OncoCyte Annual Report 2013

Plain-text annual report

Management’s Discussion and Analysis and Financial Statements December 31, 2013 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 $44 billion, generate annual revenues of $33 billion and employ approximately 232,000 people worldwide. Onex operates from ofﬁces located in Toronto, New York and London. 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 PURE Canadian Gaming, previously named 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 IBC Shareholder Information 82 Consolidated Financial Statements CHAIRMAN’S LETTER Dear Shareholders, Onex will celebrate its 30th anniversary this year. When founded in 1984, we had a staff of three, $50 million from a small group of investors and a simple strategy to ﬁnd fundamentally good businesses to own, improve and build. In those early days, Onex’ success hinged on the performance of just a small handful of businesses. Today, we span the globe with sales of $33 billion and 232,000 employees. Through stock buy-backs and dividends we’ve returned far more than has been invested by both private and public investors, yet our capital base today is $5.8 billion. We also have the good fortune to be managing another $13.5 billion on behalf of limited partners from around the world through Onex Partners, ONCAP and Onex Credit Partners. Since 1984 we’ve seen three wars, three major ﬁnancial crises, an unimaginable downfall of the North American auto industry, the rise of China as an economic powerhouse – we could go on and on. We’ve survived it all and prospered by sticking to our original strategy and by working hard to maintain the entrepreneurial spirit that deﬁnes Onex. Being an entrepreneur means parting with something of known value in exchange for the risks and rewards of something of unknown value. At Onex, we don’t just say it, we do it. Every time we invest capital on your behalf and on behalf of our Limited Partners, the investment professionals of Onex and executives of the businesses we own invest as well. This alignment is elemental to preserving capital, generating superior returns for everyone and building future generations of entrepreneurs for Onex. We had a good year in 2013. With strong credit and equity markets, Onex and our Limited Partners received $2.9 billion from realizations and distributions. Our continuing challenge is ﬁnding more great businesses to own and to grow while maintaining discipline around the prices we pay. Here are some of the highlights from the year: • Onex Partners invested $350 million to acquire Emerald Expositions, a leading operator of large business-to-busi- ness tradeshows in the United States; • Total distributions relating to Onex Partners investments were $2.2 billion, included distributions received from Carestream Health as a result of its reﬁnancing, Allison Transmission’s secondary offerings, and the sales of RSI Home Products and TMS International; • ONCAP sold BSN SPORTS and Caliber Collision Centers for total proceeds of $660 million, generating multiples of capital of approximately 4.3 times and 7.5 times, respectively; • Including realizations and distributions, the value of Onex’ interest in Onex Partners’ and ONCAP private invest- ments grew by 34 percent; • Our businesses paid down approximately $1.1 billion of debt; • Our businesses raised or reﬁnanced approximately $8.9 billion of debt; • Our businesses made capital expenditures and add-on acquisitions of approximately $1.1 billion; • Onex Credit Partners continued to grow its collateralized loan obligation pools with two CLO offerings, totalling $1 billion and increasing its capital under management to $3.3 billion by year-end; and • Onex launched the fundraising for Onex Partners IV, raising a total of $3.1 billion in aggregate commitments toward its $4.5 billion target. Fortunately, the market recognized Onex value creation in 2013. For the year, our shares were up 37 percent relative to a 30 percent increase for the S&P 500. As we’ve said before, you should expect a private equity investor like Onex to continue to outperform public markets over the long term. Looking ahead, we believe Onex is well positioned for continued growth. We have a stable, experienced team; our entrepreneurial culture is engrained throughout the organization; our investments are performing well overall; and we have the ﬁnancial resources to grow. On behalf of the Onex team and our 232,000 employees worldwide, we thank you for your ongoing support. [signed] Gerald W. Schwartz Chairman & CEO, Onex Corporation Onex Corporation December 31, 2013 1 ONEX CORPORATION More Than 29 Years of Successful Investing Founded in 1984, Onex is one of the oldest and most successful private equity ﬁrms with a long, established track record and a disciplined, active-ownership approach to investing. Onex focuses on creating long-term value by building industry-leading businesses in partnership with outstanding management teams. As an active owner, the Company has built more than 75 businesses, completing approximately 440 acquisitions with a total value of approximately $50 billion. Onex’ long-term project returns have generated a gross multiple of capital invested of 3.0 times from its core private equity activities since inception, resulting in a 28 percent gross com- pound IRR on realized, substantially realized and publicly traded investments. 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 capital as well as capital entrusted to it by other investors from around the world, including public and private pension funds, sovereign wealth funds, banks, insurance companies and others. Onex’ Capital Onex manages its $5.8 billion of 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 Credit Partners and Onex Real Estate Partners. Onex’ long-term goal is to grow its capital per share by at least 15 percent per annum, and to have that growth reﬂected in its share price. Over the last 12 months, Onex’ capital per share grew by 23 per- cent in U.S. dollars (31 percent in Canadian dollars) and our share price grew by 37 percent in Canadian dollars. Other Investors Capital In addition to the management of Onex’ capital, Onex is entrusted with capital from institutional investors around the world. The Company manages $13.5 billion of invested and committed capital on behalf of its investors, of which 80 percent relates to its private equity platforms and the balance to Onex Credit Partners. The management of capi- tal from other investors provides two signiﬁcant beneﬁts to Onex. First, Onex receives a committed stream of annual management fees on $12.0 billion of other investors’ assets under management. Second, Onex has the opportunity to share in the proﬁts of its investors through the carried interest participation. Carried interest, if realized, can signiﬁcantly enhance Onex’ investment returns. In 2013, combined management fees and carried interest received offset ongoing operating expenses. Onex’ management fees will be further enhanced once fees are called from Onex Partners IV. 2 Onex Corporation December 31, 2013 How Onex’ $5.8 billion of Capital is Deployed at December 31, 2013 Large-Cap Private Equity 56% Private 41% Public 15% Cash and Near-Cash Items 30% Mid-Market Private Equity 6% Onex Credit Partners 5% Onex Real Estate Partners 3% The How We Are Invested schedule details Onex’ $5.8 billion of capital. The Components of Onex’ $13.5 billion of Other Investors’ Assets under Management at December 31, 2013 Onex Partners IV 15% Onex Partners III 35% Onex Partners II 14% Onex Partners I 9% Onex Credit Partners 20% ONCAP 7% Assets under management include capital managed on behalf of co-investors and the management of Onex and ONCAP. HOW WE ARE INVESTED All dollar amounts, unless otherwise noted, are in millions of U.S. dollars. This How We Are Invested schedule details Onex’ $5.8 billion of capital and provides private company perfor- mance and public company ownership information. This schedule includes values for Onex’ investments in controlled companies based upon estimated fair values and as such are non-GAAP measures. This fair value summary is used by investors to compare to fair values they may prepare on Onex. While it provides a snapshot of Onex’ 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 invest- ments and allocates no value to the management company income. The presentation of Onex’ capital in this manner does not have a standardized meaning prescribed under International Financial Reporting Standards (“IFRS”) and is therefore unlikely to be comparable to similar measures presented by other companies. Onex’ audited annual consolidated ﬁnancial statements prepared in accordance with IFRS for the year ended December 31, 2013 are available on Onex’ website, www.onex.com, and on the Canadian System for Electronic Document Analysis and Retrieval (“SEDAR”) at www.sedar.com. Reconciliation to information contained in the audited annual consolidated ﬁnancial statements has not been presented as it is impractical. Onex Capital 2013 2012 As at December 31 Private Equity Onex Partners Private Companies(1) Public Companies(2) Unrealized Carried Interest on Onex Partners Investments(3) ONCAP(4) Direct Investments Private Companies(5) Public Companies(2) Onex Real Estate Partners(6) Onex Credit Partners(7) Other Investments Cash and Near-Cash(8) Onex Corporation Debt $ 2,026 627 202 337 153 186 3,531 144 260 404 103 1,741 – $ 5,779 $ 50.93 $ 1,862 704 140 409 148 145 3,408 192 171 363 97 1,141 – $ 5,009 $ 41.42 Onex Capital per Share (December 31, 2013 – C$54.16; December 31, 2012 – C$41.21)(9) (10) (1) (2) Based on the US$ fair value of the investments in Onex Partners’ financial statements net of the estimated Management Investment Plan (“MIP”) liability on these investments of $64 million (2012 – $39 million). RSI, which was sold in February 2013, was included in private companies of Onex Partners at December 31, 2012. Based on the closing market values and net of the estimated MIP liability on these investments. TMS International, which was sold in October 2013, was included in public companies of Onex Partners at December 31, 2012. (3) Represents Onex’ share of the unrealized carried interest on public and private companies in the Onex Partners Funds. (4) Based on the C$ fair value of the investments in ONCAP’s financial statements net of management incentive programs on these investments of $17 million (2012 – $25 million) and a US$/C$ exchange rate of 1.0636 (2012 – 0.9949). BSN SPORTS, which was sold in June 2013, and Caliber Collision, which was sold in November 2013, were included in ONCAP at December 31, 2012. (5) Based on the fair value. (6) Based on the fair value of Onex Real Estate Partners’ investments. (7) Based on the market values of investments in Onex Credit Partners’ Funds and Onex Credit Partners Collateralized Loan Obligations, including the warehouse facility for OCP CLO-5. Excludes $343 million (2012 – $328 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 $343 million (2012 – $328 million) invested in a segregated Onex Credit Partners’ unleveraged senior secured loan strategy fund. (9) Calculated on a fully diluted basis. Fully diluted shares were approximately 115.9 million at December 31, 2013 (December 31, 2012 – 126.1 million). Fully diluted shares include (i) all outstanding Subordinate Voting Shares; and (ii) outstanding Stock Options that have met the minimum 25% price appreciation threshold. (10) The change in Onex Capital per Share during the year is driven primarily by fair value changes of Onex’ investments. Share repurchases and options exercised during the year will have an impact on the calculation of Onex Capital per Share. The impact on Onex Capital per Share will be to the extent that the price for share repurchases and option exercises is above or below the Onex Capital per Share. Onex Corporation December 31, 2013 3 H O W W E A R E I N V E S T E D Public and Private Company Information $ 17 220 427 664 (37) 627 186 $ 813 $ 154 186 70 315 41 200 (10) 66 170 (12) 61 92 (16) 85 1,440 251 $ 1,691 Public Companies As at December 31, 2013 Onex Partners Skilled Healthcare Group(2) Spirit AeroSystems(2) Allison Transmission(2) Estimated Management Investment Plan Liability Shares Subject to Carried Interest (millions) Shares Held by Onex (millions) Closing Price per Share (1) Market Value of Onex’ Investment 10.7 11.9 22.1 3.5 6.5 15.5 $ 4.81 $ 34.08 $ 27.61 Direct Investments – Celestica – 17.8(3) $ 10.40 Signiﬁcant Private Companies As at December 31, 2013 Onex Partners The Warranty Group Carestream Health Tropicana Las Vegas Tomkins ResCare JELD-WEN SGS International USI BBAM(13) KraussMaffei Emerald Expositions Onex’ and its Limited Partners’ Ownership LTM EBITDA(4) Net Debt Cumulative Distributions Onex’ Economic Ownership Original Cost of Onex’ Investment 91% 92% 82% 56% 98% 72%(8) 93% 92% 50% 96% 99% $ 114(5) 436 (4) 559(6) 141 154(9) 111(11) 267(11) 86 1 103 93 $ 246(5) 2,150 51 1,428 350 654(9) 579 1,596 (33)(14) 1 226 605 $ 403 1,311 – 1,180(7) – – – – 49(15) – – 29% 33%(3) 18% 14% 20% 18%(8) 23% 26% 13% 24% 24% Direct Investments – Sitel Worldwide 70% $ 130 $ 743 $ – 70% (1) Closing prices on December 31, 2013. (2) Excludes Onex’ potential participation in the carried interest and includes shares related to the MIP. (3) Excludes shares held in connection with the MIP. (4) 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. (5) Amount presented for The Warranty Group is net earnings rather than EBITDA and total debt rather than net debt. (6) LTM EBITDA excludes EBITDA from businesses divested as of December 31, 2013. (7) Onex, Onex Partners III, Onex management, certain limited partners and others received distributions of $663 million from Tomkins. (8) Onex’ and its limited partners’ investment is in convertible preferred shares. The ownership percentage is presented on an as-converted basis. (9) LTM EBITDA and net debt are presented for JELD-WEN Holding, inc. (10) Net of $27 million return of capital on the convertible promissory notes prior to the conversion into additional Series A Convertible Preferred Stock of JELD-WEN in April 2013. (11) LTM EBITDA for SGS International and USI is presented on a pro-forma basis to reflect the impact of acquired businesses. (12) Net of $84 million of the amount originally invested in USI sold by Onex to certain limited partners and others as a co-investment in March 2013. (13) Ownership percentages, LTM EBITDA, net debt and cumulative distributions are presented for BBAM Limited Partnership and do not reflect information for Onex’ investments in FLY Leasing Limited (NYSE: FLY) or Meridian Aviation Partners Limited that were made in conjunction with the investment in BBAM. The Original Cost of Onex’ Investment includes $5 million invested in FLY Leasing Limited and $14 million invested in Meridian Aviation Partners Limited. (14) Net debt for BBAM represents unrestricted cash, reduced for accrued compensation liabilities. (15) Onex, Onex Partners III and Onex management received distributions of $24 million from BBAM. (16) The investments in KraussMaffei were made in euros and converted to U.S. dollars using the prevailing exchange rate on the date of the investments. 4 Onex Corporation December 31, 2013 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 Onex Corporation’s (“Onex”) con- solidated ﬁnancial results for 2013 and assesses factors that may affect future results. The ﬁnancial condition and results of operations are analyzed noting the signiﬁcant factors that impacted the consolidated statements of earnings, consolidated statements of comprehensive earnings, consolidated balance sheets and consoli- dated statements of cash ﬂows of Onex. As such, this MD&A should be read in conjunction with the audited annual consolidated ﬁnancial statements and notes thereto included in this report. The MD&A and the audited annual consolidated ﬁnancial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) 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 par- ticular Onex operating business. Onex’ MD&A and the audited annual consolidated ﬁnancial statements are prepared in accordance with IFRS, the results of which may differ from the accounting principles applied by the operating businesses in their statutory ﬁnancial statements. The following MD&A is the responsibility of management and is as of February 20, 2014. Prepara- tion of the MD&A includes the review of the disclosures on each business by senior managers of that busi- ness and the review of the entire document by each ofﬁcer of Onex and by the Onex Disclosure Committee. The Board of Directors carries out its responsibility for the review of this disclosure through its Audit and Corporate Governance Committee, comprised exclusively of independent directors. The Audit and Corporate Governance Committee has reviewed and recommended approval of the MD&A by the Board of Directors. The Board of Directors has approved this disclosure. The MD&A is presented in the following sections: 6 Our Business, Our Objective and Our Strategies 14 Industry Segments 18 Financial Review 75 Outlook Onex Corporation’s ﬁnancial ﬁlings, including the 2013 MD&A and Financial Statements and interim quarterly reports, Annual Information Form and Management Information Circular, are available on Onex’ website, www.onex.com, and 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 management as inves- tors. References to the ONCAP Groups represent Onex, the limited partners of the relevant ONCAP Fund and the management of Onex and ONCAP as investors. 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, 2013 5 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S OUR BUSINESS, OUR OBJECTIVE AND OUR STRATEGIES OUR BUSINESS: Over its 29-year history, Onex has employed an active approach to building industry-leading businesses. Onex manages its own capital and that of investors from around the world, including public and pri- vate pension funds, sovereign wealth funds, banks, insurance companies and others. The Company has generated a gross multiple of capital invested of 3.0 times on realized, substantially realized and publicly traded investments. Active ownership approach Throughout our history, we have developed a successful approach to private equity investing. We pursue busi- nesses with world-class core capabilities and strong free cash ﬂow characteristics where we have identiﬁed an opportunity, in partnership with company management, to effect change and build market leaders. As an active owner, we are focused on execution theses rather than macro-economic or industry trends with the goal of creating long-term value for Onex and our investors. Speciﬁcally, we focus on (i) carve-outs of subsidiaries and mission-critical supply divisions from multinational corporations; (ii) cost reductions and operational restruc- turings; and (iii) platforms for add-on acquisitions. We have historically been conservative with the use of ﬁnancial leverage, which has served Onex and its businesses well through many cycles. We typically acquire a control position in our businesses, which allows us to drive important strategic decisions to accelerate growth and effect change in our operating businesses. Onex does not get involved in the daily operating decisions of the businesses. Experienced team with signiﬁcant depth Onex’ team of investment professionals is led by 12 Managing Directors who collectively have more than 205 years of private equity experience and have worked at Onex for an average of 14 years. Onex’ stability results from its ownership culture, rigorous recruiting standards and highly collegial environment. The investment team is supported by more than 40 professionals who are dedicated to the taxation, ﬁnancial control, audit, legal and reporting matters of Onex, its Funds and their operating businesses. Substantial ﬁnancial resources available for future growth Onex is in excellent ﬁnancial condition with no debt and approximately $1.7 billion of cash and near-cash items at December 31, 2013. At December 31, 2013, we had $479 million of uncalled committed limited partners’ capital for future acquisi- tions by Onex Partners III and C$387 million for future acquisitions by ONCAP III. To date, Onex has raised approximately $2.5 billion of capital commitments from limited partners for Onex Partners IV. Onex is tar- geting $3.3 billion in limited partners’ capital commitments toward a $4.5 billion fund size, including Onex’ $1.2 billion commitment. 6 Onex Corporation December 31, 2013 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Strong alignment of interests We believe that an important part of our success in building industry-leading businesses and our investment track record are direct results of the strong alignment of interests between Onex’ shareholders, our limited partners and the Onex management team. In addition to Onex being the largest limited partner in each Fund, the Company’s distinctive ownership culture requires each member of the Onex management team to have a signiﬁcant ownership in Onex shares and to invest meaningfully in each operating business acquired. Onex’ management team: • is the largest shareholder in Onex, with a combined holding of approximately 23 million shares or 21 percent; • has a total cash investment in Onex’ current operating businesses of approximately $270 million; and • is required to reinvest 25 percent of all gross carried interest and Management Investment Plan (“MIP”) distributions in Onex shares until they individually own at least one million shares and hold these shares until retirement. OUR OBJECTIVE FOR SHAREHOLDERS: Onex’ business objective is to create long-term value for share- holders and to have that value reﬂected in our share price. Our strategies to deliver this value to shareholders are concentrated on (i) acquiring and building industry-leading businesses; and (ii) managing and growing other investors’ capital. We believe that Onex has the investment 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 2013. OUR STRATEGIES: Acquire and Build High-Quality Businesses 2013 performance 1) Acquiring great businesses During 2013, Onex further developed its aircraft leasing and management platform. In February 2013, the Onex Partners III Group established Meridian Aviation Partners Limited (“Meridian Aviation”), an aircraft investment company based in Ireland. Aircraft purchased by Meridian Aviation will be leased to commercial airlines and managed by BBAM Limited Partnership (“BBAM”), one of the world’s largest managers of commercial jet air- craft and an Onex Partners III Group investment. The Onex Partners III Group initially invested $32 million in Meridian Aviation, of which Onex’ share was $8 million. In July 2013, the Onex Partners III Group invested an additional $25 million in Meridian Aviation, of which Onex’ share was $6 million. These investments are primar- ily for deposits, fees and other expenses associated with the purchase of commercial passenger aircraft. In June 2013, Onex completed the acquisition of Nielsen Expositions from its parent, an afﬁliate of Nielsen Holdings N.V., for cash consideration of $950 million. The business, now operating as Emerald Expositions, LLC (“Emerald Expositions”), is a leading operator of large business-to-business tradeshows in the United States across nine end markets. The Onex Partners III Group initially invested $350 million, of which Onex’ share was $85 mil- lion. In January 2014, Emerald Expositions completed the acquisition of George Little Management, LLC (“GLM”), an operator of business-to-business tradeshows in the United States. In conjunction with this acquisition, the Onex Partners III Group invested a further $140 million in Emerald Expositions, of which Onex’ share was $34 million. Onex Corporation December 31, 2013 7 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S 2) Building our businesses The strong cash ﬂow characteristics of many of our operating businesses enabled a number of them to complete follow-on acquisitions in 2013 for total consideration of $231 million. ResCare, SGS International, The Warranty Group, USI and a number of ONCAP’s companies each completed add-on acquisitions. Onex conservatively capitalizes its businesses to allow them to grow both organically and through acquisition. By applying prudent leverage, often accepting less debt than is available, Onex believes its oper- ating companies are better equipped to withstand cyclical downturns or unforeseen events. During 2013, a number of our operating businesses took advantage of strong credit markets, collectively raising or reﬁnancing a total of $8.9 billion of debt. During the second quarter of 2013, Carestream Health, Inc. (“Carestream Health”) raised approximately $2.4 billion of funded debt, primarily to reﬁnance existing debt and to fund a distribution of $750 million to its shareholders. In addition, our operating businesses collectively paid down debt totalling approximately $1.1 billion during 2013. In October 2013, the Onex Partners II Group completed the sale of its remaining 23.4 million shares of TMS International Corp. (“TMS International”) for $17.50 in cash per share. The Onex Partners II Group received net proceeds of $410 million, of which Onex’ share was $172 million, including carried interest of $10 million. We also had realizations and received distributions from certain operating businesses, including the pro- ceeds from (i) the Onex Partners II Group’s sale in February 2013 of its 50 percent interest in RSI Home Products, Inc. (“RSI”); (ii) the ONCAP II Group’s June 2013 sale of its investment in BSN SPORTS, Inc. (“BSN SPORTS”); (iii) the Onex Partners II Group’s sales of a portion of its shares of Allison Transmission Holdings, Inc. (“Allison Transmission”) in the company’s 2013 share repurchase and secondary offerings; and (iv) the ONCAP II Group’s November 2013 sale of its investment in Caliber Collision Centers (“Caliber Collision”). The table below includes total proceeds received from realizations and cash distributions made by the operating businesses in total to their shareholders and Onex’ share thereof: Company Fund Transaction Total Amount ($ millions) Onex’ Share ($ millions) (1) Allison Transmission Onex Partners II Share repurchase, secondary offerings $ 613(2) $ 203 BBAM BSN SPORTS Caliber Collision and dividends Onex Partners III Distributions ONCAP II ONCAP II Sale of business Sale of business Carestream Health Onex Partners II Dividend/Return of capital PURE Canadian Gaming ONCAP II & III Debt repayment RSI Onex Partners II Sale of business The Warranty Group Onex Partners I & II Dividend/Return of capital TMS International Onex Partners II Sale of business and dividends Total $ 24(3) $ 227(4) $ 433(4) $ 750 $ 14 $ 323(2) $ 65 $ 415(2) $ 2,864 $ 6 $ 98 $ 173 $ 303 $ 6 $ 130 $ 20 $ 174 $ 1,113 (1) Onex’ share includes carried interest received by Onex and is reduced for amounts paid under the MIP and Onex’ net payment of carried interest in ONCAP II. (2) Represents the Onex Partners II Group only. (3) Represents the Onex Partners III Group only. (4) Represents the ONCAP II Group only. 8 Onex Corporation December 31, 2013 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Including realizations, distributions and the value growth on the remaining ownership, Onex Partners’ and ONCAP’s private companies generated returns for Onex of 34 percent during 2013. Including the public compa- nies, the value of all of our operating businesses in the Onex Partners and ONCAP Funds, including realizations, distributions and the value growth on the remaining ownership, increased by 35 percent in 2013. 3) Maintaining substantial ﬁnancial strength Onex’ ﬁnancial strength comes from both its own capital, as well as the capital commitments from its limited partners in the Onex Partners and ONCAP Funds. Onex has substantial ﬁnancial resources available to support its investing strategy. At December 31, 2013, Onex had: i. Approximately $1.7 billion of cash and near-cash items and no debt. ii. $479 million of limited partners’ uncalled capital available for future Onex Partners III investments and C$387 million available for future ONCAP III investments. iii. Approximately $1.9 billion of limited partners’ committed capital raised for Onex Partners IV, Onex’ most recent large-cap private equity Fund. In February 2014, Onex raised approximately $600 million of addi- tional limited partners’ committed capital for Onex Partners IV. Onex is targeting to raise $3.3 billion in lim- ited partners’ capital commitments, with a target total fund size of $4.5 billion including Onex’ $1.2 billion commitment. Asset Management: Manage and Grow Other Investors’ Capital Onex’ management of other investors’ capital has grown signiﬁcantly since Onex ﬁrst began acquiring businesses in 1984. In its early years, Onex would primarily use its own capital to complete acquisitions and would include other 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 other investors providing a carried interest on their investment to Onex. Onex thus began to share in the proﬁts of its other investors. Onex formalized its asset management business in 1999 when it raised its ﬁrst fund, ONCAP I, 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 invest its own capital, the establishment of Onex Partners and ONCAP enabled Onex to efﬁciently pursue a larger acquisition program. As of December 31, 2013, Onex had raised $9.9 billion of limited partners’ capital through the Onex Partners and ONCAP Funds. In addition, Onex Credit Partners manages $2.7 billion of other investors’ capital dedicated to debt investment strategies. At December 31, 2013, Onex managed $13.5 billion of other investors’ capital, in addition to $5.8 billion of Onex’ capital. Included in the other investors’ capital managed by Onex was $1.9 billion of committed capital for Onex Partners IV. In February 2014, Onex raised approximately $600 million of additional limited partners’ committed capital for Onex Partners IV. The management of other investors’ capital provides two signiﬁcant beneﬁts to Onex: (i) the Company earns management fees on $12.0 billion of other investors’ assets under man- agement; and (ii) Onex has the opportunity to share in the proﬁts of its other investors through the carried inter- est participation. This enables Onex to enhance the return on its investment. In 2013, combined management fees and carried interest received offset ongoing operating expenses. Onex’ management fees will be further enhanced once fees are called from Onex Partners IV. Onex Corporation December 31, 2013 9 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S ($ millions) Total Fee Generating Uncalled Commitments Other Investors’ Capital Under Management(a) 2013(b) 2012(b) Funds Onex Partners(c) ONCAP Onex Credit Partners (d) $ 9,801 C$ 970 $ 2,744 $ 7,135 C$ 1,015 $ 1,826 Change in Total 37 % (4)% 50 % (a) All data is presented at fair value. 2013 2012 2013(b) 2012 (b) $ 8,464 $ 6,087 $ 2,720 C$ 837 C$ 872 C$ 389 $ 2,744 $ 1,826 n/a $ 1,193 C$ 405 n/a (b) (c) (d) 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. Includes $1.9 billion of committed capital from closings of Onex Partners IV during the fourth quarter of 2013. In February 2014, Onex raised approximately $600 million of additional limited partners’ committed capital for Onex Partners IV. Onex Credit Partners is jointly controlled by Onex. Capital under management of Onex Credit Partners represents 100 percent of the other investors’ capital managed by Onex Credit Partners. 2013 performance 1) Growth in other investors’ capital under management The amount of other investors’ capital under management will ﬂuctuate as new Funds are raised and as existing investments are realized. The amount of other investors’ capital under management increased by approximately $3.5 billion during 2013 due primarily to: • The increase in value of certain of the public and private investments held by the Funds. Partially offsetting the increase were realizations and distributions during the year, as previously indicated; • $1.9 billion of limited partners’ committed capital raised for Onex Partners IV during the fourth quarter of 2013 toward a target of $3.3 billion of limited partners’ committed capital; and • An increase of $918 million from Onex Credit Partners’ other investors’ capital under management dur- ing 2013 due primarily to the creation of its third and fourth Collateralized Loan Obligations (“CLO”). Onex invested $24 million in Onex Credit Partners’ third CLO (“OCP CLO-3”) and $40 million in Onex Credit Partners’ fourth CLO (“OCP CLO-4”). In November 2013, Onex Credit Partners established a warehouse facility in connection with its ﬁfth CLO (“OCP CLO-5”). Onex purchased $10 million of subordinated notes to support the warehouse facility during 2013. In February 2014, Onex purchased an additional $30 million of subordinated notes to increase the warehouse facil- ity for OCP CLO-5. In February 2014, Onex raised approximately $600 million of additional limited partners’ committed capital for Onex Partners IV. 10 Onex Corporation December 31, 2013 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S 2) Predictable and meaningful management fees; substantial carried interest earned The management of other investors’ capital provides Onex with a predictable stream of annual management fees that substantially offsets ongoing operating expenses. In addition, the General Partner’s carried interest in the Funds provides Onex with 8 percent of the proﬁts on a substantial portion of the other investors’ capital. At December 31, 2013, there was $6.2 billion of invested capital and a further $3.0 billion of uncalled committed capital that if invested would be subject to a carried interest in the Onex Partners and ONCAP Funds. In addition, Onex Credit Partners is entitled to incentive fees on $2.4 billion of the other investors’ capital it manages. • Onex Partners, ONCAP and Onex Credit Partners earned a total of $112 million in management and trans- action fees in 2013 (2012 – $108 million). We expect to start drawing management fees for Onex Partners IV sometime in 2014. • Onex received $75 million of carried interest in 2013 (2012 – $3 million) as a result of (i) the realizations of RSI and TMS International; (ii) the distributions received from Carestream Health; and (iii) the sales of a portion of the shares of Allison Transmission. • At December 31, 2013, there was approximately $135 million of unrealized carried interest on Onex Partners’ public companies, of which Onex’ share was $54 million. There was a further $410 million of unrealized car- ried interest on Onex Partners’ and ONCAP’s private operating businesses based on the December 31, 2013 fair values, of which Onex’ share was $148 million. The actual amount of carried interest realized by Onex will depend on the ultimate performance of each Fund. Including the impact of realized carried interest, Onex generated $137 million of carried interest during 2013. Onex Corporation December 31, 2013 11 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S 2013 performance Private Equity Fund Performance The table below summarizes the performance of the Onex Partners and ONCAP Funds from inception through December 31, 2013. The gross internal rate of return (“Gross IRR”) shows the project returns achieved on the investments in the Funds. The net internal rate of return (“Net IRR”) shows the returns earned by limited partners in the Funds after the deduction for carried interest, management fees and expenses. The gross mul- tiple of capital (“Gross MOC”) shows the Funds’ total value as a multiple of cost basis. Net multiple of capital (“Net MOC”) shows the multiple of capital invested for limited partners after the deduction for carried interest, management fees and expenses. Performance Returns(1) Gross IRR (excluding Gross IRR (including Gross MOC (excluding Gross MOC (including unrealized)(2) unrealized)(3) Net IRR(4) unrealized)(2) unrealized)(3) Net MOC (4) 70% 14% –(5) 43% 53% –(5) 56% 18% 18% 43% 30% 24% 39% 14% 9% 33% 21% 11% 4.0x 1.9x –(5) 4.1x 5.6x –(5) 3.8x 2.3x 1.4x 4.1x 3.1x 1.5x 3.0x 1.9x 1.2x 3.1x 2.2x 1.2x Funds Onex Partners LP Onex Partners II LP Onex Partners III LP ONCAP L.P.(6)(7) ONCAP II L.P.(6) ONCAP III LP(6) (1) Performance returns are a non-GAAP measure. (2) (3) (4) Gross IRR (excluding unrealized) and Gross MOC (excluding unrealized) include the returns on realized, substantially realized and publicly traded investments. Gross IRR (including unrealized) and Gross MOC (including unrealized) include the returns on unrealized, realized, substantially realized and publicly traded investments. Net IRR and Net MOC are presented for limited partners in the Onex Partners and ONCAP Funds and exclude the capital contributions and distributions attributable to Onex’ commitment as a limited partner in each Fund. (5) Onex Partners III LP and ONCAP III LP do not have realized, substantially realized or publicly traded investments. (6) Returns are calculated in Canadian dollars, the functional currency of the ONCAP Funds. (7) ONCAP L.P. dissolved effective October 31, 2012 as all investments have been realized. 12 Onex Corporation December 31, 2013 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY 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 2013, $15 million was returned to shareholders through dividends and Onex repurchased 3,060,400 Subordinate Voting Shares at a total cost of $153 million, or an average purchase price of C$51.81 per share. In May 2013, Onex increased its quarterly dividend by 36 percent to C$0.0375 per Subordinate Voting Share beginning in July 2013. The increase in the dividend reﬂects Onex’ success and ongoing commitment to its shareholders. At December 31, 2013, Onex’ Subordinate Voting Shares closed at C$57.35, a 37 percent increase from December 31, 2012. This compares to a 30 percent increase in the Standard & Poor’s 500 Index (“S&P 500”) and a 10 percent increase in the S&P/TSX Composite Index (“TSX”). The chart below shows the performance of Onex’ Subordinate Voting Shares during 2013 relative to the S&P 500 and TSX. Twelve Months’ Onex Relative Performance (December 31, 2012 to December 31, 2013) OCX TSX S&P 500 2 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 140 135 130 125 120 115 110 105 100 95 90 OCX +37% S&P 500 +30% TSX +10% 31-Dec-12 31-Jan-13 28-Feb-13 31-Mar-13 30-Apr-13 31-May-13 30-Jun-13 31-Jul-13 31-Aug-13 30-Sep-13 31-Oct-13 30-Nov-13 31-Dec-13 Onex Corporation December 31, 2013 13 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S INDUSTRY SEGMENTS At December 31, 2013, Onex had seven reportable industry segments. A description of our operating businesses by industry segment, and the economic and voting ownerships of Onex, the parent com- pany, and its limited partners in those businesses, is presented below. We manage our businesses 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(a) Onex’ & Limited Partners’ Economic Ownership Onex’ Economic/ Voting Ownership 10%(a) 10%(a)/75% Aerostructures Spirit AeroSystems, Inc. (NYSE: SPR), the world’s largest independent designer 16% 4%(a)/63% and manufacturer of aerostructures (website: www.spiritaero.com). Onex shares held: 6.0 million(a) Onex Partners I shares subject to a carried interest: 11.9 million Healthcare 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). 39% 9%/86% Onex shares held: 3.5 million Onex Partners I shares subject to a carried interest: 10.7 million Carestream Health, Inc., a global provider of medical and dental imaging and healthcare information technology solutions (website: www.carestream.com). 92% 33%(a)/100% Total Onex, Onex Partners II and Onex management investment at original cost: $471 million Onex portion at cost: $186 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 original 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 Insurance Provider The Warranty Group, Inc., one of the world’s largest providers of extended warranty contracts (web site: www.thewarrantygroup.com). 91% 29%/100% Total Onex, Onex Partners I, Onex Partners II and Onex management investment at original 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 Customer Care Services SITEL Worldwide Corporation, a global provider of outsourced customer care services (website: www.sitel.com). 70% 70%/89% Onex investment at original cost: $251 million (a) Excludes shares held in connection with the MIP. 14 Onex Corporation December 31, 2013 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Industry Segments Building Products Other Businesses • Commercial Vehicles • Aircraft Leasing & Management Onex’ & Limited Partners’ Economic Ownership Onex’ Economic/ Voting Ownership 72%(a) 18%(a)/72%(a) Companies 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, certain limited partners, Onex management and others investment at original cost: $921 million Onex portion at cost: $227 million Onex Partners III portion subject to a carried interest: $569 million The Onex Partners III Group’s investment at original cost includes $750 million of convertible preferred stock and $171 million of convertible promissory notes. JELD-WEN made cumulative principal repayments of $110 million on the convertible promissory notes. In April 2013, the remaining principal of the convertible promissory notes in the amount of $61 million was converted into convertible preferred stock of JELD-WEN. Allison Transmission Holdings, Inc. (b) (NYSE: ALSN), the world leader in the design and manufacture of fully-automatic transmissions for on-highway trucks and buses, off-highway equipment and defence vehicles (website: www.allisontransmission.com). 27% 8%/–(b) Onex shares held: 15.5 million Onex Partners II shares subject to a carried interest: 22.1 million Aircraft Leasing & Management, a global platform dedicated to leasing and managing commercial jet aircraft. The platform is comprised of: BBAM Limited Partnership(b), one of the world’s leading managers of commercial jet aircraft (website: www.bbam.com). 50% 13%/50%(b) Total Onex, Onex Partners III and Onex management investment at original cost: $185 million Onex portion: $47 million Onex Partners III portion subject to a carried interest: $130 million In conjunction with the investment in BBAM, the Onex Partners III Group invested $20 million in the shares of FLY Leasing Limited (NYSE: FLY), of which Onex’ share was $5 million. Meridian Aviation Partners Limited, an aircraft investment company established by the Onex Partners III Group. 100% 25%/100% Total Onex, Onex Partners III and Onex management investment at original cost: $57 million Onex portion: $14 million Onex Partners III portion subject to a carried interest: $40 million (a) The economic ownership and voting interests of JELD-WEN are presented on an as-converted basis as the Onex Partners III Group’s investment is in convertible preferred shares. (b) Onex has certain contractual rights and protections, including the right to appoint members to the boards of directors, in respect of these entities, which are accounted for at fair value in Onex’ audited annual consolidated financial statements. Onex Corporation December 31, 2013 15 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Industry Segments Other Businesses (cont’d) • Business Services/ Tradeshows • Plastics Processing Equipment • Business Services/ Packaging Companies Onex’ & Limited Partners’ Economic Ownership Onex’ Economic/ Voting Ownership Emerald Expositions, LLC, a leading operator of business-to-business tradeshows in the United States (website: www.emeraldexpositions.com). 99% 24%/99% Total Onex, Onex Partners III and Onex management investment at original cost: $350 million Onex portion: $85 million Onex Partners III portion subject to a carried interest: $247 million In January 2014, the Onex Partners III Group invested an additional $140 million in the equity of Emerald Expositions to fund its acquisition of GLM, of which Onex’ share was $34 million. KraussMaffei Group GmbH, a leading manufacturer of plastic and rubber processing equipment (website: www.kraussmaffeigroup.com). 96% 24%/100% Total Onex, Onex Partners III and Onex management investment at original cost: $366 million(a) Onex portion: $92 million(a) Onex Partners III portion subject to a carried interest: $257 million(a) The Onex Partners III Group’s investment at original cost includes $8 million of accounts receivable that were converted into additional equity of the company in July 2013. Onex’ share of the accounts receivable was $2 million. SGS International, Inc., a global leader in design-to-print graphic services to the consumer products packaging industry (website: www.sgsintl.com). 93% 23%/93% Total Onex, Onex Partners III and Onex management investment at original cost: $260 million Onex portion: $66 million Onex Partners III portion subject to a carried interest: $183 million • Industrial Products Tomkins Limited(b), a global manufacturer of belts and hoses for the industrial and automotive markets (website: www.tomkins.co.uk). 56% 14%/50%(b) Total Onex, Onex Partners III, certain limited partners, Onex management and others investment at original cost: $1,219 million Onex portion at cost: $315 million Onex Partners III and others portion subject to a carried interest: $688 million • Gaming Tropicana Las Vegas, Inc., a casino resort with 1,467 rooms, situated on 35 acres and located directly on the Las Vegas strip (website: www.troplv.com). 82% 18%/82% Total Onex, Onex Partners III and Onex management investment at original cost: $319 million Onex portion: $70 million Onex Partners III portion subject to a carried interest: $225 million (a) The investments in KraussMaffei were made in euros and converted to U.S. dollars using the prevailing exchange rate on the date of the investments. (b) Onex has certain contractual rights and protections, including the right to appoint members to the board of directors, in respect of this entity, which is accounted for at fair value in Onex’ audited annual consolidated financial statements. 16 Onex Corporation December 31, 2013 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Industry Segments Companies • Insurance Brokerage USI Insurance Services, a leading U.S. provider of insurance brokerage services (website: www.usi.biz). Total Onex, Onex Partners III, certain limited partners, Onex management and others investment at original cost: $610 million Onex portion at cost: $170 million Onex Partners III portion subject to a carried interest: $358 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). Onex’ & Limited Partners’ Economic Ownership Onex’ Economic/ Voting Ownership 92% 26%/100% ONCAP II 100% 46%(a)/100% ONCAP II actively manages investments in EnGlobe, Mister Car Wash, CiCi’s Pizza, Pinnacle Renewable Energy Group and PURE Canadian Gaming. Total ONCAP II, Onex, Onex management and ONCAP management unrealized investments at original cost: $315 million (C$332 million) Onex portion: $145 million (C$152 million) ONCAP II portion: $143 million (C$151 million) ONCAP III ONCAP III actively manages investments in Hopkins, PURE Canadian Gaming, Davis-Standard and Bradshaw. Total ONCAP III, Onex, Onex management and ONCAP management unrealized investments at original cost: $253 million (C$253 million) Onex portion : $74 million (C$74 million) ONCAP III portion : $154 million (C$155 million) 100% 29%/100% • Real Estate Onex Real Estate Partners, a platform dedicated to acquiring and improving real estate assets in North America. 88% 88%/100% Onex’ remaining investment in Onex Real Estate Partners transactions at cost: $301 million • Credit Strategies Onex Credit Partners specializes in managing credit-related investments, including event-driven, long/short and market dislocation strategies. 