility are secured on a first-priority lien basis by all of TMS were outstanding under the revolving credit facility and the term International’s property and assets (other than accounts receivable loan, respectively. and inventory and cash proceeds therefrom) and on a second- Substantially all of Tropicana Las Vegas’ assets are priority lien basis on all of TMS International’s accounts receivable pledged as collateral under the agreement. and inventory and cash proceeds therefrom, subject to certain exceptions and permitted liens. Onex Corporation December 31, 2010 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 9. 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 , 10 . L E A S E C O M M I T M E N T S W I T H O U T R E C O U R S E T O O N E X ( c o n t ’d ) Future minimum lease payments are as follows: n) ONCAP II companies ONCAP II’s investee companies consist of EnGlobe, CSI Global Education, Inc. (“CSI”) (prior to November 2010), CiCi’s Pizza, Mister Car Wash, Caliber Collision and Sport Supply Group. Each has debt that is included in the Company’s consolidated financial statements. There are separate arrangements for each of the investee companies with no cross-guarantees between the com- panies, ONCAP or by Onex. For the year: 2011 2012 2013 2014 2015 Under the terms of the various credit agreements, com- Thereafter bined term borrowings of $298 are outstanding and combined Total future minimum lease payments revolving credit facilities of $16 are outstanding. The available Less: imputed interest facilities bear interest at various rates based on a base floating rate Balance of obligations under capital leases, plus a margin. At December 31, 2010, effective interest rates ranged without recourse to Onex from 4.8% to 7.8% on borrowings under the revolving credit and Less: current portion Capital Leases Operating Leases $ 18 $ 273 218 166 121 101 337 $ 1,216 15 11 5 3 10 $ 62 (7) 55 (13) Long-term obligations under capital leases, without recourse to Onex $ 42 Substantially all of the lease commitments relate to the operating companies. Operating leases primarily relate to premises. term loan facilities. The term loans have quarterly repayments and are due between 2012 and 2015. The companies also have subordi- nated notes of $59, due between 2012 and 2016 that bear interest at rates ranging from 13.0% to 15.0%, of which the Company owns $37. In Novem ber 2010, CSI repaid $37 of subordinated notes held by the Com pany as part of the sale of CSI by ONCAP II. Certain ONCAP II investee companies have entered into interest rate swap agreements to fix a portion of their interest expense. The total notional amount of these swap agreements at December 31, 2010 was $174, with portions expiring through to 2012. Senior debt is generally secured by substantially all of the assets of the respective company. The annual minimum repayment requirements for the next five years on consolidated long-term debt are as follows: 2011 2012 2013 2014 2015 Thereafter $ 242 395 2,356 1,096 468 2,132 $ 6,689 102 Onex Corporation December 31, 2010 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 11. 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, 2010: Current portion of reserves, December 31, 2009 Long-term portion of reserves, December 31, 2009 Gross reserve for losses and LAE, December 31, 2009(2) Less current portion of ceded claims recoverable(1) (note 4) Less long-term portion of ceded claims recoverable(1) (note 7) Net reserve for losses and LAE, December 31, 2009 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, 2010 Add current portion of ceded claims recoverable(1) (note 4) Add long-term portion of ceded claims recoverable(1) (note 7) Gross reserve for losses and LAE, December 31, 2010(2) Current portion of reserves, December 31, 2010 Property and Casualty(a) Warranty(b) Total Reserves $ 239 $ 186 $ 425 477 34 511 $ 716 $ 220 $ 936 $ $ (239) (477) – – – – – 164 386 550 (164) (36) (2) 182 (275) (479) 182 $ 534 $ 534 (537) (15) (537) (15) $ 164 $ 164 44 3 211 (176) 208 389 761 (340) Long-term portion of reserves, December 31, 2010 $ 386 $ 35 $ 421 (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 ultimate net cost of warranty policies written by The Warranty Group. Due to the reserves and the corresponding ceded claims recoverable were nature of the warranty reserves, substantially all of the ceded acquired on acquisition of The Warranty Group. The property and claims recoverable 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 The following table provides details of the unearned premiums as A subsidiary of Aon Corporation, the former parent of The Warranty 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 2010 2009 $ 2,315 $ 2,508 was sold to National Indemnity Company. As part of the sale, 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, 2010. Current portion of unearned premiums (966) (985) Long-term portion of unearned premiums $ 1,349 $ 1,523 Onex Corporation December 31, 2010 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 12 . 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 24) Stock-based compensation Other(c) 2010 2009 $ 235 611 255 203 227 340 $ 197 724 221 206 138 346 b) Pursuant to Spirit AeroSystems’ 787 aircraft long-term supply agreement with Boeing, Boeing made advance payments to Spirit AeroSystems. As at December 31, 2010, US$1,131 (2009 – US$1,111) of advance payments had been made, of which US$344 has been recognized as revenue and US$787 will be settled against future sales of Spirit AeroSystems’ 787 aircraft units to Boeing. Of the pay- ments, US$173 has been recorded as a current liability. c) Other includes the long-term portion of acquisition and restructuring accruals, amounts for liabilities arising from indemnifications, mark-to-market valuations of hedge contracts $ 1,871 $ 1,832 and warranty provisions. a) Reserves consist primarily of US$158 (2009 – US$144) estab- lished by EMSC for automobile, workers compensation, general liability and professional liability. This includes the use of an off- shore captive insurance program. 13 . I N C O M E TA X E S The reconciliation of statutory income tax rates to the Company’s effective tax rate is as follows: Year ended December 31 Income tax provision at statutory rates 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 Loss from equity-accounted investments Foreign exchange Other, including permanent differences Provision for income taxes Classified as: Current Future Provision for income taxes 2010 $ (210) 2009 $ (213) (88) – 75 (2) 38 (87) (34) (54) (10) (88) 96 (36) 239 (168) (36) 44 $ (362) $ (172) $ (276) (86) $ (362) $ (276) 104 $ (172) 104 Onex Corporation December 31, 2010 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S The Company’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 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 2010 2009 $ 1,136 $ 1,071 39 450 100 18 12 131 (1) (121) (1,320) 444 (599) (106) (571) (130) 236 (1,170) $ (726) $ 240 204 (81) (1,089) $ (726) 47 460 201 19 14 96 43 122 (1,376) 697 (496) (98) (571) (141) 3 (1,303) $ (606) $ 262 435 (66) (1,237) $ (606) (1) Income tax assets and liabilities relating to the same tax jurisdiction have been recorded on a net 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, 2010, Onex and its investment-holding companies had $278 of non-capital loss carryforwards and $313 of capital loss carryforwards. At December 31, 2010, certain operating companies in Canada and the United States had non-capital loss carryforwards avail- able to reduce future income taxes of those companies in the amount of $3,310, of which $1,007 had no expiry, $482 were available to reduce future income taxes between 2011 and 2015, inclusive, and $1,821 were available with expiration dates of 2016 through 2030. Cash taxes paid during the year amounted to $285 (2009 – $268). Onex Corporation December 31, 2010 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 14 . 