OncoCyte Annual Report 2011

Plain-text annual report

Management’s Discussion and Analysis and Financial Statements December 31, 2011 ONEX AND ITS OPERATING BUSINESSES Onex is a public company whose shares trade on the Toronto Stock Exchange under the symbol OCX. Onex’ businesses have assets of $41 billion, generate annual revenues of $37 billion and employ approximately 246,000 people worldwide. ONEX PARTNERS I ONEX PARTNERS II ONEX PARTNERS III ONCAP II ONCAP III ONEX REAL ESTATE PARTNERS ONEX CREDIT PARTNERS DIRECT The investment in The Warranty Group is split almost equally between Onex Partners I and II. The investment in ResCare is split almost equally between Onex Partners I and III. The investment in Casino ABS is split approximately 80%/20% between ONCAP II and III, respectively. Throughout this report, all amounts are in U.S. dollars unless otherwise indicated. Table of Contents 5 Management’s Discussion and Analysis 152 Shareholder Information 76 Consolidated Financial Statements CHAIRMAN’S LETTER Dear Shareholders, The current presidential primary season in the United States has brought more than usual attention to the private equity industry and, of course, not all of it has been good. We can’t speak for the entire industry, but we’re very proud of what we do here at Onex. We are and have been active owners and builders of some of the world’s greatest companies. Our companies make products used by millions of people. When you go for a dental check-up, chances are good we’re helping with the diagnosis, when you ﬂy off for a holiday – you’re probably in a plane we helped build, and when your children take the bus to school – the gears on the bus shift safely with one of our transmissions. We could go on and on. Even though we own many businesses, we don’t just put money in stock certiﬁcates. We’re not passive inves- tors or traders; that’s not our business. We are active owners working with talented and aligned leadership to turn a good company into a great one. Oftentimes when we buy a business, it’s been part of another, larger entity and didn’t get the capital or attention it deserved. With its management, we lay out a plan for improvement and growth (we’ve never seen fortunes made with shrinking businesses). When we feel that our work is completed and our ownership becomes more passive, we think about realizing on some of our value created. That’s what we do for you – our share- holders – and for our limited partners, who have asked us to manage about $9 billion, most of it coming from public employee pension plans. The hardest part of our work is selling a company we love. We have wide ranging debates on the topic and get views from the youngest investment professional and the most seasoned amongst us. This year we sold two great companies: Husky International and Emergency Medical Services, generating total proceeds of $2.7 billion and multiples of 2.9 and 7.8 times on invested capital, respectively. These were obviously great outcomes for the companies’ employee shareholders, Onex and our limited partners. We could have owned either business longer, but we felt that our role as an active owner was largely complete, hence the decision to sell. We wish both companies much continued success in the years to come. In addition to the two sales above, we had some other highlights through the course of the year: • We successfully completed the fundraising for ONCAP III, with capital commitments of C$800 million, including C$520 million from our Limited Partners; • ONCAP was very active in the mid-market private equity space, investing a total of $324 million in four operating companies across a variety of sectors; • Onex Partners’ and ONCAP’s private companies provided Onex with returns of 15 percent and 12 percent, respec- tively, in 2011; • Our businesses paid down approximately $1.3 billion of debt and distributed approximately $470 million; • Taking advantage of stronger capital markets in the ﬁrst half of the year, Onex’ operating businesses raised or reﬁnanced approximately $3.4 billion of debt; and • Onex and Onex Partners III invested $871 million and acquired a controlling interest in JELD-WEN, one of the world’s largest manufacturers of doors and windows. We’re looking forward to 2012. We have $1.3 billion of cash and cash-like investments and $2.5 billion of uncalled third-party capital. We hope to ﬁnd our next great business, give it a capital structure suitable for growth and give its employees and leadership team an opportunity to participate with us in value creation. That’s our business, and we’re proud of it. On behalf of the Onex team and our 246,000 employees worldwide, thank you for your continued support. [signed] Gerald W. Schwartz Chairman & CEO, Onex Corporation Chairman & CEO, Onex Corporation Onex Corporation December 31, 2011 1 ONEX CORPORATION Over 27 Years of Success Founded in 1984, Onex is one of North America’s oldest and most successful private equity ﬁrms committed to acquiring and building high-quality businesses. As an active owner, the Company has built more than 70 busi- nesses, completing approximately 340 acquisitions with a total value of approximately $44 billion. Onex’ long-term project returns have generated a multiple of invested capital of 3.3 times from its core private equity activities since inception, resulting in a 29 percent compound IRR on realized, substantially realized and publicly traded invest- ments. The Company is guided by an ownership culture focused on achieving strong absolute growth, with an emphasis on capital preservation. With an experienced management team, signiﬁcant ﬁnancial resources and no debt at the parent company, Onex is well-positioned to continue to acquire and build businesses. Onex manages its proprietary capital as well as capital entrusted to it by third-party investors from around the world, including public and private pension funds, sovereign wealth funds, banks, insurance companies, and fund of funds managed by other asset managers. Onex’ Capital Onex manages its $4.5 billion of proprietary capital largely through its two private equity platforms: Onex Partners (for larger transactions) and ONCAP (for mid-market transactions). The Company also invests through Onex Real Estate Partners and Onex Credit Partners. Onex’ long-term goal is to grow its proprietary capital by at least 15 percent per annum, and to have that growth reﬂected in its share price. Onex’ proprietary capital per share grew by 8 percent over the last 12 months. Third-party Capital How Onex’ $4.5 billion of Capital is Deployed at December 31, 2011 Large-cap Private Equity 57% Private 48% Public 9% Cash and Near-cash Items 29% Mid-market Private Equity 7% Onex Credit Partners 3% Onex Real Estate Partners 4% In addition to the management of Onex’ proprietary capi- Investments are valued at fair value as at December 31, 2011 with the exception of an investment that is valued based on the last third-party investment. tal, Onex is entrusted with third-party capital from institu- tional investors around the world. The Company currently manages $9.1 billion of invested and committed capital on behalf of its investors and partners, of which 89 per- cent relates to its private equity platform and the balance to Onex Credit Partners. The management of third-party capital provides two signiﬁcant beneﬁts to Onex. First, Onex receives a committed stream of annual management fees on $8.0 billion of third-party assets under manage- ment, substantially offsetting ongoing operating expenses. Second, Onex has the opportunity to share in the proﬁts of its third-party investors through the carried interest par- ticipation. Carried interest, if realized, can signiﬁcantly enhance Onex’ investment returns. 2 Onex Corporation December 31, 2011 The Components of Onex’ $9.1 billion of Third-Party Assets under Management at December 31, 2011 Onex Partners III 43% Onex Partners II 24% Onex Partners I 11% Onex Credit Partners 11% ONCAP 10% Other 1% Assets under management include capital managed on behalf of co-investors and the management of Onex and ONCAP. HOW WE ARE INVESTED All amounts, unless otherwise noted, are in millions of U.S. dollars except per share data. This How We Are Invested schedule, which is prepared quarterly and is included in the Company’s earnings releases, details Onex’ $4.5 billion of proprietary capital and provides private company performance and pub- lic company ownership information. This schedule includes values for Onex’ private companies based upon estimated fair values and as such are non-GAAP measures. While it provides a snapshot of Onex’ net assets, this schedule does not fully reﬂect the value of Onex’ asset management business as it includes only an estimate of the unrealized carried interest due to Onex based upon the current values of the investments and allocates no value to the management company income. As at December 31, 2011 Private Equity Onex Partners Private Companies Public Companies Unrealized Carried Interest on Onex Partners Investments ONCAP Direct Investments Private Companies Public Companies Alternative Assets Onex Real Estate Partners Onex Credit Partners Other Investments Cash and Near-Cash Onex Corporation Debt Proprietary Capital per Share (Canadian dollar equivalent – C$37.47)(9) Proprietary Capital $ 1,847 (1) 235 (2) 96 (3) 319 (4) 204 (5) 130 (2) 2,831 180 (6) 100 (7) 280 81 1,302 (8) – $ 4,494 $ 36.85(9) Signiﬁcant Public Companies As at December 31, 2011 Onex Partners Skilled Healthcare Group Spirit AeroSystems TMS International Direct Investments – Celestica Signiﬁcant Private Companies As at December 31, 2011 Onex Partners Center for Diagnostic Imaging The Warranty Group Hawker Beechcraft Carestream Health Allison Transmission RSI Home Products Tropicana Las Vegas Tomkins ResCare JELD-WEN(20) Shares Subject to Carried Interest (millions) Shares Held by Onex (millions) Closing Price per Share(10) Market Value of Onex’ Investment 10.7 11.9 13.2 – 3.5 6.0(12) 9.3 $ 5.46 $ 20.78 $ 9.88 17.8(12) $ 7.33 $ 19 (11) 124 (11) 92 (11) 235 130 $ 365 Onex and its Limited Partners Ownership LTM EBITDA(13) Net Debt Cumulative Distributions Onex’ Economic Ownership Original Cost of Onex’ Investment 81% 92% 49% 95% 49% 50% 76% 56% 98% 59%(21) $ 38 108(14) n/a(15) 397 712 n/a n/a(18) 727(19) 129 n/a $ 102 n/a n/a(15) $ 67 203 11(16) 1,600 3,062 n/a 49 2,325 347 n/a 434 – n/a – – – 42 19% 29% 19% 37% 15% 20% 17% 14% 20% 20%(21) $ 17 154 212 (17) 186 237 126 60 315 41 298 1,646 251 $ 1,897 Onex Corporation December 31, 2011 3 Direct Investments – Sitel Worldwide 68% $ 129 $ 681 $ – 68% H O W W E A R E I N V E S T E D Notes to Tables (1) Based on the US$ fair value of the investments in Onex Partners’ ﬁnancial statements. (2) Based on the December 31, 2011 market values. (3) Represents Onex’ share of the unrealized carried interest on public and private companies in the Onex Partners Funds. (4) Based on the C$ fair value of the investments in ONCAP’s ﬁnancial statements and US$/C$ exchange rate of 1.0170. (5) Based on value of last third-party investment. (6) Based on the carrying value of Onex Real Estate Partners’ investments at December 31, 2011. (7) Based on the December 31, 2011 market values. Excludes approximately $312 million invested in a segregated Onex Credit Partners unleveraged senior secured loan strategy fund, which is included with cash and near-cash items. (8) Includes approximately $312 million invested in a segregated Onex Credit Partners unleveraged senior secured loan strategy fund. (9) Calculated on a diluted basis. (10) Closing prices on December 31, 2011. (11) Excludes Onex’ potential participation in the carried interest. (12) Excludes shares held in connection with the Management Investment Plan. (13) EBITDA is a non-GAAP measure and is based on the local GAAP of the individual operating companies. These adjustments may include non-cash costs of stock-based compensation and retention plans, transition and restructuring expenses including severance payments, the impact of derivative instruments that no longer qualify for hedge accounting, the impacts of purchase accounting and other similar amounts. (14) Amount presented for The Warranty Group is adjusted net earnings rather than EBITDA and includes a one-time $6 million valuation allowance release in the ﬁrst quarter of 2011. Net earnings on a U.S. GAAP basis, including the impacts of purchase accounting, were $105 million and include a one-time $6 million valuation allowance release in the ﬁrst quarter of 2011. (15) This information will be provided once the company reports to its debt holders. (16) Represents interest received on the portion of the Senior Notes held by Onex, Onex Partners II and Onex management. (17) Includes investment in Senior Notes. (18) A comprehensive redevelopment underway at Tropicana Las Vegas caused a disruption to its operations, resulting in negative LTM EBITDA that is not reﬂective of a fully operational hotel and casino. (19) LTM EBITDA excludes EBITDA from businesses divested as of December 31, 2011. Including EBITDA from these divested businesses would result in LTM EBITDA of $774 million as of December 31, 2011. (20) In February 2012, Onex sold a portion of its original investment in JELD-WEN to certain limited partners and others at the same cost basis as Onex’ original investment. Onex received proceeds of $79 million. (21) On an as-converted basis. 4 Onex Corporation December 31, 2011 MANAGEMENT’S DISCUSSION AND ANALYSIS Throughout this MD&A, all amounts are in U.S. dollars unless otherwise indicated. The Management’s Discussion and Analysis (“MD&A”) provides a review of how Onex Corporation (“Onex”) performed in 2011 and assesses future prospects. The ﬁnancial condition and results of operations are analyzed noting the signiﬁcant factors that impacted the consolidated statements of earnings, consoli- dated statements of comprehensive 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 consoli- dated ﬁnancial statements and notes thereto included in this report. The MD&A and the Onex consolidated ﬁnancial statements have been prepared to provide information about 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 23, 2012. Prep- aration 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 Com- mit tee. 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: 6 Our Business, Our Objective and Our Strategies Industry Segments Financial Review 13 16 69 Outlook 70 Risk Management Onex Corporation’s ﬁnancial ﬁlings, including the 2011 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. References Throughout this MD&A, references to the Onex Partners Groups represent Onex, the limited partners of the relevant Onex Partners Fund, Onex management and, where applicable, certain other limited partners and ONCAP manage- ment. References to the ONCAP Groups represent Onex, the limited partners of the relevant ONCAP Fund and the management of Onex and ONCAP. For example, references to the Onex Partners II Group represent Onex, the limited partners of Onex Partners II, Onex management and, where applicable, certain other limited partners and ONCAP management. Forward-Looking/Safe Harbour Statements This MD&A may contain, without limitation, statements concerning possible or assumed future operations, performance or results preceded by, followed by or that include words such as “believes”, “expects”, “potential”, “anticipates”, “estimates”, “intends”, “plans” and words of similar connotation, which would constitute forward-looking statements. Forward-looking statements are not guarantees. The reader should not place undue reliance on forward-looking statements and informa- tion because they involve signiﬁcant and diverse risks and uncertainties that may cause actual operations, performance or results to be materially different from those indicated in these forward-looking statements. Onex is under no 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. Onex Corporation December 31, 2011 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 L Y S I S OUR BUSINESS, OUR OBJECTIVE AND OUR STRATEGIES OUR BUSINESS: For over 27 years, Onex has employed an active ownership approach in acquiring and build- ing industry-leading businesses. Onex manages its own capital and that of third-party investors from around the world, including public and private pension funds, sovereign wealth funds, banks, insurance companies, and fund of funds managed by other asset managers. The Company has generated 3.3 times capital on realized, substantially realized and publicly traded investments. Active ownership approach Throughout our history, we have developed a distinctive approach to acquiring, transforming and building high-quality businesses. We are disciplined and 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 maintaining pur- chase price discipline. We focus on businesses with considerable cost-saving opportunities 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 us and 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’ team of professionals is led by nine Managing Directors with an average of 16 years of working at the Company. Onex’ stability results from its ownership culture, rigorous recruiting standards and highly collegial environment. The 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 over $1.3 billion of cash and near-cash items at December 31, 2011. In addition, we have $2.5 billion of uncalled committed third-party capital in Onex Part- ners III and ONCAP III available for investment in Onex-sponsored acquisitions. Strong alignment of interests We continue to believe that our success in building companies and our record of capital preservation and supe- rior returns are direct results of the strong alignment of interests between Onex’ shareholders, our limited part- ners and the Onex management team. In addition to Onex being the largest limited partner in every fund, Onex’ distinctive ownership culture requires each member of the management team to have a signiﬁcant ownership in Onex stock and to invest meaningfully in each operating company acquired. Onex’ management team: • is the largest shareholder in Onex, with a combined holding of approximately 27 million shares or 23 percent; • has a total cash investment in Onex’ current operating businesses of approximately $255 million; and • is required to reinvest 25 percent of all gross carried interest and Management Investment Plan distributions in Onex shares until they individually own at least one million shares and hold these shares until retirement. 6 Onex Corporation December 31, 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 L Y S I S OUR OBJECTIVE: Onex’ business objective is to create long-term value for shareholders and to have that value reﬂected in our share price. Our strategies to deliver value to shareholders are concentrated on acquiring, building and growing high-quality businesses and on third-party 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 analyzes how we performed against those strategies during 2011. OUR STRATEGIES 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. 2011 performance 1) Acquire attractive businesses The acquisition market can be divided into four sourcing segments: public-to-private transactions; corporate dispositions; recapitalizations, restructurings and bankruptcies; and secondary sales from private equity ﬁrms. During 2011, Onex and ONCAP completed ﬁve acquisitions for a total investment of $1.2 billion, of which Onex’ share was $421 million. The JELD-WEN acquisition was a recapitalization, the Davis-Standard and Hopkins acqui- sitions were secondary sales from private equity ﬁrms and the remaining ONCAP acquisitions originated from corporate dispositions. In early October 2011, Onex acquired a 57 percent as-converted equity ownership interest in JELD-WEN Holding, inc. (“JELD-WEN”), one of the world’s largest manufacturers of interior and exterior doors, windows and related products for use primarily in the residential and light commercial new construction and remodelling markets. The Onex Partners III Group invested $871 million, of which Onex’ initial share was $298 million. Onex’ invest- ment was reduced to $205 million after giving effect to the October 2011 partial repayment of the convertible notes and the February 2012 sale to co-investors. During 2011, ONCAP completed the following four acquisitions: • Pinnacle Pellet, Inc. (“Pinnacle Renewable Energy Group”), a producer of wood pellets for markets around the world. The ONCAP II Group has an approximate 60 percent equity ownership in Pinnacle Renewable Energy Group. • Crown Amusements Ltd. (“Casino ABS”), the largest casino operator in the Alberta, Canada market, with four casinos. In May 2011, the ONCAP II Group initially purchased 100 percent of the equity ownership in Casino ABS. As contemplated at the time of the original investment, the ONCAP III Group subsequently purchased 22 percent of the equity ownership in Casino ABS from the ONCAP II Group in December 2011 at the same price per share. At December 31, 2011, the combined holdings of the ONCAP II Group and the ONCAP III Group are close to 100 percent of the equity ownership in Casino ABS. Onex Corporation December 31, 2011 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 L Y S I S • Hopkins Manufacturing Corporation (“Hopkins”), a manufacturer, marketer and distributor of automotive aftermarket products for sale to distributors and retailers primarily in North America. The ONCAP III Group has an approximate 90 percent equity ownership in Hopkins. • Davis-Standard Holdings, Inc. (“Davis-Standard”), a leading designer, manufacturer and supplier of highly engineered extrusion and converting machinery systems. The ONCAP III Group has an approximate 90 percent equity ownership in Davis-Standard. A total of $324 million was invested in the ONCAP acquisitions completed during 2011, of which Onex’ share was $123 million. In November 2011, Onex notiﬁed its limited partners in Onex Partners III that it would be increasing its commitment to $1.2 billion from $800 million as a result of its considerable cash position. The increased commitment will apply to operating companies acquired by Onex Partners III after May 14, 2012. 2) Build our businesses into industry leaders Today, most of Onex’ operating businesses are leaders in their respective industries. As the economic down- turn that began in 2008 lingered globally in 2011, certain of our businesses continued to face difﬁcult operating environments and therefore remained focused on realigning their cost structures. The strong cash ﬂow char- acteristics of our operating businesses enabled a number of them to complete follow-on acquisitions in 2011. Celestica, Center for Diagnostic Imaging, ResCare, Skilled Healthcare Group, TMS International and several of the ONCAP companies completed acquisitions collectively valued at approximately $162 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 2011, Onex’ oper- ating businesses collectively raised or reﬁnanced a total of $3.4 billion of debt. In addition, our operating busi- nesses collectively paid down approximately $1.3 billion of debt. As a result of these efforts, the percentage of the operating businesses’ total debt maturing in 2013 and 2014 has decreased to 36 percent at December 31, 2011 from 48 percent at December 31, 2010. As part of our original investment theses to create value, both Tomkins and JELD-WEN sold certain non-core assets during 2011 with the proceeds used to reduce debt. 3) Grow the value of our businesses Including realizations and distributions, Onex Partners’ and ONCAP’s private companies provided Onex with returns of 15 percent and 12 percent, respectively, in 2011. Including the public companies, the value of all of our operating businesses in the Onex Partners and ONCAP Funds, including distributions received, increased by 12 percent in 2011. 8 Onex Corporation December 31, 2011 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S The table below shows the realizations and distributions during 2011 and the amounts received by all investors and Onex’ share thereof: Company Fund Transaction Carestream Health Onex Partners II Dividend/Return of Capital Spirit AeroSystems Onex Partners I Secondary Offering Initial Public Offering/Repayment TMS International Onex Partners II of Promissory Notes Center for Diagnostic Imaging Onex Partners I Dividend/Return of Capital Emergency Medical Services Corporation Onex Partners I Sale of business Husky International Onex Partners I & II Sale of business JELD-WEN Onex Partners III Repayment of Convertible Notes The Warranty Group Onex Partners I & II Dividend Other Total Onex Partners II/ONCAP II Dividend/Interest Income/Return of Capital Total Amount ($ millions) Onex’ Share ($ millions) $ 200 $ 252 $ 68(a) $ 67 $ 878(b) $ 1,844 $ 42 $ 42 $ 79 $ 3,472 $ 78 $ 74 $ 26 $ 13 $ 342 $ 601 $ 14 $ 13 $ 22 $ 1,183 (a) Represents the sale of a portion of the shares held by existing shareholders and the repayment of the Promissory Notes. (b) Represents the Onex Partners I Group only. 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 and ONCAP Funds. At December 31, 2011, Onex had: i. Approximately $1.3 billion of cash and near-cash items and no debt. Onex’ practice is to maintain a debt- free parent company and not guarantee the debt of our operating businesses. ii. $2.0 billion of third-party uncalled capital available for future Onex Partners III investments. iii. $317 million of third-party uncalled capital in Onex Partners I and II, which is largely reserved for possible future funding of acquisitions by any of Onex Partners I or II’s existing businesses and for management fees. iv. C$469 million of third-party uncalled capital available for future ONCAP III investments. v. C$16 million of third-party uncalled capital in ONCAP II, which is largely reserved for possible future funding of acquisitions by any of ONCAP II’s existing businesses and for management fees. Asset Management: Manage and Grow Third-Party Capital Onex’ management of third-party capital has grown signiﬁcantly since Onex ﬁrst began acquiring busi- nesses in 1984. In its early years, Onex would primarily use its own capital to complete acquisitions and would include third-party investors in the acquired businesses to diversify risk, cultivate strategic relationships and facilitate larger acquisitions. The 1996 purchase of Celestica was the ﬁrst acquisition structured with the third-party investors providing a carried interest to Onex. Onex thus began to share in the proﬁts of its third-party investors. Onex formalized its asset management business in 1999 when it raised its ﬁrst fund, ONCAP L.P., for mid-market transactions. In 2003, the ﬁrst Onex Partners fund was raised for larger transactions. While Onex expects to be the largest investor in each acquisition in order to deploy its own capital, the establishment of Onex Partners and ONCAP enabled Onex to efﬁciently pursue a larger acquisition program. Since 1999, Onex has raised $8.0 billion of third-party capital through the Onex Partners and ONCAP Funds. Onex Corporation December 31, 2011 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 L Y S I S Onex currently manages $9.1 billion of third-party capital, in addition to the $4.5 billion of Onex proprietary cap- ital at work. The management of third-party capital provides two signiﬁcant beneﬁts to Onex. First, Onex earns management fees on $8.0 billion of its third-party assets under management, which substantially offset Onex’ ongoing operating expenses. Second, Onex has the opportunity to share in the proﬁts of its third-party investors through the carried interest participation. This enables Onex to enhance the return on its investment. ($ millions) Funds Onex Partners ONCAP(c) Onex Credit Partners (d) $ 7,075 C$ 956 $ 1,055 $ 8,473 C$ 312 $ 995 (a) All data presented at fair value. Third-Party Capital Under Management(a) Total Fee Generating Uncalled Commitments 2011(b) 2010(b) Change in Total (16)% 206 % 6 % 2011 2010 2011(b) 2010 (b) $ 6,093 $ 7,441 $ 2,334 $ 2,978 C$ 823 C$ 276 C$ 485 C$ 90 $ 1,055 $ 995 n/a n/a (b) Includes committed amounts from the management of Onex and ONCAP and directors based on the assumption that all of the remaining limited partners’ commitments are invested. (c) Includes third-party capital of ONCAP II and ONCAP III. The December 31, 2010 third-party capital is only that of ONCAP II. (d) Onex Credit Partners is jointly controlled by Onex and management of Onex Credit Partners. Capital under management of Onex Credit Partners represents 100 percent of its third-party capital. 2011 performance 1) Growth in third-party capital under management The amount of third-party capital under management will ﬂuctuate as new funds are raised and as existing investments are realized. The amount of third-party capital under management decreased by approximately $530 million during 2011 due primarily to the realizations and distributions during the year, as previously discussed, partially offset by the third-party capital commitments to the new ONCAP fund. • ONCAP completed fundraising for ONCAP III, its third mid-market private equity fund, with capital commit- ments of C$800 million, excluding commitments from management of Onex and ONCAP. Third-party capital commitments to the fund total C$520 million, representing an approximate 80 percent increase in the amount of third-party capital raised relative to ONCAP II, and include commitments from both our long-standing part- ners and new investors. As with each of our funds, Onex is the largest limited partner in ONCAP III. • Onex Credit Partners, Onex’ credit investing platform, raised approximately $100 million of third-party capi- tal through a treasury offering of OCP Credit Strategy Fund (TSX: OCS.UN) during 2011. • In our large-cap private equity platform, Onex may raise additional third-party capital once Onex Partners III is 75 percent invested. At December 31, 2011, Onex Partners III was 42 percent invested with $1.5 billion of third-party capital at work. 10 Onex Corporation December 31, 2011 Onex currently manages $9.1 billion of third-party capital, in addition to the $4.5 billion of Onex proprietary cap- ital at work. The management of third-party capital provides two signiﬁcant beneﬁts to Onex. First, Onex earns 2) Predictable and meaningful management fees; substantial carried interest earned The management of third-party capital provides Onex with a predictable stream of annual management fees management fees on $8.0 billion of its third-party assets under management, which substantially offset Onex’ that substantially offsets ongoing operating expenses. In addition, the General Partner’s carried interest in the ongoing operating expenses. Second, Onex has the opportunity to share in the proﬁts of its third-party investors Funds generally provides Onex with 8 percent of the proﬁts on a substantial portion of the third-party capital. through the carried interest participation. This enables Onex to enhance the return on its investment. At year-end, there was $4.3 billion of invested capital and a further $2.6 billion of uncalled committed capital Third-Party Capital Under Management(a) • Onex Partners, ONCAP and Onex Credit Partners earned a total of $110 million in management fees in 2011 Total Fee Generating Uncalled Commitments (2010 – $102 million). Onex earned no transaction fees in 2011 (2010 – $16 million). 2011(b) 2010(b) 2011 2010 2011(b) 2010 (b) • Onex received $65 million of carried interest in 2011 (2010 – nil) as a result of the realizations of EMSC, subject to a carried interest in the Onex Partners and ONCAP Funds. M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S Husky International, Spirit Aerosystems and TMS International. This amount was net of a voluntary reduc- tion of $35 million, reﬂecting a review of the Funds’ other operating companies and a desire to avoid a future claw-back. • At December 31, 2011, there was approximately $32 million of unrealized carried interest on Onex Partners’ public companies, of which Onex’ share was $13 million. There is a further $229 million of unrealized carried interest on Onex Partners’ and ONCAP’s private operating companies based on the December 31, 2011 fair values, of which Onex’ share was $83 million. The actual amount of carried interest realized by Onex depends on the ultimate performance of each Fund. 2011 performance 2011 performance 1) Growth in third-party capital under management The amount of third-party capital under management will ﬂuctuate as new funds are raised and as existing investments are realized. The amount of third-party capital under management decreased by approximately $530 million during 2011 due primarily to the realizations and distributions during the year, as previously Private Equity Fund Performance The table below summarizes the performance for the Onex Partners and ONCAP Funds from inception through December 31, 2011. The gross internal rate of return (“Gross IRR”) shows the returns achieved on the investments in the Funds including unrealized investments. The net internal rate of return (“Net IRR”) shows the returns earned by the third-party limited partners in the Funds after the payment of performance fees, management fees discussed, partially offset by the third-party capital commitments to the new ONCAP fund. and expenses. Funds Onex Partners LP Onex Partners II LP Onex Partners III LP ONCAP LP(5) ONCAP II LP(5) ONCAP III LP(5) Performance Returns(1) Gross IRR (excluding unrealized)(2) Gross IRR(3) Net IRR 78% 26% – 43% 57% – 57% 14% 6% 43% 21% 11% 40 % 10 % – (4) 33 % 11 % – (4) (1) Performance returns are a non-GAAP measure. (2) Gross IRR (excluding unrealized) includes the returns on realized, substantially realized and publicly traded investments. (3) Gross IRR includes the returns on unrealized, realized, substantially realized and publicly traded investments. (4) The net IRR through December 31, 2011 is not presented as net cash ﬂows to date are negative and, therefore, the net IRR is not meaningful. (5) Returns are calculated in Canadian dollars, the functional currency of the Fund. Onex Corporation December 31, 2011 11 ($ millions) Funds Change in Total (16)% 206 % 6 % Onex Partners ONCAP(c) Onex Credit Partners (d) $ 7,075 C$ 956 $ 1,055 $ 8,473 C$ 312 $ 995 $ 6,093 $ 7,441 $ 2,334 $ 2,978 C$ 823 C$ 276 C$ 485 C$ 90 $ 1,055 $ 995 n/a n/a (a) All data presented at fair value. partners’ commitments are invested. (b) Includes committed amounts from the management of Onex and ONCAP and directors based on the assumption that all of the remaining limited (c) Includes third-party capital of ONCAP II and ONCAP III. The December 31, 2010 third-party capital is only that of ONCAP II. (d) Onex Credit Partners is jointly controlled by Onex and management of Onex Credit Partners. Capital under management of Onex Credit Partners represents 100 percent of its third-party capital. • ONCAP completed fundraising for ONCAP III, its third mid-market private equity fund, with capital commit- ments of C$800 million, excluding commitments from management of Onex and ONCAP. Third-party capital commitments to the fund total C$520 million, representing an approximate 80 percent increase in the amount of third-party capital raised relative to ONCAP II, and include commitments from both our long-standing part- ners and new investors. As with each of our funds, Onex is the largest limited partner in ONCAP III. • Onex Credit Partners, Onex’ credit investing platform, raised approximately $100 million of third-party capi- tal through a treasury offering of OCP Credit Strategy Fund (TSX: OCS.UN) during 2011. • In our large-cap private equity platform, Onex may raise additional third-party capital once Onex Partners III is 75 percent invested. At December 31, 2011, Onex Partners III was 42 percent invested with $1.5 billion of third-party capital at work. M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S Have Value Creation Reﬂected in Onex’ Share Price We seek to have the value of our investing and asset management activities reﬂected in our share price. These efforts are supported by a long-standing quarterly dividend and an active stock buyback program. During 2011, Onex repurchased 3,165,296 Subordinate Voting Shares under its Normal Course Issuer Bid at a total cost of $105 million, or an average purchase price of C$33.27 per share. During the same period, $13 million was returned to shareholders through dividends. At December 31, 2011, Onex’ Subordinate Voting Shares closed at C$33.18, a 10 percent increase from December 31, 2010. This compares to no change in the Standard & Poor’s 500 Index (“S&P 500”) and an 11 percent decrease in the S&P/TSX Composite Index (“TSX”). The chart below shows the performance of Onex’ Subordinate Voting Shares during 2011 relative to the S&P 500 and TSX. 0 1 0 2 , 1 3 r e b m e c e D n o 0 0 1 t a d e x e d n I 130 125 120 115 110 105 100 95 90 85 80 OCX TSX S&P 500 OCX +10% S&P 500 0% TSX –11% 31-Dec-10 31-Jan-11 28-Feb-11 31-Mar-11 30-Apr-11 31-May-11 30-Jun-11 31-Jul-11 31-Aug-11 30-Sep-11 31-Oct-11 30-Nov-11 31-Dec-11 12 Onex Corporation December 31, 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 L Y S I S INDUSTRY SEGMENTS At December 31, 2011, Onex had eight reportable industry segments. A description of our oper- ating businesses by industry segment, and the economic and voting ownerships of Onex, the parent company, and its Limited Partners in those businesses, is presented below. We manage our busi- nesses and measure performance based on each operating company’s individual results. 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 & Limited Partners Economic Ownership Onex’ Economic/ Voting Ownership 8%(a) 8%(a)/71% Aerostructures Spirit AeroSystems, Inc. (NYSE: SPR), the world’s largest independent designer 16% 4%(a)/64% and manufacturer of aerostructures (website: www.spiritaero.com). Onex shares held: 6.0 million Onex Partners I shares subject to a carried interest: 11.9 million Healthcare Center for Diagnostic Imaging, Inc., a U.S. provider of diagnostic and therapeutic radiology services (website: www.cdiradiology.com). 81% 19%/100% Total Onex, Onex Partners I and Onex management investment at cost: $73 million, before a $42 million return of capital Onex portion at cost: $17 million, before a return of capital of $10 million Onex Partners I portion subject to a carried interest: $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 40% 9%/89% Carestream Health, Inc., a global provider of medical and dental imaging and healthcare information technology solutions (website: www.carestream.com). 95% 37%/100% Total Onex, Onex Partners II and Onex management investment at cost: $471 million, before a $243 million return of capital Onex portion at cost: $186 million, before a return of capital of $96 million Onex Partners II portion subject to a carried interest: $266 million 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: $204 million Onex portion: $41 million Onex Partners I portion subject to a carried interest: $61 million Onex Partners III portion subject to a carried interest: $94 million (a) Onex’ economic ownership percentage excludes shares held in connection with the Management Investment Plan. Onex Corporation December 31, 2011 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 L Y S I S Industry Segments Financial Services Customer Care Services Metal Services Building Products Other Businesses • Aircraft & Aftermarket Companies The Warranty Group, Inc., the world’s largest provider of extended warranty contracts (web site: www.thewarrantygroup.com). Total Onex, Onex Partners I, Onex Partners II and Onex management investment at cost: $488 million Onex portion: $154 million Onex Partners I portion subject to a carried interest: $178 million Onex Partners II portion subject to a carried interest: $137 million Onex & Limited Partners Economic Ownership Onex’ Economic/ Voting Ownership 92% 29%/100% SITEL Worldwide Corporation, a global provider of outsourced customer care services (website: www.sitel.com). 68% 68%/88% Onex investment at cost: $251 million TMS International Corp. (NYSE: TMS), a leading provider of outsourced industrial services to steel mills globally (website: www.tmsinternationalcorp.com). 60% 24%/85% 59%(a) 20%(a)/59%(a) Onex shares held: 9.3 million Onex Partners II shares subject to a carried interest: 13.2 million JELD-WEN Holding, inc., one of the world’s largest manufacturers of interior and exterior doors, windows and related products for use primarily in the residential and light commercial new construction and remodelling markets (website: www.jeld-wen.com). Total Onex, Onex Partners III and Onex management investment at cost: $871 million, before a $42 million return of capital on the convertible promissory notes Onex portion at cost: $298 million, before a return of capital of $14 million on the convertible promissory notes Onex Partners III portion subject to a carried interest: $538 million In February 2012, Onex sold a portion of its investment in JELD-WEN to certain limited partners and management of Onex at the same cost basis as Onex’ original investment. Onex received proceeds of $79 million. After giving effect to the sale in February 2012 and the partial redemption in late October 2011, Onex’ investment in JELD-WEN is $205 million. Hawker Beechcraft Corporation(b), the largest privately owned designer and manufacturer of business jet, turboprop and piston aircraft (website: www.hawkerbeechcraft.com). Total Onex, Onex Partners II and Onex management investment at cost: $537 million Onex portion: $212 million Onex Partners II portion subject to a carried interest: $303 million 49% 19%/–(b) • 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: $763 million Onex portion: $237 million Onex Partners II portion subject to a carried interest: $339 million (a) On an as-converted basis. (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 accounted for at fair value in Onex’ audited annual consolidated ﬁnancial statements. 14 Onex Corporation December 31, 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 L Y S I S Industry Segments Other Businesses (cont’d) • Industrial Products Companies Tomkins Limited(a), an engineering and manufacturing company that produces a variety of products for the industrial, automotive and building products markets worldwide (website: www.tomkins.co.uk). Total Onex, Onex Partners III, certain limited partners, Onex management and others investment at cost: $1,219 million Onex portion: $315 million Onex Partners III and others portion subject to a carried interest: $688 million Onex & Limited Partners Economic Ownership Onex’ Economic/ Voting Ownership 56% 14%/50%(a) • Gaming Tropicana Las Vegas, Inc., located directly on the Las Vegas Strip, is one of the most storied casinos in Las Vegas (website: www.troplv.com). 76% 17%/76% Total Onex, Onex Partners III and Onex management investment at cost: $279 million Onex portion: $60 million Onex Partners III portion subject to a carried interest: $196 million • Cabinetry Products RSI Home Products, Inc. (a), a leading manufacturer of kitchen, bathroom and home organization cabinetry sold through home centre retailers and distributors (website: www.rsiholdingcorp.com). 50% 20%/50%(a) Total Onex, Onex Partners II and Onex management investment at original cost: $318 million Onex portion: $126 million Onex Partners II portion subject to a carried interest: $179 million • Mid-market Opportunities ONCAP, private equity funds focused on acquiring and building the value of mid-market companies based in North America (website: www.oncap.com). ONCAP II 100% 46%/100% ONCAP II actively manages investments in EnGlobe Corp., Mister Car Wash, CiCi’s Pizza, Caliber Collision Centers, BSN SPORTS, Pinnacle Renewable Energy Group and Casino ABS. Total ONCAP II, Onex, Onex management and ONCAP management investment at cost: $411 million (C$438 million) Onex portion: $190 million (C$201 million) ONCAP II portion: $186 million (C$200 million) ONCAP III 100% 29%/100% ONCAP III actively manages investments in Hopkins, Casino ABS and Davis-Standard. Total ONCAP III, Onex, Onex management and ONCAP management investment at cost: $173 million (C$174 million) Onex portion : $50 million (C$51 million) ONCAP III portion : $106 million (C$106 million) • Real Estate Onex Real Estate Partners, a platform dedicated to acquiring and improving 88% 88%/100% real estate assets in North America. Onex investment in Onex Real Estate transactions at cost: $294 million • Credit Strategies Onex Credit Partners specializes in managing credit-related investments, including event-driven, long/short and market dislocation strategies. – 60%(b)/50%(b) Onex investment in Onex Credit Partners’ funds at market: $412 million, of which $312 million is in a segregated Onex Credit Partners unleveraged senior secured loan portfolio that purchases assets with greater liquidity. (a) 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 accounted for at fair value in Onex’ audited annual consolidated ﬁnancial statements. (b) This represents Onex’ share of the Onex Credit Partners platform. Onex Corporation December 31, 2011 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 L Y 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, 2011 compared to those for the year ended December 31, 2010 and, in selected areas, to those for the year ended December 31, 2009. The operating results for the ﬁscal years ended December 31, 2011 and 2010 have been reported in accordance with International Financial Reporting Standards (“IFRS”) and are presented in U.S. dollars. The operating results for the ﬁscal year ended December 31, 2009 were prepared in accordance with generally accepted accounting principles in Canada (“Canadian GAAP”) and are presented in Canadian dollars. IFRS differs in a number of areas from Canadian GAAP as described in the signiﬁcant accounting policies on page 19 of this MD&A. 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 Note 35 to the consolidated ﬁnancial statements This section should be read in conjunction with Onex’ the transition from the previous Canadian GAAP to IFRS on audited annual consolidated statements of earnings and earnings and comprehensive earnings for the year ended provides reconciliations and descriptions of the effect of corresponding notes thereto. Basis of presentation The use of IFRS is required for most Canadian publicly accountable enterprises for years beginning on or after January 1, 2011. Accordingly, Onex’ consolidated ﬁnan- cial statements have been prepared in accordance with IFRS 1, First-time Adoption of IFRS, using accounting poli- cies consistent with IFRS and its interpretations adopted December 31, 2010. In addition, the change in equity is shown with line-by-line reconciliations of the consolidated balance sheets at January 1, 2010 and December 31, 2010. Critical accounting policies and estimates Signiﬁcant accounting estimates The preparation of these ﬁnancial statements in confor- mity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets by the International Accounting Standards Board (“IASB”). and liabilities, disclosures of contingent assets and liabili- In completing the transition to IFRS, the Company ties and the reported amounts of revenues and expenses assessed its functional currency under IFRS. It was deter- for the periods of the consolidated ﬁnancial statements. mined that the U.S. dollar is the appropriate functional Onex and its operating companies evaluate their estimates currency for Onex’ ﬁnancial reporting under IFRS. As such, and assumptions on an ongoing basis and any revisions the ﬁnancial statements under IFRS have been reported on are recognized in the affected periods. Included in Onex’ a U.S. dollar basis. consolidated ﬁnancial statements are estimates used in In 2010 and prior periods, Onex’ consolidated determining the allowance for doubtful accounts, inven- ﬁnancial statements were prepared in Canadian dol- tory valuation, deferred tax assets and liabilities, intangi- lars and in accordance with Canadian GAAP. IFRS differs ble assets and goodwill, useful lives of property, plant and in a number of areas from Canadian GAAP. In preparing equipment and intangible assets, recoverability of devel- these consolidated ﬁnancial statements, management has opment costs associated with new product programs, rev- amended certain accounting, valuation and consolidation enue recognition under contract accounting, income taxes, methods previously applied in order to comply with IFRS, including IFRS 1, First-time Adoption of IFRS. The com- parative ﬁgures for 2010 were restated to comply with IFRS policies and disclosures. investments in associates, Limited Partners’ Interests, stock-based compensation, pension and post-employment beneﬁts, losses and loss adjustment expenses reserves, warranty provisions, restructuring provisions, legal contin- gencies and other matters. Actual results could differ mate- rially from those estimates and assumptions. 16 Onex Corporation December 31, 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 L Y S I S Judgements, assumptions and estimates are used long-term nature of such investments. Valuation method- in the determination of fair value for business combina- ologies include discounted cash ﬂows and observations of tions, investments in associates, Limited Partners’ Interests the trading multiples of public companies considered com- and legal contingencies. The assessment of goodwill, parable to the private companies being valued. The valu- intangible assets and long-lived assets for impairment, the ations take into consideration company-speciﬁc items, the determination of contract accounting, income taxes and lack of liquidity inherent in a non-public investment and actuarial valuations of pension and other post-retirement the fact that comparable public companies are not iden- beneﬁts also require the use of judgements, assumptions tical to the companies being valued. Company-speciﬁc and estimates. Due to the material nature of these factors, items are considered because, in the absence of a com- they are discussed here in greater detail. mitted buyer and completion of due diligence procedures, Business combinations In a business combination, all identiﬁable assets, liabili- there may be unknown company-speciﬁc items that may affect value. A variety of additional factors are reviewed by management, including, but not limited to, ﬁnancing ties and contingent liabilities acquired are recorded at the and sales transactions with third parties, current oper- date of acquisition at their respective fair values. One of ating performance and future expectations of the particular the most signiﬁcant estimates relates to the determination investment, changes in market outlook and the third-party of the fair value of these assets and liabilities. Land, build- ﬁnancing environment. In determining changes to the fair ings and equipment are usually independently appraised value of investments, emphasis is placed on current com- while short-term investments are valued at market prices. pany performance and market conditions. If any intangible assets are identiﬁed, depending on the For publicly traded investments, the valuation is type of intangible asset and the complexity of determin- based on closing market prices less adjustments, if any, for ing its fair value, an independent external valuation expert regulatory and/or contractual sale restrictions. may develop the fair value. These evaluations are linked The changes to fair value of the investments in closely to the assumptions made by management regard- associates are reviewed on page 35 of this MD&A. ing the future performance of the assets concerned and any Included in the measurement of the Limited Part- changes in the discount rate applied. Note 1 to the audited ners’ Interests is a reduction for the estimated unrealized annual consolidated ﬁnancial statements provides addi- carried interest as well as any contributions by and distri- tional disclosure on business combinations. butions to third-party limited partners in the Onex Partners and ONCAP Funds. The changes to fair value of the Limited Fair value of investments in associates Partners’ Interests are reviewed on page 38 of this MD&A. and Limited Partners’ Interests Associates are deﬁned under IFRS as those investments Impairment tests of goodwill, intangible assets in operating companies over which Onex has signiﬁcant inﬂuence, but not control. Under IFRS, these investments and long-lived assets Goodwill in an accounting context represents the excess are designated, upon initial recognition, at fair value on of the aggregate consideration paid and the amount of the consolidated balance sheets. The fair value of invest- any non-controlling interests in the acquired company ments in associates is assessed at each reporting date compared to the fair value of the identiﬁable net assets. with changes in fair value recognized in the consolidated Essentially all of the goodwill amount that appears on Onex’ statements of earnings. Similarly, the Limited Partners’ audited annual consolidated balance sheets at Decem- Interests which represent the interests of third-party inves- ber 31, 2011 and 2010 was recorded by the operating com- tors in the Onex Partners and ONCAP Funds are recorded panies. Goodwill is not amortized, but is assessed for at fair value, which is signiﬁcantly affected by the change impairment at the cash generating unit (“CGU”) level (or in the fair value of the underlying investments in the Onex group of CGUs) annually, or sooner if events or changes in Partners and ONCAP Funds. circumstances or market conditions indicate that the car- The valuation of non-public investments requires rying amount could exceed fair value. The test for goodwill signiﬁcant judgement by Onex due to the absence of impairment used by our operating companies is to assess quoted market values, inherent lack of liquidity and the the fair value of each CGU within an operating company and Onex Corporation December 31, 2011 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 L Y S I S determine if the goodwill associated with that CGU is less be developed, the impact to recognized revenue and costs than its carrying value. This assessment takes into consid- may be signiﬁcant if the estimates change. These estimates eration several factors, including, but not limited to, future involve assumptions of future events, including the quan- cash ﬂows and market conditions. If the fair value is deter- tity and timing of deliveries and labour performance rates, mined to be lower than the carrying value at an individual as well as projections relative to material and overhead CGU, then goodwill is considered to be impaired and an costs. Contract estimates are re-evaluated periodically and impairment charge must be recognized. Each operating changes in estimates are reﬂected in the current period. company has developed its own internal valuation model Spirit AeroSystems also expects to derive future to determine fair value. These models are subjective and revenues from new programs for which the company may require management of the particular operating company be contracted to provide design and engineering services, to exercise judgement in making assumptions about future recurring production, or both. There are several risks results, including revenues, operating expenses, capital inherent to such new programs. In the design and engi- expenditures and discount rates. The impairment test for neering phase, as well as in recurring production, the com- intangible assets and long-lived assets with limited lives is pany may incur higher than expected costs. The ability to similar to that of goodwill. Under IFRS, impairment charges recover these excess costs from the customer will depend for intangible assets and long-lived assets may subsequently on several factors, including the company’s rights under its be reversed if fair value is determined to be higher than car- contracts for the new programs. The recognition of earn- rying value. The reversal is limited, however, to restoring ings and loss under these new contracts requires the com- the carrying amount that would have been determined, net pany to make signiﬁcant assumptions regarding its future of amortization, had no impairment loss been recognized costs, ability to achieve cost reduction opportunities, as in prior periods. Impairment losses for goodwill are not well as the estimated number of units to be manufactured reversed in future periods. under the contract and other variables. Impairment charges recorded by the operating Revenues in the healthcare segment for Skilled companies under IFRS may not impact the fair values of Health care Group, Inc. (“Skilled Healthcare Group”) and the operating companies used in determining the increase Res-Care, Inc. (“ResCare”) are substantially derived from or decrease in investments in associates, the change in federal, state and local government agencies, including carried interest and for calculating the Limited Partners’ Medicare and Medicaid programs. Laws and regulations Interests liability. under these programs are complex and compliance with During 2011, certain of the operating companies such laws and regulations is subject to ongoing and future recorded charges for impairments of goodwill, intangible government review and interpretation. Management of those assets and long-lived assets. These charges are reviewed on businesses believe that they are in compliance with applica- page 38 of this MD&A and in note 24 to the audited annual ble laws and regulations. Revenues generated through con- consolidated ﬁnancial statements. tracts with government agencies require the use of estimates as contracts may be terminated or adversely modiﬁed if bud- Revenue recognition The aerostructures segment recognizes revenue using the getary appropriation to the particular government agency is decreased. Contract estimates are re-evaluated periodically contract method of accounting since a signiﬁcant portion and changes in estimates are reﬂected in the current period. of Spirit AeroSystems, Inc.’s (“Spirit AeroSystems”) rev- enues is under long-term volume-based contracts requir- ing delivery of products over several years. Revenues from Income taxes Onex, including its operating companies, is subject to each contract are recognized in accordance with the per- changing tax laws in multiple jurisdictions. Signiﬁcant centage-of-completion method of accounting, using the judgements are necessary in determining the worldwide units-of-delivery method. As a result, contract account- income tax liabilities. Although management of Onex and ing uses various estimating techniques to project costs to the operating companies believe they have made reason- completion and estimates of recoveries asserted against able estimates about the ﬁnal outcome of tax uncertain- the customer for changes in speciﬁcations. Due to the ties, no assurance can be given that the outcome of these signiﬁcant length of time over which these estimates will tax matters will be consistent with what is reﬂected in the 18 Onex Corporation December 31, 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 L Y S I S historical income tax provisions. Such differences could related future expense in the audited annual consolidated have an effect on the income tax liabilities and deferred tax ﬁnancial statements. Note 32 to the audited annual con- liabilities in the period in which such determinations are solidated ﬁnancial statements provides details on the made. At each balance sheet date, management of Onex estimates used in accounting for pensions and post-retire- and the operating companies assess whether the realization ment beneﬁts. of future tax beneﬁts is sufﬁciently probable to recognize deferred tax assets. This assessment requires the exercise of judgement on the part of management with respect to, Signiﬁcant accounting policies under IFRS The following summarizes new accounting policies under among other things, beneﬁts that could be realized from IFRS that have a signiﬁcant impact on the preparation available tax strategies and future taxable income, as well of Onex’ consolidated ﬁnancial statements compared as other positive and negative factors. The recorded amount to policies previously applied under Canadian GAAP at of total deferred tax assets could be reduced if estimates of Decem ber 31, 2010. projected future taxable income and beneﬁts from available tax strategies are lowered, or if changes in current tax regu- lations are enacted that impose restrictions on the timing Limited Partners’ Interests Onex has two private equity platforms: the Onex Partners or extent of Onex’, or its operating companies’, ability to and ONCAP Funds. These private equity funds provide a utilize future tax beneﬁts. Legal contingencies Onex, including its operating companies, becomes substantial pool of committed capital from third-party lim- ited partners which, in combination with Onex’ proprietary capital, allows Onex to be ﬂexible and timely in responding to investment opportunities. involved in various legal proceedings in the normal course Onex’ consolidated balance sheet at December 31, of operations. While we cannot predict the ﬁnal outcome of such legal proceedings, the outcome of these matters may have a signiﬁcant effect on Onex’ consolidated ﬁnancial position, results of operations or cash ﬂows. The ﬁling or 2011 includes a ﬁnancial liability line item, Limited Partners’ Interests, as required by IAS 32, Financial Instruments: Presen tation. This liability represents the fair value of the third-party invested capital in the Onex Partners and ONCAP disclosure of a suit or formal assertion of a claim does not Funds. The Limited Partners’ Interests liability is affected by automatically indicate that a provision may be appropriate. the change in the fair value of the underlying investments in Management, with the assistance of internal and external the Onex Partners and ONCAP Funds, the impact of unre- lawyers, regularly analyzes current information about these alized carried interest, as well as by any contributions from matters and provides provisions for probable contingent and distributions to the third-party limited partners in those losses, including the estimate of legal expenses to resolve Funds. Previously under Canadian GAAP, third-party lim- these matters. ited partners’ capital was recognized on the same basis as Onex’ capital – a percentage of the accounting earnings/loss Employee beneﬁts Onex, the parent company, does not have a pension plan; of the various investments. The third-party limited partners’ capital is now disclosed as a standalone liability line item in however, certain of its consolidated operating companies Onex’ consolidated balance sheets under IFRS compared to do. Management of the consolidated operating compa- previously being a component of non-controlling interests, nies use actuarial valuations to account for their pension outside of equity, under Canadian GAAP. and other post-retirement beneﬁts. These valuations rely Onex’ consolidated statements of earnings are also on statistical and other factors in order to anticipate future affected by Limited Partners’ Interests under IFRS. First, events. These factors include key actuarial assumptions any adjustments to the fair value of the Limited Partners’ such as the discount rate, the expected return on plan Interests liability arising primarily from the change in the assets, expected salary increases and mortality rates. These underlying values of the investments are recorded in Onex’ actuarial assumptions may differ signiﬁcantly from actual consolidated statements of earnings. For example, if the fair developments due to changing market and economic con- value of The Warranty Group, Inc. (“The Warranty Group”) ditions and therefore may result in a signiﬁcant change increases, the Limited Partners’ Interests liability on the in post-retirement employee beneﬁt obligations and the Onex Corporation December 31, 2011 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 L Y S I S consolidated balance sheets is increased for their portion of unrealized gains in each of the Onex Partners and ONCAP the change in value and there is a corresponding charge to Funds attributable to the management of Onex or ONCAP, Limited Partners’ Interests in the consolidated statements be recognized as a liability on Onex’ consolidated balance of earnings, thus decreasing net earnings. A decrease in the sheets, which reduces the Limited Partners’ Interests liabil- fair value of the underlying investments has the opposite ity. The corresponding increase/decrease of this liability is effect. Second, net earnings attributable to Onex, the parent recognized in Onex’ consolidated statements of earnings. company, under IFRS now includes the share of earnings The amount of unrealized carried interest attributable to attributable to both Onex, the parent company, as well as the management of Onex or ONCAP is calculated based to its third-party limited partners in Onex’ controlled oper- on the fair values of the underlying investments and the ating companies. For example, Onex, the parent company, overall unrealized gains in each respective Fund in accor- holds a 29 percent economic ownership in The Warranty dance with the limited partnership agreements. Previously Group and, when considering the investment made by under Canadian GAAP, Onex did not recognize unreal- third-party limited partners, holds a combined 92 percent ized carried interest attributable to the management of economic ownership in The Warranty Group. Under IFRS, Onex or ONCAP on its consolidated balance sheets. The 92 percent of The Warranty Group’s net earnings is attrib- adoption of this new policy resulted in an approximate utable to Onex, the parent company. Previously under $85 million decline in opening equity and a correspond- Canadian GAAP, net earnings attributable to Onex, the par- ing increase to liabilities on Onex’ January 1, 2010 consoli- ent company, included only 29 percent of The Warranty dated opening balance sheet for the estimated unrealized Group’s net earnings, while the third-party limited part- carried interest due to management of Onex and ONCAP. ners’ share of that business’ net earnings was recorded in During 2011, Onex recorded a charge of $62 mil- the non-controlling interests line in Onex’ consolidated lion (2010 – $114 million) in the consolidated statements statements of earnings, above net earnings. of earnings related to the increase in net unrealized carried The adoption of this new policy resulted in an interest attributable to management. The charge recorded approximate $1.1 billion decline in opening equity and a in 2011 was due primarily to an increase in the fair value of corresponding increase to liabilities on Onex’ January 1, certain of the private investments in the Onex Partners and 2010 consolidated opening balance sheet to show the lia- ONCAP Funds. bility to third-party limited partners at fair value. During The change in net unrealized carried interest attrib- 2011, a charge of $627 million (2010 – $831 million) was utable to Onex, the parent company, is recognized through a recorded for the increase in the fair value of the liability to reduction in the charge for the Limited Partners’ Interests. third-party limited partners. The factors con tributing to Pre viously under Canadian GAAP, Onex did not recognize the charge recorded in 2011 are discussed in detail under unrealized carried interest attributable to Onex, the parent Limited Partners’ Interests charge on page 38 of this report. company, on its consolidated balance sheets until realized. The adoption of this new policy resulted in an approximate Unrealized carried interest The General Partner of the Onex Partners and ONCAP Funds $56 million increase in opening equity and a correspond- ing decrease to the Limited Partners’ Interests liability on is entitled to a portion (20 percent) of the realized net gains Onex’ January 1, 2010 consolidated opening balance sheet. of third-party limited partners in each Fund. This share of For 2011, a recovery of $29 million (2010 – $76 million) was the net gains is referred to as carried interest. Onex is enti- recorded in the consolidated statements of earnings for tled to 40 percent of the carried interest realized in the Onex the increase in the value of the carried interest attribut- Partners and ONCAP Funds. The Onex management team is able to Onex, the parent company, due to an increase in the entitled to the remaining 60 percent of the carried interest fair value of certain of the private investments in the Onex realized in the Onex Partners Funds and the ONCAP man- Partners and ONCAP Funds. agement team is entitled to the remaining 60 percent of the During 2011, $249 million of carried interest was carried interest realized in the ONCAP Funds. generated by Onex and Onex management on the sales IFRS requires that the unrealized carried interest, of a portion of the shares of TMS International and Spirit which represents the undistributable share of the overall AeroSystems, as well as from the sales of EMSC and Husky 20 Onex Corporation December 31, 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 L Y S I S International. Onex decided to voluntarily reduce the car- its third-party limited partners in the Onex Partners and ried interest to be received by $88 million, bringing the ONCAP Funds, in Onex’ controlled operating companies. total carried interest received to $161 million, of which For example, the non-controlling interests under IFRS Onex’ share was $65 million. The reduction was made after represent the ownership interests of public shareholders a review of the remaining portfolio companies in Onex of Spirit AeroSystems. Previously under Canadian GAAP, Partners II and reﬂecting the desire to not distribute or collect the non-controlling interests represented the owner- carried interest that may be subject to a future claw-back. ship interests of both the public shareholders of Spirit Investments in associates Associates are deﬁned under IFRS as those investments AeroSystems as well as those of the third-party limited part- ners of Onex Partners. Second, the non-controlling interests’ share of in operating companies over which Onex has signiﬁcant net assets is classiﬁed as a component of equity and their inﬂuence, but not control. Under IFRS these investments share of earnings is recorded as an allocation after arriving are designated, upon initial recognition, at fair value on at net earnings. Previously under Canadian GAAP, the non- the consolidated balance sheets, with changes in fair value controlling interests’ share of net assets was recognized as recognized in the consolidated statements of earnings. The a separate line item in Onex’ consolidated balance sheets, change in fair value of investments in associates represents outside of equity, and their share of earnings was recorded the interests of both Onex, the parent company, and its as a separate line item in Onex’ consolidated statements of third-party limited partners in those investments. There is earnings, above net earnings. a corresponding charge to the Limited Partners’ Interests The adoption of this new standard under IFRS line in the consolidated statements of earnings for the resulted in an approximate $3.3 billion increase in open- third-party limited partners’ share of that fair value change. ing equity on Onex’ January 1, 2010 consolidated opening During 2011 and 2010, Onex recorded at fair balance sheet due to the reclassiﬁcation of non-controlling value its investments in associates, which include Allison interests to equity. Transmission, Hawker Beechcraft, RSI Home Products, Tomkins, Cypress and certain Onex Real Estate Partners investments. In addition, ResCare was recorded at fair Cash-settled share-based compensation Under IFRS, the liability for cash-settled share-based com- value in the investments in associates up to mid-Novem- pensation is measured at fair value as determined through ber 2010, when Onex began to consolidate that business the application of an option pricing model. The liability is following Onex’ and Onex Partners III’s acquisition of the re-measured each reporting period, with changes in fair remaining interest in ResCare not previously owned by the value recognized as the awards vest. Changes in the fair Onex Partners I Group. Previously under Canadian GAAP, value of vested awards are recognized immediately in the these investments were accounted for using the equity- consolidated statements of earnings. Previously under accounting method. Canadian GAAP, a liability for cash-settled share-based The adoption of this new policy resulted in an payments was accrued based on the intrinsic value of the approximate $330 million increase in opening equity and award, with changes recognized in the statement of earnings a corresponding increase in long-term investments on each period. Onex’ January 1, 2010 consolidated opening balance sheet. The new treatment of cash-settled share-based During 2011, Onex recorded a $501 million increase in the compensation under IFRS has also required Onex to record value of investments in associates compared to an increase all of its Management Investment Plan (“MIP”) options at of $448 million in 2010. Non-controlling interests The deﬁnition of non-controlling interests in accordance fair value. Previously under Canadian GAAP, only those MIP options that had met the MIP performance hurdles and were exercisable were accrued at their intrinsic value. The adoption of this new policy resulted in an with IFRS has two signiﬁcant differences from that previ- approximate $55 million decrease in opening equity and a ously reported under Canadian GAAP. corresponding increase in other non-current liabilities on First, non-controlling interests represent the Onex’ January 1, 2010 consolidated opening balance sheet. ownership interests of shareholders, other than Onex and Onex Corporation December 31, 2011 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 L Y S I S Provisions The balance sheet presentation for provisions in accor- • IFRS 10, Consolidated Financial Statements, establishes the principles for the preparation and presentation of dance with IFRS is different from that previously reported under Canadian GAAP. Under IFRS, Onex is required to disclose the liability for provisions as two separate line items on its consolidated balance sheets: Current portion of provisions and Non-current portion of provisions. The consolidated ﬁnancial statements and replaces the cur- rent guidance in IAS 27, Consolidated and Separate Financial Statements, and SIC 12, Consolidation – Special Purpose Entities. IFRS 10 introduces a single consolida- tion model for all entities based on control, irrespective signiﬁcant provisions in Onex’ consolidated balance sheets of the nature of the entity. consist of self-insurance, legal, warranty and restructuring. Previously under Canadian GAAP, these provisions were recorded in accounts payable and accrued liabilities, other current liabilities and other non-current liabilities. • IFRS 11, Joint Arrangements, sets out the principles to identify the type of joint arrangements and the account- ing for those arrangements and replaces IAS 31, Interests in Joint Ventures. The standard reduces the types of joint arrangements and eliminates the use of proportionate Note 1 to the audited annual consolidated ﬁnancial state- consolidation for joint ventures. ments provides a discussion of the signiﬁcant accounting policies under IFRS. Recent Accounting Pronouncements Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts In accordance with IFRS 4, Insurance Contracts, an entity is permitted to change its accounting policies for insurance • IFRS 12, Disclosure of Interests in Other Entities, provides the disclosure requirements for entities reported under IFRS 10 and IFRS 11 and replaces the disclosure require- ments currently in IAS 28, Investments in Associates. IFRS 12 requires disclosure of the nature, risks and ﬁnancial effects associated with the entity’s interests in subsidiaries, associates, joint arrangements and uncon- solidated structured entities. contracts if the change provides more relevant informa- tion to the users that is no less reliable. In October 2010, • IAS 28, Investments in Associates and Joint Ventures, pre- scribes the use of the equity method of accounting for the Financial Accounting Standards Board (“FASB”) issued investments in associates and joint ventures and applies new guidance on the accounting for costs associated with to all entities that are investors with joint control of, or acquiring or renewing insurance contracts. The new guid- signiﬁcant inﬂuence over, an investee. IAS 28 continues ance, which will impact the results of The Warranty Group, to allow entities that meet certain requirements to desig- amends the deﬁnition of the types of costs that can be cap- nate its investments in associates at fair value upon ini- italized in the acquisition of new insurance contracts and tial recognition. renewal of existing insurance contracts and places restric- tions around the capitalization of acquisition costs. The new guidance will be retroactively adopted by Onex begin- ning in the ﬁrst quarter of 2012. As a result of the appli- cation of the new guidance, Onex expects to defer fewer Fair Value Measurement In May 2011, the IASB issued IFRS 13, Fair Value Measure- ment, that provides a single framework for measuring fair value and requires enhanced disclosures when fair value costs and record lower amortization through operating is used for measurement. The standard is effective in 2013. expenses. Onex is currently evaluating the full impact of Onex is currently evaluating the impact of adopting this the new guidance on its consolidated ﬁnancial statements. standard on its consolidated ﬁnancial statements. Reporting Entity Standards In May 2011, the IASB issued a set of new standards that addresses the scope and accounting for the reporting entity. The standards are effective in 2013. Onex is cur- Employee Future Beneﬁts In June 2011, the IASB amended IAS 19, Employee Future Beneﬁts, to change the recognition, measurement and pre- sentation of deﬁned beneﬁt pension expense and to pro- rently evaluating the impact of adopting these standards vide for additional disclosures for all employee beneﬁts. on its consolidated ﬁnancial statements. The following is a The amendment is effective in 2013. Onex is currently eval- summary of the new requirements. uating the impact of the amendment on its consolidated ﬁnancial statements. 