70%(b) 70%(b)/50%(b) Onex investment in Onex Credit Partners at market: $603 million, of which $343 million is invested in a segregated Onex Credit Partners unleveraged senior secured loan portfolio that purchases assets with greater liquidity, $126 million is invested in other Onex Credit Partners Funds and $134 million is invested in collateralized loan obligations, including the warehouse facility for OCP CLO-5. (a) This represents Onex’ blended economic ownership in the ONCAP II investments. (b) This represents Onex’ share of the Onex Credit Partners asset management platform. Onex Corporation December 31, 2013 17 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S 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, 2013 compared to those for the year ended December 31, 2012 and, in selected areas, to those for the year ended December 31, 2011. 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 This section should be read in conjunction with Onex’ Disclosure of Interests in Other Entities IFRS 12, Disclosure of Interests in Other Entities, requires an entity to disclose information that enables users of audited annual consolidated statements of earnings and ﬁnancial statements to evaluate the nature of, and risks corresponding notes thereto. Changes in accounting policies Effective January 1, 2013, Onex has adopted the follow- associated with, its interest in other entities and the effects of those interests on its ﬁnancial position, ﬁnancial perfor- mance and cash ﬂows. Onex adopted IFRS 12 on January 1, 2013 in accordance with the IFRS 12 transition provisions. ing new and revised accounting standards, along with any The adoption of IFRS 12 resulted in additional disclosures consequential amendments. These changes were made in in the audited annual consolidated ﬁnancial statements. accordance with the applicable transitional provisions. Consolidated Financial Statements IFRS 10, Consolidated Financial Statements, replaces the guidance on control and consolidation in IAS 27, Con soli dated and Separate Financial Statements, and SIC-12, Consolidation – Special Purpose Entities. IFRS 10 introduces a single consolidation model for all entities based on con- Fair Value Measurement IFRS 13, Fair Value Measurement, provides a single frame- work for measuring fair value and requires enhanced dis- closures when fair value is used for measurement. IFRS 13 was adopted by Onex on a prospective basis. The adoption of IFRS 13 did not require any adjustments to the valu- ation techniques used by Onex to measure fair value and trol, irrespective of the nature of the entities, and provides did not result in any measurement adjustments as at detailed guidance on applying the deﬁnition of con- January 1, 2013. Enhanced disclosures are included in the trol. The accounting requirements for consolidation have audited annual consolidated ﬁnancial statements. remained largely consistent with IAS 27. Onex determined that the adoption of IFRS 10 on January 1, 2013 did not result in changes to the consolidation status of any of its subsidiaries and investees. Presentation of Financial Statements The amendments to IAS 1, Presentation of Financial State ments, require other comprehensive income to be grouped by those items that will be reclassiﬁed subsequently to Joint Arrangements, and Investments in Associates earnings or loss and those that will not be reclassiﬁed. and Joint Ventures IFRS 11, Joint Arrangements, supersedes IAS 31, Interests in Joint Ventures, and requires joint arrangements to be classiﬁed either as joint operations or joint ventures, Onex adopted the amendments on January 1, 2013 and has reclassiﬁed comprehensive income items of the com- parative period. These changes did not result in any adjustments to other comprehensive income or total com- depending on the contractual rights and obligations prehensive income. of each investor that jointly controls the arrangement. An investment in a joint venture is accounted for using the equity method as set out in IAS 28, Investments in Associates and Joint Ventures (amended in 2011). The other amendments to IAS 28 did not have an impact on Onex. Onex has classiﬁed its joint arrangements and concluded that the adoption of IFRS 11 did not result in any changes to the accounting for its joint arrangements. 18 Onex Corporation December 31, 2013 Employee Future Beneﬁts IAS 19, Employee Future Beneﬁts (amended in 2011), requires the net deﬁned beneﬁt liability (assets) to be recognized on the balance sheet without any deferral of actuarial gains and losses and past service costs as previously allowed. Past service costs are recognized in net earnings when incurred. Expected returns on plan assets are no longer included in post-employment beneﬁts expense. Instead, post-employ- ment beneﬁts expense includes the net interest on the net deﬁned beneﬁt liability (assets), calculated using a dis- count rate based on market yields on high quality bonds. Remeasurements consisting of actuarial gains and losses, the actual return on plan assets (excluding the net interest component) and any change in the asset ceiling are rec- ognized in other comprehensive income. Onex continues to immediately recognize in retained earnings all pension adjustments recognized in other comprehensive income. Onex also continues to recognize interest expense (income) on net post-employment beneﬁts liabilities (assets) in the audited annual consolidated statements of earnings. Onex adopted these amendments retrospectively and adjusted its opening equity as at January 1, 2012 to recognize previously unrecognized past service costs and adjustments to the asset ceiling for post-employment plans. The effects on the audited annual consolidated ﬁnancial statements of adopting the amendments to IAS 19 were not signiﬁcant. Onex, the parent company, does not provide pension, other retirement or post-retirement bene- ﬁts to its employees or to employees of any of the operating companies. In addition, Onex, the parent company, does not have any obligations and has not made any guarantees with respect to the plans of the operating companies. Impairment of Assets Onex has early adopted the amendments to IAS 36, Impair ment of Assets, effective January 1, 2013. These amendments clarify and introduce additional disclosures about fair value measurements when there has been an impairment or impairment reversal. The disclosures required by IAS 36 after adoption of the amendments are included in the audited annual consolidated ﬁnancial statements. M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Critical accounting policies and estimates Signiﬁcant accounting estimates Onex prepares its consolidated ﬁnancial statements in accordance with IFRS. The preparation of the MD&A and consolidated ﬁnancial statements in conformity with IFRS requires management to make judgements, assumptions and estimates that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabili- ties and the reported amounts of revenues and expenses for the periods of the audited annual consolidated ﬁnancial statements. Onex and its operating companies evalu- ate their estimates and assumptions on an ongoing basis and any revisions are recognized in the affected periods. Included in Onex’ audited annual consolidated ﬁnancial statements are estimates used in determining the allow- ance for doubtful accounts, inventory valuation, deferred tax assets and liabilities, intangible assets and goodwill, useful lives of property, plant and equipment and intan- gible assets, recoverability of development costs associ- ated with new product programs, revenue recognition under contract accounting, income taxes, investments in joint ventures and 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 assumptions and estimates. Judgements, assumptions and estimates are used in the determination of fair value for business com- binations, Limited Partners’ Interests, carried interest and investments in joint ventures and associates. The assess- ment of goodwill, intangible assets and long-lived assets for impairment, the determination of contract accounting, income taxes, legal contingencies and actuarial valuations of pension and other post-retirement beneﬁts also require the use of judgements, assumptions and estimates. Due to the material nature of these factors, they are discussed here in greater detail. Onex Corporation December 31, 2013 19 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Business combinations In a business combination, all identiﬁable assets, liabili- into consideration company-speciﬁc items, the lack of liquidity inherent in a non-public investment and the fact ties and contingent liabilities acquired are recorded at the that comparable public companies are not identical to the date of acquisition at their respective fair values. One of companies being valued. Such considerations are necessary the most signiﬁcant estimates relates to the determination because, in the absence of a committed buyer and comple- of the fair value of these assets and liabilities. Land, build- tion of due diligence procedures, there may be company- ings and equipment are usually independently appraised speciﬁc items that are not fully known that may affect value. while short-term investments are valued at market prices. A variety of additional factors are reviewed by management, If any intangible assets are identiﬁed, depending on the including, but not limited to, ﬁnancing and sales transac- type of intangible asset and the complexity of determin- tions with third parties, current operating performance and ing its fair value, an independent external valuation expert future expectations of the particular investment, changes in may develop the fair value. These evaluations are linked market outlook and the third-party ﬁnancing environment. closely to the assumptions made by management regard- In determining changes to the fair value of investments, ing the future performance of the assets concerned and emphasis is placed on current company performance and any changes in the discount rate applied. Note 1 to the market conditions. audited annual consolidated ﬁnancial statements provides For publicly traded investments, the valuation is additional disclosure on business combinations. based on closing market prices less adjustments, if any, for regulatory and/or contractual sale restrictions. Limited Partners’ Interests, carried interest The changes to fair value of the investments in and investments in joint ventures and associates The measurement of the Limited Partners’ Interests, carried joint ventures and associates are reviewed on page 37 of this MD&A. interest and investments in joint ventures and associates is Included in the measurement of the Limited Part- signiﬁcantly impacted by the fair values of the investments ners’ Interests is an adjustment for the change in carried held by the Onex Partners and ONCAP Funds. Joint ventures interest as well as any contributions by and distributions to and associates are deﬁned under IFRS as those investments limited partners in the Onex Partners and ONCAP Funds. in operating businesses over which Onex has joint control The changes to the fair value of the Limited Partners’ or signiﬁcant inﬂuence, but not control. In accordance with Interests are reviewed on page 42 of this MD&A. IFRS, certain of these investments are designated, upon ini- tial recognition, at fair value in the audited annual consoli- Impairment testing of goodwill, intangible assets dated balance sheets. The fair value of investments in joint ventures and associates is assessed at each reporting date and long-lived assets Goodwill in an accounting context represents the excess with changes in fair value recognized in the audited annual of the aggregate consideration paid and the amount of consolidated statements of earnings. Similarly, the Limited any non-controlling interests in the acquired company Partners’ Interests, representing the interests of limited part- compared to the fair value of the identiﬁable net assets ner investors in the Onex Partners and ONCAP Funds, and acquired. Essentially all of the goodwill amount that carried interest, representing the General Partner’s share of appears in Onex’ audited annual consolidated balance the net gains of the Onex Partners and ONCAP Funds, are sheets was recorded by the operating companies. Goodwill recorded at fair value. The fair value is signiﬁcantly affected is not amortized, but is assessed for impairment at the cash by the change in the fair value of the underlying investments generating unit (“CGU”) level (or group of CGUs) annually, in the Onex Partners and ONCAP Funds. or sooner if events or changes in circumstances or market The valuation of non-public investments requires conditions indicate that the carrying amount could exceed signiﬁcant judgement by Onex due to the absence of quoted fair value. The test for goodwill impairment used by our market values, inherent lack of liquidity and the long-term operating companies is to assess whether the fair value of nature of such investments. Valuation methodologies in- each CGU within an operating company is less than its car- clude discounted cash ﬂows and observations of the trad- rying value and determine if the goodwill associated with ing multiples of public companies considered comparable that CGU is impaired. This assessment takes into consid- to the private companies being valued. The valuations take eration several factors, including, but not limited to, future 20 Onex Corporation December 31, 2013 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S cash ﬂows and market conditions. If the fair value is deter- of time over which these estimates will be developed, the mined to be lower than the carrying value at an individual impact to recognized revenue and costs may be signiﬁcant CGU, then goodwill is considered to be impaired and an if the estimates change. These estimates involve various impairment charge must be recognized. Each operating assumptions and projections relative to the outcome of company has developed its own internal valuation model future events, including the quantity and timing of deliver- to determine fair value. These models are subjective and ies, labour performance rates, projections relative to mate- require management of the particular operating com- rial and overhead costs, as well as expected “learning curve” pany to exercise judgement in making assumptions about cost reductions over the term of the contracts. Contract future results, including revenues, operating expenses, estimates are re-evaluated periodically and changes in esti- capital expenditures and discount rates. The impairment mates are reﬂected in the current period. test for intangible assets and long-lived assets with limited Spirit AeroSystems also expects to derive future lives is similar to that for goodwill. Under IFRS, impair- revenues from new programs for which the company may ment charges for intangible assets and long-lived assets be contracted to provide design and engineering services, may subsequently be reversed if fair value is determined recurring production or both. There are several risks inher- to be higher than carrying value. The reversal is limited, ent to such new programs. In the design and engineering however, to restoring the carrying amount that would have phase, the company may incur costs in excess of forecasts been determined, net of amortization, had no impairment due to several factors, including cost overruns, customer- loss been recognized in prior periods. Impairment losses directed change orders and delays in the overall program. for goodwill are not reversed in future periods. The company may also incur higher than expected recur- Impairment charges recorded by the operating ring production costs, which may be caused by a variety of businesses under IFRS may not impact the fair values of factors, including the future impact of engineering changes the operating businesses used in determining the increase (or other change orders) or an inability to secure con- or decrease in investments in joint ventures and associ- tracts with suppliers at projected cost levels. The ability to ates, the change in carried interest and for calculating the recover these excess costs from the customers will depend Limited Partners’ Interests liability. Fair values of the oper- on several factors, including the company’s rights under its ating businesses are assessed at the enterprise level, while contracts for the new programs. The recognition of earn- impairment charges are assessed at the asset or CGU level ings and loss under these new contracts requires the com- (or group of CGUs). pany to make signiﬁcant assumptions regarding its future During 2013, certain of the operating companies costs, ability to achieve cost reduction opportunities, the recorded charges for impairments of goodwill, intangible estimated number of units to be manufactured under the assets and long-lived assets. These charges are reviewed on contracts and other variables. page 42 of this MD&A and in note 25 to the audited annual consolidated ﬁnancial statements. Revenue recognition (Healthcare segment) Revenues in the healthcare segment for Skilled Healthcare Construction contract accounting Group, Inc. (“Skilled Healthcare Group”) and Res-Care, Inc. (Aerostructures segment) The aerostructures segment recognizes revenue using the (“ResCare”) are substantially derived from U.S. federal, state and local government agency programs, including contract method of accounting since a signiﬁcant portion Medicare and Medicaid. Laws and regulations under these of Spirit AeroSystems, Inc.’s (“Spirit AeroSystems”) rev- programs are complex and compliance with such laws and enues is under long-term volume-based contracts requir- regulations is subject to ongoing and future government ing delivery of products over several years. Revenues from review and interpretation. Management may be required each contract are recognized in accordance with the per- to exercise judgement for the recognition of revenue under centage-of-completion method of accounting, using the these programs. Management of those businesses believes units-of-delivery method. Contract accounting uses vari- that they are in compliance with applicable laws and reg- ous estimating techniques to project costs to completion ulations. Revenues generated through contracts with gov- and estimates of recoveries asserted against customers ernment agencies require the use of estimates as contracts for changes in speciﬁcations. Due to the signiﬁcant length may be terminated or adversely modiﬁed if budgetary Onex Corporation December 31, 2013 21 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S appropriation to the particular government agency is de- creased. Contract estimates are re-evaluated periodically Employee beneﬁts Onex, the parent company, does not have a pension plan; and changes in estimates are reﬂected in the current period. however, certain of its operating companies do. Manage- Income taxes Onex, including its operating companies, is subject to ment of the operating companies use actuarial valuations to account for their pension and other post-retirement beneﬁts. These valuations rely on statistical and other changing tax laws in multiple jurisdictions. Signiﬁcant factors in order to anticipate future events. These factors judgements are necessary in determining worldwide income include key actuarial assumptions such as the discount tax liabilities. Although management of Onex and the oper- rate, expected salary increases and mortality rates. These ating companies believe that they have made reasonable actuarial assumptions may differ signiﬁcantly from actual estimates about the ﬁnal outcome of tax uncertainties, no developments due to changing market and economic con- assurance can be given that the outcome of these tax mat- ditions, and therefore may result in a signiﬁcant change ters will be consistent with what is reﬂected in the historical in post-retirement employee beneﬁt obligations and the income tax provisions. Such differences could have an effect related future expense in the audited annual consolidated on the income tax liabilities and deferred tax liabilities in ﬁnancial statements. Note 32 to the audited annual con- the period in which such determinations are made. At each solidated ﬁnancial statements provides details on the balance sheet date, management of Onex and the operating estimates used in accounting for pensions and post-retire- companies assess whether the realization of future tax bene- ment beneﬁts. ﬁts is sufﬁciently probable to recognize deferred tax assets. This assessment requires the exercise of judgement on the Recent Accounting Pronouncements part of management with respect to, among other things, beneﬁts that could be realized from available tax strategies and future taxable income, as well as other positive and negative factors. The recorded amount of total deferred tax assets could be reduced if estimates of projected future tax- able income and beneﬁts from available tax strategies are lowered, or if changes in current tax regulations are enacted that impose restrictions on the timing or extent of Onex’ or its operating companies’ ability to utilize future tax beneﬁts. Legal contingencies Onex, including its operating companies, becomes involved in various legal proceedings in the normal course 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 disclosure of a suit or formal assertion of a claim does not automatically indicate that a provision may be appropri- ate. Management, with the assistance of internal and exter- nal lawyers, regularly analyzes current information about these matters and provides provisions for probable con- tingent losses, including the estimate of legal expenses to resolve these matters. Investment Entity Amendments In October 2012, the International Accounting Standards Board (“IASB”) issued amendments to IFRS 10, Consoli dated Financial Statements; IFRS 12, Disclosure of Inter ests in Other Entities; and IAS 27, Separate Financial State ments, to include an exception to the consolidation requirements for investment entities as deﬁned in the amendments issued by the IASB. The amendments are effective for annual periods beginning on or after January 1, 2014. The impact of adopt- ing these amendments is not expected to have a signiﬁcant effect on Onex’ consolidated ﬁnancial statements. Financial Instruments In November 2009, the IASB issued IFRS 9, Financial Instru ments, the ﬁrst phase of a replacement for existing standard IAS 39, Financial Instruments: Recognition and Measure ment. This standard introduces new requirements for the classiﬁcation and measurement of ﬁnancial assets and removes the need to separately account for certain embed- ded derivatives. In December 2013, the IASB issued updates to IFRS 9 to incorporate new hedge accounting require- ments that increase the scope of items that can qualify as a hedged item and change the requirements of hedge effec- tiveness testing that must be met to use hedge accounting. 22 Onex Corporation December 31, 2013 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S The effective date for IFRS 9 has been deferred by the IASB. Onex is currently evaluating the impact of adopting this Signiﬁcant transactions The presentation of the transactions in this section is in standard on its consolidated ﬁnancial statements. chronological order by investment. Levies In May 2013, the IASB issued Interpretation 21, Levies (“IFRIC 21”), which provides guidance on accounting for levies in accordance with IAS 37, Provisions. The interpre- tation deﬁnes a levy as an outﬂow from an entity imposed Sale of RSI In February 2013, the Onex Partners II Group completed the sale of its 50 percent interest in RSI. The Onex Part- ners II Group received proceeds of $323 million on the sale, of which Onex’ share was $130 million, including carried by a government in accordance with legislation. IFRIC 21 interest of $3 million. The Company’s investment in RSI clariﬁes that a levy is recognized as a liability when the obli- was recorded at fair value in the audited annual consoli- gating event that triggers payment, as speciﬁed in the legis- dated balance sheets, with changes in fair value recognized lation, has occurred. IFRIC 21 is effective for annual periods in the audited annual consolidated statements of earn- beginning on or after January 1, 2014. Onex is currently eval- ings. The realized pre-tax gain on the sale of RSI, including uating the impact of adopting this standard on its consoli- prior distributions, was $153 million, of which Onex’ share dated ﬁnancial statements. was $60 million. Onex recorded a non-cash tax provision of $5 million on the sale, which was included in the provi- Variability of results Onex’ consolidated operating results may vary substantially sion for income taxes in the audited annual consolidated statements of earnings. Onex recognized a recovery of this from year to year for a number of reasons, including some tax provision during 2013 as part of an evaluation of recent of the following: the current economic environment; acqui- changes in tax law as described on page 43 of this MD&A. sitions or dispositions of businesses by Onex, the parent Management of Onex received carried interest of $5 mil- company; the change in value of stock-based compensation lion in connection with the sale. No amounts were paid on for both the parent company and its operating compa- account of the MIP as the required investment return hur- nies; changes in the market value of Onex’ publicly traded dle for Onex was not met. operating businesses; changes in the fair value of Onex’ Including prior distributions, the Onex Part- privately held operating businesses; changes in tax legisla- ners II Group realized total proceeds of $471 million over tion or in the application of tax legislation; and activities at the life of this investment compared to its initial invest- Onex’ operating companies. These activities may include ment of $318 million. the purchase or sale of businesses; ﬂuctuations in customer demand, materials and employee-related costs; changes in the mix of products and services produced or delivered; Meridian Aviation In February 2013, the Onex Partners III Group established changes in the ﬁnancing of the business; changes in contract Meridian Aviation, an aircraft investment company based accounting estimates; impairments of goodwill, intangible in Ireland. Aircraft purchased by Meridian Aviation will assets or long-lived assets; litigation; charges to restructure be leased to commercial airlines and managed by BBAM, operations; and natural disasters. Given the diversity of one of the world’s largest managers of commercial jet air- Onex’ operating businesses, the associated exposures, risks craft and an Onex Partners III Group investment. Meridian and contingencies may be many, varied and material. Aviation executed a purchase agreement in February 2013 for six commercial passenger aircraft for delivery between April 2013 and May 2015, with a list price value of more than $1.4 billion. Meridian Aviation executed leases in February 2013 with a major international commercial airline in respect of these six aircraft. The Onex Partners III Group has guaranteed certain payment obligations arising on each aircraft delivery date. Onex Corporation December 31, 2013 23 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S In February 2013, the Onex Partners III Group Onex’ share of the remaining convertible promissory notes invested $32 million in Meridian Aviation, of which Onex’ and accrued interest was $18 million. After giving effect to share was $8 million. In July 2013, the Onex Partners III the conversion, the Onex Partners III Group’s as-converted Group invested an additional $25 million in Meridian economic ownership increased to 71 percent, up from Aviation, of which Onex’ share was $6 million. These 65 percent prior to the conversion. Onex’ economic owner- investments are primarily for deposits, fees and other ship increased to 17 percent at the time of the conversion, expenses associated with the purchase of the six commer- up from 16 percent prior to the conversion. In August 2013, cial passenger aircraft. Meridian Aviation delivered the ﬁrst in connection with the conversion, Onex appointed two commercial passenger aircraft to the lessee in April 2013. additional members to the board of directors of JELD-WEN. During the fourth quarter of 2013, Meridian Aviation executed sale agreements for three of the six commercial passenger aircraft under its existing pur- Acquisition of Emerald Expositions In June 2013, Onex completed the $950 million acquisi- chase agreement, including the novation of the associ- tion of Nielsen Expositions from its parent, an afﬁliate of ated leases to the purchaser. The sale agreements are for Nielsen Holdings N.V. Following the purchase, the business two aircraft delivered in 2013 and one aircraft scheduled for continued under the new name of Emerald Expositions. delivery in 2014. Meridian Aviation recorded a net gain of Emerald Expositions is a leading operator of large busi- $32 million comprised of the sale of the two aircraft deliv- ness-to-business tradeshows in the United States across ered in 2013 and a fair value adjustment covering the nine end markets. The Onex Partners III Group invested remaining four aircraft scheduled for delivery to the com- $350 million in the equity of Emerald Expositions for an pany between 2014 and 2015. The debt ﬁnancing under- initial 100 percent ownership interest. Onex’ share of the taken by Meridian Aviation with the delivery of the ﬁrst total equity was $85 million, for an initial 24 percent own- commercial aircraft was repaid in full upon the sale. ership interest. This company is consolidated and reported USI In March 2013, as contemplated at the time of the acqui- from the time of its acquisition in the other segment of Onex’ audited annual consolidated ﬁnancial statements. In January 2014, Emerald Expositions completed sition of USI Insurance Services (“USI”) in late December the acquisition of George Little Management, LLC (“GLM”), 2012, $84 million of the amount originally invested by Onex an operator of business-to-business tradeshows in the as a co-investment in USI was sold, at Onex’ original cost, United States, for $335 million. In conjunction with this to certain limited partners and others as a co-investment. transaction, the Onex Partners III Group invested an addi- After giving effect to the co-investment sale, Onex’ invest- tional $140 million in the equity of Emerald Expositions, of ment in USI is $170 million, of which $128 million was which Onex’ share was $34 million. The balance of the pur- funded through Onex Partners III and $42 million repre- chase price and transaction costs was funded by Emerald sents the portion of the co-investment retained by Onex. Expositions through an amendment to its credit facility, as discussed on page 56 of this MD&A. JELD-WEN note conversion During the four months ended April 2013, JELD-WEN Holding, inc. (“JELD-WEN”) repaid $52 million of its Carestream Health distribution In June 2013, Carestream Health entered into a new credit convertible promissory notes and $8 million of accrued facility. This new facility consists of a $1.85 billion ﬁrst- interest, all of which was held by the Onex Partners III lien term loan that matures in June 2019, a $500 million Group, primarily from the proceeds received on the sale second-lien term loan that matures in December 2019 of certain non-core assets. Onex’ share of the repayments and a $150 million revolving facility that matures in June was $15 million. 2018. The proceeds from the new facility, along with cash In April 2013, the remaining convertible promissory on hand, were used to repay existing debt facilities, fund notes and accrued interest totalling $72 million, all of which distributions to shareholders totalling $750 million and was held by the Onex Partners III Group, were converted pay fees and expenses associated with the transaction. into Series A Convertible Preferred Stock of JELD-WEN The Onex Partners II Group’s share of Carestream Health’s in accordance with the terms of the purchase agreement. distributions to shareholders was $695 million. Onex’ 24 Onex Corporation December 31, 2013 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S share of these distributions was $303 million, including major line of business, and as a result has not been presented carried interest of $50 million and after the reduction for as a discontinued operation. At December 31, 2013, $15 mil- the amounts on account of the MIP. Under the terms of the lion remained receivable for escrow amounts and other MIP, management of Onex participates in Onex’ realized items, of which Onex’ share was $7 million. gains from operating business investments once certain During the fourth quarter of 2013, $6 million of investment return hurdles have been met. Management additional proceeds were received by ONCAP II, of which of Onex earned $21 million on account of this transac- Onex’ share was $3 million. These additional proceeds tion related to the MIP. In addition, management of Onex were recognized as a gain during the fourth quarter of 2013, received $71 million in carried interest. net of a $1 million reduction in the escrow receivable. Sale of BSN SPORTS In June 2013, the ONCAP II Group completed the sale of its Sales of shares of Allison Transmission In August 2013, Allison Transmission completed a second- interests in BSN SPORTS. The ONCAP II Group received net ary offering of 19.1 million shares of common stock and proceeds of $236 million on the sale. Onex’ share of the net repurchased 4.7 million shares of common stock, for a total proceeds was $114 million. Included in the net proceeds sale of 23.8 million shares of common stock. The second- received on the sale, there were approximately $16 million of ary offering includes the full exercise of the over-allotment additional amounts held in escrow and other items that are option. As part of the offering and share repurchase, the expected to be received by June 2015, of which Onex’ share Onex Partners II Group sold 11.9 million shares of common was $8 million. During the fourth quarter of 2013, $1 mil- stock. The Onex Partners II Group received net proceeds of lion of the additional amounts held in escrow was received, $252 million for its 11.9 million shares of common stock. of which Onex’ share was less than $1 million. The real- Onex’ portion of the net proceeds was $84 million, includ- ized pre-tax gain on the sale of BSN SPORTS was $170 mil- ing its portion of the carried interest. lion, of which Onex’ share was $82 million. Onex recorded a In November and December 2013, Allison Trans- non-cash tax provision of $7 million on the sale, which was mission completed secondary offerings of 27.5 million included in the provision for income taxes in the audited shares of common stock. The Onex Partners II Group sold annual consolidated statements of earnings. Onex recog- 13.75 million shares of common stock for net proceeds nized a recovery of this tax provision during 2013 as part of of $333 million, of which Onex’ portion was $111 million, an evaluation of recent changes in tax law as described on including its portion of the carried interest. page 43 of this MD&A. The gain on the sale is entirely attrib- The realized gain on the 2013 transactions totalled utable to the equity holders of Onex. This gain includes the $369 million. The limited partners’ share of the realized portion attributable to Onex’ investment, as well as that gain was $255 million and Onex’s share was $114 million. of the limited partners of ONCAP II. The effect of this is to Amounts received related to the carried inter- recover the charges to earnings on BSN SPORTS allocated est on the 2013 transactions totalled $31 million, of which to the limited partners over the life of the investment, which Onex’ portion was $12 million and management’s portion totalled $88 million. The balance of $75 million reﬂects was $19 million. No amounts were paid on account of these the after-tax gain on Onex’ investment in BSN SPORTS. transactions related to the MIP as the required perfor- Management of ONCAP received $18 million in carried inter- mance targets for Onex had not been met at those times. est on the sale of BSN SPORTS. The impact to Onex and man- After completion of the secondary offerings and agement of Onex was a net payment of $7 million in carried share repurchase during 2013, the Onex Partners II Group interest. Under the terms of the MIP, management of Onex continues to own 49.7 million shares of common stock, or participates in Onex’ realized gains from operating business approximately 27 percent in the aggregate, of Allison Trans- investments once certain conditions, including the required mission’s outstanding common stock. As a result, the Onex investment return hurdle, have been met. Management Partners II Group will continue to record its investment at of Onex received $6 million on account of this transaction fair value through earnings. related to the MIP. BSN SPORTS did not represent a separate Onex Corporation December 31, 2013 25 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Sale of TMS International In October 2013, the Onex Partners II Group completed to the equity holders of Onex. This gain includes the por- tion attributable to Onex’ investment, as well as that of the the sale of its remaining 23.4 million shares of TMS Inter- limited partners of ONCAP II. The effect of this is to recover national. The sale was part of an offer made for all out- the charges to earnings on Caliber Collision allocated to standing shares of TMS International and was completed the limited partners over the life of the investment, which at a price of $17.50 in cash per share. The cash cost of the totalled $215 million. The balance of $171 million reﬂects shares was $7.84. Proceeds to the Onex Partners II Group the after-tax gain on Onex’ investment in Caliber Collision. were $410 million, of which Onex’ share was $172 mil- Management of ONCAP received $42 million in carried lion, including its portion of the carried interest. Amounts interest on the sale of Caliber Collision. The impact to Onex received related to the carried interest totalled $25 million, and management of Onex was a net payment of $8 million of which Onex’ portion was $10 million and management’s in carried interest. Under the terms of the MIP, management portion was $15 million. No amounts were paid on account of Onex participates in Onex’ realized gains from operating of the MIP as the required investment return hurdle for business investments once certain conditions, including Onex was not met. the required investment return hurdle, have been met. Onex’ fourth quarter consolidated results include Management of Onex received $12 million on account of an after-tax gain of $242 million related to the sale, which this transaction related to the MIP. Caliber Collision did not is entirely attributable to the equity holders of Onex. This represent a separate major line of business, and as a result gain includes the portion attributable to Onex’ investment, has not been presented as a discontinued operation. as well as that of the limited partners of Onex Partners II. The effect of this is to recover the charges to earnings on TMS International allocated to the limited partners over the R E V I E W O F D E C E M B E R 3 1 , 2 0 1 3 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 life of the remaining investment, which totalled $150 mil- lion. The balance of $92 million reﬂects the after-tax gain The discussions that follow identify those material factors on Onex’ remaining investment in TMS International. The that affected Onex’ operating segments and Onex’ consoli- operations of TMS International have been presented as dated results for 2013. We will review the major line items discontinued in the audited annual consolidated state- to the audited annual consolidated ﬁnancial statements ments of earnings and cash ﬂows and the prior period has by segment. The audited annual consolidated statements been restated to report the results of TMS International as of earnings and cash ﬂows have been restated to report the discontinued on a comparative basis. results of TMS International as discontinued on a compar- Including proceeds from TMS International’s ear- ative basis. lier initial public offering and prior distribution, the Onex Partners II Group received proceeds totalling $504 million on its investment of $249 million. Consolidated revenues and cost of sales Consolidated revenues were Sale of Caliber Collision In November 2013, the ONCAP II Group completed the sale $27.8 billion in 2013, up 12 per- cent from $24.9 billion in 2012 of Caliber Collision. The ONCAP II Group received net pro- and up 27 percent from $22.0 bil- ceeds of $437 million on the sale. Onex’ share of the net lion in 2011. Consolidated cost of proceeds was $193 million. Included in the net proceeds sales was $21.8 billion in 2013, received on the sale, there are approximately $4 million of an increase of 10 percent from additional amounts held in escrow and for working capital $19.9 billion in 2012 and up 27 per- adjustments that are expected to be settled during 2014, of cent from $17.3 billion in 2011. which Onex’ share is $2 million. The realized gain on the sale of Caliber Collision was $386 million, of which Onex’ share was $171 million. The gain on the sale is entirely attributable T O TA L R E V E N U E S A N D C O S T O F S A L E S ($ millions) 27,809 24,917 21,843 21,981 19,908 17,258 ’13 ’12 ’11 Revenues Cost of Sales 31000 24800 18600 12400 6200 0 26 Onex Corporation December 31, 2013 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Table 1 below reports revenues and cost of sales by industry segment for the years ended December 31, 2013, 2012 and 2011. The percentage change in revenues and cost of sales for those periods is also shown. Revenues and Cost of Sales by Industry Segment for the Years Ended December 31, 2013 and 2012 TABLE 1 ($ millions) Year ended December 31 Revenues Cost of Sales 2013 2012(a) Change 2013 2012(a) Change Electronics Manufacturing Services $ 5,796 $ 6,507 (11)% $ 5,337 $ 5,988 Aerostructures Healthcare(b) Insurance Provider Customer Care Services Building Products Other (c) Total 5,961 4,902 1,168 1,438 3,457 5,087 5,404 4,947 1,205 1,429 3,168 2,257 $ 27,809 $ 24,917 10 % (1)% (3)% 1 % 9 % 125 % 12 % 5,848 3,406 600 936 2,855 2,861 5,038 3,402 621 920 2,561 1,378 $ 21,843 $ 19,908 (11)% 16 % – (3)% 2 % 11 % 108 % 10 % Results are reported in accordance with IFRS. These results may differ from those reported by the individual operating companies. (a) 2012 results have been restated for the changes in accounting policies adopted on January 1, 2013, as described in note 1 to the audited annual consolidated financial statements. (b) 2012 includes reported results of CDI, which was sold in July 2012. CDI did not represent a separate major line of business and as a result has not been presented as a discontinued operation. (c) 2013 other includes Flushing Town Center, Tropicana Las Vegas, SGS International, USI, KraussMaffei, Meridian Aviation, Emerald Expositions, the operating companies of ONCAP II (BSN SPORTS up to June 2013 and Caliber Collision up to November 2013) and ONCAP III and the parent company. 2012 other includes Flushing Town Center, Tropicana Las Vegas, SGS International (since October 2012), USI (since late December 2012), the operating companies of ONCAP II and ONCAP III and the parent company. Revenues and Cost of Sales by Industry Segment for the Years Ended December 31, 2012 and 2011 ($ millions) Revenues Cost of Sales Year ended December 31 2012(a) 2011(a) Change 2012(a) 2011(a) Change Electronics Manufacturing Services $ 6,507 $ 7,213 Aerostructures Healthcare(b) Insurance Provider Customer Care Services Building Products(c) Other (d) Total 5,404 4,947 1,205 1,429 3,168 2,257 4,864 5,030 1,184 1,416 774 1,500 $ 24,917 $ 21,981 (10)% 11 % (2)% 2 % 1 % 309 % 50 % 13 % $ 5,988 $ 6,645 5,038 3,402 621 920 2,561 1,378 4,124 3,446 579 921 660 883 $ 19,908 $ 17,258 (10)% 22 % (1)% 7 % – 288 % 56 % 15 % Results are reported in accordance with IFRS. These results may differ from those reported by the individual operating companies. (a) 2012 results have been restated for the changes in accounting policies adopted on January 1, 2013, as described in note 1 to the audited annual consolidated financial statements. 2011 results have not been restated for the changes in accounting policies adopted on January 1, 2013, as described in note 1 to the audited annual consolidated financial statements. (b) Includes reported results of CDI, which was sold in July 2012. CDI did not represent a separate major line of business and as a result has not been presented as a discontinued operation. (c) Represents results of JELD-WEN from the date of acquisition in early October 2011. (d) 2012 other includes Flushing Town Center, Tropicana Las Vegas, SGS International (since October 2012), USI (since late December 2012), the operating companies of ONCAP II and ONCAP III and the parent company. 2011 other includes Flushing Town Center, Tropicana Las Vegas, the operating companies of ONCAP II and ONCAP III and the parent company. Onex Corporation December 31, 2013 27 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Electronics Manufacturing Services Celestica Inc. (“Celestica”) delivers innovative supply chain During 2012, Celestica reported a 10 percent, or $706 million, decrease in revenues to $6.5 billion from solutions globally to customers in the communications $7.2 billion in 2011. Approximately 90 percent of this rev- (comprised of enterprise communications and telecommu- enue decrease during 2012 was due to the disengagement nications), consumer, diversiﬁed (comprised of industrial, from a signiﬁcant customer in Celestica’s consumer end aerospace and defence, healthcare, solar, green technol- market in the second half of 2012, as previously indicated. ogy, semiconductor equipment and other) and enterprise Excluding the revenues with this signiﬁcant customer in computing (comprised of servers and storage) end markets. both 2012 and 2011, Celestica’s revenues for 2012 would These solutions include design and development, engineer- have decreased by 1 percent compared to 2011. Celestica’s ing services, supply chain management, new product intro- revenue from its communications and servers end market ductions, component sourcing, electronics manufacturing, also declined during the year, reﬂecting overall demand assembly and test, complex mechanical assembly, systems weakness. Partially offsetting those revenue decreases was integration, precision machining, order fulﬁllment, logistics an increase in revenues in Celestica’s diversiﬁed end mar- and aftermarket repair and return services. ket driven primarily by new program wins and acquisitions. During 2013, Celestica reported an 11 percent, Cost of sales had a similar decrease of 10 percent, or $711 million, decrease in revenues to $5.8 billion. The or $657 million, to $6.0 billion for 2012 (2011 – $6.6 billion). decrease in revenues was due primarily to the disengage- Gross proﬁt for 2012 decreased 9 percent, or $49 million, ment from a signiﬁcant customer in Celestica’s consumer from 2011 due primarily to the decrease in revenues. end market in the second half of 2012. Excluding revenues E L E C T R O N I C S M A N U FA C T U R I N G S E R V I C E S from the signiﬁcant customer, rev- enues for 2013 increased 1 percent Aerostructures Spirit AeroSystems, Inc. (“Spirit AeroSystems”) is an air- ($ millions) compared to 2012. Revenues in craft parts designer and manufacturer of commercial 7,213 6,645 6,507 5,988 5,796 5,337 8000 Celestica’s diver siﬁed end market aerostructures. Aerostructures are structural components, increased 11 percent compared 6400 such as fuselages, propulsion systems and wing systems, to 2012, driven primarily by new for commercial, military and business jet aircraft. The com- program wins and an acquisition, 4800 pany’s revenues are substantially derived from long-term which contributed approximately volume-based pricing contracts, primarily with The Boeing one-third of the revenue increase 3200 in this end market. Rev e nues in Celestica’s communications end 1600 market increased 8 percent com- pared to 2012, driven primarily by 0 new program wins and, to a lesser extent, stronger customer demand. Celestica’s storage end market in- A E R O S T R U C T U R E S ($ millions) 5,961 5,848 5,404 5,038 4,864 4,124 ’13 ’12 ’11 Revenues Cost of Sales creased 1 percent due primarily to new program wins offset by weaker demand from one customer. The increases were partially offset by a decrease in revenues in Celestica’s server end market due to the insourcing of a server program by one customer and overall weaker demand. Cost of sales had a similar decrease of 11 percent, or $651 million, for 2013. Gross proﬁt for 2013 decreased 12 percent, or $60 million, from 2012, in line with the rev- enue decrease in 2013. ’13 ’12 ’11 Revenues Cost of Sales Company (“Boeing”) and Airbus Group (“Airbus”). Spirit AeroSystems re- 6500 ported revenues of $6.0 billion for 2013, up 10 percent, or $557 million, 5200 compared to 2012. The increase in revenues was due primarily to 3900 higher production volume and ship set deliveries to Boeing, Airbus and 2600 business jet programs. The increase in revenues was partially offset by a 1300 decrease in non-recurring revenues compared to 2012. Approximately 0 94 percent of 2013 revenues were from Boeing and Airbus. 