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-in 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 otherwise will cease to have any general voting rights. The Sub ordinate Voting Shares would then carry 100% of the general voting rights and be entitled to elect 80% of the Directors. iii) An unlimited number of Senior and Junior Preferred Shares issuable in series. The Directors are empowered to fix the rights to be attached to each series. There is no consolidated paid-in value for these shares. Details of DSUs outstanding under the plans are as follows: b) During 2010, under the Dividend Reinvestment Plan, the Com - pany issued 3,088 Subordinate Voting Shares (2009 – 3,060) at a total value of less than $1 (2009 – less than $1). In 2010 and 2009 no Subordinate Voting Shares were issued upon the exercise of stock options. Onex renewed its Normal Course Issuer Bid in April 2010 for one year, permitting the Company to purchase on the Toronto Stock Exchange up to 10% of the public float of its Subordinate Voting Shares. The 10% limit represents approxi- mately 9.1 million shares. The Company repurchased and cancelled under Nor mal Course Issuer Bids 2,040,750 Subordinate Voting Shares (2009 – 1,784,600) at a cash cost of $52 during 2010 (2009 – $41). The excess of the purchase cost of these shares over the average paid-in amount was $44 (2009 – $34), which was charged to retained earn- ings. As at December 31, 2010, the Company had the capacity under the current Normal Course Issuer Bid to purchase approximately 7.2 million shares. c) At December 31, 2010, the issued and outstanding share capi- tal consisted of 100,000 Multiple Voting Shares (2009 – 100,000), 118,279,783 Subordinate Voting Shares (2009 – 120,317,445) and nil Series 1 Senior Preferred Shares (2009 – 176,078). During the fourth quarter of 2010, the issued and outstanding Series 1 Senior Preferred Shares were cancelled. 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. Director DSU Plan Management DSU Plan Number of DSUs Weighted Average Price Number of DSUs Weighted Average Price Outstanding at December 31, 2008 Granted Additional units issued in lieu of compensation and cash dividends Outstanding at December 31, 2009 Granted Redeemed Additional units issued in lieu of compensation and cash dividends Outstanding at December 31, 2010 297,357 40,000 31,662 369,019 40,000 (38,705) 20,346 390,660 $ 22.98 $ 20.01 $ 28.40 $ 26.38 $ 28.38 202,902 – 69,978 272,880 – – 121,394 394,274 – $ 18.62 – – $ 24.59 106 Onex Corporation December 31, 2010 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) The Company has a Stock Option Plan (the “Plan”) under which options and/or share appreciation rights for a term not exceeding 10 years may be granted to Directors, officers and employees for the acquisition of Subordinate Voting Shares of the Company at a Details of options outstanding are as follows: Number of Options Weighted Average Exercise Price price not less than the market value of the shares on the business Outstanding at December 31, 2008 12,931,450 day preceding the day of the grant. Under the Plan, no options or share appreciation rights may be exercised unless the average market price of the Subordinate Voting Shares for the five prior Granted Surrendered Expired 727,500 (197,900) (11,000) business days exceeds the exercise price of the options or the Outstanding at December 31, 2009 13,450,050 share appreciation rights by at least 25% (the “hurdle price”). At Decem ber 31, 2010, 15,612,000 Subor dinate Voting Shares (2009 – 15,612,000) were reserved for issuance under the Plan, against Granted Surrendered Expired 625,000 (173,100) (12,350) $ 18.07 $ 23.35 $ 20.20 $ 20.76 $ 18.33 $ 29.29 $ 18.98 $ 26.69 which options representing 13,889,600 shares (2009 – 13,450,050) Outstanding at December 31, 2010 13,889,600 $ 18.80 were outstanding. The Plan provides that the number of options issued to certain individuals in aggregate may not exceed 10% of During 2010, total cash consideration paid on options surrendered the shares outstanding at the time the options are issued. was $2 (2009 – $1). This amount represents the difference between Options granted vest at a rate of 20% per year from the the market value of the Subordinate Voting Shares at the time of sur- date of grant, with the exception of the 772,500 remaining options render and the exercise price, both as determined under the Plan. granted in December 2007, which vest at a rate of 16.7% per year. When an option is exercised, the employee has the right to request that the Company repurchase the option for an amount equal to the difference between the fair value of the stock under the option and its exercise price. Upon receipt of such 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. Options outstanding at December 31, 2010 consisted of the following: Number of Outstanding Options Exercise Price Number of Exercisable Options Hurdle Price Remaining Life (years) 547,000 505,000 7,260,000 2,321,600 135,000 280,000 20,000 772,500 699,750 723,750 625,000 13,889,600 $ 20.50 $ 14.90 $ 15.87 $ 18.18 $ 19.25 $ 29.22 $ 33.40 $ 35.20 $ 15.95 $ 23.35 $ 29.29 547,000 505,000 7,260,000 2,321,600 108,000 – – – 279,750 144,750 – 11,166,100 $ 25.63 $ 18.63 $ 19.84 $ 22.73 $ 24.07 $ 36.53 $ 41.75 $ 44.00 $ 19.94 $ 29.19 $ 36.62 1.5 2.1 3.2 3.9 5.1 5.9 6.3 6.9 7.9 8.9 9.9 Onex Corporation December 31, 2010 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 15 . 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 Year ended December 31 2010 2009 Interest on long-term debt of operating companies Interest on obligations under capital leases of operating companies Other interest of operating companies $ 395 $ 483 4 21 4 8 $ 420 $ 495 Cash interest paid during the year amounted to $373 (2009 – $505). 16 . E A R N I N G S ( L O S S ) F R O M E Q U I T Y - A C C O U N T E D I N V E S T M E N T S b) During 2010, Hawker Beechcraft recorded impairment charges of US$115, which were primarily related to an increase of reserves for losses on certain aircraft programs. The Company recorded a loss from equity-accounted investments in 2010 of $151 relating to its 49% interest in Hawker Beechcraft, of which Onex’ share was $61. During the third quarter of 2009, Hawker Beechcraft com- pleted 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 im - pairment charges in 2009 of US$521, which included an impair- ment of US$340 for the full amount of goodwill associated with this segment. In addition, Hawker Beechcraft concluded that additional charges of US$205 were necessary to reduce the carrying value of other assets in this segment as well as to increase reserves for losses on certain aircraft programs and potential supplier claims. Primarily as a result of these impairments and other Year ended December 31 Allison Transmission(a) Hawker Beechcraft(b) Onex Real Estate(c) Tomkins(d) Other 2010 2009 non-cash charges, the Company recorded a loss from equity- $ 17 $ (151) (13) (128) 25 (181) (237) (97) – 18 accounted investments in 2009 of $237 relating to its 49% interest in Hawker Beech craft, of which Onex’ share was $95. c) Onex Real Estate’s 2009 loss was primarily from provisions established against the carrying value of a number of Onex Real $ (250) $ (497) Estate investments as a result of the economic conditions that existed at that time. a) A significant portion of the 2009 loss from Allison Transmission was due to a US$190 impairment of certain intangible assets. In addition, Allison Transmission wrote down certain long-term receivables and established reserves for other matters that the company had with General Motors Corporation (“GM”) as a result of the GM bankruptcy. The net charge from the GM items was US$37. Primarily as a result of the impairment and GM charges, the Company recorded a loss from equity-accounted investments d) In the three months since its acquisition date, Tomkins recorded a loss of US$214. The loss was due primarily to a US$144 one-time charge to earnings related to the acquisition accounting step-up in value of inventory recorded on Tomkins’ opening balance sheet and US$81 of stock-based compensation expense. Primarily as a result of the one-time charge and stock- based compensation expense, the Company recorded a loss from equity-accounted investments in 2010 of $128 relating to its inter- in 2009 of $181 relating to its 49% interest in Allison Transmission, est in Tomkins, of which Onex’ share was $34. of which Onex’ share was $58. 17. 