22 Onex Corporation December 31, 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 L Y S I S Financial Statement Presentation In June 2011, the IASB amended IAS 1, Presentation of Financial Statements, that will require entities to separately present items in other comprehensive earnings based on Signiﬁcant transactions Sales of EMSC and Husky International As a result of the sales of Emergency Medical Services Corporation (“EMSC”) and Husky International Ltd. (“Husky whether they may be recycled to the statement of earnings International”) during the ﬁrst half of 2011, Onex, the par- in future periods. The amendment is effective in 2012. The ent company, recorded an after-tax gain of $1.6 billion in adoption of this amendment is not expected to have a sig- 2011. Under IFRS, gains realized on the sales of investments niﬁcant effect on Onex’ consolidated ﬁnancial statements. no longer controlled are entirely attributable to the equity Financial Instruments In November 2009, the IASB issued IFRS 9, Financial Instruments, the ﬁrst phase of a replacement for existing standard IAS 39, Financial Instruments: Recognition and Measurement. This standard introduces new requirements for the classiﬁcation and measurement of ﬁnancial assets holders of Onex, as the interests of the limited partners were recorded as a ﬁnancial liability at fair value. During the holding period of the investments, the increase in the fair value of the Limited Partners’ Interests related to EMSC and Husky International resulted in an increase in the Limited Partners’ Interests liability with a corresponding charge in the consolidated statements of earnings. Upon disposi- and removes the need to separately account for certain tion, current and prior period charges associated with the embedded derivatives. This standard is effective in 2015. investments in EMSC and Husky International were recov- Onex is currently evaluating the impact of adopting this ered by Onex, the parent company, through the gain rec- standard on its consolidated ﬁnancial statements. ognized on the sales. The net impact to Onex’, the parent Variability of results Onex’ consolidated operating results may vary substan- company’s, retained earnings after the sales represents its share of the net gain on its investments in EMSC and Husky International. tially from quarter to quarter and year to year for a num- In May 2011, the Onex Partners I Group com- ber of reasons, including some of the following: the current pleted the sale of its remaining 13.7 million shares of EMSC economic environment; acquisitions or dispositions of for $64.00 per share. The Onex Partners I Group received businesses by Onex, the parent company; the change in net proceeds of $878 million, of which Onex’ share was value of stock-based compensation for both the parent $342 million, including carried interest of $32 million. The company and its operating companies; changes in the mar- sale was part of an offer made for all outstanding shares of ket value of Onex’ publicly traded operating companies; EMSC. The consolidated results for 2011 include a pre-tax changes in the fair value of Onex’ privately held operating gain of $600 million, which is entirely attributable to the companies; changes in tax legislation or in the application equity holders of Onex. This gain includes the portion attrib- of tax legislation; and activities at Onex’ operating compa- utable to Onex’ investment as well as that of the limited nies. These activities may include the purchase or sale of partners of Onex Partners I. The effect of this is to recover businesses; ﬂuctuations in customer demand, materials the charges to earnings for the fair value increases and his- and employee-related costs; changes in the mix of prod- torical accounting earnings on EMSC allocated to the limited ucts and services produced or delivered; changes in the partners over the life of the remaining investment, which ﬁnancing of the business; changes in contract account- totalled $375 million. The balance of $225 million reﬂects ing estimates; impairments of goodwill, intangible assets the pre-tax gain on Onex’ remaining investment in EMSC. or long-lived assets; litigation; and charges to restructure As a result of the sale, the operations of EMSC are presented operations. Given the diversity of Onex’ operating busi- as discontinued in the statements of earnings and cash ﬂows nesses, the associated exposures, risks and contingencies and prior periods have been restated to report the results of may be many and varied. EMSC as discontinued on a comparative basis. In June 2011, the Onex Partners I Group and Onex Partners II Group along with Husky International management completed the sale of Husky International for $2.1 billion. The Onex Partners I Group and Onex Part- ners II Group received net cash proceeds of $1.7 billion, Onex Corporation December 31, 2011 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 L Y S I S of which Onex’ share was $583 million, including car- Sales of shares of Spirit AeroSystems ried interest of $17 million. The carried interest realized on Onex Partners II’s sale of Husky International was vol- and TMS International The Onex Partners I Group participated in the April 2011 untarily reduced by $88 million, which was made at the secondary offering of Spirit AeroSystems by selling a por- request of Onex (Onex’ share of the reduction was $35 mil- tion of its shares. The Onex Partners II Group participated lion). In addition to the cash proceeds received on the sale, in the April 2011 initial public offering of TMS International approximately $60 million of additional amounts held in Corp. (“TMS International”) through the sale of a portion escrow and other items were expected to be received (Onex’ of its shares. The details of these transactions are described share was $19 million, excluding carried interest). During in the paragraphs below. After giving effect to the sales, the third quarter of 2011, $38 million of additional amounts Onex continues to control Spirit AeroSystems and TMS were received and the remaining expected escrow amounts International. Under IFRS, sales of shares that do not were reduced by $5 million to reﬂect Husky International’s result in a loss of control of the investment are recorded as estimate of the taxes owing in respect of taxable periods a transfer of equity to non-controlling interests holders in up to the closing date. Onex’ share of the additional the consolidated statements of equity. The amount trans- amounts received during the third quarter of 2011 was ferred to non-controlling interests holders is equivalent $18 million, including carried interest of $6 million. In to Onex’ historical accounting carrying value attributable accordance with the distribution policy set out in the to the portion of the investment that was sold. The excess Agreement of Limited Partnership, and as a result of the of proceeds received over the historical accounting car- voluntary reduction in the amount of carried interest col- rying value is recorded directly to retained earnings as an lected at the time of the sale of Husky International, Onex’ increase in equity and is not reﬂected in the consolidated carried interest entitlement was 80 percent of the additional statements of earnings. amounts received by the limited partners of Onex Part- In April 2011, Spirit AeroSystems completed a sec- ners II. At December 31, 2011, $18 million remains receiv- ondary offering of approximately 10 million shares of Class able for escrow amounts (Onex’ share is $6 million, exclud- A common stock at a price of $24.49 per share. The Onex ing carried interest) and is expected to be received within Partners I Group sold shares in this offering for total pro- four years. As a result of the long-term nature of the ceeds of $245 million. Spirit AeroSystems did not issue any remaining receivable, the amount has been discounted to new shares as part of this offering. Onex, the parent com- its current value. This brings total proceeds from Husky pany, sold 2.7 million of the shares in this offering for net International to $1.8 billion, including the value of those proceeds of $74 million, including carried interest. The sale amounts which remain to be received, compared to the price per share was a multiple of seven times Onex’ original $622 million equity investment made by the Onex Part- cost per share in Spirit AeroSystems. ners I Group and Onex Partners II Group in 2007. Included The Onex Partners I Group continues to hold in Onex’ consolidated results for 2011 is an after-tax gain 22.4 million shares of Spirit AeroSystems’ common stock, of $1.1 billion, which is entirely attributable to the equity which represents a 16 percent ownership interest, and holders of Onex. This gain includes the portion attribut- continues to retain voting control of the company. Since able to Onex’ investment as well as that of the limited part- this transaction did not result in a loss of voting control of ners of Onex Partners I and Onex Partners II. The effect of Spirit AeroSystems, it has been recorded in the consolidated this is to recover the charges to earnings for the fair value ﬁnancial statements as a transfer of equity to non-control- increases and historical accounting earnings on Husky ling interests holders, with the net cash proceeds received International allocated to the limited partners over the life in excess of the historical accounting carrying value of of the investment, which totalled $726 million. The bal- $109 million being recorded directly to retained earn- ance of $361 million reﬂects the after-tax gain on Onex’ ings. The cash proceeds recorded directly to retained earn- investment in Husky International. The operations of ings from the sale of shares have been partially offset by a Husky International have been reported as discontinued $9 million deferred tax provision recorded by Onex, the par- in the 2011 and 2010 consolidated statements of earnings, ent company, on the transaction. Of the net $100 million as well as in the consolidated statements of cash ﬂows of recorded directly to retained earnings, $23 million represents 2011 and 2010. Onex’ share excluding the impact of the limited partners. 24 Onex Corporation December 31, 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 L Y S I S In April 2011, TMS International completed an initial public offering of approximately 12.9 million shares Tropicana Las Vegas third rights offering In May 2011, Tropicana Las Vegas, Inc. (“Tropicana of Class A common stock (NYSE: TMS), including the exer- Las Vegas”) completed a third rights offering of $35 million, cise of the over-allotment option. The offering was priced at of which the Onex Partners III Group invested $29 million $13.00 per share for gross proceeds of $167 million. As part (Onex’ share was $6 million). This was completed through an of the offering, TMS International issued approximately issue of preferred shares that have similar terms to the 2009 10.9 million treasury shares while the Onex Partners II and 2010 rights offerings, that accrue dividends at a rate of Group sold approximately 1.9 million shares. The Onex 12.5 percent and that are convertible into common shares of Partners II Group received total net proceeds of $23 million Tropicana Las Vegas at a ﬁxed ratio including accrued and for its shares sold. Onex’ portion of the net proceeds was unpaid dividends. After giving effect to the offering, the Onex $9 million, including carried interest. TMS International Partners III Group owns, on an as-converted basis, approxi- used a portion of the proceeds from this offering to redeem mately 76 percent of Tropicana Las Vegas, of which Onex’ in full its Series 2008 Promissory Notes, which were held pri- share was 17 percent at December 31, 2011. marily by the Onex Partners II Group. The Onex Partners II Group received approximately $43 million for its Series 2008 Promissory Notes, including accrued interest of $6 million, CDI distribution In May 2011, Center for Diagnostic Imaging, Inc. (“CDI”) for its share of the redemption, of which Onex’ share was entered into a new credit agreement. The new agreement $17 million, including carried interest. included a $95 million term loan as well as a $25 million The Onex Partners II Group continues to hold revolving credit facility, both of which mature in May 2016. 23.4 million shares of TMS International’s common stock The proceeds from the new term loan were used to repay the for a 60 percent ownership interest. Since this transaction amounts outstanding under the former term loan and revolv- did not result in a loss of control of TMS International, the ing credit facility and pay a distribution to shareholders. The transaction has been recorded as a transfer of equity to Onex Partners I Group’s share of the $67 million distribution non-controlling interests holders in the consolidated ﬁnan- paid was $54 million, of which Onex’ share was $13 million. cial statements, with the cash proceeds received in excess of the historical accounting carrying value of $19 million recorded directly to retained earnings. Onex’ share, exclud- Investment in JELD-WEN In early October 2011, the Onex Partners III Group ac- ing the impact of the limited partners, was $7 million. quired a 57 percent as-converted equity ownership interest in JELD-WEN. JELD-WEN is one of the world’s largest Carestream Health distribution In February 2011, Carestream Health Inc. (“Carestream manufacturers of interior and exterior doors, windows and related products for use primarily in the residential Health”) entered into a new credit facility. This new facil- and light commercial new construction and remodelling ity included a $1.85 billion senior secured term loan that markets. The investment in JELD-WEN totalled $871 mil- matures in February 2017 and a $150 million senior revolv- lion and was made up of $689 million from the Onex Part - ing facility that matures in February 2016. The proceeds ners III Group and $182 million from Onex and certain from this new facility were used primarily to repay and ter- other limited partners. The total investment in JELD-WEN minate the previous credit facility. In conjunction with this consists of $700 million of convertible preferred stock and transaction, Carestream Health distributed $197 million $171 million in convertible notes. The convertible notes to the Onex Partners II Group, of which Onex’ share was may be redeemed within 18 months with proceeds from $78 million. During the third and fourth quarters of 2011, the sale of certain non-core assets and, if not redeemed, Carestream Health repurchased a total of $69 million of its will convert into additional convertible preferred stock. senior secured term loan for a cash cost of $61 million. As Onex’ initial investment in JELD-WEN was $240 million for a result, net pre-tax gains of $8 million were recognized in convertible preferred stock for a 20 percent as-converted other items during 2011. equity ownership interest in JELD-WEN and $58 mil- lion of the convertible notes. Of Onex’ total investment of $298 million, Onex funded $124 million through Onex Partners III and $174 million as a co-investor in JELD-WEN. Onex Corporation December 31, 2011 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 L Y S I S In October 2011, JELD-WEN redeemed $42 mil- • Hopkins, a Kansas, United States headquartered manu- lion of the convertible notes and interest accrued to the facturer, marketer and distributor of automotive after- redemption date, of which Onex’ share was $14 million. market products for sale to distributors and retailers In February 2012, $83 million of the amount in- primarily in North America, in June 2011. The ONCAP III vested in JELD-WEN by Onex was sold, at the same cost Group has an approximate 90 percent equity ownership basis as Onex’ original investment, to certain limited part- in Hopkins. ners and management of Onex as a co-investment. Onex • Davis-Standard, headquartered in Connecticut, United received proceeds of $79 million, reﬂecting the reduction in States, a leading designer, manufacturer and supplier the cost of Onex’ investment as a result of the redemption of highly engineered extrusion and converting machin- of a portion of the convertible notes in October 2011. Onex’ ery systems, in December 2011. The ONCAP III Group investment in JELD-WEN, after giving effect to the sale in has an approximate 90 percent equity ownership in February 2012 and the partial redemption in October 2011, Davis-Standard. is $205 million. Acquisitions by ONCAP During 2011, ONCAP completed the following four acquisitions: • Pinnacle Renewable Energy Group, a British Columbia, Canada based producer of wood pellets for markets around the world, in early May 2011. The ONCAP II A total of $324 million was invested in the ONCAP acqui- sitions completed during 2011, of which Onex’ share was $123 million. R E V I E W O F D E C E M B E R 3 1 , 2 0 1 1 C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S Group has an approximate 60 percent equity ownership The discussions that follow identify those material factors in Pinnacle Renewable Energy Group. that affected Onex’ operating segments and Onex’ consoli- • Casino ABS, the largest casino operator in the Alberta, dated results for 2011. We will review the major line items Canada market, with four casinos, in May 2011. In to the consolidated ﬁnancial statements by segment. May 2011, the ONCAP II Group initially purchased 100 percent of the equity ownership in Casino ABS. As contemplated at the time of the original investment, Consolidated revenues and cost of sales Consolidated revenues were up 25 percent, or $4.9 billion, the ONCAP III Group subsequently purchased 22 per- to $24.6 billion in 2011 compared to 2010. During 2011, cent of the equity ownership in Casino ABS from the consolidated cost of sales was up 27 percent, or $4.2 bil- ONCAP II Group in December 2011 at the same price lion, to $19.7 billion compared to last year. During 2009, per share. At December 31, 2011, the combined hold- consolidated revenues were C$20.8 billion and consoli- ings of the ONCAP II Group and the ONCAP III Group dated cost of sales was C$16.2 billion as reported in accor- are close to 100 percent of the equity ownership in dance with Canadian GAAP. Casino ABS. 26 Onex Corporation December 31, 2011 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S Table 1 below reports revenues and cost of sales by industry segment for the years ended December 31, 2011, 2010 and 2009. The percentage change in revenues and cost of sales between December 31, 2011 and 2010 is also shown. Revenues and Cost of Sales by Industry Segment for the Year Ended December 31 Revenues Cost of Sales TABLE 1 ($ millions) IFRS, U.S. Dollars Year ended December 31 2011 2010 Electronics Manufacturing Services $ 7,213 $ 6,526 Aerostructures Healthcare Financial Services Customer Care Services Metal Services Building Products(a) Other (b) Total 4,864 5,030 1,184 1,416 2,661 774 1,500 4,170 3,498 1,163 1,340 2,030 – 1,007 Canadian GAAP, Canadian Dollars IFRS, U.S. Dollars Change (%) 2009 2011 2010 Change (%) 11% 17% 44% 2% 6% 31% – 49% C$ 6,909 $ 6,645 $ 5,997 4,641 3,662 1,359 1,780 1,472 – 943 4,124 3,446 579 921 3,429 2,270 547 847 2,467 1,858 660 883 – 544 11% 20% 52% 6% 9% 33% – 62% Canadian GAAP, Canadian Dollars 2009 C$ 6,319 3,946 2,236 656 1,140 1,329 – 531 $ 24,642 $ 19,734 25% C$ 20,766 $ 19,725 $ 15,492 27% C$ 16,157 2011 and 2010 results are reported in accordance with IFRS and presented in U.S. dollars. 2009 results are reported in accordance with Canadian GAAP and presented in Canadian dollars. These results may differ from those reported by the individual operating companies. (a) Represents three months of revenues and cost of sales from JELD-WEN’s early October 2011 acquisition date. (b) 2011 other includes Flushing Town Center, Tropicana Las Vegas, the operating companies of ONCAP II and ONCAP III and the parent company. 2010 other includes Flushing Town Center, Tropicana Las Vegas, the operating companies of ONCAP II and the parent company. 2009 other includes CEI (up to May 2009), Tropicana Las Vegas, the operating companies of ONCAP II and the parent company. Electronics Manufacturing Services Celestica Inc. (“Celestica”) delivers innovative supply chain solutions globally to original equipment manufacturers and service providers in the communications (comprised of enterprise communications and telecommunications), consumer, computing (comprised of servers and storage), E L E C T R O N I C S tions contributed approximately M A N U FA C T U R I N G S E R V I C E S (IFRS, US$ millions) 7,213 6,645 6,526 5,997 one-third of the revenue increase in the diversiﬁed end market. 8000 Partially offsetting these increases was a 20 percent decline in rev- 6400 enues in Celestica’s telecommuni- and diversiﬁed (comprised of industrial, aerospace and cations end market. 4800 defence, healthcare, green technology, semiconductor capital equipment and other) end markets. These solutions include design, supply chain, manufacturing, engineering, complex mechanical and systems integration, order fulﬁll- ment, logistics and after-market services. During 2011, Celestica reported an 11 percent, or $687 million, increase in revenues to $7.2 billion from ’11 ’10 Revenues Cost of Sales Cost of sales had a similar increase during 2011 of 11 percent, 3200 or $648 million, to $6.6 billion from 1600 $6.0 billion in 2010. Gross proﬁt for the year ended December 31, 2011 0 increased 7 percent, or $39 mil- lion, from 2010 due primarily to the $6.5 billion in 2010. Celestica’s revenue growth in 2011 increase in revenues. was in the following end markets: diversiﬁed (40 per- During 2009, Celestica reported revenues of cent); enterprise communications (18 percent); servers C$6.9 billion and cost of sales of C$6.3 billion under (14 percent) and consumer (11 percent). These increases Canadian GAAP. Excluding the impact of foreign currency were primarily from new program wins with existing and translation to Canadian dollars, Celestica reported rev- new customers, and acquisitions. Revenues from acquisi- enues of $6.1 billion and cost of sales of $5.6 billion for the Onex Corporation December 31, 2011 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 L Y S I S year ended December 31, 2009. The lower revenues and to 82 percent last year. The increase was due primarily to cost of sales in 2009 were impacted by the slower economic the charges for the forward losses on programs recorded environment during that year. Aerostructures Spirit AeroSystems is an aircraft parts designer and man- during 2011 along with increased revenues from the Boeing 787 program settlement as previously indicated, which was at minimal margins. Under Canadian GAAP, Spirit AeroSystems ufacturer of commercial aerostructures. Aerostructures reported revenues of C$4.6 billion and cost of sales of are structural components, such as fuselages, propulsion C$3.9 billion for the year ended December 31, 2009. systems and wing systems, for commercial, military and Excluding the impact of foreign currency translation to business jet aircraft. The company’s revenues are substan- Canadian dollars, Spirit AeroSystems reported revenues tially derived from long-term volume-based pricing con- and cost of sales of $4.1 billion and $3.5 billion, respec- tracts, primarily with The Boeing Company (“Boeing”) and tively, during 2009. Revenues increased during 2010 com- Airbus. The long-term ﬁnancial health of the commercial pared to 2009 due primarily to an increase in ship set airline industry has a direct and signiﬁcant effect on Spirit deliveries to Boeing. AeroSystems’ commercial aircraft programs. Spirit AeroSystems’ revenues increased 17 per- cent, or $694 million, to $4.9 billion for the year ended Healthcare The healthcare segment revenues and cost of sales consist December 31, 2011 from $4.2 billion in 2010. The increase of the operations of Center for Diagnostic Imaging, Skilled in revenues was due primarily to the recognition of Healthcare Group, Carestream Health and ResCare. The deferred revenue associated with the Boeing 787 con- operations of EMSC are reported as discontinued as a result tract amendment as well as higher production deliver- of the sale of the business in May 2011. ies and aftermarket volume, partially offset by a decrease in non-recurring revenues. Total ship set deliveries increased by 12 percent to 1,089 ship sets in 2011 com- H E A LT H C A R E (IFRS, US$ millions) pared to 969 ship sets in the prior year. Approximately 5,030 96 percent of 2011 revenues were from Boeing and Airbus. Cost of sales was up The healthcare segment reported a 44 percent, or $1.5 bil- lion, increase in consolidated revenues to $5.0 billion in 2011 5125 from $3.5 billion in 2010. Cost of sales increased 52 percent, or 4100 A E R O S T R U C T U R E S (IFRS, US$ millions) 20 percent, or $695 million, to 3,446 3,498 $1.2 billion, to $3.4 billion in 2011 $4.1 billion from $3.4 billion in compared to $2.3 billion in 2010. 3075 4,864 2010. Much of the increase related 5000 2,270 During 2009, under Canadian 4,124 4,170 3,429 to the settlement with Boeing, in which Spirit AeroSystems will 4000 proceed with capital and equip- ment investments required to 3000 support additional production under the 787 program. The set- 2000 tlement increased revenues, as 1000 GAAP, the healthcare segment 2050 reported consolidated revenues of C$3.7 billion and cost of sales of 1025 C$2.2 billion. ResCare accounted 0 for much of the increase in the healthcare segment since Onex began consolidating the results of ’11 ’10 Revenues Cost of Sales ’11 ’10 Revenues Cost of Sales previously discussed, but at mini- ResCare on November 16, 2010, the date when Onex, Onex mal margins. Also included in 0 Partners III and Onex management acquired the remain- cost of sales for 2011 were pre-tax ing interest in the business. Prior to that, ResCare was charges totalling approximately recorded at fair value in investments in associates. There $129 million to recognize forward- are no comparative results for ResCare for the year ended losses on certain programs under development, partially December 31, 2009 since Onex did not have a controlling offset by favourable cumulative catch-up adjustments of interest in the business at that time and equity accounted estimated program costs of $14 million. Cost of sales as for ResCare under Canadian GAAP. a percentage of revenues was 85 percent for 2011 compared 28 Onex Corporation December 31, 2011 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S Table 2 provides revenues and cost of sales by operating company in the healthcare segment for the years ended December 31, 2011, 2010 and 2009. The percentage change in revenues and cost of sales between December 31, 2011 and 2010 is also shown. Healthcare Revenues and Cost of Sales for the Year Ended December 31 Revenues Cost of Sales TABLE 2 ($ millions) IFRS, U.S. Dollars Year ended December 31 2011 2010 Center for Diagnostic Imaging $ 149 $ 143 Skilled Healthcare Group Carestream Health ResCare(a) Total 870 2,427 1,584 820 2,338 197 Canadian GAAP, Canadian Dollars IFRS, U.S. Dollars Change (%) 4% 6% 4% 704% 2009 2011 2010 C$ 160 $ 45 $ 45 868 2,634 – 716 1,496 1,189 676 1,375 174 Change (%) – 6% 9% 583% Canadian GAAP, Canadian Dollars 2009 C$ 52 728 1,456 – $ 5,030 $ 3,498 44% C$ 3,662 $ 3,446 $ 2,270 52% C$ 2,236 2011 and 2010 results are reported in accordance with IFRS and presented in U.S. dollars. 2009 results are reported in accordance with Canadian GAAP and presented in Canadian dollars. These results may differ from those reported by the individual operating companies. (a) Onex began to consolidate the results of ResCare in mid-November 2010 when Onex, Onex Partners III and Onex management acquired the remaining interest in the business. As a result, there are no reported results for ResCare for the year ended December 31, 2009. Center for Diagnostic Imaging CDI operates 60 diagnostic imaging centres in 12 markets Skilled Healthcare Group Skilled Healthcare Group has three reportable revenue seg- in the United States, providing imaging services such as ments: long-term care services, therapy services and hos- magnetic resonance imaging (“MRI”), computed tomog- pice and home health services. Long-term care services raphy (“CT”), diagnostic and therapeutic injection proce- include the operation of skilled nursing and assisted living dures and other procedures such as PET/CT, conventional facilities. Therapy services include the company’s rehabili- x-ray, mammography and ultrasound. tation services. Hospice and home health services include During 2011, CDI reported a 4 percent, or $6 mil- hospice and home health businesses. lion, increase in revenues compared to last year, due primar- During 2011, approximately 76 percent of Skilled ily to higher revenues from existing centres and new centres. Healthcare Group’s revenues were generated from skilled Cost of sales was unchanged in 2011 compared to 2010. nursing facilities, including integrated rehabilitation ther- Revenues and cost of sales from CDI totalled apy services at these facilities. Revenues from its skilled C$160 million and C$52 million, respectively, for 2009 nursing facilities are generated from Medicare, Medicaid, reported in accordance with Canadian GAAP. Excluding the managed care providers, insurers, private pay and other impact of foreign currency translation to Canadian dollars, services, while revenues from its assisted living facilities are CDI reported revenues of $141 million and cost of sales of generated primarily from private pay sources, with a small $46 million during 2009. The higher revenues recorded dur- portion earned from Medicaid or other state-speciﬁc pro- ing 2010 were due primarily to increases in revenues from grams. To increase its revenues, Skilled Healthcare Group existing centres and new centres compared to 2009. focuses on acquiring new facilities, developing existing facilities and improving its occupancy rate and skilled mix, which is the percentage of its skilled nursing patient popu- lation that typically require a greater level of care and ser- vice and thus command higher fees. Onex Corporation December 31, 2011 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 L Y S I S During 2011, Skilled Healthcare Group’s revenues Carestream Health reported a 4 percent, or increased 6 percent, or $50 million, to $870 million com- $89 million, increase in revenues in 2011 compared to pared to 2010. Hospice and home health services revenues 2010. Included in the revenue increase was $67 million of were up 61 percent, or $32 million, in 2011 due primarily to favourable foreign exchange rates on Carestream Health’s the inclusion of a full year of revenues from the Hospice/ non-U.S. revenues compared to 2010. Excluding the Home Health acquisition in May 2010. Revenues from the impact of foreign exchange, Carestream Health reported therapy services segment increased 25 percent, or $19 mil- an increase in revenues of $22 million. The increase was lion, mainly due to negotiated rate increases and higher due primarily to a $69 million increase in the Medical Medicare billings. Revenues from the long-term care ser- Digital segment and a $29 million revenue increase from vices segment were largely unchanged during 2011. Cost of Carestream Health’s non-destructive testing business, sales increased 6 percent, or $40 million, in 2011 from 2010, which were driven by a mix of higher prices and increased much in line with the increase in revenues during the year. product sales. Partially offsetting the increase was the For the year ended December 31, 2009, Skilled anticipated revenue decline in the Medical Film segment Healthcare Group reported revenues of C$868 million of $74 million due to the continuing transition from ﬁlm to and cost of sales of C$728 million under Canadian digital processes in medical imaging. GAAP. Excluding the impact of foreign currency trans- During 2011, cost of sales was up 9 percent, or lation to Canadian dollars, Skilled Healthcare Group $121 million, compared to 2010. Cost of sales increased due reported revenues and cost of sales of $760 million and to higher costs for polyester and silver used in the produc- $639 million, respectively, during 2009. The increase in tion of ﬁlm ($152 million), which were partially recovered revenues during 2010 compared to 2009 resulted primar- through selling price increases. ily from higher weighted average rates from Medicare, Gross proﬁt for 2011 was $931 million compared Medicaid and managed care pay services as well as from to $963 million for 2010. The reduction was due to the in - acquisitions completed in 2010. Cost of sales increased crease in the cost of raw materials used in ﬁlm produc- during 2010 compared to 2009 primarily due to the tion, primarily silver, partially offset by favourable foreign increase in revenues associated with the acquisitions exchange rates, productivity and price increases on ﬁlm. completed during 2010. Carestream Health reported C$2.6 billion of rev- enues and C$1.5 billion of cost of sales for the year ended Carestream Health Carestream Health provides products and services for the December 31, 2009 in accordance with Canadian GAAP. Excluding the impact of foreign currency translation to capture, processing, viewing, sharing, printing and storing Canadian dollars, Carestream Health reported revenues of images and information for medical and dental appli- and cost of sales of $2.3 billion and $1.3 billion, respectively, cations. The company also has a non-destructive testing during 2009. During 2010, Carestream Health reported an business, which sells x-ray ﬁlm and digital radiology prod- increase in cost of sales compared to 2009 due to higher raw ucts to the non-destructive testing market. Carestream material costs for polyester and silver used in the production Health sells digital products, including computed radiogra- of ﬁlm, partially offset by favourable foreign exchange and phy and digital radiography equipment, picture archiving productivity improvement. and communication systems, information management solutions, dental practice management software and ser- vices, as well as traditional medical products, including ResCare ResCare is a human services company that provides resi- x-ray ﬁlm, printers and media, equipment, chemistry and dential, therapeutic, job training and educational sup- services. Carestream Health has three reportable segments: port to people with developmental or other disabilities, to Medical Film, Medical Digital and Dental. elderly people who need in-home care assistance, to youth with special needs and to adults who are experiencing barriers to employment. ResCare offers services to some 57,000 persons daily. 30 Onex Corporation December 31, 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 L Y S I S During the year ended December 31, 2011, Res- income. Cost of sales was up 6 percent, or $32 million, to Care reported revenues of $1.6 billion and cost of sales of $579 million in 2011 compared to 2010 due primarily to the $1.2 billion. Onex began consolidating this business in impact of the fourth quarter of 2010 reclassiﬁcation of pol- mid-November 2010, the date when Onex, Onex Part- icy beneﬁts as previously discussed. Excluding the impact ners III and Onex management acquired the remain- of the reclassiﬁcation, cost of sales had a small increase due ing interest in the business. ResCare prior to this date was to a slight deterioration of the loss ratios on the European accounted for at fair value on the consolidated balance creditor business and certain other international markets. sheets, with changes in fair value recognized in the consoli- During 2009, The Warranty Group reported rev- dated statements of earnings. As a result, revenues for 2010 enues and cost of sales of C$1.4 billion and C$656 million, were $197 million and cost of sales was $174 million, rep- respectively, in accordance with Canadian GAAP. Excluding resenting the company’s results from mid-November 2010 the impact of foreign currency translation to Canadian dol- to December 31, 2010. There are no comparative results lars, The Warranty Group reported revenues of $1.2 billion for 2009 since Onex did not have a controlling interest in and cost of sales of $574 million. Revenues decreased dur- the business at that time and equity accounted for ResCare ing 2010 compared to 2009 due primarily to the one-time under Canadian GAAP. reduction to revenues related to the reclassiﬁcation of cer- tain policy beneﬁts that had previously been expensed in Financial Services The Warranty Group’s revenues consist of warranty rev- cost of sales, as discussed earlier. The reclassiﬁcation also contributed to the decrease in cost of sales during 2010 enues, insurance premiums and administrative and mar- compared to 2009. keting fees earned on warranties and service contracts for manufacturers, retailers and distributors of consumer elec- tronics, appliances, homes and autos, as well as credit card Customer Care Services SITEL Worldwide Corporation (“Sitel Worldwide”) is one enhancements and travel and leisure programs through of the world’s largest and most diversiﬁed providers of cus- a global organization. The Warranty Group’s cost of sales tomer care outsourcing services. consists primarily of the change in reserves for future war- C U S T O M E R C A R E S E R V I C E S The company offers its clients a ranty and insurance claims, current claims payments and underwriting proﬁt-sharing payments. The Warranty Group re ported a 2 percent, or $21 million, increase in revenues to $1.2 billion in 2011. The revenue increase was due primarily to a $33 mil- lion one-time reduction in revenues recorded during the fourth quarter of 2010 related to the reclassiﬁcation of F I N A N C I A L S E R V I C E S (IFRS, US$ millions) certain policy beneﬁts against revenues which had previously been expensed in cost of sales. 1,184 1,163 Excluding the impact of the 2010 1200 reduction, there was a small decline in revenues due to lower 960 earned premiums on the con- sumer products and third-party 720 579 547 (IFRS, US$ millions) 1,416 1,340 921 847 ’11 ’10 Revenues Cost of Sales wide array of services, including customer service, technical sup- 1450 port and customer acquisition, retention and revenue genera- 1160 tion services. The majority of Sitel Worldwide’s customer care ser- 870 vices respond to inbound enquiries and are delivered telephonically. 580 Sitel Worldwide serves a broad range of industry end markets, 290 including ﬁnancial 0 services, technology, wireless, retail and consumer products, telecommuni- cations, media and entertainment, energy and utilities, travel and transportation, internet ser- administrator business in North vice providers, insurance and healthcare. Sitel Worldwide’s 480 America and the creditor business oper ating revenues are affected by the demand for the in Europe. Partially offsetting the 240 products of its customers. decrease was an increase in earned During 2011, Sitel Worldwide’s revenues ’11 ’10 Revenues Cost of Sales premiums on the consumer prod- 0 increased 6 percent, or $76 million, to $1.4 billion from ucts business in Asia and Latin 2010. Revenue from new customers and net growth America and higher investment with existing customers contributed $106 million to the Onex Corporation December 31, 2011 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 L Y S I S revenue increase. In addition, revenue increased by Revenues at TMS International were up 31 per- $24 million due to currency translation of foreign-based cent, or $631 million, to $2.7 billion during 2011 compared revenue with the weakening of the U.S. dollar during to $2.0 billion in 2010. The increase in steel production the year. Partially offsetting the revenue growth was a during 2011 drove an increase in market prices for scrap decrease of $61 million related to attrition of existing pro- and other raw materials, which contributed approximately grams. Cost of sales increased 9 percent, or $74 million, $559 million of revenue growth from the sale of raw materials to $921 million in 2011 compared to $847 million in 2010 at TMS International’s raw materials procurement business. due to higher revenues, but at slightly lower margins. The higher levels of steel production also directly affected Sitel Worldwide reported revenues of C$1.8 bil- TMS International’s service revenues, which are typically lion and cost of sales of C$1.1 billion during 2009 in accor- charged to customers based on tonnes of steel produced. The dance with Canadian GAAP. Excluding the impact of foreign company reported an 18 percent, or $72 million, increase currency translation to Canadian dollars, Sitel Worldwide in service revenues in the year due primarily to $21 million of reported revenues and cost of sales of $1.6 billion and revenue from new sites and contracts as well as an increase $999 million, respectively, during 2009. The decline in rev- in revenue from its existing customers and contracts. enues at Sitel Worldwide during 2010 was driven by lower Cost of sales for the year ended December 31, call volumes and revenues from its customers in addition to 2011 was up 33 percent, or $609 million, to $2.5 billion certain customers bringing services back in-house and oth- from $1.9 billion in 2010. Cost of sales for the raw mate- ers shifting their business between customer care providers rials business increased due to the same factors that con- based on pricing concessions. The decrease in cost of sales tributed to the increase in revenues as TMS International over the same period resulted from the company adjusting procured higher volumes of raw materials, but at higher its cost structure to correspond with decreased activity. prices. In the services business, site-level cost of sales Metal Services TMS International, formerly Tube City IMS Corporation, increased approximately $18 million during 2011 due to new sites and contracts for which certain site costs are incurred in advance of generating revenue. has two revenue categories: service revenue and revenue During 2009, TMS International reported revenues from the sale of materials. Service revenue is generated of C$1.5 billion and cost of sales of C$1.3 billion, in accor- from scrap management, scrap preparation, raw materials dance with Canadian GAAP. Excluding the impact of foreign M E TA L S E R V I C E S (IFRS, US$ millions) 2,661 2,467 2,030 1,858 ’11 ’10 Revenues Cost of Sales optimization, metal recovery and currency translation to Canadian dollars, TMS International sales, materials handling or prod- reported revenues and cost of sales of $1.3 billion and uct handling, slag or co-product $1.2 billion, respectively, during 2009. The lower revenues processing, and metal recovery 2700 and cost of sales during 2009 were the result of a sharp services and surface conditioning. decline in the volume of steel produced worldwide during Revenue from the sale of materials 2160 that year. is mainly generated by the com- pany’s raw materials procurement 1620 business, but also includes rev- Building Products The building products segment is a new reportable seg- enue from two locations of TMS 1080 ment in 2011 following Onex’ acquisition of JELD-WEN in International’s materials handling early October 2011. JELD-WEN is one of the world’s largest business. During 2011, improving manufacturers of interior and exterior doors, windows and 540 economic conditions resulted in 0 related products for use primarily in the residential and a signiﬁcant increase in steel pro- light commercial new construction and remodelling mar- duction and capacity utilization kets. JELD-WEN manages its business through three geo- over 2010. North American steel graphic segments: North America, Europe and Australasia. production capacity utilization, a key statistic used to mea- Reported 2011 revenues of $774 million repre- sure steel production, averaged 75 percent in 2011, com- sent three months of revenues from the early October 2011 pared to 70 percent in 2010. 32 Onex Corporation December 31, 2011 acquisition of JELD-WEN. The North American segment contributed 49 percent to total revenue, Europe contributed 35 percent and Australasia contributed 16 percent. M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S Cost of sales for JELD-WEN totalled $660 million for the three-month period following Onex’ acquisition of the Other Businesses The other businesses segment primarily consists of the rev- company. Included in JELD-WEN’s cost of sales was a one- enues and cost of sales of Tropicana Las Vegas, the ONCAP time charge of $32 million originating from the acquisition companies – EnGlobe Corp. (“EnGlobe”), Mister Car Wash, accounting step-up in value of inventory on the company’s CiCi’s Pizza, Caliber Collision Centers (“Caliber Collision”), balance sheet at the date of acquisition. Gross proﬁt for the BSN SPORTS, Inc. (“BSN SPORTS”), formerly Sport Supply three-month period since JELD-WEN’s early October 2011 Group, Pinnacle Renewable Energy Group, Casino ABS and acquisition date was $114 million. Excluding the impact of the Hopkins – and Flushing Town Center. The revenues and step-up in value of inventory, gross proﬁt was $146 million. cost of sales for Davis-Standard for the few days from its Since JELD-WEN was acquired in early October late December 2011 acquisition date to December 31, 2011 2011, there are no comparative results for the years ended were not signiﬁcant to Onex and therefore are not included December 31, 2010 or 2009. in the results of the ONCAP companies. The operations of Husky International are reported as discontinued as a result of the sale of the business in June 2011. Table 3 provides revenues and cost of sales by operating company in the other businesses segment for the years ended December 31, 2011, 2010 and 2009. The percentage change in revenues and cost of sales between December 31, 2011 and 2010 is also shown. Other Businesses Revenues and Cost of Sales for the Year Ended December 31 Revenues Cost of Sales TABLE 3 ($ millions) IFRS, U.S. Dollars Year ended December 31 2011 2010 ONCAP companies(a) Tropicana Las Vegas(b) Other(c) Total $ 1,344 $ 911 85 71 54 42 $ 1,500 $ 1,007 Canadian GAAP, Canadian Dollars IFRS, U.S. Dollars 2009 2011 2010 C$ 839 $ 835 $ 536 36 68 8 40 5 3 Change (%) 56% 60% 1233% Canadian GAAP, Canadian Dollars 2009 C$ 483 4 44 C$ 943 $ 883 $ 544 62% C$ 531 Change (%) 48% 57% 69% 49% 2011 and 2010 results are reported in accordance with IFRS and presented in U.S. dollars. 2009 results are reported in accordance with Canadian GAAP and presented in Canadian dollars. These results may differ from those reported by the individual operating companies. (a) 2011 ONCAP companies include EnGlobe, Mister Car Wash, CiCi’s Pizza, Caliber Collision, BSN SPORTS, Pinnacle Renewable Energy Group, Casino ABS and Hopkins. The ﬁnancial results of Pinnacle Renewable Energy Group and Casino ABS are from their acquisition dates in May 2011 to December 31, 2011 and Hopkins from its acquisition date in June 2011 to December 31, 2011. 2010 ONCAP companies include CSI (up to November 2010), EnGlobe, Mister Car Wash, CiCi’s Pizza, Caliber Collision and BSN SPORTS (from its acquisition date in August 2010). 2009 ONCAP companies include CSI, EnGlobe, Mister Car Wash, CiCi’s Pizza and Caliber Collision. (b) Tropicana Las Vegas’ 2009 ﬁnancial results are from the date of acquisition on July 1, 2009 to December 31, 2009. (c) 2011 and 2010 other includes Flushing Town Center and the parent company. 2009 other includes CEI (up to May 2009) and the parent company. ONCAP companies The ONCAP companies – EnGlobe, Mister Car Wash, CiCi’s revenues during 2011 compared to 2010. During 2011, cost of sales contributed by the ONCAP companies increased by Pizza, Caliber Collision, BSN SPORTS, formerly Sport Supply 56 percent, or $299 million, from 2010. The growth in rev- Group, Pinnacle Renewable Energy Group, Casino ABS and enues and cost of sales was due primarily to the inclusion Hopkins – reported a 48 percent, or $433 million, increase in Onex Corporation December 31, 2011 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 L Y S I S of the results of Pinnacle Renewable Energy Group and Casino ABS, acquired in May 2011, and Hopkins, acquired in Interest expense of operating companies New acquisitions are structured with the acquired com- June 2011. Partially offsetting the increases from the newly pany having sufﬁcient equity to enable it to self-ﬁnance acquired companies was the sale of CSI Global Education a signiﬁcant portion of its acquisition cost with a prudent Inc. (“CSI”) in November 2010. 2010 revenues and cost of amount of debt. The level of debt is commensurate with sales of CSI were $31 million and $4 million, respectively, the operating company’s available cash ﬂow, including which represents its operations prior to the ONCAP II consideration of funds required to pursue growth oppor- Group’s sale of that business. tunities. It is the responsibility of the acquired operating The ONCAP companies reported revenues of company to service its own debt obligations. C$839 million and cost of sales of C$483 million during Consolidated interest expense was up $146 mil- 2009 in accordance with Canadian GAAP. Excluding the lion, or 43 percent, to $488 million in 2011 from $342 mil- impact of foreign currency translation to Canadian dollars, lion in 2010. the ONCAP companies reported revenues and cost of sales Carestream Health entered into a new credit of $734 million and $423 million, respectively, during 2009. facility in February 2011. This new facility included a The increase in revenues and cost of sales during 2010 $1.85 billion senior secured term loan that matures in compared to 2009 was due primarily to the inclusion of the February 2017 and a $150 million senior revolving facil- results of BSN SPORTS, acquired in August 2010. ity that matures in February 2016. As a result of this new Tropicana Las Vegas Tropicana Las Vegas is one of the most storied casinos in debt, Carestream Health recorded a $63 million increase in interest expense in 2011 compared to 2010 due to higher principal outstanding under the new facility as well as Las Vegas, located directly on the Las Vegas Strip. Tropicana $25 million of charges related to the reﬁnancing. Las Vegas’ revenues increased 57 percent, or $31 million, Interest expense increased by $15 million due to to $85 million in 2011, while cost of sales increased 60 per- the inclusion of Pinnacle Renewable Energy Group, Casino cent, or $3 million, during the year to $8 million. Tropicana ABS and Hopkins, which were acquired by ONCAP during Las Vegas records most of its costs in operating expenses. the ﬁrst half of 2011. The increase in revenues and cost of sales during Spirit AeroSystems reported an $18 million 2011 was due primarily to the completion in late 2010 and early increase in interest expense in 2011 compared to 2010 due 2011 of the redevelopment projects undertaken, which resulted primarily to the interest costs on the $300 million senior in a more fully operational hotel and casino than in 2010. notes issued in November 2010. In 2009, Tropicana Las Vegas reported revenues of ResCare contributed $42 million in interest ex- C$36 million and cost of sales of C$4 million, from its July 1, pense in 2011 compared to $3 million in 2010. The 2011 2009 acquisition date, under Canadian GAAP. Excluding the amount represents a full year of expense whereas the 2010 impact of foreign currency translation to Canadian dollars, amount represents the interest expense from Novem- Tropicana Las Vegas reported revenues and cost of sales ber 16, 2010, the date when Onex, Onex Partners III and of $34 million and $3 million, respectively, during 2009. Onex management acquired the remaining interest in the The increase in revenues and cost of sales during 2010 business, to December 31, 2010. compared to 2009 was due primarily to the inclusion of a Interest expense contributed by JELD-WEN to- full year of revenues and cost of sales in 2010 compared to talled $17 million for the period from its acquisition in early six months of revenues and cost of sales in 2009. October 2011 to December 31, 2011. Partially offsetting the increase was a $10 mil- lion decline in interest expense recorded by Celestica in 2011 compared to last year due primarily to the com- pany’s repurchase of its outstanding 2013 senior subordi- nated notes in the ﬁrst quarter of 2010. In addition, interest expense from TMS International decreased by $9 million due to the company’s repayment of the remaining portion of its subordinated notes during the second quarter of 2011. 34 Onex Corporation December 31, 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 L Y S I S Unrealized increase in value of investments in associates at fair value, net Associates are deﬁned under IFRS as those investments in Onex’ investments. The expense recorded by Onex, the par- ent company, on its stock options during 2011 was due pri- marily to the 10 percent increase in market value of Onex’ operating companies over which Onex has signiﬁcant inﬂu- shares to C$33.18 at December 31, 2011 from C$30.23 at ence, but not control. These investments are designated, December 31, 2010. In 2010, there was a 28 percent increase upon initial recognition, at fair value in the consolidated in the market value of Onex’ shares, which drove the larger balance sheets, with changes in fair value recognized in expense amount in 2010. the consolidated statements of earnings. The investments that Onex determined to be associates and thus recorded at Table 4 details the change in stock-based compensation by fair value are Allison Transmission, Hawker Beechcraft, RSI Onex operating companies and Onex, the parent company, Home Products, Tomkins, certain Onex Real Estate Partners for years ended December 31, 2011 and 2010. investments and Cypress Insurance Group. In addition, ResCare was recorded at fair value up to mid-November Stock-based Compensation Expense 2010, when Onex began to consolidate that business follow- ing Onex, Onex Partners III and Onex management’s acqui- sition of the remaining interest in ResCare not previously owned by the Onex Partners I Group. During 2011, Onex recorded a $501 million unre- alized increase in value of investments in associates at fair value compared to a $448 million unrealized increase in fair value in 2010. Improved operating performance at some of the investments as well as debt repayment by certain of those investments during 2011 contributed to the unreal- TABLE 4 ($ millions) 2011 2010 Change ($) Onex the parent company, stock options $ 40 $ 83 $ (43) Onex, the parent company, MIP options Onex operating companies 16 77 22 81 (6) (4) Total $ 133 $ 186 $ (53) ized increase in the fair value of investments in associates. Of the total fair value increase recorded during the year, Other gains, net In November 2010, the ONCAP II Group sold its operat- approximately $358 million (2010 – $305 million) is attrib- ing company, CSI. The ONCAP II Group received net pro- utable to the limited partners in the Onex Partners Funds, ceeds of $123 million on this sale, of which Onex’ share was which contributes to the Limited Partners’ Interests charge $50 million. This sale brought total proceeds received by discussed on page 38 of this MD&A. the ONCAP II Group from CSI to $140 million compared to the ONCAP II Group’s investment of $22 million. The pre- Stock-based compensation expense Onex recorded a consolidated stock-based compensa- tax gain recorded on this sale in 2010 was approximately $97 million. Onex’ share, excluding the impact of the lim- tion expense of $133 million during 2011 compared to an ited partners, was $48 million. There were no cash taxes expense of $186 million in 2010. Onex, the parent company, payable by Onex on the sale. Table 5 details the nature of represented $56 million (2010 – $105 million) of the expense the 2010 gains. associated with its stock options and MIP options. In accor- dance with IFRS, the expense recorded on these plans is Other Gains, Net determined based on the fair value of the liability at the end of each reporting period. The fair value of the Onex stock TABLE 5 ($ millions) options and MIP options is determined using an option val- Gains on: uation model with the stock options primarily impacted by the change in the market value of Onex’ shares and the MIP Sale of CSI Other, net options primarily affected by the change in the fair value of Total Total Gains 2011 Total Gains 2010 $ – – $ – $ 97 2 $ 99 Onex Corporation December 31, 2011 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 L Y S I S Other items Onex recorded a $146 million charge for other items in Celestica Restructuring expenses at Celestica were lower by $22 mil- 2011 compared to $221 million in 2010. Table 6 provides a lion in 2011. Many of the costs were recorded in connec- breakdown of and the change in other items for the years tion with Celestica’s restructuring plans to improve capacity ended December 31, 2011 and 2010. utilization by consolidating facilities and reducing its Other Items Expense (Income) workforce. TABLE 6 ($ millions) Restructuring Transition, integration and other Transaction costs Skilled Healthcare Group settlement charge Unrealized carried interest 2011 $ 52 2010 $ 94 Change ($) $ (42) 17 17 (4) 42 – 53 attributable to management 62 114 Gain on Flushing Town Center debt extinguishment Other Total – 2 (32) (50) $ 146 $ 221 $ (75) Restructuring Restructuring expenses are considered to be costs incurred Carestream Health Carestream Health reported a decrease of $11 million in restructuring expenses in 2011. Carestream Health’s costs related primarily to a realignment of its information technology and service functions in its Medical Film and Medical Digital segments. JELD-WEN JELD-WEN’s restructuring charge was primarily related to a petition ﬁled by the company’s Spanish subsidiary, dur- ing the fourth quarter of 2011, with the Commercial Court in Spain for a declaration of insolvency. During the fourth quarter, the Commercial Court granted the insolvency peti- tion and as a result, the net assets of the Spanish subsidiary were derecognized as they were no longer controlled. The restructuring charges primarily related to the net expense of deconsolidating the net assets of that subsidiary. (25) 17 (57) (52) 32 52 by the operating companies to realign organizational struc- tures or restructure manufacturing capacity to obtain oper- Sitel Worldwide Sitel Worldwide recorded a $23 million decline in restructur- ating synergies critical to building the long-term value of ing expenses in 2011 resulting primarily from 2010 expenses those businesses. Table 7 provides a breakdown of and the incurred to improve capacity utilization, including a reduc- change in restructuring expenses by operating company tion in workforce and the closure of certain facilities. for the years ended December 31, 2011 and 2010. Restructuring Expenses TABLE 7 ($ millions) Celestica Carestream Health JELD-WEN Sitel Worldwide Other Total 2011 $ 14 4 15 17 2 2010 $ 36 15 – 40 3 Change ($) $ (22) (11) 15 (23) (1) $ 52 $ 94 $ (42) 36 Onex Corporation December 31, 2011 Transaction costs Transaction costs represent costs incurred by Onex and its operating companies to complete business acquisitions, and include costs such as advisory, legal and other profes- sional and consulting costs. During 2011, Onex recorded $17 million in transaction costs primarily related to the acquisitions made by ONCAP during the year, as well as for the acquisition of JELD-WEN in early October 2011. Skilled Healthcare Group settlement 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 earlier. During the third quarter of 2010, Skilled Healthcare Group came to a settlement agree- ment on this complaint and recorded $53 million of other M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S expense. The settlement contains no admission or conces- sion of wrongdoing by Skilled Healthcare Group. During Other Onex reported consolidated other expense of $2 million 2011, Skilled Healthcare Group recorded insurance recov- during 2011 compared to consolidated other income of eries of $4 million related to the settlement. $50 million in 2010. Consolidated other expense includes a provision of $27 million recorded by Carestream Health for Unrealized carried interest attributable to management The General Partner of the Onex Partners and ONCAP an adverse ruling related to a complaint alleging competi- tion law violations in Brazil by Carestream Health’s pre- Funds is entitled to a carried interest (20 percent) on the decessor. Carestream Health will appeal the ruling and realized gains of third-party limited partners in each Fund. vigorously pursue reversal of this ruling. Substantially off- Onex is allocated 40 percent of the carried interest realized setting the expense was income from the sale of tax losses in the Onex Partners and ONCAP Funds. The Onex man- ($10 million), as discussed below, in addition to other agement team is allocated 60 percent of the carried inter- income recorded by The Warranty Group as a result of gains est realized in the Onex Partners Funds and the ONCAP in its investment portfolio ($9 million) and the release of cer- management team is entitled to 60 percent of the carried tain provisions previously recorded by Celestica ($7 million). interest realized in the ONCAP Funds. Onex’ share of the During 2011, Onex sold entities, the sole assets unrealized carried interest is recorded as an offset in the of which were certain tax losses, to a public company Limited Partners’ Interests amount in the consolidated controlled by Mr. Gerald W. Schwartz, who is also Onex’ statements of earnings. controlling shareholder. Onex received approximately The unrealized carried interest attributable to C$5 million in cash and established receivables for management represents the share of the overall unreal- an additional C$5 million for Canadian tax losses of ized gains in each of the Onex Partners and ONCAP Funds C$100 million. The entire C$10 million was recorded as a attributable to the management of Onex and ONCAP. The gain in other items in 2011. Onex has signiﬁcant Canadian unrealized carried interest is calculated based on the cur- non-capital and capital losses available; however, Onex rent fair values of the underlying investments in the Funds does not expect to generate sufﬁcient taxable income to and the overall net unrealized gains in each respective fully utilize these losses in the foreseeable future. As such, Fund determined in accordance with the limited part- no beneﬁt has been recognized in the consolidated ﬁnan- nership agreements. During 2011, a charge of $62 million cial statements for the tax losses. In connection with the (2010 – $114 million) was recorded in the consolidated transactions, Onex obtained tax rulings from the Canada statements of earnings due primarily to an increase in the Revenue Agency, and Deloitte & Touche LLP, an inde- fair value of certain of the private investments in the Onex pendent accounting ﬁrm retained by Onex’ Audit and Partners and ONCAP Funds. Gain on Flushing Town Center debt extinguishment In December 2010, Flushing Town Center amended and Corporate Governance Committee, provided opinions that the values received by Onex for the tax losses were fair. The transactions were unanimously approved by Onex’ Audit and Corporate Governance Committee, all the members of restated its senior construction loan and mezzanine which are independent directors. Onex completed a similar loan. In conjunction with these amendments, Onex pur- transaction in 2010, receiving approximately C$8 million in chased at a discount $56 million and $38 million principal cash for Canadian tax losses of approximately C$70 million. amounts of the senior construction loan and mezzanine Included in other items in 2010 is C$8 million recorded by loan, respectively, from third-party lenders. The loans were Onex, the parent company, on the transaction. purchased for a total cash cost of $62 million. As a result of this transaction, the loans purchased by Onex were extin- guished with the original third-party lenders. As a result, Flushing Town Center recorded a net gain of $32 million on the debt extinguishment. Onex Corporation December 31, 2011 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 L Y S I S Impairment of goodwill, intangible assets and long-lived assets, net Net impairment of goodwill, intangible assets and long- The Warranty Group During the fourth quarter of 2011, as a result of its annual goodwill impairment test applied under IFRS, The War- lived assets totalled $197 million in 2011 (2010 – $14 mil- ranty Group recorded a goodwill impairment charge of lion). Table 8 provides a breakdown of the net impairment $40 million under IFRS related to its European operations. of goodwill, intangible assets and long-lived assets by oper- The impairment charge was due to a reduction in expected ating company for the years ended December 31, 2011 future growth rates driven by the poor economic conditions and 2010. in Europe and its impact on expected future cash ﬂows. Impairment of Goodwill, Intangible Assets and Long-lived Assets, Net TABLE 8 ($ millions) Skilled Healthcare Group JELD-WEN The Warranty Group Other(a) Total 2011 $ 120 22 40 15 2010 $ – – 2 12 $ 197 $ 14 Limited Partners’ Interests charge The Limited Partners’ Interests charge in Onex’ consoli- dated statements of earnings represents the change in the fair value of the underlying investments in the Onex Partners and ONCAP Funds that is recorded as Limited Partners’ Interests liability on Onex’ consolidated balance sheets. The value of the third-party capital in the Funds is affected by the change in the fair value of the underly- ing investments. The Limited Partners’ Interests charge includes the fair value changes of both consolidated oper- (a) 2011 other includes impairments of $17 million and impairment reversals ating companies and investments in associates that are held in the Onex Partners and ONCAP Funds. During 2011, Onex recorded a $627 million charge for Limited Partners’ Interests compared to a charge of $831 million in 2010. The increase in the fair value of the private investments in the Onex Partners and ONCAP Funds was 17 percent (2010 – 34 percent), which contrib- uted signiﬁcantly to the Limited Partners’ Interests charge recorded in 2011. Approximately $358 million (2010 – $305 million) of the value growth in the Onex Partners pri- vate investments was from the value increase in investments in associates. The Limited Partners’ Interests charge is net of a $91 million increase (2010 – $190 million) in carried interest for the year ended December 31, 2011. Onex’ share of the carried interest increase was $29 million (2010 – $76 mil- lion). The ultimate amount of carried interest realized will be dependent upon the actual realizations for each Fund in accordance with the partnership agreements. of $2 million related to CDI, Sitel Worldwide, BSN SPORTS and CiCi’s Pizza. 