28 Onex Corporation December 31, 2013 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Cost of sales increased 16 percent, or $810 million, contributed $38 million and $21 million, respectively, to to $5.8 billion for 2013 compared to 2012. The increase in the increase in revenues compared to 2011. Approximately cost of sales for 2013 was due primarily to the recognition 93 percent of 2012 revenues were from Boeing and Airbus. of pre-tax forward-loss charges of $1.1 billion on certain Cost of sales increased 22 percent, or $914 mil- maturing programs during 2013 compared to forward- lion, to $5.0 billion for 2012 compared to 2011. The increase loss charges of $644 million recorded on several of Spirit in cost of sales during the year was due to the recognition AeroSystems’ programs during 2012. The effect of these of pre-tax forward-loss charges of $644 million (2011 – forward-loss charges on consolidated net earnings was an $129 million) on several of Spirit AeroSystems’ programs. after-tax charge of $712 million (2012 – $412 million). The Excluding the impact of forward-loss charges, cost of sales charges recognized during 2013 and 2012 were the result increased during 2012 compared to 2011 due primarily to of a combination of events on maturing programs that the increases in production volume. resulted in changes in estimates. Spirit AeroSystems’ long- Cost of sales as a percentage of revenues was term contract estimates are based on estimated revenues 93 percent during 2012 compared to 85 percent during and related costs over the term of the contract. Contract 2011. The increase in cost of sales as a percentage of rev- costs are estimated based on actual costs incurred to date enues is due primarily to the increase in forward-loss and an estimate of remaining costs over the life of the con- charges recorded in 2012 compared to 2011. tract, which can extend for multiple years. During the early phases of development contracts, future cost estimates are subject to signiﬁcant variability, and are based on numer- Healthcare The healthcare segment revenues and cost of sales consist ous assumptions and judgements and require manage- of the operations of Skilled Healthcare Group, Carestream ment to use its historical experience on similar programs Health, Res Care and Center for Diagnostic Imaging, Inc. until low-rate production is achieved, production pro- (“CDI”) (up to July 2012). cesses mature, supply chain partners are contracted and unit costs stabilize, which typically results in assump- tions that costs will improve over the life of the contract. The level of change that was initially anticipated has been exceeded as the company’s delivery schedules have been delayed, engineering changes have continued and esti- mates of achievable cost improvements have been revised. The recognition of additional forward-loss charges in future periods will depend upon several factors including Spirit AeroSystems’ market forecast, its ability to success- fully perform under revised design and manufacturing plans, achievement of forecasted cost reductions as the company enters into production, and its ability to success- fully resolve claims and assertions with its customers and supply chain partners. Excluding the impact of forward- loss charges, cost of sales increased compared to last year H E A LT H C A R E ($ millions) 4,902 4,947 5,030 During 2013, the health- care segment reported a 1 percent, or $45 million, decrease in consoli- 5500 dated revenues compared to last year. Cost of sales at $3.4 billion 4400 was largely unchanged compared 3,406 3,402 3,446 to 2012. 3300 The healthcare segment reported a 2 percent, or $83 mil- 2200 lion, decrease in consolidated rev- enues in 2012 compared to 2011. 1100 Cost of sales decreased 1 percent, or $44 million, in 2012 from 2011. 0 In July 2012, the Onex Partners I Group’s investment in CDI was sold. The exclusion of the results ’13 ’12 ’11 Revenues Cost of Sales due primarily to the increases in production volume. of CDI from the date of sale is the primary reason for the During 2012, Spirit AeroSystems’ revenues were decline in revenues and cost of sales for the years ended up 11 percent, or $540 million, from 2011. The increase in December 31, 2013 and 2012. The sale of CDI has not been revenues during 2012 included $480 million related to presented as a discontinued operation since it did not rep- higher production volume on several Boeing and business resent a separate major line of business. jet programs to meet customer delivery schedules. In addi- tion, higher aftermarket volume and non-recurring revenue Onex Corporation December 31, 2013 29 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Table 2 provides revenues and cost of sales by operating company in the healthcare segment for the years ended Decem- ber 31, 2013, 2012 and 2011. The percentage change in revenues and cost of sales for those periods is also shown. Healthcare Revenues and Cost of Sales for the Years Ended December 31, 2013 and 2012 TABLE 2 ($ millions) Year ended December 31 Revenues Cost of Sales 2013 2012(a) Change 2013 2012(a) Change Skilled Healthcare Group $ 856 $ 867 Carestream Health ResCare Center for Diagnostic Imaging(b) 2,429 1,617 – 2,406 1,599 75 Total $ 4,902 $ 4,947 (1)% 1 % 1 % n/a (1)% $ 765 $ 748 1,444 1,197 – 1,449 1,182 23 $ 3,406 $ 3,402 2% – 1% n/a – Results are reported in accordance with IFRS. These results may differ from those reported by the individual operating companies. (a) 2012 results have been restated for the changes in accounting policies adopted on January 1, 2013, as described in note 1 to the audited annual consolidated financial statements. (b) CDI was sold in July 2012. CDI did not represent a separate major line of business and as a result has not been presented as a discontinued operation. Healthcare Revenues and Cost of Sales for the Years Ended December 31, 2012 and 2011 ($ millions) Revenues Cost of Sales Year ended December 31 2012(a) 2011(a) Change 2012(a) 2011(a) Change Skilled Healthcare Group $ 867 $ 870 Carestream Health ResCare Center for Diagnostic Imaging(b) 2,406 1,599 75 2,427 1,584 149 Total $ 4,947 $ 5,030 – (1)% 1 % (50)% (2)% $ 748 $ 716 1,449 1,182 23 1,496 1,189 45 $ 3,402 $ 3,446 4 % (3)% (1)% (49)% (1)% Results are reported in accordance with IFRS. These results may differ from those reported by the individual operating companies. (a) 2012 results have been restated for the changes in accounting policies adopted on January 1, 2013, as described in note 1 to the audited annual consolidated financial statements. 2011 results have not been restated for the changes in accounting policies adopted on January 1, 2013, as described in note 1 to the audited annual consolidated financial statements. (b) CDI was sold in July 2012. CDI did not represent a separate major line of business and as a result has not been presented as a discontinued operation. 30 Onex Corporation December 31, 2013 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Skilled Healthcare Group Skilled Healthcare Group has three reportable revenue seg- Carestream Health reported revenues of $2.4 bil- lion during 2013, up 1 percent, or $23 million, from 2012. ments: long-term care services, therapy services and hos- Excluding the impact of $21 million of unfavourable foreign pice and home health services. Long-term care services exchange translation on Carestream Health’s non-U.S. rev- include the operation of skilled nursing and assisted living enues, Carestream Health reported an increase in revenues facilities. Therapy services include the company’s rehabili- of $44 million. The increase in revenues was due primarily tation services. to higher volume in the contract manufacturing and x-ray Revenues reported by Skilled Healthcare Group systems businesses and higher prices in the traditional ﬁlm for 2013 decreased 1 percent, or $11 million, to $856 mil- businesses. Partially offsetting the increase was lower vol- lion compared to 2012. The decrease in revenues during the ume in the traditional ﬁlm businesses due to the continuing year was due primarily to a decline in average daily census transition from ﬁlm to digital processes in medical imag- and patient mix in the long-term care services segment. ing and a shift to lower-priced solutions in the digital equip- Skilled Healthcare Group’s 2013 cost of sales at ment segments. $765 million increased 2 percent, or $17 million, compared Cost of sales at $1.4 billion decreased $5 million to 2012. The increase in cost of sales was driven primarily during 2013 compared to last year. Cost of sales decreased by an increase in general and professional liability insur- due primarily to lower costs for silver, which is a major ance, as well as an increase in bad debt expense. component in the production of ﬁlm. Gross proﬁt for 2013 For the year ended December 31, 2012, revenues increased to $985 million from $957 million in 2012 due of $867 million were down slightly from 2011. The decrease primarily to higher volume of digital products sold, higher in revenues was due primarily to a reduction in Medicare prices for ﬁlm and lower commodity costs in 2013 com- reimbursement rates in the long-term care services seg- pared to 2012. ment, which was partially offset by the net addition of new Carestream Health reported revenues of $2.4 bil- third-party contracts in the therapy services segment and lion during 2012, down 1 percent, or $21 million, from the impact of an acquisition and higher average daily cen- 2011. Included in the revenue decrease was $51 million of sus in the hospice and home health services segment. unfavourable foreign exchange translation on Carestream Cost of sales reported by Skilled Healthcare Group Health’s non-U.S. revenues compared to 2011. Excluding the during 2012 increased 4 percent, or $32 million, compared impact of foreign exchange, Carestream Health reported an to $748 million in 2011. The increase in cost of sales related increase in revenues of $33 million due primarily to higher primarily to the impact of higher labour costs across all seg- volume in the digital equipment segments and higher ments, in addition to the impact of an acquisition in the prices in the traditional ﬁlm businesses, partially offset by hospice and home health services segment. lower volume in the traditional ﬁlm businesses due to the Carestream Health Carestream Health provides products and services for the continuing transition from ﬁlm to digital processes in medi- cal imaging and a shift to lower-priced solutions in digital equipment segments. capture, processing, viewing, sharing, printing and storing During 2012, cost of sales at $1.4 billion decreased of images and information for medical and dental applica- 3 percent, or $47 million, compared to 2011. Cost of sales tions. The company also has a non-destructive testing busi- decreased due primarily to lower costs for polyester and ness, which sells x-ray ﬁlm and digital radiology products silver, which are major components in the production of to the non-destructive testing market. Carestream Health ﬁlm. Gross proﬁt for 2012 increased to $957 million from sells digital products, including computed radiography and $931 million in 2011 due primarily to higher volume of digi- digital radiography equipment, picture archiving and com- tal products sold, lower commodity costs and higher prices munication systems, information management solutions, for ﬁlm in 2012 compared to 2011. Film price increases in dental practice management software and services, as 2011 only partially offset the increase in the cost of raw well as traditional medical products, including x-ray ﬁlm, materials during that period. printers and media, equipment, chemistry and services. Carestream Health has three reportable segments: Medical Film, Medical Digital and Dental. Onex Corporation December 31, 2013 31 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S ResCare ResCare has ﬁve reportable segments: Residential Services, Insurance Provider The Warranty Group, Inc. (“The Warranty Group”) rev- ResCare HomeCare, Education and Training Services, enues consist of warranty revenues, insurance premiums Workforce Services and Pharmacy Services. Residential and administrative and marketing fees, and investment Services includes the provision of services to individu- income earned on warranties and service contracts for als with developmental or other disabilities in commu- manufacturers, retailers and distributors of consumer elec- nity home settings. ResCare HomeCare provides periodic tronics, appliances, homes and autos, as well as credit card in-home care services to the elderly, as well as persons enhancements and other specialty insurance programs with disabilities. Education and Training Services con- through a global organization. The Warranty Group’s cost sists primarily of Job Corps centres, alternative educa- of sales consists primarily of the change in reserves for tion and charter schools. Workforce Services is comprised future warranty and insurance claims, current claims pay- of domestic job training and placement programs that ments and underwriting proﬁt-sharing payments. assist welfare recipients and disadvantaged job seekers in The Warranty Group reported revenues of $1.2 bil- ﬁnding employment and improving their career prospects. lion for 2013, a decrease of 3 percent, or $37 million, com- Pharmacy Services is a limited, closed-door pharmacy pared to 2012. The decrease in revenues was due primarily focused on serving individuals with cognitive, intellectual to lower earned revenues on the consumer products busi- and developmental disabilities. ResCare provides services ness in North America, lower earned revenues on the credi- to some 61,000 persons daily. tor and consumer products business in Europe as well as During 2013, ResCare reported revenues of lower overall investment income. The decrease in revenues $1.6 billion, an increase of $18 million, or 1 percent, com- was partially offset by higher U.S. and Europe auto earned pared to 2012. The increase in revenues was due primar- revenues and an increase in earned revenues on the con- ily to acquisitions and organic growth in the Residential sumer products business in the International segment. Services, ResCare HomeCare and Pharmacy Services segments. Partially offsetting the revenue increase were decreases in the Education and Training Services and I N S U R A N C E P R O V I D E R ($ millions) Workforce Services segments due to fewer referrals. 1,168 1,205 1,184 Cost of sales had a similar increase of 1 percent, or $15 million, to $1.2 billion due primarily to the increase in revenues during 2013. During the year ended December 31, 2012, rev- enues increased 1 percent, or $15 million, to $1.6 billion while cost of sales decreased slightly by 1 percent, or $7 mil- lion, from 2011. Revenues increased in the residential ser- vices and ResCare HomeCare segments due primarily to acquisition growth, which was partially offset by a decline in revenues in the Workforce Services segment resulting from the loss of international contracts, lower referrals in certain contracts and funding cuts. 600 621 579 ’13 ’12 ’11 Revenues Cost of Sales Cost of sales was $600 mil- lion during 2013, a decrease of $21 million, or 3 percent, com- 1300 pared to 2012. The decrease was driven primarily by favourable 1040 claims development on certain programs in North America and 780 International, partially offset by increased claims severity on a large 520 client in North America. The Warranty Group re- 260 ported revenues for the year ended December 31, 2012 of $1.2 bil- 0 lion, increasing 2 percent, or $21 million, compared to 2011. The increase in revenues was due pri- marily to an increase in the consumer products business in Asia and Latin America, which was partially offset by lower earned premiums on the creditor business in Europe as well as lower overall investment income. 32 Onex Corporation December 31, 2013 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Cost of sales was $621 million during 2012, an Sitel Worldwide reported revenues of $1.4 billion increase of $42 million, or 7 percent. Cost of sales increased and cost of sales of $920 million for 2012. Revenues were as a percentage of earned revenue as a result of unfavour- up 1 percent while cost of sales was largely unchanged. able claims experience in certain international markets and Included in revenues was $51 million of unfavourable for- a change in product mix primarily related to the lower cred- eign exchange translation on Sitel Worldwide’s non-U.S. itor business in Europe. This change in product mix resulted revenues compared to 2011. Excluding the impact of for- in higher cost of sales due to lower commission products. eign exchange, Sitel Worldwide reported an increase in revenues of 5 percent, or $64 million. Revenue from new Customer Care Services SITEL Worldwide Corporation (“Sitel Worldwide”) is a customers and net growth with existing customers con- tributed $105 million to the revenue increase. Partially off- diversiﬁed provider of customer care outsourcing ser- setting the revenue growth was a decrease of $41 million vices. The company offers its clients a wide array of ser- related to attrition of existing programs. Excluding the vices, including customer service, technical support, impact of foreign exchange, Sitel Worldwide reported an back ofﬁce support, and customer acquisition, retention increase in cost of sales of 3 percent, or $29 million, due and revenue generation services. The majority of Sitel primarily to the increase in revenues. Worldwide’s customer care services are inbound tele- phonic services; however, the company provides services through other communication Building Products JELD-WEN is a manufacturer of interior and exterior doors, C U S T O M E R C A R E S E R V I C E S ($ millions) 1,438 1,429 1,416 channels including social media, windows and related products for use primarily in the resi- online chat, email and interactive dential and light commercial new construction and remod- 1500 voice response. Sitel Worldwide elling markets. The company’s revenues follow seasonal new construction and repair and remodelling industry B U I L D I N G P R O D U C T S business through three geographic patterns. JELD-WEN manages its 936 920 921 serves a broad range of industry 1200 end markets, including technol- ogy, ﬁnancial services, wireless, 900 retail and consumer products, telecommunications, media and 600 entertainment, energy and utili- ($ millions) 3,457 3,168 2,855 ties, internet service providers, 300 2,561 ’13 ’12 ’11 Revenues Cost of Sales travel and transportation, insur- ance, healthcare and govern- 0 ment. Sitel Worldwide’s operating results are affected by the demand for the products of its customers. Sitel Worldwide reported revenues of $1.4 billion during 2013, an increase of $9 million, or 1 percent, com- pared to 2012. The increase in revenues was due primar- ily to net growth with new and existing customers. Cost of sales at $936 million increased $16 million, or 2 percent, 774 660 ’13 ’12 ’11 Revenues Cost of Sales segments: North America, Europe, 3600 and Australia and Asia. JELD-WEN was acquired by Onex in early 2880 October 2011. For 2013, JELD-WEN re- 2160 ported revenues of $3.5 billion, an increase of $289 million, or 9 per- 1440 cent, compared to 2012. The in- crease in revenues was primarily 720 attributable to the North American segment, where revenues increased 0 by $312 million, as well as an in- crease in the European segment. The increase in revenues in the in 2013 compared to 2012 due to higher revenues, but at North American segment was due primarily to the increased slightly lower margins due to a shift in customer mix. demand from new customers and growth in the market in addition to the acquisition of CraftMaster Manufacturing, Inc. (“CMI”), which was acquired by JELD-WEN in October 2012 and contributed $142 million of revenue in 2013. Partially offsetting the increase in revenues in the North American and European segments was a decline in revenues in Australia. Onex Corporation December 31, 2013 33 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Cost of sales was $2.9 billion for 2013, an increase of $294 million, or 11 percent, compared to 2012. The Other Businesses The other businesses segment primarily consists of increase in cost of sales during 2013 was driven by the the revenues and cost of sales of the ONCAP compa- increase in revenues, as well as additional costs resulting nies – EnGlobe Corp. (“EnGlobe”), Mister Car Wash, from the start-up of new operations and the ramping up of CiCi’s Pizza, Pinnacle Pellet, Inc. (“Pinnacle Renewable production to meet growing demand. Gross proﬁt for 2013 Energy Group”), PURE Canadian Gaming Corp. (“PURE decreased slightly to $602 million compared to $607 mil- Canadian Gaming”), previously named Casino ABS, lion for 2012. Hopkins Manufacturing Corporation (“Hopkins”), Davis- The building products segment was a new report- Standard Holdings, Inc. (“Davis-Standard”), Bradshaw able segment in 2011 following Onex’ acquisition of JELD- International, Inc. (“Bradshaw”), Caliber Collision (up WEN in early October 2011. The 2012 results represent a full to November 2013) and BSN SPORTS (up to June 2013) – year of operations compared to three months of revenues Emerald Expositions (since June 2013), KraussMaffei Group and cost of sales reported for 2011. GmbH (“KraussMaffei”), SGS International, Inc. (“SGS For the year ended December 31, 2012, JELD-WEN International”), Tropicana Las Vegas, Inc. (“Tropicana Las reported revenues of $3.2 billion compared to revenues of Vegas”), USI, Flushing Town Center, Meridian Aviation and $774 million reported in the three-month period of Onex’ the parent company. ownership in 2011. The North American segment contrib- BSN Sports was sold in June 2013 and Caliber Col- uted 53 percent to total 2012 revenues, Europe contributed lision was sold in November 2013. These businesses did not 34 percent and Australasia contributed 13 percent. represent separate major lines of business and, as a result, Cost of sales for JELD-WEN were $2.6 billion in have not been presented as discontinued operations. 2012 compared to $660 million for the three-month period in 2011. Included in JELD-WEN’s 2011 cost of sales was a one-time charge of $32 million originating from the acqui- sition accounting step-up in value of inventory in the com- pany’s balance sheet at the date of acquisition. 34 Onex Corporation December 31, 2013 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Table 3 provides revenues and cost of sales by operating company in the other businesses segment for the years ended December 31, 2013, 2012 and 2011. The percentage change in revenues and cost of sales in those periods is also shown. Other Businesses Revenues and Cost of Sales for the Years Ended December 31, 2013 and 2012 TABLE 3 ($ millions) Year ended December 31 ONCAP companies(b) Emerald Expositions(c) KraussMaffei(c) SGS International(c) Tropicana Las Vegas USI(c) Other(d) Total Revenues Cost of Sales 2012(a) Change 2013 2012(a) Change 2013 $ 2,082 77 1,405 465 97 769 192 $ 1,944 – – 93 91 15 114 $ 5,087 $ 2,257 7% n/a n/a n/a 7% n/a 68% 125% $ 1,319 $ 1,246 21 1,097 295 7 – 122 – – 57 7 – 68 $ 2,861 $ 1,378 6% n/a n/a n/a – n/a 79% 108% Results are reported in accordance with IFRS. These results may differ from those reported by the individual operating companies. (a) 2012 results have been restated for the changes in accounting policies adopted on January 1, 2013, as described in note 1 to the audited annual consolidated financial statements. (b) 2013 ONCAP companies include EnGlobe, Mister Car Wash, CiCi’s Pizza, Pinnacle Renewable Energy Group, PURE Canadian Gaming, Hopkins, Davis-Standard, Bradshaw, Caliber Collision (up to November 2013) and BSN SPORTS (up to June 2013). 2012 ONCAP companies include EnGlobe, Mister Car Wash, CiCi’s Pizza, Pinnacle Renewable Energy Group, PURE Canadian Gaming, Hopkins, Davis-Standard, Caliber Collision and BSN SPORTS. The revenues and cost of sales of Bradshaw for the few days since its late December 2012 acquisition date to December 31, 2012 were not significant to Onex and therefore not included in the 2012 results. (c) There are no comparative results for Emerald Expositions and KraussMaffei for 2012. Emerald Expositions began to be consolidated in June 2013, when the business was acquired by the Onex Partners III Group. The revenues and cost of sales of KraussMaffei for the few days since its late December 2012 acquisition date to December 31, 2012 were not significant to Onex and therefore not included in the 2012 results. SGS International began to be consolidated in October 2012 and USI began to be consolidated in late December 2012, when the businesses were acquired by the Onex Partners III Group. (d) 2013 other includes Flushing Town Center, Meridian Aviation and the parent company. 2012 other includes Flushing Town Center and the parent company. Other Businesses Revenues and Cost of Sales for the Years Ended December 31, 2012 and 2011 ($ millions) Revenues Cost of Sales Year ended December 31 ONCAP companies(b) SGS International(c) Tropicana Las Vegas USI(c) Other(d) Total 2012(a) 2011(a) Change 2012(a) 2011(a) Change $ 1,944 $ 1,344 93 91 15 114 – 85 – 71 $ 2,257 $ 1,500 45% n/a 7% n/a 61% 50% $ 1,246 $ 835 57 7 – 68 – 8 – 40 $ 1,378 $ 883 49 % n/a (13)% n/a 70 % 56 % Results are reported in accordance with IFRS. These results may differ from those reported by the individual operating companies. (a) 2012 results have been restated for the changes in accounting policies adopted on January 1, 2013, as described in note 1 to the audited annual consolidated financial statements. 2011 results have not been restated for the changes in accounting policies adopted on January 1, 2013, as described in note 1 to the audited annual consolidated financial statements. (b) 2012 ONCAP companies include EnGlobe, Mister Car Wash, CiCi’s Pizza, Pinnacle Renewable Energy Group, PURE Canadian Gaming, Hopkins, Davis-Standard, Caliber Collision and BSN SPORTS. The revenues and cost of sales of Bradshaw for the few days since its late December 2012 acquisition date to December 31, 2012 were not significant to Onex and therefore not included in the 2012 results. 2011 ONCAP companies include EnGlobe, Mister Car Wash, CiCi’s Pizza, Pinnacle Renewable Energy Group (from its acquisition date in May 2011), PURE Canadian Gaming (from its acquisition date in May 2011), Hopkins (from its acquisition date in June 2011), Caliber Collision and BSN SPORTS. (c) There are no reported results for SGS International and USI for the year ended December 31, 2011. SGS International began to be consolidated in October 2012 and USI began to be consolidated in late December 2012, when the businesses were acquired by the Onex Partners III Group. (d) 2012 and 2011 other includes Flushing Town Center and the parent company. Onex Corporation December 31, 2013 35 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S ONCAP companies The ONCAP companies reported a 7 percent, or $138 mil- During the year ended December 31, 2013, Krauss- Maffei contributed $1.4 billion in revenues and $1.1 billion lion, increase in revenues for the year ended Decem- in cost of sales. There are no comparative results for 2012 ber 31, 2013 compared to 2012. Cost of sales contributed or 2011 since the revenues and cost of sales of KraussMaffei by the ONCAP companies was up 6 percent, or $73 mil- began to be consolidated in January 2013. lion, for 2013. The growth in revenues and cost of sales was due primarily to the inclusion of the results of Bradshaw, acquired in December 2012, partially offset by a decrease SGS International SGS International offers design-to-print graphic services in revenues and cost of sales due to the sale of BSN SPORTS to the consumer products packaging industry, providing in June 2013. digital solutions for the capture, management, execution The ONCAP companies reported a 45 percent, and distribution of graphics information. The majority of or $600 million, increase in revenues for 2012 compared the company’s service offerings result in the delivery of an to 2011. Cost of sales contributed by the ONCAP compa- electronic image ﬁle, an engraved gravure cylinder or a nies was up 49 percent, or $411 million, for 2012 compared ﬂexographic printing plate. to 2011. The 2012 results include a full year of operations SGS International reported revenues and cost of for Pinnacle Renewable Energy Group, PURE Canadian sales of $465 million and $295 million, respectively, dur- Gaming, Hopkins and Davis-Standard, which were acquired ing 2013. Reported 2012 revenues of $93 million and cost by ONCAP during 2011. of sales of $57 million represent the three months of oper- ations from the October 2012 acquisition of SGS Inter- Emerald Expositions Emerald Expositions was acquired in June 2013 and is a lead- national. As SGS International was acquired in October 2012, there are no comparative results for the year ended ing operator of large business-to-business tradeshows in the December 31, 2011. United States across nine end markets. Emerald Expositions has two principal sources of revenue: tradeshow revenue and revenue from print and digital publications and select Tropicana Las Vegas Tropicana Las Vegas is a casino resort with 1,467 rooms, conferences. Tradeshow revenue is generated from selling situated on 35 acres and located directly on the Las Vegas exhibit space and sponsorship slots to exhibitors on a per- Strip. Tropicana Las Vegas’ revenues increased 7 percent, square-footage basis. or $6 million, to $97 million in 2013, while cost of sales was Emerald Expositions reported revenues and cost unchanged during the year at $7 million. Tropicana Las of sales of $77 million and $21 million, respectively, for Vegas records most of its costs in operating expenses. The essentially six months of ownership to December 31, 2013. increase in revenues during 2013 was due primarily to an As Emerald Expositions was acquired by the Onex Partners increase in average daily room rates. III Group in June 2013, there are no comparative results for Tropicana Las Vegas reported an increase in rev- 2012 or 2011. enues of $6 million, or 7 percent, to $91 million in 2012 compared to 2011, while cost of sales decreased slightly KraussMaffei KraussMaffei, acquired in December 2012, provides highly during the year to $7 million. The increase in revenues during 2012 was due primarily to an increase in room and engineered solutions and machines for the produc- table game revenues, slightly offset by a decrease in food tion of plastic and rubber products. The company pro- and beverage revenue. vides products and solutions in the injection molding, extrusion technology and reaction process machinery segments and serves customers in a wide range of indus- tries. KraussMaffei’s revenues are derived from the sale of machines and aftermarket services. 36 Onex Corporation December 31, 2013 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S USI USI is a leading provider of insurance brokerage services. The increase in interest expense during 2013 was partially offset by a combined decrease of $25 million in interest USI’s revenues consist of commissions paid by insurance expense at ResCare and Spirit AeroSystems due primarily to companies and fees paid directly by the company’s clients reﬁnancings completed during 2012. on the placement of property and casualty and individual and group health, life and disability insurance on behalf of its clients, fees paid directly by the carrier, and in certain cases by the client, for employee beneﬁt-related services, Increase in value of investments in joint ventures and associates at fair value, net Investments in joint ventures and associates are deﬁned and contingent and supplemental commissions paid based under IFRS as those investments in operating businesses on the overall proﬁt and/or volume of business placed over which Onex has joint control or signiﬁcant inﬂuence, with an insurer. USI has two reportable segments: Retail but not control. Certain of these investments are designated, Insurance Brokerage and Specialty. upon initial recognition, at fair value in the audited annual During the year ended December 31, 2013, USI consolidated balance sheets. Both realized and unrealized reported revenues of $769 million. Reported 2012 revenues gains and losses are recognized in the audited annual con- of $15 million represent results for the period from the late solidated statements of earnings as a result of increases or December 2012 acquisition of USI to December 31, 2012. decreases in the fair value of investments in joint ventures USI records its costs in operating expenses. As USI was and associates. The investments that Onex determined acquired in late December 2012, there are no comparative to be investments in joint ventures or associates and thus results for the year ended December 31, 2011. recorded at fair value are Allison Transmission, BBAM, RSI Interest expense of operating companies New investments are structured with the acquired com- (sold in February 2013), Tomkins Limited (“Tomkins”) and certain Onex Real Estate investments. Hawker Beechcraft Corporation (“Hawker Beech- pany having sufﬁcient equity to enable it to self-ﬁnance craft”), previously a joint venture investment, ﬁled for bank- a signiﬁcant portion of its acquisition cost with a prudent ruptcy protection in the United States during the second amount of debt. The level of debt is commensurate with quarter of 2012. The company emerged from bankruptcy the operating company’s available cash ﬂow, including protection in February 2013 and, under the terms of the consideration of funds required to pursue growth oppor- restructuring, the Onex Partners II Group holds a nominal tunities. It is the responsibility of the acquired operating equity interest in the company. As a result, during the ﬁrst company to service its own debt obligations. quarter of 2013, the unrealized losses previously recognized Consolidated interest expense was up $299 mil- in investments in joint ventures and associates at fair value lion, or 58 percent, to $813 million during the year ended for the decline in value of Hawker Beechcraft were realized. 2013 compared to $514 million in 2012. The increase was During 2013, Onex recorded an increase in fair due primarily to: value of investments in joint ventures and associates of • The inclusion of a full year of interest expense for SGS $1.1 billion (2012 – $863 million). The increase was due International, USI, KraussMaffei and Bradshaw, each primarily to (i) an increase in the public share value of acquired during the fourth quarter of 2012, and six Allison Transmission, including the 2013 share repurchase months of interest expense for Emerald Expositions, and secondary offering values being above the value of the acquired in June 2013. These acquisitions collectively investment at December 2012; (ii) proceeds received on increased interest expense by $234 million in 2013. the February 2013 sale of RSI being above the value of the • A $49 million increase in interest expense recorded by investment at December 31, 2012; (iii) strong operating per- Carestream Health due to a higher outstanding debt formance at certain of the investments; and (iv) debt repay- balance related to its June 2013 debt reﬁnancing, which ment by some of the investments. includes a $16 million debt prepayment charge associ- Of the total fair value increase recorded during ated with the reﬁnancing. the year ended December 31, 2013, $786 million (2012 – $614 million) is attributable to the limited partners in the Onex Partners Funds, which contributes to the Limited Onex Corporation December 31, 2013 37 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Partners’ Interests charge discussed on page 42 of this MD&A. Onex’ share of the total fair value increase was BSN SPORTS In June 2013, the ONCAP II Group completed the sale of $312 million (2012 – $249 million). BSN SPORTS, receiving net proceeds of $236 million, of which Onex’ share was $114 million. Included in the net Stock-based compensation expense Onex recorded a consolidated stock-based compensa- proceeds received on the sale, there were approximately $16 million of additional amounts held in escrow and other tion expense of $349 million during 2013 compared to an items which are expected to be received by June 2015. Onex’ expense of $239 million in 2012. Onex, the parent com- share of the amounts held in escrow and other items was pany, represented $215 million (2012 – $139 million) of the $8 million. During the fourth quarter of 2013, $1 million 2013 expense primarily related to its stock options and of the additional amounts held in escrow was received, of MIP equity interests. In accordance with IFRS, the expense which Onex’ share was less than $1 million. The realized recorded on these plans is determined based on the fair pre-tax gain on the sale of BSN SPORTS was $170 million, value of the liability at the end of each reporting period. The of which Onex’ share was $82 million. Onex recorded a fair value of the Onex stock options and MIP equity inter- non-cash tax provision of $7 million on the sale, which was ests is determined using an option valuation model, with included in the provision for income taxes in the audited the stock options primarily impacted by the change in the annual consolidated statements of earnings. Onex recog- market value of Onex’ shares and the MIP equity interests nized a recovery of this tax provision during 2013 as part of affected primarily by the change in the fair value of Onex’ an evaluation of recent changes in tax law as described on investments. The expense recorded by Onex, the parent page 43 of this MD&A. The gain on the sale is entirely attrib- company, on its stock options during 2013 was due primar- utable to the equity holders of Onex. This gain includes the ily to the 37 percent increase in the market value of Onex’ portion attributable to Onex’ investment, as well as that shares to C$57.35 at December 31, 2013 from C$41.87 at of the limited partners of ONCAP II. The effect of this is to December 31, 2012. recover the charges to earnings on BSN SPORTS allocated to the limited partners over the life of the investment, which Table 4 details the change in stock-based compensation by totalled $88 million. The balance of $75 million reﬂects Onex operating companies and Onex, the parent company, the after-tax gain on Onex’ investment in BSN SPORTS. for the years ended December 31, 2013 and 2012. Management of ONCAP received $18 million in carried Stock-Based Compensation Expense interest on the sale of BSN SPORTS. The impact to Onex and management of Onex was a net payment of $7 million in carried interest. Under the terms of the MIP, management TABLE 4 ($ millions) 2013 2012 Change of Onex participates in Onex’ realized gains from operat- Onex, the parent company, stock options $ 134 $ 115 $ 19 Onex, the parent company, MIP equity interests Onex operating companies 81 134 24 100 57 34 Total $ 349 $ 239 $ 110 Other gains For the year ended December 31, 2013, Onex recorded other gains of $561 million on the June 2013 sale of BSN SPORTS and the November 2013 sale Caliber Collision by the ONCAP II Group. During the year ended December 31, 2012, Onex recorded other gains of $59 million on the July 2012 sale of CDI by the Onex Partners I Group. ing business investments once certain conditions, includ- ing the required investment return hurdle, have been met. Management of Onex received $6 million on account of this transaction related to the MIP. BSN SPORTS did not represent a separate major line of business, and as a result has not been presented as a discontinued operation. At December 31, 2013, $15 million remained receivable for escrow amounts and other items, of which Onex’ share was $7 million. During the fourth quarter of 2013, $6 million of additional proceeds were received by ONCAP II, of which Onex’ share was $3 million. These additional proceeds were recognized as a gain during the fourth quarter of 2013, net of a $1 million reduction in the escrow receivable. 