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 Year ended December 31 2010 2009 Parent company(a) Celestica Spirit AeroSystems Other $ 86 43 30 17 $ 93 43 12 13 $ 176 $ 161 a) Parent company includes an expense of $80 (2009 – $61) relating to Onex’ stock option plan, as described in note 14(e), primarily due to the increase in the market price of Onex shares during the year. 108 Onex Corporation December 31, 2010 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 18 . G A I N S O N D I S P O S I T I O N S O F O P E R AT I N G Amounts received on account of the carried interest I N V E S T M E N T S Year ended December 31 2010 2009 Gain on sale of CSI(a) $ 88 $ Gain on Flushing Town Center debt extinguishment(b) Gain on partial sales of EMSC(c) Gains on sale of Cineplex Entertainment(d) Gain on disposition of CEI(e) Gain on partial sale of Celestica(f) Other a) CSI 32 – – – – 2 relating to the third-quarter transaction totalled $12. Consistent with market practice and the terms of Onex Partners, Onex is allo- cated 40% of the carried interest with 60% allocated to manage- ment. Onex’ share of the carried interest received was $5 and is 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- – – 595 160 20 6 2 $ 122 $ 783 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 under- In November 2010, ONCAP II sold its interests in CSI for net writer commissions of US$2.17 per share. Onex’ cash cost for proceeds of $126, of which Onex’ share was $50. Included in the these shares was US$6.67 per share. proceeds was the repayment of $37 of sub ordinated notes held by Total net cash proceeds received from the sale were the Company. The Company recorded a pre-tax gain of $88 on $446, resulting in a pre-tax gain of $320. Onex’ share of the net the transaction, of which Onex’ pre-tax gain was $40. There were proceeds and pre-tax gain was $183 and $104, respectively. no cash taxes paid as a result of the gain. Amounts received on account of the carried interest Under the terms of the MIP, as described in note 23(g), relating to the fourth-quarter transaction totalled $38. Consistent management members participated in the realizations the with market practice and the terms of Onex Partners, Onex is allo- Company achieved on the sale of CSI. Amounts paid on account cated 40% of the carried interest with 60% allocated to manage- of this transaction related to the MIP totalled $4 and have been ment. Onex’ share of the carried interest received was $15 and is deducted from the gain. included in the net proceeds and the gain. Management’s share of In addition, management of ONCAP II received $13 in the carried interest was $23. carried interest. b) Flushing Town Center 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. In December 2010, Flushing Town Center amended and restated its senior construction loan and mezzanine loan, as described in d) Cineplex Entertainment note 9. In conjunction with these amendments, the Company pur- In March 2009, Onex entered into an agreement to sell all of its chased US$56 and US$38 of the senior construction loan and mez- remaining units of Cineplex Galaxy Income Fund to a syndicate of zanine loan, respectively, from third-party lenders. The loans were underwriters at a gross price of $14.25 per unit. The transaction purchased for a total cash cost of US$62. As a result of the trans - closed in April 2009 and Onex received net proceeds of approxi- action, the loans purchased by the Company were extinguished with mately $175. As a result of the transaction, Onex recorded a pre- the original third-party lenders. Flushing Town Center recorded tax gain of $160 in the second quarter of 2009. a net gain of $32 (US$32) on the debt extinguishment. e) CEI c) EMSC At December 31, 2008, Cosmetic Essence, Inc. (“CEI”) was not in In the third quarter of 2009, under a secondary public offering of compliance with its debt covenants. During the first quarter of EMSC, Onex, Onex Partners I and certain limited partners of Onex 2009, CEI was in discussions with its lenders to achieve a restruc- Partners I sold 9.2 million shares of EMSC, of which Onex’ portion turing of its debt. A mutually agreeable restructuring and invest- was approximately 3.5 million shares. The offering was completed ment transaction was not achieved. Therefore, in May 2009 Onex at a price of US$40.00 per share, before underwriter commissions contributed its debt securities in CEI’s parent to CEI’s parent com- of US$1.90 per share. Onex’ cash cost for these shares was US$6.67 pany and transferred its shares to an entity controlled by CEI’s per share. lenders, who agreed to provide additional liquidity to CEI. At that Total net cash proceeds received from the sale were time, Onex and Onex Partners I ceased to have an equity owner- $381, resulting in a pre-tax gain of $275. Onex’ share of the net ship in the business. Onex’ and Onex Partners I’s original Decem - proceeds and pre-tax gain was $148 and $90, respectively. ber 2004 investment in CEI was $138, of which Onex’ portion was Onex Corporation December 31, 2010 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 18 . 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 ( c o n t ’d ) $32. As a result of previously recorded losses, Onex’ investment had a negative carrying value of $20 at March 31, 2009. Therefore, Onex recorded a non-cash accounting gain of $20 upon disposi- tion in the second quarter of 2009. f) Celestica In October 2009, Onex sold 11.0 million Subordinate Voting Shares of Celestica, which included shares held under the MIP, to a syndi- cate 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 own - ership in Celestica was reduced to 8% and Onex’ voting interest was reduced to 69%. Onex continues to control and consolidate Celestica. 19. A C Q U I S I T I O N , R E S T R U C T U R I N G A N D O T H E R E X P E N S E S a) In July 2010, Skilled Healthcare Group announced that a jury had returned a verdict against the company in a California state court related to a complaint filed more than four years ago. In the complaint, the plaintiffs alleged, among other matters, that certain California-based facilities operated by Skilled Healthcare Group’s wholly owned operating companies failed to provide the pre- scribed number of qualified personnel to care for their residents. In the first phase of deliberations, the jury awarded the plaintiffs more than US$650 in damages. During the third quarter of 2010, Skilled Healthcare Group came to a settlement agreement on this complaint and recorded US$53 in other expenses. The settlement contains no admission or concession of wrongdoing by Skilled Healthcare Group. Acquisition, restructuring and other expenses are typically to provide for the costs of facility consolidations, workforce reduc- tions 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 Year ended December 31 2010 2009 the planned restructuring activities, including estimating sublease Celestica Carestream Health Husky Sitel Worldwide Skilled Healthcare Group(a) Other $ 57 35 25 39 55 22 $ 92 44 42 25 – 16 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. The tables below provide a summary of acquisition, restructuring and other activities undertaken by the operating companies, $ 233 $ 219 excluding Skilled Healthcare Group as described above, detailing the components of the charges and movement in accrued liabili- ties. This summary is presented by the year in which the restruc- turing activities were initiated. Years Prior to 2009 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, 2010 $ $ $ Reconciliation of accrued liability Closing balance – December 31, 2009 $ Cash payments Charges Other adjustments 812 806 43 41 (65) 43 (4) $ $ $ $ 199 198 11 29 (21) 11 (1) Closing balance – December 31, 2010 $ 15 $ 18 (a) (b) Includes Celestica $1,414. Includes Celestica $1,414. $ $ $ $ $ 131 121 36 3 (39) 36 2 2 Non-cash Charges $ $ $ 391 391 – Total $ 1,533(a) $ 1,516(b) $ $ $ 90 73 (125) 90 (3) 35 110 Onex Corporation December 31, 2010 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 Initiated in 2009 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, 2010 $ $ $ Reconciliation of accrued liability Closing balance – December 31, 2009 $ Cash payments Charges Other adjustments Closing balance – December 31, 2010 $ (a) (b) Includes Husky $16 and Sitel Worldwide $15. Includes Husky $16 and Sitel Worldwide $15. 10 10 – 11 (8) – 1 4 $ $ $ $ $ 5 5 – 4 (2) – 1 3 $ $ $ $ 25 25 13 5 (15) 13 (1) $ 2 Initiated in 2010 Total estimated expected costs Cumulative costs expensed to date Expense for the year ended December 31, 2010 Reconciliation of accrued liability Cash payments Charges Other adjustments Closing balance – December 31, 2010 (a) (b) Includes Sitel Worldwide $43. Includes Sitel Worldwide $39. Employee Termination Costs Lease and Other Contractual Obligations Facility Exit Costs and Other $ $ $ $ $ 49 46 46 (20) 46 – 26 $ $ $ $ $ 6 4 4 (2) 4 – 2 $ $ $ $ $ 25 24 24 (19) 24 (1) 4 Total Employee Termination Costs Lease and Other Contractual Obligations Facility Exit Costs and Other Total estimated expected costs Cumulative costs expensed to date Expense for the year ended December 31, 2010 $ $ $ Reconciliation of accrued liability Closing balance – December 31, 2009 $ Cash payments Charges Other adjustments 871 862 89 52 (93) 89 (3) Closing balance – December 31, 2010 $ 45 $ $ $ $ $ 210 207 15 33 (25) 15 – 23 $ $ $ $ $ 181 170 73 8 (73) 73 – 8 Non-cash Charges $ $ $ 1 1 1 Non-cash Charges $ $ $ – – – Non-cash Charges $ $ $ 392 392 1 $ $ $ $ $ $ $ $ $ Total 41(a) 41(b) 14 20 (25) 13 1 9 Total 80(a) 74(b) 74 (41) 74 (1) $ 32 Total $ 1,654 $ 1,631 $ 178 $ 93 (191) 177 (3) $ 76 Onex Corporation December 31, 2010 111 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 . 