2010 other includes Celestica and CiCi’s Pizza. Skilled Healthcare Group Skilled Healthcare Group completed an impairment anal- ysis during the third quarter of 2011 as a result of a pre- scribed reduction in future Medicare recovery rates, the expected future growth rates for Medicare and changes to rehabilitation therapy regulations that will negatively impact Skilled Healthcare Group’s revenues and cost of sales. As a result, the company revised its estimates with respect to net revenues and gross margins, which nega- tively impacted its cash ﬂows forecasted for the long-term care services and therapy services segments and accord- ingly the company recorded non-cash goodwill and intan- gible asset impairments of $117 million and $3 million, respectively, during 2011. JELD-WEN During the fourth quarter of 2011, JELD-WEN recorded a non-cash impairment charge of $22 million to reduce the value of certain of its property, plant and equipment. The charge resulted from a program initiated by JELD-WEN sub- sequent to its acquisition by Onex to rationalize capacity resources of the company. 38 Onex Corporation December 31, 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 L Y S I S Loss from continuing operations Onex reported a consolidated loss from continuing operations of $86 million in 2011 compared to a loss from continuing operations of $11 million in 2010. During 2009, Onex reported a consolidated loss from continuing operations of C$114 mil- lion in accordance with Canadian GAAP. Table 9 shows the earnings (loss) from continuing operations by industry segment for the years ended December 31, 2011, 2010 and 2009. Earnings (loss) from continuing operations under Canadian GAAP exclude the non-controlling interests share. Table 11 on page 40 of this MD&A presents the allocation of earnings (loss) from continuing operations attributable to Onex and the non-controlling interests. Earnings (Loss) from Continuing Operations by Industry Segment TABLE 9 ($ millions) Earnings (loss) from continuing operations: Electronics Manufacturing Services Aerostructures Healthcare Financial Services Customer Care Services Metal Services Building Products(a) Other(b) Consolidated Loss from Continuing Operations IFRS, U.S. Dollars Canadian GAAP, Canadian Dollars 2011 2010 2009 $ 195 224 (112) 62 (58) 24 (89) (332) $ (86) $ 101 C$ 6 249 101 107 (50) 4 – (523) $ (11) 14 8 32 (126) (31) – (17) C$ (114) (a) Represents three months of loss from continuing operations of JELD-WEN from its early October 2011 acquisition date. (b) 2011 other includes the consolidated earnings of Tropicana Las Vegas, the operating companies of ONCAP II and ONCAP III, Flushing Town Center and the parent company. In addition, consolidated earnings include the changes in fair value of Allison Transmission, Hawker Beechcraft, Tomkins, RSI and certain Onex Real Estate Partners investments. 2010 other includes the consolidated earnings of Tropicana Las Vegas, the operating companies of ONCAP II, Flushing Town Center and the parent company. In addition, consolidated earnings include the changes in fair value of Allison Transmission, Hawker Beechcraft, RSI, Tomkins and certain Onex Real Estate Partners investments. 2009 other includes Cineplex Entertainment (up to March 2009), CEI (up to May 2009), Hawker Beechcraft, Allison Transmission, RSI, Tropicana Las Vegas, the operating companies of ONCAP II, Onex Real Estate and the parent company. The loss from continuing operations in the other segment The Limited Partners’ Interests, unrealized carried inter- totalled $332 million during 2011 (2010 – $523 million). est attributable to management and increase in fair value Table 10 shows the major components of the loss recorded of investments in associates, which impacted the loss in in the other segment for the years ended December 31, 2011 the other segment during 2011 and 2010, represent new and 2010. TABLE 10 ($ millions) 2011 2010 Loss from continuing operations – Other: accounting policies under IFRS as compared to Canadian GAAP. The 2009 loss from continuing operations of C$17 mil- lion reported in the other segment under Canadian GAAP was primarily due to losses from equity-accounted invest- Limited Partners’ Interests charge $ 627 $ 831 ments, partially offset by the gain recorded on the sale of the Stock-based compensation expense Unrealized carried interest attributable to management Interest expense Increase in fair value of investments in associates Other gains, net Other 64 62 44 (501) – 36 108 remaining units of Cineplex Entertainment. 114 19 (427) (99) (23) Loss from continuing operations – Other $ 332 $ 523 Onex Corporation December 31, 2011 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 L Y S I S Table 11 presents the earnings (loss) from continuing oper- ations attributable to equity holders of Onex Corporation Income taxes Onex reported a consolidated income tax provision of and non-controlling interests for the years ended Decem- $237 million during 2011 compared to a $239 million ber 31, 2011 and 2010. income tax provision last year. During 2011, Onex, the par- ent company, utilized $50 million of previously unbeneﬁted Earnings (Loss) from Continuing Operations losses, resulting in a recovery of income tax. The recovery TABLE 11 ($ millions) 2011 2010 was offset by a non-cash tax provision recorded by Onex, the parent company, on the sale of Husky International, Earnings (loss) from continuing operations which is included in discontinued operations. attributable to: Equity holders of Onex Corporation $ (355) $ (282) Non-controlling interests 269 271 Loss from continuing operations $ (86) $ (11) The non-controlling interests’ share of the earnings (loss) from continuing operations represents the share of earn- ings of shareholders, other than Onex and its third- party limited partners in its Funds. For example, Spirit AeroSystems’ public shareholders’ share of the net earn- ings in that business would be reported in the non-control- ling interests. Earnings from discontinued operations Earnings from discontinued operations for the years ended December 31, 2011, 2010 and 2009 represent the operations of EMSC and Husky International and the net gain recorded on the disposition of these companies. Onex recorded earn- ings from discontinued operations of $1.7 billion ($14.33 per share) during 2011 compared to earnings from dis- continued operations of $208 million ($0.96 per share) in 2010. During 2009, Onex recorded earnings from discontin- ued operations of C$226 million (C$1.86 per share) under Canadian GAAP. Table 12 presents the after-tax earnings, gain on sale net of tax, and earnings from discontinued operations for the years ended December 31, 2011, 2010 and 2009. Discontinued Operations After-tax Earnings Gain on Sale net of tax Earnings from Discontinued Operations TABLE 12 ($ millions) IFRS, U.S. Dollars Canadian GAAP, Canadian Dollars IFRS, U.S. Dollars Canadian GAAP, Canadian Dollars IFRS, U.S. Dollars Canadian GAAP, Canadian Dollars EMSC Husky International Total 2011 $ 47 22 $ 69 2010 $ 132 76 $ 208 2009 2011 2010 2009 2011 2010 2009 C$ 28 $ 559 4 1,087 C$ 32 $ 1,646 $ – – $ – C$ 194 $ 606 $ 132 C$ 222 – 1,109 76 4 C$ 194 $ 1,715 $ 208 C$ 226 40 Onex Corporation December 31, 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 L Y S I S EMSC In May 2011, the Onex Partners I Group sold its remaining Husky International In June 2011, the Onex Partners I Group and Onex Part- 13.7 million shares of EMSC for net proceeds of $878 mil- ners II Group completed the sale of Husky International, lion, of which Onex’ share was $342 million, including car- receiving net proceeds of $1.7 billion, of which Onex’ share ried interest and deducting distributions paid on account was $583 million, including carried interest and deduct- of the MIP. The sale was part of an offer made for all out- ing distributions paid on account of the MIP. The car- standing shares of EMSC. Included in Onex’ consolidated ried interest realized on Onex Partners II’s sale of Husky results for the year ended December 31, 2011 is a pre-tax International was voluntarily reduced by $88 million (Onex’ gain of $600 million from this sale, which is entirely attrib- share of the reduction was $35 million) at the request of utable to the equity holders of Onex. This gain includes the Onex. In addition to the cash proceeds received on the sale, portion attributable to Onex’ investment as well as that of there was approximately $60 million of additional amounts the limited partners of Onex Partners I. The effect of this is held in escrow and other items (Onex’ share was $19 mil- to recover the charges to earnings for the fair value increases lion, excluding carried interest). During the third quar- and historical accounting earnings on EMSC allocated to the ter of 2011, $38 million of these additional amounts were limited partners over the life of the remaining investment, received, of which Onex’ share was $18 million, includ- which totalled $375 million. The balance of $225 million ing carried interest of $6 million and deducting distribu- reﬂects the pre-tax gain on Onex’ remaining investment in tions paid on account of the MIP. The escrow amount EMSC. Onex, the parent company, has recorded a deferred was also reduced by $5 million for taxes owing in respect tax provision of $41 million on the gain. of taxable periods up to the closing date. At December 31, During 2009, the Onex Partners I Group par- 2011, $18 million remains receivable for escrow amounts ticipated in two secondary public offerings completed by and other items and is expected to be received within EMSC. The Onex Partners I Group sold a total of 18.4 mil- four years, of which Onex’ share is $6 million, exclud- lion shares for net proceeds of C$827 million. Onex’ share ing carried interest. Onex’ consolidated results include of the net proceeds received was C$331 million. Under a pre-tax gain of $1.1 billion, which is entirely attribut- Canadian GAAP, Onex recorded pre-tax gains of C$595 mil- able to the equity holders of Onex. This gain includes the lion, of which Onex’ share was C$194 million, including portion attributable to Onex’ investment as well as that C$20 million of net carried interest on the gains realized by of the limited partners of Onex Partners I and Onex Part- the third-party limited partners of Onex Partners I. ners II. The effect of this is to recover the charges to earnings for the fair value increases and historical accounting earn- ings on Husky International allocated to the limited partners over the life of the investment, which totalled $726 million. The balance of $361 million reﬂects the after-tax gain on Onex’ investment in Husky International. Onex, the parent company, has recorded a non-cash tax provision of $50 mil- lion on the gain. Note 3 to the consolidated ﬁnancial statements provides additional information on the earnings from discontinued operations. Onex Corporation December 31, 2011 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 L Y S I S Consolidated net earnings Onex recorded consolidated net earnings of $1.6 billion in 2011 compared to consolidated net earnings of $197 million in 2010. During 2009, Onex reported consolidated net earnings of C$112 million in accordance with Canadian GAAP. Table 13 shows the net earnings (loss) by industry segment for the years ended December 31, 2011, 2010 and 2009. Net earnings (loss) under Canadian GAAP exclude the non-controlling interests share. Table 14 on page 43 of this MD&A presents the allocation of net earnings (loss) attributable to Onex and the non-controlling interests. Consolidated Net Earnings (Loss) by Industry Segment TABLE 13 ($ millions) Net earnings (loss): IFRS, U.S. Dollars Canadian GAAP, Canadian Dollars 2011 2010 2009 Electronics Manufacturing Services $ 195 $ 101 C$ 6 Aerostructures Healthcare Financial Services Customer Care Services Metal Services Building Products(a) Other(b) Earnings from discontinued operations Consolidated Net Earnings 224 (112) 62 (58) 24 (89) (332) 1,715 249 101 107 (50) 4 – (523) 208 14 8 32 (126) (31) – (17) 226 $ 1,629 $ 197 C$ 112 (a) Represents three months of net loss of JELD-WEN from its early October 2011 acquisition date. (b) 2011 other includes the consolidated earnings of Tropicana Las Vegas, Husky International (up to June 2011), the operating companies of ONCAP II and ONCAP III, Flushing Town Center and the parent company. In addition, consolidated earnings include the changes in fair value of Allison Transmission, Hawker Beechcraft, Tomkins, RSI and certain Onex Real Estate Partners investments. 2010 other includes the consolidated earnings of Tropicana Las Vegas, Husky International, the operating companies of ONCAP II, Flushing Town Center and the parent company. In addition, consolidated earnings include the changes in fair value of Allison Transmission, Hawker Beechcraft, Tomkins, RSI and certain Onex Real Estate Partners investments. 2009 other includes Cineplex Entertainment (up to March 2009), CEI (up to May 2009), Hawker Beechcraft, Allison Transmission, RSI, Tropicana Las Vegas, Husky International, the operating companies of ONCAP II, Onex Real Estate and the parent company. 42 Onex Corporation December 31, 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 L Y S I S Table 14 presents the net earnings (loss) attributable to increase in the Limited Partners’ Interests liability with equity holders of Onex Corporation and non-controlling a corresponding charge in the consolidated statements interests. Net Earnings (Loss) TABLE 14 ($ millions) 2011 2010 Net earnings (loss) attributable to: of earnings. Upon disposition, current and prior period charges associated with the investments in EMSC and Husky International were effectively recovered by Onex, the parent company, through the gain recognized on the sales. The net impact to Onex’, the parent company’s, retained earnings after the sales represents its share of the net gains Equity holders of Onex Corporation $ 1,327 $ (167) on its investments in EMSC and Husky International. Non-controlling interests 302 364 Net Earnings $ 1,629 $ 197 Table 15 presents the net earnings (loss) per Subordinate Voting Share of Onex Corporation. Onex’ reported net earnings (loss) attributable to equity holders of Onex Corporation includes the share of earnings (loss) of Onex, the parent company, and its limited part- ners in its controlled operating companies. For example, Onex’ consolidated 2011 net earnings include 92 percent of the net earnings of The Warranty Group, which repre- sents Onex’ and its limited partners’ ownership interest in that business. Previously under Canadian GAAP, Onex’ net earnings would have included 29 percent of The Warranty Earnings (Loss) per Subordinate Voting Share TABLE 15 ($ per share) 2011 2010 2009 Basic and Diluted: Continuing operations $ (3.02) $ (2.36) C$ (0.94) Discontinued operations 14.33 0.96 1.86 Net Earnings (Loss) $ 11.31 $ (1.40) C$ 0.92 Group’s net earnings, which represents only Onex’, the par- ent company’s, ownership interest in The Warranty Group. Other comprehensive loss Other comprehensive earnings (loss) represents the accu- The net earnings attributable to the equity hold- mulated unrealized gains or losses, all net of income taxes, ers of Onex Corporation for the year ended December 31, related to certain available-for-sale securities, cash ﬂow 2011 include an after-tax gain of $1.6 billion on the sales of hedges and foreign exchange gains or losses on foreign EMSC and Husky International. Under IFRS, gains realized self-sustaining operations. During 2011, Onex reported an on the sales of investments no longer controlled are entirely other comprehensive loss of $132 million largely due to attributable to the equity holders of Onex as the interests unfavourable currency translation adjustments on foreign of the limited partners were recorded as a ﬁnancial liability operations of $60 million and pension actuarial losses of at fair value. During the holding period of the investments, $59 million. This compared to an other comprehensive loss the increase in the fair value of Limited Partners’ Interests of $56 million during 2010. related to EMSC and Husky International resulted in an Onex Corporation December 31, 2011 43 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S F O U R T H - Q U A R T E R R E S U L T S Table 16 presents the statements of loss for the fourth quarters ended December 31, 2011 and 2010. Fourth-Quarter Statements of Earnings (Loss) TABLE 16 ($ millions) Revenues Cost of sales (excluding amortization of property, plant and equipment, intangible assets and deferred charges) Operating expenses Interest income Amortization of property, plant and equipment Amortization of intangible assets and deferred charges Interest expense of operating companies Unrealized increase in value of investments in associates at fair value, net Foreign exchange gains (loss) Stock-based compensation expense Other gains, net Other items Impairments of goodwill, intangible assets and long-lived assets, net Limited Partners’ Interests charge Loss before income taxes and discontinued operations Provision for income taxes Loss from continuing operations Earnings from discontinued operations Net Loss for the Period 2011 2010 $ 6,758 $ 5,402 (5,377) (4,268) (841) 14 (142) (89) (137) 127 (5) (43) – (30) (71) (196) (32) (80) (112) – (618) 14 (104) (76) (91) 196 2 (58) 99 (111) (14) (410) (37) (61) (98) 94 $ (112) $ (4 ) 44 Onex Corporation December 31, 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 L Y S I S Table 17 provides a breakdown of the 2011 and 2010 fourth-quarter revenues and cost of sales by industry segment. Revenues and Cost of Sales by Industry Segment for the Three Months Ended December 31 TABLE 17 ($ millions) Revenues Cost of Sales 2010 Change (%) 2010 Change (%) Three months ended December 31 Electronics Manufacturing Services Aerostructures Healthcare Financial Services Customer Care Services Metal Services Building Products(a) Other (b) Total 2011 $ 1,753 1,219 1,334 284 364 619 774 411 $ 1,876 1,067 1,101 270 344 453 – 291 2011 $ 1,612 1,014 893 141 237 573 660 247 $ 1,732 870 747 115 216 412 – 176 (7)% 14 % 21 % 5 % 6 % 37 % – 41 % 25 % (7)% 17 % 20 % 23 % 10 % 39 % – 40 % 26 % $ 6,758 $ 5,402 $ 5,377 $ 4,268 Results are reported in accordance with IFRS. These results may differ from those reported by the individual operating companies. (a) JELD-WEN acquired in early October 2011. (b) 2011 other includes Flushing Town Center, Tropicana Las Vegas, the operating companies of ONCAP II and ONCAP III and the parent company. 2010 other includes Flushing Town Center, Tropicana Las Vegas, the operating companies of ONCAP II and the parent company. Fourth-quarter consolidated revenues and cost of sales Consolidated revenues were up 25 percent, or $1.4 billion, JELD-WEN contributed revenues of $774 million and cost of sales of $660 million from its acquisition date in early October 2011. to $6.8 billion in the fourth quarter of 2011 compared to The inclusion of ONCAP’s acquisitions of Pinnacle the same quarter of 2010. Consolidated cost of sales was up Renewable Energy Group and Casino ABS, acquired in May 26 percent, or $1.1 billion, to $5.4 billion for the three 2011, and Hopkins, acquired in June 2011, added $93 mil- months ended December 31, 2011 compared to the same lion in revenues and $63 million in cost of sales in the other period of last year. segment during the fourth quarter. Revenues and cost of sales at ResCare increased Partially offsetting the increases in revenues by $201 million and $122 million, respectively, during the and cost of sales during the fourth quarter of 2011 were fourth quarter of 2011, representing a full quarter of the decreases in revenues and cost of sales at Celestica. Celes- company’s results. The fourth quarter of 2010 included tica reported a 7 percent, or $123 million, decrease in fourth- results for ResCare beginning in mid-November 2010 when quarter revenues in 2011 across all of its end markets, other the company began to be consolidated subsequent to Onex, than its consumer market, which was relatively ﬂat, and Onex Partners III and Onex management’s acquisition of the increases in its diversiﬁed markets, due primarily to soft- remaining interest in the business. ening demand and uncertainty in the global markets. Cost TMS International’s revenues increased by of sales had a similar decrease of 7 percent, or $120 million, $166 million compared to the fourth quarter last year. The for the three months ended December 31, 2011. increase was due primarily to an increase in steel produc- tion during the fourth quarter of 2011 compared to the same period last year, which drove higher market prices for raw materials and increased service revenues. Cost of sales had a similar increase of $161 million resulting from the higher volumes and prices, which contributed to the increase in revenues. Onex Corporation December 31, 2011 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 L Y S I S Fourth-quarter unrealized increase in value of investments in associates at fair value, net The 2011 fourth-quarter net unrealized increase in value Fourth-quarter impairment of goodwill, intangible assets and long-lived assets, net During the fourth quarter of 2011, there was $71 million of of investments in associates at fair value was $127 million impairments of goodwill, intangible assets and long-lived compared to an unrealized increase of $196 million during assets recorded by Onex’ operating companies compared the same period of 2010. Improved operating performance to $14 million for the three months ended December 31, as well as debt repayment at certain of the businesses in the 2010. During the fourth quarter of 2011, The Warranty fourth quarter of 2011 provided the unrealized increase in Group recorded a goodwill impairment charge of $40 mil- the fair value of investments in associates. lion related to its European operations. In addition, JELD- Fourth-quarter stock-based compensation expense During the fourth quarter of 2011, Onex recorded a con- WEN recorded an impairment charge of $22 million related to certain of its property, plant and equipment as part of a program to rationalize capacity resources of the company. A discussion of these impairments by company is provided solidated stock-based compensation expense of $43 million on page 38 of this MD&A. compared to $58 million for the same quarter of 2010. Onex, the parent company, recorded a stock-based compensation expense of approximately $21 million in the fourth quarter Fourth-quarter Limited Partners’ Interests charge During the fourth quarter of 2011, Onex recorded a of 2011 related to its stock options and MIP options. That $196 million charge for Limited Partners’ Interests com- expense was primarily due to the 2 percent increase in the pared to a $410 million charge during the same period market value of Onex’ shares in the fourth quarter. of 2010. The increase in the fair value of the investments The increase in Onex’ share price to C$30.23 per in the Onex Partners Funds during the fourth quarter share at December 31, 2010 from C$28.91 per share at of 2011 was 5 percent (2010 – 15 percent), which con- September 30, 2010 contributed to the expense of $33 mil- tributed signiﬁcantly to the Limited Partners’ Interests’ lion recorded by Onex, the parent company, on its stock- charge recorded during the quarter. The Limited Partners’ based compensation during the fourth quarter of 2010. Interests is net of a $21 million (2010 – $179 million) in- crease in net unrealized carried interest for the three months ended December 31, 2011. Fourth-quarter other items expense During the fourth quarter of 2011, Onex recorded a $30 million charge for other items compared to a charge of $111 million during the same quarter in 2010. The charge for the net unrealized carried interest attributable to man- agement contributed $13 million (2010 – $108 million) to the other items expense during the fourth quarter. The increase in the unrealized carried interest attributable to management, and the corresponding charge, was driven by an increase in the fair value of certain of the public and pri- vate investments in the Onex Partners and ONCAP Funds during the fourth quarter of 2011. 46 Onex Corporation December 31, 2011 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S Fourth-quarter cash flow Table 18 presents the major components of cash ﬂow for on the sale of a portion of the investment in Tomkins to certain limited partners and others. Partially offsetting the the fourth quarter. Major Cash Flow Components for the Three Months Ended December 31 ($ millions) TABLE 18 Three months ended December 31 2011 2010 Cash from operating activities Cash from (used in) financing activities Cash used in investing activities Consolidated cash and cash equivalents $ 707 $ (306) $ (140) $ 872 $ 151 $ (473) held by continuing operations $ 2,448 $ 2,053 Cash from operating activities totalled $707 million in the fourth quarter of 2011 compared to $872 million in 2010. Cash from operating activities decreased during the fourth quarter of 2011 compared to 2010 due to the fact that the 2010 results included cash from EMSC and Husky Inter- national, which were sold during the second quarter of 2011. Cash used in ﬁnancing activities was $306 million in the fourth quarter of 2011 compared to cash from ﬁnanc- ing activities of $151 million in 2010. Cash used in ﬁnanc- ing activities during the quarter included (i) cash interest paid of $116 million; (ii) net debt repayments of $95 mil- lion by the operating companies; (iii) share repurchases of $97 million by Onex’ operating companies, primarily JELD-WEN; (iv) distributions of $93 million primarily to the limited partners of the Onex Partners Funds; and (v) share repurchases by Onex, the parent company, of $48 million. Partially offsetting the cash used in ﬁnancing activities were cash from ﬁnancing activities were (i) $222 million of dis- tributions primarily to the limited partners of ONCAP II, other than Onex, from the sale of CSI in November 2010; and (ii) $272 million of restricted cash representing the lim- ited partners’ net share of distributions received during the fourth quarter of 2010 from operating companies and the return of interim ﬁnancing from ResCare. Cash used in investing activities totalled $140 mil- lion in the fourth quarter of 2011 compared to $473 million in 2010. During the fourth quarter, cash used in investing activities was primarily made up of $207 million in pur- chases of property, plant and equipment by Onex’ operating companies. Included in the $473 million of cash used in investing activities during 2010 were (i) $271 million used to fund acquisitions, primarily the acquisition of ResCare; (ii) $200 million of cash used for the purchase of property, plant and equipment by Onex’ operating companies; and (iii) $91 million of cash used by discontinued operations. Partially offsetting the cash used in investing activities was $123 million of cash proceeds received by the ONCAP II Group for the sale of CSI. Consolidated cash at December 31, 2011 totalled $2.4 billion. Onex, the parent company, accounted for $990 million of the cash on hand. Table 19 provides a rec- onciliation of the change in cash at Onex, the parent com- pany, from September 30, 2011 to December 31, 2011. Change in Cash at Onex, the Parent Company contributions of $144 million from the limited partners of TABLE 19 ($ millions) (i) the Onex Partners Funds for management fees and part- nership expenses; and (ii) ONCAP III for their purchase of a portion of the investment in Casino ABS from ONCAP II and their investment in Davis-Standard. Included in the $151 million of cash from ﬁnanc- ing activities in the fourth quarter of 2010 was $602 mil- lion of cash received primarily from the limited partners of Onex Partners III and other shareholders, other than Onex, for the purchase and interim ﬁnancing of the remaining interest in ResCare in addition to the proceeds received Cash on hand at September 30, 2011 Management fees received JELD-WEN convertible notes repayment The Warranty Group distribution received Investment in Davis-Standard Onex share repurchases Other Cash on hand at December 31, 2011 $ 994 $ 40 $ 14 $ 13 $ (30) $ (48) $ 7 $ 990 Onex Corporation December 31, 2011 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 L Y S I S S U M M A R Y Q U A R T E R L Y I N F O R M A T I O N Table 20 summarizes Onex’ key consolidated ﬁnancial information for the last eight quarters. TABLE 20 ($ millions except per share amounts) 2011 2010 Dec. Sept. June March Dec. Sept. June March Revenues $ 6,758 $ 6,008 $ 6,229 $ 5,647 $ 5,402 $ 4,788 $ 4,894 $ 4,650 Earnings (loss) from continuing operations $ (112) $ 190 $ 105 $ (269) $ (98) $ (21) $ 143 $ (35) Net earnings (loss) $ (112) $ 184 $ 1,761 $ (204) $ (4) $ 35 $ 174 $ (8) Net earnings (loss) attributable to Equity holders of Onex Corporation $ (186) $ 146 $ 1,666 $ (299) $ (120) $ (40) $ 100 $ (107) Non-controlling interests Net earnings (loss) 74 38 95 95 116 75 74 99 $ (112) $ 184 $ 1,761 $ (204) $ (4) $ 35 $ 174 $ (8) Earnings (loss) per Subordinate Voting Share of Onex Corporation Earnings (loss) from continuing operations $ (1.61) $ 1.29 $ 0.15 $ (2.87) $ (1.56) $ (0.60) $ 0.71 $ (0.93) Earnings (loss) from discontinued operations – (0.04) 13.94 0.34 0.55 0.26 0.12 0.04 Net earnings (loss) per Subordinate Voting Share of Onex Corporation $ (1.61) $ 1.25 $ 14.09 $ (2.53) $ (1.01) $ (0.34) $ 0.83 $ (0.89) Onex’ quarterly consolidated ﬁnancial results do not follow any speciﬁc trends due to the acquisitions or dispositions of businesses by Onex, the parent company, and varying business activities and cycles at Onex’ operating companies. 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 Partially offsetting the increases were: This section should be read in conjunction with the remaining ownership in EMSC, which decreased consoli- audited annual consolidated balance sheets and the cor- dated assets by approximately $1.5 billion, which is net • the May 2011 sale by the Onex Partners I Group of its responding notes thereto. Consolidated assets Consolidated assets totalled $29.4 billion at December 31, of the $342 million of cash received by Onex; and • the June 2011 sale of Husky International by the Onex Partners I Group and Onex Partners II Group, which reduced consolidated assets by approximately $795 mil- 2011 compared to $28.1 billion at December 31, 2010 and lion, which is net of the $601 million of cash received $24.0 billion at January 1, 2010. Onex’ consolidated assets by Onex. at December 31, 2011 increased from December 31, 2010 due to: • the Onex Partners III Group’s acquisition of JELD-WEN in early October 2011, which increased consolidated assets by approximately $2.6 billion, net of cash invested by Onex, the parent company; and • the acquisitions completed by ONCAP during the year of Pinnacle Renewable Energy Group, Casino ABS, Hopkins and Davis-Standard, which contributed $1.1 billion to consolidated assets, net of cash invested by Onex, the parent company. 48 Onex Corporation December 31, 2011 Asset Diversiﬁcation by Industry Segment CHART 1 ($ 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 F I N A N C I A L S E R V I C E S C U S T O M E R C A R E S E R V I C E S 6,162 4,978 4,975 5,156 4,877 4,918 4,892 2,970 3,014 3,022 4,331 4,194 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S M E TA L S E R V I C E S B U I L D I N G P R O D U C T S (a) O T H E R (b) T O TA L 8,170 7,501 29,446 28,107 24,024 5,109 2,581 1,045 862 805 675 709 631 Dec ’11 Dec ’10 Jan ’10 Dec ’11 Dec ’10 Jan ’10 Dec ’11 Dec ’10 Jan ’10 Dec ’11 Dec ’10 Jan ’10 Dec ’11 Dec ’10 Jan ’10 Dec ’11 Dec ’10 Jan ’10 Dec ’11 Dec ’11 Dec ’10 Jan ’10 Dec ’11 Dec ’10 Jan ’10 (a) JELD-WEN acquired in early October 2011. (b) 2011 other includes the consolidated operations of Flushing Town Center, the operating companies of ONCAP II and ONCAP III, Tropicana Las Vegas and the parent company. In addition, the consolidated assets include the investments in Allison Transmission, Hawker Beechcraft, RSI, certain Onex Real Estate Partners investments and Tomkins at fair value. 2010 other includes the consolidated operations of Flushing Town Center, Husky International, the operating companies of ONCAP II, Tropicana Las Vegas and the parent company. In addition, the consolidated assets include the investments in Allison Transmission, Hawker Beechcraft, RSI, certain Onex Real Estate Partners investments and Tomkins at fair value. The pie charts below show the percentage breakdown of total consolidated assets by industry segment as at December 31, 2011 and 2010 and January 1, 2010. Segmented Total Consolidated Assets Breakdown Dec 2011 Dec 2010 Jan 2010 a. 10% b. 17% c. 14% d. 17% e. 2% f. 3% g. 9% x. 28% a. 11% b. 18% c. 22% d. 17% e. 2% f. 3% x. 27% a. Electronics Manufacturing Services b. Aerostructures c. Healthcare d. Financial Services e. Customer Care Services f. Metal Services g. Building Products(1) x. Other (2) a. 13% b. 18% c. 22% d. 20% e. 3% f. 3% x. 21% (1) JELD-WEN acquired in early October 2011. (2) 2011 other includes the consolidated operations of Flushing Town Center, the operating companies of ONCAP II and ONCAP III, Tropicana Las Vegas and the parent company. In addition, the consolidated assets include the investments in Allison Transmission, Hawker Beechcraft, RSI, certain Onex Real Estate Partners investments and Tomkins at fair value. 2010 other includes the consolidated operations of Flushing Town Center, Husky International, the operating companies of ONCAP II, Tropicana Las Vegas and the parent company. In addition, the consolidated assets include the investments in Allison Transmission, Hawker Beechcraft, RSI, certain Onex Real Estate Partners investments and Tomkins at fair value. Onex Corporation December 31, 2011 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 L Y S I S Consolidated long-term debt, without recourse to Onex Corporation It has been Onex’ policy to preserve a ﬁnancially strong certain ﬁnancial covenants. Changes in business condi- tions relevant to an operating company, including those resulting from changes in ﬁnancial markets and economic parent company that has funds available for new acquisi- conditions generally, may result in non-compliance with tions and to support the growth of its operating companies. certain covenants by that operating company. This policy means that all debt ﬁnancing is within the oper- Total consolidated long-term debt (consisting of ating companies and each company is required to sup- the current and long-term portions of long-term debt, net port its own debt without recourse to Onex Corporation or of ﬁnancing charges) was $7.0 billion at December 31, 2011 other Onex operating companies. compared to $6.6 billion at December 31, 2010 and $5.7 bil- The ﬁnancing arrangements of each operating lion at January 1, 2010. Table 21 summarizes consolidated company typically contain certain restrictive covenants, long-term debt by industry segment. Consolidated long- which may include limitations or prohibitions on addi- term debt does not include the debt of operating compa- tional indebtedness, payment of cash dividends, redemp- nies that are included in investments in associates as the tion of capital, capital spending, making of investments, net investment in those businesses is accounted for at fair and acquisitions and sales of assets. In addition, the oper- value and not consolidated. ating companies that have outstanding debt must meet Consolidated Long-term Debt, Without Recourse to Onex Corporation TABLE 21 ($ millions) Electronics Manufacturing Services Aerostructures Healthcare(a) Financial Services Customer Care Services Metal Services Building Products(b) Other (c) Current portion of long-term debt of operating companies As at December 31, 2011 As at December 31, 2010 $ – 1,157 2,670 203 652 377 481 1,421 6,961 (482) $ – 1,145 2,996 205 624 404 – 1,215 6,589 (243) As at January 1, 2010 $ 223 858 2,666 206 627 404 – 704 5,688 (404) Total $ 6,479 $ 6,346 $ 5,284 (a) 2010 and 2009 include EMSC. (b) JELD-WEN acquired in early October 2011. (c) 2011 other includes Radian, Flushing Town Center, Tropicana Las Vegas and the operating companies of ONCAP II and ONCAP III. 2010 other includes Husky International, Radian, Flushing Town Center, Tropicana Las Vegas and the operating companies of ONCAP II. Carestream Health (Healthcare segment) In February 2011, Carestream Health entered into a new to repay and terminate the previous credit facilities and pay a $200 million distribution to shareholders. The Onex credit facility. This new facility included a $1.85 billion Partners II Group’s share of the $200 million distribution senior secured term loan that matures in February 2017 was $197 million, of which Onex’ share was $78 million. and a $150 million senior revolving facility that matures in During the third and fourth quarters of 2011, Carestream February 2016. The senior secured term loan and senior Health repurchased a total of $69 million of its senior revolving facility bear interest at LIBOR (subject to a ﬂoor secured term loan for a cash cost of $61 million. As a result, a of 1.5 percent) plus a margin of 3.5 percent or a base rate net pre-tax gain of $8 million was recognized in other items plus a margin of 2.5 percent. Substantially all of Carestream during 2011. At December 31, 2011, $1.8 billion and nil were Health’s assets are pledged as collateral under the term outstanding under the senior secured term loan and senior loan. The proceeds of the new facility were used primarily revolving facility, respectively. 50 Onex Corporation December 31, 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 L Y S I S CDI (Healthcare segment) In May 2011, CDI entered into a new credit agreement. The JELD-WEN (Building Products segment) The acquisition of JELD-WEN in October 2011 added new agreement included a $95 million term loan as well $637 million of debt. JELD-WEN’s debt is comprised of a as a $25 million revolving credit facility, both maturing in senior secured revolving credit facility that bears interest May 2016. Both the term loan and revolving credit facility at a base rate plus a margin of up to 4 percent and matures bear interest at LIBOR plus a margin of up to 3.75 percent in 2016 and senior secured notes that mature in 2017 and depending on the company’s leverage ratio. The proceeds bear interest at a rate of 12.25 percent. In addition, the from the new term loan were used to repay the amounts Onex Partners III Group invested in convertible promis- outstanding under the former term loan and revolving sory notes that mature in 2013 and bear interest at a rate of credit facility and to pay a distribution to shareholders. 10 percent compounded annually. The convertible promis- The Onex Partners I Group’s share of the $67 million CDI sory notes will convert into Series A convertible preferred distribution was $54 million, of which Onex’ share was stock to the extent the notes plus accrued and unpaid $13 million. At December 31, 2011, $93 million and nil dividends remain unpaid at the maturity date. In October were outstanding under the term loan and revolving credit 2011, JELD-WEN paid $42 million to repurchase a portion facility, respectively. Sitel Worldwide (Customer Care Services segment) During the second quarter of 2011, Sitel Worldwide of the convertible promissory notes and interest accrued to the redemption date. At December 31, 2011, nil was out- standing under the senior secured revolving credit facility, $460 million of the senior secured notes were outstand- amended its credit facility that governs its term loan and ing and $132 million of the convertible promissory notes, revolving credit facility. The amendments included extend- including accrued interest, were outstanding. ing the maturity date on $228 million, or 64 percent, of its term loan from January 2014 to January 2017 and extend- ing the maturity date on $31 million, or 36 percent, of com- ONCAP III (Other segment) In December 2011, ONCAP III entered into a new credit mitments on its revolving credit facility from January 2013 facility. The new facility includes a C$50 million line of to January 2016. Borrowings under the extended term loan credit and a C$25 million deemed credit risk facility. Bor- and revolving credit facility both bear interest at a rate of rowings drawn on the line of credit bear interest at a LIBOR plus a margin of up to 6.75 percent or prime plus a base rate plus a margin of 2.5 percent or banker’s accep- margin of 5.75 percent. The credit agreement also included tance rate (LIBOR for U.S. dollar borrowings) plus a mar- amendments to lessen restrictions on certain covenant gin of 5.25 percent. The line of credit is available to ﬁnance levels. At December 31, 2011, $353 million and $46 million ONCAP III capital calls, bridge finance investments in were outstanding under the term loan and revolving credit ONCAP III operating companies, support foreign exchange facility, respectively. hedging of ONCAP III and ﬁnance other uses permitted by ONCAP III’s limited partnership agreement. The deemed TMS International (Metal Services segment) In December 2011, TMS International entered into a new credit risk facility is available to ONCAP III and its operat- ing companies for foreign exchange transactions, includ- senior secured asset-based revolving credit facility of up to ing foreign exchange options, forwards and swaps. Onex $350 million. The new revolving credit facility, which bears Corporation, the ultimate parent company, is only obli- interest at a base rate plus a margin of up to 2.25 percent and gated to fund borrowings under the credit facility based on matures in December 2016, replaces the company’s existing its proportionate share as a limited partner in ONCAP III. senior secured asset-based revolving credit facility, which At December 31, 2011, the amount available under the was set to mature in January 2013. At December 31, 2011, no deemed risk facility was reduced to C$10 million as a result amounts were outstanding under the senior secured asset- of a foreign exchange contract entered into by ONCAP III, based revolving credit facility and $16 million of letters of and no amounts were outstanding under the line of credit. credit, secured by the senior secured asset-based revolving credit facility, were outstanding. Note 12 to the audited annual consolidated ﬁnancial state- ments provides further disclosure of the long-term debt at each of our operating companies. Onex Corporation December 31, 2011 51 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S Table 22 details the aggregate debt maturities for Onex’ consolidated operating companies and investments in associates for each of the years up to 2017 and in total thereafter. As investments in associates are included in the table, the total amount is in excess of the reported consolidated debt. As the following table illustrates, most of the maturities occur in 2014 and thereafter. Debt Maturity Amounts by Year TABLE 22 ($ millions) 2012 2013 2014 2015 2016 2017 Thereafter Total Consolidated operating companies(a) $ 508 $ 432 $ 1,137 $ 385 $ 1,386 $ 2,691 $ 1,062 $ 7,601 Investments in associates 152 332 4,004 1,197 1,444 145 1,506 8,780 Total $ 660 $ 764 $ 5,141 $ 1,582 $ 2,830 $ 2,836 $ 2,568 $ 16,381 (a) Includes debt amounts of subsidiaries held by Onex, the parent company, and are gross of ﬁnancing fees. Excludes preferred shares of Carestream Health and The Warranty Group recorded as long-term debt under IFRS. Consolidated long-term debt classiﬁed as current totalled The Warranty Group’s liability for gross warranty $482 million at December 31, 2011. The amounts due dur- and property and casualty unearned premiums totalled ing 2012 are, for the substantial portion, intended to be reﬁ- $2.4 billion in 2011 (2010 – $2.3 billion). All of the unearned nanced over the course of the coming year in the normal premiums are related to warranty business and represent course of business. the portion of the revenue received that has not yet been During 2011, as a result of reﬁnancing and debt earned as revenue by The Warranty Group on extended repayment by the operating companies, the percentage warranty products sold through multiple distribution of total debt maturing in 2013 and 2014 decreased to channels. Typically, there is a time delay between when 36 percent at December 31, 2011 from 48 percent at the warranty contract starts to earn and the contract effec- December 31, 2010. The decrease was due primarily to the tive date. The contracts generally commence earning after reﬁnancing completed by Carestream Health in February the original manufacturer’s warranty on a product expires. 2011, as previously discussed. Note 14 to the audited annual consolidated ﬁnancial state- ments provides details of the gross warranty and property Warranty reserves and unearned premiums Warranty reserves and unearned premiums represent The and casualty reserves for loss and loss adjustment expenses and warranty unearned premiums as at December 31, 2011 Warranty Group’s gross warranty and property and casualty and 2010. reserves, as well as gross warranty unearned premiums. At December 31, 2011, gross warranty reserves and unearned premiums (consisting of the current and non-current por- Limited Partners’ Interests liability Limited Partners’ Interests liability represents the fair tions) totalled $3.1 billion, unchanged from the balance value of third-party invested capital in the Onex Partners at December 31, 2010. Gross warranty and property and and ONCAP Funds. The Limited Partners’ Interests casualty reserves are approximately $684 million (2010 – liability is affected by the change in the fair value of the $765 million) of the total, which represent the estimated and underlying investments in the Onex Partners and ONCAP incurred but not reported reserves on warranty contracts Funds, the impact of the unrealized carried interest, as and property and casualty insurance policies. The Warranty well as increased for any contributions by the third-party Group has ceded 100 percent of the property and casualty limited partners for investments made and management reserves component of $456 million (2010 – $553 million) to fees, and reduced for distributions to third-party limited third-party re-insurers, which therefore has created a ceded partners from dividends, realizations and return of capital claims recoverable asset. in those Funds. 52 Onex Corporation December 31, 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 L Y S I S At December 31, 2011, Limited Partners’ Interests Onex Partners II distributed approximately $1.1 bil- liability totalled $5.0 billion compared to $5.7 billion at De- lion to its limited partners for their portion of (i) the proceeds cember 31, 2010. Table 23 shows the change in Limited Part- on the sale of a portion of the shares in the TMS International ners’ Interests from January 1, 2010 to December 31, 2011. initial public offering and the repayment of the Series 2008 Limited Partners’ Interests TABLE 23 ($ millions) Balance – January 1, 2010 Limited Partners’ Interests charge(1) Contributions by Limited Partners Distributions to Limited Partners Balance – December 31, 2010 Limited Partners’ Interests charge(1) Contributions by Limited Partners Distributions to Limited Partners Balance – December 31, 2011 (1) Net of carried interest. 5,650 627 932 (2,229) $ 4,980 The Limited Partners’ Interests liability increased by $932 million for contributions made during 2011, which consisted primarily of amounts received from (i) the lim- ited partners of ONCAP II for their investments in Pinnacle Renewable Energy Group and Casino ABS; (ii) the limited partners of ONCAP III for their investments in Hopkins, Casino ABS and Davis-Standard; (iii) the limited partners of Onex Partners III for their investments in Tropicana Las Vegas and JELD-WEN; and (iv) the limited partners of the Onex Partners and ONCAP Funds for management fees and partnership expenses. Contributions for the year ended December 31, 2010 were approximately $1.5 billion primar- ily from the limited partners of Onex Partners III for their investments in Tomkins, ResCare and Tropicana Las Vegas. During 2011, the Limited Partners’ Interests liabil- ity was reduced for $2.2 billion of distributions primarily to the limited partners of the Onex Partners Funds. Onex Partners I distributed $920 million to its lim- ited partners for their portion of the proceeds from (i) the EMSC sale ($469 million); (ii) the secondary offering of Spirit AeroSystems ($152 million); (iii) the distribution from CDI ($42 million); (iv) the sale of Husky Inter national ($242 mil- lion); and (v) the distribution from The Warranty Group ($15 million). Promissory Notes ($37 million); (ii) the proceeds from the sale of Husky International ($781 million); (iii) the distribu- tion received by the Fund from Carestream Health in the ﬁrst quarter of 2011 ($119 million); (iv) the dividends and return $ 3,708 831 1,451 of capital received from certain operating companies in late 2010 ($103 million), as discussed in Onex’ Decem ber 31, 2010 annual MD&A; and (v) the dividends and interest received (340) from certain operating companies in late 2011 ($31 million). Onex Partners III distributed $218 million to its limited partners for their portion of (i) a return of capital received from ResCare ($190 million) and (ii) a partial prin- cipal repayment including accrued interest on the convert- ible promissory notes from JELD-WEN ($28 million). ONCAP II distributed C$23 million to its limited partners primarily for their portion of (i) the distribution received from EnGlobe; and (ii) the proceeds on the sale of a portion of Casino ABS to ONCAP III, as previously discussed. The $340 million of distributions that reduced the Limited Partners’ Interests liability for the year ended December 31, 2010 were comprised primarily of the divi- dend paid by Husky International, proceeds received on the sale of a portion of Tomkins to co-investors, and pro- ceeds received on ONCAP II’s sale of CSI Global Education. At December 31, 2011, the total unrealized car- ried interest netted against the Limited Partners’ Interests on Onex’ consolidated balance sheet was $261 million, of which Onex’ share was $96 million. The Limited Partners’ Interests charge of $627 mil- lion recorded during 2011 (2010 – $831 million) is discussed in detail on page 38 of this MD&A. Onex Corporation December 31, 2011 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 L Y S I S Equity Total equity was $5.7 billion at December 31, 2011 com- of equity to non-controlling interests holders. The amount transferred to non-controlling interests holders is equivalent pared to $4.1 billion at December 31, 2010. Table 24 to Onex’ historical accounting carrying value attributable to provides a reconciliation of the change in equity from the portion of the investment that was sold. The excess of December 31, 2010 to December 31, 2011. proceeds received over the value of the transfer of equity to Change in Equity TABLE 24 ($ millions) Balance – December 31, 2010 Dividends declared Purchase and cancellation of shares Investments by shareholders other than Onex Distributions to non-controlling interests Repurchase of shares of operating companies Sale of investments in operating companies under continuing control Non-controlling interests of discontinued operations Net earnings for the period Other comprehensive loss for 2011 Equity as at December 31, 2011 the non-controlling interests holders is recorded directly to retained earnings as an increase in equity. During the second quarter of 2011, the Onex Partners I Group sold a portion of its ownership interest in $ 4,142 Spirit AeroSystems’ secondary offering. This sale did not (13) (105) 661 (19) (74) 259 (666) 1,629 (132) result in a loss of control of Spirit AeroSystems by Onex. Therefore, of the $245 million net proceeds received in this offering, $136 million was transferred to non-controlling interests, representing the historical accounting carrying value attributable to the portion of the investment sold, with the remaining $109 million of proceeds in excess of the historical accounting carrying value recorded directly in retained earnings. The excess proceeds recorded directly to retained earnings from the sale of shares have been par- tially offset by a $9 million deferred tax provision recorded $ 5,682 by Onex, the parent company, on the transaction. Of the Investments by shareholders other than Onex Onex recorded an increase in equity of $661 million during 2011 due to an increase in investments by share- holders other than Onex. The increase was due primarily to the acquisitions of Pinnacle Renewable Energy Group by the ONCAP II Group and JELD-WEN by the Onex Partners III Group, where the entire ownership in those businesses was not acquired. Each of Pinnacle Renewable Energy Group and JELD-WEN have investors who contin- ued to have an ownership interest in the business following the acquisition. These investors represent an approximate 40 percent equity ownership in each of the companies. Also contributing to the increase in investments by share- holders other than Onex was the investment by public shareholders in TMS International on the issuance of new common shares in the initial public offering. Sale of investments in operating companies under continuing control During the year ended December 31, 2011, Onex recorded an equity increase of $259 million as a result of the sale of invest- ments in operating companies under continuing control. Under IFRS, dispositions of investments that do not result in a loss of control of the investment are recorded as a transfer 54 Onex Corporation December 31, 2011 net $100 million recorded directly to retained earnings, $23 million represents Onex’ share excluding the impact of the limited partners. In April 2011, the Onex Partners II Group partici- pated in the initial public offering of TMS International by selling approximately 1.9 million shares. After giv- ing effect to the offering, Onex continues to control TMS International. Net proceeds received by the Onex Partners II Group totalled $23 million, of which $4 million was trans- ferred to non-controlling interests representing the histori- cal accounting carrying value sold, with the difference of $19 million being recorded directly to retained earnings. Onex’ share, excluding the impact of the limited partners, was $7 million. Non-controlling interests of discontinued operations Onex recorded a decrease in equity of $666 million dur- ing 2011 related primarily to non-controlling interests in EMSC. Under IFRS, non-controlling interests represent the ownership interests of shareholders, other than Onex and its third-party limited partners, in the Onex Partners and ONCAP Funds, in Onex’ controlled operating compa- nies. Prior to the sale of EMSC, the non-controlling inter- ests balance included the ownership interests of EMSC’s public shareholders. Due to the May 2011 sale by the Onex Partners I Group of its remaining shares in EMSC, the M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S non-controlling interests attributable to EMSC have been removed from equity since the sale resulted in a loss of Stock Option Plan Onex, the parent company, has a Stock Option Plan in control of the investment. Shares outstanding At January 31, 2012, Onex had 115,072,846 Subordinate place that provides for options and/or share apprecia- tion rights to be granted to Onex directors, ofﬁcers and employees for the acquisition of Subordinate Voting Shares of Onex, the parent company, for a term not exceeding Voting Shares issued and outstanding. Table 25 shows the 10 years. The options vest equally over ﬁve years with the change in the number of Subordinate Voting Shares out- exception of the 760,083 remaining options granted in standing from December 31, 2010 to January 31, 2012. December 2007, which vest over six years. The price of the Change in Subordinate Voting Shares Outstanding Voting Shares on the business day preceding the day of the options issued is at the market value of the Subordinate TABLE 25 Subordinate Voting Shares outstanding 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 at December 31, 2010 118,279,783 time of exercise. Shares repurchased under Onex’ Normal Course At December 31, 2011, Onex had 14,036,498 options Issuer Bid (3,210,892) outstanding to acquire Subordinate Voting Shares, of which Issue of shares – Dividend Reinvestment Plan 3,955 11,892,198 options were vested and 10,964,615 of those Subordinate Voting Shares outstanding at January 31, 2012 vested options were exercisable. Table 26 provides informa- 115,072,846 tion on the activity during 2011 and 2010. Subordinate Voting Share, which were paid quarterly at a Granted Onex also has 100,000 Multiple Voting Shares outstanding, which have a nominal paid-in value reﬂected in Onex’ con- solidated ﬁnancial statements. Note 18 to the audited annual consolidated ﬁnancial statements provides additional infor- mation on Onex’ share capital. There was no change in the Multiple Voting Shares outstanding during 2011. Cash dividends During 2011, Onex declared dividends totalling C$0.11 per rate of C$0.0275 per Subordinate Voting Share. The divi- dends are payable on or about January 31, April 30, July 31 and October 31 of each year. The dividend rate remained unchanged from that of 2010 and 2009. Total payments for dividends have decreased with the repurchase of Subor- dinate Voting Shares under the Normal Course Issuer Bids. Dividend Reinvestment Plan Onex’ Dividend Reinvestment 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 the period from January 1, 2011 to December 31, 2011, Onex issued 2,829 Sub ordinate Voting Shares at an average cost of C$34.13 per Subordinate Voting Share, creating a cash savings of less than C$1 million. Change in Stock Options Outstanding TABLE 26 Number of Options Weighted Average Exercise Price Outstanding at December 31, 2009 13,450,050 Granted Surrendered Expired 625,000 (173,100) (12,350) Outstanding at December 31, 2010 13,889,600 Surrendered Expired 695,000 (506,235) (41,867) C$ 18.33 C$ 29.29 C$ 18.98 C$ 26.69 C$ 18.80 C$ 33.54 C$ 20.00 C$ 25.29 Outstanding at December 31, 2011 14,036,498 C$ 19.47 During 2011, 506,235 options were surrendered at a weighted average exercise price of C$20.00 for aggregate cash consideration of C$8 million and 41,867 options expired. In addition, during 2011, 695,000 options were issued, of which 10,000 were issued in the second quarter at an exercise price of C$37.31, 60,000 were issued dur- ing the third quarter at an exercise price of C$37.37 and 625,000 were issued during the fourth quarter at an exer- cise price of C$33.11. Onex Corporation December 31, 2011 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 L Y S I S During 2010, 625,000 options were granted with Voting Shares. Onex may purchase up to 37,196 Subor- an exercise price of C$29.29 and which vest over ﬁve years. dinate Voting Shares during any trading day, being 25 per- In addition, 173,100 options were surrendered in 2010 at cent of its average daily trading volume for the six-month a weighted average exercise price of C$18.98 for aggre- period ended March 31, 2011. Onex may also purchase gate cash consideration of C$2 million, and 12,350 options Subordinate Voting Shares from time to time under the expired. Normal Course Issuer Bids Onex had Normal Course Issuer Bids (the “Bids”) in place Toronto Stock Exchange’s block purchase exemption, if available, under the new NCIB. The new NCIB commenced on April 14, 2011 and will conclude on the earlier of the date on which purchases under the NCIB have been com- during 2011 that enable it to repurchase up to 10 percent pleted and April 13, 2012. A copy of the Notice of Intention of its public ﬂoat of Subordinate Voting Shares during the to make the Normal Course Issuer Bid ﬁled with the period of the relevant Bid. Onex believes that it is advanta- Toronto Stock Exchange is available at no charge to share- geous to Onex and its shareholders to continue to repur- holders by contacting Onex. chase Onex’ Subordinate Voting Shares from time to time During 2011, Onex repurchased 3,165,296 Sub- when the Subordinate Voting Shares are trading at prices ordinate Voting Shares under its Bid for a total cost of that reﬂect a meaningful discount to their intrinsic value. $105 million (C$105 million), or at an average cost per On April 14, 2011, Onex renewed its Normal share of C$33.27. Under similar Bids, Onex repurchased Course Issuer Bid (“NCIB”) following the expiry of its previ- 2,040,750 Subordinate Voting Shares at a total cost of ous NCIB on April 13, 2011. Under the new NCIB, Onex is $50 million (C$52 million) or at an average cost per share of permitted to purchase up to 10 percent of its public ﬂoat C$25.44 during 2010. in its Subordinate Voting Shares, or 9,114,853 Subordinate Included in Table 27 below is a summary of Onex’ repurchases of Subordinate Voting Shares under its Bids for the last 10 years. Shares Repurchased 1,587,100 11,586,100 9,143,100 939,200 9,176,300 3,357,000 3,481,381 1,784,600 2,040,750 3,165,296 Total Cost of Shares Repurchased (in C$ millions) Average Share Price (in C$ per share) C$ 26 C$ 16.45 166 150 18 203 113 101 41 52 105 $ 14.36 $ 16.37 $ 18.93 $ 22.17 $ 33.81 $ 28.89 $ 23.04 $ 25.44 $ 33.27 46,260,827 C$ 975 C$ 21.09 TABLE 27 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Total 56 Onex Corporation December 31, 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 L Y S I S Deferred Share Unit Plans In January 2011, Onex issued 47,477 Management Deferred $1 million (2010 – 40,000 DSUs at a cost of approximately $1 million) in lieu of that amount of cash compensation Share Units (“MDSUs”) to management having an aggre- for directors’ fees. During 2011, an additional 15,728 DSUs gate value, at the date of grant, of $2 million in lieu of that (2010 – 20,346 DSUs) were issued to directors in lieu of cash amount of cash compensation for the Company’s 2010 ﬁs- directors’ fees and for dividends on outstanding DSUs. cal year. At December 31, 2011, there were 443,139 MDSUs There were no DSUs redeemed during 2011 (2010 – 38,705 outstanding. In early 2012, 65,832 MDSUs were issued DSUs redeemed for cash consideration of approximately to management, having an aggregate value, at the date of $1 million). At December 31, 2011, there were 446,388 grant, of $2 million in lieu of cash compensation for Onex’ director DSUs outstanding. MDSUs and DSUs must be 2011 ﬁscal year. Forward agreements were entered into held until leaving the employment of Onex or retirement with a counterparty ﬁnancial institution to hedge Onex’ from the Board. Table 28 reconciles the changes in the exposure to changes in the value of the MDSUs. DSUs and MDSUs outstanding at December 31, 2011 from During 2011, Onex granted 40,000 Deferred Share December 31, 2009. Units (“DSUs”) to its directors at a cost of approximately Change in Outstanding Deferred Share Units TABLE 28 Outstanding at December 31, 2009 Granted Redeemed Additional units issued in lieu of compensation and cash dividends Outstanding at December 31, 2010 Granted Additional units issued in lieu of compensation and cash dividends Outstanding at December 31, 2011 Director DSU Plan Management DSU Plan Number of DSUs Weighted Average Price Number of DSUs Weighted Average Price 369,019 40,000 (38,705) 20,346 390,660 40,000 15,728 446,388 C$ 28.40 C$ 26.38 C$ 28.38 C$ 36.57 C$ 34.11 272,880 – – 121,394 394,274 – – C$ 24.59 – – 48,865 C$ 31.14 443,139 Management of capital Onex considers the capital it manages to be the amounts • build the long-term value of its operating businesses; • control the risk associated with capital invested in any it has in cash and cash equivalents and near-cash invest- particular business or activity. All debt ﬁnancing is ments, and the investments made by it in the operating within the operating businesses and each company is businesses, Onex Real Estate Partners and Onex Credit required to support its own debt. Onex’ practice is not to Partners. Onex also manages the third-party capital invested guarantee the debt of the operating businesses and there in the Onex Partners, ONCAP and Onex Credit Partners are no cross-guarantees of debt between the operating Funds. Onex’ objectives in managing capital are to: businesses; and • preserve a ﬁnancially strong parent company with • have appropriate levels of committed third-party capital appropriate liquidity and no, or a limited amount of, available to invest along with Onex’ capital. This enables debt so that it has funds available to pursue new acqui- Onex to respond quickly to opportunities and pursue sitions and growth opportunities, as well as support the acquisitions of businesses of a size it could not achieve building of its existing businesses. Onex does not gener- using only its own capital. The management of third- ally have the ability to draw cash from its operating busi- party capital also provides management fees to Onex and nesses. Accordingly, maintaining adequate liquidity at the ability to enhance Onex’ returns by earning a carried the parent company is important; interest on the proﬁts of third-party participants. • achieve an appropriate return on capital invested com- mensurate with the level of risk taken on; Onex Corporation December 31, 2011 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 L Y S I S At December 31, 2011, Onex, the parent company, had 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 approximately $1.0 billion of cash on hand and $312 mil- lion of near-cash items at market value. This section should be read in conjunction with the Onex, the parent company, has a conservative audited annual consolidated statements of cash ﬂows and cash management policy that limits its cash investments the corresponding notes thereto. Table 29 summarizes the to short-term high-rated money market instruments. This major consolidated cash ﬂow components for the years policy is driven toward maintaining liquidity and preserv- ended December 31, 2011 and 2010. ing principal in all money market investments. At December 31, 2011, Onex had access to $2.8 bil- Major Cash Flow Components lion of uncalled committed third-party capital for acquisi- tions primarily through Onex Partners III ($2.0 billion) and TABLE 29 ($ millions) 2011 2010 ONCAP III (C$469 million). Cash from operating activities $ 1,188 $ 1,536 The strategy for risk management of capital did Cash from (used in) financing activities $ (1,263) $ 329 not change in 2011. Non-controlling interests Non-controlling interests in equity in Onex’ consolidated balance sheet as at December 31, 2011 primarily represent the ownership interests of shareholders, other than Onex Cash used in investing activities $ (12) $ (2,343) Consolidated cash and cash equivalents held by continuing operations $ 2,448 $ 2,053 Cash from operating activities Table 30 provides a breakdown of cash from operating and its third-party limited partners in its Funds, in Onex’ activities by cash generated from operations and changes controlled operating companies. At December 31, 2011, the in non-cash working capital items, other operating activi- non-controlling interests balance increased to $3.9 billion ties, warranty reserves and premiums and cash ﬂows from from $3.6 billion at December 31, 2010. The increase was operating activities of discontinued operations for the due primarily to: years ended December 31, 2011 and 2010. • $136 million related to the sale of a portion of the shares of Spirit AeroSystems held by the Onex Partners I Group, Components of Cash from (used in) which resulted in the transfer of a portion of the owner- Operating Activities ship interests in the company to public shareholders; • $157 million from the initial public offering of TMS TABLE 30 ($ millions) 2011 2010 International due to the issuance of new common shares Cash generated from operations $ 1,734 $ 1,703 by TMS International to public shareholders; • $51 million due to the acquisition of Pinnacle Renewable Energy Group during 2011; • $327 million related to the early October 2011 acquisition Changes in non-cash working capital items: Accounts receivable Inventories Other current assets 1 (162) 3 (200) (599) (47) of JELD-WEN; and Accounts payable, accrued liabilities • $231 million of comprehensive earnings attributable to and other current liabilities (457) 294 non-controlling interests. Partially offsetting the increase in the non-controlling interests balance was a $642 million decrease related to the sale of the remaining shares of EMSC during the year. Decrease in cash due to changes in non-cash working capital items (615) (552) Decrease in other operating activities, warranty reserves and premiums (31) (86) Cash flows from operating activities of discontinued operations 100 471 Cash from operating activities $ 1,188 $ 1,536 58 Onex Corporation December 31, 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 L Y S I S Cash generated from operations includes net earnings • $92 million of cash received from the limited partners before interest and provision for income taxes adjusted of ONCAP II and management of Onex and ONCAP for for cash taxes paid and items not affecting cash and cash their acquisitions of Pinnacle Renewable Energy Group equivalents. and Casino ABS. The signiﬁcant changes in non-cash working capital items Included in cash from ﬁnancing activities in 2010 was: in 2011 were: • $1.5 billion of cash received primarily from the limited • a $457 million decrease in accounts payable, accrued lia- partners of Onex Partners III, Onex management and bilities and other current liabilities due in part to the Spirit certain other limited partners for the investment in AeroSystems settlement with Boeing on the 787 program, Tomkins, the acquisition and interim ﬁnancing of the which allowed for the recognition of deferred revenue and remaining interest in ResCare and the second Tropicana customer advances at Spirit AeroSystems, as well as lower Las Vegas rights offering. inventory purchases at Celestica; and • a $162 million increase in inventory driven primarily Substantially offsetting this were: by higher inventory balances at Spirit AeroSystems to • $349 million of distributions primarily to the limited support new programs. partners of the Onex Partners Funds for the distributions made by TMS International, Carestream Health, Husky Cash from operating activities also included $100 million of International and The Warranty Group; cash ﬂows from operating activities of discontinued opera- • $298 million of cash interest paid; tions, which represents the cash from operating activities • a $272 million change in restricted cash representing the of EMSC and Husky International which were sold during limited partners’ net share of distributions received in the second quarter of 2011. Cash from (used in) ﬁnancing activities Cash used in ﬁnancing activities was $1.3 billion in 2011 the fourth quarter of 2010 from certain operating com- panies and the return of interim ﬁnancing from ResCare; • $232 million of cash used by Celestica to repurchase its remaining 2013 senior subordinated notes; and compared to cash from ﬁnancing activities of $329 million in • $167 million of cash used by Celestica for purchases of its 2010. The cash used in ﬁnancing activities in the year ended shares in the open market. December 31, 2011 included $2.2 billion of distributions primarily to the limited partners of the Onex Partners Funds (as discussed under Limited Partners’ Interests liability on Cash used in investing activities Cash used in investing activities totalled $12 million in page 52 of this report) and $411 million of cash interest paid. 2011 compared to $2.3 billion in 2010. Cash used in invest- Partially offsetting these were: ing activities was primarily due to (i) $1.2 billion used to fund acquisitions primarily completed by Onex Part- • $573 million of cash received from the limited partners of ners III ($733 million), ONCAP ($291 million) and Celestica Onex Partners III, Onex management and certain other ($81 million); and (ii) $286 million of other investing activi- limited partners for the investment in JELD-WEN; ties consisting primarily of an additional investment in • a $272 million change in restricted cash that was distrib- Onex Credit Partners of $150 million and a $91 million net uted to the limited partners in early 2011; change in securities and short-term investments at The • $268 million of proceeds from the sales of a portion of Warranty Group. This was partially offset by cash ﬂows the shares of Spirit AeroSystems and TMS International; from discontinued operations of $2.0 billion related to the • net new debt of $134 million primarily at CDI and Sitel sales of EMSC and Husky International. Worldwide; During 2010, cash used in investing activities • the receipt of $123 million from the limited partners of totalled $2.3 billion and consisted primarily of (i) $474 mil- ONCAP III and management of Onex and ONCAP for lion used to fund acquisitions by Carestream Health, their acquisitions of Hopkins, Casino ABS and Davis- EMSC, Skilled Healthcare Group, Celestica, the ONCAP II Standard; and Group’s purchase of BSN SPORTS, as well as the acquisi- tion and interim ﬁnancing of ResCare, and the investment Onex Corporation December 31, 2011 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 L Y S I S in Flushing Town Center by Onex, and (ii) a cash investment of $1.2 billion by the Onex Partners III Group in Tomkins. Consolidated cash resources At December 31, 2011, consolidated cash held by con- These were partially offset by $123 million of net cash pro- tinuing operations was $2.4 billion compared to $2.1 billion ceeds received by ONCAP II for the sale of CSI. at December 31, 2010. The major components of consoli- In addition, there was $646 million of cash used dated cash at December 31, 2011 were: for purchases of property, plant and equipment by Onex’ • approximately $1.0 billion of cash on hand at Onex, the operating companies (2010 – $660 million). Table 31 details parent company; and the property, plant and equipment expenditures by indus- • approximately $660 million of cash at Celestica. try segment. Cash Used for Property, Plant and Equipment tion at the parent company with appropriate liquidity Onex believes that maintaining a strong ﬁnancial posi- Purchases by Industry Segment TABLE 31 ($ millions) Electronics Manufacturing Services Aerostructures Healthcare Financial Services Customer Care Services Metal Services Building Products(a) Other(b) Total (a) JELD-WEN acquired in October 2011. enables the Company to pursue new opportunities to cre- ate long-term value and support Onex’ existing operating companies. In addition to the approximate $1.0 billion of cash at the parent company at December 31, 2011, there was approximately $310 million of near-cash items that are invested in a segregated unleveraged fund managed by Onex Credit Partners. Onex increased its investment in the fund, whose investments are focused on liquid senior debt securities, by $150 million during 2011. Table 32 provides a reconciliation of the change in cash at Onex, the parent 2010 $ 61 261 103 9 21 40 – 165 company, from December 31, 2010 to December 31, 2011. 