38 Onex Corporation December 31, 2013 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Caliber Collision In November 2013, the ONCAP II Group completed the sale Other items Onex recorded a charge for other items in 2013 of $449 mil- of Caliber Collision. The ONCAP II Group received net pro- lion (2012 – $46 million). Table 5 provides a breakdown of ceeds of $437 million on the sale. Onex’ share of the net and the change in other items for the years ended Decem- proceeds was $193 million. Included in the net proceeds ber 31, 2013 and 2012. received on the sale, there are approximately $4 million of additional amounts held in escrow and for working capital Other Items Expense (Income) adjustments that are expected to be settled during 2014, of which Onex’ share is $2 million. The realized gain on the sale TABLE 5 ($ millions) 2013 2012 Change of Caliber Collision was $386 million, of which Onex’ share was $171 million. The gain on the sale is entirely attributable to the equity holders of Onex. This gain includes the portion attributable to Onex’ investment, as well as that of the lim- ited partners of ONCAP II. The effect of this is to recover the charges to earnings on Caliber Collision allocated to the lim- Restructuring $ 93 $ 103 $ (10) Transition, integration and other Transaction costs Carried interest due to 73 23 Onex and ONCAP management 262 27 46 91 ited partners over the life of the investment, which totalled Change in fair value of $215 million. The balance of $171 million reﬂects the gain contingent consideration 104 (2) on Onex’ investment in Caliber Collision. Management of Spirit AeroSystems severe ONCAP received $42 million in carried interest on the sale of Caliber Collision. The impact to Onex and management weather event Meridian Aviation of Onex was a net payment of $8 million in carried interest Foreign exchange loss (gain) 46 (23) 171 106 176 (32) 25 (56) to ONCAP management. Under the terms of the MIP, man- agement of Onex participates in Onex’ realized gains from operating business investments once certain conditions, including the required investment return hurdle, have been met. Management of Onex received $12 million on account of this transaction related to the MIP. Caliber Collision did not represent a separate major line of business, and as a result has not been presented as a discontinued operation. CDI In July 2012, the Onex Partners I Group completed the sale of CDI. Net proceeds to the Onex Partners I Group were $91 million, of which Onex’ share was $24 million, including carried interest of $3 million. Included in the net proceeds amount was $9 million held in escrow and for working capital adjustments, which is expected to be settled in 2014. Onex’ share of the amounts held in escrow and for work- ing capital adjustments was $2 million, excluding carried interest. During the fourth quarter of 2012, less than $1 mil- lion of the amount held for working capital adjustments was settled. No amounts were paid on account of the MIP as the required investment return hurdle for Onex was not Other Total met. Onex’ 2012 audited annual consolidated ﬁnancial statements include a gain of $59 million, which was entirely attributable to the equity holders of Onex. Other Total 30 (32) 18 (122) (146) – (7) (66) $ 449 $ 46 $ 403 Restructuring Restructuring expenses are considered to be costs incurred by the operating companies to realign organizational structures or restructure manufacturing capacity to obtain operating synergies critical to building the long-term value of those businesses. Table 6 provides a breakdown of and the change in restructuring expenses by operating com- pany for the years ended December 31, 2013 and 2012. Restructuring Expenses TABLE 6 ($ millions) JELD-WEN Celestica Sitel Worldwide Carestream Health 2013 $ 31 28 14 10 10 2012 Change $ 35 $ (4) 44 15 6 3 (16) (1) 4 7 $ 93 $ 103 $ (10) Onex Corporation December 31, 2013 39 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S JELD-WEN JELD-WEN reported a decrease of $4 million in restructur- Transition, integration and other Transition, integration and other expenses are typically ing expense in 2013. Restructuring charges of $31 million in to provide for the costs of transitioning the activities of an 2013 relate primarily to costs associated with the closure of operating company from a prior parent company upon facilities. The charges recorded by JELD-WEN during 2012 acquisition and to integrate new acquisitions at the operat- primarily relate to the realignment of administrative and ing companies. sales departments to reduce general and administrative costs and the termination of certain contracts. Celestica In June 2012, Celestica announced that it would wind down Transaction costs Transaction costs are incurred by Onex and its operating companies to complete business acquisitions, and typically include advisory, legal and other professional and consult- its manufacturing services for a signiﬁcant consumer cus- ing costs. Transaction costs for 2013 were primarily due to tomer by the end of 2012. In connection with the wind-down the acquisition of Emerald Expositions, as discussed on and in order to reduce its overall cost structure and improve page 24 of this MD&A, and acquisitions completed by the its margin performance, Celestica announced restructuring operating companies. actions throughout its global network. At December 31, 2013, Celestica had completed its planned restructuring actions. Celestica recorded $28 million of restructuring charges during 2013 in connection with these planned actions. Carried interest due to Onex and ONCAP management The General Partners of the Onex Partners and ONCAP During 2012, Celestica recorded $44 million of restructur- Funds are entitled to a carried interest of 20 percent on ing charges, which includes $16 million in non-cash charges the realized gains of the limited partners in each Fund, against property, plant and equipment recorded in connec- as determined in accordance with the limited partner- tion with the wind-down. ship agreements. Onex is allocated 40 percent of the car- ried interest realized in the Onex Partners Funds. The Sitel Worldwide During the year ended December 31, 2013, Sitel Worldwide Onex management team is allocated 60 percent of the car- ried interest realized in the Onex Partners Funds and the reported restructuring expenses of $14 million (2012 – ONCAP management team is entitled to that portion of the $15 million). The charges incurred in 2013 and 2012 primarily carried interest realized in the ONCAP Funds that equates relate to expenses incurred to rationalize facility and labour to a 12 percent carried interest on both limited partners’ costs, realign operations and resources to support growth and Onex capital. Onex’ share of the carried interest is plans, and shift the geographic mix of certain operations. recorded as an offset in the Limited Partners’ Interests Carestream Health Carestream Health reported restructuring expenses of amount in the audited annual consolidated statements of earnings. The carried interest due to management of Onex $10 million during 2013 compared to $6 million in 2012. and ONCAP represents the share of the overall net gains Carestream Health’s costs related primarily to the reor- in each of the Onex Partners and ONCAP Funds attribut- ganization of European sales and service functions and able to the management of Onex and ONCAP. The carried the relocation and closure of a ﬁlm ﬁnishing plant. The interest is estimated based on the current fair values of 2012 charges related primarily to the sale of a portion of the underlying investments in the Funds and the overall Carestream Health’s Molecular Imaging business, which net gains in each respective Fund determined in accor- resulted in the shutdown of certain operations. dance with the limited partnership agreements. The ulti- mate amount of carried interest earned will be based on the overall performance of each of Onex Partners I, II, III 40 Onex Corporation December 31, 2013 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S and IV and ONCAP II and III, independently. During 2013, a charge of $262 million (2012 – $91 million) was recorded Other For the year ended December 31, 2013, Onex reported con- in the audited annual consolidated statements of earnings solidated other income of $122 million (2012 – $66 mil- for an increase in management’s share of the carried inter- lion). During 2013, in connection with the settlement of est due primarily to an increase in the fair value of certain class action lawsuits, Celestica recorded other income of of the private and publicly traded investments in the Onex $24 million for the receipt of recoveries of damages related Partners and ONCAP Funds. to certain purchases made by the company in prior periods. In addition, other income recorded during 2013 includes Change in fair value of contingent consideration During 2013, Onex recorded net charges of $104 million (i) $24 million of realized and unrealized gains on invest- ments in securities held by the operating companies; (2012 – net recovery of $2 million) in relation to the esti- (ii) $15 million of gains from JELD-WEN’s sale of non- mated change in fair value of contingent consideration core assets; (iii) $14 million of other income from equity related to acquisitions completed by Onex and its operat- ing companies. The fair value of contingent consideration accounted investments; and (iv) $9 million of gains on the sale of tax losses, as discussed below. liabilities is typically based on the estimated future ﬁnancial In February and November 2013, Onex sold enti- performance of the acquired businesses. Financial targets ties, the sole assets of which were certain tax losses, to used in the estimation process include certain deﬁned companies controlled by Mr. Gerald W. Schwartz, who ﬁnancial targets and realized internal rates of return. The is Onex’ controlling shareholder. Onex received $9 mil- total estimated fair value of contingent consideration liabil- lion (2012 – $16 million) in cash for tax losses of $89 mil- ities at December 31, 2013 was $200 million (December 31, lion (2012 – $166 million). The cash received of $9 million 2012 – $83 million). was recorded as a gain in other items during 2013. Onex has signiﬁcant non-capital and capital losses available; Spirit AeroSystems severe weather event During 2013, Spirit AeroSystems incurred $30 million of however, Onex does not expect to generate sufﬁcient tax- able income to fully utilize these losses in the foresee- additional costs related to the April 2012 tornado that hit able future. As such, no beneﬁt was previously recognized its Wichita, Kansas facility. In October 2012, Spirit Aero- in the unaudited interim or audited annual consolidated Systems agreed to a settlement with its insurers for all ﬁnancial statements for the tax losses. In connection with claims related to the tornado for property damage, clean- these transactions, Deloitte & Touche LLP, an independent up, recovery costs and business interruption expenses, accounting ﬁrm retained by Onex’ Audit and Corporate net of any deductibles, recording a net gain of $146 million Governance Committee, provided an opinion that the during 2012. The settlement resolved all contingencies sur- value received by Onex for the tax losses was fair. The rounding the storm damage. Spirit AeroSystems will recog- transactions were unanimously approved by Onex’ Audit nize future costs as they are incurred. and Corporate Governance Committee, all the members of Meridian Aviation During the fourth quarter of 2013, Meridian Aviation exe- Other income for 2012 includes realized and unre- alized gains of $25 million on investments in securities held cuted sale agreements for three of the six commercial by operating companies, a gain of $15 million recorded by passenger aircraft under its existing purchase agreement, Sitel Worldwide on a repurchase of preferred shares and including the novation of the associated leases to the $16 million of gains on the sale of tax losses. which are independent directors. purchaser. The sale agreements are for two aircraft deliv- ered in 2013 and one aircraft scheduled for delivery in 2014. Meridian Aviation recorded a net gain of $32 million comprised of the sale of the two aircraft delivered in 2013 and a fair value adjustment covering the remaining four aircraft scheduled for delivery to the company between 2014 and 2015. Onex Corporation December 31, 2013 41 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Impairment of goodwill, intangible assets and long-lived assets, net Net impairment of goodwill, intangible assets and long- CiCi’s Pizza ONCAP II’s operating company, CiCi’s Pizza, recorded non-cash goodwill and intangible impairment charges of lived assets for 2013 totalled $319 million (2012 – $65 mil- $33 million (2012 – $16 million) and $24 million (2012 – nil), lion). Table 7 provides a breakdown of the net impairment respectively, during the fourth quarter of 2013 due primar- of goodwill, intangible assets and long-lived assets by ily to a decrease in projected future earnings and a reduc- operating company for the years ended December 31, 2013 tion in the exit multiple due to market risks. and 2012. Impairment of Goodwill, Intangible Assets and Long-Lived Assets, Net TABLE 7 ($ millions) Skilled Healthcare Group Tropicana Las Vegas CiCi’s Pizza Flushing Town Center Celestica Other(a) Total 2013 $ 95 91 57 43 – 33 2012 $ 12 – 16 – 18 19 $ 319 $ 65 (a) 2013 other includes impairments of $33 million related to EnGlobe, JELD-WEN, Sitel Worldwide, The Warranty Group and USI. 2012 other includes impairments of $19 million related to Carestream Health, JELD-WEN, Spirit AeroSystems, The Warranty Group and BSN SPORTS (sold in June 2013). Skilled Healthcare Group Skilled Healthcare Group completed an impairment analysis Flushing Town Center During 2013, Flushing Town Center recorded non-cash impairments of $43 million associated with its retail and parking structures. Celestica Celestica did not record any impairment charges dur- ing 2013 compared to charges of $18 million in 2012. The charges recorded during 2012 primarily relate to good- will associated with the healthcare business acquired by Celestica in 2010. Limited Partners’ Interests charge The Limited Partners’ Interests charge in Onex’ audited annual consolidated statements of earnings primarily represents the change in the fair value of the underlying investments in the Onex Partners and ONCAP Funds that is allocated to the limited partners and recorded as Limited Partners’ Interests liability in Onex’ audited annual con- during the third quarter of 2013 as a result of the ongoing solidated balance sheets. The value of the limited partners’ shift of seniors from Medicare to Medicare Advantage, which capital in the Funds is affected primarily by the change in pays a lower per diem rate than Medicare, and its effect on the fair value of the underlying investments. The Limited expected future revenue growth rates in the long-term care Partners’ Interests charge includes the fair value changes of facilities, as well as future decreases in home health care both consolidated operating companies and investments reimbursement rates. As a result, the company revised its in joint ventures and associates that are held in the Onex estimates with respect to net revenues and gross margins, Partners and ONCAP Funds. which negatively impacted its cash ﬂows forecasted for the During 2013, Onex recorded a $1.9 billion charge long-term care services segment and home health reporting for Limited Partners’ Interests compared to a charge of unit. Accordingly, Skilled Healthcare Group recorded non- $929 million in 2012. The increase in the fair value of cer- cash goodwill impairments of $93 million and a non-cash tain of the private and publicly traded investments held intangible asset impairment of $2 million during 2013. Tropicana Las Vegas Due to a decline in the recoverable amount of Tropicana Las Vegas, measured in accordance with IAS 36, Impair ment of Assets, Tropicana Las Vegas recorded non-cash long-lived asset impairments of $91 million in the second quarter of 2013. in the Onex Partners and ONCAP Funds contributed signiﬁcantly to the Limited Partners’ Interests charge recorded in 2013. The Limited Partners’ Interests charge is net of a $395 million increase (2012 – $132 million) in carried inter- est for the year ended December 31, 2013. Onex’ share of the carried interest increase for 2013 was $137 million (2012 – $47 million). The amount of carried interest that has been netted against the Limited Partners’ Interests increased 42 Onex Corporation December 31, 2013 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S in 2013 due to the increase in the fair value of certain of the private and publicly traded investments in the Onex Loss from continuing operations Onex reported a consolidated loss from continuing opera- Partners and ONCAP Funds. The ultimate amount of carried tions of $1.1 billion in 2013 compared to consolidated interest realized will be dependent upon the actual realiza- losses of $10 million in 2012 and $112 million in 2011. tions for each Fund in accordance with the limited partner- Table 8 shows the earnings (loss) from continuing opera- ship agreements. tions by industry segment for the years ended Decem- Income taxes Onex recorded a consolidated income tax recovery of Earnings (Loss) from Continuing Operations $333 million in 2013 compared to a tax provision of $76 mil- by Industry Segment lion in 2012. During the third quarter of 2013, as a result of evaluating recent changes in tax law for the treatment of TABLE 8 ($ millions) 2013 2012(a) 2011 (a) ber 31, 2013, 2012 and 2011. surplus and upstream loans, Onex, the parent company, Earnings (loss) from continuing determined that its previously recognized deferred tax pro- operations: visions on gains realized from the disposition of foreign Electronics Manufacturing operating companies are temporary differences which are Services $ 118 $ 118 probable to not reverse in the foreseeable future, consis- tent with the principles outlined in IAS 12, Income Taxes. As a result, Onex, the parent company, recorded a $526 mil- Aerostructures Healthcare Insurance Provider lion non-cash recovery of deferred income taxes, of which Customer Care Services $480 million was included in Onex’, the parent company’s, Building Products deferred income tax liability at December 31, 2012 and Other(c) $46 million represents the provisions established and Loss from Continuing (540) (117) 112 (21) (85) (541) 45 70(b) 109 (20) (67) (265) $ 195 224 (112)(b) 60 (58) (89) (332) reversed during 2013. The recovery of income taxes recorded during 2013, as discussed above, was partially Operations $ (1,074) $ (10) $ (112) offset by non-cash tax provisions recorded by Onex, the (a) 2012 results have been restated for the changes in accounting policies adopted parent company, on (i) the June and July 2013 distribu- tions received from Carestream Health; (ii) the sale of BSN on January 1, 2013, as described in note 1 to the audited annual consolidated financial statements. 2011 results have not been restated for the changes in accounting policies adopted on January 1, 2013, as described in note 1 to the SPORTS in June 2013; and (iii) the sale of RSI in February audited annual consolidated financial statements. 2013, in addition to a deferred tax provision recorded by Spirit AeroSystems. During the fourth quarter of 2013, Spirit AeroSys- (b) Includes reported results of CDI, which was sold in July 2012. CDI did not represent a separate major line of business and as a result has not been presented as a discontinued operation. (c) 2013 other includes the consolidated earnings of Tropicana Las Vegas, tems reversed the recognition of nearly all of its net U.S. SGS International, USI, KraussMaffei, Meridian Aviation, Emerald Expositions deferred tax assets as at December 31, 2013. Spirit Aero Sys- tems determined that, as a result of cumulative losses, it is no longer probable that the company will earn sufﬁcient future taxable proﬁts to utilize nearly all of the previously recog- nized tax assets. As a result, included in Spirit AeroSystems’ tax provision is $296 million related to the reversal of its con- solidated net U.S. deferred tax assets and $15 million related to the reversal of deferred tax assets on its state income tax credits and other items. In addition, Spirit AeroSystems rec- ognized a provision of $32 million through other compre- hensive earnings related to the reversal of nearly all of its consolidated net U.S. deferred tax assets. Spirit AeroSystems will continue to monitor its deferred tax position and may recognize a portion of its U.S. deferred tax assets in future periods as available evidence changes. (since June 2013), the operating companies of ONCAP II (BSN SPORTS up to June 2013 and Caliber Collision up to November 2013) and ONCAP III, Flushing Town Center, OCP CLO-1 through OCP CLO-4, the warehouse facility for OCP CLO-5 and the parent company. In addition, consolidated earnings include the changes in fair value of Allison Transmission, BBAM, RSI (up to February 2013), Tomkins and certain Onex Real Estate investments. 2012 other includes the consolidated earnings of Tropicana Las Vegas, SGS International (since October 2012), USI (since late December 2012), transaction costs of KraussMaffei, the operating companies of ONCAP II and ONCAP III, Flushing Town Center, OCP CLO-1, OCP CLO-2 and the parent company. In addition, other includes the changes in fair value of Allison Transmission, BBAM, Hawker Beechcraft, RSI, Tomkins and certain Onex Real Estate investments. 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, other includes the changes in fair value of Allison Transmission, Hawker Beechcraft, RSI, Tomkins and certain Onex Real Estate Partners investments. Onex Corporation December 31, 2013 43 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S The loss from continuing operations in the other segment Table 10 presents the earnings (loss) from continuing oper- totalled $541 million in 2013 compared to a loss of $265 mil- ations attributable to equity holders of Onex Corporation lion in 2012 and a loss of $332 million in 2011. Table 9 shows and non-controlling interests for the years ended Decem- the major components of the earnings (loss) from continu- ber 31, 2013, 2012 and 2011. ing operations recorded in the other segment for the years ended December 31, 2013, 2012 and 2011. Earnings (Loss) from Continuing Operations TABLE 9 ($ millions) 2013 2012(a) 2011 (a) TABLE 10 ($ millions) 2013 2012(a) 2011 (a) Loss (earnings) from continuing operations – other: Limited Partners’ Interests Earnings (loss) from continuing operations attributable to: Equity holders of charge $ 1,855 $ 929 $ 627 Onex Corporation $ (605) $ (143) $ (373 ) Stock-based compensation Non-controlling interests (469) 133 261 expense 293 156 Unrealized carried interest due to Onex and ONCAP management Interest expense of operating companies Impairment of intangible assets and long-lived assets Increase in value of investments in joint ventures and associates 262 336 209 91 67 – 64 62 44 – Loss from Continuing Operations $ (1,074) $ (10) $ (112) (a) 2012 results have been restated for the changes in accounting policies adopted on January 1, 2013, as described in note 1 to the audited annual consolidated financial statements. 2011 results have not been restated for the changes in accounting policies adopted on January 1, 2013, as described in note 1 to the audited annual consolidated financial statements. The non-controlling interests’ share of the earnings (loss) from continuing operations represents the share of earn- ings (loss) of shareholders, other than Onex and its limited at fair value, net Other gains (1,098) (561) (863) (59) (501 ) – partners in its Funds. For example, Spirit AeroSystems’ pub- lic shareholders’ share of the net earnings (loss) in the busi- Non-cash recovery of deferred ness would be reported in the non-controlling interests line. income taxes by Onex, the parent company Other Loss from Continuing Operations – Other $ 541 $ 265 $ 332 (480) (275) – (56) – 36 Earnings from discontinued operations Earnings from discontinued operations for the years ended December 31, 2013, 2012 and 2011 includes the operations of TMS International and the net gain recorded on dispo- sition. In addition, earnings from discontinued opera- (a) 2012 results have been restated for the changes in accounting policies adopted tions for the year ended December 31, 2011 includes the on January 1, 2013, as described in note 1 to the audited annual consolidated financial statements. 2011 results have not been restated for the changes in accounting policies adopted on January 1, 2013, as described in note 1 to the audited annual consolidated financial statements. operations of Emergency Medical Services Corporation (“EMSC”) and Husky International Ltd. (“Husky Inter na- tional”) and the net gains recorded on the disposition of these companies. Onex recorded after-tax earnings from discontinued operations of $261 million ($2.22 per share) in 2013 compared to after-tax earnings from discontin- ued operations of $26 million ($0.13 per share) in 2012 and $1.7 billion ($14.48 per share) in 2011. Note 3 to the audited annual consolidated ﬁnancial statements provides additional information on earnings from discontinued operations. 44 Onex Corporation December 31, 2013 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Table 11 presents the after-tax earnings, gain on sale, net of tax, and earnings from discontinued operations for the years ended December 31, 2013, 2012 and 2011. Earnings from Discontinued Operations TABLE 11 ($ millions) After-Tax Earnings Gain on Sale, Net of Tax Earnings from Discontinued Operations 2013 2012 2011 2013 2012 2011 2013 2012 2011 Earnings from discontinued operations: TMS International $ 19 $ 26 $ 24 $ 242 $ – $ – $ 261 $ 26 $ 24 EMSC Husky International – – – – 47 22 – – – – 559 1,087 – – – – 606 1,109 Total $ 19 $ 26 $ 93 $ 242 $ – $ 1,646 $ 261 $ 26 $ 1,739 TMS International In October 2013, the Onex Partners II Group sold its remain- the MIP. In addition to the cash proceeds received on the sale, there was approximately $60 million of additional ing interest in TMS International to a third party, as dis- amounts held in escrow and other items, of which Onex’ cussed on page 26 of this MD&A. EMSC In May 2011, the Onex Partners I Group sold its remaining share was $19 million, excluding carried interest. Onex, the parent company, recorded a non-cash tax provision of $49 million on the gain. During the third quarter of 2011, $38 million of the additional amounts held in escrow was 13.7 million shares of EMSC for net proceeds of $878 mil- received. Onex’ share of the amounts received during the lion, of which Onex’ share was $342 million, including car- third quarter of 2011 was $18 million, including carried ried interest of $32 million and deducting distributions paid interest of $6 million and deducting distributions paid on on account of the MIP. Onex, the parent company, recorded account of the MIP. The escrow amount was also reduced a deferred tax provision of $41 million on the gain. during the third quarter of 2011 by $5 million for taxes owing in respect of taxable periods up to the closing date. Husky International In June 2011, the Onex Partners I Group and Onex Part- In addition, Onex recorded a non-cash tax provision of $1 million during the third quarter of 2011. At December 31, ners II Group completed the sale of Husky International 2013, $18 million remains receivable for escrow amounts and received net proceeds of $1.7 billion, of which Onex’ and other items, of which Onex’ share is $6 million, share was $583 million, including carried interest of ex cluding carried interest. The escrow amounts and other $17 million and deducting distributions paid on account of items are expected to be received in 2015. Onex Corporation December 31, 2013 45 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Consolidated net earnings (loss) Onex recorded a consolidated net loss of $813 million in Table 13 presents the net earnings (loss) attributable to equity holders of Onex Corporation and non-controlling interests 2013 compared to consolidated net earnings of $16 mil- for the years ended December 31, 2013, 2012 and 2011. lion and $1.6 billion in 2012 and 2011, respectively. Table 12 shows the net earnings (loss) by industry segment for the Net Earnings (Loss) years ended December 31, 2013, 2012 and 2011. TABLE 13 ($ millions) 2013 2012(a) 2011 (a) Consolidated Net Earnings (Loss) by Industry Segment Net earnings (loss) attributable to: TABLE 12 ($ millions) 2013 2012(a) 2011 (a) Net earnings (loss): Electronics Manufacturing Services Aerostructures Healthcare Insurance Provider Customer Care Services Building Products Other(c) Earnings from discontinued operations Consolidated $ 118 $ 118 $ 195 (540) (117) 112 (21) (85) (541) 45 70(b) 109 (20) (67) (265) 224 (112 )(b) 60 (58) (89) (332) 261 26 1,739 Equity holders of Onex Corporation Non-controlling interests $ (354) (459) $ (128) $ 1,326 144 301 Net Earnings (Loss) $ (813) $ 16 $ 1,627 (a) 2012 results have been restated for the changes in accounting policies adopted on January 1, 2013, as described in note 1 to the audited annual consolidated financial statements. 2011 results have not been restated for the changes in accounting policies adopted on January 1, 2013, as described in note 1 to the audited annual consolidated financial statements. Table 14 presents the net earnings (loss) per subordinate voting share of Onex Corporation. Net Earnings (Loss) per Subordinate Voting Share Net Earnings (Loss) $ (813) $ 16 $ 1,627 TABLE 14 ($ per share) 2013 2012(a) 2011 (a) (a) 2012 results have been restated for the changes in accounting policies adopted Basic and Diluted: on January 1, 2013, as described in note 1 to the audited annual consolidated financial statements. 2011 results have not been restated for the changes in accounting policies adopted on January 1, 2013, as described in note 1 to the audited annual consolidated financial statements. (b) Includes reported results of CDI, which was sold in July 2012. CDI did not represent a separate major line of business and as a result has not been presented as a discontinued operation. (c) 2013 other includes the consolidated earnings of Tropicana Las Vegas, SGS International, USI, KraussMaffei, Meridian Aviation, Emerald Expositions (since June 2013), the operating companies of ONCAP II (BSN SPORTS up to June 2013 and Caliber Collision up to November 2013) and ONCAP III, Flushing Town Center, OCP CLO-1 through OCP CLO-4, the warehouse facility for OCP CLO-5 and the parent company. In addition, other includes the changes in fair value of Allison Transmission, BBAM, RSI (sold in February 2013), Tomkins and certain Onex Real Estate investments. 2012 other includes the consolidated earnings of Tropicana Las Vegas, SGS International (since October 2012), USI (since late December 2012), transaction costs of KraussMaffei, the operating companies of ONCAP II and ONCAP III, Flushing Town Center, OCP CLO-1, OCP CLO-2 and the parent company. In addition, other includes the changes in fair value of Allison Transmission, BBAM, Hawker Beechcraft, RSI, Tomkins and certain Onex Real Estate investments. 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, other includes the changes in fair value of Allison Transmission, Hawker Beechcraft, RSI, Tomkins and certain Onex Real Estate Partners investments. 46 Onex Corporation December 31, 2013 Continuing operations $ (5.34) $ (1.25) $ (3.18) Discontinued operations 2.22 0.13 14.48 Net Earnings (Loss) $ (3.12) $ (1.12) $ 11.30 (a) 2012 results have been restated for the changes in accounting policies adopted on January 1, 2013, as described in note 1 to the audited annual consolidated financial statements. 2011 results have not been restated for the changes in accounting policies adopted on January 1, 2013, as described in note 1 to the audited annual consolidated financial statements. Other comprehensive earnings Other comprehensive earnings (loss) represents the unre- alized gains or losses, all net of income taxes, related to certain available-for-sale securities, cash ﬂow hedges, remeasurements for post-employment beneﬁt plans and foreign exchange gains or losses on foreign self-sustaining operations. During 2013, Onex reported other comprehen- sive earnings of $78 million (2012 – $4 million), after giving effect to the impact of the adoption of new accounting poli- cies, as discussed on page 18 of this MD&A. The comprehen- sive earnings increase was due primarily to $174 million of favourable remeasurements for post-employment beneﬁt plans (2012 – unfavourable of $69 million), partially offset by $48 million of unfavourable currency translation adjust- ments on foreign operations (2012 – $32 million favourable). M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S F O U R T H Q U A R T E R R E S U L T S Table 15 presents the statements of loss for the fourth quarters ended December 31, 2013 and 2012. Fourth Quarter Statements of Loss TABLE 15 ($ 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 Increase in value of investments in joint ventures and associates at fair value, net Stock-based compensation expense Other gains Other items Impairment 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 2013 2012 (a) $ 6,986 $ 6,375 (5,665) (1,092) 32 (137) (138) (221) 534 (91) 391 (159) (91) (657) (308) (152) (460) 237 (4,876) (876) 21 (137) (87) (134) 248 (76) – (108) (38) (364) (52) (37) (89) 6 $ (223) $ (83) (a) 2012 results have been restated for the changes in accounting policies adopted on January 1, 2013, as described in note 1 to the audited annual consolidated financial statements. Table 16 provides a breakdown of the 2013 and 2012 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 16 ($ millions) Revenues Cost of Sales Three months ended December 31 Electronics Manufacturing Services Aerostructures Healthcare Insurance Provider Customer Care Services Building Products Other (b) Total 2013 $ 1,437 1,494 1,312 285 371 889 1,198 $ 6,986 2012(a) Change $ 1,496 1,432 1,299 306 370 817 655 $ 6,375 (4)% 4 % 1 % (7)% – 9 % 83 % 10 % 2013 $ 1,317 1,688 885 145 241 730 659 $ 1,377 1,181 873 160 241 656 388 $ 5,665 $ 4,876 (4)% 43 % 1 % (9)% – 11 % 70 % 16 % 2012(a) Change Results are reported in accordance with IFRS. These results may differ from those reported by the individual operating companies. (a) 2012 results have been restated for the changes in accounting policies adopted on January 1, 2013, as described in note 1 to the audited annual consolidated financial statements. (b) 2013 other includes the consolidated earnings of Tropicana Las Vegas, SGS International, USI, KraussMaffei, Meridian Aviation, Emerald Expositions, the operating companies of ONCAP II (Caliber Collision up to November 2013) and ONCAP III, Flushing Town Center and the parent company. 2012 other includes the consolidated earnings of Tropicana Las Vegas, SGS International (since October 2012), USI (since late December 2012), the operating companies of ONCAP II and ONCAP III, Flushing Town Center and the parent company. Onex Corporation December 31, 2013 47 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Fourth quarter consolidated revenues and cost of sales Consolidated revenues were up 10 percent, or $611 million, Partially offsetting the increases in revenues and cost of sales during the fourth quarter of 2013 were decreases at Celestica, included in the Electronics Manu- to $7.0 billion in the fourth quarter of 2013 compared to the fac turing Services segment, and The Warranty Group, same quarter of 2012. Consolidated cost of sales increased included in the Insurance Provider segment. by $789 million, or 16 percent, to $5.7 billion for the three Celestica’s revenues for the fourth quarter of months ended December 31, 2013 compared to the same 2013 decreased by $59 million, or 4 percent, compared to period last year. the same period last year. The decrease in revenues was Revenues and cost of sales at Spirit AeroSystems, driven primarily by a decrease in the server end mar- included in the Aerostructures segment, increased by ket due to the insourcing of a program by a customer $62 million and $507 million, respectively, during the fourth and overall demand weakness as well as a decrease in the quarter of 2013. The increase in revenues was due primarily consumer end market due to program transitions. These to production volume increases on Boeing and business jet decreases were partially offset by increases in Celestica’s programs to support customer delivery schedules. Cost of communications, storage and diversiﬁed end markets sales increased in line with revenues excluding the impact due primarily to new program wins. Cost of sales for of additional forward losses of $546 million recorded during the fourth quarter of 2013 decreased by $60 million, or the fourth quarter of 2013, partially offset by a $51 million 4 percent, in line with the revenue decrease. favourable cumulative catch-up adjustment. Revenues and cost of sales at The Warranty Group JELD-WEN’s revenues, included in the Building decreased by $21 million and $15 million, respectively, com- Products segment, increased by $72 million compared to the pared to the fourth quarter of 2012. The decrease in rev- fourth quarter of 2012. The increase was primarily attribut- enues was due to lower earned premiums and fees on the able to growth in the North American and European seg- consumer products business in North America, Asia and ments which includes the impact of an additional month’s Europe as well as lower earned premiums on the European revenue from CMI in 2013. CMI was acquired in late October creditor business. The decrease was partially offset by 2012. Partially offsetting the increase in revenues in the higher U.S. and Europe auto earned revenues and higher North American and European segments was a decline in earned revenues on the consumer products business in revenues in Australia. Cost of sales reported by JELD-WEN Latin America. The decrease in cost of sales was driven for the fourth quarter of 2013 increased by $74 million com- primarily by lower earned revenues, favourable claims pared to the same quarter of 2012. The increase in fourth development on certain programs in North America and quarter cost of sales was driven by a number of factors, International, partially offset by increased claims severity including the increase in revenues. on a large client in North America. Fourth quarter 2013 revenues and cost of sales in the other segment increased by $543 million and $271 million, respectively, compared to the same period Fourth quarter interest expense Fourth quarter 2013 interest expense totalled $221 million last year. The increase was due primarily to the inclusion compared to $134 million during the fourth quarter of 2012. of the revenues and cost of sales of USI and KraussMaffei, Fourth quarter interest expense increased by $87 million due acquired by the Onex Partners III Group in late December primarily to the inclusion of interest expense of companies 2012, Bradshaw, acquired by the ONCAP III Group in late acquired in December 2012, including USI, KraussMaffei and December 2012, and Emerald Expositions, acquired by the Bradshaw, and the acquisition of Emerald Expositions in Onex Partners III Group in June 2013. The increase was par- June 2013. tially offset by the decrease in revenues and cost of sales due to the ONCAP II Group’s sales of BSN SPORTS in June 2013 and Caliber Collision in November 2013. 48 Onex Corporation December 31, 2013 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Fourth quarter increase in value of investments in joint ventures and associates at fair value, net The 2013 fourth quarter increase in value of investments the fourth quarter of 2013. The charge for other items was partially offset by other income recorded during the fourth quarter of 2013, which includes $32 million of gains recorded by Meridian Aviation and $9 million of gains on the sale of in joint ventures and associates at fair value was $534 mil- tax losses, as discussed below. lion compared to an increase of $248 million during the During the fourth quarter of 2013, Meridian same period of 2012. The increase in fair value of invest- Aviation executed sale agreements for three of the six ments in associates is due primarily to (i) an increase in the commercial passenger aircraft under its existing pur- public share value of Allison Transmission, including the chase agreement, including the novation of the associ- November and December 2013 secondary offering values ated leases to the purchaser. The sale agreements are for being above the value of the investment at September 30, two aircraft delivered in 2013 and one aircraft scheduled for 2013; and (ii) improved operating performance and debt delivery in 2014. Meridian Aviation recorded a net gain of repayment at certain of the investments. $32 million comprised of the sale of the two aircraft deliv- Fourth quarter stock-based compensation expense During the fourth quarter of 2013, Onex recorded a consoli- ered in 2013 and a fair value adjustment covering the remaining four aircraft scheduled for delivery to the com- pany between 2014 and 2015. In November 2013, Onex sold entities, the sole dated stock-based compensation expense of $91 million assets of which were certain tax losses, to companies con- compared to $76 million for the same quarter of 2012. Onex, trolled by Mr. Gerald W. Schwartz, who is Onex’ controlling the parent company, recorded a stock-based compensation shareholder. Onex received $9 million (2012 – $9 million) in expense of approximately $40 million in the fourth quarter cash for tax losses of $89 million (2012 – $93 million). The of 2013 related to its stock options and MIP equity interests. cash received of $9 million was recorded as a gain in other That expense was primarily due to the 6 percent increase in items during the fourth quarter. Onex has signiﬁcant non- the market value of Onex’ shares in the fourth quarter. capital and capital losses available; however, Onex does not Fourth quarter other gains Onex recorded other gains of $391 million during the fourth expect to generate sufﬁcient taxable income to fully utilize these losses in the foreseeable future. As such, no beneﬁt was previously recognized in the unaudited interim or quarter of 2013 from the sale of Caliber Collision ($386 mil- audited annual consolidated ﬁnancial statements for the lion) and additional proceeds received, net of a $1 million tax losses. In connection with this transaction, Deloitte & reduction of escrow receivable, on the sale of BSN SPORTS Touche LLP, an independent accounting ﬁrm retained by ($5 million), as discussed on page 38 of this MD&A. Onex did Onex’ Audit and Corporate Governance Committee, pro- not record any other gains during the fourth quarter of 2012. vided an opinion that the value received by Onex for the tax Fourth quarter other items expense During the fourth quarter of 2013, Onex recorded a $159 million charge for other items compared to a charge losses was fair. The transaction was unanimously approved by Onex’ Audit and Corporate Governance Committee, all the members of which are independent directors. of $108 million during the same quarter of 2012. The charge for the carried interest due to management of Onex and ONCAP contributed $145 million (2012 – $35 million) to the Fourth quarter impairment of goodwill, intangible assets and long-lived assets, net During the fourth quarter of 2013, there was $91 million of other items expense during the fourth quarter. The increase impairments of goodwill, intangible assets and long-lived in the carried interest due to management of Onex and assets recorded by Onex’ operating companies compared ONCAP, and the corresponding charge, was driven primar- to $38 million for the three months ended December 31, ily by an increase in the fair value of certain of the private 2012. A discussion of these impairments by company is investments in the Onex Partners and ONCAP Funds during provided on page 42 of this MD&A. Onex Corporation December 31, 2013 49 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Fourth quarter Limited Partners’ Interests charge During the fourth quarter of 2013, Onex recorded a $208 million to the limited partners of ONCAP II for their share of the proceeds on the sale of Caliber Collision; (ii) $657 million charge for Limited Partners’ Interests com- cash interest paid of $220 million; and (iii) share repur- pared to a $364 million charge during the same period of chases of $117 million by Onex, the parent company, and 2012. The increase in the fair value of certain of the private Onex’ operating companies. Partially offsetting the cash and public investments in the Onex Partners and ONCAP used in ﬁnancing activities was $103 million of net debt Funds contributed signiﬁcantly to the Limited Partners’ issuances by the operating companies and contributions of Interests charge recorded during both quarters. The $9 million from the limited partners of (i) ONCAP II for their Limited Partners’ Interests is net of a $218 million (2012 – add-on investments in EnGlobe and Pinnacle Renewable $45 million) change in carried interest for the three months Energy Group; and (ii) the Onex Partners Funds for manage- ended December 31, 2013. ment fees and partnership expenses. Included in the $727 million of cash from ﬁnancing Fourth quarter earnings from discontinued operations During the fourth quarter of 2013, Onex recorded $237 mil- activities in the fourth quarter of 2012 was $498 million of net debt issuances by the operating companies and con- tributions of $1.2 billion from the limited partners of (i) lion (2012 – $6 million) of earnings from discontinued opera- the Onex Partners III Group for their investments in SGS tions related to the October 2013 sale of TMS Inter national, International, USI, BBAM and KraussMaffei, in addition as discussed on page 26 of this MD&A. to their add-on investments in JELD-WEN and Tropicana Fourth quarter cash ﬂow Table 17 presents the major components of cash ﬂow for Las Vegas; (ii) the Onex Partners Funds for management fees and partnership expenses; and (iii) ONCAP III for their investment in Bradshaw. Partially offsetting the cash from the fourth quarters of 2013 and 2012. ﬁnancing activities were (i) distributions of $562 million Major Cash Flow Components for the Three Months Ended December 31 ($ millions) TABLE 17 Three months ended December 31 2013 2012 Cash from operating activities $ 511 $ 784 Cash from (used in) financing activities $ (935) $ 727 Cash from (used) in investing activities $ 828 $ (1,283) Consolidated cash and cash equivalents held by continuing operations $ 3,191 $ 2,629 primarily to the limited partners of the Onex Partners Funds of amounts received from Tomkins, The Warranty Group, Carestream Health, Allison Transmission and JELD-WEN; (ii) share repurchases of $195 million by Onex’ operating companies, including Celestica’s substantial issuer bid; and (iii) cash interest paid of $146 million. Cash from investing activities in the fourth quarter of 2013 includes cash proceeds of (i) $836 million received on the sales of TMS International ($410 million) and Caliber Collision ($426 million); (ii) $333 million received on the sales of a portion of shares of Allison Transmission; and (iii) $222 million of proceeds from the sale of property, plant Cash from operating activities totalled $511 million in the and equipment consisting primarily of proceeds on the fourth quarter of 2013 compared to $784 million in 2012. sale of two aircraft by Meridian Aviation. This was partially Cash used in ﬁnancing activities was $935 mil- offset by (i) net purchases of investments and securities of lion in the fourth quarter of 2013 compared to cash from $198 million mainly by The Warranty Group and OCP CLO-4; ﬁnancing activities of $727 million in 2012. Cash used in (ii) $260 million in purchases of property, plant and equip- ﬁnancing activities included (i) distributions of $498 million ment by Onex’ operating companies; and (iii) $63 million of to the limited partners of the Onex Partners Funds, primar- ily from the sale of TMS International and amounts received cash used for investing activities of discontinued operations, which represents cash used for investing activities of TMS from The Warranty Group and Allison Transmission, and International up to the date of its disposition. 50 Onex Corporation December 31, 2013 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Cash used in investing activities in the fourth Change in Cash at Onex, the Parent Company quarter of 2012 includes (i) $1.3 billion used to fund the acquisitions of SGS International, USI, KraussMaffei, TABLE 18 ($ millions) Bradshaw and the investment in BBAM; (ii) net purchases Cash on hand at September 30, 2013 $ 1,046 of investments and securities of $297 million mainly by Sale of Caliber Collision The Warranty Group and OCP CLO-2; and (iii) $169 million Sale of TMS International in purchases of property, plant and equipment by Onex’ Sale of shares of Allison Transmission and dividends operating companies. This was partially offset by distribu- The Warranty Group distribution received tions of $667 million received from Tomkins and Allison Net Onex Credit Partners activity, including warehouse Transmission. facility associated with OCP CLO-5 Consolidated cash at December 31, 2013 totalled Add-on investments in EnGlobe and Pinnacle Renewable $3.2 billion. Onex, the parent company, accounted for ap prox- Energy Group imately $1.4 billion of the cash on hand. Table 18 provides a Options exercised for cash reconciliation of the change in cash at Onex, the parent com- Onex share repurchases pany, from September 30, 2013 to December 31, 2013. Other, net, including dividends, management fees and operating costs Cash on hand at December 31, 2013 173 172 113 20 (6) (6) (16) (89) (9) $ 1,398 S U M M A R Y Q U A R T E R L Y I N F O R M A T I O N Table 19 summarizes Onex’ key consolidated ﬁnancial information for the last eight quarters. TABLE 19 ($ millions except per share amounts) 2013 2012(a) Dec. Sept. June March Dec. Sept. June March Revenues $ 6,986 $ 7,133 $ 7,068 $ 6,622 $ 6,375 $ 6,139 $ 6,333 $ 6,070 Earnings (loss) from continuing operations $ (460) $ 391 $ (725) $ (280) $ (89) $ 88 $ (182) $ 173 Net earnings (loss) $ (223) $ 399 $ (718) $ (271) $ (83) $ 98 $ (172) $ 173 Net earnings (loss) attributable to Equity holders of Onex Corporation $ 200 $ 366 $ (612) $ (308) $ (158) $ 173 $ (201) $ 58 Non-controlling Interests (423) 33 (106) 37 75 (75) 29 115 Net earnings (loss) $ (223) $ 399 $ (718) $ (271) $ (83) $ 98 $ (172) $ 173 Earnings (loss) per Subordinate Voting Share of Onex Corporation Earnings (loss) from continuing operations $ (0.32) $ 3.18 $ (5.42) $ (2.76) $ (1.41) $ 1.45 $ (1.80) $ 0.51 Earnings from discontinued operations 2.09 0.04 0.04 0.05 0.03 0.05 0.05 – Net earnings (loss) $ 1.77 $ 3.22 $ (5.38) $ (2.71) $ (1.38) $ 1.50 $ (1.75) $ 0.51 (a) 2012 results have been restated for the changes in accounting policies adopted on January 1, 2013, as described in note 1 to the audited annual consolidated financial statements. 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. Onex Corporation December 31, 2013 51 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S 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 these increases were: Consolidated assets Consolidated assets totalled $36.9 billion at December 31, • the October 2013 sale by the Onex Partners II Group of its remaining ownership in TMS International, which decreased consolidated assets by $817 million, which is 2013 compared to $36.3 billion at December 31, 2012. Onex’ net of the $172 million of cash received by Onex; consolidated assets at December 31, 2013 increased from • the June 2013 sale of BSN SPORTS and the November December 31, 2012 due primarily to: 2013 sale of Caliber Collision by the ONCAP II Group, • the Onex Partners III Group’s acquisition in mid-June which reduced consolidated assets by approximately 2013 of Emerald Expositions, which increased consoli- $220 million, which is net of the $290 million of cash and dated assets by approximately $1.1 billion, net of cash escrow received by Onex; invested by Onex, the parent company; and • the sale by the Onex Partners II Group of its 50 percent • the inclusion of the investments held in the asset portfo- interest in RSI in February 2013, net of proceeds received lios of OCP CLO-3, which closed in March 2013, and OCP by Onex, the parent company; and CLO-4, which closed in October 2013. • the sales of a portion of shares of Allison Transmission in that company’s share repurchase and secondary offerings completed during the third and fourth quarters of 2013, net of proceeds received by Onex, the parent company. Asset Diversiﬁcation by Industry Segment CHART 1 (Unaudited) ($ millions) E L E C T R O N I C S A E R O S T R U C T U R E S H E A LT H C A R E (a) M A N U FA C T U R I N G S E R V I C E S I N S U R A N C E P R O V I D E R C U S T O M E R C A R E S E R V I C E S B U I L D I N G P R O D U C T S 5,371 5,155 4,978 4,898 4,903 4,808 4,194 3,971 3,707 O T H E R (b)(c) T O TA L 17,372 16,140 36,867 36,302 29,377 2,970 2,639 2,659 2,483 2,626 2,581 9,215 632 631 613 31 Dec ’13 31 Dec ’12 1 Jan ’12 31 Dec ’13 31 Dec ’12 1 Jan ’12 31 Dec ’13 31 Dec ’12 1 Jan ’12 31 Dec ’13 31 Dec ’12 1 Jan ’12 31 Dec ’13 31 Dec ’12 1 Jan ’12 31 Dec ’13 31 Dec ’12 1 Jan ’12 31 Dec ’13 31 Dec ’12 1 Jan ’12 31 Dec ’13 31 Dec ’12 1 Jan ’12 (a) January 1, 2012 includes the consolidated operations of CDI, which was sold in July 2012. (b) The assets of TMS International are included in the other segment for January 1, 2012 and December 31, 2012 as TMS International has been presented as a discontinued operation. (c) December 2013 other includes the consolidated operations of Tropicana Las Vegas, SGS International, USI, KraussMaffei, Meridian Aviation, Emerald Expositions, the operating companies of ONCAP II and ONCAP III, Flushing Town Center, OCP CLO-1 through OCP CLO-4, the warehouse facility for OCP CLO-5 and the parent company. In addition, other includes the investments in Allison Transmission, BBAM, Tomkins and certain Onex Real Estate Partners investments at fair value. December 2012 other includes the consolidated operations of Tropicana Las Vegas, SGS International, USI, KraussMaffei, the operating companies of ONCAP II and ONCAP III, Flushing Town Center, OCP CLO-1, OCP CLO-2 and the parent company. In addition, other includes the investments in Allison Transmission, BBAM, Hawker Beechcraft, RSI, Tomkins and certain Onex Real Estate investments at fair value. January 2012 other includes the consolidated operations of Tropicana Las Vegas, the operating companies of ONCAP II and ONCAP III, Flushing Town Center and the parent company. In addition, other includes the investments in Allison Transmission, Hawker Beechcraft, RSI, Tomkins and certain Onex Real Estate investments at fair value. 