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 b) Sitel Worldwide’s 2009 writedowns consist primarily of a second-quarter non-cash goodwill impairment charge of $52, which was a result of the loss of certain business contracts in its Year ended December 31 2010 2009 European region. Skilled Healthcare Group(a) Sitel Worldwide(b) TMS International(c) CiCi’s Pizza(d) Celestica(e) Other $ – – – 3 8 4 $ 180 64 62 44 14 6 $ 15 $ 370 a) Due to a reduction in the expected future growth rates for Medicare and Medicaid and their effect on expected cash flows, Skilled Healthcare Group recorded a non-cash goodwill impair- ment charge of $180 in the fourth quarter of 2009. c) In the second quarter of 2009, TMS International revised its long-term outlook to reflect changes in expectations for certain customers and contracts. As a result, TMS International per- formed a goodwill impairment test that resulted in a non-cash goodwill impairment charge of $62. d) 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 increase in the discount rate used due to market risks associated with the economic environment in 2009. e) In the fourth quarter of 2010, Celestica recorded a non-cash long-lived asset impairment charge of $8 (2009 – $14), primarily to impair certain of its property, plant and equipment. 21. 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 was as follows: Year ended December 31 Weighted average number of shares outstanding (in millions): Basic Diluted 2010 119 119 2009 122 122 2 2 . S I G N I F I C A N T C U S T O M E R S O F O P E R AT I N G C O M PA N I E S A N D C O N C E N T R AT I O N O F C R E D I T R I S K A number of operating companies, by the nature of their businesses, individually serve major customers that account for a large portion of their revenues. For each of these operating companies, the table below shows the number of significant customers and the percentage of revenues they represent. Year ended December 31 CDI Celestica EMSC Skilled Healthcare Group Spirit AeroSystems TMS International The Warranty Group 2010 Number of Significant Customers 1 1 1 2 2 1 1 Percentage of Revenues 12% 20% 22% 69% 94% 32% 12% 2009 Number of Significant Customers 1 1 1 2 2 1 1 Percentage of Revenues 12% 17% 23% 67% 96% 25% 10% Accounts receivable from the above significant customers at December 31, 2010 totalled $617 (2009 – $587). 112 Onex Corporation December 31, 2010 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 2 3 . C O M M I T M E N T S , C O N T I N G E N C I E S A N D The Company and its operating companies also have R E L AT E D PA R T Y T R A N S A C T I O N S insurance to cover costs incurred for certain environmental mat- a) Contingent liabilities in the form of letters of credit, letters of guarantee and surety and performance bonds are primarily provided by certain operating companies to various third parties and include certain bank guarantees. At December 31, 2010, the amounts potentially payable in respect of these guarantees totalled $568. The Company, which includes the operating companies, has total commitments of approximately $106 with respect to cor- porate investments. A significant portion of this amount is funded by third-party limited partners of the Onex and ONCAP 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 10. The aggregate commitments for capital assets at Decem - ber 31, 2010 amounted to $394. 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 certain pre-acquisition liability claims against the acquired com- panies. The operating companies have recorded liability provi- sions based on their consideration and analysis of their exposure in respect of such claims. Such provisions are reflected, as appro- priate, in Onex’ consolidated financial statements. Onex, the parent company, has not currently recorded any further liability provision 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 outcome 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 lia- bility inherent in activities relating to their past and present oper- ations. As conditions of acquisition agreements, certain operating companies have agreed to accept certain pre-acquisition liability claims on the acquired companies after obtaining indemnifica- tion from prior owners. 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, 2010, US$1,475 (2009 – US$1,475) has been invested of the approximately US$1,655 of total capital committed. Onex has invested US$346 (2009 – US$346) 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, 2010 was US$33 (2009 – US$33). Prior to November 2006, Onex received annual manage- ment fees based on 2% of the capital committed to Onex Partners I by investors other than Onex and Onex management. The annual management fee was reduced to 1% of the net funded commit- ments 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 minimum 8% return on their investment in Onex Partners I over the life of Onex Partners I. The investment by Onex Partners I investors for this purpose takes into consideration management fees and other amounts paid in by Onex Partners I investors. The returns to Onex Partners I investors, other than Onex and Onex management, are based upon all investments made through Onex Partners I, with the result that 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 mar- ket practice, Onex, as sponsor of Onex Partners I, is allocated 40% of the carried interest with 60% allocated to management. Onex defers all gains associated with the carried interest until such time as the potential for repayment of amounts received is remote. For the year ended December 31, 2010, nil (2009 – $20) has been received by Onex as carried interest and recognized as income while management received nil (2009 – $30) with respect to the carried interest. At December 31, 2010, the total amount of carried interest that has been deferred from income was $58 (2009 – $58). Onex Corporation December 31, 2010 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 3 . C O M M I T M E N T S , C O N T I N G E N C I E S A N D 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 ) e) In August 2006, Onex completed the closing of Onex Partners II with funding commitments totalling approximately US$3,450. Onex Partners II provides committed capital for Onex-sponsored acquisitions not related to Onex’ operating companies at Decem - ber 31, 2003 or to ONCAP or Onex Partners I. As at December 31, 2010, US$2,944 (2009 – US$2,903) has been invested of the approxi- mately US$3,450 of total capital committed. Onex has funded US$1,164 (2009 – US$1,148) of its US$1,407 commitment. Onex controls the General Partner and Manager of Onex Partners II. Onex management has committed, as a group, to invest a mini- mum of 1% of Onex Partners II, which may be adjusted annually up to a maximum of 4%. As at December 31, 2010, management and directors had committed approximately 3% (2009 – 3%). The total amount invested in Onex Partners II’s investments by Onex management and directors at December 31, 2010 was US$117, of which US$2 (2009 – nil) was invested in the year ended Decem - ber 31, 2010. Onex received annual management fees based on 2% of the capital committed to Onex Partners II 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 2008, when Onex established a suc- cessor fund, Onex Partners III. A carried interest is received on the overall gains achieved by Onex Partners II investors, other than Onex and Onex management, to the extent of 20% of the gains, provided that those investors have achieved a minimum 8% return on their investment in Onex Partners II over the life of Onex Partners II. The investment by Onex Partners II investors for this purpose takes into consideration management fees and other amounts paid by Onex Partners II investors. The returns to Onex Partners II investors, other than Onex and Onex management, are based upon all investments made through Onex Partners II, with the result that the initial car- ried interests achieved by Onex on gains could be recovered from Onex if subsequent Onex Partners II investments do not exceed the overall target return level of 8%. Consistent with market prac- tice and Onex Partners I, Onex, as sponsor of Onex Partners II, will be allocated 40% of the carried interest with 60% allocated to management. Onex defers all gains associated with the carried interest until such time as the potential for repayment of amounts received is remote. As at December 31, 2010, no amount had been received as carried interest related to Onex Partners II. 114 Onex Corporation December 31, 2010 f) In December 2009, Onex completed the closing of Onex Part- ners III with funding commitments totalling approximately US$4,300. Onex Partners III provides committed capital for Onex- sponsored