2011 $ 62 233 90 3 32 83 13 130 $ 646 $ 660 Change in Cash at Onex, the Parent Company (b) 2011 other includes Flushing Town Center, Tropicana Las Vegas and the TABLE 32 ($ millions) operating companies of ONCAP II and ONCAP III. 2010 other includes Flushing Town Center, Tropicana Las Vegas and the operating companies of ONCAP II. Cash on hand at December 31, 2010 $ 533 During 2011, Spirit AeroSystems invested $233 million in property, plant and equipment and tooling costs to sup- port the company’s programs with Boeing and Airbus. Carestream Health invested $56 million in prop- erty, plant and equipment primarily associated with expenditures for equipment leased to others as well as manufacturing and infrastructure improvements. TMS International invested $83 million in property, plant and equipment to maintain service levels for existing customers and support growth for new customers. Tropicana Las Vegas invested approximately $42 mil- lion in 2011 primarily associated with the completion of the refurbishment project for the resort. Carestream Health distribution received Proceeds on Husky International sale Proceeds on EMSC sale Proceeds on sale of Spirit AeroSystems shares Proceeds on TMS International initial public offering CDI distribution received The Warranty Group distribution received Investment in JELD-WEN, net Additional investment in Onex Credit Partners Fund ONCAP acquisitions Onex share repurchases Investments in Onex Real Estate Partners Other, net, including dividends, management fees and operating costs Cash on hand at December 31, 2011 78 601 342 74 26 13 13 (284) (150) (123) (105) (32) 4 $ 990 60 Onex Corporation December 31, 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 L Y S I S A D D I T I O N A L U S E S O F C A S H Contractual obligations Table 33 presents the contractual obligations of Onex’ consolidated operating companies as at December 31, 2011: Contractual Obligations TABLE 33 ($ millions) Long-term debt, without recourse to Onex(1) Finance and operating leases Purchase obligations Total contractual obligations (1) Includes deferred ﬁnancing fees. Payments Due by Period Less than 1 year 1–3 years 4–5 years After 5 years $ 482 $ 1,357 $ 1,769 $ 3,488 312 279 423 125 228 57 302 – $ 1,073 $ 1,905 $ 2,054 $ 3,790 Total $ 7,096 1,265 461 $ 8,822 In addition to the obligations in table 33, certain of Onex’ letters of credit, letters of guarantee, and surety and per- consolidated operating companies have funding obliga- formance bonds provided by certain operating companies tions related to their deﬁned beneﬁt pension plans. The to various third parties, including bank guarantees. These operating companies estimate that $53 million of contri- guarantees are without recourse to Onex. butions will be required for their deﬁned beneﬁt pension As part of the Carestream Health purchase from plans in 2012. Kodak in 2007, the acquisition agreement provides that if A breakdown of long-term debt by industry seg- Onex and Onex Partners II realize an internal rate of return ment is provided in table 21 on page 50 of this MD&A. In in excess of 25 percent on their investment in Carestream addition, notes 12 and 13 to the audited annual consoli- Health, Kodak will receive payment equal to 25 percent of dated ﬁnancial statements provide further disclosure on the excess return up to $200 million. At December 31, 2011, long-term debt and lease commitments. Our consolidated a provision of $3 million (2010 – $3 million) has been rec- operating companies currently believe they have adequate ognized in Onex’ consolidated balance sheets. cash from operations, cash on hand and borrowings avail- able to them to meet anticipated debt service require- ments, capital expenditures and working capital needs. Onex’ commitment to the Funds Onex, the parent company, is the largest limited partner There is, however, no assurance that our consolidated in the Onex Partners and ONCAP Funds. Table 34 presents operating companies will generate sufﬁcient cash flow the commitment and uncalled committed capital of Onex, from operations or that future borrowings will be available the parent company, in these Funds at December 31, 2011: to enable them to grow their business, service all indebted- ness or make anticipated capital expenditures. Commitments At December 31, 2011, Onex and its operating companies had total commitments of $260 million. Commitments by Onex and its operating companies provided in the normal course of business include commitments for corporate investments and letters of credit, letters of guarantee and surety and performance bonds. Approximately $254 million of the total commit- ments in 2011 were for contingent liabilities in the form of TABLE 34 ($ millions) Fund Size Onex’ Commitment Uncalled Committed Capital Onex Partners I Onex Partners II Onex Partners III(a) ONCAP II ONCAP III(b) $ 1,655 $ 3,450 $ 4,700 C$ 574 C$ 800 $ 400 $ 1,407 $ 1,200 C$ 252 C$ 252 $ 22 $ 161 $ 643 C$ 14 C$ 197 (a) Onex’ commitment reﬂects the increased commitment announced in November 2011, which takes effect in May 2012. (b) Onex’ commitment has been reduced for a portion of the annual commitment for Onex management’s participation. Onex Corporation December 31, 2011 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 L Y S I S In November 2011, Onex announced that it would be At December 31, 2011, Celestica’s deﬁned ben- increasing its commitment to Onex Partners III to $1.2 bil- eﬁt pension plans were in a net asset position of $10 mil- lion from $800 million, bringing the total fund size to lion. Celestica’s pension funding policy is to contribute $4.7 billion. The increased commitment will apply to Onex amounts sufﬁcient to meet minimum local statutory fund- Partners III investments completed after May 14, 2012, and ing requirements that are based on actuarial calculations. will not change Onex’ ownership of businesses acquired The company may make additional discretionary contribu- prior to that date. tions taking into account actuarial assessments and other factors. Celestica estimates $11 million of contributions for Pension plans Seven of Onex’ operating companies have deﬁned ben- its deﬁned beneﬁt pension plans in 2012 based on the most recent actuarial valuations. A signiﬁcant deterioration in the eﬁt pension plans, of which the more signiﬁcant plans are asset values could lead to higher than expected future con- those of Spirit AeroSystems, Celestica, Carestream Health tributions; however, Celestica does not expect this will have and JELD-WEN. At December 31, 2011, the deﬁned ben- a material adverse impact on its cash ﬂows or liquidity. eﬁt pension plans of the seven Onex operating companies Carestream Health’s deﬁned beneﬁt pension had combined assets of $1.8 billion against combined obli- plans were in an unfunded position of approximately gations of $2.0 billion, with a net deﬁcit of $132 million. $50 million at December 31, 2011. The company’s pension A surplus in any plan is not available to offset deﬁciencies plans are broadly diversiﬁed in equity and debt securities, in others. as well as other investments. Carestream Health expects to Spirit AeroSystems has several U.S. deﬁned beneﬁt contribute approximately $3 million in 2012 to its deﬁned pension plans that were frozen at the date of Onex’ acquisi- beneﬁt pension plans, and it does not believe that future tion of Spirit AeroSystems, with no future service beneﬁts pension contributions will materially impact its liquidity. being earned in these plans. Pension assets are placed in a At December 31, 2011, JELD-WEN’s deﬁned ben- trust for the purpose of providing liquidity sufﬁcient to pay eﬁt pension plans were in an unfunded position of approxi- beneﬁt obligations. Therefore, required and discretionary mately $191 million. The company’s pension plans are contributions to those plans are not expected in 2012. In broadly diversiﬁed in equity and debt securities, as well as addition, Spirit AeroSystems has a U.K. deﬁned beneﬁt pen- other investments. JELD-WEN estimates that $28 million of sion plan with expected contributions of $9 million in 2012. contributions will be required for its deﬁned beneﬁt pen- Spirit AeroSystems’ deﬁned beneﬁt pension plans remained sion plans in 2012. overfunded by approximately $119 million at Decem- Onex, the parent company, does not have a pen- ber 31, 2011. sion plan and has no obligation to the pension plans of its operating companies. 62 Onex Corporation December 31, 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 L Y S I S A D D I T I O N A L S O U R C E S O F C A S H Onex Partners II has completed seven investments or Private equity Funds Onex has additional sources of cash from its private equity acquisitions, investing $2.9 billion of equity, including Onex, in those transactions. At December 31, 2011, Onex Partners II has uncalled third-party committed capital of Funds. Private equity Funds provide capital for Onex- $244 million, which is largely reserved for possible future sponsored acquisitions that are not related to Onex’ oper- funding for any of Onex Partners II’s existing businesses ating companies that existed prior to the formation of the and for management fees. Funds. The Funds provide a substantial pool of commit- During 2009, Onex completed fundraising for its ted capital, which enables Onex to be ﬂexible and timely in third large-cap private equity fund, Onex Partners III, a responding to investment opportunities. $4.7 billion private equity fund. Onex’ initial commitment Table 35 provides a summary of the remaining to the fund was $1.0 billion, which could be either increased commitments available from third-party limited part- or decreased by $500 million with six months’ notice to the ners for future Onex-sponsored acquisitions in the Onex third-party limited partners. On December 31, 2008, Onex Partners and ONCAP Funds as of December 31, 2011. notiﬁed its limited partners that it would be reducing its Private Equity Funds Uncalled Third-party effective July 1, 2009. Subsequent to the reduction in 2009, commitment to the Fund to approximately $500 million Committed Capital TABLE 35 ($ millions) Onex Partners I Onex Partners II Onex Partners III ONCAP II ONCAP III Available Uncalled Committed Capital (excluding Onex) (a) $ 73 $ 244 $ 2,017 C$ 16 C$ 469 (a) Includes committed amounts from the management of Onex and ONCAP and directors, calculated based on the assumption that all of the remaining limited partners’ commitments are invested. Onex’ commitment may be increased up to approximately $1.5 billion, but cannot be decreased. Since July 2009, Onex has increased its commitment as follows: • to $800 million for new acquisitions completed after June 16, 2010 and up to May 14, 2012 • to $1.2 billion for new investments completed after May 14, 2012. Changes to Onex’ commitment do not change Onex’ own- ership of businesses acquired prior to the effective dates of the changes. Onex Partners III has completed four invest- ments or acquisitions, investing $1.5 billion of third-party capital in those transactions. The committed amounts by the third-party limited part- During 2006, ONCAP raised its second mid-market ners are not included in Onex’ consolidated cash and will Fund, ONCAP II, a C$574 million private equity fund includ- be drawn upon as acquisitions are made. ing a commitment of C$252 million from Onex. ONCAP II During 2003, Onex raised its ﬁrst large-cap Fund, has completed eight acquisitions, putting C$255 million of Onex Partners I, with $1.655 billion of committed capital, third-party capital to work. At December 31, 2011, this Fund including committed capital from Onex of $400 million. had uncalled committed third-party capital of C$16 million, Since 2003, Onex Partners I has completed 10 investments which is largely reserved for possible future funding for any or acquisitions with $1.5 billion of equity, including Onex, of ONCAP II’s existing businesses and for management fees. being put to work. While Onex Partners I has concluded During 2011, ONCAP completed fundraising its investment period, the Fund still has uncalled third- for its third mid-market private equity fund, ONCAP III, party committed capital of $73 million, which is available a C$800 million private equity fund with total third-party for possible future funding of acquisitions by any of Onex capital commitments of C$520 million, excluding commit- Partners I’s existing businesses up to November 2012 and ments from management of Onex and ONCAP. ONCAP III for management fees. has completed three investments or acquisitions, putting During 2006, Onex raised its second large-cap C$123 million of third-party capital to work. At Decem- Fund, Onex Partners II, a $3.45 billion private equity fund, ber 31, 2011, this Fund has uncalled committed third-party including committed capital of $1.4 billion from Onex. capital of C$469 million available for future acquisitions. Onex Corporation December 31, 2011 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 L Y S I S Related party transactions Related party transactions are primarily investments by the management of Onex and of the operating companies in the equity of the operating companies acquired. The investment programs are designed to align Onex management’s interests with those of Onex’ shareholders and the third-party investors in Onex’ Funds. The various investment programs are described in detail in the following pages and certain key aspects are summa- rized in table 36. Investment Programs TABLE 36 Management Investment Plan Carried Interest Minimum Stock Price Appreciation/ Return Threshold Vesting Associated Investment by Management 15% 6 years • personal “at risk” equity investment required Compounded (4 years prior to • 25% of gross proceeds on the 7.5 percent gain allocated under the MIP to be Return November 2007) reinvested in Subordinate Voting Shares or Management DSUs until 1,000,000 shares or DSUs owned 8% Onex Partners I • corresponds to participation in minimum 1% “at risk” management team Compounded 4 years equity investment Participation Return Onex Partners II • 25% of gross proceeds to be reinvested in Subordinate Voting Shares or 5 years Management DSUs until 1,000,000 shares or DSUs owned Onex Partners III 6 years Stock Option 25% 5 years • satisfaction of exercise price (market value at grant date) Plan Price Appreciation (6 years for 2007) Management DSU Plan n/a n/a • investment of elected portion of annual compensation in Management DSUs • value reflects changes in Onex’ share price • units not redeemable while employed Director DSU n/a n/a • investment of elected portion of annual directors’ fees in Director DSUs Plan • value reflects changes in Onex’ share price • units not redeemable until retirement • annual allocation of DSUs Management Investment Plan Onex has a Management Investment Plan (the “MIP”) that return of its investment plus a net 15 percent internal rate of return from the investment in order for management requires its management members to invest in each of the to be allocated the additional 7.5 percent of Onex’ gain. operating companies acquired by Onex. Management’s The plan has vesting requirements, certain limitations and required cash investment is 1.5 percent of Onex’ interest in voting requirements. each acquisition. An amount invested in an Onex Partners During 2011, management invested $9 million acquisition under the Fund’s 1 percent investment require- (2010 – $9 million) under the MIP, including amounts ment (discussed below) also applies toward the 1.5 percent invested under the Onex Partners and ONCAP 1 percent investment requirement under the MIP. investment requirement. Management received $56 million In addition to the 1.5 percent participation, man- under the MIP in 2011 (2010 – $4 million) associated with agement is allocated 7.5 percent of Onex’ realized gain the gains Onex achieved during the year. Notes 1 and 31 to from an operating company investment, subject to cer- the audited annual consolidated ﬁnancial statements pro- tain conditions. In particular, Onex must realize the full vide additional details on the MIP. 64 Onex Corporation December 31, 2011 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S Onex Partners and ONCAP Funds The structure of the Onex Partners and ONCAP III Funds requires the management of Onex or ONCAP to invest a Table 37 shows the amount of carried interest received by Onex, the parent company, by year. minimum of 1 percent in all acquisitions. This structure Carried Interest applies to Onex Partners I, II and III and ONCAP III. Onex Partners I completed its investment period in 2006. For TABLE 37 ($ millions) Onex Partners II and III, Onex management and directors have committed to invest 4 percent and 5 percent, respec- tively, of the total capital invested by those Funds for the commitment periods beginning in 2012. For ONCAP III, management of Onex and ONCAP as well as directors have committed to invest 6 percent of the total capital invested by the Fund for the commitment period beginning in 2012. The total amount invested in 2011 by Onex man- agement and directors on acquisitions and investments completed through the Onex Partners and ONCAP Funds was $60 million (2010 – $36 million). Carried interest – 2003 Carried interest – 2004 Carried interest – 2005 Carried interest – 2006 Carried interest – 2007 Carried interest – 2008 Carried interest – 2009 Carried interest – 2010 Carried interest – 2011 Total Carried Interest Received $ 1 4 16 55 77 – 19 – 65 $ 237 Carried interest participation The General Partners of the Onex Partners Funds, which are controlled by Onex, are entitled to a carried interest (20 percent) on the realized gains of third-party limited partners in each Fund, subject to an 8 percent compound annual preferred return to those limited partners on all amounts contributed in each particular Fund. Onex, as sponsor of the Onex Partners Funds, is entitled to 40 per- cent of the carried interest and the Onex management team is entitled to 60 percent. Under the terms of the part- nership agreements, Onex may receive carried interest as realizations occur. The ultimate amount of carried inter- est earned will be based on the overall performance of each of Onex Partners I, II and III, independently, and includes typical catch-up and claw-back provisions within each Fund, but not between Funds. During 2011, management of Onex received carried inter- est of $96 million (2010 – nil). During 2011, Onex, the parent company, realized carried interest as follows: • $9 million on the sale of a portion of the shares of Spirit AeroSystems by Onex Partners I in the secondary offering completed by the company during the second quarter; • $32 million on the sale of the remaining shares of EMSC by Onex Partners I; • $1 million from Onex Partners II as a result of the initial public offering of TMS International and the redemption of TMS International’s Series 2008 Promissory Notes in April 2011; • $17 million during the second quarter of 2011, from the sale of Husky International by the limited partners of Onex Partners I ($14 million) and Onex Partners II ($3 million). The amount of carried interest earned by Onex, the parent company, and the Onex management team on the sale of Husky International by the limited partners of Onex Partners II was voluntarily reduced by $88 million (Onex’ share of the reduction was $35 mil- lion) at the request of Onex. The reduction was made after a review of the remaining portfolio companies in Onex Partners II and reﬂecting the desire to not distribute or collect carried interest that may be subject to a future claw-back; and Onex Corporation December 31, 2011 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 L Y S I S • $6 million during the third quarter of 2011 from the limited partners of Onex Partners I ($1 million) and Management Deferred Share Unit Plan Effective December 2007, a Management Deferred Share Onex Partners II ($5 million) related to their receipt of Unit Plan (“MDSU Plan”) was established as a further a portion of the amounts held in escrow at the time of means of encouraging personal and direct economic inter- the sale of Husky International. In accordance with the ests by the Company’s senior management in the perfor- distribution policy set out in the Agreement of Limited mance of the Subordinate Voting Shares. Under the MDSU Partnership, and as a result of the voluntary reduction in Plan, the members of the Company’s senior management the amount of carried interest collected at the time of the team are given the opportunity to designate all or a portion sale of Husky International, Onex’ carried interest enti- of their annual compensation to acquire MDSUs based tlement was 80 percent of the escrow amounts received on the market value of Onex shares at the time in lieu of by the limited partners of Onex Partners II. cash. MDSUs vest immediately but are redeemable by the participant only after he or she has ceased to be an ofﬁcer During 2010, there was no carried interest received by or employee of the Company or an afﬁliate for a cash pay- Onex, the parent company. ment equal to the then current market price of Subordinate Voting Shares. Additional units are issued equivalent to the At December 31, 2011, there was $13 million (2010 – value of any cash dividends that would have been paid on $49 million) of unrealized carried interest allocable to the Subordinate Voting Shares. To hedge Onex’ exposure Onex on the public companies held at market value in the to changes in the trading price of Onex shares associated Onex Partners Funds. In addition, Onex has the potential with the MDSU Plan, the Company enters into forward to earn a further $83 million (2010 – $84 million) of car- agreements with a counterparty ﬁnancial institution for all ried interest on its private businesses in the Onex Partners grants under the MDSU Plan. The costs of those arrange- and ONCAP Funds based on their fair values determined ments are borne entirely by participants in the MDSU at December 31, 2011. Plan. MDSUs are redeemable only for cash and no shares or other securities of Onex will be issued on the exercise, Stock Option Plan Onex, the parent company, has a Stock Option Plan in place redemption or other settlement thereof. Table 28 on page 57 of this MD&A provides details of the change in the MDSUs that provides for options and/or share appreciation rights outstanding during 2011 and 2010. to be granted to Onex directors, ofﬁcers and employees for the acquisition of Subordinate Voting Shares of Onex, the parent company, for a term not exceeding 10 years. Director Deferred Share Unit Plan Onex, the parent company, established a Director Deferred The options vest equally over ﬁve years with the exception Share Unit Plan (“DSU Plan”) in 2004, which allows Onex of the options granted in December 2007, which vest over directors to apply directors’ fees to acquire Deferred Share six years. The price of the options issued is at the market Units (“DSUs”) based on the market value of Onex shares value of the Subordinate Voting Shares on the business day at the time. Grants of DSUs may also be made to Onex preceding the day of the grant. Vested options are not exer- directors from time to time. Holders of DSUs are entitled cisable unless the average ﬁve-day market price of Onex to receive for each DSU, upon redemption, a cash payment Subordinate Voting Shares is at least 25 percent greater equivalent to the market value of a Subordinate Voting than the exercise price at the time of exercise. Table 26 on Share at the redemption date. The DSUs vest immediately, page 55 of this MD&A provides details of the change in the are only redeemable once the holder retires from the Board stock options outstanding during 2011 and 2010. of Directors and must be redeemed by the end of the year following the year of retirement. Additional units are issued equivalent to the value of any cash dividends that would have been paid on the Subordinate Voting Shares. Onex, the parent company, has recorded a liability for the future settlement of DSUs at the balance sheet date by reference to the value of underlying shares at that date. The liability is adjusted up or down for the change in the market value of 66 Onex Corporation December 31, 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 L Y S I S the underlying Subordinate Voting Shares, with the corre- Onex is now entitled to a management fee of sponding amount reﬂected in the consolidated statements 1.75 percent on the committed capital of the third-party of earnings. Table 28 on page 57 of this MD&A provides limited partners of Onex Partners III. This management details of the change in the DSUs outstanding during 2011 fee will be earned during the investment period of Onex and 2010. Investment in Onex shares and acquisitions In 2006, Onex adopted a program designed to further Partners III for a period of up to ﬁve years. Thereafter, a 1 percent management fee is payable to Onex based on third-party invested capital. ONCAP I has been fully realized and as a result, align the interests of the Company’s senior management Onex no longer earns a management fee from this Fund. and other investment professionals with those of Onex During the initial fee period for ONCAP II, Onex received shareholders through increased share ownership. Under a management fee of 2 percent on the committed capi- this program, members of senior management of Onex tal of the Fund provided by third-party investors. The are required to invest at least 25 percent of all amounts initial fee period for ONCAP II concluded in July 2011 received on the 7.5 percent gain allocated under the when ONCAP established a successor Fund, ONCAP III, MIP and the carried interest in Onex Subordinate Voting and as a result, Onex is now entitled to a 2 percent man- Shares and/or Management DSUs until they individually agement fee on ONCAP II’s third-party invested capital. hold at least 1,000,000 Onex Subordinate Voting Shares The management fee on ONCAP II will decline over time and/or Management DSUs. Under this program, during as realizations on invested capital occur. 2011 Onex management reinvested C$18 million (2010 – Onex is entitled to a management fee of 2 percent less than C$1 million) in the purchase of Subordinate on the committed capital of the third-party limited part- Voting Shares. ners of ONCAP III for a period of up to six years. Thereafter, Members of management and the Board of Direc- a 1.5 percent management fee is payable to Onex based on tors of Onex can invest limited amounts in partnership third-party invested capital. with Onex in all acquisitions outside the Onex Partners and Onex Credit Partners earns management fees ONCAP Funds at the same time and cost as Onex and other on third-party capital invested. The fees charged by Onex outside investors. During 2011, approximately $5 million Credit Partners are based on capital invested and vary by in investments (2010 – $9 million) was made by Onex man- investment product. agement and Onex Board members. As determined at the time of acquisition, the oper- ating companies typically pay an annual management fee Management fees Onex receives management fees through its private equity to Onex. Onex is entitled to its pro-rata share of the fees received from the operating companies to the extent of its platforms, Onex Partners and ONCAP, and directly from interest as a limited partner in each company. the operating businesses. In addition, Onex Credit Partners Management fees earned by Onex Partners, ONCAP earns management fees on its third-party capital. and Onex Credit Partners totalled approximately $110 mil- Onex Partners I completed its investment period lion in 2011 (2010 – $102 million). in 2006, and for the remainder of the life of this Fund, Onex will receive a 1 percent annual management fee based on third-party invested capital. During the investment period Debt of operating companies Onex’ practice is not to guarantee the debt of its oper ating of Onex Partners II, Onex received a management fee of companies, and there are no cross-guarantees between 2 percent on the committed capital of the Fund pro- operating companies. Onex may hold debt as part of vided by third-party investors. Toward the end of 2008, its investment in certain operating companies, which the initial fee period for Onex Partners II concluded when amounted to $1.3 billion at December 31, 2011 compared Onex began to receive a management fee from Onex to $1.4 billion at December 31, 2010. Note 12 to the audited Partners III. Onex, therefore, earns a 1 percent manage- annual consolidated ﬁnancial statements provides infor- ment fee on Onex Partners II’s third-party invested capi- mation on the debt of operating companies held by Onex. tal. The management fee on Onex Partners I and II will decline over time as realizations on invested capital occur. Onex Corporation December 31, 2011 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 L Y S I S Tax loss transactions During 2011, Onex sold entities, the sole assets of which within a company have been detected. Accordingly, our disclosure controls and procedures and our internal con- were certain tax losses, to a public company controlled by trols over ﬁnancial reporting are effective in providing rea- Mr. Gerald W. Schwartz, who is also Onex’ controlling share- sonable, not absolute, assurance that the objectives of our holder. As a result of these transactions, Onex recorded control systems have been met. a gain of C$10 million in other items in 2011. A discussion During 2010, Onex, the parent company, imple- of these transactions is included on page 37 of this MD&A. mented an information technology solution that accom- In January 2012, Onex completed a similar trans- modates accounting under IFRS for 2010 and going action, receiving approximately C$2 million in cash for forward. In addition, Onex documented its internal con- Canadian tax losses of C$20 million. The entire C$2 million trol processes surrounding IFRS reporting concurrently will be recorded as a gain in other items in the ﬁrst quar- with the implementation in 2010. There were no signiﬁ- ter of 2012. In connection with this transaction, Deloitte & cant changes in internal controls over ﬁnancial reporting Touche LLP, an independent accounting ﬁrm retained by for the year ended December 31, 2011 that have materi- Onex’ Audit and Corporate Governance Committee, pro- ally affected, or are reasonably likely to materially affect, vided an opinion that the value received by Onex for the the reliability of ﬁnancial reporting and the preparation of tax losses was fair. The transactions were unanimously ﬁnancial statements in accordance with IFRS. approved by Onex’ Audit and Corporate Governance Com- mittee, all the members of which are independent directors. 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 Limitation on scope of design Management has limited the scope of the design of inter- nal controls over ﬁnancial reporting and disclosure con- trols and procedures to exclude the controls, policies and procedures of JELD-WEN, the results of which are included in the 2011 consolidated ﬁnancial statements of Onex, the Except for the limitation in scope of the design of internal parent company, since the acquisition date of October 3, controls over ﬁnancial reporting as noted below, the Chief Executive Officer and the Chief Financial Ofﬁcer have designed, or caused to be designed under their supervi- sion, internal controls over ﬁnancial reporting to provide 2011. The scope limitation is in accordance with Section 3.3 of National Instrument 52-109, Certiﬁcation of Disclosure in Issuer’s Annual and Interim Filings, which allow an issuer to limit its design of internal controls over ﬁnancial report- reasonable assurance regarding the reliability of ﬁnan- ing and disclosure controls and procedures to exclude the cial reporting and the preparation of ﬁnancial statements controls, policies and procedures of a company acquired not for external purposes in accordance with IFRS. Except for more than 365 days before the end of the ﬁnancial period to the limitation in scope of the design of disclosure controls which the certiﬁcate relates. Table 38 shows a summary of and procedures as noted below, the Chief Executive Ofﬁcer the ﬁnancial information for JELD-WEN, which is included and the Chief Financial Ofﬁcer have also designed, or in the December 31, 2011 audited annual consolidated caused to be designed under their supervision, disclosure ﬁnancial statements of Onex, the parent company. controls and procedures to provide reasonable assurance that information required to be disclosed by the Company Financial information for JELD-WEN in its corporate ﬁlings has been recorded, processed, sum- marized and reported within the time periods speciﬁed in TABLE 38 (IFRS, U.S. $ millions) securities legislation. Revenue A control system, no matter how well conceived Net loss and operated, can provide only reasonable, not absolute, Current assets assurance that its objectives are met. Due to inherent limi- Non-current assets tations in all such systems, no evaluations of controls can Current liabilities provide absolute assurance that all control issues, if any, Non-current liabilities 2011 $ 774 $ (89) $ 776 $ 1,805 $ 563 $ 1,097 68 Onex Corporation December 31, 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 L Y S I S OUTLOOK 2011 was another tumultuous year for both the equity and of interesting opportunities has been Europe, where some credit markets, reﬂecting ongoing global economic uncer- companies are looking to divest of their U.S.-based sub- tainty. All eyes were on the European Union as it faced its sidiaries to generate cash. In addition to participating in biggest challenge since it was formed 18 years ago. While it auctions, our team is focused on originating proprietary is clear that Europe has a long road ahead to ﬁscal stability, investment opportunities like we did with both Tomkins the full breadth and depth of the debt crisis is unknown. and JELD-WEN. We are also interested in ﬁnding more Despite the difﬁcult economic environment, industrial partners with deep expertise and relationships to overall demand for our industrial businesses’ products broaden our origination capabilities. increased last year. Most of our operating companies As we have done throughout our 27 year history, grew earnings and generated strong free cash ﬂow, allow- we are looking for just a few great businesses to acquire ing some to reduce debt levels and pay distributions. This each year. Following an active year of realizations, we now resulted in year-over-year mark-to-market returns to Onex have over $1.3 billion in cash and near-cash items, which is of 15 percent and 12 percent from our interests in the Onex sufﬁcient to meet Onex’ fund commitments. In that regard Partners and ONCAP private operating companies, respec- we increased our commitment to Onex Partners III to tively, including distributions. Reﬂected in our valuations $1.2 billion from $800 million with effect for acquisitions is an appropriate mark for Hawker Beechcraft, which con- after May 14, 2012. At this time we have approximately tinues to suffer from the prolonged depressed state of the $2.5 billion of uncalled committed capital from our third- general aviation market, despite management’s efforts to party Limited Partners for acquisitions through Onex Part- aggressively reduce costs, improve its sales effectiveness ners III and ONCAP III. and conserve cash. In addition to investing capital primarily through While value is persistently being created in our its two private equity platforms, Onex uses its cash to repur- businesses, we regularly review our alternatives to capture chase shares under the Normal Course Issuer Bid when we this value. In 2011, when credit markets were strong and believe the shares are trading at prices that reﬂect a mean- the initial public offering (“IPO”) markets were open, Onex ingful discount to our view of their value. We believe this and its partners realized approximately $3.5 billion primar- provides good value for our shareholders. During 2011, ily through the sales of Husky International and Emergency Onex repurchased approximately 3.2 million shares for Medical Services as well as the IPO of TMS International. C$105 million at an average price of C$33.27 per share. When the markets are once again receptive to IPOs and We continue to believe that our success in build- appropriately valuing high-quality companies, we will con- ing companies and our record of capital preservation and sider additional offerings. Fortunately, we can be patient superior growth – a 3.3 multiple on invested capital and a given the strength of our operating companies’ balance 29 percent gross IRR – are direct results of the strong align- sheets, and we are more than happy to continue owning ment of interests between Onex’ shareholders, our limited these businesses given their attractive cash-on-cash returns. partners and the Onex management team. In addition to We were disappointed that we were unable to Onex being the largest limited partner in every fund, Onex’ complete one or two more acquisitions at the upper-end distinctive ownership culture requires each member of of the private equity market last year. Overall transaction the management team to have a signiﬁcant ownership in volume was modest as corporate America, with solid bal- Onex stock and to invest meaningfully in each operating ance sheets and anemic growth, seemed reluctant to part company acquired. At December 31, 2011, the team had with even non-core subsidiaries until strategic alternatives approximately $1.3 billion invested in Onex’ shares and were available. Despite this challenging acquisition market, its businesses. we did complete an $871 million investment in JELD-WEN, For over 27 years, we have employed an active one of the world’s largest residential door and window ownership approach in acquiring and building industry- manufacturers, and ONCAP was very busy in the mid-mar- leading businesses. We are excited about the potential of ket space, acquiring four businesses in 2011. our current portfolio of companies and remain focused In the last few months, there has been a slight on helping them to enhance their productivity and proﬁt- increase in merger and acquisition activity, which has ability with the goal of creating long-term value for Onex translated into more pipeline activity at Onex. One source and its investors. Onex Corporation December 31, 2011 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 L Y S I S RISK MANAGEMENT This section describes the risks that we believe are material Onex maintains an active involvement in its oper- to Onex that could adversely affect Onex’ business, ﬁnan- ating companies in the areas of strategic planning, ﬁnancial cial condition or results of operations. The risks described structures and negotiations and acquisitions. In the early below are not the only risks that may impact our business. stages of ownership, Onex may provide resources for busi- Additional risks not currently known to us or that we cur- ness and strategic planning and ﬁnancial reporting while rently believe are immaterial may also have a material an operating company builds these capabilities in-house. adverse effect on future business and operations. In almost all cases, Onex ensures there is oversight of its As managers, it is our responsibility to identify investment through representation on the acquired com- and manage business risk. As shareholders, we require an pany’s board of directors. Onex does not get involved in the appropriate return for the risk we accept. day-to-day operations of acquired companies. Operating companies are encouraged to reduce Managing risk Onex’ general approach to the management of risk is to risk and/or expand opportunity by diversifying their cus- tomer bases, broadening their geographic reach or product apply common-sense business principles to the manage- and service offerings and improving productivity. In certain ment of the Company, the ownership of its operating com- instances, we may also encourage an operating company panies and the acquisition of new businesses. Each year, to seek additional equity in the public markets in order to detailed reviews are conducted of many opportunities to continue its growth without eroding its balance sheet. One purchase either new businesses or add-on acquisitions for element of this approach may be to use new equity invest- existing businesses. Onex’ primary interest is in acquiring ment, when ﬁnancial markets are favourable, to prepay well-managed companies with a strong position in growing existing debt and absorb related penalties. Some of the industries. In addition, diversiﬁcation among Onex’ oper- strategies and policies to manage business risk at Onex and ating companies enables Onex to participate in the growth its operating companies are discussed in this section. of a number of high-potential industries with varying business cycles. As a general rule, Onex attempts to arrange as Business cycles Diversiﬁcation by industry and geography is a deliberate many factors as practical to minimize risk without hamper- strategy at Onex to reduce the risk inherent in business ing its opportunity to maximize returns. When a purchase cycles. Onex’ practice of owning companies in various opportunity meets Onex’ criteria, for example, typically a industries with differing business cycles reduces the risk fair price is paid, though not necessarily the lowest price, of holding a major portion of Onex’ assets in just one or for a high-quality business. Onex does not commit all of two industries. Similarly, the Company’s focus on build- its capital to a single acquisition and does have equity ing industry leaders with extensive international opera- partners with whom it shares the risk of ownership. The tions reduces the ﬁnancial impact of downturns in speciﬁc Onex Partners and ONCAP Funds streamline Onex’ pro- regions. Onex is well diversiﬁed among various indus- cess of sourcing and drawing on commitments from such try segments, with no single industry or business repre- equity partners. senting more than 10 percent of its proprietary capital. An acquired company is not burdened with more The table in note 34 to the audited annual consolidated debt than it can likely sustain, but rather is structured so ﬁnancial statements provides information on the geo- that it has the ﬁnancial and operating leeway to maximize graphic diversiﬁcation of Onex’ consolidated revenues. long-term growth in value. Finally, Onex invests in ﬁnan- cial partnership with management. This strategy not only gives Onex the beneﬁt of experienced managers but also is designed to ensure that an operating company is run entre- preneurially for the beneﬁt of all shareholders. 70 Onex Corporation December 31, 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 L Y S I S Operating liquidity It is Onex’ view that one of the most important things Timeliness of investment commitments Onex’ ability to create value for shareholders is depen- Onex can do to control risk is to maintain a strong par- dent in part on its ability to successfully complete large ent company with an appropriate level of liquidity. Onex acquisitions. Our preferred course is to complete acqui- needs to be in a position to support its operating compa- sitions on an exclusive basis. However, we also partici- nies when and if it is appropriate and reasonable for Onex, pate in large acquisitions through an auction or bidding as an equity owner with paramount duties to act in the process with multiple potential purchasers. Bidding best interests of Onex shareholders, to do so. Maintaining is often very competitive for the large-scale acquisi- liquidity is important because Onex, as a holding company, tions that are Onex’ primary interest, and the ability to generally does not have guaranteed sources of meaning- make knowledgeable, timely investment commitments ful cash ﬂow other than management fees. The approxi- is a key component in successful purchases. In such mate $112 million in annualized management fees that are instances, the vendor often establishes a relatively short expected to be earned by Onex Partners, ONCAP and Onex timeframe for Onex to respond deﬁnitively. In order to Credit Partners in 2012 will be used to offset the costs of improve the efficiency of Onex’ internal processes on running the parent company. both auction and exclusive acquisition processes, and A signiﬁcant portion of the purchase price for so reduce the risk of missing out on high quality acquisi- new acquisitions is generally funded with debt provided by tion opportunities, Onex has committed pools of capi- third-party lenders. This debt, sourced exclusively on the tal from third-party investors with the Onex Partners strength of the acquired company’s ﬁnancial condition and ONCAP Funds. As at December 31, 2011, the Onex and prospects, is a debt of the acquired company at clos- Partners Funds have $2.3 billion of undrawn commit- ing and is without recourse to Onex, the parent company, ted third-party capital and the ONCAP Funds have or to its other operating companies or partnerships. The C$485 million of such undrawn capital. foremost consideration, however, in developing a ﬁnanc- Once the investment period for Onex Partners III ing structure for an acquisition is identifying the appropri- has expired at the end of 2013, Onex will need to have raised ate amount of equity to invest. In Onex’ view, this should or be in the process of raising additional third-party capital be the amount of equity that maximizes the risk/reward to continue its program of investing new third-party capital equation for both shareholders and the acquired company. in large-scale acquisitions. The ability to raise new capital In other words, it allows the acquired company to not only commitments at that time will be dependent upon general manage its debt through reasonable business cycles but economic conditions and the track record or success Onex also to have sufﬁcient ﬁnancial latitude for the business to has achieved with the management and investment of prior vigorously pursue its growth objectives. funds. To date, Onex has a strong track record of investing While Onex seeks to optimize the risk/reward third-party capital and most investors in the original Onex equation in all acquisitions, there is the risk that the Partners and ONCAP Funds have committed to invest in acquired company will not generate sufﬁcient proﬁtabil- successor funds that have been established. ity or cash ﬂow to service its debt requirements and/or meet related debt covenants or provide adequate ﬁnancial Capital commitment risk The limited partners in the Onex Partners and ONCAP Funds comprise a rela- ﬂexibility for growth. In such circumstances, additional tively small group of high-quality, primarily institutional, investment by the equity partners, including Onex, may investors. To date, each of these investors has met its be appropriate. In severe circumstances, the recovery of commitments on called capital, and Onex has received Onex’ equity and any other investment in that operating no indications that any investor will be unable to meet company is at risk. its commitments in the future. While Onex’ experience with its limited partners suggests that commitments will be honoured, there is always the possibility that a limited partner may not be able to meet its entire commitment over the life of the fund. Onex Corporation December 31, 2011 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 L Y S I S Financial risks In the normal course of business, Onex and its operating had a ﬁxed interest rate or the interest rate was effectively ﬁxed by interest rate swap contracts. The risk inherent in companies may face a variety of risks related to ﬁnancial such a strategy is that, should interest rates decline, the management. In dealing with these risks, it is a matter of beneﬁt of such declines may not be obtainable or may only Company policy that neither Onex nor its operating com- be achieved at the cost of penalties to terminate existing panies engage in speculative derivatives trading or other arrangements. There is also the risk that the counterparty speculative activities. Default on known credit As previously noted, new investments generally include a meaningful amount on an interest rate swap agreement may not be able to meet its commitments. Guidelines are in place that specify the nature of the ﬁnancial institutions that operating com- of third-party debt. Those lenders typically require that the panies can deal with on interest rate contracts. acquired company meet ongoing tests of ﬁnancial perfor- Onex, the parent company, has some exposure to mance as deﬁned by the terms of the lending agreement, interest rate changes primarily through its cash and short- such as ratios of total debt to operating income (“EBITDA”) term investments, which are held in short-term deposits and the ratio of EBITDA to interest costs. It is Onex’ prac- and commercial paper. A 0.25 percent increase (0.25 per- tice to not burden acquired companies with levels of debt cent decrease) in the interest rate, assuming no signiﬁcant that might put at risk their ability to generate sufﬁcient changes in the cash balance at the parent company, would levels of proﬁtability or cash ﬂow to service their debts – result in a minimal impact in annual interest income. and so meet their related debt covenants – or which might In addition, The Warranty Group, which holds substan- hamper their ﬂexibility to grow. tially all of its investments in interest-bearing securities, Financing risk The volatility in the global credit markets has created some unpredictability about whether would also have some exposure to interest rate changes. A 0.25 percent increase in the interest rate would decrease businesses, even creditworthy businesses, will be able the fair value of the investments held by The Warranty to obtain new loans. This represents a risk to the ongoing Group by $12 million, with a corresponding decrease in viability of many otherwise healthy businesses whose loans other comprehensive earnings. However, as the invest- or operating lines of credit are up for renewal in the short ments are reinvested, a 0.25 percent increase in the interest term. The major portion of Onex’ operating companies’ reﬁ- rate would increase the annual interest income recorded nancing will take place in 2014 and thereafter. Table 22 on by The Warranty Group by $5 million. page 52 of this MD&A provides the aggregate debt maturi- ties for Onex’ consolidated operating companies and invest- Currency ﬂuctuations The functional currency of Onex, the parent company, and substantially all of ments in associates for each of the years up to 2017 and in Onex’ operating companies is the U.S. dollar. A number of total thereafter. Onex’ operating companies conduct business outside of Interest rate risk As previously noted, new invest- ments generally include a meaningful amount of third- the United States and as a result are exposed to currency risk on the portion of their business which is not based on party debt taken on by the acquired operating company. U.S. currency. Fluctuations in the value of the U.S. dollar An important element in controlling risk is to manage, to relative to other currencies can have an impact on Onex’ the extent reasonable, the impact of ﬂuctuations in interest reported results and consolidated ﬁnancial position. Onex’ rates on the debt of the operating company. operating companies may use currency derivatives in the Onex’ operating companies generally seek to ﬁx normal course of business to hedge against adverse ﬂuctu- the interest on some of their term debt or otherwise mini- ations in key operating currencies, but speculative activity mize the effect of interest rate increases on a portion of is not permitted. their debt at the time of acquisition. This is achieved by Onex holds cash and marketable securities in taking on debt at ﬁxed interest rates or entering into inter- Canadian-dollar-denominated securities. The portion of est rate swap agreements or ﬁnancial contracts to control securities held in Canadian dollars is based on Onex’ the level of interest rate ﬂuctuation on variable rate debt. view of funds it will require for future operating costs At December 31, 2011, approximately 52 percent (2010 – and investments in Canada. Onex does not speculate on 56 percent) of Onex’ operating companies’ long-term debt the direction of exchange rates between the U.S. dollar and 72 Onex Corporation December 31, 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 L Y S I S the Canadian dollar when determining the balance of cash AeroSystems has entered into long-term supply contracts and marketable securities to hold in each currency. A with its key suppliers of raw materials, which limit the 5 percent strengthening (5 percent weakening) of the U.S. company’s exposure to rising raw materials prices. Most of dollar relative to the Canadian dollar at December 31, the raw materials purchased is based on a ﬁxed pricing or 2011 would result in an $8 million decrease ($8 million at reduced rates through Boeing’s or Airbus’ high-volume increase) in net earnings of Onex, the parent company. purchase contracts. In addition, Celestica has exposure to the U.S. dollar/ Diesel fuel is a key commodity used in TMS Inter- Canadian dollar foreign currency exchange rate. A 5 per- national’s operations. The company consumes approxi- cent strengthening (5 percent weakening) of the Canadian mately 11 million gallons of diesel fuel annually. To dollar against the U.S. dollar at December 31, 2011 would help mitigate the risk of price ﬂuctuations in fuel, TMS result in a $6 million increase ($5 million decrease) in other International incorporates into substantially all of its comprehensive earnings of Celestica and an $11 million contracts pricing escalators based on published price indi- increase ($10 million decrease) in net earnings. ces that would generally offset some portion of the fuel Fair value changes The fair value measurements for investments in associates, Limited Partners’ Interests price changes. Silver is a signiﬁcant commodity used in Care- and unrealized carried interest are primarily driven by stream Health’s manufacturing of x-ray ﬁlm. The com- the underlying fair value of the investments in the Onex pany’s management continually monitors movement and Partners and ONCAP Funds. A change to a reasonably pos- trends in the silver market and enters into collar and for- sible alternative estimate and/or assumption used in the ward agreements when considered appropriate to mitigate valuation of non-public investments in the Onex Partners some of the risk of future price ﬂuctuations for periods and ONCAP Funds could have a signiﬁcant impact on the generally up to a year. fair values calculated for investments in associates, Limited Partners’ Interests and unrealized carried interest, which would impact both Onex’ ﬁnancial condition and results of operations. Integration of acquired companies An important aspect of Onex’ strategy for value creation is to acquire what we consider to be “platform” companies. Insurance claims The Warranty Group under- writes and administers extended warranties and credit Such companies often have distinct competitive advan- tages in products or services in their respective indus- insurance on a wide variety of consumer goods, including tries that provide a solid foundation for growth in scale automobiles, consumer electronics and major home appli- and value. In these instances, Onex works with company ances. Unlike most property insurance risk, the risk asso- management to identify attractive add-on acquisitions ciated with extended warranty claims is non-catastrophic that may enable the platform company to achieve its goals and short-lived, resulting in predictable loss trends. The more quickly and successfully than by focusing solely on predictability of claims, which is enhanced by the large the development and/or diversiﬁcation of its customer volume of claims data in the company’s database, enables base, which is known as organic growth. Growth by acqui- The Warranty Group to appropriately measure and price risk. sition, however, may carry more risk than organic growth. While as many of these risks as possible are considered Commodity price risk Certain Onex operating companies are vulnerable to price in the acquisition planning, operating companies under- taking these acquisitions also face such risks as unknown fluctuations in major commodities. Individual operat- expenses related to the cost-effective amalgamation of ing companies may use ﬁnancial instruments to offset the operations, the retention of key personnel and customers, impact of anticipated changes in commodity prices related the future value of goodwill, intangible assets and intel- to the conduct of their businesses. Aluminum, titanium lectual property. There are also risk factors associated with and raw materials such as carbon ﬁbre used to manufac- the 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. Onex Corporation December 31, 2011 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 L Y S I S Dependence on government funding Since 2005, Onex has acquired businesses, or interests Signiﬁcant customers Some of Onex’ major acquisitions have been divisions of in businesses, in various segments of the U.S. healthcare large companies. As part of these purchases, the acquired industry. Certain of the revenues of these companies are company has often continued to supply its former owner partially dependent on funding from federal, state and local through long-term supply arrangements. It has been Onex’ government agencies, especially those agencies respon- policy to encourage its operating companies to quickly sible for U.S. federal Medicare and state Medicaid funding. diversify their customer bases to the extent practical in Budgetary pressures, as well as economic, industry, politi- order to manage the risk associated with serving a single cal and other factors, could inﬂuence governments to not major customer. increase or, in some cases, to decrease appropriations for Certain Onex operating companies have major the services that are offered by Onex’ operating subsidiaries, customers that represent more than 10 percent of annual which could reduce their revenues materially. Future reve- revenues. Spirit AeroSystems primarily relies on two major nues may be affected by changes in rate-setting structures, customers, Boeing and Airbus. The table in note 30 to the methodologies or interpretations that may be proposed audited annual consolidated ﬁnancial statements provides or are under consideration. While each of Onex’ operat- information on the concentration of business the consoli- ing companies in the U.S. healthcare industry is subject to dated operating companies have with major customers. reimbursement risk directly related to its particular business segment, it is unlikely that all of these companies would be affected by the same event, or to the same extent, simulta- Environmental considerations Onex has an environmental protection policy that has been neously. Ongoing pressure on government appropriations adopted by its operating companies; many of these oper- is a normal aspect of business for these companies, and all ating companies have also adopted supplemental poli- seek to minimize the effect of possible funding reductions cies appropriate to these industries or businesses. Senior through productivity improvements and other initiatives. ofﬁcers at each of these companies are ultimately respon- It is not known what impact, if any, proposed healthcare sible for ensuring compliance with these policies. They are reform in the United States will have on the companies. required to report annually to their company’s board of directors and to Onex regarding compliance. Environmental management by the operat- ing companies is accomplished through the education of employees about environmental regulations and appropri- ate operating policies and procedures; site inspections by environmental consultants; the addition of proper equip- ment or modiﬁcation of existing equipment to reduce or eliminate environmental hazards; remediation activities as required; and ongoing waste reduction and recycling pro- grams. Environmental consultants are engaged to advise on current and upcoming environmental regulations that may be applicable. 