52 Onex Corporation December 31, 2013 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S The pie charts below show the percentage breakdown of total consolidated assets by industry segment at December 31, 2013 and 2012 and January 1, 2012. Segmented Total Consolidated Assets Breakdown Dec 2013 Dec 2012 Jan 2012 a. 7% b. 14% c. 10% d. 13% e. 2% f. 7% g. 47% a. 7% b. 15% c. 11% d. 13% e. 2% f. 7% g. 45% a. Electronics Manufacturing Services b. Aerostructures c. Healthcare d. Insurance Provider e. Customer Care Services f. Building Products g. Other(1) a. 10% b. 17% c. 14% d. 17% e. 2% f. 9% g. 31% (1) December 2013 other includes the consolidated operations of Tropicana Las Vegas, SGS International, USI, KraussMaffei, Meridian Aviation, Emerald Expositions, the operating companies of ONCAP II and ONCAP III, Flushing Town Center, OCP CLO-1 through OCP CLO-4, the warehouse facility for OCP CLO-5 and the parent company. In addition, other includes the investments in Allison Transmission, BBAM, Tomkins and certain Onex Real Estate Partners investments at fair value. December 2012 other includes the consolidated operations of Tropicana Las Vegas, SGS International, USI, KraussMaffei, the operating companies of ONCAP II and ONCAP III, Flushing Town Center, OCP CLO-1, OCP CLO-2 and the parent company. In addition, other includes the investments in Allison Transmission, BBAM, Hawker Beechcraft, RSI, Tomkins and certain Onex Real Estate investments at fair value. January 2012 other includes the consolidated operations of Tropicana Las Vegas, the operating companies of ONCAP II and ONCAP III, Flushing Town Center and the parent company. In addition, other includes the investments in Allison Transmission, Hawker Beechcraft, RSI, Tomkins and certain Onex Real Estate investments at fair value. Consolidated long-term debt, without recourse to Onex Corporation It has been Onex’ policy to preserve a ﬁnancially strong The ﬁnancing arrangements of each operating company typically contain certain restrictive covenants, which may include limitations or prohibitions on addi- parent company that has funds available for new acquisi- tional indebtedness, payment of cash dividends, redemp- tions and to support the growth of its operating compa- tion of capital, capital spending, making of investments, nies. This policy means that all debt ﬁnancing is within and acquisitions and sales of assets. The ﬁnancing arrange- the operating companies and each company is required to ments may also require the redemption of indebtedness in support its own debt without recourse to Onex Corporation the event of a change of control of the operating company. or other Onex operating companies. In addition, the operating companies that have outstand- ing debt must meet certain ﬁnancial covenants. Changes in business conditions relevant to an operating company, including those resulting from changes in ﬁnancial markets and economic conditions generally, may result in non-com- pliance with certain covenants by that operating company. Onex Corporation December 31, 2013 53 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Total consolidated long-term debt (consisting of long-term debt by industry segment. Consolidated long- the current and long-term portions of long-term debt, net term debt does not include the debt of operating busi- of ﬁnancing charges) was $12.0 billion at December 31, 2013 nesses that are included in investments in joint ventures compared to $10.5 billion at December 31, 2012 and $7.0 bil- and associates as the net investment in those businesses is lion at January 1, 2012. Table 20 summarizes consolidated accounted for at fair value and not consolidated. Consolidated Long-Term Debt of Operating Companies, Without Recourse to Onex Corporation TABLE 20 ($ millions) Electronics Manufacturing Services Aerostructures Healthcare Insurance Provider Customer Care Services Building Products Other (a) Current portion of long-term debt of operating companies As at December 31, 2013 As at December 31, 2012 $ – $ 55 1,128 3,009 255 740 661 6,177 11,970 (651) 1,133 2,540 258 725 547 5,212 10,470 (286) As at January 1, 2012 $ – 1,157 2,670 203 652 481 1,798 6,961 (482) Total $ 11,319 $ 10,184 $ 6,479 (a) December 31, 2013 other includes the consolidated operations of Tropicana Las Vegas, SGS International, USI, KraussMaffei, Meridian Aviation, Emerald Expositions, the operating companies of ONCAP II and ONCAP III, Flushing Town Center and OCP CLO-1 through OCP CLO-4. December 31, 2012 other includes the consolidated operations of Tropicana Las Vegas, SGS International, USI, KraussMaffei, the operating companies of ONCAP II and ONCAP III, Flushing Town Center, OCP CLO-1 and OCP CLO-2. January 1, 2012 other includes the consolidated operations of Tropicana Las Vegas, the operating companies of ONCAP II and ONCAP III and Flushing Town Center. Long-term debt of TMS International is included in the other segment for January 1, 2012 and December 31, 2012 as TMS International has been presented as a discontinued operation. Spirit AeroSystems (Aerostructures segment) In August 2013, Spirit AeroSystems amended its credit to maturity. The second-lien term loan bears interest at LIBOR (subject to a ﬂoor of 1 percent) plus a margin of agreement to suspend its existing debt covenant ratios until 8.5 percent and matures in December 2019. The offering price December 2014. This was to accommodate the $448 million was 98 percent of par to yield 10 percent to maturity. The of forward-loss charges recognized during the second quar- revolving facility bears interest at LIBOR (subject to a ﬂoor ter of 2013. The amendment requires the company to meet of 1 percent) plus a margin of 4 percent and matures in June certain minimum liquidity and borrowing base covenants 2018. As a result of the reﬁnancing, Carestream Health recog- while the existing debt covenant ratios are suspended. nized a charge in interest expense of $16 million in 2013. At No other amendments were made to Spirit AeroSystems’ December 31, 2013, the ﬁrst-lien term loan with $1.8 billion credit agreement. outstanding was recorded net of the unamortized discount of $25 million. At December 31, 2013, the second-lien term Carestream Health (Healthcare segment) In June 2013, Carestream Health entered into a new credit loan with $500 million outstanding was recorded net of the unamortized discount of $9 million. At December 31, 2013, facility. This new credit facility consists of a $1.85 billion no amounts were outstanding under the revolving facility. ﬁrst-lien term loan, a $500 million second-lien term loan The proceeds from the new credit facility, along and a $150 million revolving facility. The ﬁrst-lien term with cash on hand, were used to repay existing debt facili- loan bears interest at LIBOR (subject to a ﬂoor of 1 percent) ties, fund a $750 million distribution to shareholders and plus a margin of 4 percent and matures in June 2019. The pay fees and expenses associated with the transaction, as offering price was 98.5 percent of par to yield 5.4 percent discussed on page 24 of this MD&A. 54 Onex Corporation December 31, 2013 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Skilled Healthcare Group (Healthcare segment) During 2013, Skilled Healthcare Group entered into insured Preferred Stock of JELD-WEN in accordance with the terms of the purchase agreement. Onex’ share of the remain- loans from a department of the U.S. federal government. ing convertible promissory notes and accrued interest was The loans, in the amount of $88 million, bear interest at $18 million. After giving effect to the conversion, the Onex rates ranging from 3.39 percent to 4.55 percent, amortize Partners III Group’s as-converted economic ownership over 30 to 35 years and are secured by 10 of the company’s increased to 71 percent, of which Onex’ share was 17 percent. nursing facilities. At December 31, 2013, $87 million was In June 2013, JELD-WEN amended its senior outstanding under the insured loans. secured credit facility to increase the size of its term loan In December 2013, Skilled Healthcare Group en - to $100 million from $30 million. The term loan bears inter- tered into an additional credit facility. This new credit facil- est at either the Eurodollar rate plus a margin of 3.5 per- ity consists of a $62 million mortgage-backed term loan cent or a base rate plus a margin of 2.5 percent, requires and a $5 million asset-based revolving credit facility. The quarterly amortization payments beginning in December loans are secured by 10 of the company’s skilled nursing 2013 and matures in April 2016. Proceeds from the addition facilities, bear interest at a rate based on LIBOR (subject to to the term loan were primarily used to repay a portion of a ﬂoor of 0.75%) plus a margin of 5.95 percent and mature the outstanding balance under the revolving credit facil- in December 2016. At December 31, 2013, $67 million was ity. At December 31, 2013, $99 million and $70 million were outstanding under the new credit facility. outstanding under the term loan and revolving credit facil- The proceeds from the insured loans and new credit ity, respectively. The amount available under the revolving facility were used to repay a portion of the term loan under credit facility was reduced by $38 million of letters of credit the existing senior secured credit facility and pay fees and outstanding at December 31, 2013. expenses associated with the transactions. The Warranty Group (Insurance Provider segment) In December 2013, The Warranty Group redeemed $65 mil- Onex Credit Partners’ CLOs (Other segment) In March 2012, Onex Credit Partners established its ﬁrst CLO. A CLO is a leveraged structured vehicle that holds a lion of its redeemable preferred shares, including $34 mil- widely diversiﬁed collateral asset portfolio and is funded lion of accumulated and unpaid dividends. The Onex through the issuance of collateralized loan instruments in a Partners I Group and Onex Partners II Group received a series of tranches of secured notes and equity. As of Decem- total redemption of $63 million, of which Onex’ share was ber 31, 2013, Onex Credit Partners had established four CLOs. $20 million. Included in long-term debt at December 31, The CLOs were funded through the issuance of secured 2013 was $380 million of redeemable preferred shares, of notes and equity in private placement transactions in an which $369 million was held by the Onex Partners I Group aggregate amount of $1.9 billion, comprised of (i) $327 mil- and Onex Partners II Group. lion from OCP CLO-1, which closed in March 2012; (ii) $521 million from OCP CLO-2, which closed in November JELD-WEN (Building Products segment) During the four months ended April 2013, the Onex 2012; (iii) $512 million from OCP CLO-3, which closed in March 2013; and (iv) $514 million from OCP CLO-4, which Partners III Group received payments from JELD-WEN closed in October 2013. totalling $60 million, including accrued interest, to repay The secured notes bear interest at a rate of LIBOR a portion of its convertible promissory notes (all of which plus a margin and mature between March 2023 and were held by the Onex Partners III Group). Onex’ share of October 2025. The notes and equity of the Onex Credit the repayments was $15 million. In April 2013, the remain- Partners CLOs are designated at fair value through net ing convertible promissory notes and accrued interest of earnings upon initial recognition. At December 31, 2013, $72 million, all of which were held by the Onex Partners III the fair value of the notes and equity held by investors Group, were converted into additional Series A Convertible other than Onex was $1.7 billion. Onex Corporation December 31, 2013 55 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S PURE Canadian Gaming (Other segment) In March 2013, PURE Canadian Gaming, previously named SGS International (Other segment) In November 2013, SGS International amended the credit Casino ABS, amended its credit facility agreement to increase agreement governing its senior secured term loan and the amount of its term loan by $70 million (C$71 million) senior secured revolving credit facility to reduce the to $167 million (C$170 million). Borrowings under the term interest rate of its senior secured term loan. The amend- loan bear interest at a rate of LIBOR plus a margin of up ment reduces the rate at which borrowings bear interest to 4 percent, depending on the company’s leverage ratio. to LIBOR (subject to a ﬂoor of 1.00 percent) plus a margin The net proceeds from the amended credit facility were used of up to 3.25 percent or a base rate plus a margin of up to to repay $54 million (C$55 million) of subordinated debt 2.25 percent, depending on the company’s leverage ratio. that bore interest at 8.5 percent and to repurchase $14 mil- Previously, borrowings under the senior secured term loan lion (C$15 million) of subordinate notes held primarily bore interest at LIBOR (subject to a ﬂoor of 1.25 percent) by the ONCAP II Group and ONCAP III Group. Onex’ share plus a margin of up to 3.75 percent or a base rate plus of the repurchase of subordinated notes was $6 million a margin of up to 2.75 percent, depending on the com- (C$6 million). Emerald Expositions (Other segment) In June 2013, as part of the acquisition, Emerald Exposi- pany’s leverage ratio. At December 31, 2013, $385 million was outstanding under the senior secured term loan and no amounts were outstanding under the senior secured revolving credit facility. Based on the outstanding bal- tions entered into a credit facility consisting of a $430 mil- ances at December 31, 2013 and the current LIBOR rate, lion term loan and a $90 million revolving facility. The the amendment to the credit facility represents an annual offering price of the term loan was 99 percent of par to yield interest savings of approximately $2 million. 5.75 percent to maturity. Borrowings under the term loan bear interest at LIBOR (subject to a ﬂoor of 1.25 percent) plus a margin of 4.25 percent. The term loan requires quar- USI (Other segment) In December 2013, USI amended the credit agreement terly repayments, but can be repaid in whole or in part governing its senior secured term loan and senior secured without premium or penalty any time before maturity in revolving credit facility. The amendment reduces the rate at June 2020. The revolving facility bears interest at LIBOR which borrowings under the senior secured term loan bear plus a margin of 4.25 percent and matures in June 2018. interest to LIBOR plus a margin of 3.25 percent or a base At December 31, 2013, the term loan with $428 million out- rate plus a margin of 2.25 percent. In addition, the LIBOR standing was recorded net of the unamortized discount of ﬂoor was reduced to 1.00 percent for borrowings under the $4 million and no amounts were outstanding under the senior secured term loan. Previously, borrowings under revolving facility. the senior secured term loan bore interest at LIBOR plus a In January 2014, Emerald Expositions amended its margin of up to 4.00 percent or a base rate plus a margin credit facility to increase its term loan by $200 million to of up to 3.00 percent, depending on the company’s lever- partially fund its acquisition of GLM. The addition to the age ratio. Borrowings under the senior secured term loan term loan continues to bear interest at the same rate as the were previously subject to a LIBOR ﬂoor of 1.25 percent. At existing term loan and requires quarterly repayments until December 31, 2013, $1.0 billion was outstanding under the maturity in June 2020. senior secured term loan and no amounts were outstanding In June 2013, as part of the acquisition, Emerald under the senior secured revolving credit facility. The senior Expositions issued $200 million in aggregate principal secured term loan is recorded net of the unamortized dis- amount of 9 percent senior notes due in June 2021. Interest count of $5 million. Based on the outstanding balances at is payable semi-annually beginning in December 2013. The December 31, 2013 and the current LIBOR rate, the amend- senior notes may be redeemed by the company at any time ment to the credit facility represents an annual interest sav- at various premiums above face value. At December 31, ings of approximately $8 million. 2013, $200 million of the senior notes was outstanding. 56 Onex Corporation December 31, 2013 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Table 21 details the aggregate debt maturities as at December 31, 2013 for Onex’ consolidated operating companies and invest- ments in joint ventures and associates for each of the years up to 2019 and in total thereafter. As investments in joint ventures and associates are included in the table, the total amount is in excess of the reported consolidated debt. As the following table illustrates, most of the maturities occur in 2016 and thereafter. Debt Maturity Amounts by Year TABLE 21 ($ millions) 2014 2015 2016 2017 2018 2019 Thereafter Total Consolidated operating companies(a) $ 741 $ 329 $ 1,566 $ 1,155 $ 1,226 $ 3,766 $ 2,170 $ 10,953 Investments in joint ventures and associates 44 127 1,319 441 348 2,166 – 4,445 Total $ 785 $ 456 $ 2,885 $ 1,596 $ 1,574 $ 5,932 $ 2,170 $ 15,398 (a) Includes debt amounts of subsidiaries held by Onex, the parent company, and are gross of financing fees. Excludes preferred shares of The Warranty Group recorded as long- term debt under IFRS. Excludes debt of the Onex Credit Partners Collateralized Loan Obligations, which are collateralized by the asset portfolio held by each respective CLO. In January 2013, Tomkins (included in the table above in amendments included increasing the amount available investments in joint ventures and associates) amended under the revolving credit facility by $10 million to $410 mil- approximately $1.4 billion of the credit facility that governs lion, reducing the interest rate spread over LIBOR by its term loans to reduce the interest rate spread and LIBOR 100 basis points and extending the maturity of the revolving ﬂoor. Under the terms of the amendment, borrowings on credit facility from August 2016 to January 2019. the term loans currently bear interest at LIBOR (subject to a ﬂoor of 1 percent) plus a margin of 2.75 percent. In September 2013, Tomkins exercised a call option to redeem Warranty reserves and unearned premiums Warranty reserves and unearned premiums represent The $115 million of the $445 million outstanding senior secured Warranty Group’s gross warranty and property and casualty second-lien notes at a redemption price of 103 percent of reserves, as well as gross warranty unearned premiums. At the principal amount plus accrued and unpaid interest. December 31, 2013, gross warranty reserves and unearned In February 2013, Allison Transmission (included premiums (consisting of the current and non-current por- in the table above in investments in joint ventures and tions) totalled $3.1 billion, unchanged from the balance associates) repriced its Term Loan B-2 ($793 million due in at December 31, 2012. Gross warranty and property and August 2017), reducing the interest rate spread over LIBOR casualty reserves are approximately $530 million (2012 – by 50 basis points, from 3.5 percent to 3 percent. In connec- $616 million) of the total, which represent the estimated and tion with the repricing, Allison Transmission’s Term Loan incurred but not reported reserves on warranty contracts B-1 ($411 million due in August 2014) was reﬁnanced with and property and casualty insurance policies. The Warranty additional Term Loan B-2 borrowings, increasing the inter- Group has ceded 100 percent of the property and casualty est rate spread over LIBOR by 50 basis points, from 2.5 per- reserves component of $310 million (2012 – $383 million) to cent to 3 percent, and extending the maturing from August third-party reinsurers, which therefore has created a ceded 2014 to August 2017. In August 2013, Allison Transmission claims recoverable asset. The Warranty Group’s liability for repriced its Term Loan B-3 ($1.1 billion due in August 2019), gross warranty and property and casualty unearned pre- reducing the interest rate spread over LIBOR by 50 basis miums totalled $2.6 billion in 2013 (2012 – $2.5 billion). All points, from 3.25 percent to 2.75 percent. In December 2013, of the unearned premiums are related to warranty busi- Allison Transmission converted $650 million of its Term ness and represent the portion of the revenue received that Loan B-2 (due in August 2017) to Term Loan B-3 (due in has not yet been earned as revenue by The Warranty Group August 2019). As a result, the interest rate spread over LIBOR on extended warranty products sold through multiple dis- decreased by 25 basis points, from 3 percent to 2.75 per- tribution channels. Typically, there is a time delay between cent; however a 1 percent ﬂoor was added to LIBOR. Allison when the warranty contract starts to earn and the contract Transmission also amended its revolving credit facility. The effective date. The contracts generally commence earning Onex Corporation December 31, 2013 57 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S after the original manufacturer’s warranty on a product Partners III and others for their investment in the USI co- expires. Note 14 to the audited annual consolidated ﬁnancial investment; (iii) the limited partners of ONCAP II for their statements provides details of the gross warranty and prop- add-on investments in EnGlobe and Pinnacle Renewable erty and casualty reserves for loss and loss adjustment Energy Group; and (iv) the limited partners of the Onex expenses and warranty unearned premiums as at Decem- Partners and ONCAP Funds for management fees and part- ber 31, 2013 and 2012. nership expenses. Contributions totalled $1.3 billion for the year Limited Partners’ Interests Limited Partners’ Interests liability represents the fair ended December 31, 2012 primarily from (i) the limited partners of Onex Partners III for their investments in SGS value of limited partners’ invested capital in the Onex International, USI, BBAM and KraussMaffei, in addition Partners and ONCAP Funds. The Limited Partners’ to their add-on investments in JELD-WEN and Tropicana Interests liability is affected by the change in the fair value of the underlying investments in the Onex Partners and Las Vegas; (ii) the limited partners of ONCAP III for their investment in Bradshaw; and (iii) certain limited partners ONCAP Funds, the impact of the carried interest, as well as of Onex Partners III and others for their investment in the any contributions by and distributions to limited partners JELD-WEN co-investment. in those Funds. During 2013, the Limited Partners’ Interests liabil- At December 31, 2013, Limited Partners’ Interests ity was reduced by $1.5 billion of distributions primarily to liability totalled $7.0 billion compared to $6.2 billion at the limited partners of Onex Partners I, Onex Partners II, December 31, 2012. Onex Partners III and ONCAP II. Onex Partners I distributed $24 million to its limited partners for their share of the dis- Table 22 shows the change in Limited Partners’ Interests tribution from The Warranty Group. Onex Partners II distrib- from January 1, 2012 to December 31, 2013. uted $1.1 billion to its limited partners for their share of (i) Limited Partners’ Interests TABLE 22 ($ millions) Balance – January 1, 2012 Limited Partners’ Interests charge Contributions by limited partners Distributions paid to limited partners Balance – December 31, 2012(1) Limited Partners’ Interests charge Contributions by limited partners Distributions paid to limited partners Balance – December 31, 2013 the proceeds on the October 2013 sale of TMS International, as well as the dividends received during 2013; (ii) the pro- ceeds on the February 2013 sale of RSI; (iii) the dividends and return of capital from Carestream Health; (iv) the proceeds on the sales of a portion of the shares of Allison Transmission as well as the dividends received during 2013; and (v) the distribution from The Warranty Group. Onex $ 4,980 929 1,311 (977) Partners III distributed $63 million to its limited partners 6,243 1,855 401 (1,540) $ 6,959 and others primarily for their share of the principal repay- ments and accrued interest on the convertible promissory notes from JELD-WEN. Distributions of $307 million were paid to the limited partners of ONCAP II for their share of the proceeds on the June 2013 sale of BSN SPORTS and the November 2013 sale of Caliber Collision. (1) The current portion of the Limited Partners’ Interests was $35 million at During 2012, the Limited Partners’ Interests liabil- December 31, 2012 and was included in accounts payable and accrued liabilities. ity was reduced for $977 million of distributions primarily The Limited Partners’ Interests liability increased by $401 million for contributions made in 2013, which con- sisted primarily of amounts received from (i) the lim- ited partners of Onex Partners III for their investment in Emerald Expositions; (ii) certain limited partners of Onex to the limited partners of the Onex Partners Funds. Onex Partners I distributed $105 million to its limited partners for their share of (i) the June 2012 and December 2012 divi- dends and returns of capital from The Warranty Group; and (ii) the July 2012 sale of CDI. Onex Partners II distrib- uted $349 million to its limited partners and others for 58 Onex Corporation December 31, 2013 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S their share of (i) the proceeds on the sale of a portion of the shares of Allison Transmission as well as the dividends Investments by shareholders other than Onex Onex recorded an increase in consolidated equity of received during 2012; and (ii) the dividends and returns of $119 million during 2013 due to an increase in investments capital received from Carestream Health and The Warranty in operating companies by shareholders other than Onex Group. Onex Partners III distributed $506 million to its lim- ited partners and others for their share of (i) the December 2012 distribution from Tomkins; and (ii) partial principal repayments including accrued interest on the convertible promissory notes from JELD-WEN. and stock-based compensation provided to employees at the operating companies. Repurchase of shares of operating companies Onex recorded a decrease in equity of $109 million during At December 31, 2013, total carried interest netted 2013 due to the repurchase of shares of operating compa- against the Limited Partners’ Interests in Onex’ consoli- nies. The decrease was due primarily to Celestica for its dated balance sheet was $538 million, of which Onex’ share purchases of shares in the open market throughout the was $202 million. year and share repurchases by Carestream Health. The Limited Partners’ Interests charge recorded for 2013 is discussed in detail on page 42 of this MD&A. Non-controlling interests on sale of investments in Equity Total equity was $4.3 billion at December 31, 2013 com- operating companies Onex recorded a decrease in equity of $209 million during 2013 related primarily to the non-controlling interests of pared to $5.4 billion at December 31, 2012, after giving BSN SPORTS and TMS International, which were sold dur- effect to the impact of the adoption of new accounting ing 2013. policies, as described in note 1 to the audited annual con- solidated ﬁnancial statements. Table 23 provides a recon- ciliation of the change in equity from December 31, 2012 to December 31, 2013. Change in Equity TABLE 23 ($ millions) Balance – December 31, 2012 Change in accounting policies(1) Dividends declared Shares repurchased and cancelled Investments by shareholders other than Onex Distributions to non-controlling interests Repurchase of shares of operating companies Non-controlling interests on sale of investments in operating companies Net loss for the period Other comprehensive earnings for the period, net of tax $ 5,441 8 (15) (153) 119 (2) (109) (209) (813) 78 Equity as at December 31, 2013 $ 4,345 (1) Impact of the adoption of new accounting policies, as described in note 1 to the audited annual consolidated financial statements. Shares outstanding At January 31, 2014, Onex had 111,048,755 Subordinate Voting Shares issued and outstanding. Table 24 shows the change in the number of Subordinate Voting Shares out- standing from December 31, 2012 to January 31, 2014. Change in Subordinate Voting Shares Outstanding TABLE 24 Subordinate Voting Shares outstanding at December 31, 2012 114,496,438 Shares repurchased under Onex’ Normal Course Issuer Bids Shares repurchased in a private transaction Issue of shares – Dividend Reinvestment Plan Subordinate Voting Shares outstanding (2,457,600) (1,000,000) 9,917 at January 31, 2014 111,048,755 Onex also has 100,000 Multiple Voting Shares outstand- ing, which have a nominal paid-in value reﬂected in Onex’ audited annual consolidated ﬁnancial statements. Note 18 to the audited annual consolidated ﬁnancial statements pro- vides additional information on Onex’ share capital. There was no change in the Multiple Voting Shares outstanding during 2013. Onex Corporation December 31, 2013 59 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Cash dividends In May 2013, Onex increased its quarterly dividend by At December 31, 2013, Onex had 7,867,175 options outstanding to acquire Subordinate Voting Shares, of which 36 percent to C$0.0375 per Subordinate Voting Share begin- 2,907,441 options were vested and exercisable. Table 25 pro- ning in the second quarter of 2013. During 2013, Onex vides information on the activity during 2013 and 2012. declared dividends of C$0.14 per Subordinate Voting Share, which were paid quarterly at a rate of C$0.0275 per Change in Stock Options Outstanding Subordinate Voting Share for the ﬁrst quarter of 2013 and at a rate of C$0.0375 per Subordinate Voting Share for the remain- ing quarters of 2013. The dividends are payable on or about TABLE 25 January 31, April 30, July 31 and October 31 of each year. Outstanding at January 1, 2012 Dividend Reinvestment Plan Onex’ Dividend Reinvestment Plan enables Canadian Granted Surrendered Expired Number of Options 14,036,498 1,025,000 (1,488,620) (278,326) shareholders to reinvest cash dividends to acquire new Outstanding at December 31, 2012 13,294,552 Subordinate Voting Shares of Onex at a market-related price Granted at the time of reinvestment. During 2013, Onex issued 8,062 Surrendered Subordinate Voting Shares at an average cost of C$48.33 per Expired 3,402,000 (8,660,526) (168,851) Weighted Average Exercise Price C$ 19.47 C$ 40.26 C$ 18.32 C$ 30.87 C$ 20.96 C$ 56.92 C$ 16.34 C$ 33.51 Subordinate Voting Share, creating a cash savings of less than $1 million (less than C$1 million). During the period from January 1, 2012 to December 31, 2012, Onex issued 6,183 Subordinate Voting Shares at an average cost of C$37.94 per Subordinate Voting Share, creating a cash savings of less than $1 million (less than C$1 million). Stock Option Plan Onex, the parent company, has a Stock Option Plan in place that provides for options and/or share apprecia- tion rights to be granted to Onex directors, ofﬁcers and employees for the acquisition of Subordinate Voting Shares of Onex, the parent company, for a term not exceeding 10 years. The options vest equally over ﬁve years with the exception of 2,750,000 of the 3,402,000 options granted in December 2013, which vest at a rate of 15 percent per year during the ﬁrst four years and 40 percent in the ﬁfth year. The price of the options issued is no less than the market value of the Subordinate Voting Shares on the business day preceding the day of the grant. Vested options are not exer- cisable unless the average ﬁve-day market price of Onex Subordinate Voting Shares is at least 25 percent greater than the exercise price at the time of exercise. Outstanding at December 31, 2013 7,867,175 C$ 41.34 During 2013, 8,660,526 options were surrendered at a weighted average exercise price of C$16.34 for aggregate cash consideration of $292 million (C$299 million) and 168,851 options expired. In addition, during 2013, 3,402,000 options were issued at an exercise price of C$56.92 per share, all of which were issued during the fourth quarter of 2013. In January 2014, Onex issued 3,950,000 options to acquire Subordinate Voting Shares with an exercise price of C$57.45 per share. The options vest at a rate of 15 percent per year during the ﬁrst four years and 40 percent in the ﬁfth year. During 2012, 1,488,620 options were surrendered at a weighted average exercise price of C$18.32 for aggre- gate cash consideration of $30 million (C$30 million) and 278,326 options expired. In addition, during 2012, 1,025,000 options were issued, of which 50,000 options were issued in the third quarter at an exercise price of C$38.50 and 975,000 options were issued during the fourth quarter at an exercise price of C$40.35. 60 Onex Corporation December 31, 2013 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Normal Course Issuer Bids Onex had Normal Course Issuer Bids (the “Bids”) in place and April 15, 2014. A copy of the Notice of Intention to make the Normal Course Issuer Bid ﬁled with the Toronto Stock during 2013 that enable it to repurchase up to 10 percent Exchange is available at no charge to shareholders by con- of its public ﬂoat of Subordinate Voting Shares during tacting Onex. the period of the relevant Bid. Onex believes that it is Under the previous NCIB that expired on advantageous to Onex and its shareholders to continue April 15, 2013, Onex repurchased 1,526,865 Subordinate to repurchase Onex’ Subordinate Voting Shares from time Voting Shares at a total cost of $65 million (C$65 million), to time when the Subordinate Voting Shares are trading at or an average purchase price of C$42.35 per share. For the prices that reﬂect a signiﬁcant discount to their value as year ended December 31, 2013, Onex repurchased 2,060,400 perceived by Onex. Subordinate Voting Shares under its Normal Course Issuer On April 16, 2013, Onex renewed its Normal Bids for a total cost of $100 million (C$102 million), or an Course Issuer Bid (“NCIB”) following the expiry of its previ- average cost per share of C$49.53. In addition, Onex repur- ous NCIB on April 15, 2013. Under the new NCIB, Onex is chased 397,200 Subordinate Voting Shares under its Normal permitted to purchase up to 10 percent of its public ﬂoat of Course Issuer Bid in January 2014 for a total cost of $21 mil- Subordinate Voting Shares, or 8,874,849 Subordinate Voting lion (C$23 million), or an average cost per share of C$57.01. Shares. Onex may purchase up to 32,914 Subordinate Under similar Bids, Onex repurchased 627,061 Subor dinate Voting Shares during any trading day, being 25 percent Voting Shares at a total cost of $24 million (C$24 million) of its average daily trading volume for the six-month during 2012. period ended March 31, 2013. Onex may also purchase In addition, Onex repurchased 1,000,000 of its Subordinate Voting Shares from time to time under the Sub ordinate Voting Shares in a private transaction for Toronto Stock Exchange’s block purchase exemption, if a cash cost of C$56.50 per Subordinate Voting Share or available, under the new NCIB. The new NCIB commenced $53 million (C$57 million) in November 2013, which repre- on April 16, 2013 and will conclude on the earlier of the date sented a slight discount to the trading price of Onex shares on which purchases under the NCIB have been completed at that date. The shares were held indirectly by Mr. Gerald W. Schwartz, who is Onex’ controlling shareholder. Included in table 26 below is a summary of Onex’ repurchases of Subordinate Voting Shares under its NCIB for the last 10 years. TABLE 26 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013(1) Total (1) Includes 1,000,000 Subordinate Voting Shares repurchased in a private transaction. Shares Repurchased Total Cost of Shares Repurchased (in C$ millions) Average Share Price (in C$ per share) 9,143,100 939,200 9,176,300 3,357,000 3,481,381 1,784,600 2,040,750 3,165,296 627,061 3,060,400 C$ 150 C$ 16.37 18 203 113 101 41 52 105 24 159 18.93 22.17 33.81 28.89 23.04 25.44 33.27 38.59 51.81 36,775,088 C$ 966 C$ 26.25 Onex Corporation December 31, 2013 61 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Deferred Share Unit Plans During the second quarter of 2013, 30,537 Deferred Share institution to hedge Onex’ exposure to changes in the mar- ket value of its Subordinate Voting Shares associated with a Units (“DSUs”) were issued to directors having an aggre- portion of the outstanding Director DSUs. gate value, at the date of grant, of $2 million in lieu of that At December 31, 2013, there were 467,230 Man- amount of cash compensation for directors’ fees (2012 – age ment Deferred Share Units (“MDSUs”) outstanding. 40,000 DSUs at a cost of approximately $2 million). During In January 2014, Onex issued 97,704 MDSUs to manage- 2013, an additional 11,969 DSUs (2012 – 14,366 DSUs) were ment having an aggregate value, at the date of grant, of issued to directors in lieu of cash directors’ fees and for divi- $5 million (C$6 million) in lieu of that amount of cash com- dends on outstanding DSUs. There were no DSUs redeemed pensation for Onex’ 2013 ﬁscal year. Forward agreements during 2013 or 2012. At December 31, 2013, there were have been entered into to hedge Onex’ entire exposure to 543,260 Director DSUs outstanding. In 2012, Onex entered changes in the value of the MDSUs. into a forward agreement with a counterparty ﬁnancial MDSUs and DSUs must be held until leaving the employment of Onex or retirement from the Board. Table 27 reconciles the changes in the DSUs and MDSUs outstanding at December 31, 2013 from January 1, 2012. Change in Outstanding Deferred Share Units TABLE 27 Outstanding at January 1, 2012 Granted Exercised Director DSU Plan Management DSU Plan Number of DSUs Weighted Average Price Number of MDSUs Weighted Average Price 446,388 40,000 – C$ 38.53 – Additional units issued in lieu of compensation and cash dividends 14,366 C$ 39.08 Outstanding at December 31, 2012 Granted Additional units issued in lieu of compensation and cash dividends Outstanding at December 31, 2013 Hedged with a counterparty financial institution Outstanding at December 31, 2013 – Unhedged C$ 49.94 C$ 51.66 500,754 30,537 11,969 543,260 (250,829) 292,431 – C$ 40.11 C$ 37.83 – C$ 49.48 443,139 – (113,534) 136,399 466,004 – 1,226 467,230 (467,230) – Management of capital Onex considers the capital it manages to be the amounts it Accordingly, maintaining adequate liquidity at the parent company is important; has in cash and cash equivalents and near-cash investments, • achieve an appropriate return on capital invested com- and the investments made by it in the operating businesses, mensurate with the level of assumed risk; Onex Real Estate Partners and Onex Credit Partners. Onex • build the long-term value of its operating businesses; also manages the capital from other investors invested in • control the risk associated with capital invested in any the Onex Partners, ONCAP and Onex Credit Partners Funds. particular business or activity. All debt ﬁnancing is within Onex’ objectives in managing capital are to: the operating businesses and each company is required • preserve a ﬁnancially strong parent company with appro- to support its own debt. Onex Corporation does not guar- priate liquidity and no, or a limited amount of, debt so antee the debt of the operating businesses and there are that funds are available to pursue new acquisitions and no cross-guarantees of debt between the operating busi- growth opportunities, as well as support expansion of nesses; and its existing businesses. Onex does not generally have the ability to draw cash from its operating businesses. 62 Onex Corporation December 31, 2013 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S • have appropriate levels of committed limited partners’ 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 capital available to invest along with Onex’ capital. This allows Onex to respond quickly to opportunities and This section should be read in conjunction with the pursue acquisitions of businesses of a size it could not audited annual consolidated statements of cash ﬂows and achieve using only its own capital. The management of the corresponding notes thereto. Table 28 summarizes the limited partners’ capital also provides management fees major consolidated cash ﬂow components for the years to Onex and the ability to enhance Onex’ returns by earn- ended December 31, 2013 and 2012. ing a carried interest on the proﬁts of limited partners. Major Cash Flow Components At December 31, 2013, Onex, the parent company, had approximately $1.4 billion of cash on hand and $343 million TABLE 28 ($ millions) 2013 2012 of near-cash items at market value. Cash from operating activities $ 1,586 $ 2,043 Onex, the parent company, has a conservative Cash from (used in) financing activities $ (858) $ 175 cash management policy that limits its cash investments Cash used in investing activities $ (192) $ (2,015) to short-term high-rated money market instruments. This Consolidated cash and cash equivalents held policy is driven toward maintaining liquidity and preserv- by continuing operations $ 3,191 $ 2,629 ing principal in all money market investments. At December 31, 2013, Onex had access to $843 mil- lion of uncalled committed limited partners’ capital for Cash from operating activities Table 29 provides a breakdown of cash from operating acquisitions through Onex Partners III ($479 million) and activities by cash generated from operations and changes ONCAP III (C$387 million). In addition, Onex raised approxi- in non-cash working capital items, other operating activi- mately $1.9 billion of limited partners’ committed capi- ties and warranty reserves and premiums for the years tal for Onex Partners IV during the fourth quarter of 2013. ended December 31, 2013 and 2012. In February 2014, Onex raised approximately $600 million of additional limited partners’ committed capital for Onex Components of Cash from Operating Activities Partners IV toward a target of $3.3 billion. The strategy for risk management of capital did not change in 2013. TABLE 29 ($ millions) 2013 2012 Cash generated from operations $ 934 $ 1,584 Non-controlling interests Non-controlling interests in equity in Onex’ consolidated Changes in non-cash working capital items: Accounts receivable balance sheets as at December 31, 2013 primarily represent Inventories the ownership interests of shareholders, other than Onex Other current assets and its limited partners in its Funds, in Onex’ controlled Accounts payable, accrued liabilities (123) 650 19 (39) 371 18 operating companies. The non-controlling interests balance and other current liabilities 31 33 at December 31, 2013 decreased to $3.2 billion from $3.8 bil- lion at December 31, 2012. The decrease was primarily due to the non-controlling interests’ share of the net loss during 2013 of $459 million and a decrease of $209 million primar- ily due to the sales of BSN SPORTS and TMS International. Increase in cash and cash equivalents due to changes in non-cash working capital items 577 383 Decrease in other operating activities and change in warranty reserves and premiums (42) (74) The largest contributors to the non-controlling interests Cash flows from operating activities of balance come from ownership interests of public share- holders of Celestica and Spirit AeroSystems. Additional information is provided about the non-controlling interests associated with Celestica and Spirit AeroSystems in note 19 to the audited annual consolidated ﬁnancial statements. discontinued operations 117 150 Cash from Operating Activities $ 1,586 $ 2,043 Onex Corporation December 31, 2013 63 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Cash generated from operations includes net earnings Partially offsetting these were: (loss) before interest and income taxes, adjusted for cash • $1.3 billion of net new long-term debt primarily from taxes paid and items not affecting cash and cash equiva- the note issuance of OCP CLO-3 and OCP CLO-4 and lents. Included in determining cash generated from oper- the debt raised by Carestream Health during the second ations during 2013 are payments totalling $292 million quarter of 2013; and by Onex, the parent company, for the exercise of stock • $401 million of cash received primarily from the lim- options, as discussed on page 60 of this MD&A. ited partners of Onex Partners III for their investment in The signiﬁcant changes in non-cash working capital items Partners III and others for their co-investment in USI and for the year ended December 31, 2013 were: the limited partners of the Onex Partners and ONCAP • a $123 million increase in accounts receivable primarily Funds for management fees and partnership expenses. Emerald Expositions, certain limited partners of Onex from Spirit AeroSystems due to higher revenues; and • a $650 million decrease in inventories primarily at Spirit For the year ended December 31, 2012, cash from ﬁnancing AeroSys tems due to the forward-loss charges recorded activities was $175 million. Included in cash from ﬁnancing during 2013, and at Flushing Town Center, partially offset activities for 2012 were: by an increase in inventory at Celestica. • Approximately $1.2 billion of cash received from the lim- ited partners of the Onex Partners III Group primarily for Cash from operating activities also included $117 million of their investments in SGS International, USI, BBAM and cash ﬂows from operating activities of discontinued opera- KraussMaffei in addition to their add-on investments in tions, which represents the cash from operating activities JELD-WEN and Tropicana Las Vegas; of TMS International up to the date of its disposition. • $75 million of cash received from the limited partners of the ONCAP III Group for their investment in Bradshaw; For the year ended December 31, 2012, the decrease in and inventory at (i) Spirit AeroSystems due primarily to the • $825 million of net new long-term debt primarily from forward-loss charges recorded by the company; and (ii) the note issuances of OCP CLO-1 and OCP CLO-2. Celestica due primarily to the disengagement from a signiﬁcant consumer customer contributed signiﬁcantly to Partially offsetting these was cash used in ﬁnancing activi- the changes in non-cash working capital items. ties, which included (i) $977 million of distributions to the limited partners of the Onex Partners Funds (as discussed Cash from (used in) ﬁnancing activities Cash used in ﬁnancing activities was $858 million for 2013 under Limited Partners’ Interests on page 58 of this MD&A); (ii) $445 million of cash interest paid; (iii) $315 million of compared to cash from ﬁnancing activities of $175 million cash used primarily by Celestica for purchases of its shares for 2012. Cash used in ﬁnancing activities for 2013 included: in the open market; and (iv) $117 million of cash used for • $1.5 billion of distributions primarily to the limited part- ﬁnancing activities of discontinued operations. ners of Onex Partners II and ONCAP II (as discussed under Limited Partners’ Interests on page 58 of this MD&A); Cash used in investing activities Cash used in investing activities totalled $192 million for • $697 million of cash interest paid; 2013 compared to $2.0 billion during 2012. Cash used in • $153 million of cash used by Onex, the parent company, investing activities consisted primarily of (i) net purchases for purchases of its shares; and of investments and securities of $1.1 billion mainly by • $109 million of cash used primarily by Carestream Health the OCP CLOs and The Warranty Group; (ii) $513 million and Celestica for the repurchase of share capital. used to fund acquisitions, of which $338 million related to the Onex Partners III Group’s acquisition of Emerald Expositions as outlined in note 2 to the audited annual con- solidated ﬁnancial statements; and (iii) $115 million of cash used for investing activities of discontinued operations. 