acquisitions not related to Onex’ operating companies at December 31, 2003 or to ONCAP, Onex Partners I or Onex Partners II. As at December 31, 2010, approximately US$1,074 (2009 – US$195) has been invested, of which Onex’ share was US$205 (2009 – US$45). Onex had a US$1,000 commitment for the period from January 1, 2009 to June 30, 2009. On December 31, 2008, Onex gave notice to the investors of Onex Partners III that Onex’ commitment would be decreasing to US$500 effective July 1, 2009. In December 2009, Onex notified the investors of Onex Partners III that it would be increasing its commitment to US$800 effective June 16, 2010. This commitment may be increased up to approximately US$1,500 at the option of Onex, but may not be decreased. Onex controls the General Partner and Manager of Onex Partners III. Onex management has commit- ted, as a group, to invest a minimum of 1% of Onex Partners III, which may be adjusted annually up to a maximum of 6%. At De - cem ber 31, 2010, management and directors had committed 4% (2009 – 3%). The total amount invested in Onex Partners III’s invest- ments by Onex management and directors at December 31, 2010 was US$34, of which US$29 (2009 – US$5) was invested in the year ended December 31, 2010. Onex receives annual management fees based on 1.75% of the capital committed to Onex Partners III by investors other than Onex and Onex management. The annual management fee is reduced to 1% of the net funded commitments at the earlier of the end of the commitment period, when the funds are fully invested, or if Onex establishes a successor fund. A carried interest is received on the overall gains achieved by Onex Partners III investors, other than Onex and Onex management, to the extent of 20% of the gains, provided that those investors have achieved a minimum 8% return on their investment in Onex Partners III over the life of Onex Partners III. The investment by Onex Partners III investors for this purpose takes into consideration management fees and other amounts paid by Onex Partners III investors. The returns to Onex Partners III investors, other than Onex and Onex management, are based upon all investments made through Onex Partners III, with the result that the initial carried interests achieved by Onex on gains could be recovered from Onex if subsequent Onex Partners III investments do not exceed the overall target return level of 8%. Consistent with market practice and Onex Partners I and Onex Partners II, Onex, as spon- sor of Onex Partners III, will be allocated 40% of the carried inter- est with 60% allocated to management. Onex defers all gains associated with the carried interest until such time as the potential for repayment of amounts received is remote. As at December 31, 2010, no amount has been received as carried interest related to Onex Partners III. N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S g) Under the terms of the MIP, management members of the Com - pany invest in all of the operating entities acquired by the Company. k) In connection with the 2007 purchase of Carestream Health from Eastman Kodak Company (“Kodak”), if, upon the disposition The aggregate investment by management members of Carestream Health, Onex and Onex Partners realize an internal 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 require- rate of return on their initial US$471 investment in excess of 25%, Kodak is entitled to 25% of the excess return, up to US$200. At December 31, 2010, Onex and Onex Partners had received distribu- tions of US$231 from Carestream Health. No amount has been recorded for any potential payment to Kodak in the consolidated ment in Onex Partners’ transactions are allocated to meet the 1.5% financial statements. Onex investment requirement under the MIP. For investments made prior to November 7, 2007, the investment rights to acquire the remaining 5⁄6ths vest equally over four years with the invest- ment rights vesting in full if the Company disposes of 90% or more l) In April 2010 and March 2009, Onex entered into the sale of an entity, whose sole assets were certain tax losses, to a public com - pany controlled by Mr. Gerald W. Schwartz, who is also Onex’ con- of an investment before the fifth year. trolling shareholder. Onex received $8 (2009 – $3) in cash for tax The MIP was amended in 2007. For investments made losses of $70 (2009 – $23). The entire $8 (2009 – $3) was recorded as 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 a gain and was included in other income in the consolidated state- ment of earnings. Onex has significant Canadian non-capital and capital losses available and valuation allowances have been estab- disposes of all of an investment before the seventh year. Under lished against the benefit of all of these losses in the consolidated the MIP and amended MIP, the investment rights related to a financial statements. As such, Onex does not expect to generate particular acquisition are exercisable only if the Company earns sufficient taxable income to fully utilize these losses in the foresee- a minimum 15% per annum compound rate of return for that able future. In connection with these transactions, Onex obtained acquisition after giving effect to the investment rights. tax rulings from the Canada Revenue Agency and Deloitte & Touche Under the terms of the MIP, the total amount paid by LLP, an independent accounting firm retained by Onex’ Audit and management members in 2010 for the interest in the investments Corporate Governance Committee, provided opinions that the val- made outside of Onex Partners but including Onex Real Estate and ues received by Onex for the tax losses were fair. Onex’ Audit and ONCAP was $2 (2009 – $1). Investment rights exercisable at the Corporate Governance Committee, all the members of which are same price for 7.5% (2009 – 7.5%) of the Company’s interest in acqui- independent directors, unanimously approved the transactions. sitions were issued at the same time. Realizations under the MIP including the value of units distributed were $4 in 2010 (2009 – $20). h) Members of management and Board of directors of the Com - pany invested $12 in 2010 (2009 – $8) in Onex’ investments made outside of Onex Partners at the same cost as Onex and other out- side investors. Those investments by management and Board of directors are 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 invest- ment rights and carried interest to acquire Onex shares in the market until the management member owns one million Onex Sub ordinate Voting Shares and/or management DSUs. During 2010, Onex management reinvested approximately $1 (2009 – $2) to acquire Onex shares. 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, 2010 was $9 (2009 – $13). 2 4 . P E N S I O N A N D N O N - P E N S I O N P O S T - R E T I R E M E N T B E N E F I T S The operating companies have a number of defined benefit and defined contribution plans providing pension, other retirement and post-employment benefits to certain of their employees. The non-pension post-retirement benefits include retirement and ter mination benefits, health, dental and group life. The plans at the oper ating companies are independent and surpluses within certain plans cannot be used to offset deficits. Onex, the parent company, does not provide pension, other retirement or post- retirement bene fits to its employees or to those of any of the oper - ating companies. The total costs during 2010 for defined contribution pen- sion plans were $134 (2009 – $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 pen- sion plans for funding purposes were during 2010, and the next required valuations will be during 2011. Onex Corporation December 31, 2010 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 4 . P E N S I O N A N D N O N - P E N S I O N P O S T - R E T I R E M E N T B E N E F I T S ( c o n t ’d ) In 2010, 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 $167 (2009 – $183). Included in the total was $34 (2009 – $31) 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 fair 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 2010 2009 2010 2009 2010 2009 $ 845 $ 919 $ 420 $ 400 $ 153 $ 151 6 53 – (15) 80 (47) 1 – – 41 – 1 53 – (16) (5) (108) – – (2) 3 – 9 18 1 (22) 29 (25) – – (15) (41) (11) 15 21 1 (15) 40 (30) 1 1 (12) (3) 1 6 9 – (3) 14 (5) – (6) (3) – (1) 5 9 – (4) 7 (13) – (1) (1) – – $ 964 $ 845 $ 363 $ 420 $ 164 $ 153 $ 1,036 $ 1,008 $ 322 $ 282 $ 126 14 – (15) (56) – – 39 – 178 7 – (16) (128) – (3) (10) – 26 24 1 (22) (21) – (14) (39) (1) 42 36 1 (15) (22) 1 (12) 10 (1) – – 4 – (3) – – (1) – – – $ $ – – 4 – (4) – – – – – – Closing plan assets $ 1,144 $ 1,036 $ 276 $ 322 $ Asset category Equity securities Debt securities Real estate Other Percentage of Plan Assets 2010 35% 60% 2% 3% 100% 2009 52% 42% 3% 3% 100% Equity securities do not include direct investments in 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. 