74 Onex Corporation December 31, 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 L Y S I S Many of the operating companies are involved in the remediation of particular environmental situations, Other contingencies Onex and its operating companies are or may become par- such as soil contamination. In almost all cases, these situ- ties to legal claims arising in the ordinary course of busi- ations have occurred prior to Onex’ acquisition of those ness. The operating companies have recorded liability companies, and the estimated costs of remedial work and provisions based upon their consideration and analysis of related activities are managed either through agreements their exposure in respect of such claims. Such provisions with the vendor of the company or through provisions are reﬂected, as appropriate, in Onex’ consolidated ﬁnan- established at the time of acquisition. Manufacturing activ- cial statements. Onex, the parent company, has not cur- ities carry the inherent risk that changing environmental rently recorded any further liability provision and we do regulations may identify additional situations requiring not believe that the resolution of known claims would rea- capital expenditures or remedial work and associated costs sonably be expected to have a material adverse impact on to meet those regulations. Onex’ consolidated ﬁnancial position. However, the ﬁnal outcome with respect to outstanding, pending or future Income taxes The Company has investments in companies that oper- actions cannot be predicted with certainty, and therefore there can be no assurance that their resolution will not have ate in a number of tax jurisdictions. Onex provides for the an adverse effect on our consolidated ﬁnancial position. tax on undistributed earnings of its subsidiaries that are not permanently reinvested based on the expected future income tax rates that are substantively enacted at the time of the income/gain recognition events. Changes to the expected future income tax rate will affect the provision for future tax, both in the current year and in respect of prior year amounts that are still outstanding, either positively or negatively, depending on whether rates decrease or increase. Changes to tax legislation or the application of tax legislation may affect the provision for future tax and the taxation of deferred amounts. Onex Corporation December 31, 2011 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 International Financial Reporting Standards. The signiﬁcant accounting policies which management believes are appropriate for the Company are described in note 1 to the consolidated ﬁnancial statements. Additionally, the Company’s transition from reporting under previous Canadian generally accepted accounting principles to International Financial Reporting Standards is presented in note 35. The Board of Directors is responsible for reviewing and approving the consolidated ﬁnancial statements and oversee- ing 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 23, 2012 Christine M. Donaldson Vice President Finance 76 Onex Corporation December 31, 2011 INDEPENDENT AUDITOR’S REPORT To the Shareholders of Onex Corporation: We have audited the accompanying consolidated ﬁnancial statements of Onex Corporation and its subsidiaries, which com- prise the consolidated balance sheets as at December 31, 2011, December 31, 2010 and January 1, 2010, the consolidated statements of earnings, comprehensive earnings, equity and cash ﬂows for the years ended December 31, 2011 and 2010 and the related notes, which comprise a summary of signiﬁcant accounting policies and other explanatory information. Management’s responsibility for the consolidated ﬁnancial statements Management is responsible for the preparation and fair presentation of these consolidated ﬁnancial statements in accor- dance with International Financial Reporting Standards, 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 ethi- cal requirements and plan and perform the audits 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 and its subsidiaries as at December 31, 2011, December 31, 2010 and January 1, 2010 and their ﬁnancial per- formance and their cash ﬂows for the years ended December 31, 2011 and 2010 in accordance with International Financial Reporting Standards. [signed] PricewaterhouseCoopers LLP Chartered Accountants, Licensed Public Accountants Toronto, Canada February 23, 2012 Onex Corporation December 31, 2011 77 CONSOLIDATED BALANCE SHEETS As at December 31, 2011 As at December 31, 2010 As at January 1, 2010 $ 2,448 $ 2,532 $ 3,018 749 3,272 4,428 1,186 12,083 5,102 5,415 1,813 2,599 2,434 715 3,430 4,004 1,495 12,176 4,056 4,864 1,872 2,505 2,634 605 2,928 3,204 1,101 10,856 3,366 3,448 1,915 2,241 2,198 $ 29,446 $ 28,107 $ 24,024 $ 3,893 $ 3,964 $ 3,268 263 890 482 19 1,400 6,947 180 6,479 45 1,727 2,331 1,075 4,980 257 1,211 243 14 1,314 7,003 284 6,346 43 1,780 1,921 938 5,650 255 974 404 20 1,342 6,263 231 5,284 39 1,935 1,670 810 3,708 23,764 23,965 19,940 360 3,862 1,460 5,682 373 3,638 131 4,142 381 3,329 374 4,084 $ 29,446 $ 28,107 $ 24,024 (in millions of U.S. dollars) Assets Current assets Cash and cash equivalents (note 4) Short-term investments Accounts receivable Inventories (note 5) Other current assets (note 6) Property, plant and equipment (note 7) Long-term investments (note 8) Other non-current assets (note 9) Intangible assets (note 10) Goodwill (note 10) Liabilities and Equity Current liabilities Accounts payable and accrued liabilities Current portion of provisions (note 11) Other current liabilities Current portion of long-term debt of operating companies, without recourse to Onex Corporation (note 12) Current portion of obligations under finance leases, without recourse to Onex Corporation (note 13) Current portion of warranty reserves and unearned premiums (note 14) Non-current portion of provisions (note 11) Long-term debt of operating companies, without recourse to Onex Corporation (note 12) Non-current portion of obligations under finance leases, without recourse to Onex Corporation (note 13) Non-current portion of warranty reserves and unearned premiums (note 14) Other non-current liabilities (note 15) Deferred income taxes (note 16) Limited Partners’ Interests (note 17) Equity Share capital (note 18) Non-controlling interests Retained earnings and accumulated other comprehensive earnings Signed on behalf of the Board of Directors [signed] Director [signed] Director 78 Onex Corporation December 31, 2011 CONSOLIDATED STATEMENTS OF EARNINGS Year ended December 31 (in millions of U.S. dollars except per share data) Revenues Cost of sales (excluding amortization of property, plant and equipment, intangible assets and deferred charges) Operating expenses Interest income Amortization of property, plant and equipment Amortization of intangible assets and deferred charges Interest expense of operating companies (note 20) Unrealized increase in value of investments in associates at fair value, net (note 8) Foreign exchange loss Stock-based compensation expense (note 21) Other gains, net (note 22) Other items (note 23) Impairment of goodwill, intangible assets and long-lived assets, net (note 24) Limited Partners’ Interests charge (note 17) Earnings before income taxes and discontinued operations Provision for income taxes (note 16) Loss from continuing operations Earnings from discontinued operations (note 3) Net Earnings for the Year Earnings (Loss) from Continuing Operations attributable to: Equity holders of Onex Corporation Non-controlling Interests Loss from Continuing Operations for the Year Net Earnings (Loss) attributable to: Equity holders of Onex Corporation Non-controlling Interests Net Earnings for the Year Net Earnings (Loss) per Subordinate Voting Share of Onex Corporation (note 26) Basic and Diluted: Continuing operations Discontinued operations Net Earnings (Loss) for the Year 2011 2010 $ 24,642 $ 19,734 (19,725) (2,921) (15,492) (2,306) 32 (462) (311) (488) 501 (14) (133) – (146) (197) (627) 151 (237) (86) 1,715 34 (403) (284) (342) 448 (8) (186) 99 (221) (14) (831) 228 (239) (11) 208 $ 1,629 $ 197 $ (355) $ (282) 269 271 $ (86) $ (11) $ 1,327 $ (167) 302 364 $ 1,629 $ 197 $ (3.02) $ (2.36) 14.33 0.96 $ 11.31 $ (1.40) Onex Corporation December 31, 2011 79 CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS Year ended December 31 (in millions of U.S. dollars) Net earnings for the year Other comprehensive earnings (loss), net of tax Currency translation adjustments Change in fair value of derivatives designated as hedges Unrealized gains on available-for-sale financial assets Pension actuarial loss and other Other comprehensive earnings (loss) from discontinued operations, net of tax (note 3) 2011 $ 1,629 (60) (7) 8 (59) (14) 2010 $ 197 (17) (4) 7 (47) 5 Total Comprehensive Earnings for the Year $ 1,497 $ 141 Total Comprehensive Earnings (Loss) attributable to: Equity holders of Onex Corporation Non-controlling Interests Total Comprehensive Earnings for the Year $ 1,266 231 $ 1,497 $ (188) 329 $ 141 80 Onex Corporation December 31, 2011 CONSOLIDATED STATEMENTS OF EQUITY (in millions of U.S. dollars except per share data) Share Capital (note 18) Retained Earnings Accumulated Other Comprehensive Earnings (Loss) Total Equity Attributable to Equity Holders of Onex Corporation Non- controlling Interests Total Equity Balance – January 1, 2010 $ 381 $ 338 $ 36(b) $ 755 $ 3,329 $ 4,084 Dividends declared(a) Purchase and cancellation of shares (note 18) Investments by shareholders other than Onex Distributions to non-controlling interests Repurchase of shares of operating companies Comprehensive Earnings (Loss) Net earnings (loss) for the year Other comprehensive earnings (loss) for the year, net of tax: Currency translation adjustments Change in fair value of derivatives designated as hedges Unrealized gains on available-for-sale financial assets Pension actuarial loss and other – (8) – – – – – – – – (13) (42) – – – (167) – – – (10) – – – – – – (13) (50) – – – – – 160 (9) (171) (13) (50) 160 (9) (171) (167) 364 197 (23) (23) (1) (24) 3 6 3 3 6 (7) 5 1 8 7 (40) (47) Balance – December 31, 2010 $ 373 $ 106 $ 25(c) $ 504 $ 3,638 $ 4,142 Dividends declared(a) Purchase and cancellation of shares (note 18) Investments by shareholders other than Onex Distributions to non-controlling interests Repurchase of shares of operating companies Sale of investments in operating companies under continuing control (note 25) Non-controlling interests of discontinued operations (note 3) Comprehensive Earnings (Loss) Net earnings for the year Other comprehensive earnings (loss) for the year, net of tax: Currency translation adjustments Change in fair value of derivatives designated as hedges Unrealized gains on available-for-sale financial assets Pension actuarial loss and other − (13) − − − − − (13) (92) 24 – (7) 151 – – 1,327 − − − – – – – (15) – – – – – – – – (40) (9) 4 (1) (13) (105) 24 – (7) 151 – – – 637 (19) (67) 108 (13) (105) 661 (19) (74) 259 (666) (666) 1,327 302 1,629 (40) (9) 4 (16) (13) (19) 3 (42) (53) (28) 7 (58) Balance – December 31, 2011 $ 360 $ 1,481 $ (21)(d) $ 1,820 $ 3,862 $ 5,682 (a) Dividends declared per Subordinate Voting Share during 2011 totalled C$0.11 (2010 – C$0.11). In 2011, shares issued under the dividend reinvestment plan amounted to less than $1 (2010 – less than $1). There are no tax effects for Onex on the declaration or payment of dividends. (b) Accumulated Other Comprehensive Earnings (Loss) as at January 1, 2010 consisted of unrealized gains on the effective portion of cash flow hedges of $4, unrealized gains on available-for-sale financial assets of $35 and other of negative $3. Accumulated Other Comprehensive Earnings (Loss) at January 1, 2010 included $8 of net earnings related to discontinued operations. Income taxes did not have a significant effect on these items. (c) Accumulated Other Comprehensive Earnings (Loss) as at December 31, 2010 consisted of currency translation adjustments of negative $23, unrealized gains on the effective portion of cash flow hedges of $7 and unrealized gains on available-for-sale financial assets of $41. Accumulated Other Comprehensive Earnings (Loss) as at December 31, 2010 included $13 of net earnings related to discontinued operations. Income taxes did not have a significant effect on these items. (d) Accumulated Other Comprehensive Earnings (Loss) as at December 31, 2011 consisted of currency translation adjustments of negative $63, unrealized losses on the effective portion of cash flow hedges of $2, unrealized gains on available-for-sale financial assets of $45 and other of negative $1. Income taxes did not have a significant effect on these items. Onex Corporation December 31, 2011 81 CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31 (in millions of U.S. dollars) Operating Activities Loss for the year from continuing operations Adjustments to loss from continuing operations: Provision for income taxes Interest income Interest expense of operating companies Net earnings before interest and provision for income taxes Cash taxes paid Items not affecting cash and cash equivalents: Amortization of property, plant and equipment Amortization of intangible assets and deferred charges Amortization of deferred warranty costs Unrealized increase in value of investments in associates at fair value, net (note 8a) Stock-based compensation expense Other gains, net (note 22) Impairment of goodwill, intangible assets and long-lived assets, net (note 24) Limited Partners’ Interests charge (note 17) Change in provisions Other Changes in non-cash working capital items: Accounts receivable Inventories Other current assets Accounts payable, accrued liabilities and other current liabilities Decrease in cash and cash equivalents due to changes in working capital items Increase (decrease) in other operating activities Increase (decrease) in warranty reserves and premiums Cash flows from operating activities of discontinued operations (note 3) Financing Activities Issuance of long-term debt Repayment of long-term debt Cash interest paid Cash dividends paid Repurchase of share capital of Onex Corporation Repurchase of share capital of operating companies Financing provided by Limited Partners (note 17) Issuance of share capital by operating companies Proceeds from sales of operating investments under continuing control (note 25) Distributions paid to non-controlling interests and Limited Partners Change in restricted cash for distribution to Limited Partners Decrease due to other ﬁnancing activities Cash flows used for financing activities of discontinued operations (note 3) Investing Activities Acquisition of operating companies, net of cash and cash equivalents in acquired companies of $191 (2010 – $55) (note 2) Purchase of property, plant and equipment Proceeds from other gains (note 22) Cash interest and dividends received Investment in Tomkins Limited Increase (decrease) due to other investing activities Cash flows from (used for) investing activities of discontinued operations (note 3) Decrease in Cash and Cash Equivalents for the Year Increase (decrease) in cash due to changes in foreign exchange rates Cash and cash equivalents, beginning of the year – continuing operations Cash and cash equivalents, beginning of the year – discontinued operations Cash and Cash Equivalents Cash and cash equivalents held by discontinued operations (note 3) Cash and Cash Equivalents Held by Continuing Operations 82 Onex Corporation December 31, 2011 2011 2010 $ (86) $ (11 ) 237 (32) 488 607 (161) 462 311 47 (501) 62 – 197 627 89 (6) 239 (34) 342 536 (187) 403 284 72 (448) 174 (99) 14 831 114 9 1,734 1,703 1 (162) 3 (457) (615) (58) 27 100 1,188 594 (460) (411) (13) (105) (149) 932 151 268 (2,248) 272 (52) (42) (1,263) (1,155) (646) – 45 – (286) 2,030 (12) (87) 3 2,053 479 2,448 – (200) (599) (47) 294 (552) 6 (92) 471 1,536 2,180 (1,997) (298) (13) (50) (167) 1,451 25 – (349) (272) (55) (126) 329 (474) (660) 123 11 (1,219) 81 (205) (2,343) (478) (8) 2,582 436 2,532 479 $ 2,448 $ 2,053 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in millions of U.S. dollars except per share data) Onex Corporation and its subsidiaries (collectively, the “Company”) is a diversiﬁed company with operations in a range of industries including electronics manufacturing services, aerostructures, healthcare, ﬁnancial services, customer care services, metal services, building products, gaming, cabinetry products, industrial products, commercial vehicles and aircraft and aftermarket. Additionally, the Company has investments in real estate, credit strategies and mid-market private equity opportunities. Note 34 provides addi- tional description of the Company’s operations on a segmented basis. Throughout these statements, the term “Onex” refers to Onex Corporation, the ultimate parent company. Onex Corporation is a Canadian corporation domiciled in Canada and is listed on the Toronto Stock Exchange under the symbol OCX. Onex Corporation’s shares are traded in Canadian dollars. The registered address for Onex Corporation is 161 Bay Street, Toronto, Ontario. Gerald W. Schwartz controls Onex Corporation by indirectly holding all of the outstanding Multiple Voting Shares of the corporation. All amounts are in millions of U.S. dollars unless otherwise noted. The consolidated ﬁnancial statements were authorized for issue by the Board of Directors on February 23, 2012. 1 . B A S I S O F P R E P A R A T I O N A N D S I G N I F I C A N T In completing the transition to IFRS the Company con- A C C O U N T I N G P O L I C I E S S T A T E M E N T O F C O M P L I A N C E The consolidated ﬁnancial statements have been prepared in accor- dance with International Financial Reporting Standards (“IFRS”) and its interpretations adopted by the International Accounting Standards Board (“IASB”). These consolidated ﬁnancial statements were prepared on a going concern basis, under the historical cost convention, as modiﬁed by the revaluation of available-for-sale ﬁnancial assets, and ﬁnancial assets and ﬁnancial liabilities (includ- ing derivative instruments) at fair value through total comprehen- sive earnings. In 2010 and prior periods, the Company’s consolidated ﬁnancial statements were prepared in accordance with accounting principles generally accepted in Canada (“Canadian GAAP”). IFRS differs in a number of areas from Canadian GAAP. In preparing these consolidated ﬁnancial statements, management has amended cer- tain accounting, valuation and consolidation methods previously applied to comply with IFRS, including IFRS 1, First-time Adoption of IFRS. The comparative ﬁgures for 2010 were restated to reﬂect these adjustments, including note disclosures at January 1, 2010 where the effect of the transition from previous Canadian GAAP to IFRS was signiﬁcant. Note 35 contains reconciliations and descriptions of the effect of the transition from the previous Canadian GAAP to IFRS on earnings and comprehensive earnings for the year ended Decem- ber 31, 2010. In addition, equity is reconciled with line-by-line rec- onciliations of the consolidated balance sheets at January 1, 2010 and December 31, 2010. ducted an evaluation of the primary and secondary factors to assess its functional currency under IFRS. It was determined that the U.S. dollar is the Company’s functional currency under IFRS. As such, the ﬁnancial statements under IFRS have been reported on a U.S. dollar basis. C O N S O L I D A T I O N The consolidated ﬁnancial statements represent the accounts of Onex and its subsidiaries, including its controlled operating com- panies. 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”, and ONCAP II L.P. and ONCAP III LP, referred to collectively as “ONCAP” (as described in note 31). The results of operations of subsidiaries are included in the consolidated ﬁnancial statements from the date that con- trol commences until the date that control ceases. All signiﬁcant intercompany balances and transactions have been eliminated. Investments in operating companies over which the Company has signiﬁcant inﬂuence, but not control, are designated, upon initial recognition, at fair value through earnings. As a result, the investments are recorded at fair value in the consolidated bal- ance sheets, with changes in fair value recognized in the consoli- dated statements of earnings. Onex Corporation December 31, 2011 83 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S The principal operating companies and Onex’ economic ownership, Onex and the Limited Partners’ economic ownership and voting interests in these entities are as follows: December 31, 2011 December 31, 2010 Onex and Limited Partners Ownership Onex Ownership Voting Onex Ownership Onex and Limited Partners Ownership 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”)(a) 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”)(a) The Warranty Group, Inc. (“The Warranty Group”) Investments made through Onex and Onex Partners III JELD-WEN Holding, inc. (“JELD-WEN”)(c) 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 Fund (“ONCAP II”) ONCAP III Fund (“ONCAP III”) Onex Real Estate Partners (“Onex Real Estate”) 9% 68% 19% – 9% 5% 15% 37% 19% 20% 24% – 29% 20% 14% 17% 20% 46% 29% 88% 9% 68% 81% – 40% 16% 49% 95% 49% 50% 60% – 92% 59% 56% 76% 71% 88% 100% – 89% 64% (b) 100% (b) 50%(b) 85% – 100% 59% 50%(b) 76% 9% 68% 19% 12% 9% 7% 15% 38% 19% 20% 36% 36% 29% – 14% 16% 9% 68% 81% 31% 40% 23% 49% 97% 49% 50% 91% 98% 92% – 56% 74% Voting 71% 88% 100% 82% 89% 74% (b) 100% (b) 50% (b) 100% 100% 100% – 50% (b) 74% 98% 100% 20% 98% 100% 100% 100% 88% 100% 100% 100% 46% – 86% 100% – 86% 100% – 100% (a) EMSC and Husky were sold during the second quarter of 2011, as described in note 3. (b) Onex exerts signiﬁcant inﬂuence over these investments, which are designated at fair value through earnings, through its right to appoint members of the boards of directors of these entities. (c) Economic ownership and voting interests are presented on an as-converted basis. The allocation of net earnings and comprehensive earnings attributable to equity holders of Onex Corporation and non-controlling interests is completed using an as-converted economic ownership of 68% to reflect certain JELD-WEN shares that are recorded as liabilities at fair value. The ownership percentages are before the effect of any potential dilution relating to the Management Investment Plans (the “MIP”), as described in note 31(i). The allocation of net earnings and comprehensive earnings attributable to equity holders of Onex Corporation and non-controlling interests is completed using the economic ownership of Onex and the Limited Partners. The voting interests include shares that Onex has the right to vote through contractual arrangements or through multiple voting rights attached to particular shares. In certain circumstances, the voting arrangements give Onex the right to elect the majority of the boards of directors of the companies. 84 Onex Corporation December 31, 2011 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 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 Operating companies may enter into agreements to sell accounts receivable when considered appropriate, whereby the The Company’s functional currency is the U.S. dollar, as it is the accounts receivable are transferred to an unrelated third party. currency of the primary economic environment in which it oper- The transfers are recorded as sales of accounts receivable, as the ates. For such operations, monetary assets and liabilities denomi- operating companies do not retain any ﬁnancial or legal interest nated in foreign currencies are translated into U.S. dollars at the in the sold accounts receivable. The accounts receivable are sold at period-end exchange rates. Non-monetary assets and liabilities their face value less a discount rate as provided in the agreements. denominated in foreign currencies are translated at histori- cal rates and revenue and expenses are translated at the average Inventories exchange rates prevailing during the month of the transaction. Inventories are recorded at the lower of cost or net realizable Exchange gains and losses also arise on the settlement of foreign- value. To the extent economic circumstances have changed, pre- currency denominated transactions. These exchange gains and vious writedowns are reversed and recognized in the consolidated losses are recognized in earnings. statements of earnings in the period the reversal occurs. For Assets and liabilities of foreign operations with non-U.S. inventories in the aerostructures segment, costs are attributed to dollar functional currencies are translated into U.S. dollars using units delivered under long-term contracts based on the estimated the period-end exchange rates. Revenue and expenses are trans- average cost of all units expected to be produced. Certain inven- lated at the average exchange rates prevailing during the month tories in the healthcare and metal services segments are stated of the transaction. Gains and losses arising from the translation of using an average cost method. For substantially all other invento- these foreign operations are deferred in the currency translation ries, cost is determined on a ﬁrst-in, ﬁrst-out basis. account included in equity. Inventories include real estate assets that are available for sale. Real estate assets held-for-sale are recorded at the lower Cash and cash equivalents of cost or net realizable value. Cash and cash equivalents includes liquid investments such as term deposits, money market instruments and commercial paper Property, plant and equipment with original maturities of less than three months. The invest- Property, plant and equipment is recorded at cost less accumu- ments are carried at cost plus accrued interest, which approximates lated amortization and provisions for impairments, if any. Cost fair value. consists of expenditures directly attributable to the acquisition of the asset. The costs of construction of qualifying long-term assets Short-term investments include capitalized interest, as applicable. Short-term investments consist of liquid investments such as Land is not amortized. For substantially all remaining money market instruments and commercial paper with original property, plant and equipment, amortization is provided for on maturities of three months to a year. The investments are carried a straight-line basis over the estimated useful lives of the assets at fair value. Accounts receivable as follows: Buildings up to 50 years Accounts receivable are recognized initially at fair value and sub- Machinery and equipment up to 20 years sequently measured at amortized cost using the effective inter- est method. A provision is recorded for impairment when there is objective evidence (such as signiﬁcant ﬁnancial difﬁculties of the debtor) that the Company will not be able to collect all amounts due according to the original terms of the receivable. A provi- sion expense is recorded as the difference between the carrying value of the receivable and the present value of future cash ﬂows expected from the debtor, with an offsetting amount recorded as an allowance, reducing the carrying value of the receivable. The provision expense is included in operating expenses in the con- solidated statements of earnings. When a receivable is considered permanently uncollectible, the receivable is written off against the allowance account. Leasehold improvements over the term of the lease When components of an asset have a signiﬁcantly different useful life or residual value than the primary asset, the components are amortized separately. Residual values, useful lives and methods of amortization are reviewed at each ﬁscal year end and adjusted prospectively. Investment property Investment property includes commercial property held to earn rental income and property that is being constructed or developed for future use as investment property. Investment property is included with property, plant and equipment in the consolidated balance sheets and recorded at cost less accumu- lated amortization and provisions for impairments, if any. Onex Corporation December 31, 2011 85 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S The cost of investment property includes direct devel- Goodwill opment costs, property transfer taxes and borrowing costs direct- Goodwill is initially measured as the excess of the aggregate of ly attributable to the development of the property. the consideration transferred, the fair value of any contingent The Company’s investment property consists of consideration, the amount of any non-controlling interest in Flushing Town Center’s retail space and parking structures. The the acquired company and, in a business combination achieved fair value of Flushing Town Center’s investment property at in stages, the fair value at the acquisition date of the Company’s December 31, 2011 was approximately $437 (2010 – $470). The previously held interest in the acquired company compared to decrease in fair value of Flushing Town Center’s investment prop- the net fair value of the acquiree’s identiﬁable assets and liabili- erty during 2011 was primarily due to the sale of a portion of its ties acquired. Substantially all of the goodwill and intangible retail space. For the year ended December 31, 2011, property, asset amounts that appear in the consolidated balance sheets plant and equipment additions included $16 (2010 – $124) related are recorded by the operating companies. The recoverability of to Flushing Town Center’s investment property. goodwill is assessed annually or whenever events or changes Leases in circumstances indicate that the carrying amount may not be recoverable. Goodwill is allocated to cash generating units Leases of property, plant and equipment where the Company has (“CGUs”) of the acquisition that gave rise to the goodwill for the substantially all the risks and rewards of ownership are classiﬁed purposes of impairment testing. Impairment of goodwill is tested as ﬁnance leases. Finance leases are capitalized at the lease’s at the level where goodwill is monitored for internal management commencement at the lower of the fair value of the leased prop- purposes. Therefore, goodwill may be assessed for impairment erty or the present value of the minimum lease payments. at the level of either an individual CGU or a group of CGUs. The Each lease payment is allocated between the liability carrying amount of a CGU is compared to its recoverable amount, and ﬁnance charges so as to achieve a constant interest rate on which is the higher of its value-in-use or fair value less costs to the balance outstanding. The corresponding lease obligations, sell, to determine if an impairment exists. Impairment losses for net of ﬁnance charges, are included in the consolidated balance goodwill are not reversed in future periods. sheets. Property, plant and equipment acquired under ﬁnance Impairment charges recorded by the operating companies leases is depreciated over the shorter of the useful life of the asset under IFRS may not impact the fair values of the operating compa- and the lease term. nies used in determining the increase or decrease in investments Leases in which a signiﬁcant portion of the risks and in associates, the change in carried interest and for calculating the rewards of ownership are retained by the lessor are classiﬁed as Limited Partners’ Interests liability. operating leases. Payments made under operating leases (net of any incentives received from the lessor) are recorded in the con- Investments in associates solidated statements of earnings on a straight-line basis over the Associates are those entities over which the Company has period of the lease. Intangible assets signiﬁcant inﬂuence, but not control. Investments in associates are designated, upon initial recognition, at fair value through earn- ings in accordance with IAS 39, Financial Instruments: Recognition Intangible assets, including intellectual property and software, are and Measurement. As a result, the investments are recorded at fair recorded at their fair value at the date of acquisition of the related value in the consolidated balance sheets, with changes in fair value operating company or cost if internally generated. Amortization is recognized in the consolidated statements of earnings. provided for intangible assets with limited life. For substantially all limited life intangible assets, amortization is provided for on a Impairment of long-lived assets straight-line basis over their estimated useful lives as follows: Property, plant and equipment and intangible assets are reviewed Trademarks and licenses 1 year to 30 years cumstances suggest that the carrying amount of an asset may not for impairment annually or whenever events or changes in cir- Customer relationships 3 years to 29 years Computer software Other 1 year to 10 years 1 year to 25 years Intangible assets with indeﬁnite useful lives are not amortized. The assessment of indeﬁnite life is reviewed annually. Changes in the useful life from indeﬁnite to ﬁnite are made on a prospective basis. be recoverable. An impairment loss is recognized when the carry- ing value of an asset or CGU exceeds the recoverable amount. The recoverable amount of an asset or CGU is the greater of its value- in-use or its fair value less costs to sell. Impairment losses for long-lived assets are reversed in future periods if the circumstances that led to the impairment no longer exist. The reversal is limited to restoring the carrying amount that would have been determined, net of amortization, had no impairment loss been recognized in prior periods. 86 Onex Corporation December 31, 2011 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S Other non-current assets Acquisition costs relating to the ﬁnancial services segment to settle the obligation and the payment can be reliably estimated. The Company’s signiﬁcant provisions consist of the following: Certain costs of the warranty business, principally commissions, underwriting and sales expenses that vary with, and are pri- a) Self-insurance marily related to, the production of new business, are deferred Self-insurance provisions are established for automobile, workers’ and amortized as the related premiums and contract fees are compensation, general liability, professional liability and other earned. The possibility of premium deﬁciencies and the related claims. Provisions are established for claims based on an assess- recoverability of deferred acquisition costs is evaluated annu- ment of actual claims and claims incurred but not reported. The ally. Management considers the effect of anticipated investment reserves may be established based on consultation with third-par- income in its evaluation of premium deﬁciencies and the related ty independent actuaries using actuarial principles and assump- recoverability of deferred acquisition costs. Deferred acquisition tions that consider a number of factors, including historical claim costs are derecognized when related contracts are either settled payment patterns and changes in case reserves and the assumed or cancelled. rate of inﬂation in healthcare costs and property damage repairs. Other current liabilities Proﬁt-sharing provisions relating to the ﬁnancial services segment b) Warranty Certain operating companies offer warranties on the sale of prod- ucts or services. A provision is recorded to provide for future Certain arrangements with producers of warranty contracts warranty costs based on management’s best estimate of prob- include proﬁt-sharing provisions whereby the underwriting able claims under these warranties. The provision is based on proﬁts, after a ﬁxed percentage allowance for the company and an the terms of the warranty, which vary by customer and product allowance for investment income, are remitted to the producers or service and historical experience. The appropriateness of the on a retrospective basis. Unearned premiums and contract fees provision is evaluated at each reporting period. The warranty pro- subject to retrospective commission agreements totalled $400 at visions exclude reserves recognized by The Warranty Group for its December 31, 2011 (2010 – $500). warranty contracts. Financing charges c) Restructuring Financing charges consist of costs incurred by the operating com- Restructuring provisions are recognized only when a detailed for- panies relating to the issuance of debt and are amortized over the mal plan for the restructuring – including the concerned business term of the related debt or as the debt is retired, if earlier. These or part of the business, the principal locations affected, details ﬁnancing charges are recorded against the carrying value of the regarding the employees affected, the restructuring’s timing and long-term debt, as described in note 12. the expenditures that will have to be undertaken – has been devel- Losses and loss adjustment expenses reserves main features have already been publicly announced to those oped and the restructuring has either commenced or the plan’s Losses and loss adjustment expenses reserves relate to The affected by it. Warranty Group and represent the estimated ultimate net cost of all reported and unreported losses incurred and unpaid through Note 11 provides further details on provisions recognized by December 31, 2011. The Warranty Group does not discount losses the Company. and loss adjustment expenses reserves. The reserves for unpaid losses and loss adjustment expenses are estimated using individ- Pension and non-pension post-retirement beneﬁts ual case-basis valuations and statistical analyses. Those estimates The operating companies accrue their obligations under employ- are subject to the effects of trends in loss severity and frequency ee beneﬁt plans and related costs, net of plan assets. The costs and claims reporting patterns of the company’s third-party admin- of deﬁned beneﬁt pensions and other post-retirement beneﬁts istrators. Although considerable variability is inherent in such earned by employees are accrued in the period incurred and are estimates, management believes the reserves for losses and loss actuarially determined using the projected unit credit method adjustment expenses are reasonable. The estimates are continu- pro-rated on length of service, based on management’s best esti- ally reviewed and adjusted as necessary as experience develops or mates of items, including expected plan investment performance, new information becomes known; such adjustments are included salary escalation, retirement ages of employees, the discount rate in current operations. Provisions used in measuring the liability and expected healthcare costs. Plan assets are valued at fair value for the purposes of calculat- ing expected returns on those assets. Past service costs from plan A provision is a liability of uncertain timing or amount and is gen- amendments are recognized immediately in earnings, unless the erally recognized when the Company has a present obligation as a result of a past event, it is probable that payment will be made Onex Corporation December 31, 2011 87 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S amendments have not vested, in which case they are deferred and substantively enacted tax rate applicable to that income or loss. amortized on a straight-line basis over the vesting period. Tax expense or recovery is recognized in the income statement, The value of any plan assets recognized is restricted to except to the extent that it relates to items recognized directly in the sum of any past service costs not yet recognized and the pres- equity, in which case the tax effect is also recognized in equity. ent value of any economic beneﬁts available in the form of refunds Deferred tax liabilities for taxable temporary differences from the plan or reductions in future contributions to the plan. associated with investments in subsidiaries, associates and joint Actuarial gains (losses) arise from the difference between ventures are recognized, except when the Company is able to the actual long-term rate of return on plan assets and the expected control the timing of the reversal of temporary differences and it long-term rate of return on plan assets for a period or from changes is probable that the temporary differences will not reverse in the in actuarial assumptions used to determine the beneﬁt obligation. foreseeable future. Actuarial gains (losses) are recognized in other comprehensive In the ordinary course of business, there are transac- earnings and directly recorded in retained earnings, without recog- tions for which the ultimate tax outcome is uncertain. The ﬁnal nition to the consolidated statements of earnings. tax outcome of these matters may be different from the estimates Deﬁned contribution plan accounting is applied to originally made by the Company in determining its income tax multi-employer deﬁned beneﬁt plans, for which the operating provisions. The Company periodically evaluates the positions companies have insufﬁcient information to apply deﬁned beneﬁt taken with respect to situations in which applicable tax rules and accounting. Limited Partners’ Interests regulations are subject to interpretation. Provisions related to tax uncertainties are established where appropriate based on the best estimate of the amount that will ultimately be paid to or received The interests of the Limited Partners and other investors through from tax authorities. Accrued interest and penalties relating to tax the Onex Partners and ONCAP Funds are recorded as a ﬁnancial uncertainties are recorded in current income tax expense. liability in accordance with IAS 32, Financial Instruments: Presen- tation. The structure of the Onex Partners and ONCAP Funds as deﬁned in the partnership agreements, speciﬁcally the limited Revenue recognition Electronics Manufacturing Services life of the Funds, requires presentation of the Limited Partners’ Revenue from the electronics manufacturing services segment Interests as a liability. The liability is recorded at fair value and consists primarily of product sales and services. Revenue is recog- is impacted by the change in fair value of the underlying invest- nized upon delivery or when signiﬁcant risks and rewards of own- ments in the Onex Partners and ONCAP Funds, a reduction for ership have been transferred to the customer and receivables are unrealized carried interest as well as any contributions and dis- reasonably assured of collection. tributions in those Funds. Adjustments to the fair value of the Limited Partners’ Interests are reﬂected through earnings and Aerostructures loss, net of the change in carried interest. A signiﬁcant portion of Spirit AeroSystems’ revenues is under Income taxes long-term volume-based pricing contracts, requiring delivery of products over several years. Revenue from these contracts is recog- Income taxes are recorded using the asset and liability method of nized under the contract method of accounting in accordance with income tax allocation. Under this method, assets and liabilities IAS 11, Construction Contracts. Revenues and earnings are recog- are recorded for the future income tax consequences attributable nized on each contract by reference to the percentage-of-comple- to differences between the ﬁnancial statement carrying values of tion of the contract activity primarily using the units-of-delivery assets and liabilities and their respective income tax bases, and on method. The contract method of accounting involves the use of tax loss and tax credit carryforwards. Deferred tax assets are recog- various estimating techniques to project costs at completion and nized only to the extent that it is probable that taxable proﬁt will includes estimates of recoveries asserted against the customer for be available against which the deductible temporary differences changes in speciﬁcations. Due to the signiﬁcant length of time over as well as tax loss and tax credit carryforwards can be utilized. which these estimates will be developed, the impact to recognized These deferred income tax assets and liabilities are recorded using revenues and costs may be signiﬁcant if the estimates change. substantively enacted income tax rates. The effect of a change in These estimates involve various assumptions and projections rel- income tax rates on these deferred income tax assets or liabili- ative to the outcome of future events, including the quantity and ties is included in income in the period in which the rate change timing of product deliveries based on contractual terms and market occurs. Certain of these differences are estimated based on the projections. Also included are assumptions relative to future labour current tax legislation and the Company’s interpretation thereof. performance and rates, projections relative to material and over- Income tax expense or recovery is based on the income head costs and expected “learning curve” cost reductions over the earned or loss incurred in each tax jurisdiction and the enacted or term of the contract. 88 Onex Corporation December 31, 2011 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S Where the outcome of a contract cannot be reliably of the dealer cost. However, the company is primarily liable on estimated, all contract related costs are expensed and revenues these contracts and must refund the full amount of customer retail are recognized only to the extent that those costs are recoverable. price if the selling dealer or retailer cannot or will not refund its When the outcome of such contracts becomes reliably estimat- portion. The amount the company has historically been required able, revenues are recognized prospectively. to pay under such circumstances has been negligible. The poten- The company periodically reevaluates its contract esti- tially refundable excess of customer retail price over dealer cost at mates and reﬂects changes in estimates in the current period, and December 31, 2011 was $2,100 (2010 – $1,800). uses the cumulative catch-up method of accounting for revisions The company records revenue and associated unearned in estimates of total revenue, total costs or extent of progress on revenue at the customer retail price on warranty contracts issued a contract. by statutory insurance companies domiciled in Europe. The dif- During the year ended December 31, 2011 the com- ference between the customer retail price and dealer cost is rec- pany recognized revenues of $4,684 (2010 – $4,039) for contracts ognized as commission and deferred as a component of deferred accounted under the contract method of accounting. Contracts acquisition costs. in progress at December 31, 2011 had incurred costs of $23,290 The company has dealer obligor and administrator obli- (2010 – $19,012) and recognized earnings of $3,529 (2010 – $2,948). gor service contracts with the dealers or retailers to facilitate the Additionally, these contracts had received advances of $1,651 sale of extended warranty contracts. Dealer obligor service con- (2010 – $1,563) and retentions of nil (2010 – nil). At December 31, tracts result in sales of extended warranty contracts in which the 2011 the company was due $2,600 (2010 – $2,419) from custom- dealer/retailer is designated as the obligor. Administrator obligor ers for contract work and $5 (2010 – $5) was due to customers for service contracts result in sales of extended warranty contracts in contract work. which the company is designated as the obligor. For both deal- For revenues not recognized under the contract method er obligor and administrator obligor, premium and/or contract of accounting, Spirit AeroSystems recognizes revenues from the fee revenue is recognized over the contractual exposure period sale of products at the point of passage of title, which is generally of the contracts or historical claim payment patterns. Unearned at the time of shipment. Revenues earned from providing main- premiums and contract fees on single-premium insurance relat- tenance services, including any contracted research and devel- ed to warranty agreements are calculated to result in premiums opment, are recognized when the service is complete or other and contract fees being earned over the period at risk. Factors are contractual milestones are attained. developed based on historical analyses of claim payment patterns Healthcare over the duration of the policies in force. All other unearned pre- miums and contract fees are determined on a pro rata basis. Revenue in the healthcare segment consists primarily of CDI’s Reinsurance premiums, commissions, losses and loss patient service and healthcare provider management service adjustment expenses are accounted for on bases consistent with revenue, Skilled Healthcare Group’s patient service revenue, those used in accounting for the original policies issued and the Carestream Health’s product sales revenue and ResCare’s client terms of the reinsurance contracts. Premiums ceded to other service revenue. Service revenue is recognized at the time of companies have been reported as a reduction of revenue. Expense service, if revenues and costs can be reliably measured and eco- reimbursement received in connection with reinsurance ceded nomic beneﬁts are expected to be received, and is recorded net of has been accounted for as a reduction of the related acquisition provisions for contractual discounts and estimated uncompensat- costs. Reinsurance receivables and prepaid reinsurance premium ed care. Revenue from product sales is recognized when the fol- amounts are reported as assets. lowing criteria are met: signiﬁcant risks and rewards of ownership have been transferred; involvement in the capacity as an owner of Customer Care Services the goods has ceased; revenue and costs incurred can be reliably The customer care services segment generates revenue primar- measured; and economic beneﬁts are expected to be realized. ily through the provision of a wide array of outsourced customer Financial Services care management services, including customer service, techni- cal support and customer acquisition, retention and revenue The ﬁnancial services segment revenue consists of revenue from generation services. These services support its clients’ customers The Warranty Group’s warranty contracts primarily in North through phone, e-mail, online chat and interactive voice response America and Europe. The company records revenue and associ- and are generally charged by the minute or hour, per employee, ated unearned revenue on warranty contracts issued by North per subscriber or user, or on a per item basis for each transac- American obligor companies at the net amount remitted by the tion processed. Revenue is recognized to the extent that it is prob- selling dealer or at retailer “dealer cost”. Cancellations of these able that future economic beneﬁts will be received and revenue contracts are typically processed through the selling dealer or can be reliably measured. A portion of the revenue is often subject retailer, and the company refunds only the unamortized balance Onex Corporation December 31, 2011 89 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S to performance standards. Revenue subject to monthly or longer services is recognized at the time of service, when revenues and performance standards is recognized when such performance costs can be reliably measured and economic beneﬁts are expected standards are met. to be received by the company. The company is reimbursed by clients for certain pass- through out-of-pocket expenses, consisting primarily of tele- Depending on the terms under which the operating companies communication, employee performance incentive, and postage supply product, they may also be responsible for some or all of and shipping costs. The reimbursement and related costs are the repair or replacement costs of defective products. The com- reﬂected in the accompanying consolidated statements of earn- panies establish provisions for issues that are probable and esti- ings as revenue and cost of services, respectively. mable in amounts management believes are adequate to cover Metal Services ultimate projected claim costs. The ﬁnal amounts determined to be due related to these matters could differ signiﬁcantly from The metal services segment generates revenue primarily through recorded estimates. raw materials procurement and slag processing, metal recovery and metal sales. Research and development Revenue from raw materials procurement represents Research and development activities can be either (a) contracted sales to third parties whereby the company either purchases or (b) self-initiated: scrap iron and steel from a supplier and then immediately sells the scrap to a customer, with shipment made directly from the supplier to the third-party customer, or the company earns a con- a) Costs for contracted research and development activities, car- ried out in the scope of externally ﬁnanced research and devel- tractually determined fee for arranging scrap shipments for a cus- opment contracts, are expensed when the related revenues are tomer directly with a vendor. The company recognizes revenue recorded. from raw materials procurement sales when title and risk of loss pass to the customer. Revenue from slag processing, metal recovery and metal b) Costs for self-initiated research and development activities are assessed as to whether they qualify for recognition as inter- sales is derived from the removal of slag from a furnace and pro- nally generated intangible assets. Apart from complying with cessing it to separate metallic material from other slag compo- the general requirements for initial measurement of an intan- nents. Metallic material is generally returned to the customer or gible asset, qualiﬁcation criteria are met only when technical as sold to other end users and the non-metallic material is gener- well as commercial feasibility can be demonstrated and cost can ally sold to third parties. The company recognizes revenue from be reliably measured. It must also be probable that the intan- slag processing and metal recovery services when it performs the gible asset will generate future economic beneﬁts, be clearly services and revenue from co-product sales when title and risk of identiﬁable and allocable to a speciﬁc product. Further to meet- loss pass to the customer. Building Products ing these criteria, only such costs that relate solely to the develop- ment phase of a self-initiated project are capitalized. Any costs that are classiﬁed as part of the research phase of a self-initiated Revenue from the building products segment primarily consists project are expensed as incurred. If the research phase cannot be of product sales. Revenue is recognized when signiﬁcant risks clearly distinguished from the development phase, the respec- and rewards of ownership have been transferred to the customer; tive project-related costs are treated as if they were incurred in involvement in the capacity as an owner of the goods has ceased; the research phase only. Capitalized development costs are gen- revenue and costs incurred can be reliably measured; and receiv- erally amortized over the estimated number of units produced. ables are reasonably assured of collection. Incentive payments In cases where the number of units produced cannot be reliably to customers are recorded as a reduction of revenue over the estimated, capitalized development costs are amortized over the periods beneﬁted. Other estimated useful life of the internally generated intangible asset. Internally generated intangible assets are reviewed for impair- ment annually when the asset is not yet in use or when events or Other segment revenues consist of product sales and services. changes in circumstances indicate that the carrying amount may Revenue from product sales is recognized when the following cri- not be recoverable and the asset is in use. teria are met: signiﬁcant risks and rewards of ownership have been During 2011, $162 (2010 – $182) in research and devel- transferred; involvement in the capacity as an owner of the goods opment costs were expensed and $22 of development costs has ceased; revenue and costs incurred can be reliably measured; (2010 – $22) were capitalized. Capitalized development costs relat- and economic beneﬁts are expected to be realized. Revenue from ing to the aerostructures segment are included in intangible assets. 90 Onex Corporation December 31, 2011 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S Stock-based compensation paid on the Subordinate Voting Shares. The Company has recorded The Company follows the fair value-based method of accounting, a liability for the future settlement of the DSUs by reference to the which is applied to all stock-based compensation plans. value of underlying Subordinate Voting Shares at the balance sheet There are ﬁve types of stock-based compensation plans. date. On a quarterly basis, the liability is adjusted up or down for The ﬁrst is the Company’s Stock Option Plan (the “Plan”), described the change in the market value of the underlying shares, with the in note 18(e), which provides that in certain situations the Com- corresponding amount reﬂected in the consolidated statements pany has the right, but not the obligation, to settle any exercisable of earnings. To hedge the Company’s exposure to changes in the option under the Plan by the payment of cash to the option holder. trading price of Onex shares associated with the Management DSU The Company has recorded a liability for the potential future set- Plan, the Company enters into forward agreements with a counter- tlement of the vested options at the balance sheet date by refer- party ﬁnancial institution for all grants under the Management DSU ence to the fair value of the liability. The liability is adjusted each Plan. As such, the change in value of the forward agreements will be reporting period for changes in the fair value of the options with recorded to offset the amounts recorded as stock-based compensa- the corresponding amount reﬂected in the consolidated state- tion under the Management DSU Plan. The administrative costs of ments of earnings. those arrangements are borne entirely by participants in the plan. The second type of plan is the MIP, which is described Management DSUs are redeemable only for cash and no shares or in note 31(i). The MIP provides that exercisable investment rights other securities of the Corporation will be issued on the exercise, may be settled by issuance of the underlying shares or, in cer- redemption or other settlement thereof. tain situations, by a cash payment for the value of the investment The ﬁfth type of plan is employee stock option and rights. The Company has recorded a liability for the potential other stock-based compensation plans in place for employees at future settlement of the vested rights at the balance sheet date by various operating companies, under which, on payment of the reference to the fair value of the liability. The liability is adjusted exercise price, stock of the particular operating company or cash each reporting period for changes in the fair value of the rights is issued. The Company records a compensation expense for such with the corresponding amount reﬂected in the consolidated options based on the fair value over the vesting period. statements of earnings. The third type of plan is the Director Deferred Share Unrealized carried interest Unit Plan. A Deferred Share Unit (“DSU”) entitles the holder to Onex, as the General Partner of the Onex Partners and ONCAP receive, upon redemption, a cash payment equivalent to the mar- Funds, is entitled to a portion (20%) of the realized net gains of ket value of a Subordinate Voting Share at the redemption date. third-party limited partners in each Fund. This share of the net The Director DSU Plan enables Onex directors to apply direc- gains is referred to as carried interest. Onex is entitled to 40% of tors’ fees earned to acquire DSUs based on the market value of the carried interest realized in the Onex Partners and ONCAP Onex shares at the time. Grants of DSUs may also be made to Funds. The Onex management team is entitled to the remaining Onex directors from time to time. The DSUs vest immediately, are 60% of the carried interest realized in the Onex Partners Funds redeemable only when the holder retires and must be redeemed and the ONCAP management team is entitled to the remaining within one year following the year of retirement. Additional 60% of the carried interest realized in the ONCAP Funds. units are issued for any cash dividends paid on the Subordinate The unrealized carried interest of the Onex Partners and Voting Shares. The Company has recorded a liability for the future ONCAP Funds is calculated based on the fair values of the underly- settlement of the DSUs by reference to the value of underlying ing investments and the overall unrealized gains in each respec- Subordinate Voting Shares at the balance sheet date. On a quar- tive Fund in accordance with the limited partnership agreements. terly basis, the liability is adjusted up or down for the change in The unrealized carried interest reduces the amount due to the the market value of the underlying shares, with the corresponding Limited Partners and will eventually be paid through the realiza- amount reﬂected in the consolidated statements of earnings. tion of the Limited Partners’ share of the underlying Onex Partners The fourth type of plan is the Management Deferred and ONCAP Fund investments. The change in net unrealized car- Share Unit Plan (“Management DSU Plan”). The Management ried interest attributable to Onex is recognized through a reduced DSU Plan enables Onex management to apply all or a portion of charge for the Limited Partners’ Interests. The unrealized carried their annual compensation earned to acquire DSUs based on the interest of the Onex Partners and ONCAP Funds attributable to market value of Onex shares at the time. The DSUs vest immedi- management is recognized as a liability within other non-current ately and are redeemable only when the holder has ceased to be liabilities. The charge for the change in net unrealized carried an ofﬁcer or employee of the Company or an afﬁliate for a cash interest attributable to management is recorded within other payment equal to the then current market price of Subordinate items in the consolidated statements of earnings. Voting Shares. Additional units are issued for any cash dividends Onex Corporation December 31, 2011 91 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S Financial assets and ﬁnancial liabilities d) Loans and receivables Financial assets and ﬁnancial liabilities are initially recognized Financial assets that are non-derivative with ﬁxed or determinable at fair value and are subsequently accounted for based on their payments that are not quoted in an active market are classiﬁed classiﬁcation as described below. Transaction costs in respect of as loans and receivables. These instruments are accounted for at an asset or liability not recorded at fair value through net earn- amortized cost using the effective interest rate method. ings are added to the initial carrying amount. The classiﬁcation depends on the purpose for which the ﬁnancial instruments were e) Financial liabilities measured at amortized cost acquired and their characteristics. Except in very limited circum- Financial liabilities not classiﬁed as fair value through net earn- stances, the classiﬁcation is not changed subsequent to initial ings or loans and receivables are accounted at amortized cost recognition. Financial assets purchased and sold, where the con- using the effective interest rate method. Long-term debt has been tract requires the asset to be delivered within an established time designated as a ﬁnancial liability measured at amortized cost. frame, are recognized on a trade-date basis. Derivatives and hedge accounting a) Fair value through net earnings At the inception of a hedging relationship, the Company docu- Financial assets and ﬁnancial liabilities that are purchased and ments the relationship between the hedging instrument and the incurred with the intention of generating earnings in the near hedged item, its risk management objectives and its strategy for term are classiﬁed as fair value through net earnings. Other undertaking the hedge. The Company also requires a documented instruments may be designated as fair value through net earnings assessment, both at hedge inception and on an ongoing basis, of on initial recognition. b) Available-for-sale whether or not the derivatives that are used in the hedging transac- tions are highly effective in offsetting the changes attributable to the hedged risks in the fair values or cash ﬂows of the hedged items. Financial assets classiﬁed as available-for-sale are carried at fair Derivatives that are not designated as effective hedg- value, with the changes in fair value recorded in other comprehen- ing relationships continue to be accounted for at fair value with sive earnings. Securities that are classiﬁed as available-for-sale and changes in fair value being included in other items in the consoli- do not have a quoted price in an active market are recorded at fair dated statements of earnings. value, unless fair value is not reliably determinable, in which case When derivatives are designated as effective hedging they are recorded at cost. Available-for-sale securities are writ- relationships, the Com pany classiﬁes them either as: (a) hedges of ten down to fair value through earnings whenever it is necessary the change in fair value of recognized assets or liabilities or ﬁrm to reﬂect an impairment. Gains and losses realized on disposal commitments (fair value hedges); (b) hedges of the variability in of available-for-sale securities, which are calculated on an aver- highly probable future cash ﬂows attributable to a recognized age cost basis, are recognized in earnings. Impairments are deter- asset or liability or a forecasted transaction (cash ﬂow hedges); or mined based upon all relevant facts and circumstances for each (c) hedges of net investments in a foreign self-sustaining operation investment and recognized when appropriate. Foreign exchange (net investment hedges). gains and losses on available-for-sale assets are recognized imme- diately in earnings. a) Fair value hedges c) Held-to-maturity investments The Company’s fair value hedges principally consist of inter- est rate swaps that are used to protect against changes in the fair Securities that have ﬁxed or determinable payments and a ﬁxed value of ﬁxed-rate long-term ﬁnancial instruments due to move- maturity date, which the Company intends and has the ability to ments in market interest rates. hold to maturity, are classiﬁed as held-to-maturity and account- Changes in the fair value of derivatives that are desig- ed for at amortized cost using the effective interest rate method. nated and qualify as fair value hedging instruments are recorded Investments classiﬁed as held-to-maturity are written down to in the consolidated statements of earnings, along with changes fair value through earnings whenever it is necessary to reﬂect an in the fair value of the assets, liabilities or group thereof that are impairment. Impairments are determined based on all relevant attributable to the hedged risk. facts and circumstances for each investment and recognized when appropriate. 92 Onex Corporation December 31, 2011 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S b) Cash ﬂow hedges De-recognition of ﬁnancial instruments The Company is exposed to variability in future interest cash A ﬁnancial asset is de-recognized if substantially all risks and ﬂows on non-trading assets and liabilities that bear interest at rewards of ownership and, in certain circumstances, control of the variable rates or are expected to be reinvested in the future. ﬁnancial asset are transferred. A ﬁnancial liability is de-recognized The effective portion of changes in the fair value of when it is extinguished, with any gain or loss on extinguishment derivatives that are designated and qualify as cash ﬂow hedges is to be recognized in other items in the consolidated statements recognized in other comprehensive earnings. Any gain or loss in of earnings. fair value relating to the ineffective portion is recognized imme- diately in the consolidated statements of earnings in other items. Government assistance Amounts accumulated in other comprehensive earnings The operating companies may receive government assistance in are reclassiﬁed in the consolidated statements of earnings in the the form of grants or investment tax credits for the acquisition of period in which the hedged item affects earnings. However, when capital assets and other expenditures. Government assistance is the forecasted transaction that is hedged results in the recogni- recognized when there is reasonable assurance that the operating tion of a non-ﬁnancial asset or a non-ﬁnancial liability, the gains companies will realize the beneﬁts. Government assistance relat- and losses previously deferred in other comprehensive earnings ing to the acquisition of capital assets is deducted from the costs are transferred from other comprehensive earnings and included of the related assets and amortization is calculated on the net in the initial measurement of the cost of the asset or liability. amount. Other forms of government assistance relating to oper- When a hedging instrument expires or is sold, or when ating expenditures are recorded as a reduction of the expense at a hedge no longer meets the criteria for hedge accounting, any the time the expense is incurred. cumulative gain or loss existing in other comprehensive earnings at that time remains in other comprehensive earnings until the Assets held-for-sale and discontinued operations forecasted transaction is eventually recognized in the consolidated An asset is classiﬁed as held-for-sale if its carrying amount will be statements of earnings. When a forecasted transaction is no longer recovered by sale rather than by continuing use in the business, the expected to occur, the cumulative gain or loss that was reported in asset is available for immediate sale in its present condition, and other comprehensive earnings is immediately transferred to the management is committed to, and has initiated, a plan to sell the consolidated statements of earnings. asset which, when initiated, is expected to result in a completed c) Net investment hedges sale within 12 months. An extension of the period required to com- plete the sale does not preclude the asset from being classiﬁed Hedges of net investments in foreign operations are accounted for as held-for-sale, provided the delay is for reasons beyond the in a manner similar to cash ﬂow hedges. Any gain or loss on the Company’s control and management remains committed to its hedging instrument relating to the effective portion of the hedge plan to sell the asset. Assets that are classiﬁed as held-for-sale are is recognized in other comprehensive earnings. The gain or loss measured at the lower of their carrying amount or fair value less relating to the ineffective portion is recognized immediately in costs to sell and are no longer depreciated. At December 31, 2011, the consolidated statements of earnings in other items. Gains and assets classiﬁed as held-for-sale totalled $124, which primarily losses accumulated in other comprehensive earnings are included consisted of JELD-WEN’s non-core assets and operations that are in the consolidated statements of earnings upon the reduction or being sold as contemplated in the original transaction. disposal of the investment in the foreign operation. A discontinued operation is a component of the Impairment of ﬁnancial instruments Company that has either been disposed of, or satisﬁes the criteria to be classiﬁed as held-for-sale, and represents a separate major The Company assesses at each reporting date whether there line of business or geographic area of operations, is part of a sin- is objective evidence that a ﬁnancial asset or group of ﬁnancial gle coordinated plan to dispose of a separate major line of busi- assets is impaired. Where an impairment exists for available-for- ness or geographic area of operations, or is an operating company sale ﬁnancial assets, the cumulative loss, measured as the differ- acquired exclusively with a view to its disposal. ence between the acquisition cost and the current fair value, less any impairment loss on that ﬁnancial asset previously recognized in earnings, is removed from equity and recognized in earnings. Onex Corporation December 31, 2011 93 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S Use of estimates considered comparable to the private companies being valued The preparation of ﬁnancial statements in conformity with IFRS and discounted cash ﬂows. The valuations take into consideration requires management to make estimates and assumptions that company-speciﬁc items, the lack of liquidity inherent in a non- affect the reported amounts of assets and liabilities, the related public investment and the fact that comparable public companies disclosures of contingent assets and liabilities at the date of the are not identical to the companies being valued. Considerations ﬁnancial statements, and the reported amounts of revenue and are necessary because, in the absence of a committed buyer and expenses during the reporting period. Actual results could differ completion of due diligence similar to that performed in an actu- materially from those estimates and assumptions. These esti- al negotiated sale process, there may be company-speciﬁc items mates and underlying assumptions are reviewed on an ongoing that are not fully known that may affect value. In addition, a vari- basis. Revisions to accounting estimates are recognized in the ety of additional factors are reviewed by management, including, period in which the estimate is revised if the revision affects only but not limited to, ﬁnancing and sales transactions with third that period, or in the period of the revision and future periods if parties, current operating performance and future expectations the revision affects both current and future periods. of the particular investment, changes in market outlook and the Subjects that involve critical assumptions and estimates third-party ﬁnancing environment. In determining changes to the and that have a signiﬁcant inﬂuence on the amounts recognized valuations, emphasis is placed on current company performance in the audited annual consolidated ﬁnancial statements are fur- and market conditions. ther described as follows: Business combinations In a business combination, all identiﬁable assets, liabilities and Investments in associates designated at fair value are measured with signiﬁcant unobservable inputs (level 3 of the fair value hierarchy), with the exception of ResCare (prior to November 2010) and Hawker Beechcraft debt, which are measured with sig- contingent liabilities acquired are recorded at the date of acqui- niﬁcant other observable inputs (level 2 of the fair value hierarchy). sition at their respective fair values. One of the most signiﬁcant Further information is provided in notes 8 and 28. estimates relates to the determination of the fair value of these assets and liabilities. Land, buildings and equipment are usually Goodwill impairment tests and recoverability of assets independently appraised while short-term investments are valued The Company tests at least annually whether goodwill has suf- at market prices. If any intangible assets are identiﬁed, depending fered any impairment, in accordance with its accounting policies. on the type of intangible asset and the complexity of determining The determination of the recoverable amount of a CGU (or group its fair value, an independent external valuation expert may devel- of CGUs) to which goodwill is allocated involves the use of esti- op the fair value, using appropriate valuation techniques, which mates by management. The Company generally uses discounted are generally based on a forecast of the total expected future net cash ﬂow-based methods to determine these values. These dis- cash ﬂows. These valuations are linked closely to the assumptions counted cash ﬂow calculations typically use ﬁve-year projections made by management regarding the future performance of the that are based on the operative plans approved by management. assets concerned and any changes in the discount rate applied. Cash ﬂow projections take into account past experience and rep- In certain circumstances where estimates have been resent management’s best estimate of future developments. Cash made, the companies may obtain third-party valuations of certain ﬂows after the planning period are extrapolated using estimated assets, which could result in further reﬁnement of the fair-value growth rates. Key assumptions on which management has based allocation of certain purchase prices and accounting adjustments. its determination of fair value less costs to sell and value-in-use Investments in associates include estimated growth rates, weighted average cost of capital and tax rates. These estimates, including the methodology used, Investments in operating companies over which the Company can have a material impact on the respective values and ulti- has signiﬁcant inﬂuence, but not control, are recorded at fair mately the amount of any goodwill impairment. Note 24 provides value. The fair value of investments in associates is assessed at details on the signiﬁcant estimates used in the calculation of the each reporting date with changes to the values being recorded recoverable amounts for impairment testing. Likewise, whenever through earnings. The valuation of these non-public invest- property, plant and equipment and other intangible assets are ments requires signiﬁcant judgement by the Company due to the tested for impairment, the determination of the assets’ recoverable absence of quoted market values, inherent lack of liquidity and amount involves the use of estimates by management and can the long-term nature of such assets. Valuation methodologies have a material impact on the respective values and ultimately the include observations of the trading multiples of public companies amount of any impairment. 