64 Onex Corporation December 31, 2013 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Partially offsetting these were: During 2013, Celestica invested $53 million in property, • $1.1 billion received on the sales of TMS International plant and equipment primarily to enhance its manufactur- ($410 million), BSN SPORTS ($224 million) and Caliber ing capabilities in various geographies and to support new Col li sion ($426 million); customer programs. • $908 million received on the sales of RSI ($323 mil- Spirit AeroSystems invested $252 million in prop- lion) and a portion of the shares of Allison Transmission erty, plant and equipment, related primarily to purchases of ($585 million); and tooling and machinery and equipment for the development • $290 million of proceeds on the sale of property, plant programs and to support increasing production rates for and equipment consisting primarily of proceeds on the several Boeing programs, as well as for repair costs incurred sale of two aircraft by Meridian Aviation. after the severe weather event, as discussed on page 41 of this MD&A. Cash used in investing activities totalled $2.0 billion for JELD-WEN invested $80 million in property, plant 2012 and consisted primarily of (i) $1.4 billion used to fund and equipment, including expenditures related to the con- acquisitions primarily completed by Onex Partners III, struction of a new ﬁbre plant. as outlined in note 2 to the audited annual consolidated Cash used for the purchase of property, plant and ﬁnancial statements; (ii) net purchases of investments and equipment in the other segment consisted primarily of cash securities of $785 million mainly by the OCP CLOs and The used by Meridian Aviation to purchase two aircraft, which Warranty Group; and (iii) $165 million for the investment in were subsequently sold during 2013. BBAM by Onex Partners III. This was partially offset by cash proceeds of $1.1 billion received on the sale of CDI ($71 mil- lion), the sale of shares of Allison Transmission ($326 mil- Consolidated cash resources At December 31, 2013, consolidated cash held by continuing lion) and the distribution paid by Tomkins ($663 million). operations increased from December 31, 2012 to $3.2 billion In addition, there was $835 million of cash used from $2.7 billion. The major components at December 31, for purchases of property, plant and equipment by Onex’ 2013 were: operating companies (2012 – $607 million). Table 30 details • approximately $1.4 billion of cash on hand at Onex, the the property, plant and equipment expenditures by indus- parent company; and try segment. • approximately $545 million of cash at Celestica. Cash Used for Property, Plant and Equipment Onex believes that maintaining a strong ﬁnancial position at the parent company with appropriate liquidity enables the Company to pursue new opportunities to create long-term value and support Onex’ existing operating businesses. In addition to the approximate $1.4 billion of cash at the par- ent company at December 31, 2013, there was $343 million of near-cash items that are invested in a segregated unlever- aged fund managed by Onex Credit Partners. Purchases by Industry Segment TABLE 30 ($ millions) Electronics Manufacturing Services Aerostructures Healthcare Insurance Provider Customer Care Services Building Products Other(a) Total 2013 $ 53 252 93 2 28 80 327 2012 $ 101 222 95 3 25 81 80 $ 835 $ 607 (a) 2013 other includes Tropicana Las Vegas, SGS International, USI, KraussMaffei, Emerald Expositions, Meridian Aviation, the operating companies of ONCAP II and ONCAP III and Flushing Town Center. 2012 other includes Tropicana Las Vegas, SGS International, USI, KraussMaffei, the operating companies of ONCAP II and ONCAP III and Flushing Town Center. Onex Corporation December 31, 2013 65 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Table 31 provides a reconciliation of the change in cash Recent events Emerald Expositions In January 2014, Emerald Expositions completed the acquisi- tion of George Little Management, LLC (“GLM”), an opera- tor of business-to-business tradeshows in the United States. In conjunction with this acquisition, the Onex Partners III Group invested an additional $140 million in Emerald Expo- sitions, of which Onex’ share was $34 million. Onex Partners IV In February 2014, Onex raised approximately $600 mil- lion of additional limited partners’ committed capital for Onex Partners IV. To date, Onex has raised $2.5 billion of capital commitments from limited partners for Onex Part- ners IV. Onex is targeting $3.3 billion in limited partners’ capital commitments toward a $4.5 billion fund size, including Onex’ $1.2 billion commitment. Onex expects to complete fundraising in 2014. at Onex, the parent company, from December 31, 2012 to December 31, 2013. Change in Cash at Onex, the Parent Company TABLE 31 (unaudited) ($ millions) Cash on hand at December 31, 2012 $ 813 Carestream Health distribution received Sale of shares of Allison Transmission and dividends Sale of TMS International and dividends Sale of Caliber Collision Proceeds received on the sale of interest in RSI Sale of BSN SPORTS USI sale to co-investors The Warranty Group distribution received JELD-WEN note repayment including accrued interest PURE Canadian Gaming debt repayment BBAM distribution received Investment in Emerald Expositions Net Onex Credit Partners activity, including warehouse facility associated with OCP CLO-5 Investments in Meridian Aviation Options exercised for cash Onex share repurchases Other, net, including dividends, management fees and operating costs 303 203 174 173 130 98 84 20 15 6 6 (85 ) (50) (14) (292) (153) (33 ) Cash on hand at December 31, 2013 $ 1,398 A D D I T I O N A L U S E S O F C A S H Contractual obligations Table 32 presents the contractual obligations of Onex and its operating companies as at December 31, 2013: Contractual Obligations TABLE 32 ($ millions) Total Less than 1 year 1–3 years 4–5 years After 5 years Payments Due by Period Long-term debt, without recourse to Onex(a) $ 12,183 $ 651 $ 1,895 $ 2,217 $ 7,420 Finance and operating leases Purchase obligations 1,775 725 371 433 523 271 293 21 588 – Total contractual obligations $ 14,683 $ 1,455 $ 2,689 $ 2,531 $ 8,008 (a) Excludes debt amounts of subsidiaries held by Onex, the parent company, and debt of investments in joint ventures and associates. Amounts are gross of financing fees. 66 Onex Corporation December 31, 2013 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S In addition to the obligations in table 32, certain of Onex’ consolidated operating companies have funding obligations Onex’ commitment to the Funds Onex, the parent company, is the largest limited partner related to their deﬁned beneﬁt pension plans. The operating in each of the Onex Partners and ONCAP Funds. Table 33 companies estimate that $37 million of contributions will presents the commitment and uncalled committed capi- be required in 2014 for their deﬁned beneﬁt pension plans. tal of Onex, the parent company, in these Funds at Decem- Onex, the parent company, does not provide pension, other ber 31, 2013: retirement or post-retirement beneﬁts to its employees or to employees of any of the operating companies. In addition, Onex, the parent company, does not have any obligations TABLE 33 ($ millions) Fund Size and has not made any guarantees with respect to the plans of the operating companies. A breakdown of long-term debt by industry seg- ment is provided in table 20 on page 54 of this MD&A. In addition, notes 12 and 13 to the audited annual consolidated ﬁnancial statements provide further disclosure on long- term debt and lease commitments. Our consolidated oper- ating companies currently believe they have adequate cash from operations, cash on hand and borrowings available to Onex Partners I Onex Partners II Onex Partners III Onex Partners IV(b) ONCAP II ONCAP III(c) $ 1,655 $ 3,450 $ 4,700 $ 3,136 C$ 574 C$ 800 Onex’ Commitment $ 400 $ 1,407 $ 1,200 $ 1,200 Onex’ Uncalled Committed Capital (a) $ – $ 158 $ 151 $ 1,200 C$ 252 C$ 2 C$ 252 C$ 163 (a) Onex’ uncalled committed capital is calculated based on the assumption that all of the remaining limited partners’ commitments are invested. (b) Represents committed capital raised during 2013 for Onex Partners IV them to meet anticipated debt service requirements, capital including the minimum committed amounts from the management of Onex. expenditures and working capital needs. There is, however, no assurance that our consolidated operating companies will generate sufﬁcient cash ﬂow from operations or that future borrowings will be available to enable them to grow their business, service all indebtedness or make anticipated capital expenditures. Commitments At December 31, 2013, Onex and its operating companies had total commitments of $672 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 $337 million of the total commit- ments in 2013 were for contingent liabilities in the form of letters of credit, letters of guarantee, and surety and per- formance bonds provided by certain operating companies to various third parties, including bank guarantees. These guarantees are without recourse to Onex. The remainder of the commitments of $335 mil- lion relate to the acquisition of GLM completed by Emerald Expositions in January 2014. The $335 million purchase price was funded by debt ﬁnancing at Emerald Expositions and $140 million invested in Emerald Expositions by the Onex Partners III Group. In February 2014, Onex raised approximately $600 million of additional limited partners’ committed capital for Onex Partners IV. (c) Onex’ commitment has been reduced for the annual commitment for Onex management’s participation. Pension plans Seven (2012 – eight) of Onex’ consolidated operating com- panies have deﬁned beneﬁt pension plans, of which the more signiﬁcant plans are those of Spirit AeroSys tems, Celestica, Carestream Health, JELD-WEN and KraussMaffei. At December 31, 2013, the deﬁned beneﬁt pension plans of the Onex consolidated operating companies had combined assets of $2.2 billion (2012 – $2.2 billion) against combined obligations of $2.3 billion (2012 – $2.5 billion), with a net deﬁcit of $33 million (2012 – $313 million). A surplus in any plan is not available to offset deﬁciencies in the others. Onex, the parent company, does not have a pen- sion plan and has no obligation to the pension plans of its operating companies. Spirit AeroSystems has several U.S. deﬁned beneﬁt pension plans that were frozen at the date of Onex’ acquisi- tion of Spirit AeroSystems, with no future service beneﬁts being earned in these plans. Pension assets are placed in a trust for the purpose of providing liquidity sufﬁcient to pay beneﬁt obligations. Therefore, required and discretion- ary contributions to those plans are not expected in 2014. Onex Corporation December 31, 2013 67 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S In addition, Spirit AeroSystems has a U.K. deﬁned beneﬁt A D D I T I O N A L S O U R C E S O F C A S H pension plan that is fully funded. Effective December 31, 2013, the U.K. pension plan beneﬁts were frozen due to an amendment which closed the plan, resulting in a Private equity Funds Onex’ private equity Funds are an additional source of net curtailment gain of $13 million. Spirit AeroSystems’ cash. They provide capital for Onex-sponsored acquisitions deﬁned beneﬁt pension plans remained overfunded by that are not related to Onex’ operating companies that $250 million (2012 – $78 million) at December 31, 2013. existed prior to the formation of the Funds. The Funds pro- At December 31, 2013, Celestica’s deﬁned beneﬁt vide a substantial pool of committed capital, which enables pension plans were overfunded on a net basis by $15 mil- Onex to be ﬂexible and timely in responding to investment lion (2012 – $14 million). Celestica’s pension funding policy opportunities. is to contribute amounts sufﬁcient to meet minimum local statutory funding requirements that are based on actu- Table 34 provides a summary of the remaining commit- arial calculations. The company may make additional dis- ments available from limited partners for future Onex- cretionary contributions based on actuarial assessments. sponsored acquisitions in the Onex Partners and ONCAP Celestica estimates $17 million of contributions for its Funds as of December 31, 2013. deﬁned beneﬁt pension plans in 2014 based on the most recent actuarial valuations. Private Equity Funds’ Uncalled Limited Partners’ Carestream Health’s deﬁned beneﬁt pension plans Committed Capital were in an underfunded position of $65 million (2012 – $72 million) at December 31, 2013. The company’s pension TABLE 34 ($ millions) plan assets are broadly diversiﬁed in equity and debt funds, as well as other investments. Carestream Health expects to contribute approximately $3 million in 2014 to its deﬁned beneﬁt pension plans, and it does not believe that future pension contributions will materially impact its liquidity. At December 31, 2013, JELD-WEN’s deﬁned ben- e ﬁt pension plans were in an underfunded position of Onex Partners I Onex Partners II Onex Partners III Onex Partners IV(b) ONCAP II ONCAP III(c) Available Uncalled Committed Capital (excluding Onex) $ 63 $ 242 (a) $ 479 (a) $ 1,936 (a) C$ 2 (a) C$ 387 (a) $112 million (2012 – $206 million). The company’s pen- (a) Includes committed amounts from the management of Onex and ONCAP sion plan assets are broadly diversiﬁed in equity and debt securities, as well as other investments. JELD-WEN esti- and directors, calculated based on the assumption that all of the remaining limited partners’ commitments are invested. (b) Includes limited partners’ committed capital raised during 2013 for mates that $13 million of contributions will be required Onex Partners IV. In February 2014, Onex raised approximately $600 million for its deﬁned beneﬁt pension plans in 2014. KraussMaffei grants pensions to the majority of its employees in Germany and to certain employees in Switzerland and the United Kingdom. At December 31, 2013, KraussMaffei’s deﬁned beneﬁt pension plans had a net pension liability of $109 million (2012 – $103 million). KraussMaffei expects to contribute approximately $3 mil- lion to its deﬁned beneﬁt pension plans in 2014. of additional limited partners’ committed capital for Onex Partners IV. (c) Onex’ commitment has been reduced for the annual commitment for Onex management’s participation. The committed amounts by the limited partners are not included in Onex’ consolidated cash and will be funded as capital is called. 68 Onex Corporation December 31, 2013 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S During 2003, Onex raised its ﬁrst large-cap Fund, Changes to Onex’ commitment do not alter Onex’ own- Onex Partners I, with $1.655 billion of committed capital, ership of businesses acquired prior to the effective dates including committed capital from Onex of $400 million. of the changes. Onex Partners III has completed nine Since 2003, Onex Partners I has completed 10 investments investments or acquisitions, investing $2.8 billion of lim- or acquisitions with $1.5 billion of equity, including Onex, ited partners’ capital in those transactions. At December 31, being invested. While Onex Partners I has concluded its 2013, Onex Partners III had $479 million of uncalled limited investment period, the Fund still has uncalled limited part- partners’ capital. ners’ committed capital of $63 million for future funding of During 2013, Onex commenced fundraising for management fees. In January 2014, the date of termination its fourth large-cap private equity fund, Onex Partners IV, for Onex Partners I was extended to February 2015. Onex which will provide capital for new Onex-sponsored acqui- Partners I may be further extended with the approval of a sitions. By December 31, 2013, Onex Partners IV had majority in interest of the limited partners for up to two $3.1 billion of committed capital, including committed capi- additional one-year periods. tal from Onex of $1.2 billion. In February 2014, Onex raised During 2006, Onex raised its second large-cap approximately $600 million of additional limited partners’ Fund, Onex Partners II, a $3.45 billion private equity fund, committed capital for Onex Partners IV. Onex is targeting including committed capital of $1.4 billion from Onex. Onex $4.5 billion of committed capital for Onex Partners IV and Partners II has completed seven investments or acquisitions, expects the ﬁnal closing to occur during 2014. investing $2.9 billion of equity, including Onex, in those During 2006, ONCAP raised its second mid-market transactions. At December 31, 2013, Onex Partners II has Fund, ONCAP II, a C$574 million private equity fund includ- uncalled limited partners’ committed capital of $242 mil- ing a commitment of C$252 million from Onex. ONCAP II lion, which is largely reserved for possible future funding for has completed eight acquisitions, investing C$262 mil- any of Onex Partners II’s existing businesses and for man- lion of limited partners’ capital. At December 31, 2013, this agement fees. Fund had uncalled committed limited partners’ capital of During 2009, Onex completed fundraising for C$2 million. its third large-cap private equity fund, Onex Partners III, During 2011, ONCAP completed fundraising for a $4.7 billion private equity fund. Onex’ initial commit- its third mid-market private equity fund, ONCAP III, a ment to the fund was $1.0 billion, which could be either C$800 million private equity fund with total limited part- increased or decreased by $500 million with six months’ ners’ capital commitments of C$520 million, excluding notice to the limited partners. On December 31, 2008, Onex commitments from management of Onex and ONCAP. notiﬁed its limited partners that it would be reducing its ONCAP III has completed four investments or acquisi- commitment to the Fund to approximately $500 million tions, investing C$179 million of limited partners’ capital. At effective July 1, 2009. Since July 2009, Onex has increased its December 31, 2013, this Fund has uncalled committed lim- commitment as follows: ited partners’ capital of C$387 million available for future • to $800 million for new acquisitions completed after acquisitions and for management fees. June 16, 2010 and up to May 14, 2012; and • to $1.2 billion for new investments completed after May 14, 2012. 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 manage- ment’s interests with those of Onex’ shareholders and the limited partner investors in Onex’ Funds. Onex Corporation December 31, 2013 69 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S The various investment programs are described in detail in the following pages and certain key aspects are summarized in table 35. Investment Programs TABLE 35 Management Investment Plan Minimum Stock Price Appreciation/ Return Threshold 15% Compounded Return Carried Interest Participation – Onex Partners 8% Compounded Return Carried Interest Participation – ONCAP 8% Compounded Return Stock Option Plan 25% Price Appreciation Associated Investment by Management • personal “at risk” equity investment required • 25% of gross proceeds on the 7.5% gain allocated under the MIP to be reinvested in Subordinate Voting Shares or Management DSUs until 1,000,000 shares and DSUs owned • corresponds to participation in minimum 1% “at risk” Onex management team equity investment for Onex Partners I through III and 2% “at risk” Onex management team equity investment for Onex Partners IV • 25% of gross proceeds to be reinvested in Subordinate Voting Shares or Management DSUs until 1,000,000 shares and DSUs owned Vesting Vests equally over 6 years Onex Partners I Fully vested Onex Partners II Fully vested Onex Partners III Will be fully vested in December 2014 Onex Partners IV Will vest equally over 6 years from the due date of the first capital call for Onex Partners IV ONCAP II Fully vested • corresponds to participation in minimum 1% “at risk” ONCAP management team equity investment ONCAP III Vests equally over 5 years ending in July 2016 Vests equally over 5 years, except for 2,750,000 options which vest at a rate of 15 percent per year during the first 4 years and 40 percent in the 5th year • satisfaction of exercise price (market value at grant date) 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 Plan n/a n/a • investment of elected portion of annual directors’ fees in Director DSUs • value reflects changes in Onex’ share price • units not redeemable until retirement • annual allocation of DSUs 70 Onex Corporation December 31, 2013 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Management Investment Plan Onex has a Management Investment Plan (the “MIP”) completed in 2014. For ONCAP III, management of Onex and ONCAP as well as directors have committed to invest that requires its management members to invest in each 6 percent of the total capital invested by the Fund for new of the operating businesses acquired or invested in by investments completed in 2014. Onex. Management’s required cash investment is 1.5 per- The total amount invested in 2013 by management cent of Onex’ interest in each acquisition or investment. of Onex and ONCAP, and directors on acquisitions and An amount invested in an Onex Partners acquisition under investments completed through the Onex Partners III and the Fund’s investment requirement (discussed below) also ONCAP II Funds was $22 million (2012 – $67 million). applies toward the 1.5 percent investment requirement under the MIP. In addition to the 1.5 percent participation, man- Carried interest participation The General Partners of the Onex Partners and ONCAP agement is allocated 7.5 percent of Onex’ realized gain Funds, which are controlled by Onex, are entitled to a car- from an operating business investment, subject to certain ried interest of 20 percent on the realized gains of the conditions. In particular, Onex must realize in cash the full limited partners in each Fund, subject to an 8 percent com- return of its investment plus a net 15 percent internal rate pound annual preferred return to those limited partners on of return from the investment in order for management to all amounts contributed in each particular Fund. Onex, as be allocated the additional 7.5 percent of Onex’ gain. The sponsor of the Onex Partners Funds, is entitled to 40 per- plan has vesting requirements, certain limitations and vot- cent of the carried interest realized in the Onex Partners ing requirements. Funds. The Onex management team is allocated 60 percent During 2013, management invested $4 million of the carried interest realized in the Onex Partners Funds. (2012 – $13 million) under the MIP, including amounts The ONCAP management team is entitled to that portion invested under the minimum investment requirements of the carried interest realized in the ONCAP Funds that of the Onex Partners Funds to meet the 1.5 percent MIP equates to a 12 percent carried interest on both limited requirement. Management received $39 million under the partners’ and Onex capital. Under the terms of the part- MIP in 2013 (2012 – less than $1 million). Notes 1 and 31 to nership agreements, Onex may receive carried interest as the audited annual consolidated ﬁnancial statements pro- realizations occur. The ultimate amount of carried interest vide additional details on the MIP. Onex Partners and ONCAP Funds The structure of the Onex Partners and ONCAP Funds earned will be based on the overall performance of each of Onex Partners I, II, III and IV, and ONCAP II and III, inde- pendently, and includes typical catch-up and claw-back provisions within each Fund, but not between Funds. requires management of Onex or ONCAP to invest a mini- During 2013, management of Onex received carried mum of 1 percent in all acquisitions, with the exception of interest totalling $110 million, comprised of (i) $5 million Onex Partners IV, which requires the management of Onex on the sale of RSI; (ii) $71 million on the distributions from to invest a minimum of 2 percent in all acquisitions. Onex Carestream Health; (iii) $19 million on the sales of a portion Partners I completed its investment period in 2006 and of the shares of Allison Transmission in that company’s share Onex Partners II completed its investment period in 2011. repurchase and secondary offerings; and (iv) $15 million During 2013, Onex obtained approval for an extension of on the sale of TMS International. During the same period, the commitment period for Onex Partners III into 2014 to management of ONCAP received carried interest of $60 mil- enable further investing through that Fund. The commit- lion on the sales of BSN SPORTS ($18 million) and Caliber ment period for Onex Partners III would have otherwise Collision ($42 million). The impact of the ONCAP transac- expired in December 2013. Onex management and direc- tions to Onex and management of Onex was a net payment tors have committed to invest 6 percent of the total capi- of $15 million in carried interest. tal invested by Onex Partners III and 8 percent of the total During 2012, management of Onex received $5 mil- capital invested by Onex Partners IV for new investments lion of carried interest on the sale of CDI. Onex Corporation December 31, 2013 71 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Table 36 shows the amount of carried interest received by Onex, the parent company, by year. Carried Interest TABLE 36 ($ millions) 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 Carried interest – 2012 Carried interest – 2013 Total Carried Interest Received $ 1 4 16 55 77 – 19 – 65 3 75 $ 315 During 2013, Onex, the parent company, realized carried interest of $75 million, which was comprised of amounts received on the following transactions: (i) $3 million on the February 2013 sale of RSI; (ii) $50 million in connection with the distributions received from Carestream Health in June and July 2013; (iii) $12 million on the sales of a por- tion of the shares of Allison Transmission in that company’s share repurchase and secondary offerings; and (iv) $10 mil- lion on the October 2013 sale of TMS International. During 2012, Onex, the parent company, realized carried interest of $3 million in connection with the sale of CDI by Onex Partners I in July 2012. At December 31, 2013, there was $54 million of unreal- ized carried interest allocable to Onex based on the val- ues of the public companies held at market value in the Onex Partners Funds. In addition, Onex has the potential to receive a further $148 million of carried interest on its private businesses in the Onex Partners and ONCAP Funds based on their fair values determined at December 31, 2013. 72 Onex Corporation December 31, 2013 Incentive fees Onex Credit Partners is entitled to incentive fees on $2.4 billion of other investors’ capital it manages. Incentive fees range between 5 percent and 20 percent of the net income of a fund or a share of the return above an invest- ment return hurdle of a CLO. Certain incentive fees are subject to a minimum preferred return to investors on all amounts contributed in a particular fund. During the year ended December 31, 2013, Onex Credit Partners earned $10 million of incentive fees, of which Onex’ share as an investor in Onex Credit Partners was $7 million. Stock Option Plan Onex, the parent company, has a Stock Option Plan in place that provides for options and/or share appreciation rights to be granted to Onex directors, ofﬁcers and employees for the acquisition of Subordinate Voting Shares of Onex, the parent company, for a term not exceeding 10 years. The options vest equally over ﬁve years, with the exception of 2,750,000 of the 3,402,000 options granted in December 2013, which vest at a rate of 15 percent per year during the ﬁrst four years and 40 percent in the ﬁfth year. The price of the options issued is at the market value of the Subordinate Voting Shares on the business day preceding the day of the grant. Vested options are not exercisable unless the average ﬁve-day market price of Onex Subordinate Voting Shares is at least 25 percent greater than the exercise price at the time of exercise. Table 25 on page 60 of this MD&A provides details of the change in the stock options outstanding at December 31, 2013 and 2012. Management Deferred Share Unit Plan Effective December 2007, a Management Deferred Share Unit Plan (“MDSU Plan”) was established as a further means of encouraging personal and direct economic inter- ests by the Company’s senior management in the perfor- mance of the Subordinate Voting Shares. Under the MDSU Plan, the members of the Company’s senior management team are given the opportunity to designate all or a por- tion of their annual compensation to acquire MDSUs based on the market value of Onex shares at the time in lieu of M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S cash. MDSUs vest immediately but are redeemable by the participant only after he or she has ceased to be an ofﬁcer Repurchase of shares In November 2013, Onex repurchased 1,000,000 of its Sub- or employee of the Company or an afﬁliate for a cash pay- ordinate Voting Shares in a private transaction for a cash ment equal to the then current market price of Subordinate cost of C$56.50 per Subordinate Voting Share or $53 mil- Voting Shares. Additional units are issued equivalent to the lion (C$57 million), which represented a slight discount to value of any cash dividends that would have been paid on the trading price of Onex shares at that date. The shares the Subordinate Voting Shares. To hedge Onex’ exposure to were held indirectly by Mr. Gerald W. Schwartz, who is changes in the trading price of Onex shares associated with Onex’ controlling shareholder. The private transaction was the MDSU Plan, the Company enters into forward agree- approved by the Board of Directors of Onex. ments with a counterparty ﬁnancial institution for all grants under the MDSU Plan. The costs of those arrangements are borne entirely by participants in the MDSU Plan. MDSUs Investment in Onex shares and acquisitions In 2006, Onex adopted a program designed to further are redeemable only for cash and no shares or other securi- align the interests of the Company’s senior management ties of Onex will be issued on the exercise, redemption or and other investment professionals with those of Onex other settlement thereof. Table 27 on page 62 of this MD&A shareholders through increased share ownership. Under provides details of the change in the MDSUs outstanding this program, members of senior management of Onex during 2013 and 2012. Director Deferred Share Unit Plan Onex, the parent company, established a Director Deferred are required to invest at least 25 percent of all amounts received on the 7.5 percent gain allocated under the MIP and the carried interest in Onex Subordinate Voting Shares and/or Management DSUs until they individually hold at Share Unit Plan (“DSU Plan”) in 2004, which allows Onex least 1,000,000 Onex Subordinate Voting Shares and/or directors to apply directors’ fees to acquire DSUs based Management DSUs. Under this program, during 2013 Onex on the market value of Onex shares at the time. Grants of management reinvested C$18 million (2012 – less than DSUs may also be made to Onex directors from time to C$1 million) in the purchase of Subordinate Voting Shares. time. Holders of DSUs are entitled to receive for each DSU, Members of management and the Board of upon redemption, a cash payment equivalent to the mar- Directors of Onex can invest limited amounts in part- ket value of a Subordinate Voting Share at the redemption nership with Onex in all acquisitions outside the Onex date. The DSUs vest immediately, are only redeemable Partners and ONCAP Funds at the same time and cost as once the holder retires from the Board of Directors and Onex and other outside investors. During 2013, $2 million must be redeemed by the end of the year following the year in investments (2012 – less than $1 million) were made by of retirement. Additional units are issued equivalent to the Onex management and Onex Board members. value of any cash dividends that would have been paid on the Subordinate Voting Shares. The Company has entered into a forward agreement with a counterparty ﬁnancial Management fees Onex receives management fees on limited partners’ capi- institution to hedge the Company’s exposure to changes in tal through its private equity platforms, Onex Partners and the market value of Onex’ Subordinate Voting Shares asso- ONCAP, and directly from certain of its operating busi- ciated with a portion of the outstanding DSUs. Onex, the nesses. In addition, Onex Credit Partners earns manage- parent company, has recorded a liability for the future set- ment fees on its investors’ capital. tlement of DSUs at the balance sheet date by reference to During the initial fee period of the Onex Partners the value of underlying shares at that date. The liability is and ONCAP Funds, Onex receives a management fee based adjusted for the change in the market value of the under- upon limited partners’ committed capital to each Fund. At lying Subordinate Voting Shares, with the corresponding December 31, 2013, the management fees of ONCAP III are amount reﬂected in the audited annual consolidated state- determined based on limited partners’ committed capital. ments of earnings. Table 27 on page 62 of this MD&A pro- Following the termination of the initial fee period, vides details of the change in the DSUs outstanding during Onex becomes entitled to a management fee on lim- 2013 and 2012. ited partners’ invested capital. At December 31, 2013, the Onex Corporation December 31, 2013 73 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S management fees of Onex Partners I, Onex Partners II, Onex Partners III and ONCAP II are determined based upon Tax loss transaction During 2013, Onex sold entities, the sole assets of which were each Fund’s limited partners’ invested capital. As realiza- certain tax losses, to companies controlled by Mr. Gerald W. tions occur in these Funds, the management fees calculated Schwartz, who is also Onex’ controlling shareholder. As a based on invested limited partners’ capital will decline. result of these transactions, Onex recorded a gain of $9 mil- In December 2013, the initial fee period for Onex lion (2012 – $16 million) in other items in 2013. A discussion Partners III expired and Onex’ entitlement to management of these transactions is included on page 41 of this MD&A. In fees changed from being based on committed capital to connection with these transactions, Deloitte & Touche LLP, being based on limited partners’ invested capital. In addi- an independent accounting ﬁrm retained by Onex’ Audit tion, Onex Partners III deferred its December 2013 capital and Corporate Governance Committee, provided an opin- call for management fees until early 2014. Management ion that the value received by Onex for the tax losses was fees to be called by Onex Partners III in early 2014 will be fair. The transactions were unanimously approved by Onex’ $19 million lower than the last management fee call due to Audit and Corporate Governance Committee, all the mem- the impact of the end of the initial fee period. bers of which are independent directors. During the fourth quarter of 2013, Onex raised $3.1 billion of total capital commitments for Onex Part- ners IV, which includes Onex’ commitment of $1.2 billion. Onex Partners IV is targeting $4.5 billion in total capital commitments, including Onex’ commitment, and expects 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 to complete fundraising during 2014. We expect to start The Chief Executive Ofﬁcer and the Chief Financial Ofﬁcer drawing management fees for Onex Partners IV sometime have designed, or caused to be designed under their super- in 2014. During the initial fee period of Onex Partners IV, vision, internal controls over ﬁnancial reporting to provide Onex will receive annual management fees based upon reasonable assurance regarding the reliability of ﬁnancial 1.75 percent of up to $3.0 billion of committed capital to reporting and the preparation of ﬁnancial statements for Onex Partners IV by investors other than Onex and Onex external purposes in accordance with IFRS. The Chief management and 1.5 percent on capital committed by Executive Ofﬁcer and the Chief Financial Ofﬁcer have also investors other than Onex and Onex management in excess designed, or caused to be designed under their supervi- of $3.0 billion. sion, disclosure controls and procedures to provide reason- In March and October 2013, Onex Credit Partners able assurance that information required to be disclosed closed OCP CLO-3 and OCP CLO-4, respectively. In addition, by the Company in its corporate ﬁlings has been recorded, in November 2013, Onex Credit Partners established a ware- processed, summarized and reported within the time peri- house facility in connection with its ﬁfth CLO, OCP CLO-5. ods speciﬁed in securities legislation. The increase in investors’ capital associated with these new A control system, no matter how well conceived CLOs will result in an increase in the management fees and operated, can provide only reasonable, not absolute, earned by Onex Credit Partners. Debt of operating companies Onex’ practice is not to guarantee the debt of its operat- assurance that its objectives are met. Due to inherent limi- tations in all such systems, no evaluations of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Accordingly, our ing companies, and there are no cross-guarantees between internal controls over ﬁnancial reporting and disclosure operating companies. Onex may hold debt as part of controls and procedures are effective in providing reason- its investment in certain operating companies, which able, not absolute, assurance that the objectives of our con- amounted to $873 million at December 31, 2013 compared trol systems have been met. to $1.1 billion at December 31, 2012. Note 12 to the audited annual consolidated ﬁnancial statements provides infor- mation on the debt of operating companies held by Onex. 74 Onex Corporation December 31, 2013 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S OUTLOOK Onex’ reported quarterly and annual consolidated which includes limited partner commitments of $3.3 billion ﬁnancial results may vary substantially from quarter to and Onex’ $1.2 billion commitment, and expects to com- quarter and year to year due to acquisitions and disposi- plete fundraising in 2014. tions of businesses, changes in the value of its publicly A new fund will contribute to Onex’ stream of traded and privately held operating companies and the annual management fees once the fund begins invest- effect of varying business cycles at its operating companies. ing and provides the potential to earn carried interest on Accordingly, it is difﬁcult to predict the future consolidated invested limited partner capital. Onex’ limited partner- ﬁnancial results for Onex. However, it is Onex’ objective to ship agreements typically have a 10-year term and provide complete acquisitions during 2014. New acquisitions where a predictable ﬂow of management fees from assets under Onex has control would add to the consolidated revenues, management. Fees for Onex Partners III stepped down to assets and liabilities. Similarly, if a controlled business is 1 percent of invested capital in December 2013, marking sold, consolidated revenues, assets and liabilities would the end of its original ﬁve-year commitment period. We be reduced. It is difﬁcult to predict when new acquisitions expect to start drawing management fees for Onex Part- may occur or when businesses may be sold. ners IV sometime in 2014. Onex remains in a very strong ﬁnancial position We believe Onex is well-positioned for continued to complete new investment opportunities as they arise. In growth in 2014. We have a stable, experienced team; our addition to our own cash, we have approximately $840 mil- investing culture is ingrained throughout the organization; lion of undrawn committed capital from limited partners in our investments are performing well overall; and we have Onex Partners III and ONCAP III. Fur thermore, to date, Onex the ﬁnancial resources to grow. has raised approximately $2.5 billion of capital commit- This printed report is by its nature current only ments from limited partners for Onex Partners IV, its fourth at the point in time when it is issued. We encourage you private equity fund for larger transactions. Onex is target- to visit our website: www.onex.com for updates on Onex’ ing a fund size of $4.5 billion in total capital commitments, activities. Onex Corporation December 31, 2013 75 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S RISK MANAGEMENT This section describes the risks that we believe are mate- Onex maintains an active involvement in its oper- rial to Onex that could adversely affect Onex’ business, ating businesses in the areas of strategic planning, ﬁnancial ﬁnancial condition or results of operations. The risks structures, and negotiations and acquisitions. In the early described below are not the only risks that may impact our stages of ownership, Onex may provide resources for busi- business. Additional risks not currently known to us or that ness and strategic planning and ﬁnancial reporting while we currently believe are immaterial may also have a mate- an operating business builds these capabilities in-house. rial 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 businesses 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 busi- instances, we may also encourage an operating business nesses 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’ operat- strategies and policies to manage business risk at Onex and ing businesses enables Onex to participate in the growth its operating businesses are discussed in this section. of a number of high-potential industries with varying busi- ness 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 its two industries. Similarly, the Company’s focus on build- capital to a single acquisition and has equity partners with ing industry leaders with extensive international opera- whom it shares the risk of ownership. The Onex Partners tions reduces the ﬁnancial impact of downturns in speciﬁc and ONCAP Funds streamline Onex’ process of sourcing regions. Onex is well diversiﬁed among various industry and drawing on commitments from such equity partners. segments, with no single industry or business representing An acquired company is not burdened with more more than 10 percent of Onex capital. The table in note 34 debt than it can likely sustain, but rather is structured so to the audited annual consolidated ﬁnancial statements that it has the ﬁnancial and operating leeway to maximize provides information on the geographic diversiﬁcation of long-term growth in value. Finally, Onex invests in ﬁnancial Onex’ consolidated revenues. 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. 76 Onex Corporation December 31, 2013 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Operating liquidity It is Onex’ view that one of the most important things Onex over the past few years resulted in Hawker Beechcraft being unable to meet certain of its ﬁnancial obligations. During can do to control risk is to maintain a strong parent com- the second quarter of 2012, Hawker Beechcraft ﬁled for pany with an appropriate level of liquidity. Onex needs bankruptcy protection in the United States. As a result, Onex to be in a position to support its operating businesses no longer exerted signiﬁcant inﬂuence over the company. when and if it is appropriate and reasonable for Onex, as On February 15, 2013, Hawker Beechcraft exited bankruptcy an equity owner with paramount duties to act in the best protection. As part of the restructuring, Onex has a nominal interests of Onex shareholders, to do so. Maintaining equity interest in the company. liquidity is important because Onex, as a holding company, generally does not have guaranteed sources of meaningful cash ﬂow other than management fees. The approximate Timeliness of investment commitments Onex’ ability to create value for shareholders is dependent $75 million in annualized management fees that are in part on its ability to successfully complete large acquisi- expected to be earned by Onex Partners, ONCAP and Onex tions. Our preferred course is to complete acquisitions on Credit Partners in 2014 will be used to offset the costs of an exclusive basis. However, we also participate in large running the parent company. Onex’ management fees acquisitions through an auction or bidding process with will be further enhanced once fees are called from Onex multiple potential purchasers. Bidding is often very com- Partners IV. petitive for the large-scale acquisitions that are Onex’ pri- A signiﬁcant portion of the purchase price for mary interest, and the ability to make knowledgeable, new acquisitions is generally funded with debt provided timely investment commitments is a key component in by third-party lenders. This debt, sourced exclusively on successful purchases. In such instances, the vendor often the strength of the acquired company’s ﬁnancial condition establishes a relatively short time frame for Onex to respond and prospects, is a debt of the acquired company at clos- deﬁnitively. In order to improve the efﬁciency of Onex’ ing and is without recourse to Onex, the parent company, internal processes on both auction and exclusive acqui- or to its other operating companies or partnerships. The sition processes, and so reduce the risk of missing out on foremost consideration, however, in developing a ﬁnancing high-quality acquisition opportunities, Onex has commit- structure for an acquisition is identifying the appropriate ted pools of capital from limited partner investors with the amount of equity to invest. In Onex’ view, this should be Onex Partners and ONCAP Funds. As at December 31, 2013, the amount of equity that maximizes the risk/reward equa- Onex Partners III has $479 million of undrawn committed tion for both shareholders and the acquired company. In limited partners’ capital and ONCAP III has C$387 million other words, it allows the acquired company to not only of such undrawn capital. manage its debt through reasonable business cycles but Onex Partners IV raised $1.9 billion of commit- also to have sufﬁcient ﬁnancial latitude for the business to ted limited partners’ capital during the fourth quarter of vigorously pursue its growth objectives. 