116 Onex Corporation December 31, 2010 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S The funded status of the plans of the operating subsidiary companies is 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 2010 2009 2010 2009 2010 2009 $ 1,144 $ 1,036 $ 276 (964) (845) (363) $ 322 (420) $ – (164) $ – (153) $ 180 $ 191 $ (87) $ (98) $ (164) $ (153) – 135 51 – 109 47 (4) 83 (51) (4) 73 (47) (11) 31 – (8) 31 – Deferred benefit amount – asset (liability) $ 366 $ 347 $ (59) $ (76) $ (144) $ (130) The deferred benefit asset is included in the Company’s consolidated balance sheets under “Other long-term assets” (note 7). The deferred benefit liabilities are included in the Company’s consolidated balance sheets under “Other liabilities” (note 12). The net expense for the plans, excluding discontinued operations, is outlined below: Year ended December 31 Net periodic costs: Current service cost Interest cost Actual return on plan assets Difference between expected return and actual return on plan assets for period Actuarial (gain) loss Difference between actuarial (gain) loss recognized for period and actual actuarial (gain) loss on the accrued benefit obligation for period Plan amendments (curtailment/settlement (gain) loss) Difference between amortization of past service costs for period and actual plan amendments for period Other Pension Plans in which Assets Exceed Accumulated Benefits Pension Plans in which Accumulated Benefits Exceed Assets Non-Pension Post-Retirement Benefits 2010 2009 2010 2009 2010 2009 $ 6 53 $ 1 53 (126) (178) $ 50 80 (79) – – – 106 (6) 17 – – – 9 18 (26) 11 25 (21) 5 – 1 $ 15 21 (42) 29 32 (30) 3 (1) – $ 6 9 – – 15 (13) (1) (2) – $ 5 9 – – 8 (7) – (1) – Net periodic costs (income) $ (16) $ (7) $ 22 $ 27 $ 14 $ 14 Onex Corporation December 31, 2010 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 4 . P E N S I O N A N D N O N - P E N S I O N P O S T - R E T I R E M E N T B E N E F I T S ( c o n t ’d ) The following assumptions were used to account for the plans: Year ended December 31 Accrued benefit obligation: 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 2010 2009 2010 2009 4.65%–5.67% 4.56%–7.00% 5.00%–5.67% 4.00%–6.40% 0.00%–4.29% 0.00%–4.33% 0.00%–4.70% 0.00%–4.69% 4.79%–6.27% 5.32%–7.50% 5.75%–6.40% 4.00%–7.50% rate of return on plan assets 4.34%–8.04% 4.29%–8.00% 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%–4.33% 0.00%–4.80% 0.00%–4.69% 0.00%–4.68% 2010 2009 7.55%–9.50% 4.50%–5.00% 3.50%–14.00% 3.50%–5.00% Between 2014 and 2030 Between 2010 and 2030 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 2010 $ $ 2 19 1% Increase 2009 $ $ 2 20 2010 $ (2) $ (16) 1% Decrease 2009 $ (2) $ (17) 118 Onex Corporation December 31, 2010 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 . 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 primarily of investments in debt securities. The investments in highly liquid debt securities are subject to credit risk. A description of the investments held by EMSC and The Warranty Group is included in note 6. At December 31, 2010, Onex, the parent company, held and Medicare, Medicaid and other contracted payor reimburse- ment as a contractual provision. Uncompensated care or doubtful account provisions are related principally to services provided to self-paying unin- sured patients and are estimated at the date of service based on historical 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 $487 at December 31, 2010: Allowance for Uncompensated Care Allowance for Contractual Discounts Balance at December 31, 2009 $ 601 $ 1,052 Additions Reductions 1,973 (1,948) 5,320 (5,286) $530 of cash and cash equivalents in short-term high-rated money Balance at December 31, 2010 $ 626 $ 1,086 market instruments. In addition, Celestica had $630 of cash and cash equivalents, comprised of cash (approximately 38%) and cash Additions to the allowances consist primarily of provisions equivalents (approximately 62%). Celestica’s current portfolio con- against earnings and reductions to these accounts are primarily sists of certain money market funds that exclusively hold U.S. gov- due to write-offs. ernment securities and certificates of deposit. The majority of Celestica’s and Onex’, the parent company’s, cash and cash equiva- Liquidity risk lents are held with financial institutions, each of which has a cur- Liquidity risk is the risk that Onex and its subsidiaries will have rent Standard & Poor’s rating of A-1 or above. insufficient funds on hand to meet their respective obligations as they come due. Accounts payable are primarily due within Accounts receivable are also subject to credit risk. At December 31, 90 days. The repayment schedules for long-term debt and capital the aging of consolidated accounts receivable was as follows: leases of the operating companies have been disclosed in notes 9 Current 1–30 days past due 31–60 days past due >60 days past due 2010 2009 $ 2,900 $ 2,700 238 66 193 187 73 102 and 10. Onex, the parent company, has no significant debt and has not guaranteed the debt of the operating companies. Market risk Market risk is the risk that the future cash flows of a financial instrument will fluctuate due to changes in market prices. The $ 3,397 $ 3,062 Company is primarily exposed to fluctuations in the foreign cur- rency exchange rate between the Canadian and U.S. dollars and At December 31, 2010, the provision for uncollectible accounts fluctuations in the LIBOR and U.S. prime interest rates. totalled $1,783 (2009 – $1,726) and primarily relates to accounts receivable at EMSC. Companies in the emergency healthcare Foreign currency exchange rates industry maintain provisions for contractual discounts and for The functional currency of substantially all of Onex’ operating uncompensated care or doubtful accounts. EMSC is contractually companies is the U.S. dollar. As investments in self-sustaining sub- required, in most circumstances, to provide care regardless of the sidiaries are excluded from the financial instrument disclosure, the patient’s ability to pay. Company’s exposure on financial instruments to the Cana dian/ EMSC records gross revenue based on fee-for-service U.S. dollar foreign currency exchange rate is primarily at the parent rate schedules that are generally negotiated with various con - company through the holding of U.S.-dollar-denominated cash tracting entities, including municipalities and facilities. Fees are and cash equivalents. A 5% strengthening (5% weakening) of the billed for all revenue sources and to all payors under the gross fee Canadian dollar against the U.S. dollar at December 31, 2010 would schedules for that specific contract; however, reimbursement in the result in a $23 decrease ($23 increase) in net earnings. As all of the case of certain state and federal payors, including Medicare and U.S.-dollar-denominated cash and cash equivalents at the parent Medi caid, will not change as a result of the gross fee schedules. company are designated as held-for-trading, there would be no EMSC records the difference between gross fee schedule revenue effect on other comprehensive earnings. Onex Corporation December 31, 2010 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 5 . F I N A N C I A L I N S T R U M E N T S A N D long-term debt had a fixed interest rate or the interest rate was FA I R VA L U E M E A S U R E M E N T S ( c o n t ’d ) effectively fixed by interest rate swap contracts. The long-term debt of the operating companies is without recourse to Onex. In addition, two operating companies have significant In addition, The Warranty Group holds substantially all exposure to the U.S. dollar/Canadian dollar foreign currency of its investments in interest-bearing securities, as described in exchange rate. A 5% strengthening (5% weakening) of the Cana - note 6. A 0.25% (25 basis point) increase in the interest rate would dian dollar against the U.S. dollar at December 31, 2010 would decrease the fair value of the investments held by US$13 and result result in a US$9 increase (US$9 decrease) in net earnings of in a corresponding decrease to other comprehensive earnings Celestica. A 5% strengthening (5% weakening) of the Canadian of The Warranty Group. However, as the investments are reinvested, dollar against the U.S. dollar at December 31, 2010 would result a 0.25% increase in the interest rate would increase the annual in a US$23 increase (US$23 decrease) in other comprehensive interest income recorded by The Warranty Group by US$5. earnings of Husky. Interest rates Commodity risk Certain of Onex’ operating