94 Onex Corporation December 31, 2011 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S Limited Partners’ Interests inability to secure contracts with suppliers at projected cost The interests of the Limited Partners and other investors through levels. The ability to recover these excess costs from the cus- the Onex Partners and ONCAP Funds are recorded at fair value, tomer will depend on several factors, including the Company’s which is signiﬁcantly driven by estimates of the fair values of rights under its contracts for the new programs. The recogni- the Company’s investments held by the Onex Partners and tion of earnings and loss under these new contracts requires the ONCAP Funds. The valuation of non-public investments requires Company to make signiﬁcant assumptions regarding its future signiﬁcant judgement by the Company due to the absence of costs, ability to achieve cost reduction opportunities, as well as quoted market values, inherent lack of liquidity and the long-term the estimated number of units to be manufactured under the nature of such assets. Valuation methodologies include observa- contract and other variables. tions of the trading multiples of public companies considered com- • Revenues for Skilled Healthcare Group and ResCare in the parable to the private companies being valued and discounted cash healthcare segment are substantially derived from federal, ﬂows. The valuations take into consideration company-speciﬁc state and local government agencies, including Medicare and items, the lack of liquidity inherent in a non-public investment and Medicaid programs. Laws and regulations under these pro- the fact that comparable public companies are not identical to the grams are complex and subject to interpretation. Management companies being valued. Considerations are necessary because, in of those businesses believes that they are in compliance with the absence of a committed buyer and completion of due diligence all applicable laws and regulations. Compliance with such laws similar to that performed in an actual negotiated sale process, there and regulations is subject to ongoing and future government may be company-speciﬁc items that are not fully known that may review and interpretation, including processing claims at lower affect value. In addition, a variety of additional factors are reviewed amounts upon audit as well as signiﬁcant regulatory action by management, including, but not limited to, ﬁnancing and sales including revenue adjustments, ﬁnes, penalties and exclusion transactions with third parties, current operating performance and from programs. Government agencies may condition their future expectations of the particular investment, changes in market contracts upon a sufﬁcient budgetary appropriation. If a gov- outlook and the third-party ﬁnancing environment. In determining ernment agency does not receive an appropriation sufﬁcient changes to the valuations, emphasis is placed on current company to cover its contractual obligations, it may terminate the con- performance and market conditions. For publicly traded invest- tract or defer or reduce reimbursements to be received by the ments, the valuation is based on closing market prices less adjust- Company. In addition, previously appropriated funds could ments, if any, for regulatory and/or contractual sale restrictions. also be reduced or eliminated through subsequent legislation. Included in the measurement of the Limited Partners’ Interests is a deduction for the estimated unrealized carried inter- Income taxes est of the Onex Partners and ONCAP Funds. The Company, including the operating companies, operates and The Limited Partners’ Interests are measured with sig- earns income in numerous countries and is subject to chang- niﬁcant unobservable inputs (level 3 of the fair value hierarchy). ing tax laws in multiple jurisdictions within these countries. Further information is provided in note 17. Signiﬁcant judgements are necessary in determining the world- Revenue recognition wide income tax liabilities. Although management believes that it has made reasonable estimates about the ﬁnal outcome of tax • The Company’s accounting for construction contracts in the uncertainties, no assurance can be given that the ﬁnal outcome aerostructures segment involves critical assumptions and esti- of these tax matters will be consistent with what is reﬂected in the mates which have a signiﬁcant inﬂuence on the amounts rec- historical income tax provisions. Such differences could have an ognized in the audited annual consolidated ﬁnancial state- effect on the income tax liabilities and deferred tax liabilities in ments. The revenue recognition policy for the aerostructures the period in which such determinations are made. At each bal- segment above provides a description of the critical assump- ance sheet date, the Company assesses whether the realization of tions and estimates used by the Company. A signiﬁcant portion future tax beneﬁts is sufﬁciently probable to recognize deferred tax of future revenues in the aerostructures segment is expected to assets. This assessment requires the exercise of judgement on the be derived from new programs for which the Company may be part of management with respect to, among other things, beneﬁts contracted to provide design and engineering services, recur- that could be realized from available tax strategies and future tax- ring production, or both. There are several risks inherent in able income, as well as other positive and negative factors. The such new programs. In the design and engineering phase, the recorded amount of total deferred tax assets could be reduced if Company may incur costs in excess of our forecasts due to sev- estimates of projected future taxable income and beneﬁts from eral factors, including cost overruns, customer directed change available tax strategies are lowered, or if changes in current tax orders and delays in the overall program. The Company may regulations are enacted that impose restrictions on the timing or also incur higher than expected recurring production costs, extent of the Company’s ability to utilize future tax beneﬁts. which may be caused by a variety of factors, including the future impact of engineering changes (or other change orders) or an Onex Corporation December 31, 2011 95 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S Legal contingencies Dividend distributions The Company and its operating companies in the normal course Dividend distributions to the shareholders of Onex Corporation of operations become involved in various legal proceedings, as are recognized as a liability in the consolidated balance sheets in described in note 31. While the Company cannot predict the the period in which the dividends are declared and authorized by ﬁnal outcome of such legal proceedings, the outcome of these the Board of Directors. matters may have a material effect on the Company’s consoli- dated ﬁnancial position, results of operations or cash ﬂows. Management regularly analyzes current information about these matters and provides provisions for probable contingent losses, including the estimate of legal expenses to resolve the matters. Internal and external lawyers are used for these assessments. In R E C E N T L Y 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 Standards, amendments and interpretations not yet adopted or effective Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts making the decision regarding the need for provisions, manage- In accordance with IFRS 4, Insurance Contracts, an entity is per- ment considers the degree of probability of an unfavourable out- mitted to change its accounting policies for insurance contracts if, come and the ability to make a sufﬁciently reliable estimate of the and only if, the change makes the ﬁnancial statements more rel- amount of loss. The ﬁling of a suit or formal assertion of a claim or evant to the economic decision-making needs of users and no less the disclosure of any such suit or assertion does not automatically reliable, or more reliable and no less relevant to those needs. In indicate that a provision may be appropriate. October 2010, the Financial Accounting Standards Board (“FASB”) Employee beneﬁts issued new guidance on the accounting for costs associated with acquiring or renewing insurance contracts. The new guid- Onex, the parent company, does not provide pension, other ance, which will impact The Warranty Group’s results, modiﬁes retirement or post-retirement beneﬁts to its employees or to the deﬁnition of the types of costs incurred that can be capital- those of any of the operating companies. The operating compa- ized in the acquisition of new and renewal insurance contracts nies account for pension and other post-retirement beneﬁts in and restricts the capitalization of acquisition costs to those that accordance with actuarial valuations. These valuations rely on are related directly to the successful acquisition of new or renewal statistical and other factors in order to anticipate future events. insurance contracts. The Company will be retroactively adopting These factors include key actuarial assumptions, including the new guidance as an accounting policy change on January 1, the discount rate, expected return on plan assets, expected sal- 2012. As a result of this change in accounting policy, the Company ary increases and mortality rates. These actuarial assumptions expects to defer fewer costs and record lower amortization. The may differ materially from actual developments due to changing Company is currently evaluating the full effects of implementing market and economic conditions and therefore may result in a the new policy. signiﬁcant change in post-retirement employee beneﬁt obliga- tions and the related future expense. Note 32 provides details on Reporting Entity Standards the estimates used in accounting for pensions and post-retire- In May 2011, the IASB issued a group of ﬁve new standards that ment beneﬁts. Stock-based compensation addresses the scope and accounting for the reporting entity. The new standards consist of amendments to IAS 27, which was renamed Separate Financial Statements, amendments to IAS 28, The Company’s stock-based compensation accounting for its which was renamed Investments in Associates and Joint Ventures, MIP options is completed using an internally developed valuation IFRS 10 – Consolidated Financial Statements, IFRS 11 – Joint model. The critical assumptions and estimates used in the valu- Arrangements and IFRS 12 – Disclosure of Interests in Other Entities. ation model include the fair value of the underlying investments, These ﬁve new standards are effective for annual periods begin- the time to expected exit from each investment, a risk-free rate ning on or after January 1, 2013. The Company is currently evalu- and an industry comparable historical volatility for each invest- ating the impact of adopting these standards on its consolidated ment. The fair value of the underlying investments includes criti- ﬁnancial statements. A description of the signiﬁcant changes and cal assumptions and estimates as described above for investments new requirements is included below. in associates and Limited Partners’ Interests. • IFRS 10 establishes the principles for the presentation and Earnings per share preparation of consolidated ﬁnancial statements when an entity controls one or more other entities. IFRS 10 introduces Basic earnings per share is based on the weighted average number a single consolidation model for all entities based on control, of Subordinate Voting Shares outstanding during the year. Diluted irrespective of the nature of the entity. IFRS 10 supersedes all earnings per share is calculated using the treasury stock method. of the guidance in IAS 27, Consolidated and Separate Financial Statements and Standing Interpretations Committee 12, Consolidation – Special Purpose Entities. 96 Onex Corporation December 31, 2011 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S • IFRS 11 establishes the principles for determining the type of IFRS 9 – Financial Instruments joint arrangements and the accounting for those arrangements in In November 2009, the IASB issued IFRS 9, Financial Instruments, accordance with that type of joint arrangement. IFRS 11 reduces which represents the ﬁrst phase of its replacement of IAS 39, the types of joint arrangements and eliminates use of the propor- Financial Instruments: Recognition and Measurement, and intro- tionate consolidation method for joint ventures. IFRS 11 super- duces new requirements for the classiﬁcation and measurement sedes all of the guidance in IAS 31, Interests in Joint Ventures. of ﬁnancial assets and removes the need to separately account • IFRS 12 provides the disclosure requirements for entities for certain embedded derivatives. IFRS 9 is effective for annual reported under IFRS 10 and IFRS 11 and replaces the disclosure periods beginning on or after January 1, 2015. The Company is requirements currently in IAS 28, Investments in Associates. currently evaluating the impact of adopting this standard on its IFRS 12 requires the disclosure of the nature, risks and ﬁnancial consolidated ﬁnancial statements. effects associated with the entity’s interests in subsidiaries, associates, joint arrangements and unconsolidated structured 2 . A C Q U I S I T I O N S entities. • IAS 28 prescribes the use of the equity method for investments in associates and joint ventures. IAS 28 applies to all entities that are investors with joint control of, or signiﬁcant inﬂuence over, an investee. However, IAS 28 retains the ability of the Company to designate its investments in associates, upon ini- tial recognition, at fair value through earnings. IFRS 13 – Fair Value Measurement In May 2011, the IASB issued IFRS 13, Fair Value Measurement, which provides a single framework for measuring fair value and requires enhanced disclosures when fair value is used for mea- surement. IFRS 13 is effective for annual periods beginning on or after January 1, 2013. The Company is currently evaluating the impact of adopting this standard on its consolidated ﬁnancial statements. IAS 19 – Employee Future Beneﬁts In June 2011, the IASB issued an amendment to IAS 19, Employee Future Beneﬁts, which changes the recognition, measurement and presentation of deﬁned beneﬁt pension expense and provides for additional disclosures of all employee beneﬁts. The amendments to IAS 19 are effective for annual periods beginning on or after January 1, 2013. The Company is currently evaluating the impact of adopting this standard on its consolidated ﬁnancial statements. IAS 1 – Presentation of Financial Statements In June 2011, the IASB issued an amendment to IAS 1, Presen- tation of Financial Statements, which requires entities to sepa- rately present items in other comprehensive earnings based on whether they may be recycled to earnings or loss in future peri- ods. The amendment to IAS 1 is effective for annual periods beginning on or after July 1, 2012. The impact of adopting this standard is not expected to have a signiﬁcant effect on the con- solidated ﬁnancial statements. During 2011 and 2010 several acquisitions, which were accounted for as business combinations, were completed either directly by Onex or through subsidiaries of Onex. Any third-party borrowings in respect of these acquisitions are without recourse to Onex. Business combinations are accounted for using the pur- chase method. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. Identiﬁable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at fair values at the date of acquisition, irrespective of the extent of any non-control- ling interests. Any non-controlling interests in the acquired com- pany are measured either at fair value or at the non-controlling interest’s proportionate share of the identiﬁable assets and liabili- ties of the acquired business. The fair values are determined using a combination of valuation techniques, including discounted cash ﬂows and projected earnings multiples, and allocated to the assets and liabilities accordingly. The key inputs to the model include assumptions related to the future customer demand, material and employee-related costs, changes in mix of product and services produced or delivered and restructuring programs. The excess of the aggregate of the consideration transferred, the amount of any non-controlling interests in the acquired company and, in a business combination achieved in stages, the fair value at the acquisition date of the Company’s previously held interest in the acquired company compared to the fair value of the identiﬁable net assets acquired is recorded as goodwill. Acquisition-related costs are expensed as incurred and related restructuring charges are expensed in the periods after the acquisition date. Subsequent changes in the fair value of contingent consideration recorded as a liability at the acquisition date are recognized in earnings or loss. In certain circumstances where estimates have been made, the companies are obtaining third-party valuations of cer- tain assets, which could result in further reﬁnement of the fair- value allocation of certain purchase prices and accounting adjust- ments. The results of operations for all acquired businesses are included in the consolidated statements of earnings, comprehen- sive earnings and equity of the Company from their respective dates of acquisition. Onex Corporation December 31, 2011 97 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 2 0 1 1 A C Q U I S I T I O N S Details of the purchase price and allocation for the 2011 acquisitions are as follows: Cash and cash equivalents Other current assets Intangible assets with limited life Intangible assets with indefinite life Goodwill Property, plant and equipment and other non-current assets Current liabilities Non-current liabilities Non-controlling interests in net assets ONCAP(a) Celestica(b) JELD-WEN(c) $ 52 $ 1 $ 138 196 262 188 278 267 1,243 (211) (824)(1) 208 (64) 50 13 – 34 1 99 (17) – 82 – 859 114 256 119 1,384 2,870 (661) (1,182)(2) 1,027 (327) Other(d) $ – 3 6 1 41 9 60 (1) – 59 – Total $ 191 1,108 395 445 472 1,661 4,272 (890) (2,006) 1,376 (391) Interest in net assets acquired $ 144 $ 82 $ 700 $ 59 $ 985 (1) Included in non-current liabilities of ONCAP is $201 of acquisition ﬁnancing provided by ONCAP, of which Onex’ share was $85. (2) Included in non-current liabilities of JELD-WEN is $171 of acquisition ﬁnancing provided by the Company, of which Onex’ share was $58. a) In May 2011, ONCAP II completed the acquisition of a major- ity of the issued and outstanding shares of Pinnacle Pellet, Inc. In December 2011, ONCAP III completed the acqui- sition of Davis-Standard Holdings, Inc. (“Davis-Standard”), a (“Pinnacle Renewable Energy Group”). Pinnacle Renewable Connecticut, United States headquartered designer, manufac- Energy Group is a British Columbia, Canada headquartered pro- turer and supplier of highly engineered extrusion and converting ducer of wood pellets for markets around the world. Onex and machinery systems. Onex and ONCAP III have an approximate ONCAP II have an approximate 60% equity ownership in Pinnacle 90% ownership in Davis-Standard, of which Onex’ equity owner- Renewable Energy Group, of which Onex’ equity ownership is 29%. ship is 26%. In May 2011, ONCAP II completed the acquisition of Onex, ONCAP II, ONCAP III and management of Onex Crown Amusements Ltd. (“Casino ABS”). Casino ABS is the largest and ONCAP invested a total of $324 in these investments, of casino operator in the Alberta, Canada market, with four casinos. which Onex’ investment was $123. In December 2011, ONCAP III purchased approximately 22% of In addition, ONCAP includes acquisitions made by Casino ABS from ONCAP II at the same cost basis as ONCAP II’s Caliber Collision Centers (“Caliber Collision”), Hopkins, Mister original investment. Onex, ONCAP II and ONCAP III have close Car Wash and BSN SPORTS, formerly Sport Supply Group, Inc. to 100% of the equity ownership in Casino ABS, of which Onex’ (“Sport Supply Group”). The purchase price for these acquisitions equity ownership is 44%. was $21, of which $2 was non-cash consideration. In June 2011, ONCAP III completed the acquisition of Hopkins Manufacturing Corporation (“Hopkins”), a Kansas, United States headquartered manufacturer, marketer and dis- b) In June 2011, Celestica completed the acquisition of Brooks Automation’s semiconductor equipment contract manufactur- tributor of automotive aftermarket products for sale to distribu- ing operations. These operations specialize in manufacturing tors and retailers primarily in North America. Onex and ONCAP III complex mechanical equipment and providing systems integra- have an approximate 90% equity ownership in Hopkins, of which tion services for semiconductor equipment manufacturers. The Onex’ equity ownership is 26%. purchase price for this acquisition was $82, which was ﬁnanced by Celestica. 98 Onex Corporation December 31, 2011 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S c) In early October 2011, the Company acquired a controlling interest in JELD-WEN Holding, inc. (“JELD-WEN”). JELD-WEN is In February 2012, Onex sold a total of $83 of its original investment in JELD-WEN to certain limited partners and others at one of the world’s largest manufacturers of interior and exterior the same cost basis as Onex’ original investment. Onex received doors, windows and related products for use primarily in the resi- proceeds of $79, reﬂecting the cost reduction from JELD-WEN’s dential and light commercial new construction and remodelling convertible notes redemption in October 2011. Onex’ investment markets. The Company’s investment in JELD-WEN consisted of in JELD-WEN was reduced to $173 of convertible preferred stock $700 of convertible preferred stock for a 57% as-converted equity for a 15% as-converted equity ownership interest and $32 of con- ownership interest and $171 for convertible notes. The convert- vertible notes. ible notes can be redeemed within 18 months with proceeds from the sale of certain non-core assets and, if not redeemed, will con- vert into additional convertible preferred stock. The Company’s d) Other includes acquisitions made by CDI, ResCare, Skilled Healthcare Group and TMS International for total consideration investment of $871 was made by Onex, Onex Partners III, Onex of $59, of which $50 was ﬁnanced with cash by the respective management and others. Onex’ initial investment in JELD-WEN operating companies and $9 was non-cash consideration. was $240 for convertible preferred stock for a 20% as-converted equity ownership interest and $58 of convertible notes. Included in the acquisitions above were gross receivables due In October 2011, JELD-WEN redeemed $42 of the con- from customers of $543, of which $27 of contractual cash ﬂows vertible notes and interest accrued to the redemption date, of are not expected to be recovered. The fair value of these receiv- which Onex’ share was $14. ables was determined to be $516. Details of the net loss since the date of acquisition for the signiﬁcant 2011 acquisitions are as follows: Revenues Expenses Net loss ONCAP JELD-WEN Total $ 243 257 $ (14) $ 774 863 $ (89) $ 1,017 1,120 $ (103) The Company estimates it would have reported consolidated rev- In addition to the acquisitions described above, in April 2010 and enues of $27,495 and net earnings of $1,524 for the year ended May 2011, Tropicana Las Vegas completed preferred share rights December 31, 2011, if the acquisitions completed during 2011 had offerings of $50 and $35, respectively. Onex, Onex Partners III and been acquired on January 1, 2011. Onex management invested $45 and $29 in the April 2010 and May 2011 preferred rights offerings, of which Onex’ share was Goodwill of the acquisitions is attributable primarily to the $10 and $6, respectively. The preferred shares under both offer- acquired workforce, non-contractual established customer ings have terms similar to the 2009 preferred share offering, accrue bases and technological knowledge of the acquired companies. dividends at an annual rate of 12.5% and are convertible into Goodwill of the acquisitions that is expected to be deductible for common shares of Tropicana Las Vegas at a ﬁxed ratio including tax purposes is $50. accrued and unpaid dividends. After giving effect to the addition- al investments, Onex, Onex Partners III and Onex management’s ownership, on an as-converted basis, at December 31, 2011 was 76% (2010 – 74%), of which Onex’ share was 17% (2010 – 16%). Onex Corporation December 31, 2011 99 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 2 0 1 0 A C Q U I S I T I O N S Details of the purchase price and allocation for the 2010 acquisitions are as follows: Flushing Town Center(a) Skilled Healthcare Group(b) ONCAP II(c) Carestream Health(d) ResCare(e) EMSC(f) Other(g) Total Cash and cash equivalents Other current assets Intangible assets with limited life Intangible assets with indefinite life Goodwill Property, plant and equipment and other non-current assets Current liabilities Non-current liabilities Non-controlling interests in net assets Interest previously held $ 23 125 – – – 331 479 (27) (443) 9 – – $ – $ 13 $ 4 $ 15 $ – $ – $ 55 – – 5 57 1 63 – – 63 – – 84 29 54 89 9 278 (51) (128) 99 (36) – 11 37 – 63 – 115 (5) (1) 109 – – 296 112 227 234 106 990 (190) (555)(1) 245 (5) (113) 9 67 2 74 2 154 (22) (15) 117 – – 13 16 – 14 1 44 (17) (11) 16 – – 538 261 288 531 450 2,123 (312) (1,153) 658 (41) (113) Interest in net assets acquired $ 9 $ 63 $ 63 $ 109 $ 127 $ 117 $ 16 $ 504 (1) Included in non-current liabilities of ResCare is $159 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 the managing partner of Flushing Town Center, a mixed-use develop- d) In September 2010, Carestream Health completed the acqui- sition of Quantum Medical Imaging, LLC (“Quantum Medical ment located in New York City. As a result, Onex began consoli- Imaging”). Quantum Medical Imaging is a manufacturer of digital dating its interest in the ﬁrst quarter of 2010. and conventional x-ray systems used by hospitals, imaging centres b) In May 2010, Skilled Healthcare Group completed the acquisi- tions of substantially all the assets of ﬁve Medicare-certiﬁed hos- pice companies and four Medicare-certiﬁed home health compa- and health clinics. In addition, Carestream Health completed one other acquisition during 2010. The total purchase price of these acquisitions was $109, which was ﬁnanced by Carestream Health. nies in the United States, operating in Arizona, Idaho, Montana and Nevada. The total purchase price of these acquisitions was e) In mid-November 2010, Onex and Onex Partners III acquired all of the outstanding common shares of ResCare not previ- $63, which was ﬁnanced by Skilled Healthcare Group, of which $17 ously owned by Onex and its afﬁliates. Onex, Onex Partners III was in the form of certain deferred and/or contingent payments. and Onex management’s equity investment was $120, of which Onex’ share was $22. Including Onex and Onex Partners I’s 2004 c) In August 2010, ONCAP II completed the acquisition of Sport Supply Group. Sport Supply Group is a leading marketer, manu- investments in ResCare, the combined investment of Onex, Onex Partners I, Onex Partners III and Onex management was $204, of facturer and distributor of proprietary and third-party sporting which Onex’ share was $41. goods equipment and branded team uniforms to the institutional As a result of this transaction, Onex and its afﬁliates and team sports market in the United States. Onex and ONCAP II control ResCare and began consolidating ResCare in the fourth purchased a 62% equity ownership in Sport Supply Group. Onex quarter of 2010. and ONCAP II’s total equity investment in Sport Supply Group In addition, ResCare completed an acquisition in was $56, of which Onex’ share was $29. During 2011, Sport Supply December 2010 for total consideration of $7. Group began operating as BSN SPORTS. In addition, ONCAP II includes acquisitions made by Caliber Collision, Mister Car Wash and BSN SPORTS. The pur- f) During 2010, EMSC completed seven acquisitions located in the United States for total consideration of $117. The Company sold chase price for these acquisitions was $7. its remaining interests in EMSC during the second quarter of 2011 and no longer consolidates EMSC. 100 Onex Corporation December 31, 2011 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S g) Other includes acquisitions made by Celestica and TMS International. Net earnings since the date of the acquisitions were not signiﬁcant to the Company’s results for the year ended Decem- ber 31, 2010. Included in the acquisitions above were gross receivables due Goodwill of the acquisitions is attributable primarily to from customers of $356, of which $25 of contractual cash ﬂows are the acquired workforce and non-contractual established custom- not expected to be recovered. The fair value of these receivables er bases of the acquired companies. Goodwill of the acquisitions was determined to be $331. that was expected to be deductible for tax purposes was $301. 3 . D I S C O N T I N U E D O P E R A T I O N S The following tables show revenue, expenses and net after-tax results from discontinued operations. Year ended December 31, 2011 Revenue Expenses EMSC(a) Husky(b) $ 1,018 508 $ 1,526 $ 942 470 $ 1,412 Year ended December 31, 2010 Revenue Expenses EMSC(a) Husky(b) $ 2,860 1,095 $ 3,955 $ 2,648 994 $ 3,642 Pre-tax Earnings $ 76 38 $ 114 Pre-tax Earnings $ 212 101 $ 313 Tax Provision Gain Net of Tax Earnings for the Year $ 29 16 $ 45 $ 559 1,087 $ 1,646 $ 606 1,109 $ 1,715 Tax Provision Gain Net of Tax Earnings for the Year $ 80 25 $ 105 $ – – $ – $ 132 76 $ 208 a) In May 2011, Onex, Onex Partners I, Onex management and certain limited partners sold their remaining 13.7 million shares b) In June 2011, Onex, Onex Partners I, Onex Partners II and Onex management completed the sale of their entire investment in of EMSC, of which Onex’ portion was approximately 4.8 million Husky. The sale was completed for net cash proceeds of $1,652, shares. The sale was part of an offer made for all outstanding of which Onex’ share was $583, including carried interest and shares of EMSC. The sale was completed at a price of $64.00 cash deducting distributions paid on account of the MIP. In addition to per share. Onex’ cash cost for these shares was $6.67 per share. the net cash proceeds, additional amounts of $60 held in escrow Total cash proceeds received from the sale were $878, and receivable from Husky were recognized on the sale, of which resulting in a pre-tax gain of $600. Onex recorded a deferred tax Onex’ share was $19, excluding carried interest. The proceeds provision of $41 on the gain. Onex’ share of the cash proceeds was held in escrow are for the closing working capital, tax indemni- $342, including carried interest and deducting distributions paid ties and other adjustments and have been recorded at fair value. on account of the MIP. The gain on the sale is entirely attributable As a result, a pre-tax gain of $1,142 was recognized on the sale of to the equity holders of Onex Corporation as the interests of the Husky. In addition, Onex recorded a non-cash tax provision of Limited Partners were recorded as a ﬁnancial liability at fair value. $49 on the gain. The gain on the sale is entirely attributable to the Amounts received on account of the carried interest equity holders of Onex Corporation, as the interests of the Limited related to this transaction totalled $80. Consistent with market Partners were recorded as a ﬁnancial liability at fair value. practice and the terms of the Onex Partners agreements, Onex is During the third quarter of 2011, $38 of the additional allocated 40% of the carried interest with 60% allocated to man- amounts held in escrow and receivable from Husky were received agement. Onex’ share of the carried interest received was $32 and by the Company, of which Onex’ share was $18, including carried is included in Onex’ share of the cash proceeds. Management’s interest and deducting distributions paid on account of the MIP. share of the carried interest was $48. In addition, amounts paid on As a result of a change in estimated amounts held in escrow to account of the MIP totalled $20 for this transaction. be received by the Company, a pre-tax loss of $5 was recorded during the third quarter of 2011. In addition, Onex recorded a non-cash tax provision of $1 during the third quarter of 2011. Onex Corporation December 31, 2011 101 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S At December 31, 2011, $18 was held in escrow for tax indemnities The following table shows the summarized aggregate assets and and other expenses, of which Onex’ share was $6 excluding carried liabilities of discontinued operations: interest, and is expected to be received in approximately four years. Amounts received during 2011 on account of the car- ried interest related to this transaction totalled $57. Consistent December 31, 2010 January 1, 2010 with market practice and the terms of the Onex Partners agree- Cash and cash equivalents $ 479 $ 436 ments, Onex is allocated 40% of the carried interest with 60% allocated to management. Onex’ share of the carried interest received was $23 and is included in Onex’ share of the cash pro- ceeds. Management’s share of the carried interest was $34. The amount of carried interest received on this transaction was volun- tarily reduced by $88 (Onex’ share of the reduction was $35) at the request of Onex. The carried interest that was voluntarily reduced may be received on a future realization in Onex Partners II. Other current assets Intangible assets Goodwill Property, plant and equipment and other non-current assets Current liabilities Non-current liabilities 946 460 514 733 3,132 (716) (992) 896 395 502 758 2,987 (635) (1,069) In addition, amounts paid during 2011 on account of the MIP Net assets of discontinued operations $ 1,424 $ 1,283 totalled $31 for this transaction. The following table presents the summarized aggregate cash ﬂows from discontinued operations: Year ended December 31, 2010 Operating activities Financing activities Investing activities Increase (decrease) in cash and cash equivalents for the year Increase in cash and cash equivalents due to changes in foreign exchange rates Distribution paid to Husky shareholders Cash and cash equivalents, beginning of the year Cash and cash equivalents, end of the year Year ended December 31, 2011 Operating activities Financing activities Investing activities Decrease in cash and cash equivalents for the year Increase in cash and cash equivalents due to changes in foreign exchange rates Cash and cash equivalents, beginning of the year Cash and cash equivalents, end of the year Proceeds from sales of operating companies no longer controlled EMSC $ 214 (69) (158) (13) – – 300 Husky Total $ 257 $ 471 (57) (47) 153 3 (100) 136 (126) (205) 140 3 (100) 436 $ 287 $ 192 $ 479 EMSC $ 76 8 (371) (287) – 287 – 878 $ 878 Husky Total $ 24 $ 100 (50) (167) (193) 1 192 – (42) (538) (480) 1 479 – 1,690 $ 1,690 2,568 $ 2,568 102 Onex Corporation December 31, 2011 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 4 . C A S H A N D C A S H E Q U I V A L E N T S 6 . O T H E R C U R R E N T A S S E T S Cash and cash equivalents comprised the following: Other current assets comprised the following: As at December 31 Cash at bank and on hand Bank term deposits Commercial paper Money market funds 2011 $ 1,050 411 845 142 446 425 578 2010 As at December 31 2011 2010 $ 1,083 Current portion of ceded claims recoverable held by The Warranty Group (note 14) $ 154 $ 209 $ 2,448 $ 2,532 (i) Current portion of prepaid premiums of The Warranty Group Current portion of deferred costs of (i) Cash and cash equivalents at December 31, 2010 includes $479 related to The Warranty Group (note 9) Prepaid expenses Other(a) 362 162 154 354 277 177 126 706 $ 1,186 $ 1,495 discontinued operations. 5 . I N V E N T O R I E S Inventories comprised the following: As at December 31 Raw materials Work in progress Finished goods Real estate held for sale 2011 $ 1,231 2,546 455 196 2010 $ 1,002 2,324 474 204 $ 4,428 $ 4,004 During the year ended December 31, 2011, $14,042 (2010 – $11,976) of inventory was expensed in cost of sales. Note 11 pro- vides details on inventory provisions recorded by the Company. (a) Other at December 31, 2010 includes $272 of restricted cash that was distributed to the limited partners of the Onex Partners’ Funds in January 2011. The restricted cash represented the limited partners’ net share of distributions received in the fourth quarter of 2010. Onex Corporation December 31, 2011 103 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 7 . 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: At January 1, 2010 Cost Accumulated amortization and impairments Net book amount Year ended December 31, 2010 Opening net book amount Additions Disposals Amortization charge Amortization and impairment charges (discontinued operations) Acquisition of subsidiaries Impairment charge Transfers from construction in progress Foreign exchange Other Closing net book amount At December 31, 2010 Cost Accumulated amortization and impairments Net book amount Year ended December 31, 2011 Opening net book amount Additions Disposals Amortization charge Amortization charge (discontinued operations) Acquisition of subsidiaries Disposition of operating companies Impairment charge Transfers from construction in progress Foreign exchange Other Land Buildings Machinery and Equipment Construction in Progress $ 387 (8) $ 379 $ 1,358 (380) $ 978 $ 3,379 (1,804) $ 1,575 $ 379 $ 978 $ 1,575 2 (1) – – 39 – 39 – 5 35 (20) (86) (15) 87 (5) 535 (5) 12 163 (21) (317) (68) 31 (1) 412 (9) 5 $ 434 – $ 434 $ 434 598 (2) – − 256 – (986) − 7 Total $ 5,558 (2,192) $ 3,366 $ 3,366 798 (44) (403) (83) 413 (6) – (14) 29 $ 463 $ 1,516 $ 1,770 $ 307 $ 4,056 $ 471 (8) $ 463 $ 1,987 (471) $ 1,516 $ 3,811 (2,041) $ 1,770 $ 307 – $ 307 $ 6,576 (2,520 ) $ 4,056 $ 463 $ 1,516 $ 1,770 $ 307 $ 4,056 1 (4) – – 160 (30) – – 2 (1) 50 (44) (105) (4) 687 (226) (9) 97 (5) (33) 203 (8) (357) (17) 541 (225) (14) 314 (6) – 420 (1) – – 95 (22) – (411) (1) (1) 674 (57) (462) (21) 1,483 (503) (23) – (10) (35) Closing net book amount $ 591 $ 1,924 $ 2,201 $ 386 $ 5,102 At December 31, 2011 Cost Accumulated amortization and impairments Net book amount $ 599 (8) $ 591 $ 2,445 (521) $ 1,924 $ 4,223 (2,022) $ 2,201 $ 386 – $ 386 $ 7,653 (2,551) $ 5,102 Property, plant and equipment cost and accumulated amortization and impairments have been reduced for components retired during 2010 and 2011. At December 31, 2011 property, plant and equipment includes amounts under ﬁnance leases of $104 (2010 – $92) and related accumulated amortization of $48 (2010 – $43). During 2011, borrowing costs of $13 (2010 – $34) were capitalized and are included in the cost of additions. 104 Onex Corporation December 31, 2011 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 8 . L O N G - T E R M I N V E S T M E N T S Long-term investments comprised the following: Investments in associates at fair value through earnings: Onex Partners(a) Other associate investments(a) EMSC insurance collateral(b) Long-term investments held by The Warranty Group(c) Investment in Onex Credit Partners funds(d) Other December 31, 2011 December 31, 2010 January 1, 2010 $ 3,234 $ 2,771 $ 1,264 128 – 1,501 412 140 106 139 1,475 255 118 133 158 1,548 218 127 $ 5,415 $ 4,864 $ 3,448 a) Investments in associates, over which the Company has signiﬁcant inﬂuence, but not control, are designated, upon initial recogni- tion, at fair value. The fair value of investments in associates is assessed at each reporting date with changes to the values being recorded through earnings. Details of those investments designated at fair value included in long-term investments are as follows: Balance – January 1, 2010 Purchase of investments Distributions received Unrealized increase (decrease) in investments, net Interest income Other adjustments(i) Balance – December 31, 2010 Purchase of investments Distributions received Unrealized increase in investments, net Interest income Balance – December 31, 2011 Onex Partners Other Associate Investments Total $ 1,264 $ 133 $ 1,397 1,271 (121) 461 7 (111) 4 (18) (13) – – 1,275 (139) 448 7 (111) $ 2,771 $ 106 $ 2,877 – (38) 494 7 29 (14) 7 – 29 (52) 501 7 $ 3,234 $ 128 $ 3,362 (i) In the fourth quarter of 2010, Onex and Onex Partners III acquired all of the outstanding common shares of ResCare not previously owned by Onex or its afﬁliates. As a result of this transaction, Onex and its afﬁliates controlled and began consolidating the results of ResCare in the fourth quarter of 2010. Onex Partners includes investments in Allison Transmission, In September 2010, the Company, together with the Hawker Beechcraft, ResCare (prior to November 2010), RSI and Canada Pension Plan Investment Board (“CPPIB”), acquired Tomkins (since September 2010). Other associates accounted Tomkins plc. The newly acquired business is operating as Tomkins at fair value through earnings include investments in Cypress Limited (“Tomkins”). Tomkins is a global engineering and manufac- Insurance Group (“Cypress”) and certain real estate investments. turing group that produces a variety of products for the industrial, Investments in associates designated at fair value are measured automotive and building products markets across North America, with signiﬁcant unobservable inputs (level 3 of the fair value hier- Europe and Asia. The equity investment of $2,125 was initially archy), with the exception of ResCare (prior to November 2010) split equally between the Company and CPPIB. Management of and Hawker Beechcraft debt, which are measured with signiﬁcant Tomkins also became investors in the business. During the fourth other observable inputs (level 2 of the fair value hierarchy). The quarter of 2010, the Company and CPPIB equally sold a total of associates also have ﬁnancing arrangements that typically restrict $314 of their investment to certain limited partners and others. The their ability to transfer cash and other assets to the Company. Tomkins investment held by certain limited partners and others Onex Corporation December 31, 2011 105 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S is in an entity controlled by the Company and therefore included in Expected maturities may differ from contractual maturities the investment of Tomkins. The Company’s investment of $1,219 because borrowers may have the right to call or prepay obliga- was made by Onex, Onex Partners III, certain limited partners, Onex tions with or without call or prepayment penalties. management and others. Onex’ net investment in the acquisition At December 31, 2011, certiﬁcates of deposit, money was $315 for a 14% equity ownership interest. market funds and available-for-sale ﬁxed-maturity securities with b) The Company sold its remaining interests in EMSC during the second quarter of 2011 and no longer consolidates EMSC. a carrying value of $38 (2010 – $38) were on deposit with various insurance departments and regulators to satisfy various regula- tory requirements. c) The table below presents the fair value of all investments in securities held by The Warranty Group at December 31: d) The investments in Onex Credit Partners Funds are recorded at fair value and classiﬁed as fair value through earnings. In August 2011 2010 Credit Partners unleveraged senior secured loan strategy fund. 2011, Onex invested an additional $150 in a segregated Onex U.S. government and agencies $ 92 $ 72 States and political subdivisions Foreign governments Corporate bonds Mortgage-backed securities Other Current portion(1) Long-term portion 129 451 652 359 63 $ 1,746 (245) $ 1,501 60 429 756 362 64 $ 1,743 (268) $ 1,475 (1) The current portion is included in short-term investments in the consolidated balance sheets. Management believes that unrealized losses on indi- vidual securities that are not recognized as impairments are the result of normal price ﬂuctuations due to market conditions and are not an indication of objective evidence of an impairment loss. Management further believes it has the intent and ability to hold these securities until they fully recover in value. These determina- tions are based upon an in-depth analysis of individual securities. The fair value of ﬁxed-maturity securities owned by The Warranty Group, by contractual maturity, is shown below: 9 . O T H E R N O N - C U R R E N T A S S E T S Other non-current assets comprised the following: As at December 31 Deferred income taxes (note 16) Defined benefit pensions (note 32) Non-current portion of ceded claims recoverable held by The Warranty Group (note 14) Non-current portion of prepaid premiums of The Warranty Group 2011 $ 256 159 2010 $ 346 186 358 474 207 359 391 418 233 298 $ 1,813 $ 1,872 a) Deferred costs of The Warranty Group consist of certain costs of acquiring warranty and credit business including commissions, underwriting and sales expenses that vary with, and are primar- ily related to, the production of new business. These charges are deferred and amortized as the related premiums and contract fees are earned. At December 31, 2011, $369 (2010 – $410) of costs were deferred, of which $162 (2010 – $177) has been recorded as current (note 6). The Company’s accounting for deferred costs of acquiring warranty and credit business will change on January 1, Fair values generally represent quoted market value prices for Non-current portion of deferred costs securities traded in an active market or estimated using a valu- of The Warranty Group(a) ation technique. Other As at December 31 Years to maturity: One or less After one through five After five through ten After ten Mortgage-backed securities Other 2011 2010 2012, as described in note 1. $ 245 $ 268 655 310 114 359 63 667 294 88 362 64 $ 1,746 $ 1,743 106 Onex Corporation December 31, 2011 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 1 0 . G O O D W I L L A N D I N T A N G I B L E A S S E T S Goodwill and intangible assets comprised the following: Goodwill Trademarks and Licenses Customer Relationships Computer Software Other Intangible Assets with Limited Life Other Intangible Assets with Indefinite Life Total Intangible Assets At January 1, 2010 Cost $ 2,209 Accumulated amortization and impairments (11) Net book amount (1) $ 2,198 Year ended December 31, 2010 $ 332 (95) $ 237 $ 1,581 (568) $ 1,013 $ 569 (398) $ 171 $ 1,542 (801) $ 741 $ 79 $ 4,103 – (1,862) $ 79 $ 2,241 Opening net book amount $ 2,198 $ 237 $ 1,013 $ 171 $ 741 $ 79 $ 2,241 Additions Disposals Amortization charge Amortization charge (discontinued operations) Acquisition of subsidiaries Impairment charge Foreign exchange Other – (3) – − 531 – (5) (87) – – (22) − 75 (5) – – – – (133) (11) 93 – (5) – 65 – (58) (4) 25 (3) 1 – 38 (3) (65) (43) 77 – − (29) – – – − 279 – 1 (9) 103 (3) (278) (58) 549 (8) (3) (38) Closing net book amount $ 2,634 $ 285 $ 957 $ 197 $ 716 $ 350 $ 2,505 At December 31, 2010 Cost $ 2,645 Accumulated amortization and impairments (11) Net book amount (1) $ 2,634 Year ended December 31, 2011 $ 407 (122) $ 285 $ 1,668 (711) $ 957 $ 658 (461) $ 197 $ 1,645 (929) $ 716 $ 350 $ 4,728 – (2,223) $ 350 $ 2,505 Opening net book amount $ 2,634 $ 285 $ 957 $ 197 $ 716 $ 350 $ 2,505 Additions Disposals Amortization charge Amortization charge (discontinued operations) Acquisition of subsidiaries Disposition of operating companies Impairment charge, net(2) Foreign exchange Other – – – – 472 (514) (166) (7) 15 – – (26) – 264 (5) 2 (6) (2) – – (143) (3) 203 (67) – (1) (4) 48 (1) (59) (1) 8 (20) – (2) – 22 – (80) (12) 108 (325) – – (20) – – – – 257 (27) (10) (1) (3) 70 (1) (308) (16) 840 (444) (8) (10) (29) Closing net book amount $ 2,434 $ 512 $ 942 $ 170 $ 409 $ 566 $ 2,599 At December 31, 2011 Cost $ 2,611 Accumulated amortization and impairments (177) Net book amount (1) $ 2,434 $ 658 (146) $ 512 $ 1,772 (830) $ 942 $ 668 (498) $ 170 $ 1,189 (780) $ 409 $ 573 $ 4,860 (7) (2,261) $ 566 $ 2,599 (1) Trademarks and licenses and customer relationships include amounts determined to have indeﬁnite useful lives. (2) Impairment charge for 2011 is net of impairment reversals of $2. Onex Corporation December 31, 2011 107 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S Additions to goodwill and intangible assets were primarily Intellectual property primarily represents the costs of certain acquired through business combinations (note 2). Additions to intellectual property and process know-how obtained in acqui- intangible assets through internal development were $25 (2010 – sitions. Intangible assets include trademarks, non-competition $52) and those acquired separately were $45 (2010 – $51). Included agreements, customer relationships, software and contract rights in the balance of intangible assets at December 31, 2011 were $170 obtained in the acquisition of certain facilities. Certain intan- (2010 – $209) of internally generated intangible assets. gible assets are determined to have indeﬁnite useful lives when the Company has determined there is no foreseeable limit to the period over which the intangible assets are expected to generate net cash inﬂows. 1 1 . P R O V I S I O N S A summary of provisions presented contra to assets in the consolidated balance sheets detailed by the components of charges and move- ments is presented below. Balance – January 1, 2011 Charged (credited) to statement of earnings: Additional provisions Unused amounts reversed during the year Disposition of operating companies Amounts used during the year Other adjustments Balance – December 31, 2011 Accounts Receivable Provision(a) Inventory Provision(b) $ 71 $ 91 30 (6) (4) (24) 4 49 (13) (42) (26) – Total $ 162 79 (19) (46) (50) 4 $ 71 $ 59 $ 130 a) Accounts receivable provisions are established by the operat- ing companies when there is objective evidence that the company b) Inventory provisions are established by the operating compa- nies for any excess, obsolete or slow-moving items. will not be able to collect all amounts due according to the origi- nal terms of the receivable. When a receivable is considered per- manently uncollectible, the receivable is written off against the allowance account. 108 Onex Corporation December 31, 2011 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S A summary of provisions presented as liabilities in the consolidated balance sheets detailed by the components of charges and movements is presented below. Balance – December 31, 2010 $ 63 $ 349 $ 78 $ 51 Restructuring(c) Self-Insurance(d) Warranty(e) Other(f) Charged (credited) to statement of earnings: Additional provisions Unused amounts reversed during the year Acquisition of subsidiaries Disposition of operating companies Amounts used during the year Increase in provisions due to passage of time and changes in discount rates Other adjustments Balance – December 31, 2011 Current portion of provisions Non-current portion of provisions 44 (2) – (2) (64) 1 – $ 40 35 $ 5 137 (1) 23 (208) (120) 1 – $ 181 74 $ 107 53 (5) 49 (31) (48) 1 – $ 97 53 $ 44 45 (8) 47 – (16) – 6 $ 125 101 $ 24 Total $ 541 279 (16) 119 (241) (248) 3 6 $ 443 263 $ 180 c) Restructuring provisions are typically to provide for the costs of facility consolidations and workforce reductions incurred at the d) Self-insurance provisions are established for automobile, workers’ compensation, general liability, professional liability and operating companies. other claims. Provisions are established for claims based upon The operating companies record restructuring provi- an assessment of actual claims and claims incurred but not sions relating to employee terminations, contractual lease obliga- reported. The reserves may be established based on consultation tions and other exit costs when the liability is incurred. The recog- with third-party independent actuaries using actuarial principles nition of these provisions requires management to make certain and assumptions that consider a number of factors, including his- judgements regarding the nature, timing and amounts associated torical claim payment patterns and changes in case reserves and with the planned restructuring activities, including estimating the assumed rate of inﬂation in health care costs and property sublease income and the net recovery from equipment to be dis- damage repairs. posed of. At the end of each reporting period, the operating com- panies evaluate the appropriateness of the remaining accrued balances. The restructuring plans are expected to result in cash e) Warranty provisions are established by the operating com- panies for warranties offered on the sale of products or services. outﬂows for the operating companies between 2012 and 2015. Warranty provisions are established to provide for future warranty The closing balance of restructuring provisions consisted of the under these warranties. The warranty provisions exclude reserves costs based on management’s best estimate of probable claims following: As at December 31 Employee termination costs Lease and other contractual obligations Facility exit costs and other recognized by The Warranty Group for its warranty contracts. 2011 $ 23 15 2 $ 40 2010 $ 35 26 2 $ 63 f) Other includes legal, transition and integration, asset retirement and other provisions. Transition and integration provisions are typically to provide for the costs of transitioning the activities of an operating company from a prior parent company upon acquisition and to integrate new acquisitions at the operating companies. Onex Corporation December 31, 2011 109 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 1 2 . L O N G - T E R M D E B T O F O P E R A T I N G C O M P A N I E S , W I T H O U T R E C O U R S E T O O N E X C O R P O R A T I O N Long-term debt of operating companies, without recourse to Onex Corporation, is as follows: As at December 31 Carestream Health(a) Senior revolving facility and senior secured term loan due 2016 and 2017 Senior secured first lien term loan due 2013 Senior secured second lien term loan due 2013 Redeemable preferred shares Other Celestica(b) Center for Diagnostic Imaging(c) Emergency Medical Services(d) Revolving credit facility due 2015 Revolving credit facility and term loan due 2016 Revolving credit facility and term loan due 2013 Other Revolving credit facility and term loan due 2015 Other Flushing Town Center(e) Senior construction loan due 2014 Mezzanine loan due 2014 Husky(f) JELD-WEN(g) ResCare(h) Sitel Worldwide(i) Skilled Healthcare Group(j) Spirit AeroSystems(k) The Warranty Group(l) TMS International(m) Tropicana Las Vegas(n) ONCAP companies(o) Revolving credit facility and term loan due 2014 Senior secured notes due 2017 Senior secured revolving credit facility due 2016 Convertible promissory notes due 2013 Other Senior secured 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 2013–2016 and 2014–2017 Senior unsecured notes due 2018 Mandatorily redeemable preferred shares Revolving credit facility and term loan due 2015 and 2016 Subordinated notes due 2014 Other Revolving credit facility and term loan due 2014 and 2013–2016 Senior subordinated notes due 2017 Senior subordinated notes due 2020 Other Term loan due 2012 Redeemable preferred shares Revolving borrowings and senior secured term loan due 2016 and 2014 Senior subordinated notes due 2015 Subordinated notes due 2020 Redeemable preferred shares Other Revolving credit facility and term loan due 2014 Revolving credit facility and term loans due 2012 to 2016 Subordinated notes due 2012 to 2021 Other Other Less: long-term debt held by the Company Long-term debt, December 31 Less: financing charges Current portion of long-term debt of operating companies, without recourse to Onex Corporation Consolidated long-term debt of operating companies, without recourse to Onex Corporation 110 Onex Corporation December 31, 2011 2011 $ 1,759 – – 247 3 2,009 – 93 – 1 94 – – – 579 33 612 – 448 – 132 57 637 165 – 200 4 369 399 232 113 744 342 130 3 475 562 295 300 29 2010 $ – 1,218 440 420 8 2,086 – – 33 1 34 420 1 421 541 25 566 364 – – – – – 167 30 200 9 406 353 253 100 706 381 130 9 520 566 294 300 19 1,186 1,179 190 506 696 157 223 – – 7 387 60 737 281 57 1,075 6 (1,254) 7,096 (135) 6,961 (482) $ 6,479 192 506 698 159 223 43 297 1 723 27 316 59 6 381 11 (1,390) 6,732 (143) 6,589 (243) $ 6,346 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S Onex Corporation does not guarantee the debt of its operating In August, October and December 2011, Carestream companies, nor are there any cross-guarantees between operating Health purchased $35, $4 and $30 of its senior secured term loan companies. for a cash cost of $30, $4 and $27, respectively. Carestream Health The ﬁnancing arrangements for each operating com- recognized net pre-tax gains of $5 in the third quarter of 2011 and pany typically contain certain restrictive covenants, which may $3 in the fourth quarter of 2011 on the repurchases of its senior include limitations or prohibitions on additional indebtedness, secured term loan, which are included in other items in the con- payment of cash dividends, redemption of capital, capital spend- solidated statement of earnings. ing, making of investments and acquisitions and sales of assets. At December 31, 2011, $1,767 and nil were outstanding In addition, certain ﬁnancial covenants must be met by the oper- under the senior secured term loan and senior revolving facility, ating companies that have outstanding debt. respectively. The senior secured term loan is recorded net of the Future changes in business conditions of an operat- unamortized discount of $8. ing company may result in non-compliance with certain cov- Substantially all of Carestream Health’s assets are enants by the company. No adjustments to the carrying amount pledged as collateral under the term loan. or classiﬁcation of assets or liabilities of any operating company In connection with the term loan, Carestream Health have been made in the consolidated ﬁnancial statements with had an interest rate swap agreement with a notional amount respect to any possible non-compliance. totalling $800 that swapped the variable rate portion for a ﬁxed a) Carestream Health rate of 1.55%. The agreement expired in December 2011. Included in long-term debt at December 31, 2011 is $247 In April 2007, Carestream Health entered into senior secured ﬁrst (2010 – $420) of redeemable preferred shares, including accumu- and second lien term loans with an aggregate principal amount of lated and unpaid dividends, of which $242 (2010 – $413) was held $1,510 and $440, respectively. Additionally, as part of the ﬁrst lien by the Company. The redeemable preferred shares accrue annual term loan, Carestream Health obtained a senior revolving credit dividends at a rate of 10% and are automatically converted into facility with available funds of up to $150. The ﬁrst and second common shares of Carestream Health for the initial liquidation lien term loans bore interest at LIBOR plus a margin of 2.00% and amount plus accumulated and unpaid dividends upon a liqui- 5.25%, respectively, or at a base rate plus a margin of 1.00% and dation or other triggering event. During the ﬁrst quarter of 2011, 4.25%, respectively. The senior revolving credit facility bore inter- Carestream Health redeemed $200 of its redeemable preferred est at LIBOR or a base rate plus a margin of up to 1.75%, payable shares, including $7 of accumulated and unpaid dividends. The quarterly. At December 31, 2010, $1,218 and $440 were outstand- Company’s share of the redemption was $197, of which Onex’ ing under the senior secured ﬁrst and second lien term loans, share was $78. respectively, and nil was outstanding under the senior revolving credit facility. b) Celestica In February 2011, Carestream Health entered into a In March 2010, Celestica redeemed all of its outstanding 7.625% new credit facility. The credit facility consists of a $1,850 senior notes due in 2013. Celestica paid $232 to repurchase its notes with secured term loan and a $150 senior revolving facility. The senior a carrying value of $223. Celestica recognized a charge of $9 in secured term loan matures in February 2017 and the senior the ﬁrst quarter of 2010 on the repurchase of the 2013 notes, revolving facility matures in February 2016. The senior secured which was included in interest expense in the consolidated state- term loan and senior revolving facility bear interest at LIBOR ment of earnings. (subject to a ﬂoor of 1.50%) plus a margin of 3.50% or a base rate At December 31, 2010, Celestica had a $200 revolving plus a margin of 2.50%. Interest is payable on the interest rollover credit facility, which was due to mature in April 2011. In January dates for LIBOR borrowings and quarterly for base rate borrow- 2011, Celestica renewed its revolving credit facility on gener- ings. The senior secured term loan requires quarterly instalment ally similar terms and conditions, increased its size from $200 payments of $5. to $400 and extended its maturity to January 2015. No amounts The proceeds from the new facility were used primar- were drawn on the facility at December 31, 2011 and 2010. At ily to repay the senior secured ﬁrst and second lien term loans of December 31, 2011, Celestica had $27 of letters of credit outstand- Carestream Health. ing that were issued under its facility. As a result of the reﬁnancing, Carestream Health recog- The facility has restrictive covenants relating to debt nized charges of $25 in the ﬁrst quarter of 2011, which are included incurrence, the sales of assets and a change of control and also in interest expense in the consolidated statement of earnings. contains ﬁnancial covenants that require Celestica to maintain certain ﬁnancial ratios. Celestica also has uncommitted bank overdraft facilities available for intraday and overnight operating requirements that totalled $70 at December 31, 2011. Onex Corporation December 31, 2011 111 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S c) Center for Diagnostic Imaging e) Flushing Town Center In July 2009, CDI entered into a credit agreement consisting In December 2010, Flushing Town Center amended and restated its of a $55 term loan and a $15 revolving credit facility. Both the senior construction loan and mezzanine loan, increasing the total term loan and revolving credit facility bore interest at LIBOR amount available under the construction loan to $642, including plus a margin of 4.25%, and were originally due in July 2013. At $25 of letters of credit, and extending the maturity to December December 31, 2010, $33 was outstanding under the term loan and 2013. The loans have two one-year extension options. The loans nil was outstanding under the revolving credit facility. bear interest at LIBOR plus a margin that ranges between 1.55% In May 2011, CDI entered into a new credit agreement. and 3.65%. In conjunction with these amendments, the Company The new agreement consists of a $95 term loan and a $25 revolv- purchased $56 and $38 of the senior construction loan and mezza- ing credit facility. Both the term loan and revolving credit facility nine loan, respectively, from third-party lenders. bear interest at LIBOR plus a margin of up to 3.75% depending on In November 2011, Flushing Town Center amended its the company’s leverage ratio and mature in May 2016. The term senior construction loan agreement whereby the Company con- loan requires quarterly principal repayments of $2 beginning tributed an additional $14 in equity, of which $7 was in cash and in December 2011. The required quarterly principal payments $7 was in the form of a letter of credit that can be drawn upon to increase throughout the term until they reach $3 in December fund project costs. In addition, the initial maturity of the loans 2015. Substantially all of the assets of CDI’s wholly owned subsid- was extended to June 2014 and the second extension was reduced iaries are pledged as collateral under the term loan and revolving by six months. As at December 31, 2011 $3 was available under credit facility. the letter of credit. The proceeds from the new term loan were used to As at December 31, 2011, $592 and $43 (2010 – $560 repay the amounts outstanding under the former term loan and and $38) of principal plus accrued interest were outstanding revolving credit facility and pay a $67 distribution to shareholders. under the senior construction and mezzanine loans, respectively, The Company’s share of the distribution was $54, of which Onex’ of which a total of $102 (2010 – $94) was held by the Company. share was $13. At December 31, 2011, $93 and nil were outstand- The senior construction and mezzanine loans are recorded net of ing under the term loan and revolving credit facility, respectively. unamortized debt extinguishment gains of $13 and $10 (2010 – CDI entered into interest rate swap agreements that $19 and $13), respectively. In addition, letters of credit of $7 were effectively ﬁx the interest rate on a portion of the borrowings outstanding, which partially reduce the amount available to be under the credit agreement. In November 2009, CDI entered into drawn under the senior construction loan. a two-year interest rate cap agreement for a notional amount of Substantially all of Flushing Town Center’s assets are $27 in order to hedge its exposure to ﬂuctuations in the three- pledged as collateral under the senior construction and mezza- month LIBOR rates above 3.5%. The cap agreement began in nine loans. April 2010 and terminates in September 2012. In June 2011, CDI entered into an additional four-year interest rate cap agreement f) Husky for a notional amount of $48 in order to hedge its exposure to At December 31, 2010, the long-term debt of Husky consisted of ﬂuctuations in the three-month LIBOR rates above 3.5%. The cap a $520 committed, secured credit agreement comprised of a $410 agreement terminates in June 2015. term loan and a $110 revolving credit facility. At December 31, 2010, $364 and nil were outstanding under the term loan and revolving d) Emergency Medical Services credit facility, respectively. In April 2010, EMSC completed the ﬁnancing of new senior The credit agreement had restrictions on the incur- secured credit facilities consisting of a $425 term loan and a $150 rence of new debt, the sales of assets, capital expenditures and the revolving credit facility. The proceeds from the new facilities were maintenance of certain ﬁnancial ratios. Substantially all of Husky’s used to repay the company’s existing facilities consisting of a $200 assets were pledged as collateral under the credit agreement. senior secured term loan and $250 senior subordinated