2013. Onex Partners IV is targeting $3.3 billion in limited While Onex seeks to optimize the risk/reward partners’ capital commitments and expects to complete equation in all acquisitions, there is the risk that the fundraising during 2014. The ability to raise new capital acquired company will not generate sufﬁcient proﬁtability commitments is dependent upon general economic con- or cash ﬂow to service its debt requirements and/or meet ditions and the track record or success Onex has achieved related debt covenants or provide adequate ﬁnancial with the management and investment of prior funds. To ﬂexibility for growth. In such circumstances, additional date, Onex has a strong track record of investing other investment by the equity partners, including Onex, may be investors’ capital and most investors in the original Onex appropriate. In severe circumstances, the recovery of Onex’ Partners and ONCAP Funds did commit to invest in the equity and any other investment in that operating com- successor funds that have been established. pany is at risk. The decline in the general aviation industry Onex Corporation December 31, 2013 77 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Capital commitment risk The limited partners in the Onex Partners and ONCAP Funds comprise a rela- Interest rate risk As previously noted, new invest- ments generally include a meaningful amount of third- tively small group of high-quality, primarily institutional, party debt taken on by the acquired operating company. investors. To date, each of these investors has met its com- An important element in controlling risk is to manage, to mitments on called capital, and Onex has received no the extent reasonable, the impact of ﬂuctuations in interest indications that any investor will be unable to meet its rates on the debt of the operating company. commitments in the future. While Onex’ experience with Onex’ operating companies generally seek to ﬁx its limited partners suggests that commitments will be the interest on some of their term debt or otherwise mini- honoured, there is always the risk that a limited partner mize the effect of interest rate increases on a portion of may not be able to meet its entire commitment over the life their debt at the time of acquisition. This is achieved by of the fund. Financial risks In the normal course of business, Onex and its operating taking on debt at ﬁxed interest rates or entering into inter- est rate swap agreements or ﬁnancial contracts to control the level of interest rate ﬂuctuation on variable rate debt. At December 31, 2013, approximately 50 percent (2012 – companies may face a variety of risks related to ﬁnancial 38 percent) of Onex’ operating companies’ long-term debt management. In dealing with these risks, it is a matter of had a ﬁxed interest rate or the interest rate was effectively Company policy that neither Onex nor its operating com- ﬁxed by interest rate swap contracts. The risk inherent in panies engage in speculative derivatives trading or other such a strategy is that, should interest rates decline, the speculative activities. Default on known credit As previously noted, new investments generally include a meaningful amount beneﬁt of such declines may not be obtainable or may only be achieved at the cost of penalties to terminate existing arrangements. There is also the risk that the counterparty of third-party debt. Those lenders typically require that the on an interest rate swap agreement may not be able to acquired company meet ongoing tests of ﬁnancial perfor- meet its commitments. Guidelines are in place that specify mance as deﬁned by the terms of the lending agreement, the nature of the ﬁnancial institutions that operating com- such as ratios of total debt to operating income (“EBITDA”) panies can deal with on interest rate contracts. and the ratio of EBITDA to interest costs. It is Onex’ prac- The Onex Credit Partners’ CLOs are exposed to tice to not burden acquired companies with levels of debt interest rate risk on the debt issued by each CLO as sub- that might put at risk their ability to generate sufﬁcient stantially all interest for debt issued by the CLOs is based levels of proﬁtability or cash ﬂow to service their debts – on a spread over a ﬂoating base rate. However, the interest and so meet their related debt covenants – or which might rate risk is largely offset within each CLO by holding invest- hamper their ﬂexibility to grow. ments in debt securities, which receive interest based on a Financing risk The continued volatility in the global credit markets has created some unpredictability spread over the same or similar ﬂoating base rate. Onex, the parent company, has some exposure to about whether businesses, even creditworthy businesses, interest rate changes primarily through its cash and short- will be able to obtain new loans. This represents a risk to term investments, which are held in short-term deposits the ongoing viability of many otherwise healthy businesses and commercial paper. A 0.25 percent increase (0.25 per- whose loans or operating lines of credit are up for renewal cent decrease) in the interest rate, assuming no signiﬁcant in the short term. A signiﬁcant portion of Onex’ operating changes in the cash balance at the parent company, would companies’ reﬁnancing will take place in 2016 and there- result in a minimal impact on annual interest income. In after. Table 21 on page 57 of this MD&A provides the aggre- addition, The Warranty Group, which holds substantially all gate debt maturities for Onex’ consolidated operating of its investments in interest-bearing securities, would also companies and investments in joint ventures and associ- have some exposure to interest rate changes. A 0.25 percent ates for each of the years up to 2019 and in total thereafter. increase in the interest rate would decrease the fair value 78 Onex Corporation December 31, 2013 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S of the investments held by The Warranty Group by $13 mil- lion, with a corresponding decrease in other comprehen- Insurance claims The Warranty Group under- writes and administers extended warranties and credit sive earnings. However, as the investments are reinvested, a insurance on a wide variety of consumer goods, including 0.25 percent increase in the interest rate would increase the automobiles, consumer electronics and major home appli- annual interest income recorded by The Warranty Group by ances. Unlike most property insurance risk, the risk asso- $5 million. Currency ﬂuctuations The functional currency of Onex, the parent company, and substantially all of ciated with extended warranty claims is non-catastrophic and short-lived, resulting in predictable loss trends. The predictability of claims, which is enhanced by the large vol- Onex’ operating companies is the U.S. dollar. A number of ume of claims data in the company’s database, enables The Onex’ operating companies conduct business outside of Warranty Group to appropriately measure and price risk. the United States and as a result are exposed to currency risk on the portion of their business that is not based on U.S. currency. Fluctuations in the value of the U.S. dollar Commodity price risk Certain Onex operating companies are vulnerable to price relative to other currencies can have an impact on Onex’ ﬂuctuations in major commodities. Individual operat- reported results and consolidated ﬁnancial position. ing companies may use ﬁnancial instruments to offset the Onex’ operating companies may use currency derivatives impact of anticipated changes in commodity prices related in the normal course of business to hedge against adverse to the conduct of their businesses. Aluminum, titanium ﬂuctuations in key operating currencies, but speculative and raw materials such as carbon ﬁbre used to manufac- activity is not permitted. ture composites represent the principal raw materials used Onex and its operating companies have minimal in Spirit AeroSystems’ manufacturing operations. Spirit exposure to ﬂuctuations in the value of the U.S. dollar rela- AeroSystems has entered into long-term supply contracts tive to the Canadian dollar. with its key suppliers of raw materials, which limit the Onex’ results are reported in U.S. dollars, and company’s exposure to rising raw materials prices. Most of ﬂuctuations in the value of the U.S. dollar relative to other the raw materials purchased are based on a ﬁxed pricing or currencies can have an impact on Onex’ reported results at reduced rates through Boeing’s or Airbus’ high-volume and consolidated ﬁnancial position. During 2013, Onex’ purchase contracts. equity balance reﬂected a $43 million decrease in the value Silver is a signiﬁcant commodity used in Care- of Onex’ equity for the translation of its operating com- stream Health’s manufacturing of x-ray ﬁlm. The com- panies with non-U.S. dollar functional currencies (2012 – pany’s management continually monitors movement and $34 million). trends in the silver market and enters into collar and for- Fair value changes The fair value measurements for investments in joint ventures and associates, Limited ward agreements when considered appropriate to mitigate some of the risk of future price ﬂuctuations for periods of Partners’ Interests and carried interest are primarily driven generally up to a year. by the underlying fair value of the investments in the Onex Partners and ONCAP Funds. A change to a reasonably pos- sible alternative estimate and/or assumption used in the Regulatory risk Certain of Onex’ operating companies and investment valuation of non-public investments in the Onex Partners advisor afﬁliates may be subject to extensive governmen- and ONCAP Funds could have a signiﬁcant impact on the tal regulations and oversight with respect to their business fair values calculated for investments in joint ventures and activities. The failure to comply with applicable regulations, associates, Limited Partners’ Interests and carried interest, obtain applicable regulatory approvals, or maintain those which would impact both Onex’ ﬁnancial condition and approvals so obtained, may subject the applicable operat- results of operations. ing company to civil penalties, suspension or withdrawal of any regulatory approval obtained, injunctions, operat- ing restrictions and criminal prosecutions and penalties, which could, individually or in the aggregate, have a mate- rial adverse effect on Onex’ consolidated ﬁnancial position. Onex Corporation December 31, 2013 79 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Integration of acquired companies An important aspect of Onex’ strategy for value creation is affected by the same event, or to the same extent, simulta- neously. Ongoing pressure on government appropriations to acquire what we consider to be “platform” companies. is a normal aspect of business for these companies, and all Such companies often have distinct competitive advan- seek to minimize the effect of possible funding reductions tages in products or services in their respective industries through productivity improvements and other initiatives. that provide a solid foundation for growth in scale and value. In these instances, Onex works with company man- agement to identify attractive add-on acquisitions that Signiﬁcant customers Some of Onex’ major acquisitions have been divisions of may enable the platform company to achieve its goals large companies. As part of these purchases, the acquired more quickly and successfully than by focusing solely on company has often continued to supply its former owner the development and/or diversiﬁcation of its customer through long-term supply arrangements. It has been Onex’ base, which is known as organic growth. Growth by acqui- policy to encourage its operating companies to quickly sition, however, may carry more risk than organic growth. diversify their customer bases to the extent practical in While as many of these risks as possible are considered order to manage the risk associated with serving a single in the acquisition planning, operating companies under- major customer. Certain Onex operating companies have taking these acquisitions also face such risks as unknown major customers that represent more than 10 percent of expenses related to the cost-effective amalgamation of their annual revenues. Spirit AeroSystems has one cus- operations, the retention of key personnel and custom- tomer that represents approximately 18 percent of Onex’ ers, and the future value of goodwill, intangible assets and consolidated revenues. intellectual property. There are also risk factors associated with the industry and the combined business in general. Onex works with company management to understand Environmental considerations Onex has an environmental protection policy that has been and attempt to mitigate such risks as much as possible. adopted by its operating businesses subject to company- Dependence on government funding Since 2005, Onex has acquired businesses, or interests speciﬁc modiﬁcations; many of the operating businesses have also adopted supplemental policies appropriate to their industries or businesses. Senior ofﬁcers at each of the in businesses, in various segments of the U.S. healthcare operating businesses are ultimately responsible for ensuring industry. Some of the revenues of these companies are par- compliance with these policies. They are required to report tially dependent on funding from federal, state and local annually to their company’s board of directors and/or to government agencies, especially those agencies respon- Onex regarding compliance. sible for U.S. federal Medicare and state Medicaid funding. Environmental management by the operating Budgetary pressures, as well as economic, industry, politi- businesses is generally accomplished through the edu- cal and other factors, could inﬂuence governments to not cation of employees about environmental regulations increase or, in some cases, to decrease appropriations for and appropriate operating policies and procedures; site the services that are offered by Onex’ operating subsidiaries, inspections by environmental consultants; the addition of which could reduce their revenues materially. Future reve- proper equipment or modiﬁcation of existing equipment nues may be affected by changes in rate-setting structures, to reduce or eliminate environmental hazards; remedia- methodologies or interpretations that may be proposed tion activities as required; and ongoing waste reduction or are under consideration. While each of Onex’ operat- and recycling programs, all as appropriate to the business. ing companies in the U.S. healthcare industry is subject to Environmental consultants may be engaged to advise on reimbursement risk directly related to its particular business current and upcoming environmental regulations that may segment, it is unlikely that all of these companies would be be applicable. 80 Onex Corporation December 31, 2013 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Many of the operating businesses are involved in the remediation of particular environmental situa- Other contingencies Onex and its operating companies are or may become par- tions, such as soil contamination. In almost all cases, ties to legal claims arising in the ordinary course of busi- these situations have occurred prior to Onex’ acquisition ness. The operating companies have recorded liability of those businesses, and the estimated costs of remedial provisions based upon their consideration and analysis work and related activities are generally managed either of their exposure in respect of such claims. Such provi- through agreements with the vendor of the company or sions are reﬂected, as appropriate, in Onex’ consolidated through provisions established at the time of acquisition. ﬁnancial statements. Onex, the parent company, has not Manufacturing activities carry the inherent risk that chang- currently recorded any further liability provision and we ing environmental regulations may identify additional situ- do not believe that the resolution of known claims would ations requiring capital expenditures or remedial work and reasonably be expected to have a material adverse impact associated costs to meet those regulations. on Onex’ consolidated ﬁnancial position. However, the ﬁnal Income taxes The Company has investments in companies that oper- outcome with respect to outstanding, pending or future actions cannot be predicted with certainty, and therefore there can be no assurance that their resolution will not have 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 probable to reverse in the foreseeable future 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 appli- cation of tax legislation may affect the provision for future tax and the taxation of deferred amounts. During the third quarter of 2013, as a result of evaluating recent changes in tax law for the treatment of surplus and upstream loans, Onex, the parent company, determined that its previously recognized deferred tax provisions on gains realized from the disposition of foreign operating companies are tempo- rary differences that are probable to not reverse in the fore- seeable future, consistent with the principles outlined in IAS 12, Income Taxes. As a result, Onex, the parent com- pany, recorded a $526 million non-cash recovery of deferred income taxes, of which $480 million was included in Onex’, the parent company’s, deferred income tax liabil- ity at December 31, 2012 and $46 million represents the provisions established and reversed during 2013. Onex Corporation December 31, 2013 81 MANAGEMENT’S RESPONSIBILITY MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS 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. The Board of Directors is responsible for reviewing and approving the consolidated ﬁnancial statements and over- seeing management’s performance of its ﬁnancial reporting responsibilities. An Audit and Corporate Governance Committee of four 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] [signed] [signed] Donald W. Lewtas Chief Financial Oﬃcer February 20, 2014 Christine M. Donaldson Vice President Finance 82 Onex Corporation December 31, 2013 INDEPENDENT AUDITOR’S REPORT 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 comprise the consolidated balance sheets as at December 31, 2013, December 31, 2012 and January 1, 2012, the consolidated statements of earnings, comprehensive earnings, equity and cash ﬂows for the years ended December 31, 2013 and 2012 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 ethical 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, 2013, December 31, 2012 and January 1, 2012 and their ﬁnancial per- formance and their cash ﬂows for the years ended December 31, 2013 and 2012 in accordance with International Financial Reporting Standards. [signed] [signed] PricewaterhouseCoopers llp Chartered Professional Accountants, Licensed Public Accountants Toronto, Canada February 20, 2014 Onex Corporation December 31, 2013 83 CONSOLIDATED BALANCE SHEETS (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 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 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 (note 19) Retained earnings and accumulated other comprehensive earnings As at December 31, 2013 As at December 31, 2012 As at January 1, 2012 $ 3,191 $ 2,656 $ 2,448 754 3,639 3,872 1,478 12,934 5,105 7,564 2,100 4,695 4,469 730 3,858 4,519 1,443 13,206 5,495 6,424 1,986 4,833 4,358 749 3,272 4,428 1,154 12,051 5,102 5,415 1,776 2,599 2,434 $ 36,867 $ 36,302 $ 29,377 $ 4,342 $ 4,549 $ 3,893 331 1,621 651 1,350 8,295 419 11,319 1,779 2,526 1,225 6,959 32,522 346 3,191 808 4,345 347 1,340 286 1,366 7,888 264 10,184 1,774 2,852 1,683 6,208 30,853 358 3,822 1,269 5,449 263 909 482 1,400 6,947 180 6,479 1,727 2,368 1,059 4,980 23,740 360 3,863 1,414 5,637 See accompanying notes to the consolidated financial statements, including the changes in accounting policies retroactively adopted on January 1, 2013, as described in note 1. $ 36,867 $ 36,302 $ 29,377 Signed on behalf of the Board of Directors [signed] Director [signed] Director 84 Onex Corporation December 31, 2013 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 21) Increase in value of investments in joint ventures and associates at fair value, net (note 8(a)) Stock-based compensation expense (note 22) Other gains (note 23) Other items (note 24) Impairment of goodwill, intangible assets and long-lived assets, net (note 25) Limited Partners’ Interests charge (note 17) Earnings (loss) before income taxes and discontinued operations Recovery of (provision for) income taxes (note 16) Loss from continuing operations Earnings from discontinued operations (note 3) Net Earnings (Loss) 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 (Loss) for the Year Net Earnings (Loss) per Subordinate Voting Share of Onex Corporation (note 26) Basic and Diluted: Continuing operations Discontinued operations Net Loss for the Year 2013 2012 $ 27,809 $ 24,917 (21,843) (4,197) (19,908) (3,276) 106 (619) (537) (813) 1,098 (349) 561 (449) (319) (1,855) (1,407) 333 (1,074) 261 60 (538) (318) (514) 863 (239) 59 (46) (65) (929) 66 (76) (10) 26 $ (813) $ 16 $ (605) (469) $ (1,074) $ (143) 133 $ (10) $ (354) (459) $ (813) $ (128) 144 $ 16 $ (5.34) 2.22 $ (1.25) 0.13 $ (3.12) $ (1.12) See accompanying notes to the consolidated financial statements, including the changes in accounting policies retroactively adopted on January 1, 2013, as described in note 1. Onex Corporation December 31, 2013 85 CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS Year ended December 31 (in millions of U.S. dollars) Net earnings (loss) for the year Other comprehensive earnings (loss), net of tax Items that may be reclassified to net earnings (loss): Currency translation adjustments Change in fair value of derivatives designated as hedges Unrealized gains (loss) on available-for-sale financial assets Items that will not be reclassified to net earnings (loss): Remeasurements for post-employment benefit plans Other comprehensive earnings from discontinued operations, net of tax (note 3) Other comprehensive earnings, net of tax Total Comprehensive Earnings (Loss) for the Year Total Comprehensive Earnings (Loss) attributable to: Equity holders of Onex Corporation Non-controlling Interests Total Comprehensive Earnings (Loss) for the Year 2013 $ (813) 2012 $ 16 (48) (24) (29) (101) 174 5 78 32 24 15 71 (69) 2 4 $ (735) $ 20 $ (336) (399) $ (735) $ (127) 147 $ 20 See accompanying notes to the consolidated financial statements, including the changes in accounting policies retroactively adopted on January 1, 2013, as described in note 1. 86 Onex Corporation December 31, 2013 CONSOLIDATED STATEMENTS OF EQUITY (in millions of U.S. dollars except per share data) Balance – January 1, 2012 Change in accounting policy (note 1) 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(c) 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 Remeasurements for post-employment benefit plans (note 32) Other comprehensive earnings from discontinued operations, net of tax (note 3) Balance – December 31, 2012 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(c) Non-controlling interests on sale of investments in operating companies (notes 3 and 23) Non-controlling interests on conversion of promissory notes Comprehensive Earnings (Loss) Net 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 loss on available-for-sale financial assets Remeasurements for post-employment benefit plans (note 32) Other comprehensive earnings from discontinued operations, net of tax (note 3) Share Capital (note 18) $ 360 – – (2) – – – – – – – – – $ 358 – (12) – – – – – – – – – – – Retained Earnings $ 1,433 2 (13) (22) 36 – (19) (128) – – – (37) – $ 1,252 (15) (141) – – – – 31 (354) – – – 87 – Accumulated Other Comprehensive Earnings (Loss) Total Equity Attributable to Equity Holders of Onex Corporation $ (21)(b) – – – – – – $ 1,772 2 (13) (24) 36 – (19) Non- controlling Interests $ 3,857 6 – – 113 (5) (296) (128) 144 Total Equity $ 5,629 8 (13) (24) 149 (5) (315) 16 32 24 15 (69) 2 11 21 2 (32) 1 $ 3,822 – – 119 (2) (109) $ 5,449 (15) (153) 119 (2) (109) (209) (31) (459) (12) (13) (4) 87 2 (209) – (813) (48) (24) (29) 174 5 – 21 3 13 – 1 $ 17(d) – – – – – – – – (36) (11) (25) – 3 21 3 13 (37) 1 $ 1,627 (15) (153) – – – – 31 (354) (36) (11) (25) 87 3 Balance – December 31, 2013 $ 346 $ 860 $ (52)(e) $ 1,154 $ 3,191 $ 4,345 (a) Dividends declared per Subordinate Voting Share during 2013 totalled C$0.14 (2012 – C$0.11). In 2013, shares issued under the dividend reinvestment plan amounted to less than $1 (2012 – 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, 2012 consisted of currency translation adjustments of negative $63, unrealized losses on the effective (c) portion of cash flow hedges of $3 and unrealized gains on available-for-sale financial assets of $45. Accumulated Other Comprehensive Earnings (Loss) as at January 1, 2012 included $4 of net losses related to discontinued operations. Income taxes did not have a significant effect on these items. Repurchase of shares of operating companies consisted primarily of shares repurchased by Celestica under its normal course issuer bid during 2012 and 2013, and its substan- tial issuer bid completed during the fourth quarter of 2012. During 2013, Celestica repurchased approximately 4.1 million of its subordinate voting shares (2012 – 35.8 million) for a cash cost of $44 (2012 − $289). In addition, during the fourth quarter of 2012, Sitel Worldwide repurchased common shares from a third-party investor for $1. (d) Accumulated Other Comprehensive Earnings (Loss) as at December 31, 2012 consisted of currency translation adjustments of negative $41 and unrealized gains on available- for-sale financial assets of $58. Accumulated Other Comprehensive Earnings (Loss) as at December 31, 2012 included $3 of net losses related to discontinued operations. Income taxes did not have a significant effect on these items. (e) Accumulated Other Comprehensive Earnings (Loss) as at December 31, 2013 consisted of currency translation adjustments of negative $74, unrealized losses on the effective portion of cash flow hedges of $11 and unrealized gains on available-for-sale financial assets of $33. Income taxes did not have a significant effect on these items. See accompanying notes to the consolidated financial statements, including the changes in accounting policies retroactively adopted on January 1, 2013, as described in note 1. Onex Corporation December 31, 2013 87 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 (recovery of) income taxes (note 16) Interest income Interest expense of operating companies (note 21) Net earnings (loss) 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, net Increase in value of investments in joint ventures and associates at fair value, net (note 8(a)) Stock-based compensation expense Other gains (note 23) Impairment of goodwill, intangible assets and long-lived assets, net (note 25) 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 Increase in cash and cash equivalents due to changes in working capital items Decrease in other operating activities Increase 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 Distributions paid to non-controlling interests and Limited Partners (note 17) Change in restricted cash for distribution to Limited Partners (note 17) 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 $14 (2012 – $275) (note 2) Purchase of property, plant and equipment Proceeds from sale of property, plant and equipment Proceeds from sale of investment in joint ventures and associates at fair value (note 8(a)) Proceeds from sale of operating investment no longer controlled (notes 3 and 23) Distributions received from investments in joint ventures and associates of Onex Partners (note 8(a)) Purchase of investments in joint venture of Onex Partners (note 8(a)) Cash interest and dividends received Net purchases of investments and securities (note 8) Decrease due to other investing activities Cash flows used for investing activities of discontinued operations (note 3) Increase 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 (note 3) Cash and Cash Equivalents Cash and cash equivalents held by discontinued operations (note 3) Cash and Cash Equivalents Held by Continuing Operations 2013 2012 $ (1,074) $ (10) (333) (106) 813 (700) (234) 619 537 (25) (1,098) 13 (561) 319 1,855 95 114 934 (123) 650 19 31 577 (115) 73 117 1,586 4,106 (2,834) (697) (14) (153) (109) 401 47 (1,542) 35 (70) (28) (858) (513) (835) 290 908 1,060 52 – 72 (1,062) (49) (115) (192) 536 (1) 2,629 27 3,191 – 76 (60) 514 520 (294) 538 318 32 (863) 211 (59) 65 929 91 96 1,584 (39) 371 18 33 383 (96) 22 150 2,043 2,320 (1,495) (445) (12) (24) (315) 1,311 34 (982) (35) (65) (117) 175 (1,393) (607) 31 326 71 676 (165) 19 (785) (73) (115) (2,015) 203 5 2,339 109 2,656 27 $ 3,191 $ 2,629 See accompanying notes to the consolidated financial statements, including the changes in accounting policies retroactively adopted on January 1, 2013, as described in note 1. 88 Onex Corporation December 31, 2013 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, insurance provider, customer care services, building prod- ucts, commercial vehicles, aircraft leasing and management, business services/tradeshows, plastics processing equipment, business services/packaging, industrial products, gaming and insurance brokerage. Additionally, the Company has investments in real estate, credit strategies and mid-market private equity opportunities. Note 34 provides additional 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 and also indirectly holds 18% of the outstanding Subordinate Voting Shares of the corporation as at December 31, 2013. 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 20, 2014. 1. B A S I S O F P R E PA R AT I O N A N D S I G N I F I C A N T C O N S O L I D AT I O N A C C O U N T I N G P O L I C I E S S TAT 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. The U.S. dollar is the Company’s functional currency. As such, the ﬁnancial statements have been reported on a U.S. dollar basis. 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”), Onex Partners III LP (“Onex Partners III”) and Onex Partners IV LP (“Onex Partners IV”), 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). In addition, Onex indirectly controls and consolidates the operations of the collateralized loan obligations of Onex Credit Partners. The results of operations of subsidiaries are included in the consolidated ﬁnancial statements from the date that control commences until the date that control ceases. All signiﬁcant intercompany balances and transactions have been eliminated. Certain investments in operating companies over which the Company has joint control or signiﬁcant inﬂuence, but not control, are designated, upon initial recognition, at fair value through earnings. As a result, these investments are recorded at fair value in the consolidated balance sheets, with changes in fair value recognized in the consolidated statements of earnings. Onex Corporation December 31, 2013 89 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 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, 2013 December 31, 2012 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 Skilled Healthcare Group, Inc. (“Skilled Healthcare Group”) Spirit AeroSystems, Inc. (“Spirit AeroSystems”) Investments made through Onex and Onex Partners II Allison Transmission Holdings, Inc. (“Allison Transmission”) Carestream Health, Inc. (“Carestream Health”) RSI Home Products, Inc. (“RSI”)(b) TMS International Corp. (“TMS International”)(c) Investments made through Onex, Onex Partners I and Onex Partners II The Warranty Group, Inc. (“The Warranty Group”) Investments made through Onex and Onex Partners III BBAM Limited Partnership (“BBAM”)(d) Emerald Expositions, LLC (“Emerald Expositions”) JELD-WEN Holding, inc. (“JELD-WEN”)(e) KraussMaffei Group GmbH (“KraussMaffei”) SGS International, Inc. (“SGS International”) Tomkins Limited (“Tomkins”) Tropicana Las Vegas, Inc. (“Tropicana Las Vegas”) USI Insurance Services (“USI”)(f) 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 Credit Partners(h) Onex Real Estate Partners (“Onex Real Estate”) 11% 70% 9% 5% 8% 36% (b) (c) 29% 13% 24% 18% 24% 23% 14% 18% 26% 11% 70% 39% 16% 27% 92% (b) (c) 91% 50% 99% 72% 96% 93% 56% 82% 92% 75% 89% 86% 63% (a) 100% (b) (c) 100% 50%(a) 99% 72% 100% 93% 50%(a) 82% 100% 20% 98% 100% 46%(g) 29% 70% 88% 100% 100% 70% 88% 100% 100% 50% 100% 10% 70% 9% 5% 13% 37% 20% 24% 29% 13% – 16% 25% 24% 14% 18% 37% 20% 46%(g) 29% 70% 88% 10% 70% 39% 16% 41% 93% 50% 60% 91% 50% – 64% 97% 94% 56% 83% 93% 98% 100% 100% 70% 88% Voting 74% 89% 87% 63% (a) 100% 50% (a) 90% 100% 50% (a) – 64% 100% 94% 50% (a) 83% 100% 100% 100% 100% 50% 100% (a) Onex exerts joint control or 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. (b) RSI was sold during the first quarter of 2013, as described in note 8(a). (c) TMS International was sold during the fourth quarter of 2013 and is presented as a discontinued operation, as described in note 3. (d) In connection with the investment in BBAM, Onex established Meridian Aviation Partners Limited (“Meridian Aviation”) in February 2013. Onex’ and the Limited Partners’ economic interest in Meridian Aviation at December 31, 2013 was 100%, of which Onex’ economic ownership was 25%. Onex’ voting interest in Meridian Aviation was 100% at December 31, 2013. (e) The economic ownership and voting interests of JELD-WEN are presented on an as-converted basis as the Company’s investment is in convertible preferred shares. The allocation of net earnings and comprehensive earnings attributable to equity holders of Onex Corporation and non-controlling interests is calculated using an as-converted economic ownership of 77% at December 31, 2013 (2012 – 71%) to reflect certain JELD-WEN shares that are recorded as liabilities at fair value. In April 2013, all of the outstanding convertible promissory notes were converted into Series A Convertible Preferred Stock of JELD-WEN, as described in note 12(e). (f) In March 2013, Onex sold a portion of its original investment in USI to certain limited partners and others, as described in note 2. (g) Represents Onex’ blended economic ownership in the ONCAP II investments. (h) Represents Onex’ share of the Onex Credit Partners asset management platform. The ownership percentages are before the effect of any potential dilution relating to the Management Investment Plans (the “MIP”), as described in note 31(j). The allocation of net earnings and comprehensive earnings attributable to equity holders of Onex Corporation and non-controlling interests is calculated 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. 90 Onex Corporation December 31, 2013 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S C H A N G E S I N A C C O U N T I N G P O L I C I E S the Company to measure fair value and did not result in any mea- The Company has adopted the following new and revised stan- surement adjustments as at January 1, 2013. Enhanced disclosures dards, along with any consequential amendments, effective are included in these consolidated ﬁnancial statements. January 1, 2013. These changes were made in accordance with the applicable transitional provisions. IAS 1 – Presentation of Financial Statements IFRS 10 – Consolidated Financial Statements Financial Statements, effective January 1, 2013. These amend ments IFRS 10, Consolidated Financial Statements, replaces the guid- required the Company to group other comprehensive income items ance on control and consolidation in IAS 27, Consolidated and by those that will be reclassiﬁed subsequently to earnings or loss Separate Financial Statements, and SIC-12, Consolidation – Special and those that will not be reclassiﬁed. The Company has reclassi- Purpose Entities. IFRS 10 requires consolidation of an investee ﬁed comprehensive income items of the comparative period. These only if the investor possesses power over the investee, has expo- changes did not result in any adjustments to other comprehensive The Company has adopted the amendments to IAS 1, Presenta tion of sure to variable returns from its involvement with the investee income or total comprehensive income. and has the ability to use its power over the investee to affect its returns. Detailed guidance is provided on applying the deﬁnition IAS 19 – Employee Future Benefits of control. The accounting requirements for consolidation have IAS 19, Employee Future Benefits (amended in 2011), requires the remained largely consistent with IAS 27. The Company deter- net deﬁned beneﬁt liabilities (assets) to be recognized on the bal- mined that the adoption of IFRS 10 on January 1, 2013 did not ance sheet without any deferral of actuarial gains and losses and result in any change in the consolidation status of any of its sub- past service costs, as previously allowed. Past service costs are sidiaries and investees. IFRS 11 – Joint Arrangements and IAS 28 – Investments in Associates and Joint Ventures recognized in net earnings when incurred. Expected returns on plan assets are no longer included in post-employment beneﬁts expense. Instead, post-employment beneﬁts expense includes the net interest on the net deﬁned beneﬁt liabilities (assets) calculated IFRS 11, Joint Arrangements, supersedes IAS 31, Interests in Joint using a discount rate based on market yields on high quality bonds. Ventures, and requires joint arrangements to be classiﬁed either Remeasurements consisting of actuarial gains and losses, the actual as joint operations or joint ventures depending on the contrac- return on plan assets (excluding the net interest component) and tual rights and obligations of each investor that jointly controls any change in the asset ceiling are recognized in other comprehen- the arrangement. An investment in a joint venture is accounted sive income. The Company continues to immediately recognize for using the equity method as set out in IAS 28, Investments in retained earnings all pension adjustments recognized in other in Associates and Joint Ventures (amended in 2011). The other comprehensive income. The Company also continues to recognize amendments to IAS 28 did not affect the Company. The Company interest expense (income) on net post-employment beneﬁts liabili- has classiﬁed its joint arrangements and concluded that the adop- ties (assets) in the consolidated statements of earnings. tion of IFRS 11 did not result in any changes in the accounting for The Company adopted these amendments retroactively its joint arrangements. and adjusted its opening equity as at January 1, 2012 to recognize previously unrecognized past service costs and adjustments to the IFRS 12 – Disclosure of Interests in Other Entities asset ceiling for post-employment plans. IFRS 12, Disclosure of Interests in Other Entities, requires an entity The effects on the consolidated ﬁnancial statements of to disclose information that enables users of ﬁnancial statements adopting the amendments to IAS 19 were not signiﬁcant. Onex Cor- to evaluate the nature of, and risks associated with, its interest po ration, the ultimate parent company, does not provide pension, in other entities and the effects of those interests on its ﬁnancial other retirement or post-retirement beneﬁts to its employees or to position, ﬁnancial performance and cash ﬂows. The Company those of any of the operating companies and does not have any obli- adopted IFRS 12 on January 1, 2013 in accordance with the IFRS 12 gations and has not made any guarantees with respect to the plans transition provisions. Enhanced disclosures are included in these of the operating companies. consolidated ﬁnancial statements. IFRS 13 – Fair Value Measurement The Company has early adopted the amendments to IAS 36, Impair IFRS 13, Fair Value Measurement, provides a single framework for ment of Assets, effective January 1, 2013. These amendments clarify measuring fair value and requires enhanced disclosures when fair and introduce additional disclosures about fair value measurements value is used for measurement. The Company adopted IFRS 13 on when there has been an impairment or impairment reversal. The January 1, 2013 on a prospective basis. The adoption of IFRS 13 did disclosures required by IAS 36 after adoption of the amendments not require any adjustments to the valuation techniques used by are included in these consolidated ﬁnancial statements. IAS 36 – Impairment of Assets Onex Corporation December 31, 2013 91 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 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 accounts receivable are transferred to an unrelated third party. the currency of the primary economic environment in which it The transfers are recorded as sales of accounts receivable, as the operates. For such operations, monetary assets and liabilities operating companies do not retain any ﬁnancial or legal interest denominated in foreign currencies are translated into U.S. dollars in the sold accounts receivable. The accounts receivable are sold at at the year-end exchange rates. Non-monetary assets and liabili- their face value less a discount as provided in the agreements. ties 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. The determination of net realizable value requires signiﬁ- currency denominated transactions. These exchange gains and cant judgement, including consideration of factors such as losses are recognized in earnings. shrinkage, the aging of and future demand for inventory and con- Assets and liabilities of foreign operations with non-U.S. tractual arrangements with customers. To the extent that circum- dollar functional currencies are translated into U.S. dollars using stances have changed subsequently such that the net realizable the year-end exchange rates. Revenue and expenses are translated value has increased, previous writedowns are reversed and rec- at the average exchange rates prevailing during the month of the ognized in the consolidated statements of earnings in the period transaction. Gains and losses arising from the translation of these the reversal occurs. For inventories in the aerostructures segment, foreign operations are deferred in the currency translation account costs are attributed to units delivered under long-term contracts included in equity. Cash and cash equivalents based on the estimated average cost of all units expected to be produced. Certain inventories in the healthcare segment are stated using an average cost method. For substantially all other Cash and cash equivalents includes liquid investments such as inventories, cost is determined on a ﬁrst-in, ﬁrst-out basis. term deposits, money market instruments and commercial paper Inventories include real estate assets of Flushing Town with original maturities of less than three months. The invest- Center that are available for sale. Real estate assets held-for-sale ments are carried at cost plus accrued interest, which approxi- are recorded at the lower of cost or net realizable value. mates fair value. Short-term investments Property, plant and equipment is recorded at cost less accumu- Short-term investments consist of liquid investments such as lated amortization and provisions for impairment, if any. Cost money market instruments and commercial paper with original consists of expenditures directly attributable to the acquisition of maturities of three months to a year. The investments are carried the asset. The costs of construction of qualifying long-term assets Property, plant and equipment at fair value. Accounts receivable include capitalized interest, as applicable. Land is not amortized. For substantially all remaining property, plant and equipment, amortization is provided for on Accounts receivable are recognized initially at fair value and sub- a straight-line basis over the estimated useful lives of the assets sequently measured at amortized cost using the effective inter- as follows: est method. A provision is recorded for impairment when there is objective evidence (such as signiﬁcant ﬁnancial difﬁculties of the Buildings up to 45 years debtor) that the Company will not be able to collect all amounts Machinery and equipment up to 20 years 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- 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 solidated statements of earnings. When a receivable is considered permanently uncollectible, the receivable is written off against the prospectively. allowance account. 92 Onex Corporation December 31, 2013 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S Investment property Intangible assets Investment property includes commercial property held to earn Intangible assets, including intellectual property and software, are rental income and property that is being constructed or devel- recorded at their fair value at the date of acquisition of the related oped for future use as investment property. Investment property is operating company or cost if internally generated or purchased. included with property, plant and equipment in the consolidated Amortization is provided for intangible assets with limited life. For balance sheets and recorded at cost less accumulated amortiza- substantially all limited life intangible assets, amortization is pro- tion and provisions for impairment, if any. vided for on a straight-line basis over their estimated useful lives The cost of investment property includes direct develop- as follows: ment costs, property transfer taxes and borrowing costs directly attributable to the development of the property. Trademarks and licenses 1 year to 30 years The Company’s investment property consists of Flushing Customer relationships 3 years to 30 years Town Center’s retail space and parking structures. The fair value of Flushing Town Center’s investment property at December 31, 2013 was $398 (2012 – $452), which is collateral for the outstanding long-term debt of Flushing Town Center. The fair value of Flushing Town Center’s investment property is a Level 3 measurement in the fair value hierarchy and was calculated primarily by discounting the expected net operating income using a discount and terminal capitalization rate of 6.50%. For the year ended December 31, 2013, property, plant and equipment additions included $5 (2012 − $4) related to Flushing Town Center’s investment property. Leases Leases of property, plant and equipment where the Company, as lessee, has substantially all the risks and rewards of ownership are classiﬁed as ﬁnance leases. Finance leases are capitalized at the lease’s commencement at the lower of the fair value of the leased property or the present value of the minimum lease pay- ments. Each lease payment is allocated between the liability and ﬁnance charges so as to achieve a constant interest rate on the balance outstanding. The corresponding lease obligations, net of ﬁnance charges, are included in the consolidated balance sheets. Property, plant and equipment acquired under ﬁnance leases is depreciated over the shorter of the useful life of the asset and the lease term. Leases in which a signiﬁcant portion of the risks and rewards of ownership are retained by the lessor are classiﬁed as operating leases. When the Company is the lessee, payments made under operating leases (net of any incentives received from the lessor) are recorded in the consolidated statements of earn- ings on a straight-line basis over the period of the lease. Certain of the operating companies lease out investment property and property, plant and equipment under operating leases. When the Company is the lessor, payments received under operating leas- es (net of any incentives provided by the operating companies) are recognized in the consolidated statements of earnings on a straight-line basis over the period of the lease. 