companies have exposure to commodi- The Company is exposed to changes in future cash flows as a ties. In particular, aluminum, titanium and raw materials such as result of changes in the interest rate environment. The parent carbon fibres used to manufacture composites are the principal company is exposed to interest rate changes primarily through its raw materials for Spirit AeroSystems’ manufacturing operations. cash and cash equivalents, which are held in short-term term To limit its exposure to rising raw materials prices, Spirit Aero - deposits and commercial paper. Assuming no significant changes Systems has entered into long-term supply contracts directly with in cash balances held by the parent company from those at its key suppliers of raw materials and collective raw materials December 31, 2010, a 0.25% increase (0.25% decrease) in the inter- sourcing contracts arranged through certain of its customers. est rate (including the Canadian and U.S. prime rates) would In addition, diesel fuel is a key commodity used in TMS result in a $1 increase ($1 decrease) in annual interest income. As International’s operations. To help mitigate the risk of changes in all of the U.S. dollar cash and cash equivalents at the parent com- fuel prices, substantially all of its contracts contain pricing escala- pany are designated as held-for-trading, there would be no effect tors based on published commodity or inflation price indices. on other comprehensive earnings. Silver is a significant commodity used in Carestream The operating companies’ results are also affected by Health’s manufacturing of x-ray film. The company’s management changes in interest rates. A change in the interest rate (including continually monitors movement and trends in the silver market the LIBOR and U.S. prime interest rates) would result in a change and enters into forward agreements when considered appropriate in interest expense being recorded due to the variable-rate portion to mitigate some of the risk of future price fluctuations generally of the long-term debt of the operating companies. At Decem ber 31, for periods of up to a year. 2010, approximately 56% (2009 – 66%) of the operating companies’ Financial instruments classification Financial assets were classified as follows: Held-for-trading(2) Available-for-sale(3) Held-to-maturity(4) December 31, 2010 December 31, 2009 Carrying Value Fair Value(1) Carrying Value Fair Value(1) $ 681 $ 1,914 $ 14 $ 681 $ 1,914 $ 14 $ 617 $ 2,017 $ 4 $ 617 $ 2,017 $ 4 (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 sheets. At December 31, 2010 and 2009, 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 sheets. (4) Amounts are primarily included in investments in the consolidated balance sheets. In addition to the above, at December 31, 2010, cash and cash equivalents of $2,518 (2009 – $3,206) 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. 120 Onex Corporation December 31, 2010 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 Fair Value Measurements markets, quoted market prices for identical assets in inactive The Company’s estimates of fair value for financial assets and markets, inputs other than quoted market prices that are financial liabilities are based on the framework established in the observable for the asset, such as interest rates or yield curves, fair value accounting guidance. The fair value hierarchy gives the or other inputs derived principally from other observable mar- highest priority to quoted prices with readily available independent ket information. When quoted market prices in active markets data in active markets for identical assets or liabilities (Level 1) and are not available, fair values are derived through matrix pricing, the lowest priority to unobservable market inputs (Level 3). The which is a mathematical technique used principally to value three levels of the hierarchy are as follows: debt securities by relying on the securities’ relationship to other benchmark quoted securities and not by relying exclusively on (cid:129) Level 1 includes financial instruments whose fair value is deter- quoted market prices for specific securities. mined based on observable unadjusted quoted market prices for identical financial assets or liabilities in active markets (cid:129) Level 3 includes financial instruments whose fair value is which the Company has the ability to access at the measure- de termined from techniques in which one or more of the ment date. This is the most reliable fair value measurement and significant inputs, such as assumptions about risk, are unob- includes, for example, active exchange-traded equity securities. servable. Because Level 3 fair values contain unobservable (cid:129) Level 2 includes financial instruments whose fair value is ues. Level 3 fair values represent the best estimate of an de termined based upon various inputs including, but not amount that could be realized in a current market exchange in lim ited to, quoted market prices for similar assets in active the absence of actual market exchanges. market inputs, judgement must be used to determine fair val- The table below summarizes the available-for-sale investments of The Warranty Group within the fair value hierarchy: Fixed-maturity securities Equity securities Total % of Total Fixed-maturity securities Equity securities Total % of Total Total $ 1,729 53 $ 1,782 100.0% Total $ 1,883 25 $ 1,908 100.0% December 31, 2010 $ $ $ $ Level 1 – 53 53 3.0% December 31, 2009 Level 1 – 24 24 1.3% Level 2 $ 1,729 – $ 1,729 97.0% Level 2 $ 1,881 1 $ 1,882 98.6% $ $ $ $ Level 3 – – – 0.0% Level 3 2 – 2 0.1% The following table represents a summary of the changes in the In addition, substantially all of Onex’ $254 (2009 – $229) invest- fair value of The Warranty Group’s available-for-sale investments ment in the Onex Credit Partners funds is recorded at fair value measured on a recurring basis using Level 3, for the years ended using significant other observable inputs (Level 2 in the fair value December 31, 2009 and 2010: hierarchy). Balance, December 31, 2008 Purchases, issuances, settlements Transfers in and/or out of Level 3 Foreign exchange Balance, December 31, 2009 Purchases, issuances, settlements Balance, December 31, 2010 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, 2010 had a carrying value of $6,689 (2009 – $6,039) and a fair value of $6,510 (2009 – $5,729). $ 26 (15) (7) (2) $ 2 (2) $ – Onex Corporation December 31, 2010 121 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 . S U B S E Q U E N T E V E N T S Onex, ONCAP and the operating companies may enter into agree- ments to acquire or make investments in other businesses. Such transactions are typically subject to a number of conditions, many of which are beyond the control of Onex, ONCAP or the operating companies. The effect of such planned transactions, if completed, may be significant to the consolidated financial position of Onex. EMSC In early February 2011, Onex announced that it had agreed to vote in favour of a definitive merger agreement providing for the sale of EMSC. Under the terms of the agreement, EMSC shareholders, including Onex, will receive US$64 in cash per share at closing. Under the proposed transaction, Onex, Onex Partners I, Onex management and certain co-investors will sell their remaining 13.7 million EMSC shares for net proceeds of US$878. Onex’ share of the net proceeds would be US$339 including carried interest. This transaction is expected to close in the second quarter of 2011 and is subject to certain customary closing conditions. 