notes. In June 2011, the Company sold its entire investment in At December 31, 2010, $420 and nil were outstanding Husky and no longer consolidates Husky. under the term loan and revolving credit facility, respectively. Substantially all of EMSC’s domestic assets were pledged as collateral under the senior secured credit facilities. In May 2011, the Company sold its remaining interests in EMSC and no longer consolidates EMSC. 112 Onex Corporation December 31, 2011 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S g) JELD-WEN h) ResCare In October 2011, JELD-WEN completed an offering of $460 in In December 2010, ResCare amended and restated its senior aggregate principal amount of 12.25% senior secured notes due in secured revolving credit facility to extend the maturity of its senior 2017. JELD-WEN received net proceeds of $448 after original issue secured revolving credit facility from July 2013 to December 2015 discounts. Interest on the senior secured notes is payable semi- as well as maintain the size of the facility at $275 through July 2013 annually. The notes may be redeemed prior to maturity at various before stepping down to $240 through December 2015. Borrowings premiums above face value. The notes are secured by a second under the senior secured revolving credit facility bear interest at priority lien on the collateral securing the senior secured revolv- LIBOR plus a margin of 4.00%. At December 31, 2010 and 2011, ing credit facility, as described below. At December 31, 2011, the nil was outstanding under the senior secured revolving credit senior secured notes with $460 outstanding were recorded net of facility. The amount available under the facility is reduced by $60 the unamortized discount of $12. of standby letters of credit outstanding at December 31, 2011. In October 2011, JELD-WEN entered into a new $300 In December 2010, ResCare completed the ﬁnancing of senior secured revolving credit facility, maturing in April 2016. a $170 senior secured term loan and $200 of senior subordinated The facility contains a $75 sublimit for the issuance of letters of notes. The proceeds were used to repay a portion of ResCare’s credit and a $100 sublimit for borrowings by a European sub- existing indebtedness of $150 of senior unsecured notes, com- sidiary of JELD-WEN. Borrowings under the facility bear inter- plete the acquisition of all the publicly held shares of ResCare and est at either the Eurodollar rate or a base rate determined as for general corporate purposes. ResCare repaid the remainder of the highest of the overnight Federal Funds rate plus 0.50%, the its $150 senior unsecured notes in January 2011. Eurodollar rate plus 1.00% or the prime rate. A margin is added The senior secured term loan bears interest at LIBOR to the Eurodollar and base rate that varies based on JELD-WEN’s (subject to a ﬂoor of 1.75%) plus a margin of 5.50%, with the princi- consolidated leverage ratio; base rate loan margins range from pal balance due in December 2016. The senior subordinated notes 1.50% to 3.00% and Eurodollar-based loan margins range from bear interest at a rate of 10.75% and are repayable at maturity in 2.50% to 4.00%. In addition, JELD-WEN pays a commitment fee January 2019. ranging from 0.45% to 0.75% on the unused portion of the facility At December 31, 2011, $168 and $200 (2010 – $170 and and a letter of credit fee ranging from 2.50% to 4.00% on the face $200) were outstanding under the senior secured term loan and amount of outstanding letters of credit. senior subordinated notes, respectively. The senior secured term Borrowings under the senior secured revolving credit loan is recorded net of the unamortized discount of $3 (2010 – $3). facility are secured by ﬁrst priority liens on substantially all of ResCare has additional capacity of $175 available under the present and future assets of JELD-WEN and its subsidiary its debt agreements to increase its senior secured term loan or the guarantors. senior secured revolving credit facility, subject to certain limita- At December 31, 2011, nil was outstanding under the tions and conditions. ResCare is required under its debt agree- senior secured revolving credit facility. The amount available is ments to maintain certain ﬁnancial covenants, and substantially reduced by $35 of letters of credit outstanding at December 31, 2011. all of ResCare’s assets are pledged as collateral under its debt JELD-WEN is required under the terms of the senior agreements. secured revolving credit facility to maintain certain ﬁnancial ratios. The facility and the indenture governing the senior secured i) Sitel Worldwide notes also contain certain additional requirements, including lim- In December 2008, Sitel Worldwide amended its credit facil- itations or prohibitions on certain investments, payments, asset ity. The amendment included increases to the applicable interest sales and additional indebtedness. rates and changes to the ﬁnancial covenants. In October 2011, JELD-WEN issued convertible prom- Sitel Worldwide’s credit facility, as amended, consists of issory notes in the amount of $171, all of which are held by the a $675 term loan maturing in January 2014 and an $85 revolving Company. The notes are due in 2013 and bear interest at a rate credit facility maturing in January 2013. As a result of repayments of 10% compounded annually. The notes are automatically con- and repurchases made in 2007 and 2008, no quarterly payments verted into Series A Convertible Preferred Stock of JELD-WEN for are due under the term loan until maturity. The term loan and the outstanding principal amount plus accrued and unpaid divi- revolving credit facility bear interest at a rate of LIBOR plus a mar- dends to the extent the notes remain unpaid at the maturity date. gin of up to 5.5% or prime plus a margin of 4.5%. Subsequently, JELD-WEN paid $42, including accrued interest, In May and June 2011, Sitel Worldwide amended its to repurchase a portion of the notes, all of which was paid to the credit facility that governs its term loan and revolving credit facil- Company. At December 31, 2011, $132 was outstanding under the ity. The amendments included extending the maturity date on convertible promissory notes, including accrued interest, all of $228, or 64%, of its term loan from January 2014 to January 2017 which was held by the Company. Onex Corporation December 31, 2011 113 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S and extending the maturity on $31, or 36%, of commitments for j) Skilled Healthcare Group its revolving credit facility from January 2013 to January 2016. In December 2005, Skilled Healthcare Group issued unsecured Borrowings under the extended term loan and revolving credit senior subordinated notes in the amount of $200 due in 2014. In facility bear interest at a rate of LIBOR plus a margin of up to 6.75% June 2007, using proceeds from its May 2007 initial public offer- or prime plus a margin of 5.75%. In addition, the credit agreement ing, Skilled Healthcare Group redeemed $70 of the notes. The was amended to lessen restrictions with respect to certain cove- notes bear interest at a rate of 11.0% per annum and are redeem- nant levels. able at the option of the company at various premiums above face Borrowings under the facility are secured by substan- value beginning in 2009. At December 31, 2011, $130 (2010 – $130) tially all of Sitel Worldwide’s assets. was outstanding under the notes. At December 31, 2011, $353 and $46 (2010 – $353 and In April 2010, Skilled Healthcare Group completed the nil) were outstanding under the term loan and revolving credit ﬁnancing of a new $330 term loan and $100 revolving credit facil- facility, respectively. ity. The term loan bears interest at LIBOR (subject to a ﬂoor of Sitel Worldwide is required under the terms of the facil- 1.50%) plus a margin of 3.75%, and requires quarterly principal ity to maintain certain ﬁnancial ratio covenants. The facility also repayments of $1 until maturity in 2016. The revolving credit contains certain additional requirements, including limitations or facility bears interest at LIBOR (subject to a ﬂoor of 1.50%) plus prohibitions on additional indebtedness, payment of cash divi- a margin of 3.75%, and is repayable at maturity in 2015. The term dends, redemption of stock, capital spending, investments, acqui- loan was increased by an additional $30 to fund acquisitions com- sitions and asset sales. pleted in the second quarter of 2010. Substantially all of Skilled In March 2010, Sitel Worldwide completed an offering Healthcare Group’s assets are pledged as collateral under the of $300 in aggregate principal amount of senior unsecured notes term loan and revolving credit facility. due in 2018. The notes bear interest at an annual rate of 11.50% The proceeds from the new term loan were used to with no principal payments due until maturity. Proceeds from repay the amounts outstanding under the former term loan and the offering were used to repay a portion of the indebtedness out- revolving credit facility. Skilled Healthcare Group recognized a standing under the existing term loan and all of the outstanding loss of $7 on the repurchase of the term loan and revolving credit balance under the revolving credit facility. In conjunction with this facility, which is included in interest expense in the consolidated repayment, the debt covenants of the credit facility were amended statements of earnings. to reduce the minimum adjusted EBITDA to interest ratio require- At December 31, 2011, $342 and nil (2010 – $355 and ment and to change the total debt to adjusted EBITDA covenant $26) were outstanding under the term loan and revolving credit to a senior secured debt to adjusted EBITDA covenant. At Decem- facility, respectively. ber 31, 2011, the 2018 senior notes with $300 outstanding were In June 2010, Skilled Healthcare Group entered into an recorded net of the unamortized discount of $6 (2010 – $7) and interest rate cap agreement and an interest rate swap agreement. embedded derivative of $62 (2010 – $40) associated with the senior The interest rate cap agreement was for a notional amount of $70 unsecured notes. The embedded derivative is included in other in order to hedge exposure to ﬂuctuations in the one-month LIBOR long-term liabilities in the consolidated balance sheets. rates above 2.0% from July 2010 to December 2011. The interest Included in long-term debt at December 31, 2011 is $65 rate swap agreement is for a notional amount of $70 and swaps the (2010 – $58) of mandatorily redeemable Class B preferred shares, of variable rate portion for a ﬁxed rate of 2.3% from January 2012 to which $43 (2010 – $38) was held by Onex. The mandatorily redeem- June 2013. able Class B preferred shares accrue annual dividends at a rate of 12% and are redeemable at the option of the holder on or before k) Spirit AeroSystems July 2018. Also included in long-term debt at December 31, 2011 In June 2005, Spirit AeroSystems executed an $875 credit agree- is $48 (2010 – $42) of mandatorily redeemable Class C preferred ment that consists of a $700 senior secured term loan and a $175 shares, of which $36 (2010 – $31) was held by Onex. The mandatori- senior secured revolving credit facility. In November 2006, Spirit ly redeemable Class C preferred shares accrue annual dividends at AeroSystems used a portion of the proceeds from its initial pub- a rate of 16% and are redeemable at the option of the holder on or lic offering to permanently repay $100 of the senior secured term before July 2018. Outstanding amounts related to preferred shares loan and amended its credit agreement. In March 2008, Spirit at December 31, 2010 and 2011 include accrued dividends. AeroSystems amended the agreement to increase the amount available under the senior secured revolving credit facility to $650 and add a provision allowing additional indebtedness of up to $300. In June 2009, Spirit AeroSystems further amended its credit agreement to extend the maturity of the senior secured revolv- ing credit facility from June 2010 to June 2012 as well as increase the size of the facility to $729 from $650 through June 2010 before 114 Onex Corporation December 31, 2011 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S stepping down to $409 through June 2012. In October 2010, Spirit If a change in control of Spirit AeroSystems occurs, the AeroSystems amended its credit agreement to extend the matu- holders of the 2017 and 2020 senior notes have the right to require rity of the revolving credit facility from June 2012 to September Spirit AeroSystems to repurchase the senior notes at a price of 2014 as well as increase the amount available under the facility 101% plus accrued and unpaid interest. The 2017 and 2020 senior to $650 from $409. In addition, Spirit AeroSystems extended the notes rank equal in right of payment and are subordinate to the maturity date with respect to $437 of its term loan to September senior secured credit facility. 2016 (“Term B-2”), with $130 of the term loan remaining due in September 2013 (“Term B-1”). At December 31, 2011, $129, $433 l) The Warranty Group and nil (2010 – $129, $437 and nil) were outstanding under Term In November 2006, The Warranty Group entered into a $225 B-1, Term B-2 and the revolving credit facility, respectively. In credit agreement consisting of a $200 term loan and up to $25 addition, letters of credit of $20 were outstanding, which par- of revolving credit loans and swing line loans. The amounts out- tially reduce the amount available to be drawn under the senior standing on the credit agreement bear interest at LIBOR plus a secured revolving credit facility. Term B-1 requires equal quarter- margin based on The Warranty Group’s credit rating. The term ly principal instalments of $32 beginning in December 2012. Term loan requires annual payments of $2, with the balance due in B-2 requires equal quarterly principal instalments of $1, with the 2012. The revolving credit and swing line loans matured in 2011. balance due upon maturity. The revolving credit facility requires At December 31, 2011, $190 (2010 – $192) was outstanding on the the principal to be repaid at maturity. term loan. Borrowings under the agreement bear interest based on The debt is subject to various terms and conditions, LIBOR plus an interest rate margin of up to 4.0%, payable quarter- which include The Warranty Group maintaining a minimum ly. In connection with the term loan, Spirit AeroSystems initially credit rating and certain ﬁnancial ratios relating to minimum entered into interest rate swap agreements on $400 of the term capitalization levels. loan. The agreements, which matured in July 2011, swapped the Included in long-term debt at December 31, 2011 is ﬂoating interest rate portion with a ﬁxed interest rate that ranged $506 (2010 – $506) of redeemable preferred shares, including between 3.2% and 4.3%. In July 2011, Spirit AeroSystems entered accumulated and unpaid dividends, of which $493 (2010 – $493) into interest rate swap agreements on $325 of the term loan. The was held by the Company. The redeemable preferred shares agreements, which mature between 2013 and 2014, swap the accrue annual dividends at a rate of 8% and are automatically ﬂoating interest rate portion with a ﬁxed interest rate that ranges converted into common shares of The Warranty Group for the ini- between 0.7% and 1.4%. tial liquidation amount plus accumulated and unpaid dividends Substantially all of Spirit AeroSystems’ assets are upon a liquidation or other triggering event. pledged as collateral under the credit agreement. In September 2009, Spirit AeroSystems completed an m) TMS International offering of $300 in aggregate principal amount of 7.5% senior sub- In January 2007, TMS International entered into a senior secured ordinated notes due in 2017. The offering price was 97.804% of asset-based revolving credit facility with an aggregate principal par to yield 7.875% to maturity. The net proceeds were used to amount of up to $165, which bore interest at a base rate plus a repay $200 in borrowings under its existing revolving credit facil- margin of up to 2.50% and was available through to January 2013. ity without any reduction of the lenders’ commitment, with the As at December 31, 2010, nil was outstanding under this revolv- remainder used for general corporate purposes. Interest is pay- ing credit facility. In December 2011, TMS International termi- able semi-annually beginning in April 2010. The 2017 senior notes nated its 2007 senior secured asset-based revolving credit facility may be redeemed prior to maturity at various premiums above and entered into a new senior secured asset-based revolving credit face value. At December 31, 2011, the 2017 senior notes with $300 facility with an aggregate principal amount of up to $350. The new outstanding were recorded net of the unamortized discount of $5 revolving credit facility bears interest at a base rate plus a margin (2010 – $6). of up to 2.25%. The maximum availability under the new revolv- In November 2010, Spirit AeroSystems completed an ing credit facility is based on speciﬁed percentages of eligible offering of $300 in aggregate principal amount of 6.75% senior accounts receivable, inventory and equipment. The new revolv- subordinated notes due in 2020. The net proceeds were used to ing credit facility is available through to December 2016; however, repay $150 in borrowings under its existing revolving credit facil- it is subject to “springing maturities” if TMS International does ity without any reduction of the lenders’ commitment, with the not reﬁnance its senior secured term loan and its senior sub- remainder to be used for general corporate purposes. Interest is ordinated notes, with the maturity occurring three months prior payable semi-annually beginning in June 2011. The 2020 senior to the scheduled maturities of these instruments. As at Decem- notes may be redeemed prior to maturity at various premiums ber 31, 2011, nil was outstanding under the new revolving credit above face value. At December 31, 2010 and 2011, $300 of senior facility. In addition, there were $16 of letters of credit outstanding notes due in 2020 were outstanding. Onex Corporation December 31, 2011 115 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S secured by the new revolving credit facility. The obligations under 2010, TMS International amended the agreement governing the the new revolving credit facility are secured on a ﬁrst-priority lien subordinated notes to reduce the interest rate to 8.0%, effective basis by TMS International’s accounts receivable, inventory and January 1, 2011. Cash interest payments were required beginning cash proceeds therefrom and on a second-priority lien basis by in 2014. TMS International could prepay the notes, in whole or substantially all of TMS International’s other property and assets, in part, without premium penalty or discount at any time. In March subject to certain exceptions and permitted liens. 2010, TMS International paid $23, including accrued interest In January 2007, TMS International entered into a of $9, to repurchase a portion of its notes due in 2020, of which senior secured term loan credit facility with an aggregate princi- $23, including accrued interest of $9 was paid to the Company. At pal amount of $165 and a senior secured synthetic letter of cred- December 31, 2010, $43 was outstanding, including accrued inter- it facility of $20, which bear interest at a base rate plus a margin est, of which $41 was held by the Company. In April 2011, using of up to 2.25%. The senior secured term loan facility and sen- proceeds from its initial public offering, TMS International paid ior secured synthetic letter of credit facility are repayable quar- $44, including accrued interest of $6, to repurchase the remaining terly, with annual payments of $2, and mature in January 2014. portion of its notes due in 2020, of which $43, including accrued The facilities require TMS International to prepay outstanding interest of $6, was paid to the Company. amounts under certain conditions. At December 31, 2011, $157 Included in long-term debt at December 31, 2010 was (2010 – $159) was outstanding under the term loan and there $297 of redeemable preferred shares, including accumulated and were $12 (2010 – $18) of letters of credit outstanding relating to unpaid dividends, of which $270 was held by the Company. The the synthetic letter of credit facility. The obligations under the redeemable preferred shares accrued annual dividends at a rate senior secured term loan facility and senior secured synthetic let- of 8% and were automatically convertible into common shares of ter of credit facility are secured on a ﬁrst-priority lien basis by all TMS International for the initial liquidation amount plus accu- of TMS International’s property and assets (other than accounts mulated and unpaid dividends upon a liquidation or other trig- receivable and inventory and cash proceeds therefrom) and on a gering event. In April 2011, the initial public offering of TMS second-priority lien basis on all of TMS International’s accounts International resulted in the automatic conversion of the initial receivable and inventory and cash proceeds therefrom, subject to liquidation amount plus accumulated and unpaid dividends of certain exceptions and permitted liens. the redeemable preferred shares into common shares of TMS In connection with the senior secured term loan credit International based on the common share price in the initial facility, TMS International entered into interest rate swap agree- public offering. ments that swap the variable rate portion of the interest for a ﬁxed rate of 2.2% on a notional amount of $40 and 2.3% on a notional amount of $40. The agreements mature in March 2012. n) Tropicana Las Vegas In March 2010, Tropicana Las Vegas entered into a credit agree- In addition, TMS International has $225 of unsecured ment that consists of a $50 revolving credit facility and a delayed senior subordinated notes outstanding issued in 2007. The notes draw $10 term loan. The revolving credit facility and term loan bear interest at a rate of 9.75% and mature in February 2015. The bear interest at a ﬁxed annual rate of 4.00% and 6.00%, respective- notes are redeemable at the option of the company at various ly, and mature in March 2014. The term loan requires repayment premiums above face value, beginning in 2011. At December 31, of the principal balance in equal monthly instalments beginning 2011, notes of $223 (2010 – $223) were outstanding. in January 2013. At December 31, 2011, $50 and $10 (2010 – $27 In December 2008 and the ﬁrst quarter of 2009, TMS and nil) were outstanding under the revolving credit facility and International issued subordinated notes in the amount of $51, of the term loan, respectively. which $49 were held by the Company. The notes were due in 2020 Substantially all of Tropicana Las Vegas’ assets are and bore interest at a rate of 15.0% in the ﬁrst year, 17.5% in the pledged as collateral under the agreement. second year and 20.0% in the third year and beyond. In December 116 Onex Corporation December 31, 2011 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S o) ONCAP companies The annual minimum repayment requirements for the next ﬁve ONCAP’s investee companies consist of EnGlobe, CiCi’s Pizza, years on consolidated long-term debt are as follows: Mister Car Wash, Caliber Collision, BSN SPORTS and the fol- lowing companies that were acquired during 2011: Pinnacle Renewable Energy Group, Casino ABS, Hopkins and Davis- Standard. Each has debt that is included in the Company’s con- solidated ﬁnancial statements. There are separate arrangements for each of the investee companies with no cross-guarantees between the companies, ONCAP or Onex Corporation. 2012 2013 2014 2015 2016 Under the terms of the various credit agreements, com- Thereafter bined term borrowings of $655 are outstanding and combined revolving credit facilities of $82 are outstanding. The available facilities bear interest at various rates based on a base ﬂoating rate plus a margin. At December 31, 2011, effective interest rates ranged from 2.3% to 7.4% on borrowings under the revolving 1 3 . L E A S E C O M M I T M E N T S credit and term loan facilities. The term loans have quarterly Future minimum lease payments are as follows: $ 482 294 1,063 382 1,387 3,488 $ 7,096 repayments and are due between 2012 and 2016. The companies also have subordinated notes of $281 due between 2012 and 2021 that bear interest at rates ranging from 10.0% to 17.0%, of which the Company owns $237. Certain ONCAP 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, 2011 was $152, with portions expiring through to 2014. For the year: 2012 2013 2014 2015 2016 Senior debt is generally secured by substantially all of Thereafter the assets of the respective company. In December 2011, ONCAP III entered into a C$75 credit facility that consists of a C$50 line of credit and a C$25 deemed credit risk facility. The line of credit is available to ﬁnance ONCAP III capital calls, bridge ﬁnance investments in ONCAP III operating companies, support foreign exchange hedging of ONCAP III and ﬁnance other uses permitted by ONCAP III’s limited partnership agreement. The deemed credit risk facility is available to ONCAP III and its operating companies for foreign exchange transac- tions, including foreign exchange options, forwards and swaps. Borrowings drawn on the line of credit bear interest at a base rate plus a margin of 2.50% or banker’s acceptance rate (LIBOR for U.S. dollar borrowings) plus a margin of 5.25%. Borrowings under the credit facility are due and payable upon demand; however, ONCAP III shall have 15 business days to complete a capital call to the limited partners of ONCAP III to fund the demand. Onex Corporation, the ultimate parent company, is only obligated to fund borrowings under the credit facility based on its proportion- ate share as a limited partner in ONCAP III. At December 31, 2011, the amount available under the deemed risk facility was reduced to C$10 as a result of a foreign exchange contract entered into by ONCAP III, and no amounts were outstanding on the line of credit. Finance Leases Operating Leases $ 22 $ 290 225 169 128 89 290 $ 1,191 18 11 8 3 12 $ 74 (10) 64 (19) Total future minimum lease payments Less: imputed interest Balance of obligations under finance leases, without recourse to Onex Corporation Less: current portion Non-current obligations under finance leases, without recourse to Onex Corporation $ 45 Substantially all of the lease commitments relate to the operating companies. Operating leases primarily relate to premises. Onex Corporation December 31, 2011 117 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 1 4 . 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. 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, 2011: Current portion of reserves, December 31, 2010 Non-current portion of reserves, December 31, 2010 Gross reserves for losses and LAE, December 31, 2010(2) Less current portion of ceded claims recoverable(1) (note 6) Less non-current portion of ceded claims recoverable(1) (note 9) Net reserves for losses and LAE, December 31, 2010 Benefits to policy holders incurred, net of reinsured amounts Payments for benefits to policy holders, net of reinsured amounts Other, including changes due to foreign exchange Net reserves for losses and LAE, December 31, 2011 Add current portion of ceded claims recoverable(1) (note 6) Add non-current portion of ceded claims recoverable(1) (note 9) Gross reserves for losses and LAE, December 31, 2011(2) Current portion of reserves, December 31, 2011 Property and Casualty(a) Warranty(b) Total Reserves $ 165 388 $ 553 (165) (388) – $ – – – $ 177 35 $ 212 (44) (3) 165 $ 550 (540) (3) $ – $ 172 100 356 456 (100) 54 2 228 (202) $ 342 423 $ 765 (209) (391) 165 $ 550 (540 ) (3 ) $ 172 154 358 684 (302 ) Non-current portion of reserves, December 31, 2011 $ 356 $ 26 $ 382 (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 loss- es on property and casualty policies. The property and casualty reserves and the corresponding ceded claims recoverable were Unearned Premiums The following table provides details of the unearned premiums. acquired on acquisition of The Warranty Group. The property and As at December 31 casualty business is being run off and new business is not being Unearned premiums booked. The reserves are 100% ceded to third-party reinsurers. Current portion of unearned premiums b) Warranty reserves represent estimated ultimate net cost of war- ranty policies written by The Warranty Group. Due to the nature of the warranty reserves, substantially all of the ceded claims recoverable and warranty reserves are of a current nature. Non-current portion of unearned premiums 2011 2010 $ 2,443 (1,098) $ 2,329 (972) $ 1,345 $ 1,357 118 Onex Corporation December 31, 2011 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 1 5 . O T H E R N O N - C U R R E N T L I A B I L I T I E S Other non-current liabilities comprised the following: As at December 31 Boeing advance(a) Deferred revenue and other deferred items Unrealized carried interest due to Onex and ONCAP management(b) Defined benefit pensions and non-pension post-retirement benefits (note 32) Stock-based compensation(c) JELD-WEN employee stock ownership plan(d) Other(e) 2011 $ 628 253 165 477 290 121 397 2010 $ 614 250 199 272 290 − 296 $ 2,331 $ 1,921 a) Pursuant to Spirit AeroSystems’ 787 aircraft long-term supply agreement with The Boeing Company (“Boeing”), Boeing made advance payments to Spirit AeroSystems. During the second quarter of 2011, Spirit Aero Systems ﬁnalized a memorandum of agreement with Boeing related to the 787 long-term supply agree- ment, which resulted in the recognition of deferred revenues b) Unrealized carried interest due to management of Onex and ONCAP through the Onex Partners and ONCAP Funds is rec- ognized as a non-current liability and reduces the Limited Partners’ Interests liability, as described in note 17. The unreal- ized carried interest is calculated based on current fair values of the Funds’ investments and the overall unrealized gains in each respective Fund in accordance with the limited partnership agreements. The liability will be increased or decreased based upon changes in the fair values and realizations of the under- lying investments in the Onex Partners and ONCAP Funds. The liability will ultimately be recovered upon the realization of the Limited Partners’ share of the underlying Onex Partners and ONCAP Fund investments. During 2011, the unrealized car- ried interest liability was reduced for carried interest paid on the sales of EMSC and Husky (note 3) and the partial disposi- tions of Spirit AeroSystems and TMS International (note 25), partially offset by a charge for the change in carried interest of $62, as described in note 23. c) At December 31, 2011, the stock-based compensation liability consisted of $275 (2010 – $281) for the stock-based compensation plans at the parent company and $15 (2010 – $9) for stock option and other share-based compensation plans in place at the operat- and the development of an annual price adjustment process ing companies. with Boeing. As at December 31, 2011, $1,136 (2010 – $1,131) of advance payments had been made, of which $507 has been rec- ognized as revenue and $629 will be settled against future sales of Spirit AeroSystems’ 787 aircraft units to Boeing. Of the payments, $1 has been recorded as a current liability. d) JELD-WEN’s employee stock ownership plan (“ESOP”) was established to allow its employees to share in the success of the company through the ESOP’s ownership of JELD-WEN stock. The company may make discretionary contributions of cash or JELD-WEN shares to the ESOP on behalf of the employees. JELD- WEN consolidates the trust established to maintain the ESOP and therefore reports the liability for the value of JELD-WEN stock and miscellaneous other net assets held by the ESOP for the beneﬁt of the employees. The company will periodically repurchase JELD- WEN shares owned by the ESOP to fund distributions to ESOP participants. During the fourth quarter of 2011, JELD-WEN repur- chased stock from the ESOP for a cash cost of $31. e) Other includes amounts for liabilities arising from indemni- ﬁcations, unearned insurance contract fees, embedded deriva- tives on long-term debt and mark-to-market valuations of hedge contracts. Onex Corporation December 31, 2011 119 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 1 6 . I N C O M E T A 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 Changes related to: Amounts capitalized for book not deductible for tax Income tax rate differential of operating companies Book to tax differences on property, plant and equipment and intangibles Non-taxable gains Unbenefited tax losses Foreign exchange Limited Partners’ Interests Other, including permanent differences Provision for income taxes Classified as: Current Deferred Provision for income taxes 2011 $ 42 20 (20) 65 (135) 96 (31) 150 50 2010 $ 94 17 (164) (9) (149) 67 26 258 99 $ 237 $ 239 $ 167 70 $ 237 $ 175 64 $ 239 The Company’s deferred income tax assets and liabilities, without taking into consideration the offsetting of balances within the same tax jurisdiction, comprised the following: Deferred Tax Assets Balance – January 1, 2010 Credited (charged) to net earnings Credited (charged) to net earnings (discontinued operations) Credited (charged) directly to equity Recognition of previously unrecognized benefits Exchange differences Acquisition of subsidiaries Other adjustments Scientific Research and Development $ 14 – 6 – – – – – Provisions $ 234 (7) Deferred Revenue $ 163 (41) (17) 1 – – 26 2 – – – – 1 – Tax Losses $ 213 (4) (2) – 14 – 1 13 Balance – December 31, 2010 $ 20 $ 239 Credited (charged) to net earnings Credited directly to equity Recognition of previously unrecognized benefits Exchange differences Acquisition of subsidiaries Disposition of operating companies Other adjustments – – – – – (20) 1 35 2 1 (1) 6 (90) (1) $ 123 27 $ 235 (18) – – 1 1 – (1) – – (9) 23 (45) 5 Property, Plant and Equipment, and Intangibles Other Total $ 54 (14) $ 178 34 $ 856 (32) (1) – 1 – 1 (3) $ 38 1 – – (1) – – – 21 (9) – 2 22 (18) 7 (8) 15 2 51 (6) $ 230 (103) $ 885 (58) – – (1) 29 (26) 33 2 1 (11) 59 (181) 37 Balance – December 31, 2011 $ 1 $ 191 $ 151 $ 191 $ 38 $ 162 $ 734 120 Onex Corporation December 31, 2011 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S Gains on Sales of Operating Companies Pension and Non-Pension Post-Retirement Benefits Property, Plant and Equipment, and Intangibles Deferred Tax Liabilities Balance – January 1, 2010 Charged (credited) to net earnings Charged (credited) to net earnings (discontinued operations) Charged (credited) directly to equity Exchange differences Acquisition of subsidiaries Other adjustments Balance – December 31, 2010 Charged (credited) to net earnings Charged to net earnings (discontinued operations) Charged (credited) directly to equity Exchange differences Acquisition of subsidiaries Disposition of operating companies Other adjustments $ 465 (6) – – – – – $ 459 55 – 9 – – – – $ 57 11 – (10) – – – $ 443 35 22 – 1 151 5 Foreign Exchange $ 138 (4) – – 4 – – Other $ 152 11 (6) 6 (3) 10 (5) Total $ 1,255 47 16 (4) 2 161 – $ 58 $ 657 $ 138 $ 165 $ 1,477 (33) – (30) – – – 27 (30) 40 – 2 253 (175) (2) 21 – – (10) – – (7) – – 9 (6) 16 (67) 4 13 40 (12) (14) 269 (242) 22 Balance – December 31, 2011 $ 523 $ 22 $ 745 $ 142 $ 121 $ 1,553 At December 31, 2011, Onex and its investment holding compa- 1 7 . L I M I T E D P A R T N E R S ’ I N T E R E S T S nies have $603 of non-capital loss carryforwards and $3 of capital loss carryforwards. Deferred income tax assets are recognized for tax loss carryforwards to the extent that the realization of the related tax beneﬁt through future taxable income is probable. Unrecognized deferred income tax assets at December 31, 2011 were $1,045 in respect of losses amounting to $3,259 that can be carried forward and applied against future taxable income. At December 31, 2011 the aggregate amount of taxable temporary differences not recognized in association with invest- ments in subsidiaries and associates was $614. The investments in the Onex Partners and ONCAP Funds by those other than Onex are presented within the Limited Partners’ Interests. Details of those interests are as follows: Balance – January 1, 2010 Limited Partners’ Interests charge(a) Contributions by Limited Partners(b) Distributions paid to Limited Partners(c) Balance – December 31, 2010 Limited Partners’ Interests charge(a) Contributions by Limited Partners(b) Distributions paid to Limited Partners(c) Balance – December 31, 2011 Limited Partners’ Interests $ 3,708 831 1,451 (340) $ 5,650 627 932 (2,229) $ 4,980 a) Limited Partners’ Interests charge was reduced for the change in the carried interest of $91 for the year ended December 31, 2011 (2010 – $190). Onex’ share of the change in the carried interest was $29 for the year ended December 31, 2011 (2010 – $76). Onex Corporation December 31, 2011 121 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S b) Management fees received from the Limited Partners were $106 for the year ended December 31, 2011 (2010 – $43). Con- iii) An unlimited number of Senior and Junior Preferred Shares issuable in series. The Directors are empowered to ﬁx the rights to tributions by Limited Partners during 2011 were primarily for the be attached to each series. acquisition of JELD-WEN by Onex Partners III and the acquisi- tions of Pinnacle Renewable Energy Group, Casino ABS, Hopkins and Davis-Standard by ONCAP II and ONCAP III. Contributions b) At December 31, 2011, the issued and outstanding share capi- tal consisted of 100,000 Multiple Voting Shares (2010 – 100,000) by Limited Partners during 2010 were primarily for the acquisition and 115,117,316 Subordinate Voting Shares (2010 – 118,279,783). of Tomkins and the acquisition of the portion of ResCare that was During the fourth quarter of 2010, the Company cancelled the previously not owned by Onex or its afﬁliates. issued and outstanding Series 1 Senior Preferred Shares. There c) Distributions paid to Limited Partners for 2011 primarily consisted of the proceeds paid on the sales of EMSC and Husky shares at December 31, 2011 or 2010. The Multiple Voting Shares have a nominal paid-in value in these consolidated ﬁnancial (note 3) and the partial dispositions of Spirit AeroSystems and statements. were no issued and outstanding Senior and Junior Preferred TMS International (note 25). In addition, distributions paid to the Limited Partners for 2011 and 2010 includes distributions received from Carestream Health, The Warranty Group and other operating companies. c) During 2011, under the Dividend Reinvestment Plan, the Company issued 2,829 Subordinate Voting Shares (2010 – 3,088) at an average cost of C$34.13 per share (2010 – C$27.68). In 2011 and 2010, no Subordinate Voting Shares were issued upon the 1 8 . S H A R E C A P I T A L exercise of stock options. Onex renewed its Normal Course Issuer Bid in April 2011 for one year, permitting the Company to purchase on the Toronto Stock Exchange up to 10% of the public ﬂoat of its Sub- ordinate Voting Shares. The 10% limit represents approximately 9.1 million shares. During 2011, the Company repurchased and cancelled under its Normal Course Issuer Bid 3,165,296 of its Subordinate Voting Shares at a cash cost of $105 (C$105). The excess of the purchase cost of these shares over the average paid-in amount was $92 (C$92), which was charged to retained earnings. As at December 31, 2011, the Company has the capacity under the cur- rent Normal Course Issuer Bid to purchase approximately 5.9 mil- lion shares. During 2010, the Company repurchased and cancelled under its Normal Course Issuer Bids 2,040,750 of its Subordinate Voting Shares at a cash cost of $50 (C$52). The excess of the pur- chase cost of these shares over the average paid-in amount was $42 (C$44), which was charged to retained earnings. d) The Company has a Director Deferred Share Unit Plan (“Di- rector DSU Plan”) and a Management Deferred Share Unit Plan (“Management DSU Plan”), as described in note 1. 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 Subordinate Voting Shares would then carry 100% of the general voting rights and be entitled to elect 80% of the Directors. 122 Onex Corporation December 31, 2011 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S Details of DSUs outstanding under the plans are as follows: Outstanding at January 1, 2010 Granted Redeemed Additional units issued in lieu of compensation and cash dividends Outstanding at December 31, 2010 Granted Additional units issued in lieu of compensation and cash dividends Outstanding at December 31, 2011 e) The Company has a Stock Option Plan (the “Plan”) under which options and/or share appreciation rights for a term not exceed- ing 10 years may be granted to Directors, ofﬁcers and employees for the acquisition of Subordinate Voting Shares of the Company at a price not less than the market value of the shares on the business day preceding the day of the grant. Under the Plan, no options or share appreciation rights may be exercised unless the average market price of the Subordinate Voting Shares for the ﬁve prior business days exceeds the exercise price of the options or the share appreciation rights by at least 25% (the “hurdle price”). At December 31, 2011, 15,612,000 Subordinate Voting Shares (2010 – 15,612,000) were reserved for issuance under the Plan, against which options representing 14,036,498 shares (2010 – 13,889,600) were outstanding, of which 11,892,198 options were vested. The Plan provides that the number of options issued to certain indi- Director DSU Plan Management DSU Plan Number of DSUs Weighted Average Price Number of DSUs Weighted Average Price 369,019 40,000 (38,705) 20,346 390,660 40,000 15,728 446,388 C$ 28.40 C$ 26.38 C$ 28.38 C$ 36.57 C$ 34.11 272,880 – – 121,394 394,274 – 48,865 443,139 – – C$ 24.59 – C$ 31.14 Details of options outstanding are as follows: Number of Options Weighted Average Exercise Price Outstanding at January 1, 2010 13,450,050 Granted Surrendered Expired 625,000 (173,100) (12,350) Outstanding at December 31, 2010 13,889,600 Granted Surrendered Expired 695,000 (506,235) (41,867) Outstanding at December 31, 2011 14,036,498 C$ 18.33 C$ 29.29 C$ 18.98 C$ 26.69 C$ 18.80 C$ 33.54 C$ 20.00 C$ 25.29 C$ 19.47 viduals in aggregate may not exceed 10% of the shares outstanding During 2011 and 2010, the total cash consideration paid on at the time the options are issued. options surrendered was $8 (C$8) and $2 (C$2), respectively. This Options granted vest at a rate of 20% per year from the amount represents the difference between the market value of the date of grant with the exception of the 760,083 remaining options Subordinate Voting Shares at the time of surrender and the exer- granted in December 2007, which vest at a rate of 16.7% per year. cise price, both as determined under the Plan. When an option is exercised, the employee has the right to request that the Company repurchase the option for an amount equal to the difference between the fair value of the stock under the option and its exercise price. Upon receipt of such request, the Company has the right to settle its obligation to the employee by the payment of cash, the issuance of shares or a combination of cash and shares. Onex Corporation December 31, 2011 123 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S Options outstanding at December 31, 2011 consisted of the following: Number of Outstanding Options Exercise Price Number of Exercisable Options Hurdle Price Remaining Life (years) 155,500 505,000 7,260,000 2,248,625 115,000 280,000 20,000 760,083 672,290 702,500 622,500 10,000 60,000 625,000 14,036,498 C$ 20.50 C$ 14.90 C$ 15.87 C$ 18.18 C$ 19.25 C$ 29.22 C$ 33.40 C$ 35.20 C$ 15.95 C$ 23.35 C$ 29.29 C$ 37.31 C$ 37.37 C$ 33.11 155,500 505,000 7,260,000 2,248,625 115,000 – – – 399,790 280,700 − − − − 10,964,615 C$ 25.63 C$ 18.63 C$ 19.84 C$ 22.73 C$ 24.07 C$ 36.53 C$ 41.75 C$ 44.00 C$ 19.94 C$ 29.19 C$ 36.62 C$ 46.64 C$ 46.72 C$ 41.39 0.5 1.1 2.2 2.9 4.1 4.9 5.3 5.9 6.9 7.9 8.9 9.4 9.5 9.9 1 9 . E X P E N S E S B Y N A T U R E 2 0 . I N T E R E S T E X P E N S E O F O P E R A T I N G C O M P A N I E S Year ended December 31 2011 2010 Interest on long-term debt of operating companies Interest on obligations under finance leases of operating companies Other interest expense of operating companies(1) $ 434 $ 311 3 51 3 28 $ 488 $ 342 (1) Other includes debt prepayment expense of $28 (2010 − $16) . The nature of expenses in cost of sales and operating expenses, excluding amortization of property, plant and equipment, intan- gible assets and deferred charges, consisted of the following: Year ended December 31 2011 2010 Cost of inventory, raw materials and consumables used $ 13,962 $ 11,263 Employee benefit expense(1) Repairs, maintenance and utilities Benefits incurred by The Warranty Group on warranty agreements Operating lease payments Amortization charges Professional fees Provisions Transportation Other expenses 5,153 648 579 292 194 328 130 383 977 3,762 592 547 209 208 143 61 186 827 $ 22,646 $ 17,798 (1) Employee beneﬁt expense excludes employee costs capitalized into inventory and internally generated capital assets. Stock-based compensation is disclosed separately in the consolidated statements of earnings. 124 Onex Corporation December 31, 2011 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 2 1 . S T O C K - B A S E D C O M P E N S A T I O N E X P E N S E 2 3 . O T H E R I T E M S Year ended December 31 Parent company(a) Celestica Spirit AeroSystems Other 2011 $ 56 44 14 19 $ 133 $ 186 a) Parent company stock-based compensation primarily relates to Onex’ stock option plan (as described in note 18(e)) and the MIP (as described in note 31(i)). The expense is determined based on Other(g) the fair value of the liability at the end of each reporting period. 2010 Year ended December 31 $ 105 Restructuring(a) 42 31 8 Transition, integration and other(b) Transaction costs(c) Skilled Healthcare Group settlement charge(d) Unrealized carried interest due to Onex and ONCAP management(e) Gain on Flushing Town Center debt extinguishment(f) 2011 $ 52 17 17 (4) 62 – 2 2010 $ 94 42 − 53 114 (32) (50) $ 146 $ 221 The fair value for Onex’ stock option plan is determined using an option valuation model. The signiﬁcant inputs into the model were the share price at December 31, 2011 of C$33.18 (2010 – C$30.23), exercise price of the options, volatility of each option issuance ranging from 23.70% to 25.56%, an average divi- dend yield of 0.33% and an average risk-free rate of 1.67%. The vola- tility is measured as the historical volatility based on the remaining life of each respective option issuance. The fair values for the MIP options are determined using an internally developed valuation model. The signiﬁcant inputs into the model are the fair value of the underlying invest- ments, the time to expected exit from each investment, a risk-free rate of 1.27% and an industry comparable historical volatility for each investment. 2 2 . O T H E R G A I N S , N E T Year ended December 31 Gains on: Sale of CSI(a) Other, net 2011 $ – – $ – 2010 $ 97 2 $ 99 a) CSI In November 2010, ONCAP II sold its interests in CSI Global Education, Inc. (“CSI”) for net proceeds of $123 (C$126), of which Onex’ share was $50 (C$50). Included in the proceeds was the repayment of $37 (C$37) of subordinated notes held by the Company. The Company recorded a pre-tax gain of $97 on the transaction. There were no cash taxes paid as a result of the gain. Under the terms of the MIP, as described in note 31(i), management members participated in the realizations the Company achieved on the sale of CSI. Amounts paid on account of this transaction related to the MIP totalled C$4. In addition, management of ONCAP II received C$13 in carried interest. a) Restructuring charges recorded at the operating companies were: Year ended December 31 Celestica(i) Carestream Health(ii) JELD-WEN(iii) Sitel Worldwide(iv) Other 2011 $ 14 4 15 17 2 2010 $ 36 15 – 40 3 $ 52 $ 94 i) Celestica’s restructuring plans primarily consist of actions to consolidate facilities and reduce its workforce. ii) Carestream Health’s restructuring plans are primarily related to a realignment of its information technology and service func- tions in its Medical Film and Medical Digital segments. iii) JELD-WEN’s restructuring charge was primarily related to a petition ﬁled by the company’s Spanish subsidiary during the fourth quarter of 2011 with the Commercial Court in Spain for a declaration of insolvency. During the fourth quarter, the Commercial Court granted the insolvency petition and as a result, the net assets of the Spanish subsidiary were derec- ognized as they were no longer controlled. The restructuring charges primarily related to the net expense of deconsolidating the net assets of that subsidiary. iv) Sitel Worldwide’s restructuring plans are to rationalize facility and labour costs, realign operations and resources to support growth plans and shift the geographic mix of certain resources. b) Transition, integration and other expenses are typically to provide for the costs of transitioning activities of an operating company from a prior parent company upon acquisition and to integrate new acquisitions at the operating companies. Onex Corporation December 31, 2011 125 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S c) Transaction costs are incurred by Onex and its operating com- panies to complete business acquisitions, and typically include 2 4 . I M P A I R M E N T O F G O O D W I L L , I N T A 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 , N E T advisory, legal and other professional and consulting costs. d) 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 earlier. Year ended December 31 Skilled Healthcare Group(a) JELD-WEN(b) The Warranty Group(c) During the third quarter of 2010, Skilled Healthcare Group came Other(d) 2011 $ 120 22 40 15 $ 197 2010 $ − − 2 12 $ 14 to a settlement agreement on this complaint and recorded $53 in other expenses. The settlement contained no admission or con- cession of wrongdoing by Skilled Healthcare Group. During 2011, Skilled Healthcare Group recorded insurance recoveries of $4 related to the settlement. e) Unrealized carried interest reﬂects the change in the amount of carried interest due to Onex and ONCAP management through the Onex Partners and ONCAP Funds. The unrealized carried interest is calculated based on current fair values of the Funds’ investments and the overall unrealized gains in each respective Fund in accordance with the limited partnership agreements. The unrealized carried interest liability is recorded in other non- current liabilities and reduces the amount due to the Limited Partners, as described in note 17. The liability will be recovered upon the realization of the Limited Partners’ share of the under- lying Onex Partners and ONCAP Fund investments. During the second and third quarters of 2011 the unrealized carried inter- est liability was reduced for carried interest paid on the sales of EMSC and Husky (note 3) and the partial dispositions of Spirit AeroSystems and TMS International (note 25). f) In December 2010, Flushing Town Center amended and restat- ed its senior construction loan and mezzanine loan, as described in note 12. In conjunction with these amendments, the Company purchased $56 and $38 of the senior construction loan and mez- zanine loan, respectively, from third-party lenders. The loans were purchased for a total cash cost of $62. As a result of the transaction, the loans purchased by the Company were extin- guished with the original third-party lenders. Flushing Town Center recorded a net gain of $32 on the debt extinguishment. g) Other for the years ended December 31, 2011 and 2010 includes realized gains recorded by The Warranty Group on its investment portfolio. In addition, other for the year ended December 31, 2011 includes a charge of $27 recorded by Carestream Health for an adverse ruling related to a complaint alleging competition law violations in Brazil by Carestream Health’s predecessor. Carestream Health will appeal the ruling and vigorously pursue reversal of this ruling. 126 Onex Corporation December 31, 2011 a) Due to a reduction in expected future recovery rates for Medicare, expected future growth rates for Medicare and changes to rehabilitation therapy regulations and their effect on expected cash ﬂows, Skilled Healthcare Group recorded non-cash goodwill and intangible asset impairments of $117 and $3, respectively, in the third quarter of 2011. The impairments were calculated on a value-in-use basis using discount rates of 9.5% and 12.5%. b) During the fourth quarter of 2011, JELD-WEN recorded a non- cash impairment charge of $22 to impair certain of its property, plant and equipment, primarily as part of a program to rationalize capacity resources of the company. c) In the fourth quarter of 2011, as a result of its annual good- will impairment test, The Warranty Group recorded a non-cash impairment charge of $40 related to its European operations. The impairment charge was due to a reduction in expected future growth rates driven by the poor economic conditions in Europe and their effect on expected future cash ﬂows. d) Other in 2011 includes impairments of $17 and impairment reversals of $2 related to CDI, Sitel Worldwide, BSN SPORTS and CiCi’s Pizza. Other in 2010 includes Celestica and CiCi’s Pizza. Substantially all of the Company’s goodwill and intangible assets with indeﬁnite useful lives use the value-in-use method to mea- sure the recoverable amount. The carrying value of goodwill and intangible assets with indeﬁnite useful lives is allocated on a seg- mented basis in note 34. In measuring the recoverable amounts for goodwill and intangi- ble assets at December 31, 2011, signiﬁcant estimates include the growth rate and discount rate, which ranged from 1.0% to 8.5% and 9.5% to 20.0%, respectively. N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 2 5 . D I S P O S I T I O N S O F O P E R A T I N G C O M P A N I E S Amounts received on account of the carried interest U N D E R C O N T I N U I N G C O N T R O L During 2011, Onex completed a number of transactions by sell- ing a portion of its ownership interests in certain companies. Since these transactions did not result in a loss of control by the Company, they have been recorded as a transfer of equity to non- controlling interests holders. The excess of proceeds over the value of the transfer of equity to the non-controlling interest hold- ers was recorded directly to retained earnings. The major transac- tions not resulting in a loss of control and the resulting impact on retained earnings are summarized and described as follows: Year ended December 31 2011 2010 Excess of cash proceeds recorded directly to retained earnings: Spirit AeroSystems(a) TMS International(b) $ 100 51 $ 151 $ – – $ – a) In April 2011, under a secondary public offering of Spirit AeroSystems, Onex, Onex Partners I, Onex management and related to this transaction totalled $22. Consistent with market practice and the terms of the Onex Partners agreements, Onex is allocated 40% of the carried interest with 60% allocated to man- agement. Onex’ share of the carried interest received was $9 and is included in the net proceeds. Management’s share of the car- ried interest was $13. In addition, amounts paid on account of the MIP totalled $5 for this transaction. As a result of this transaction, Onex, Onex Partners I, Onex management and certain limited partners’ economic inter- est in Spirit AeroSystems was reduced to 16%, of which Onex’ eco- nomic ownership is 5%. Onex continues to control and consoli- date Spirit AeroSystems. b) In April 2011, TMS International completed an initial public offering of approximately 12.9 million shares of Class A common stock (NYSE: TMS), including the exercise of the over-allotment option. As part of the offering, Onex, Onex Partners II and Onex management sold approximately 1.9 million shares. Net proceeds of $23 were received by Onex, Onex Partners II and Onex manage- ment, resulting in a transfer of the historical accounting carrying value of $4 to non-controlling interests in the consolidated state- certain limited partners sold approximately 10 million shares of ments of equity. The net cash proceeds in excess of the historical Spirit AeroSystems, of which Onex’ portion was approximately accounting carrying value of $19 were recorded directly to retained 2.7 million shares. The offering was completed at a price of $24.49 earnings. Onex’ share of the net proceeds was $9, including carried per share. Onex’ cash cost for these shares was $3.33 per share. interest received on the share sale. Total net cash proceeds received from the sale were Proceeds of the initial public offering received by TMS $245, resulting in a transfer of the historical accounting carry- International were used to redeem its subordinated notes for $44 ing value of $136 to non-controlling interests in the consolidated and for general corporate purposes. Onex, Onex Partners II and statements of equity. The net cash proceeds in excess of the his- Onex management received $43, including accrued interest of torical accounting carrying value of $109 were recorded directly $6, for their share of the redemption of the subordinated notes. to retained earnings. In addition, Onex recorded a deferred tax Onex’ share of the redemption of the subordinated notes was $17, provision of $9 directly to retained earnings. Onex’ share of the including carried interest received on the redemption of the sub- net proceeds was $74, including carried interest and deducting ordinated notes. distributions paid on account of the MIP. Onex Corporation December 31, 2011 127 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S Amounts received on account of the carried inter- 26. NET EARNINGS PER SUBORDINATE VOTING SHARE est related to these transactions totalled $2. Onex’ share of the carried interest received was $1 and is included in the net pro- ceeds for the share sale and the redemption of the subordinat- ed notes. Management’s share of the carried interest was $1. No amounts were paid on account of this transaction The weighted average number of Subordinate Voting Shares for the purpose of the earnings per share calculations was as follows: Year ended December 31 2011 2010 related to the MIP as the required performance targets have not Weighted average number of shares outstanding (in millions): Basic Diluted 117 117 119 119 been met at this time. As part of its initial public offering, TMS International issued approximately 10.9 million new common shares. As a result of the dilution of the Company’s ownership interest in TMS International from the issuance, a transfer from the non-control- ling interests of $32 was recorded in the consolidated statement of equity. This reﬂects Onex’ share of the increase in the book value of the net assets of TMS International due to the issuance of addi- tional common shares at a value above the Company’s account- ing carrying value of TMS International. As a result of the dilutive transaction discussed above and the sale of shares by Onex, Onex Partners II and Onex man- agement, Onex and the Limited Partners’ economic ownership interest in TMS International was reduced to 60%, of which Onex’ share is 24%. Onex continues to control and consolidate TMS International. 128 Onex Corporation December 31, 2011 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 2 7 . F I N A N C I A L I N S T R U M E N T S Financial assets and liabilities reported at December 31, 2010 include EMSC and Husky, which were sold during the second quarter of 2011. Financial assets held by the Company, presented by ﬁnancial statement line item, were as follows: Fair Value through Net Earnings Recognized Designated Available- for-Sale Held-to- Maturity Loans and Receivables Derivatives Used for Hedging Total December 31, 2011 Assets as per balance sheet Cash and cash equivalents Short-term investments Accounts receivable Other current assets Long-term investments Other non-current assets $ – $ 2,448 $ – $ – $ – $ – $ 2,448 372 – 3 3,795 1 68 – 32 – – 309 – – 1,501 – – – – 22 – – 3,212 77 – 101 – – 8 14 – 749 3,212 120 5,332 102 Total $ 4,171 $ 2,548 $ 1,810 $ 22(a) $ 3,390(b) $ 22 $ 11,963 December 31, 2010 Assets as per balance sheet Cash and cash equivalents Short-term investments Accounts receivable Other current assets Long-term investments Other non-current assets Fair Value through Net Earnings Recognized Designated Available- for-Sale Held-to- Maturity Loans and Receivables Derivatives Used for Hedging Total $ – 398 – 1 3,172 1 $ 2,532 – – 294 31 – $ – 317 – 6 1,584 – $ – $ – $ – $ 2,532 – – 1 18 – – 3,401 57 – 26 – – 45 12 16 715 3,401 404 4,817 43 Total $ 3,572 $ 2,857 $ 1,907 $ 19(a) $ 3,484(b) $ 73 $ 11,912 (a) Fair value of held-to-maturity assets, which are measured at amortized cost at December 31, 2011, was $22 (2010 – $19). (b) The carrying value of loans and receivables approximates their fair value. Financial liabilities held by the Company, presented by ﬁnancial statement line item, were as follows: Fair Value through Net Earnings Recognized Designated Financial Liabilities at Amortized Cost Derivatives Used for Hedging Total December 31, 2011 Liabilities as per balance sheet Accounts payable and accrued liabilities $ – $ – $ 3,665 $ 17 $ 3,682 Provisions Other current liabilities Long-term debt Obligations under finance leases Other non-current liabilities Limited Partners’ Interests Total – 31 – – 359 – – 1 – – 9 4,980 54 260 7,096 64 69 – – 15 – – 12 – 54 307 7,096 64 449 4,980 $ 390 $ 4,990 $ 11,208 $ 44 $ 16,632 Onex Corporation December 31, 2011 129 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S Fair Value through Net Earnings Recognized Designated Financial Liabilities at Amortized Cost Derivatives Used for Hedging Total December 31, 2010 Liabilities as per balance sheet Accounts payable and accrued liabilities $ 20 $ – $ 3,585 $ 1 $ 3,606 Provisions Other current liabilities Long-term debt Obligations under finance leases Other non-current liabilities Limited Partners’ Interests Total – 1 – – 240 – $ 261 – – – – – 5,650 $ 5,650 33 155 6,732 57 44 – – 46 – – 16 – 33 202 6,732 57 300 5,650 $ 10,606 $ 63 $ 16,580 The gains (losses) recognized by the Company related to ﬁnancial assets and liabilities were as follows: Year ended December 31 2011 2010 Fair Value through Net Earnings Available-for-Sale Fair value adjustments Interest income Impairments Held-to-Maturity Interest income Interest expense and other Loans and Receivables Provisions and other Liabilities at Amortized Cost Interest expense of operating companies Derivatives used for Hedging Total gains (losses) recognized Earnings (Loss) Comprehensive Earnings (Loss) (1) Earnings (Loss) Comprehensive Earnings (1) $ (182)(a) $ – $ (462)(a) $ – 96 (1) 2 (1) 5 (488) 14 $ (555) 11 – – – – – – (39) $ (28) − 108 (6) 2 – (7) (342) 14 $ (693) 10 – – – – – 9 $ 19 (1) Amounts recognized in comprehensive earnings (loss) are presented gross of the income tax effect. (a) Primarily consists of Limited Partners’ Interests charge of $627 (2010 – $831), carried interest charge of $62 (2010 – $114) and unrealized increase of investments in associates at fair value of $501 (2010 – $448). 