2 7. I N F O R M AT I O N B Y I N D U S T R Y A N D G E O G R A P H I C S E G M E N T 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 2010 (2009 – seven): electronics manufacturing services; aerostruc- tures; healthcare; financial services; customer support services; metal services; and other. The electronics manufacturing services segment consists of Celestica, which provides manufacturing services for electronics original equipment manufacturers. The aerostructures segment consists of Spirit AeroSystems, which manufactures aerostructures. The healthcare segment consists of EMSC, a leading provider of ambulance transport services and outsourced hospital emergency department physician staffing and management services in the United States; Carestream Health, a leading global provider of medical imaging and health- care information technology solutions; CDI, which owns and operates diagnostic imaging centres in the United States; Skilled Healthcare Group, 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 ser - vices segment consists of The Warranty Group, which underwrites and administers extended warranties on a variety of consumer goods and also provides consumer credit and other specialty insurance products primarily through automobile dealers. The customer support services segment consists of Sitel World - wide, which provides services for telecommunications, consumer goods, retail, technology, transportation, finance and utility com- panies. The metal services segment consists of TMS International, 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; Tropi cana Las Vegas, one of the best-known and most storied casi- nos in Las Vegas; Allison Transmission, a leading designer and manu facturer of automatic transmissions for on-highway trucks and buses, off-highway equipment and military vehicles world- wide; Hawker Beechcraft, a leading manufacturer of business jet, turboprop and piston aircraft; RSI, a leading manufacturer of cab- inetry for the residential marketplace in North America; Tomkins, an industrial company that operates a number of businesses serving the general industrial, automotive and building products markets; Cineplex Entertain ment, Canada’s largest film exhibi- tion company (up to March 2009); as well as CEI (disposed of in May 2009), Onex Real Estate, ONCAP II and the parent company. The operations of ResCare (prior to mid-Novem ber 2010), Allison Trans mis sion, Hawker Beech craft, RSI, Tomkins and Cine plex Entertainment are accounted for using the equity-accounting method, as described in note 1. 122 Onex Corporation December 31, 2010 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 2010 Industry Segments Electronics Manufacturing Services Aero- structures Healthcare Financial Services Customer Support Services Metal Services Other Consolidated Total $ 6,717 $ 4,293 $ 6,548 $ 1,199 $ 1,381 $ 2,091 $ 2,137 $ 24,366 Revenues Cost of sales Selling, general and administrative expenses (6,173) (224) (3,578) (178) (4,866) (716) Earnings before the undernoted items 320 537 966 Amortization of property, plant and equipment Amortization of intangible assets and deferred charges Interest expense of operating companies Interest income Loss from equity-accounted investments Foreign exchange gains (loss) Stock-based compensation expense Other income (expense) Gains on dispositions of operating investments (73) (16) (15) – – (2) (43) – – Acquisition, restructuring and other expenses (57) Writedown of goodwill, intangible assets and long-lived assets (8) Earnings (loss) before income taxes (117) (159) (4) (61) – (1) (5) (30) 5 – (2) – (213) (167) 4 (7) (5) (12) 11 – (91) – (563) (450) 186 (12) (18) (3) – – (1) – 22 – (1) (2) (882) (376) 123 (35) (19) (81) 1 – (5) – (3) – (39) – (1,914) (55) 122 (51) (13) (42) – – 1 – – – – – (1,282) (600) (19,258) (2,599) 255 2,509 (77) (524) (49) (51) 33 (242) (52) (91) – 122 (43) (332) (420) 38 (250) (69) (176) 35 122 (233) (5) (15) and non-controlling interests $ 106 $ 322 $ 327 $ 171 $ (58) $ Recovery of (provision for) income taxes Non-controlling interests (23) (76) (103) (204) (122) (166) (61) (78) Net earnings (loss) $ 7 $ 15 $ 39 $ 32 Total assets Long-term debt (a) Property, plant and equipment additions Goodwill additions Goodwill $ 3,087 $ 5,055 $ 6,146 $ 4,900 $ $ $ $ – 64 11 11 $ 1,138 $ 2,972 $ $ $ 308 – 3 $ $ 167 440 $ 1,396 $ $ $ $ 190 10 – 342 6 – (52) 669 660 30 – 117 $ $ $ $ $ $ $ $ $ $ $ $ 17 (11) (4) $ (200) $ 685 (48) 154 (362) (374) 2 $ (94) $ (51) 836 $ 6,385 $ 27,078 375 $ 1,216 $ 6,551 42 – 238 $ $ $ 249 91 $ $ 870 542 512 $ 2,619 (a) Long-term debt includes current portion, excludes capital leases and is net of deferred charges. Onex Corporation December 31, 2010 123 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 2 7. I N F O R M AT I O N B Y I N D U S T R Y A N D G E O G R A P H I C S E G M E N T ( c o n t ’d ) 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 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 and non-controlling interests Recovery of (provision for) income taxes Non-controlling interests Net earnings (loss) Total assets Long-term debt (a) Property, plant and equipment additions Goodwill additions Goodwill (86) (25) (39) – – (2) (43) – – (92) (14) 65 (5) (54) 6 3,265 234 69 – – $ $ $ $ $ $ $ (130) (200) (5) (50) 8 – 3 (12) 4 – (1) – $ $ $ $ $ $ $ 313 (107) (192) 14 4,685 902 235 – 3 $ $ $ $ $ $ $ (224) (226) 7 7 (6) (7) (11) – (44) (180) 169 (130) (3) 36 5,616 2,792 163 46 1,065 (a) Long-term debt includes current portion, excludes capital leases and is net of deferred charges. Geographic Segments (656) (509) 194 (13) (22) (3) – – 1 (1) – – (2) – $ $ $ $ $ $ $ 154 (46) (76) 32 5,206 203 12 – 361 (1,140) (487) 153 (57) (24) (82) 1 – (10) – – – (25) (64) (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) $ (108) $ (97) $ (17) (1) (126) 745 660 25 – 124 $ $ $ $ $ $ $ $ $ $ $ $ 7 59 (31) 891 401 43 – 252 $ $ $ $ $ $ 2009 Asia and Oceania 149 126 (94) $ 645 (172) (361) 181 $ 112 4,937 $ 25,345 738 66 7 507 $ $ $ $ 5,930 613 53 2,312 Other Total North America Europe 2010 Asia and Oceania Other Total North America Europe Revenue(1) $ 15,569 $ 3,194 $ 4,781 $ 822 $ 24,366 $ 15,570 $ 3,639 $ 4,934 $ 688 $ 24,831 Property, plant and equipment $ 3,386 $ 374 $ 278 $ 63 $ 4,101 $ 2,859 $ 406 $ 309 $ 49 $ 3,623 Intangible assets $ 1,913 $ 250 $ 56 $ 14 $ 2,233 $ 1,701 $ 293 $ 74 $ 18 $ 2,086 Goodwill $ 2,223 $ 274 $ 93 $ 29 $ 2,619 $ 1,896 $ 269 $ 101 $ 46 $ 2,312 (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 22. 124 Onex Corporation December 31, 2010 SHAREHOLDER INFORMATION Year-end Closing Share Price As at December 31 Toronto Stock Exchange 2010 2009 2008 2007 2006 $ 30.23 $ 23.60 $ 18.19 $ 34.99 $ 28.35 Shares Registrar and Transfer Agent Subordinate Voting Shares of CIBC Mellon Trust Company the Company are listed and traded P.O. Box 7010 on the Toronto Stock Exchange. Adelaide Street Postal Station Share Symbol OCX Dividends Dividends on Subordinate Voting Shares are payable quarterly on or about January 31, April 30, July 31 and Toronto, Ontario M5C 2W9 (416) 643-5500 or call toll-free throughout Canada and the United States 1-800-387-0825 www.cibcmellon.ca or inquiries@cibcmellon.ca (e-mail) October 31 of each year. At December 31, All questions about accounts, stock 2010 the indicated dividend rate for certificates or dividend cheques each Subordinate Voting Share was should be directed to the Registrar $0.11 per annum. and Transfer Agent. Shareholder Dividend Reinvestment Plan Electronic Communication with Shareholders E-mail: info@onex.com Website: www.onex.com Auditors PricewaterhouseCoopers llp Chartered Accountants Duplicate Communication Registered holders of Onex Corporation shares may receive more than one copy of shareholder mailings. Every effort is made to avoid duplication, but when shares are registered under different names and/or addresses, multiple mailings result. Shareholders who receive but do not require more than The Dividend Reinvestment Plan provides We encourage individuals to receive one mailing for the same ownership are shareholders of record who are resident Onex’ shareholder communications requested to write to the Registrar and in Canada a means to reinvest cash divi- electronically. You can submit your Transfer Agent and arrangements will dends in new Subordinate Voting Shares request online by visiting CIBC Mellon be made to combine the accounts for of Onex Corporation at a market-related Trust Company’s website at mailing purposes. price and without payment of brokerage www.cibcmellon.com/electronicdelivery commissions. To participate, registered or contacting them at 1-800-387-0825. Shares Held in Nominee Name shareholders should contact Onex’ share To ensure that shareholders whose registrar, CIBC Mellon Trust Company. Investor Relations Contact shares are not held in their name receive Non-registered shareholders who wish Requests for copies of this report, all Company reports and releases to participate should contact their invest- quarterly reports, other annual reports on a timely basis, a direct mailing list ment dealer or broker. and other corporate communications is maintained by the Company. If you Corporate Governance Policies A presentation of Onex’ corporate governance policies is included in the Management Information Circular should be directed to: Investor Relations Onex Corporation 161 Bay Street P.O. Box 700 would like your name added to this list, please forward your request to Investor Relations at Onex. Annual Meeting of Shareholders that is mailed to all shareholders Toronto, Ontario M5J 2S1 Onex Corporation’s Annual Meeting of and is available on Onex’ website. (416) 362-7711 Shareholders will be held on May 12, 2011 at 10 a.m. (Eastern Daylight Time) at Hazelton Hotel, 118 Yorkville Avenue, Toronto, Ontario. Typesetting and copyediting by Moveable Inc. www.moveable.com Printed in Canada