130 Onex Corporation December 31, 2011 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 2 8 . F A I R V A L U E M E A S U R E M E N T S Fair values of ﬁnancial instruments The estimated fair values of ﬁnancial instruments as at Decem- ber 31, 2011 and 2010 are based on relevant market prices and information available at those dates. The carrying values of cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued liabilities approximate the fair values of these ﬁnancial instruments due to the short maturity of these instruments. The fair value of consolidated long- term debt measured at amortized cost at December 31, 2011 was $6,822 (2010 – $6,593). Financial instruments measured at fair value are allocated within the fair value hierarchy based upon the lowest level of input that is signiﬁcant to the fair value measurement. The three levels of the fair value hierarchy are as follows: • Quoted prices in active markets for identical assets (“Level 1”); • Signiﬁcant other observable inputs (“Level 2”); and • Signiﬁcant other unobservable inputs (“Level 3”). The allocation of ﬁnancial assets in the fair value hierarchy, excluding cash and cash equivalents, at December 31, 2011 is as follows: Financial assets at fair value through earnings Trading securities Investments in associates Other Available-for-sale financial assets Investments in debt Investments in equities Other Level 1 Level 2 Level 3 Total $ – $ 51 – 329 – 64 – 15 529 1,663 – 83 $ – 3,347 – – – – $ 51 3,362 858 1,663 64 83 Total financial assets at fair value $ 393 $ 2,341 $ 3,347 $ 6,081 The allocation of ﬁnancial assets in the fair value hierarchy, excluding cash and cash equivalents, at December 31, 2010 is as follows: Financial assets at fair value through earnings Trading securities Investments in associates Other Available-for-sale financial assets Investments in debt Investments in equities Other Level 1 Level 2 Level 3 Total $ – – 364 103(a) 50 5 $ 33 65 623 1,743 6 – $ – 2,812 – – – – $ 33 2,877 987 1,846 56 5 Total financial assets at fair value $ 522 $ 2,470 $ 2,812 $ 5,804 (a) Balance represents EMSC’s investments in debt. EMSC was sold in the second quarter of 2011. Onex Corporation December 31, 2011 131 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S The allocation of ﬁnancial liabilities in the fair value hierarchy at December 31, 2011 is as follows: Financial liabilities at fair value through net earnings Limited Partners’ Interests Unrealized carried interest due to Onex and ONCAP management Derivatives Other Total financial liabilities at fair value Level 1 Level 2 Level 3 Total $ – – – – $ – $ – $ 4,980 $ 4,980 – – 12 165 62 161 165 62 173 $ 12 $ 5,368 $ 5,380 The allocation of ﬁnancial liabilities in the fair value hierarchy at December 31, 2010 is as follows: Financial liabilities at fair value through net earnings Limited Partners’ Interests Unrealized carried interest due to Onex and ONCAP management Derivatives Other Total financial liabilities at fair value Level 1 Level 2 Level 3 Total $ – – – – $ – $ – $ 5,650 $ 5,650 – – 2 199 40 20 199 40 22 $ 2 $ 5,909 $ 5,911 Details of ﬁnancial assets and liabilities measured at fair value with signiﬁcant unobservable inputs (Level 3), excluding investments in associates designated at fair value through earnings (note 8) and Limited Partners’ Interests designated at fair value (note 17), are as follows: Financial Assets at Fair Value through Net Earnings Available- for-Sale Financial Assets Financial Liabilities at Fair Value through Net Earnings $ – – – – $ – – – – – $ – $ – $ 2 – – (2) $ – – – – – $ 85 139 35 – $ 259 84 (20) 181 (116) $ – $ 388 $ – $ (84) Balance – January 1, 2010 Total gains or losses In net earnings Additions Settlements Balance – December 31, 2010 Total gains or losses In net earnings Disposition of operating companies Additions from business combinations Settlements Balance – December 31, 2011 Unrealized gains (losses) in net earnings for assets and liabilities held at the end of the reporting period 132 Onex Corporation December 31, 2011 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S The fair value measurements for investments in associates, Limited Partners Interests and unrealized carried interest are primar- ily driven by the underlying fair value of the investments in the Onex Partners and ONCAP Funds. A change to reasonably pos- sible alternative estimates and assumptions used in the valua- tion of non-public investments in the Onex Partners and ONCAP Funds (as described in note 1) may have a signiﬁcant impact on the fair values calculated for these ﬁnancial assets and liabilities. A change in the valuation of the underlying investments may have multiple impacts to Onex’ consolidated ﬁnancial statements and those impacts are dependent on the method of accounting used for that investment, the Fund(s) within which that investment is held and the progress of that investment in meeting the Management Investment Plan exercise hurdles. For example, an increase in the fair value of an investment in an associate would have the following impacts on Onex’ consolidated ﬁnancial statements: i) an increase in the unrealized value of investments in associ- ates at fair value in the consolidated statements of earnings with a corresponding increase in long-term investments in the consolidated balance sheets; ii) a charge would be recorded for the Limited Partners’ share of the fair value increase for the investment in associates on the Limited Partners’ Interests line in the consolidated statements of earnings with a corresponding increase to the Limited Partners’ Interests in the consolidated balance sheets; iii) a change in the calculation of unrealized carried interest in the respective Fund that holds the investment in associate, resulting in a recovery being recorded in the Limited Partners’ Interests line in the consolidated statements of earnings with a corresponding decrease to the Limited Partners’ Interests in the consolidated balance sheets; iv) a charge would be recorded for the change in unrealized car- ried interest due to Onex and ONCAP management on the other items line in the consolidated statements of earnings with a corresponding increase to the other non-current liabil- ities in the consolidated balance sheets; and 2 9 . F I N A N C I A L I N S T R U M E N T R I S K S A N D C A P I T A L D I S C L O S U R E 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 short-term investments consist of investments in debt securities. In addition, the long-term investments of The Warranty Group included in the investments line in the consolidated balance sheets, consist primarily of investments in debt securities. The investments in debt securities are subject to credit risk. A descrip- tion of the investments held by The Warranty Group is included in note 8. At December 31, 2011, Onex Corporation, the ultimate parent company, held approximately $990 of cash and cash equiva- lents in short-term high-rated money market instruments. In addi- tion, Celestica had approximately $660 of cash and cash equiva- lents. Celestica’s current portfolio consists of bank deposits and certain money market funds that hold primarily U.S. government securities. The majority of Celestica’s and Onex Corporation’s, the ultimate parent company’s, cash and cash equivalents is held with ﬁnancial institutions, each of which has a current Standard & Poor’s rating of A-1 or above. Accounts receivable are also subject to credit risk. At December 31, 2011, the aging of consolidated accounts receivable was as follows: Current 1-30 days past due 31-60 days past due >60 days past due Accounts Receivable $ 2,610 323 100 239 $ 3,272 v) a change in the fair value of the vested investment rights held under the Management Investment Plan, resulting in a charge Liquidity risk being recorded on the stock-based compensation line in the consolidated statements of earnings and a corresponding increase to other non-current liabilities in the consolidated balance sheets. Liquidity risk is the risk that Onex and its operating companies will have insufﬁcient funds on hand to meet their respective obligations as they come due. The operating companies operate autonomously and generally have restrictions on cash distribu- tions to shareholders under their ﬁnancing agreements. Onex needs to be in a position to support its operating companies when and if it is appropriate and reasonable for Onex, as an equity owner with paramount duties to act in the best interests of Onex’ shareholders. Maintaining sufﬁcient liquidity at Onex is impor- tant because Onex, as a holding company, generally does not have guaranteed sources of meaningful cash ﬂow. Onex Corporation December 31, 2011 133 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S In completing acquisitions, it is generally Onex’ policy to Interest rates ﬁnance a signiﬁcant portion of the purchase price with debt pro- The Company is exposed to changes in future cash ﬂows as a vided by third-party lenders. This debt, sourced exclusively on the result of changes in the interest rate environment. The parent strength of the acquired companies’ ﬁnancial condition and pros- company is exposed to interest rate changes primarily through pects, is assumed by the acquired company at closing and is with- its cash and cash equivalents, which are held in short-term term out recourse to Onex Corporation, the ultimate parent company, deposits and commercial paper. Assuming no signiﬁcant changes or to its other operating companies or partnerships. The foremost in cash balances held by the parent company from those at consideration, however, in developing a ﬁnancing structure for December 31, 2011, a 0.25% increase (0.25% decrease) in the an acquisition is identifying the appropriate amount of equity to interest rate (including the Canadian and U.S. prime rates) would invest. In Onex’ view, this should be the amount of equity that result in a minimal impact on annual interest income. As all of the maximizes the risk/reward equation for both shareholders and the Canadian dollar cash and cash equivalents at the parent company acquired company. are designated as fair value through net earnings, there would be Accounts payable for the operating companies are pri- no effect on other comprehensive earnings. marily due within 90 days. The repayment schedules for long- The operating companies’ results are also affected by term debt and ﬁnance leases of the operating companies have changes in interest rates. A change in the interest rate (includ- been disclosed in notes 12 and 13. Onex Corporation, the ultimate ing the LIBOR and U.S. prime interest rate) would result in a parent company, has no debt and has not guaranteed the debt of change in interest expense being recorded due to the variable- the operating companies. Market risk rate portion of the long-term debt of the operating companies. At December 31, 2011, approximately 52% (2010 – 56%) of the operating companies’ long-term debt had a ﬁxed interest rate or Market risk is the risk that the future cash ﬂows of a ﬁnancial the interest rate was effectively ﬁxed by interest rate swap con- instrument will ﬂuctuate due to changes in market prices. The tracts. The long-term debt of the operating companies is without Company is primarily exposed to ﬂuctuations in the foreign cur- recourse to Onex Corporation, the ultimate parent company. rency exchange rate between the Canadian and U.S. dollars and In addition, The Warranty Group holds substantially ﬂuctuations in the LIBOR and U.S. prime interest rate. all of its investments in interest bearing securities, as described Foreign currency exchange rates in note 8. A 0.25% increase in the interest rate would decrease the fair value of the investments held by $12 and result in a cor- Onex’ operating companies operate autonomously as self-sustain- responding decrease to other comprehensive earnings of The ing companies. In addition, the functional currency of substan- Warranty Group. However, as the investments are reinvested, tially all of Onex’ operating companies is the U.S. dollar. As invest- a 0.25% increase in the interest rate would increase the annual ments in self-sustaining subsidiaries are excluded from the ﬁnancial interest income recorded by The Warranty Group by $5. instrument disclosure, the Company’s exposure on ﬁnancial instru- ments to the Canadian/U.S. dollar foreign currency exchange rate is Commodity risk primarily at the parent company, through the holding of Canadian- Certain of Onex’ operating companies have exposure to commod- dollar-denominated cash and cash equivalents. A 5% strengthen- ities. In particular, aluminum, titanium and raw materials such ing (5% weakening) of the Canadian dollar against the U.S. dollar at as carbon ﬁbres used to manufacture composites are the princi- December 31, 2011 would result in an $8 increase ($8 decrease) in pal raw materials for Spirit AeroSystems’ manufacturing opera- net earnings. As all of the Canadian-dollar-denominated cash and tions. To limit its exposure to rising raw materials prices, Spirit cash equivalents at the parent company are designated as fair value AeroSystems has entered into long-term supply contracts directly through net earnings, there would be no effect on other compre- with its key suppliers of raw materials and collective raw materials hensive earnings. sourcing contracts arranged through certain of its customers. In addition, Celestica has signiﬁcant exposure to the In addition, diesel fuel is a key commodity used in TMS U.S. dollar/Canadian dollar foreign currency exchange rate. A 5% International’s operations. To help mitigate the risk of changes in strengthening (5% weakening) of the Canadian dollar against the fuel prices, substantially all of its contracts contain pricing escala- U.S. dollar at December 31, 2011 would result in a $6 increase ($5 tors based on published commodity or inﬂation price indices. decrease) in the other comprehensive earnings of Celestica and Silver is a signiﬁcant commodity used in Carestream an $11 increase ($10 decrease) in net earnings. Health’s manufacturing of x-ray ﬁlm. The company’s manage- ment continually monitors movement and trends in the silver market and enters into collar and forward agreements when con- sidered appropriate to mitigate some of the risk of future price ﬂuctuations, generally for periods of up to a year. 134 Onex Corporation December 31, 2011 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S Capital disclosures • have appropriate levels of committed third-party capital avail- Onex considers the capital it manages to be the amounts it has able to invest along with Onex’ capital. This enables Onex to in cash, cash equivalents and short-term investments, the invest- respond quickly to opportunities and pursue acquisitions of ments made by it in the operating companies, Onex Real Estate businesses it could not achieve using only its own capital. The and Onex Credit Partners. Onex also manages the third-party management of third-party capital also provides management capital invested in the Onex Partners, ONCAP and Onex Credit fees to Onex and the ability to enhance Onex’ returns by earn- Partners Funds. ing a carried interest on the proﬁts of third-party participants. Onex’ objectives in managing capital are to: At December 31, 2011, Onex, the parent company, had approxi- • preserve a ﬁnancially strong parent company with substantial mately $990 of cash and cash equivalents on hand and $312 of liquidity and no, or a limited amount of, debt so that it can have near-cash items in a segregated unleveraged fund managed by funds available to pursue new acquisitions and growth oppor- Onex Credit Partners. Onex, the parent company, has a conser- tunities as well as support the growth of its existing business- vative cash management policy that limits its cash investments es. Onex does not generally have the ability to draw cash from to short-term high-rated money market products. At Decem- its operating companies. Accordingly, maintaining adequate ber 31, 2011, Onex had access to $2,811 of uncalled committed liquidity at the parent company is important; third-party capital for acquisitions through the Onex Partners and • achieve an appropriate return on capital commensurate with ONCAP Funds. the level of risk taken on; • build the long-term value of its operating companies; The strategy for risk management of capital has not changed • control the risk associated with capital invested in any particular signiﬁcantly since December 31, 2010. business or activity. All debt ﬁnancing is within the operating companies and each operating company is required to support its own debt. Onex does not normally guarantee the debt of the operating companies and there are no cross-guarantees of debt between the operating companies; and 3 0 . 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 A T I N G C O M P A N I E S A N D C O N C E N T R A T 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 Caliber Collision CDI Celestica Hopkins JELD-WEN Pinnacle Renewable Energy Group Skilled Healthcare Group Spirit AeroSystems TMS International The Warranty Group 2011 2010 Number of Significant Customers Percentage of Revenues Number of Significant Customers Percentage of Revenues 4 1 2 1 1 2 2 2 2 1 52% 12% 30% 19% 17% 93% 67% 96% 39% 12% 4 1 1 − − − 2 2 1 1 52% 12% 20% − − − 69% 94% 32% 12% Accounts receivable from the above signiﬁcant customers at December 31, 2011 totalled $514 (2010 – $330). Onex Corporation December 31, 2011 135 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 3 1 . 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 A T E D P A R T Y T R A N S A C T I O N S a) Contingent liabilities in the form of letters of credit, letters of guarantee and surety and performance bonds are primarily pro- vided by certain operating companies to various third parties and include certain bank guarantees. At December 31, 2011, the amounts potentially payable in respect of these guarantees totalled $254. The Company, which includes the operating compa- nies, has total commitments of approximately $6 with respect to corporate investments. 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 compa- nies, has commitments with respect to real estate operating leas- es, which are disclosed in note 13. The aggregate commitments for capital assets at Decem- ber 31, 2011 amounted to $461 and are expected to be incurred between 2012 and 2016. b) Onex and its operating companies are or may become parties to legal claims, product liability and warranty claims arising from the ordinary course of business. Certain operating companies, as conditions of acquisition agreements, have agreed to accept cer- tain pre-acquisition liability claims against the acquired compa- nies. The operating companies have recorded provisions based on their consideration and analysis of their exposure in respect of such claims. Such provisions are reﬂected, as appropriate, in Onex’ consolidated ﬁnancial statements (refer to note 11). Onex Corporation, the ultimate parent company, has not currently recorded any further provision and does not believe that the reso- lution 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 there- fore there can be no assurance that their resolution will not have an adverse effect on Onex’ consolidated ﬁnancial position. 136 Onex Corporation December 31, 2011 c) The operating companies are subject to laws and regulations concerning the environment and to the risk of environmen- tal liability inherent in activities relating to their past and pres- ent operations. As conditions of acquisition agreements, certain operating companies have agreed to accept certain pre-acquisi- tion liability claims on the acquired companies after obtaining indemniﬁcation from prior owners. The Company and its operating companies also have insurance to cover costs incurred for certain environmental mat- ters. Although the effect on operating results and liquidity, if any, cannot be reasonably estimated, management of Onex and the operating companies believe, based on current information, that these environmental matters should not have a material adverse effect on the Company’s consolidated ﬁnancial condition. d) In February 2004, Onex completed the closing of Onex Part- ners I with funding commitments totalling $1,655. Onex Partners I provided committed capital for Onex-sponsored acquisitions not related to Onex’ operating companies at December 31, 2003 or to ONCAP. As at December 31, 2011, $1,475 (2010 – $1,475) has been invested of the $1,655 of total capital committed. Onex has invest- ed $346 (2010 – $346) of its $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 man- agement and directors at December 31, 2011 was $23 (2010 – $33). Prior to November 2006, Onex received annual man- agement 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 fund- ed commitments at the end of the initial fee period in November 2006, when Onex established a successor fund, Onex Partners II. Carried interest is received on the overall gains achieved by Onex Partners I investors, other than Onex and Onex manage- ment, to the extent of 20% of the gains, provided that those inves- tors have achieved a minimum 8% return on their investment in Onex Partners I over the life of Onex Partners I. The invest- ment by Onex Partners I investors for this purpose takes into con- sideration 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 car- ried interests achieved by Onex on gains could be recovered from Onex if subsequent Onex Partners I investments do not exceed the overall target return level of 8%. Consistent with market prac- tice, Onex, as sponsor of Onex Partners I, is allocated 40% of the carried interest with 60% allocated to Onex management. For the year ended December 31, 2011, $55 (2010 – nil) has been received by Onex as carried interest while Onex management received $82 (2010 – nil) with respect to the carried interest. N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S e) In August 2006, Onex completed the closing of Onex Partners II with funding commitments totalling $3,450. Onex Partners II 2008, Onex gave notice to the investors of Onex Partners III that Onex’ commitment would be decreasing to $500 effective July provided committed capital for Onex-sponsored acquisitions not 1, 2009. In December 2009, Onex notiﬁed the investors of Onex related to Onex’ operating companies at December 31, 2003 or to Partners III that it would be increasing its commitment to $800 ONCAP or Onex Partners I. As at December 31, 2011, $2,944 (2010 – effective June 16, 2010. In November 2011, Onex notiﬁed the $2,944) has been invested of the $3,450 of total capital committed. investors of Onex Partners III that it would be increasing its com- Onex has funded $1,164 (2010 – $1,164) of its $1,407 commitment. mitment to $1,200 effective May 15, 2012. This commitment may Onex controls the General Partner and Manager of Onex Partners be increased to approximately $1,500 at the option of Onex, but II. Onex management has committed, as a group, to invest a mini- may not be decreased. Onex controls the General Partner and mum of 1% of Onex Partners II, which may be adjusted annually Manager of Onex Partners III. Onex management has committed, up to a maximum of 4%. As at December 31, 2011, Onex manage- as a group, to invest a minimum of 1% of Onex Partners III, which ment and directors had committed approximately 4% (2010 – 3%). may be adjusted annually up to a maximum of 6%. At Decem- The total amount invested in Onex Partners II’s remaining invest- ber 31, 2011, Onex management and directors had committed ments by Onex management and directors at December 31, 2011 5% (2010 – 4%). The total amount invested in Onex Partners III’s was $98, of which nil (2010 – $2) was invested in the year ended investments by Onex management and directors at December 31, December 31, 2011. 2011 was $59, of which $26 (2010 – $28) was invested in the year Prior to November 2008 Onex received annual man- ended December 31, 2011. agement fees based on 2% of the capital committed to Onex Onex receives annual management fees based on 1.75% Partners II by investors other than Onex and Onex manage- of the capital committed to Onex Partners III by investors other ment. The annual management fee was reduced to 1% of the than Onex and Onex management. The annual management fee net funded commitments at the end of the initial fee period in is reduced to 1% of the net funded commitments at the earlier of November 2008, when Onex established a successor fund, Onex the end of the commitment period or if Onex establishes a succes- Partners III. Carried interest is received on the overall gains sor fund. Carried interest is received on the overall gains achieved achieved by Onex Partners II investors, other than Onex and by Onex Partners III investors, other than Onex and Onex man- Onex management, to the extent of 20% of the gains, provided agement, to the extent of 20% of the gains, provided that those that those investors have achieved a minimum 8% return on their investors have achieved a minimum 8% return on their invest- investment in Onex Partners II over the life of Onex Partners II. ment in Onex Partners III over the life of Onex Partners III. The The investment by Onex Partners II investors for this purpose investment by Onex Partners III investors for this purpose takes takes into consideration management fees and other amounts into consideration management fees and other amounts paid by paid by Onex Partners II investors. Onex Partners III investors. The returns to Onex Partners II investors, other than The returns to Onex Partners III investors, other than Onex and Onex management, are based upon all investments Onex and Onex management, are based upon all investments made through Onex Partners II, with the result that the initial car- made through Onex Partners III, with the result that the initial ried interests achieved by Onex on gains could be recovered from carried interests achieved by Onex on gains could be recovered Onex if subsequent Onex Partners II investments do not exceed from Onex if subsequent Onex Partners III investments do not the overall target return level of 8%. Consistent with market prac- exceed the overall target return level of 8%. Consistent with mar- tice and Onex Partners I, Onex, as sponsor of Onex Partners II, is ket practice and Onex Partners I and Onex Partners II, Onex, as allocated 40% of the carried interest with 60% allocated to Onex sponsor of Onex Partners III, will be allocated 40% of the carried management. For the year ended December 31, 2011, $10 (2010 – interest with 60% allocated to Onex management. As at Decem- nil) has been received by Onex as carried interest while Onex man- ber 31, 2011, no amount has been received as carried interest agement received $14 (2010 – nil) with respect to the carried interest. related to Onex Partners III. f) In December 2009, Onex completed the closing of Onex Partners III with funding commitments totalling approximately g) In May 2006, ONCAP completed the closing of ONCAP II with funding commitments totalling C$574. ONCAP II provided $4,300. Onex Partners III provides committed capital for Onex- committed capital for ONCAP-sponsored acquisitions of sponsored acquisitions not related to Onex’ operating com- small and medium-sized businesses requiring between C$20 and panies at December 31, 2003 or to ONCAP, Onex Partners I C$75 of initial equity capital. As at December 31, 2011, C$470 or Onex Partners II. As at December 31, 2011, approximately (2010 – C$323) has been invested of the approximately C$574 of $1,794 (2010 – $1,074) has been invested, of which Onex’ share total capital committed. Onex has invested C$215 (2010 – C$145) was $336 (2010 – $205). Onex had a $1,000 commitment for the of its C$252 commitment. Onex controls the General Partner and period from January 1, 2009 to June 30, 2009. On December 31, Manager of ONCAP II. The total amount invested in ONCAP II’s Onex Corporation December 31, 2011 137 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S remaining investments by management of Onex and ONCAP and The returns to ONCAP III investors, other than Onex directors at December 31, 2011 was C$39, of which C$17 (2010 – and management of Onex and ONCAP, are based upon all invest- C$6) was invested in the year ended December 31, 2011. ments made through ONCAP III, with the result that the initial Prior to July 2011, ONCAP received annual manage- carried interests achieved by ONCAP on gains could be recovered ment fees based on 2% of the capital committed to ONCAP II by if subsequent ONCAP III investments do not exceed the overall investors other than Onex and management of Onex and ONCAP. target return level of 8%. Consistent with market practice, Onex, The annual management fee was reduced to 2% of the net funded as sponsor of ONCAP III, is allocated 40% of the carried interest commitments at the end of the initial fee period in July 2011, with 60% allocated to ONCAP management. As at December 31, when ONCAP established a successor fund, ONCAP III. Carried 2011, no amount has been received as carried interest related to interest is received on the overall gains achieved by ONCAP II ONCAP III. investors other than management of Onex and ONCAP, to the extent of 20% of the gains, provided that those investors have achieved a minimum 8% return on their investment in ONCAP II i) Under the terms of the MIP, management members of the Company invest in all of the operating entities acquired by over the life of ONCAP II. The investment by ONCAP II investors the Company. for this purpose takes into consideration management fees and The aggregate investment by management members other amounts paid in by ONCAP II investors. The returns to ONCAP II investors, other than manage- under the MIP is limited to 9% of Onex’ interest in each acqui- sition. The form of the investment is a cash purchase for 1⁄ 6th ment of Onex and ONCAP, are based upon all investments made through ONCAP II, with the result that the initial carried interests (1.5%) of the MIP’s share of the aggregate investment, and invest- ment rights for the remaining 5⁄6ths (7.5%) of the MIP’s share at achieved by ONCAP on gains could be recovered if subsequent the same price. Amounts invested under the minimum invest- ONCAP II investments do not exceed the overall target return ment requirement in Onex Partners’ transactions are allocated level of 8%. Consistent with market practice, Onex, as sponsor of to meet the 1.5% Onex investment requirement under the MIP. ONCAP II, is allocated 40% of the carried interest with 60% allo- cated to ONCAP management. For the year ended December 31, For investments made prior to November 7, 2007, the investment rights to acquire the remaining 5⁄6ths vest equally over four years 2011, ONCAP management received nil (2010 – C$13) with respect with the investment rights vesting in full if the Company disposes to the carried interest. of 90% or more of an investment before the ﬁfth year. The MIP was amended in 2007. For investments made h) In September 2011, ONCAP completed the closing of ONCAP III with funding commitments totalling C$800, excluding subsequent to November 7, 2007, the vesting period for the investment rights to acquire the remaining 5⁄6ths increased from commitments from management of Onex and ONCAP. ONCAP III four to six years, with the investment rights vesting in full if the provides committed capital for ONCAP-sponsored acquisitions of Company disposes of all of an investment before the seventh year. small and medium-sized businesses requiring between C$50 and Under the MIP and amended MIP, the investment rights related C$100 of initial equity capital. As at December 31, 2011, C$174 has to a particular acquisition are exercisable only if the Company been invested of the approximately C$800 of total capital com- earns a minimum 15% per annum compound rate of return for mitted. Onex has invested C$51 of its C$252 commitment. Onex that acquisition after giving effect to the investment rights. controls the General Partner and Manager of ONCAP III. The total Under the terms of the MIP, the total amount paid amount invested in ONCAP III’s remaining investments by man- by management members in 2011, including amounts invested agement of Onex and ONCAP and directors at December 31, 2011 under minimum investment requirements of the Onex Partners was C$17. and ONCAP Funds to meet the 1.5% MIP requirement, was $9 ONCAP receives annual management fees based on 2% (2010 – $9). Investment rights exercisable at the same price for of the capital committed to ONCAP III by investors other than Onex 7.5% (2010 – 7.5%) of the Company’s interest in acquisitions were and management of Onex and ONCAP. The annual management issued at the same time. Realizations under the MIP distributed in fee is reduced to 1.5% of the net funded commitments at the ear- 2011 were $56 (2010 – $4). lier of the end of the commitment period or if ONCAP establishes a successor fund. A carried interest is received on the overall gains achieved by ONCAP III investors, other than Onex and management j) Members of management and the Board of Directors of the Com- pany invested $5 in 2011 (2010 – $9) in Onex’ investments made of Onex and ONCAP, to the extent of 20% of the gains, provided that outside of Onex Partners and ONCAP at the same cost as Onex and those investors have achieved a minimum 8% return on their invest- other outside investors. Those investments by management and ment in ONCAP III over the life of ONCAP III. The investment by the Board of Directors are subject to voting control by Onex. ONCAP III investors for this purpose takes into consideration man- agement fees and other amounts paid in by ONCAP III investors. 138 Onex Corporation December 31, 2011 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S k) Each member of Onex management is required to reinvest 25% of the proceeds received related to their share of the MIP investment Committee, provided opinions that the values received by Onex for the tax losses were fair. Onex’ Audit and Corporate rights and carried interest to acquire Onex shares in the market Governance Committee, all the members of which are indepen- until the management member owns one million Onex Subordinate dent directors, unanimously approved the transactions. The fol- Voting Shares and/or management DSUs. During 2011, Onex man- lowing transactions were completed during 2011 and 2010: agement reinvested approximately C$18 (2010 – less than C$1) to • In 2011, Onex received $5 (C$5) in cash and will receive $5 (C$5) acquire Onex shares. l) Certain operating companies have made loans to certain direc- tors or ofﬁcers of the individual operating companies typically for on or before March 31, 2012 for Canadian tax losses of C$100. The entire $10 (C$10) was recorded as a gain and included in other items in the consolidated statements of earnings. • In April 2010, Onex received $7 (C$8) in cash for Canadian the purpose of acquiring shares in those operating companies. tax losses of C$70. The entire $7 (C$8) was recorded as a gain The total value of the loans outstanding as at December 31, 2011 and was included in other items in the consolidated statements was $35 (2010 – $9). of earnings. m) In connection with the 2007 purchase of Carestream Health from Eastman Kodak Company (“Kodak”), if, upon the disposi- In January 2012, Onex received $2 (C$2) in cash for Canadian tax losses of C$20 sold to a company controlled by Mr. Gerald W. tion of Carestream Health, Onex and Onex Partners realize an Schwartz, who is Onex’ controlling shareholder. The entire $2 internal rate of return on their initial $471 investment in excess of (C$2) will be recorded as a gain in the ﬁrst quarter of 2012 in the 25%, Kodak is entitled to 25% of the excess return, up to $200. At consolidated statements of earnings. In connection with this December 31, 2011, Onex and Onex Partners had received distri- transaction, Deloitte & Touche LLP, an independent account- butions of $427 (2010 – $231) from Carestream Health and recog- ing ﬁrm retained by Onex’ Audit and Corporate Governance nized a provision at fair value of $3 (2010 – $3). Committee, provided an opinion that the value received by Onex n) Onex Corporation, the ultimate parent company, receives fees from certain operating companies for services provided. The fees from consolidated operating companies are eliminated in these consolidated ﬁnancial statements. During 2011, fees of $4 (2010 – $28) were received from non-consolidated operating com- for the tax losses was fair. Onex’ Audit and Corporate Governance Committee, all the members of which are independent directors, unanimously approved the transaction. p) The Company’s key management consists of the senior execu- tives of Onex and its signiﬁcant operating companies. Also includ- panies and included with revenues in these consolidated ﬁnancial ed are the directors of Onex Corporation. Aggregate payments to statements. the Company’s key management were as follows: o) During 2011 and 2010, Onex entered into the sale of entities, whose sole assets were certain tax losses, to a public company controlled by Mr. Gerald W. Schwartz, who is Onex’ controlling shareholder. Onex has signiﬁcant Canadian non-capital and capital losses available; however, Onex does not expect to gen- erate sufﬁcient taxable income to fully utilize these losses in the foreseeable future. As such, no beneﬁt has been recognized in Year ended December 31 2011 Short-term employee benefits and costs $ 126 Post-employment benefits Termination benefits Share-based payments(1) 2 3 174 $ 305 2010 $ 98 1 – 38 $ 137 the consolidated ﬁnancial statements. In connection with these (1) Share-based payments includes carried interest paid to Onex management transactions, Onex obtained tax rulings from the Canada Revenue Agency and Deloitte & Touche LLP, an independent account- ing ﬁrm retained by Onex’ Audit and Corporate Governance as described in note 31(d), (e) and (f) and payments under the MIP as described in note 31(i). Onex Corporation December 31, 2011 139 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 3 2 . 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 operating companies are independent and surpluses within cer- tain plans cannot be used to offset deﬁcits. Onex Corporation, the ultimate parent company, does not provide pension, other retire- ment or post-retirement beneﬁts to its employees or to those of any of the operating companies. Accrued beneﬁt obligations and the fair value of the plan assets for accounting purposes are measured at December 31 of each year. The most recent actuarial valuations of the largest pension plans for funding purposes was 2008 to 2011, and the next required valuations will be as of 2011 to 2013. The Company estimates that in 2012 the minimum funding requirement for the deﬁned beneﬁt pension plans will be $53. In 2011, total cash payments for employee future beneﬁts, consisting of cash contributed by the operating com- panies 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 $169 (2010 – $162). Included in the total was $30 (2010 – $31) contributed to The total costs during 2011 for deﬁned contribution pension plans and multi-employer plans were $113 (2010 – $110). multi-employer plans. For the deﬁned beneﬁt pension plans and non-pension post-retirement plans, the estimated present value of accrued beneﬁt obligations and the estimated market value of the net assets available to provide these beneﬁts were as follows: As at December 31 2011 2010 2011 2010 2011 2010 Pension Plans in which Assets Exceed Accumulated Benefits Pension Plans in which Accumulated Benefits Exceed Assets Non-Pension Post-Retirement Benefits Accrued benefit obligations: Opening benefit obligations Current service cost Interest cost Contributions by plan participants Benefits paid Actuarial loss in year Foreign currency exchange rate changes Acquisitions Dispositions Plan amendments Settlements/curtailments Reclassification of plans Other $ 944 $ 792 $ 398 $ 410 $ 165 $ 139 7 64 – (24) 146 (4) – – – – 218 – 6 50 – (13) 75 5 1 – – – 28 – 10 12 1 (11) 18 (3) 403 – (2) (4) (218) (2) 9 19 1 (21) 29 (4) – – (1) (15) (28) (1) 6 8 – (6) 12 (2) 2 (6) – – – – 6 9 – (4) 13 4 – – – (2) – – Closing benefit obligations $ 1,351 $ 944 $ 602 $ 398 $ 179 $ 165 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 Closing plan assets 140 Onex Corporation December 31, 2011 $ 1,130 $ 978 $ 298 $ 314 $ – $ – 170 35 – (24) (6) – – 206 (1) 121 12 – (13) 5 – – 27 – 1 18 1 (11) – 206 (3) (206) 7 25 26 1 (21) (5) – (14) (27) (1) – 6 – (6) – – – – – – 4 – (4) – – – – – $ 1,510 $ 1,130 $ 311 $ 298 $ – $ – Asset Category Equity securities Debt securities Real estate Other N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S Percentage of Plan Assets 2011 37% 59% 1% 3% 100% 2010 35% 60% 2% 3% 100% Equity securities do not include direct investments in the shares The expected return on plan assets is determined by considering of the Company or its subsidiaries but may be invested indirectly the expected returns available on the assets underlying the cur- as a result of the inclusion of the Company’s and its subsidiaries’ rent investment policies of each pension plan. Expected yields on shares in certain market investment funds. debt securities are based on gross redemption yields as at the bal- ance sheet date. Expected returns on equity and real estate invest- ments reﬂect long-term real rates of return experienced in the respective markets. The funded status of the plans of the operating subsidiary companies was as follows: Pension Plans in which Assets Exceed Accumulated Benefits Pension Plans in which Accumulated Benefits Exceed Assets Non-Pension Post-Retirement Benefits As at December 31 2011 2010 2011 2010 2011 2010 Deferred benefit amount: Plan assets, at fair value Accrued benefit obligation Plan surplus (deficit): Unrecognized transitional obligation and past service costs $ 1,510 (1,351) $ 159 $ 1,130 (944) $ 186 $ 311 (602) $ (291) $ 298 (398) $ (100) $ – (179) $ (179) $ – (165) $ (165) – – – – (7) (7) Deferred benefit amount – asset (liability) $ 159 $ 186 $ (291) $ (100) $ (186) $ (172) The deferred beneﬁt asset is included in the Company’s consolidated balance sheets under “Other non-current assets” (note 9). The deferred beneﬁt liabilities are included in the Company’s consolidated balance sheets under “Other non-current liabilities” (note 15). Onex Corporation December 31, 2011 141 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S The net expense (earnings) for the plans, excluding discontinued operations, is outlined below: Pension Plans in which Assets Exceed Accumulated Benefits Pension Plans in which Accumulated Benefits Exceed Assets Non-Pension Post-Retirement Benefits Year ended December 31 2011 2010 2011 2010 2011 2010 Net periodic expense (earnings): Current service cost Interest cost Actual return on plan assets Difference between expected return and actual return on plan assets for period Plan amendments (curtailment/settlement gain) Difference between amortization of past service costs for period and actual plan amendments for period $ 7 64 (170) 83 – – $ 6 50 (121) 48 – – $ 10 12 (1) (5) – – $ 9 19 (25) 9 (1) – Net periodic expense (earnings) $ (16) $ (17) $ 16 $ 11 $ 6 $ 6 8 – – – (1) $ 13 8 – – (2) (1) $ 11 The net periodic expense (earnings) for pension plans and non-pension post-retirement beneﬁts are included in cost of sales and operating expenses in the income statement. 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 rate of return on plan assets Weighted average rate of compensation increase Assumed healthcare cost trend rates Initial healthcare cost rate Cost trend rate declines to Pension Benefits Non-Pension Post-Retirement Benefits 2011 2010 2011 2010 3.0%–5.4% 0.0%–4.2% 4.7%–5.7% 0.0%–4.3% 3.0%–5.1% 0.0%–4.7% 5.0%–5.7% 0.0%–4.7% 3.0%–5.7% 4.5%–8.0% 0.0%–4.3% 4.8%–6.3% 4.3%–8.0% 0.0%–4.3% 2011 7.1%–9.5% 4.5%–5.0% 3.0%–5.7% 5.8%–6.5% n/a n/a 0.0%–4.7% 0.0%–4.7% 2010 7.2%–9.5% 4.5%–5.0% Year that the rate reaches the rate it is assumed to remain at Between 2014 and 2030 Between 2014 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 1% Increase 1% Decrease 2011 $ 1 $ 19 2010 $ 2 $ 18 2011 $ (1) $ (16) 2010 $ (2) $ (16 ) 142 Onex Corporation December 31, 2011 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 3 3 . S U B S E Q U E N T E V E N T S Onex and certain operating companies may enter into agree- ments to acquire or make investments in other businesses. These transactions are typically subject to a number of conditions, many of which are beyond the control of Onex or the operating compa- nies. The effect of these planned transactions, if completed, may be signiﬁcant to the consolidated ﬁnancial position of Onex. 3 4 . I N F O R M A T 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 com- panies and strategic partnerships. Each reportable segment offers different products and services and is managed separately. The Company had eight reportable segments in 2011 (2010 – seven): electronics manufacturing services; aerostruc- tures; healthcare; ﬁnancial services; customer care services; metal services; building products (2011 only); and other. The electronics manufacturing services segment consists of Celestica, which pro- vides supply chain solutions, including manufacturing services to electronics original equipment manufacturers and service pro- viders. The aerostructures segment consists of Spirit AeroSystems, which manufactures aerostructures. The healthcare segment con- sists of EMSC (sold in May 2011), a leading provider of ambulance transport services and outsourced hospital emergency depart- ment physician stafﬁng and management services in the United States; Carestream Health, a leading global provider of medical imaging and healthcare information technology solutions; CDI, which owns and operates diagnostic imaging centres in the United States; Skilled Healthcare Group, which operates skilled nursing and assisted living facilities in the United States; and ResCare, a leading U.S. provider of residential training, educa- tion and support services for people with disabilities and special needs. The ﬁnancial services segment consists of The Warranty Group, which underwrites and administers extended warran- ties on a variety of consumer goods and also provides consumer credit and other specialty insurance products primarily through automobile dealers. The customer care services segment consists of Sitel Worldwide, which provides services for telecommunica- tions, consumer goods, retail, technology, transportation, ﬁnance and utility companies. The metal services segment consists of TMS International, a leading provider of outsourced services to steel mills. The building products segment consists of JELD-WEN, one of the world’s largest manufacturers of interior and exterior doors, windows and related products for use primarily in the residential and light commercial new construction and remodelling markets. Other includes Husky (sold in June 2011), one of the world’s larg- est suppliers of injection molding equipment and services to the plastics industry; Tropicana Las Vegas, one of the most storied casinos in Las Vegas; Allison Transmission, a leading designer and manufacturer 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 cabi- netry for the residential marketplace in North America; Tomkins, an industrial company that operates a number of businesses serving the general industrial, automotive and building prod- ucts markets; as well as Onex Real Estate, the operating compa- nies of ONCAP II and ONCAP III and the parent company. Allison Transmission, Hawker Beechcraft, ResCare (prior to November 2010), RSI and Tomkins are recorded at fair value through net earnings, as described in note 1. Onex Corporation December 31, 2011 143 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 2011 Industry Segments Electronics Manufacturing Services Aerostruc- tures Healthcare Financial Services Customer Care Services Metal Services Building Products Other Consoli- dated Total Revenues $ 7,213 $ 4,864 $ 5,030 $ 1,184 $ 1,416 $ 2,661 $ 774 $ 1,500 $ 24,642 Cost of sales (excluding amortization of property, plant and equipment, intangible assets and deferred charges) Operating expenses Interest income Amortization of property, plant (6,645) (234) 1 (4,124) (178) – (3,446) (918) 4 (579) (429) – (921) (377) – and equipment (64) (107) (126) (5) Amortization of intangible assets and deferred charges Interest expense of operating (14) (41) (168) (18) companies (6) (77) (221) (4) Unrealized increase in value of investments in associates at fair value, net Foreign exchange gains (loss) Stock-based compensation expense Other items Impairment of goodwill, intangible assets and long-lived assets, net Limited Partners’ Interests charge Earnings (loss) before income taxes – (1) (44) (7) – – – (2) (14) 3 – – – (10) (9) (32) (129) – – – – 9 (40) – (34) (28) (85) – (2) – (18) – – (2,467) (59) – (47) (13) (34) – 1 (2) – – – (660) (118) 1 (883) (608) 26 (19,725) (2,921) 32 (25) (54) (462) (5) (24) (311) (17) (44) (488) – (2) – (17) (22) – 501 2 (64) (84) (6) (627) 501 (14) (133) (146) (197) (627) and discontinued operations $ 199 $ 324 $ (25) $ 118 $ (49) $ 40 $ (91) $ (365) $ 151 Recovery of (provision for) income taxes Earnings (loss) from continuing operations Earnings from discontinued operations Net earnings (loss) for the year Total assets Long-term debt(a) Property, plant and equipment additions Intangible assets with indefinite life Goodwill additions from acquisitions Goodwill Net earnings (loss) attributable to: Equity holders of Onex Corporation Non-controlling interests Net earnings (loss) for the year (4) (100) (87) (56) (9) (16) 2 33 (237) 195 – 195 224 – 224 (112) 606 494 62 – 62 (58) – (58) 24 – 24 (89) (332) (86) – (89) 1,109 777 1,715 1,629 $ 2,970 $ – $ 4,978 $ 1,157 $ 4,194 $ 2,670 $ 4,877 $ 203 $ 631 $ 652 $ 1,045 $ 377 $ 2,581 $ 481 $ 8,170 $ 29,446 $ 1,421 $ 6,961 $ 60 $ – $ 34 $ 48 $ 275 $ – $ – $ 3 $ 96 $ 258 $ 41 $ 911 $ 3 $ 16 $ – $ 304 $ 32 $ 36 $ – $ 118 $ 75 $ – $ – $ 239 $ 13 $ 257 $ 119 $ 120 $ 120 $ 674 $ 376 $ 943 $ 278 $ 472 $ 691 $ 2,434 $ 17 $ 178 $ 195 $ 35 $ 189 $ 224 $ 512 $ 59 $ (39) $ 17 $ (60) $ 786 $ 1,327 $ (18) $ 3 $ (19) $ 7 $ (29) $ (9) $ 302 $ 494 $ 62 $ (58) $ 24 $ (89) $ 777 $ 1,629 (a) Long-term debt includes current portion, excludes ﬁnance leases and is net of ﬁnancing charges. 144 Onex Corporation December 31, 2011 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 2010 Industry Segments Revenues $ 6,526 $ 4,170 $ 3,498 $ 1,163 $ 1,340 $ 2,030 $ 1,007 $ 19,734 Electronics Manufacturing Services Aerostruc- tures Healthcare Financial Services Customer Care Services Metal Services Other Consoli- dated Total Cost of sales (excluding amortization of property, plant and equipment, intangible assets and deferred charges) Operating expenses Interest income Amortization of property, plant and equipment Amortization of intangible assets and deferred charges Interest expense of operating companies Unrealized increase in value of investments in associates at fair value, net Foreign exchange gains (loss) Stock-based compensation expense Other gains, net Other items Impairment of goodwill, intangible assets and long-lived assets Limited Partners’ Interests charge Earnings (loss) before income taxes (5,997) (216) (3,429) (181) – (71) (16) (16) – (4) (42) – (36) (9) – – (95) (25) (59) – (5) (31) – 2 – – (2,270) (629) 3 (116) (167) (122) 21 (5) (5) – (68) – – (547) (435) – (5) (24) (4) – – – – 21 (2) – (847) (363) 1 (34) (25) (79) – (5) – – (43) – – (1,858) (53) – (49) (12) (43) – – – – – – – (544) (429) 30 (33) (15) (19) 427 11 (108) 99 (97) (3) (831) (15,492) (2,306) 34 (403) (284) (342) 448 (8) (186) 99 (221) (14) (831) and discontinued operations $ 119 $ 347 $ 140 $ 167 $ (55) $ 15 $ (505) $ 228 Recovery of (provision for) income taxes Earnings (loss) from continuing operations Earnings from discontinued operations Net earnings (loss) for the year Total assets Long-term debt(a) Property, plant and equipment additions Intangible assets with indefinite life Goodwill additions from acquisitions Goodwill Net earnings (loss) attributable to: Equity holders of Onex Corporation Non-controlling interests Net earnings (loss) for the year (18) 101 – 101 $ 3,014 $ – $ 63 $ – $ 14 $ 15 (98) 249 – 249 $ 4,975 $ 1,145 $ 284 $ – $ – $ 3 (39) 101 132 233 $ 6,162 $ 2,996 $ 141 $ 266 $ 428 $ 1,403 (60) 107 – 107 $ 4,918 $ 205 $ 3 $ 16 $ – $ 344 5 (50) – (50) $ 675 $ 624 $ 22 $ 36 $ – $ 118 (11) 4 – 4 $ 862 $ 404 $ 41 $ – $ – $ 240 (18) (523) 76 (447) (239) (11) 208 197 $ 7,501 $ 28,107 $ 1,215 $ 6,589 $ 244 $ 798 $ 179 $ 497 $ 89 $ 531 $ 511 $ 2,634 $ 9 $ 92 $ 101 $ 57 $ 192 $ 249 $ 136 $ 97 $ 233 $ 101 $ 6 $ 107 $ (34) $ 6 $ (442) $ (167) $ (16) $ (2) $ (5) $ 364 $ (50) $ 4 $ (447) $ 197 (a) Long-term debt includes current portion, excludes ﬁnance leases and is net of ﬁnancing charges. Geographic Segments 2011 2010 Canada U.S. Europe Asia and Oceania Other Total Canada U.S. Europe Asia and Oceania Other Total $ 1,264 $ 15,323 $ 4,181 $ 2,968 $ 906 $ 24,642 $ 1,598 $ 11,687 $ 3,153 $ 2,589 $ 707 $ 19,734 Revenue(1) Property, plant and equipment $ 345 $ 3,539 $ 694 $ 408 $ 116 $ 5,102 $ 241 $ 3,023 $ 379 $ 283 $ 130 $ 4,056 Intangible assets $ 238 $ 2,028 $ 223 $ 94 $ 16 $ 2,599 $ 317 $ 1,871 $ 243 $ 58 $ 16 $ 2,505 Goodwill $ 184 $ 1,790 $ 279 $ 148 $ 33 $ 2,434 $ 125 $ 2,105 $ 282 $ 93 $ 29 $ 2,634 (1) Revenues are attributed to geographic areas based on the destinations of the products and/or services. Other consists primarily of operations in Central and South America, and Mexico. Onex Corporation December 31, 2011 145 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 3 5 . T R A N S I T I O N T O I F R S The Company’s consolidated ﬁnancial statements for the year ending December 31, 2011 are the ﬁrst annual ﬁnancial statements that comply with IFRS, including the application of IFRS 1, First-time adoption of IFRS. IFRS 1 requires that compar- ative ﬁnancial information be provided for the ﬁrst date at which the Company has applied IFRS, which was January 1, 2010 (the “Transition Date”). IFRS 1 also requires ﬁrst-time adopters to retrospectively apply all effective IFRS standards as of the report- ing date. However, it also provides for certain optional exemp- tions and certain mandatory exceptions for the ﬁrst-time adop- tion of IFRS. In completing the transition to IFRS the Company conducted an evaluation of the primary and secondary factors used to assess its functional currency under IFRS. It was deter- mined that the U.S. dollar is the Company’s functional cur- rency under IFRS. Accordingly, the ﬁnancial statements under IFRS have been reported on a U.S. dollar basis. Initial elections upon adoption Set forth below are the applicable IFRS 1 exemptions and excep- tions applied in the conversion from Canadian GAAP (as report- ed at December 31, 2010 and prior consolidated ﬁnancial state- ments) to IFRS. IFRS Exemption Options Business combinations – IFRS 1 allows for the guidance under IFRS 3 (revised), Business Combinations, to be applied either retrospectively or prospectively. Onex has elected to adopt IFRS 3 (revised) prospectively. Accordingly, all business com- binations on or after January 1, 2010 will be accounted for in accordance with IFRS 3 (revised). Employee beneﬁts – IFRS 1 provides the option to retro- spectively apply either the corridor approach under IAS 19, Employee Beneﬁts, for the recognition of actuarial gains and losses, or recognize all cumulative gains and losses deferred under Canadian GAAP in opening retained earnings at the tran- sition date. Onex will elect to recognize all cumulative actuarial gains and losses that existed at the transition date in opening retained earnings for all of its employee beneﬁt plans at the operating companies. Cumulative translation differences – IAS 21, The Effects of Changes in Foreign Exchange Rates, requires an entity to determine the translation differences in accordance with IFRS from the date on which a subsidiary was formed or acquired. IFRS 1 allows cumula- tive 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 transla- tion differences arising from periods prior to the date of transition to IFRS. Onex deemed all cumulative translation differences to be zero on transition to IFRS. Borrowing costs – IAS 23, Borrowing Costs, requires an entity to capitalize the borrowing costs related to all qualifying assets. Onex has elected to adopt IAS 23 prospectively. Accordingly, bor- rowing costs related to qualifying assets on or after January 1, 2010 will be capitalized. Leases – 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. IFRS Mandatory Exceptions Hedge accounting – IFRS 1 requires hedge accounting to be applied prospectively from the transition date to transactions that satisfy the hedge accounting criteria at that date in accordance with IAS 39, Financial Instruments: Recognition and Mea surement. Only hedging relationships that satisfy the hedge accounting criteria as of the transition date 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 sheets as a non-hedging derivative ﬁnancial instrument. Estimates – Hindsight is not used to create or revise estimates. The estimates previously made by the Company under Canadian GAAP will not be revised for the application of IFRS except where necessary to reﬂect any differences in accounting policies between IFRS and Canadian GAAP. 146 Onex Corporation December 31, 2011 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S R E C O N C I L I A T I O N O F F I N A N C I A L S T A T E M E N T S T O I F R S The following are reconciliations of the ﬁnancial statements previously presented under Canadian GAAP to the ﬁnancial statements prepared under IFRS. The reconciliations do not reﬂect adjustments for operating company investments subsequently disposed of or classiﬁed as discontinued operations. Reconciliation of Consolidated Balance Sheet as at January 1, 2010 (in millions of dollars) Assets Current assets Cash and cash equivalents Short-term investments Accounts receivable Inventories Other current assets Property, plant and equipment Long-term investments Other non-current assets Intangible assets Goodwill Liabilities and Equity Current liabilities December 31, 2009 Canadian GAAP (C$) Adjustments to U.S. Dollar Functional Currency December 31, 2009 Canadian GAAP (US$) IFRS Adjustments IFRS Adjustment References January 1, 2010 IFRS (US$) $ 3,206 $ (156) $ 3,050 $ (32) $ 3,018 636 3,062 3,085 1,384 11,373 3,623 3,255 2,696 2,086 2,312 (31) (149) (150) (67) (553) (184) (158) (132) (101) (112) 605 2,913 2,935 1,317 10,820 3,439 3,097 2,564 1,985 2,200 – 15 269 (216) 36 (73) 351 (649) 256 (2) (a) (b) (b) (c) (a,b,d) (e) 605 2,928 3,204 1,101 10,856 3,366 3,448 1,915 2,241 2,198 $ 25,345 $ (1,240) $ 24,105 $ (81) $ 24,024 Accounts payable and accrued liabilities $ 3,819 $ (185) $ 3,634 $ (366) Current portion of provisions Other current liabilities Current portion of long-term debt, without recourse to Onex Corporation Current portion of obligations under finance leases, without recourse to Onex Corporation Current portion of warranty reserves and unearned premiums Non-current portion of provisions Long-term debt of operating companies, without – 992 425 21 1,410 6,667 – – (48) (21) (1) (68) (323) – – 944 404 20 1,342 6,344 – recourse to Onex Corporation 5,505 (267) 5,238 Non-current portion of obligations under finance leases, without recourse to Onex Corporation 41 (2) 39 Non-current portion of warranty reserves and unearned premiums Other non-current liabilities Deferred income taxes Non-controlling interests Limited Partners’ Interests Equity Share capital Non-controlling interests Retained earnings and accumulated other comprehensive earnings 2,034 1,832 1,237 6,370 – (99) (91) (180) (309) – 1,935 1,741 1,057 6,061 – 23,686 (1,271) 22,415 508 – 1,151 1,659 (127) – 158 31 381 – 1,309 1,690 $ 25,345 $ (1,240) $ 24,105 255 30 – – – (81) 231 46 – – (71) (247) (6,061) 3,708 (2,475) – 3,329 (935) 2,394 $ (81) (f) (f) (f) (f) (f,g) (h) (h) (h) (i) $ 3,268 255 974 404 20 1,342 6,263 231 5,284 39 1,935 1,670 810 – 3,708 19,940 381 3,329 374 4,084 $ 24,024 Onex Corporation December 31, 2011 147 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S Reconciliation of Consolidated Balance Sheet as at December 31, 2010 (in millions of dollars) Assets Current assets Cash and cash equivalents Short-term investments Accounts receivable Inventories Other current assets Property, plant and equipment Long-term investments Other non-current assets Intangible assets Goodwill Liabilities and Equity Current liabilities December 31, 2010 Canadian GAAP (C$) Adjustments to U.S. Dollar Functional Currency December 31, 2010 Canadian GAAP (US$) IFRS Adjustments IFRS Adjustment References December 31, 2010 IFRS (US$) $ 2,518 $ 14 $ 2,532 $ – $ 2,532 711 3,397 3,614 1,695 11,935 4,101 3,754 2,436 2,233 2,619 4 19 20 8 65 11 20 14 12 14 715 3,416 3,634 1,703 12,000 4,112 3,774 2,450 2,245 2,633 – 14 370 (208) 176 (56) 1,090 (578) 260 1 (a) (b) (b) (c) (a,b,d) (e) 715 3,430 4,004 1,495 12,176 4,056 4,864 1,872 2,505 2,634 $ 27,078 $ 136 $ 27,214 $ 893 $ 28,107 Accounts payable and accrued liabilities $ 4,307 $ 24 $ 4,331 $ (367) Current portion of provisions Other current liabilities Current portion of long-term debt, without recourse to Onex Corporation Current portion of obligations under finance leases, without recourse to Onex Corporation Current portion of warranty reserves and unearned premiums Non-current portion of provisions Long-term debt of operating companies, without recourse to Onex Corporation Non-current portion of obligations under finance leases, without recourse to Onex Corporation Non-current portion of warranty reserves and unearned premiums Other non-current liabilities Deferred income taxes Non-controlling interests Limited Partners’ Interests Equity Share capital Non-controlling interests Retained earnings and accumulated other comprehensive earnings – 1,165 242 13 1,306 7,033 – 6,309 42 1,770 1,871 1,089 7,483 – 25,597 500 – 981 1,481 – 6 1 – 7 38 – 34 – 9 6 (144) 41 – (16) (127) – 279 152 – 1,171 243 13 1,313 7,071 – 6,343 42 1,779 1,877 945 7,524 – 25,581 373 – 1,260 1,633 $ 27,078 $ 136 $ 27,214 257 40 – 1 1 (68) 284 3 1 1 44 (7) (7,524) 5,650 (1,616) – 3,638 (1,129) 2,509 $ 893 (f) (f) (f) (f) (f,g) (h) (h) (h) (i) $ 3,964 257 1,211 243 14 1,314 7,003 284 6,346 43 1,780 1,921 938 – 5,650 23,965 373 3,638 131 4,142 $ 28,107 148 Onex Corporation December 31, 2011 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S Reconciliation of Statement of Net Earnings (Loss) for the Year Ended December 31, 2010 Reconciliation of Consolidated Statement of Comprehensive Earnings for the Year Ended December 31, 2010 (in millions of dollars except per share data) Net Loss under Canadian GAAP Adjustments to U.S. dollar functional currency Net Earnings under Canadian GAAP Revenue recognition Unrealized increase in value of investments in associates at fair value, net Stock-based compensation Other items: Unrealized carried interest attributable to management Restructuring provisions Non-controlling interests Limited Partners’ Interests Income taxes Gain on sale of CSI Other, net IFRS Adjustment References (b) (c) (g) (g) (j) (h) (h) (k) (l) IFRS Adjustment References (in millions of dollars) C$ (51) Comprehensive earnings under Canadian GAAP 63 Adjustments to U.S. dollar US$ 12 functional currency 64 Comprehensive earnings under Canadian GAAP Adjustments to Net Earnings, net of tax Non-controlling interests Foreign currency translation adjustments Actuarial loss and other (h) (m) (n) 699 (28) (114) 13 363 (831) Total comprehensive earnings (loss) 9 11 (1) attributable to: Equity holders of Onex Corporation Non-controlling interests Net Earnings under IFRS US$ 197 C$ (113) 136 US$ 23 185 5 (8) (64) $ (188) 329 $ 141 Comprehensive earnings under IFRS US$ 141 Net earnings (loss) attributable to: Equity holders of Onex Corporation Non-controlling interests Net loss per Subordinate Voting Share of Onex Corporation Basic and Diluted: Net loss $ (167) 364 $ 197 The transition from Canadian GAAP to IFRS reporting resulted in certain balances being reclassiﬁed for presentation purposes in the consolidated balance sheets. Adjustments to the Company’s consolidated balance sheets, excluding reclassiﬁcations, and con- solidated statements of comprehensive earnings in the transition from Canadian GAAP to IFRS reporting consisted of the following: a) Where products are provided free of charge to customers in connection with a commitment to provide an identiﬁable future $ (1.40) beneﬁt, IFRS requires that the product be recognized as a receiv- able at fair value, while Canadian GAAP required recognition as a long-term asset at cost. As such, on transition to IFRS the prod- ucts were recognized at fair value and a component was classiﬁed as a current account receivable from other non-current assets under Canadian GAAP presentation. Onex Corporation December 31, 2011 149 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S b) Under IFRS, Spirit AeroSystems recognizes revenue relating to its long-term volume-based pricing contracts under IAS 11, e) On transition to IFRS an impairment was recognized by Spirit AeroSystems for its deferred development costs. The impairment Construction Contracts. In accordance with IAS 11, revenue and was due to the consideration of its deferred development charges costs are recognized with consideration for the entire life of the as an intangible asset under IFRS and consequently the different contracts, while under Canadian GAAP certain components of impairment testing requirements. contracts were considered separately for revenue and cost rec- ognition. The difference in the method of recognizing revenue and costs associated with the long-term contracts resulted in a f) In accordance with IFRS, provisions related to restructuring, warranty, asset retirement obligations, legal, self-insurance and reduction of inventory and a corresponding decrease in retained other have been presented separately in the consolidated balance earnings under IFRS. In addition, costs associated with the long- sheets. Under Canadian GAAP, provisions were recorded within term supply contracts resulted in a reduction of cost of goods sold accounts payable and accrued liabilities, other current liabilities under IFRS. The deferred tax impact related to this adjustment and other non-current liabilities. was reﬂected in other non-current assets. In accordance with IFRS, pre-production costs associ- ated with long-term volume-based pricing contracts at Spirit g) Adjustments to other non-current liabilities for employee future beneﬁts related primarily to the recognition of cumula- AeroSystems have been classiﬁed as inventory from other non- tive actuarial gains and losses on transition to IFRS, as described current assets. above, and unamortized past service costs that were recognized During the third quarter of 2010, Onex, the parent com- on transition to IFRS. pany, received fees from Tomkins for services rendered in con- In accordance with IFRS, the liability for cash-settled junction with the acquisition of Tomkins. Under Canadian GAAP, share-based payments is accrued at fair value by applying an these fees were eliminated as Tomkins was accounted for using option pricing model while Canadian GAAP permitted recogni- the equity-accounted method. c) For certain investments over which the Company has the abil- ity to exert signiﬁcant inﬂuence, but not control, IFRS allows the tion at the intrinsic value of the payments. As such, the liability for cash-settled share-based payments was adjusted to reﬂect the fair value of these awards. In addition, the liability for share-based payments was adjusted to reﬂect the use of the graded vesting investments to be designated for recognition at fair value. The basis as required under IFRS, while Canadian GAAP permitted the Company has designated to record at fair value its signiﬁcant pooling of share-based instruments and recognition on a straight- inﬂuence investments in Allison Transmission, Hawker Beech- line basis. craft, RSI, ResCare (prior to November 2010), Tomkins, Cypress Other non-current liabilities also includes an adjust- and Onex Real Estate. The transition from the equity accounting ment to recognize the unrealized carried interest in the Onex method under Canadian GAAP to fair value under IFRS resulted in Partners and ONCAP Funds. The unrealized carried interest is a net increase of the investments’ carrying value and adjustments calculated based on the fair values of the underlying invest- to fair value since the transition to IFRS. ments and the overall unrealized gains in each respective Fund in d) A portion of the deferred development charges related to Spirit AeroSystems previously recorded within other non-current assets ity reﬂects the portion due to Onex management. The portion of unrealized carried interest due to Onex is recognized through a has been classiﬁed as an intangible asset for IFRS reporting. reduced charge for the Limited Partners’ Interests. The unrealized Onex has elected to recognize all cumulative actuarial carried interest liability reduces the amount due to the Limited gains and losses for employee future beneﬁt plans deferred under Partners and will eventually be paid through the realization of Canadian GAAP in opening retained earnings at the date of transi- the Limited Partners’ share of the underlying Onex Partners and accordance with the limited partnership agreements. The liabil- tion to IFRS. A reduction (increase) to deferred beneﬁt assets (liabil- ONCAP Fund investments. ities), net of the associated deferred tax impact, was recognized for this transitional adjustment. Subsequently, under IFRS, Onex has elected to recognize all actuarial gains and losses immediately in a h) Under IFRS, the interests of the Limited Partners and other investors through the Onex Partners and ONCAP Funds are separate statement of other comprehensive earnings and directly required to be recorded as a ﬁnancial liability. The liability is to retained earnings, without recognition to the income statement. recorded at fair value and reﬂects the discounted future estimated cash ﬂows to settle the liability. As changes in the future estimated cash ﬂows occur, the liability is adjusted through earnings to the fair value of the underlying investments in the Onex Partners and ONCAP Funds. 150 Onex Corporation December 31, 2011 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S The remaining third-party interests in the Company’s consolidated investments are considered to be non-controlling l) Under IFRS, the gain recognized for the sale of CSI by ONCAP II was increased for the recovery of the Limited Partners’ interests and are presented as a component of equity under IFRS. share of negative accounting retained earnings associated with In addition to the equity classiﬁcation, the non-controlling interests the investment in CSI. Additionally, the gain was not reduced for were adjusted for their share of the change in opening net assets, the amounts paid on account of the MIP as Onex accrues a liabil- including accumulated other comprehensive income (loss) items. ity for the MIP under IFRS. i) The adjustment to retained earnings and accumulated other comprehensive earnings reﬂects Onex’ share of the change in attributable to the equity holders of Onex Corporation, as interests of the Limited Partners were recorded as a ﬁnancial liability at fair net assets for the respective periods. The signiﬁcant adjustments value under IFRS. Under Canadian GAAP, the Limited Partners’ to retained earnings include the impact of accounting for the share was recognized as non-controlling interests. The gain on the sale of CSI of $97 under IFRS is entirely Limited Partners’ Interests, investments in associates, unrealized carried interest and stock-based compensation. A reconciliation of retained earnings and accumulated other comprehensive earn- ings at January 1, 2010 is as follows: m) An assessment of the functional currency under IFRS complet- ed by the operating companies resulted in certain foreign enti- ties having a different functional currency from that determined under Canadian GAAP. The result is that the foreign entities were Retained earnings and accumulated other comprehensive earnings under Canadian GAAP Significant adjustments: Limited Partners’ Interests Unrealized carried interest due to Onex and ONCAP management Investments in associates recorded at fair value Stock-based compensation Other, net January 1, 2010 considered to be foreign operations under IFRS and resulted in recognition of a foreign currency translation adjustment in other $ 1,309 comprehensive income under IFRS. In addition, the currency translation adjustments include the non-controlling interests’ (1,100) share and the allocation to the non-controlling interests is made in the consolidated statements of equity. (85) 330 (55) (25) n) Actuarial gains (losses) for employee future beneﬁt plans are recorded directly to other comprehensive earnings (loss) without recognition in the consolidated statement of earnings under IFRS. Retained earnings and accumulated other comprehensive Onex’ policy under Canadian GAAP was to recognize actuarial earnings under IFRS $ 374 gains and losses in the statement of earnings that exceeded 10% j) The recognition of restructuring accruals related to termination beneﬁts under IFRS are recognized when an entity is committed, without realistic possibility of withdrawal, to the termination, while Canadian GAAP required recognition when the termination was probable. As a result of this recognition distinction, an adjust- ment was made to recognize fewer restructuring provisions under IFRS, which will be recognized at a later date under IFRS. k) The adjustment for income taxes relates to the difference in the method of determining the deferred tax impact for foreign jurisdictions between Canadian GAAP and IFRS. Canadian GAAP required the deferred tax impact to be calculated based on the tax currency, while IFRS requires the calculation to be based on the foreign entity’s functional currency. This difference was also impacted by a change in the functional currency of certain foreign entities at the operating companies under IFRS. of the greater of the beneﬁt obligation or the fair market value of plan assets on a straight-line basis over the average remaining service period of active employees. IFRS cash flow adjustments The consolidated statements of cash ﬂows under IFRS have been adjusted from Canadian GAAP to conform with the presentation requirements of IFRS and Onex’ functional currency of the U.S. dollar under IFRS. Certain items speciﬁc to IFRS within the consolidated statements of earnings have been adjusted as non-cash items in the consolidated statements of cash ﬂows. These non-cash adjust- ments include the following: unrealized increase of investments in associates at fair value, Limited Partners’ Interests and change in provisions. Additionally, the Canadian GAAP adjustment in the consolidated statements of cash ﬂows for the non-controlling interests’ share of net earnings is not required as the allocation of net earnings is made in the consolidated statements of equity under IFRS. Onex Corporation December 31, 2011 151 SHAREHOLDER INFORMATION Year-end Closing Share Price As at December 31 (in Canadian dollars) 2011 2010 2009 2008 2007 Toronto Stock Exchange $ 33.18 $ 30.23 $ 23.60 $ 18.19 $ 34.99 Shares Registrar and Transfer Agent The Subordinate Voting Shares of CIBC Mellon Trust Company(1) the Company are listed and traded on the Toronto Stock Exchange. P.O. Box 700 Postal Station B Website: www.onex.com Auditors Montreal, Quebec H3B 3K3 PricewaterhouseCoopers LLP Share Symbol OCX Dividends Dividends on the Subordinate Voting Shares are payable quarterly on or about January 31, April 30, July 31 and (416) 682-3860 or call toll-free throughout Canada and the United States 1-800-387-0825 www.canstockta.com or inquiries@canstockta.com (e-mail) 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 October 31 of each year. At December 31, All questions about accounts, stock shares are registered under diﬀerent 2011 the indicated dividend rate for each certiﬁcates or dividend cheques names and/or addresses, multiple Subordinate Voting Share was C$0.11 should be directed to the Registrar mailings result. Shareholders who per annum. and Transfer Agent. Shareholder Dividend Reinvestment Plan Electronic Communication with Shareholders receive but do not require more than one mailing for the same ownership are requested to write to the Registrar and Transfer Agent and arrangements will The Dividend Reinvestment Plan provides We encourage individuals to receive be made to combine the accounts for shareholders of record who are resident Onex’ shareholder communications mailing purposes. in Canada a means to reinvest cash divi- electronically. You can submit your dends in new Subordinate Voting Shares request online by visiting CIBC Mellon Shares Held in Nominee Name of Onex Corporation at a market-related Trust Company’s(1) website at To ensure that shareholders whose price and without payment of brokerage www.canstockta.com/electronicdelivery shares are not held in their name receive commissions. To participate, registered or contacting them at 1-800-387-0825. all Company reports and releases shareholders should contact Onex’ share on a timely basis, a direct mailing list registrar, CIBC Mellon Trust Company.(1) (1) Canadian Stock Transfer Company Inc. is maintained by the Company. If you Non-registered shareholders who wish to participate should contact their investment dealer or broker. Corporate Governance Policies A presentation of Onex’ corporate governance policies is included in the Management Information Circular that is mailed to all shareholders and is available on Onex’ website. acts as the Administrative Agent for CIBC Mellon Trust Company. Investor Relations Contact Requests for copies of this report, quarterly reports, other annual reports and other corporate communications should be directed to: Investor Relations Onex Corporation 161 Bay Street P.O. Box 700 Toronto, Ontario M5J 2S1 (416) 362-7711 investor@onex.com would like your name added to this list, please forward your request to Investor Relations at Onex. Annual Meeting of Shareholders Onex Corporation’s Annual Meeting of Shareholders will be held on May 10, 2012 at 10:00 a.m. (Eastern Daylight Time) at Hazelton Hotel, 118 Yorkville Avenue, Toronto, Ontario. Typesetting by Moveable Inc. www.moveable.com Printed in Canada 152 Onex Corporation December 31, 2011

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