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 prospec- tive basis. Goodwill Goodwill is initially measured as the excess of the aggregate of the consideration transferred, the fair value of any contingent consid- eration, the amount of any non-controlling interest 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 inter- est in the acquired company compared to the net fair value of the identiﬁable assets and liabilities acquired. Substantially all of the goodwill and intangible asset amounts that appear in the consoli- dated balance sheets are recorded by the operating companies. The recoverability of goodwill is assessed annually or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Judgement is required in determining whether events or changes in circumstances during the year are indica- tors that a review for impairment should be conducted prior to the annual assessment. For the purposes of impairment testing, good- will is allocated to the cash generating units (“CGUs”) of the busi- ness whose acquisition gave rise to the goodwill. Impairment of goodwill is tested at the level where goodwill is monitored for inter- nal management purposes. Therefore, goodwill may be assessed for impairment at the level of either an individual CGU or a group of CGUs. The determination of CGUs and the level at which goodwill is monitored requires judgement by management. The carrying amount of a CGU or a group of CGUs is compared to its recover- able amount, which is the higher of its value-in-use or fair value less costs to sell, to determine if an impairment exists. Impairment losses for goodwill are not reversed in future periods. Onex Corporation December 31, 2013 93 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S Impairment charges recorded by the operating compa- nies under IFRS may not impact the fair values of the operating companies used in determining the change in carried interest and Other current liabilities Profit-sharing provisions relating to the insurance provider segment for calculating the Limited Partners’ Interests liability. Fair values of Certain arrangements with producers of warranty contracts the operating companies are assessed at the enterprise level, while include proﬁt-sharing provisions whereby the underwriting impairment charges are assessed at the level of either an individual proﬁts, after a ﬁxed percentage allowance for the company and an CGU or group of CGUs. allowance for investment income, are remitted to the producers on a retrospective basis. Unearned premiums and contract fees Investments in joint ventures and associates subject to retrospective commission agreements totalled $400 at Joint ventures and associates are those entities over which the December 31, 2013 (2012 − $400). Company has joint control or signiﬁcant inﬂuence, but not con- trol. Certain investments in joint ventures and associates are des- Financing charges ignated, upon initial recognition, at fair value through earnings Financing charges consist of costs incurred by the operating com- in accordance with IAS 39, Financial Instruments: Recognition panies relating to the issuance of debt and are amortized over the and Measurement. As a result, the investments are recorded at term of the related debt or as the debt is retired, if earlier. These fair value in the consolidated balance sheets, with changes in fair unamortized ﬁnancing charges are netted against the carrying value recognized in the consolidated statements of earnings. value of the long-term debt, as described in note 12. Impairment of long-lived assets Losses and loss adjustment expenses reserves Property, plant and equipment, investment property and intan- Losses and loss adjustment expenses reserves relate to The gible assets are reviewed for impairment annually or whenever Warranty Group and represent the estimated ultimate net cost of events or changes in circumstances suggest that the carrying all reported and unreported losses incurred and unpaid through amount of an asset may not be recoverable. Judgement is required December 31, 2013. The Warranty Group does not discount losses in determining whether events or changes in circumstances dur- and loss adjustment expenses reserves. The reserves for unpaid ing the year are indicators that a review for impairment should be losses and loss adjustment expenses are estimated using individ- conducted prior to the annual assessment. An impairment loss is ual case-basis valuations and statistical analyses. Those estimates recognized when the carrying value of an asset or CGU exceeds the are subject to the effects of trends in loss severity and frequen- recoverable amount. The recoverable amount of an asset or CGU is cy and claims reporting patterns of the company’s third-party the greater of its value-in-use or its fair value less costs to sell. administrators. Although considerable variability is inherent in Impairment losses for long-lived assets are reversed in such estimates, management believes the reserves for losses and future periods if the circumstances that led to the impairment loss adjustment expenses are reasonable. The estimates are con- no longer exist. The reversal is limited to restoring the carrying tinually reviewed and adjusted as necessary as experience devel- amount that would have been determined, net of amortization, ops or new information becomes known; such adjustments are had no impairment loss been recognized in prior periods. included in current operations. Other non-current assets Acquisition costs relating to the insurance provider segment Provisions A provision is a liability of uncertain timing or amount and is gen- Certain costs of the warranty business, principally commissions, erally recognized when the Company has a present obligation as underwriting and sales expenses that result directly from, and a result of a past event, it is probable that payment will be made are essential to, the acquisition of new business, are deferred to settle the obligation and the payment can be reliably estimat- and amortized as the related premiums and contract fees are ed. Judgement is required to determine the extent of an obliga- earned. The possibility of premium deﬁciencies and the related tion and whether it is probable that a payment will be made. The recoverability of deferred acquisition costs is evaluated annu- Company’s signiﬁcant provisions consist of the following: ally. Management considers the effect of anticipated investment income in its evaluation of premium deﬁciencies and the related a) Self-insurance recoverability of deferred acquisition costs. Deferred acquisition Self-insurance provisions may be established for automobile, work- costs are derecognized when related contracts are either settled ers’ compensation, general liability, professional liability and other or cancelled. 94 Onex Corporation December 31, 2013 claims. Provisions are established for claims based on an assess- ment of actual claims and claims incurred but not reported. The reserves may be established based on consultation with third-party independent actuaries using actuarial principles and assumptions N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S that consider a number of factors, including historical claim pay- plan liabilities expected to arise from employee service in the cur- ment patterns and changes in case reserves, and the assumed rate rent period. The past service cost is the change in the beneﬁt obli- of inﬂation in healthcare costs and property damage repairs. gation in respect of employee service in prior periods and which b) Warranty results from a plan amendment or curtailment. Past service costs (or recoveries) from plan amendments are recognized immedi- Certain operating companies offer warranties on the sale of prod- ately in earnings, whether vested or unvested. ucts or services. A provision is recorded to provide for future war- Remeasurements, consisting of actuarial gains and loss- ranty costs based on management’s best estimate of probable es, the actual return on plan assets (excluding the net interest com- claims under these warranties. The provision is based on the terms ponent) and any change in the asset ceiling, are recognized in other of the warranty, which vary by customer and product or service comprehensive earnings. Remeasurements recognized in other and historical experience. The appropriateness of the provision is comprehensive earnings are directly recorded in retained earnings, evaluated at the end of each reporting period. The warranty provi- without recognition to the consolidated statements of earnings. sions exclude reserves recognized by The Warranty Group for its Deﬁned contribution plan accounting is applied to multi- warranty contracts. c) Restructuring employer deﬁned beneﬁt plans, for which the operating companies have insufﬁcient information to apply deﬁned beneﬁt accounting. Note 32 provides further details on pension and non- Restructuring provisions are recognized only when a detailed pension post-retirement beneﬁts. formal plan for the restructuring – including the concerned busi- ness or part of the business, the principal locations affected, Limited Partners’ Interests details regarding the employees affected, the restructuring’s tim- The interests of the Limited Partners and other investors through ing and the expenditures that will have to be undertaken – has the Onex Partners and ONCAP Funds are recorded as a ﬁnancial been developed and the restructuring has either commenced or liability in accordance with IAS 32, Financial Instruments: the plan’s main features have already been publicly announced to Presentation. The structure of the Onex Partners and ONCAP those affected by it. Funds as deﬁned in the partnership agreements, speciﬁcally the limited life of the Funds, requires presentation of the Limited Note 11 provides further details on provisions recognized by Partners’ Interests as a liability. The liability is recorded at fair the Company. value and is impacted by the change in fair value of the under- lying investments in the Onex Partners and ONCAP Funds, the Pension and non-pension post-retirement benefits change in carried interest, as well as any contributions by and dis- Onex, the parent company, does not provide pension, other retire- tributions to Limited Partners in those Funds. Adjustments to the ment or post-retirement beneﬁts to its employees or to those of fair value of the Limited Partners’ Interests are reﬂected through any of the operating companies. The operating companies that earnings, net of the change in carried interest. have pension and non-pension post-retirement beneﬁts accrue Note 17 provides further details on Limited Partners’ their obligations under such employee beneﬁt plans and related Interests. costs, net of plan assets. The costs of deﬁned beneﬁt pensions and other post-retirement beneﬁts earned by employees are accrued Income taxes in the period incurred and are actuarially determined using the Income taxes are recorded using the asset and liability method of projected unit credit method pro-rated on length of service, based income tax allocation. Under this method, assets and liabilities on management’s judgement and best estimates of assumptions are recorded for the future income tax consequences attributable for factors which impact the ultimate cost, including salary esca- to differences between the ﬁnancial statement carrying values of lation, retirement ages of employees, the discount rate used in assets and liabilities and their respective income tax bases, and on measuring the liability and expected healthcare costs. tax loss and tax credit carryforwards. Deferred tax assets are recog- Plan assets are recorded at fair value at each reporting nized only to the extent that it is probable that taxable proﬁt will date. Where a plan is in a surplus, the value of the net asset recog- be available against which the deductible temporary differences nized is restricted to the present value of any economic beneﬁts as well as tax loss and tax credit carryforwards can be utilized. available in the form of refunds from the plan or reductions in These deferred income tax assets and liabilities are recorded using future contributions to the plan. substantively enacted income tax rates. The effect of a change in The cost of deﬁned beneﬁt plans recognized in the con- income tax rates on these deferred income tax assets or liabili- solidated statements of earnings comprises the net total of the ties is included in income in the period in which the rate change current service cost, the past service cost, gains or losses from occurs. Certain of these differences are estimated based on current settlements and the net interest expense or income. The current tax legislation and the Company’s interpretation thereof. service cost represents the increase in the present value of the Onex Corporation December 31, 2013 95 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S Income tax expense or recovery is based on the income Aerostructures earned or loss incurred in each tax jurisdiction and the enacted or A signiﬁcant portion of Spirit AeroSystems’ revenues is under substantively enacted tax rate applicable to that income or loss. long-term volume-based pricing contracts, requiring delivery of Tax expense or recovery is recognized in the income statement, products over several years. Revenue from these contracts is rec- except to the extent that it relates to items recognized directly in ognized under the contract method of accounting in accordance equity, in which case the tax effect is also recognized in equity. with IAS 11, Construction Contracts. Revenues and costs are recog- Deferred tax liabilities for taxable temporary differences nized on each contract by reference to the percentage-of-comple- associated with investments in subsidiaries, joint ventures and tion of the contract activity primarily using the units-of-delivery associates are recognized, except when the Company is able to method. The contract method of accounting involves the use of control the timing of the reversal of temporary differences and it various estimating techniques to project costs at completion and is probable that the temporary differences will not reverse in the includes estimates of recoveries asserted against customers for foreseeable future. changes in speciﬁcations. Due to the signiﬁcant length of time In the ordinary course of business, there are transac- over which these estimates will be developed and applied, the tions for which the ultimate tax outcome is uncertain. The ﬁnal impact to recognized revenues and costs may be signiﬁcant if the tax outcome of these matters may be different from the judge- estimates change. These estimates involve various assumptions ments and estimates originally made by the Company in deter- and projections relative to the outcome of future events, including mining its income tax provisions. The Company periodically the quantity and timing of product deliveries based on contrac- evaluates the positions taken with respect to situations in which tual terms and market projections. Also included are assumptions applicable tax rules and regulations are subject to interpreta- relative to future labour performance and rates, projections rela- tion. Provisions related to tax uncertainties are established where tive to material and overhead costs and expected “learning curve” appropriate based on the best estimate of the amount that will cost reductions over the terms of the contracts. ultimately be paid to or received from tax authorities. Accrued Where the outcome of a contract cannot be reliably interest and penalties relating to tax uncertainties are recorded in estimated, all contract-related costs are expensed and revenues current income tax expense. are recognized only to the extent that those costs are recoverable. Note 16 provides further details on income taxes. When the outcome of such contracts becomes reliably estimable, revenues are recognized prospectively. Revenue recognition The company periodically re-evaluates its contract esti- Revenues are recognized net of estimated returns and allowances, mates and reﬂects changes in estimates in the current period, and trade discounts and volume rebates, where applicable. Where the uses the cumulative catch-up method of accounting for revisions Company is responsible for shipping and handling to customers, to estimates of total revenue, total costs or extent of progress on amounts charged for these services are recognized as revenue, a contract. and shipping and handling costs incurred are reported as a com- During the year ended December 31, 2013, the com- ponent of cost of sales in the consolidated statements of earnings. pany recognized revenues of $5,736 (2012 – $5,178) for contracts Electronics Manufacturing Services accounted for under the contract method of accounting. Contracts in progress at December 31, 2013 had recognized cumulative costs Revenue from the electronics manufacturing services segment of $33,638 (2012 – $28,071) and recognized cumulative earnings of consists primarily of product sales and services. Revenue is rec- $3,543 (2012 – $3,675). Additionally, these contracts had received ognized when signiﬁcant risks and rewards of ownership have advances of $1,916 (2012 – $1,897) and retentions of nil (2012 – nil). been transferred to the customer and receivables are reasonably At December 31, 2013, the company was due $2,059 (2012 – $2,389) assured of collection. from customers for contract work and $29 (2012 – $1) was due to For certain customers, warehousing services are pro- customers for contract work. vided in connection with manufacturing services. Contracts are For revenues not recognized under the contract method assessed to determine whether the manufacturing and warehous- of accounting, Spirit AeroSystems recognizes revenues from the ing services can be accounted for as separate units of accounting. sale of products at the point of passage of title, which is generally If the services do not constitute separate units of accounting, or at the time of shipment. Revenues earned from providing main- the manufacturing services do not meet all of the revenue rec- tenance services, including any contracted research and devel- ognition requirements, revenue recognition is deferred until the opment, are recognized when the service is complete or other products have been shipped to the customer. substantive contractual milestones are attained. Milestone pay- 96 Onex Corporation December 31, 2013 ments are recognized as revenue when milestones are deemed to be substantive and are achieved. Milestone payments collected in advance that are subject to signiﬁcant future performance obli- gations are presented as advance payments or deferred revenue, and are recognized as revenue when the milestone is achieved. N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S Healthcare agreements are calculated to result in premiums and contract fees Revenue in the healthcare segment consists of Skilled Healthcare being earned over the period at risk. Factors are developed based on Group’s patient service revenue, Carestream Health’s product sales historical analyses of claim payment patterns over the duration of revenue, ResCare’s client service revenue and CDI’s patient service the policies in force. All other unearned premiums and contract fees and healthcare provider management service revenue (up to July are determined on a pro rata basis. 2012). Service revenue is recognized at the time of service if rev- Reinsurance premiums, commissions, losses and loss enues and costs can be reliably measured and economic beneﬁts adjustment expenses are accounted for on bases consistent with are expected to be received, and is recorded net of provisions those used in accounting for the original policies issued and the for contractual discounts and estimated uncompensated care. terms of the reinsurance contracts. Premiums ceded to other Revenue from product sales is recognized when the following cri- companies have been reported as a reduction of revenue. Expense teria are met: signiﬁcant risks and rewards of ownership have been reimbursement received in connection with reinsurance ceded transferred; involvement in the capacity as an owner of the goods has been accounted for as a reduction of the related acquisition has ceased; revenue and costs incurred can be reliably measured; costs. Reinsurance receivables and prepaid reinsurance premium and economic beneﬁts are expected to be realized. amounts are reported as assets. Insurance Provider Customer Care Services The insurance provider segment revenue consists of revenue The customer care services segment generates revenue primarily from The Warranty Group’s warranty contracts primarily in North through the provision of a wide array of outsourced customer care America and Europe. The company records revenue and associ- management services, including customer service, technical sup- ated unearned revenue on warranty contracts issued by North port and customer acquisition, retention and revenue generation American obligor companies at the net amount remitted by the services. These services support its clients’ customers through selling dealer or at retailer “dealer cost”. Cancellations of these phone, e-mail, online chat, interactive voice response and social contracts are typically processed through the selling dealer or media channels and are generally charged by the minute or hour, retailer, and the company refunds only the unamortized balance per employee, per subscriber or user, or on a per item basis for of the dealer cost. However, the company is primarily liable for each transaction processed. Revenue is recognized to the extent these contracts and must refund the full amount of customer retail that it is probable that future economic beneﬁts will be received price if the selling dealer or retailer cannot or will not refund its and revenue can be reliably measured. A portion of the revenue portion. The amount the company has historically been required is often subject to performance standards. Revenue subject to to pay under such circumstances has been negligible. monthly or longer performance standards is recognized when The company records revenue and associated unearned such performance standards are met. revenue at the customer retail price on warranty contracts issued The company is reimbursed by clients for certain pass- by statutory insurance companies domiciled in Europe. The dif- through out-of-pocket expenses, consisting primarily of telecom- ference between the customer retail price and dealer cost is rec- munication, employee performance incentive, and postage and ognized as commission and deferred as a component of deferred shipping costs. The reimbursement and related costs are reﬂected acquisition costs. in the accompanying consolidated statements of earnings as rev- The company has dealer obligor and administrator obli- enue and cost of services, respectively. gor service contracts with the dealers or retailers to facilitate the sale of extended warranty contracts. Dealer obligor service contracts Building Products result in sales of extended warranty contracts in which the dealer/ Revenue from the building products segment primarily consists retailer is designated as the obligor. Administrator obligor service of product sales. Revenue is recognized when signiﬁcant risks contracts result in sales of extended warranty contracts in which and rewards of ownership have been transferred to the customer; the company is designated as the obligor. For both dealer obligor involvement in the capacity as an owner of the goods has ceased; and administrator obligor, premium and/or contract fee revenue revenue and costs incurred can be reliably measured; and receiv- is recognized over the contractual exposure period of the contracts ables are reasonably assured of collection. Incentive payments or historical claim payment patterns. Unearned premiums and to customers are recorded as a reduction of revenue over the contract fees on single-premium insurance related to warranty periods beneﬁted. Onex Corporation December 31, 2013 97 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S Other Research and development Other segment revenues consist of product sales, services and Research and development activities can be either (a) contracted construction contracts: or (b) self-initiated: • Revenue from product sales is recognized when the following criteria are met: signiﬁcant risks and rewards of ownership have been transferred; involvement in the capacity as an owner of the a) Costs for contracted research and development activities, car- ried out in the scope of externally ﬁnanced research and devel- goods has ceased; revenue and costs incurred can be reliably opment contracts, are expensed when the related revenues are measured; and economic beneﬁts are expected to be realized. recorded. Where product sales are subject to customer acceptance, rev- enue is recognized at the earlier of receipt of customer accep- tance or expiration of the acceptance period. Where product b) Costs for self-initiated research and development activities are assessed as to whether they qualify for recognition as inter- sales require the Company to install the product at the customer nally generated intangible assets. Apart from complying with location and such installation is essential to the functionality of the general requirements for initial measurement of an intan- the product, revenue is recognized when the product has been gible asset, qualiﬁcation criteria are met only when technical as delivered to and installed at the customer location. well as commercial feasibility can be demonstrated and cost can • Revenue from services is recognized at the time of service, be reliably measured. It must also be probable that the intan- when revenues and costs can be reliably measured and eco- gible asset will generate future economic beneﬁts, be clearly nomic beneﬁts are expected to be received by the company. identiﬁable and allocable to a speciﬁc product. Further to meet- Where services performed are subject to customer acceptance, ing these criteria, only such costs that relate solely to the develop- revenue is recognized at the earlier of receipt of customer ment phase of a self-initiated project are capitalized. Any costs acceptance or expiration of the acceptance period. that are classiﬁed as part of the research phase of a self-initiated • Revenues from construction contracts are recognized on project are expensed as incurred. If the research phase cannot be each contract by reference to the percentage-of-completion clearly distinguished from the development phase, the respec- of the contract activity primarily by comparing contract costs tive project-related costs are treated as if they were incurred in incurred to the estimated total contract costs. The contract the research phase only. Capitalized development costs are gen- method of accounting involves the use of various estimating erally amortized over the estimated number of units produced. techniques to project costs at completion and includes esti- In cases where the number of units produced cannot be reliably mates of ultimate proﬁtability and ﬁnal contract settlements. estimated, capitalized development costs are amortized over the Any expected loss from a construction contract is recognized in estimated useful life of the internally generated intangible asset. the period when the estimated total contract costs exceed the Internally generated intangible assets are reviewed for impair- estimated total contract revenue. Where the outcome of a con- ment annually when the asset is not yet in use or when events or struction contract cannot be reliably estimated, all contract- changes in circumstances indicate that the carrying amount may related costs are expensed and revenues are recognized only to not be recoverable and the asset is in use. the extent that those costs are recoverable. When the outcome During 2013, $212 (2012 – $175) of research and develop- of the construction of such contracts becomes reliably estima- ment costs were expensed and $38 of development costs (2012 – ble, revenues are recognized prospectively. $12) were capitalized. Capitalized development costs relating to the aerostructures segment are included in intangible assets. For arrangements where the Company derives revenues from multiple service or products elements, the recognition of reve- Stock-based compensation nues is separated based on the relative fair value of each element The Company follows the fair value-based method of accounting, separately identiﬁed in the arrangements. which is applied to all stock-based compensation plans. There are ﬁve types of stock-based compensation Depending on the terms under which the operating companies plans. The ﬁrst is the Company’s Stock Option Plan (the “Plan”), supply products, they may also be responsible for some or all of described in note 18(e), which provides that in certain situations the repair or replacement costs of defective products. The com- the Company has the right, but not the obligation, to settle any panies establish provisions for issues that are probable and esti- exercisable option under the Plan by the payment of cash to the mable in amounts management believes are adequate to cover option holder. The Company has recorded a liability for the poten- ultimate projected claim costs. The ﬁnal amounts determined tial future settlement of the vested options at the balance sheet to be due related to these matters could differ signiﬁcantly from date by reference to the fair value of the liability. The liability is recorded estimates. 98 Onex Corporation December 31, 2013 adjusted each reporting period for changes in the fair value of the options with the corresponding amount reﬂected in the consoli- dated statements of earnings. N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S The second type of plan is the MIP, which is described in the market value of the underlying shares, with the correspond- in note 31(j). The MIP provides that exercisable investment rights ing amount reﬂected in the consolidated statements of earnings. may be settled by issuance of the underlying shares or, in cer- To economically hedge the Company’s exposure to changes in the tain situations, by a cash payment for the value of the investment trading price of Onex shares associated with the Management DSU rights. The Company has recorded a liability for the potential Plan, the Company enters into forward agreements with a coun- future settlement of the vested rights at the balance sheet date by terparty ﬁnancial institution for all grants under the Management reference to the fair value of the liability. The liability is adjusted DSU Plan. As such, the change in value of the forward agreements each reporting period for changes in the fair value of the rights will be recorded to offset the amounts recorded as stock-based with the corresponding amount reﬂected in the consolidated compensation under the Management DSU Plan. The administra- statements of earnings. tive costs of those arrangements are borne entirely by participants The third type of plan is the Director Deferred Share in the plan. Management DSUs are redeemable only for cash and Unit Plan (“Director DSU Plan”). A Deferred Share Unit (“DSU”) no shares or other securities of the Corporation will be issued on entitles the holder to receive, upon redemption, a cash payment the exercise, redemption or other settlement thereof. Details of equivalent to the market value of a Subordinate Voting Share the Management DSUs outstanding under the plan are provided at the redemption date. The Director DSU Plan enables Onex in note 18(d). Directors to apply directors’ fees earned to acquire DSUs based The ﬁfth type of plan is employee stock option and on the market value of Onex shares at the time. Grants of DSUs other stock-based compensation plans in place for employees at may also be made to Onex Directors from time to time. The DSUs various operating companies, under which, on payment of the vest immediately, are redeemable only when the holder retires exercise price, stock of the particular operating company or cash and must be redeemed within one year following the year of is issued. The Company records a compensation expense for such retirement. Additional units are issued for any cash dividends options based on the fair value over the vesting period. paid on the Subordinate Voting Shares. The Company has record- ed a liability for the future settlement of the DSUs by reference Carried interest to the value of underlying Subordinate Voting Shares at the bal- Onex, as the General Partner of the Onex Partners and ONCAP ance sheet date. On a quarterly basis, the liability is adjusted for Funds, is entitled to a portion (20%) of the realized net gains of the change in the market value of the underlying shares, with the the limited partners in each Fund. This share of the net gains is corresponding amount reﬂected in the consolidated statements referred to as carried interest. Onex is entitled to 40% of the car- of earnings. To economically hedge a portion of the Company’s ried interest realized in the Onex Partners Funds. The Onex man- exposure to changes in the trading price of Onex shares, the agement team is entitled to the remaining 60% of the carried Company entered into a forward agreement for a portion of out- interest realized in the Onex Partners Funds. The ONCAP manage- standing Director DSUs with a counterparty ﬁnancial institution. ment team is entitled to that portion of the carried interest real- The change in value of the forward agreement will be recorded ized in the ONCAP Funds that equates to a 12% carried interest on to partially offset the amounts recorded as stock-based com- both limited partners’ and Onex capital. pensation under the Director DSU Plan. Details of the Director The unrealized carried interest of the Onex Partners DSUs outstanding under the plan and the portion hedged by the and ONCAP Funds is calculated based on the fair values of the Company are provided in note 18(d). underlying investments and the overall unrealized gains in each The fourth type of plan is the Management Deferred respective Fund in accordance with the limited partnership agree- Share Unit Plan (“Management DSU Plan”). The Management ments. The unrealized carried interest reduces the amount due DSU Plan enables Onex management to apply all or a portion of to the Limited Partners and will eventually be paid through the their annual compensation earned to acquire DSUs based on the realization of the Limited Partners’ share of the underlying Onex market value of Onex shares at the time. The DSUs vest immedi- Partners and ONCAP Fund investments. The change in net carried ately and are redeemable only when the holder has ceased to be interest attributable to Onex is recognized through the charge for an ofﬁcer or employee of the Company or an afﬁliate for a cash the Limited Partners’ Interests. The unrealized carried interest of payment equal to the then current market price of Subordinate the Onex Partners and ONCAP Funds attributable to management Voting Shares. Additional units are issued for any cash dividends is recognized as a liability within other non-current liabilities. The paid on the Subordinate Voting Shares. The Company has recorded charge for the change in net carried interest attributable to man- a liability for the future settlement of the DSUs by reference to the agement is recorded within other items in the consolidated state- value of underlying Subordinate Voting Shares at the balance sheet ments of earnings. date. On a quarterly basis, the liability is adjusted for the change Onex Corporation December 31, 2013 99 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S Financial assets and financial liabilities c) Held-to-maturity investments Financial assets and ﬁnancial liabilities are initially recognized Securities that have ﬁxed or determinable payments and a ﬁxed at fair value and are subsequently accounted for based on their maturity date, which the Company intends and has the ability to classiﬁcation as described below. Transaction costs in respect of an hold to maturity, are classiﬁed as held-to-maturity and account- asset or liability not recorded at fair value through net earnings are ed for at amortized cost using the effective interest rate method. added to the initial carrying amount. Gains and losses for ﬁnancial Investments classiﬁed as held-to-maturity are written down to instruments recognized through net earnings are primarily rec- fair value through earnings whenever it is necessary to reﬂect an ognized in other items in the consolidated statements of earn- impairment. Impairments are determined based on all relevant ings. The classiﬁcation of ﬁnancial assets and ﬁnancial liabilities facts and circumstances for each investment and recognized depends on the purpose for which the ﬁnancial instruments were when appropriate. acquired and their characteristics. Except in very limited circum- stances, the classiﬁcation is not changed subsequent to initial rec- d) Loans and receivables ognition. Financial assets purchased and sold, where the contract Financial assets that are non-derivative with ﬁxed or determin- requires the asset to be delivered within an established time frame, able payments that are not quoted in an active market are classi- are recognized on a trade-date basis. ﬁed as loans and receivables. These instruments are accounted for at amortized cost using the effective interest rate method. a) Fair value through net earnings Financial assets and ﬁnancial liabilities that are purchased and e) Financial liabilities measured at amortized cost incurred with the intention of generating earnings in the near Financial liabilities not classiﬁed as fair value through net earn- term are classiﬁed as fair value through net earnings. Other ings or loans and receivables are accounted for at amortized cost instruments may be designated as fair value through net earn- using the effective interest rate method. Long-term debt has been ings on initial recognition. The long-term debt of the Onex Credit designated as a ﬁnancial liability measured at amortized cost with Partners Collateralized Loan Obligations (“OCP CLOs”) are desig- the exception of long-term debt in the OCP CLOs, which have nated at fair value through net earnings upon initial recognition been designated to be recorded at fair value through net earnings. to eliminate a measurement inconsistency, as the asset portfolio of the OCP CLOs is recorded at fair value through net earnings. Derivatives and hedge accounting b) Available-for-sale At the inception of a hedging relationship, the Company docu- ments the relationship between the hedging instrument and the Financial assets classiﬁed as available-for-sale are carried at fair hedged item, its risk management objectives and its strategy for value, with the changes in fair value recorded in other comprehen- undertaking the hedge. The Company also requires a documented sive earnings. Securities that are classiﬁed as available-for-sale and assessment, both at hedge inception and on an ongoing basis, of which do not have a quoted price in an active market are recorded whether or not the derivatives that are used in the hedging transac- at fair value, unless fair value is not reliably determinable, in which tions are highly effective in offsetting the changes attributable to case they are recorded at cost. Available-for-sale securities are writ- the hedged risks in the fair values or cash ﬂows of the hedged items. ten down to fair value through earnings whenever it is necessary Derivatives that are not designated as effective hedg- to reﬂect an impairment. Gains and losses realized on disposal of ing relationships continue to be accounted for at fair value with available-for-sale securities, which are calculated on an average changes in fair value being included in other items in the consoli- cost basis, are recognized in earnings. Impairments are determined dated statements of earnings. based upon all relevant facts and circumstances for each invest- When derivatives are designated as effective hedging ment and recognized when appropriate. Foreign exchange gains relationships, the Company classiﬁes them either as: (a) hedges and losses on available-for-sale assets are recognized immediately of the change in fair value of recognized assets or liabilities or ﬁrm in earnings. commitments (fair value hedges); (b) hedges of the variability in highly probable future cash ﬂows attributable to a recognized asset or liability or a forecasted transaction (cash ﬂow hedges); or (c) hedges of net investments in a foreign self-sustaining opera- tion (net investment hedges). 100 Onex Corporation December 31, 2013 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S a) Fair value hedges Impairment of financial instruments Changes in the fair value of derivatives that are designated and The Company assesses at each reporting date whether there is qualify as fair value hedging instruments are recorded in the con- objective evidence that a ﬁnancial asset or group of ﬁnancial solidated statements of earnings, along with changes in the fair assets is impaired. Where an impairment exists for available-for- value of the assets, liabilities or group thereof that are attributable sale ﬁnancial assets, the cumulative loss, measured as the differ- to the hedged risk. b) Cash flow hedges 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. The Company is exposed to variability in future interest cash ﬂows on non-trading assets and liabilities that bear interest at De-recognition of financial instruments variable rates or are expected to be reinvested in the future. A ﬁnancial asset is de-recognized if substantially all risks and The effective portion of changes in the fair value of deriv- rewards of ownership and, in certain circumstances, control of the atives that are designated and qualify as cash ﬂow hedges is rec- ﬁnancial asset are transferred. A ﬁnancial liability is de-recognized ognized in other comprehensive earnings. Any gain or loss in fair when it is extinguished, with any gain or loss on extinguishment value relating to the ineffective portion is recognized immediately to be recognized in other items in the consolidated statements in the consolidated statements of earnings in other items. of earnings. Amounts accumulated in other comprehensive earnings are reclassiﬁed in the consolidated statements of earnings in the Government assistance period in which the hedged item affects earnings. However, when The operating companies may receive government assistance in the forecasted transaction that is hedged results in the recogni- the form of grants or investment tax credits for the acquisition of tion of a non-ﬁnancial asset or a non-ﬁnancial liability, the gains capital assets and other expenditures. Government assistance is and losses previously deferred in other comprehensive earnings recognized when there is reasonable assurance that the operating are transferred from other comprehensive earnings and included companies will realize the beneﬁts. Government assistance relat- in the initial measurement of the cost of the asset or liability. ing to the acquisition of capital assets is deducted from the costs When a hedging instrument expires or is sold, or when of the related assets and amortization is calculated on the net a hedge no longer meets the criteria for hedge accounting, any amount. Other forms of government assistance relating to operat- cumulative gain or loss existing in other comprehensive earnings ing expenditures are recorded as a reduction of the expense at the at that time remains in other comprehensive earnings until the time the expense is incurred. forecasted transaction is eventually recognized in the consoli- dated statements of earnings. When a forecasted transaction is Assets held-for-sale and discontinued operations no longer expected to occur, the cumulative gain or loss that was An asset is classiﬁed as held-for-sale if its carrying amount will be reported in other comprehensive earnings is immediately trans- recovered by the assets’ sale rather than by its continuing use in ferred to the consolidated statements of earnings. the business, the asset is available for immediate sale in its present c) Net investment hedges condition, and management is committed to, and has initiated, a plan to sell the asset which, when initiated, is expected to result Hedges of net investments in foreign operations are accounted for in a completed sale within 12 months. An extension of the period in a manner similar to cash ﬂow hedges. Any gain or loss on the required to complete the sale does not preclude the asset from hedging instrument relating to the effective portion of the hedge being classiﬁed as held-for-sale, provided the delay is for reasons is recognized in other comprehensive earnings. The gain or loss beyond the Company’s control and management remains commit- relating to the ineffective portion is recognized immediately in ted to its plan to sell the asset. Assets that are classiﬁed as held- the consolidated statements of earnings in other items. Gains and for-sale are measured at the lower of their carrying amount or fair losses accumulated in other comprehensive earnings are included value less costs to sell and are no longer depreciated. The determi- in the consolidated statements of earnings upon the reduction or nation of fair value less costs to sell involves judgement by manage- disposal of the investment in the foreign operation. ment to determine the probability and timing of disposition and the amount of recoveries and costs. A discontinued operation is a component of the Com- pany that has either been disposed of, or satisﬁes the criteria to be classiﬁed as held-for-sale, and represents a separate major line of business or geographic area of operations, is part of a single coordinated plan to dispose of a separate major line of business or geographic area of operations, or is an operating company acquired exclusively with a view to its disposal. Onex Corporation December 31, 2013 101 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S Use of judgements and estimates During 2013 and 2012, Onex invested capital in the Onex The preparation of ﬁnancial statements in conformity with Credit Partners’ CLOs and warehouse facilities as described in IFRS requires management to make judgements, estimates and note 8(c) and 8(e). Onex intends to provide additional ﬁnancial assumptions that affect the reported amounts of assets and liabil- collateral for the warehouse facility of Onex Credit Partners’ ﬁfth ities, the related disclosures of contingent assets and liabilities at CLO, OCP CLO-5. The collateral to be provided for the warehouse the date of the ﬁnancial statements, and the reported amounts of facility of OCP CLO-5 is expected to be substantially reinvested in revenue and expenses during the reporting period. Actual results the most subordinate capital of OCP CLO-5 upon closing. could differ materially from those estimates and assumptions. These estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized Limited Partners’ Interests, carried interest and investments in joint ventures and associates in the period in which the estimate is revised if the revision affects The measurement of the Limited Partners’ Interests, carried inter- only that period, or in the period of the revision and future peri- est and investments in joint ventures and associates is signiﬁcantly ods if the revision affects both current and future periods. impacted by the fair values of the Company’s investments held Areas that involve critical judgements, assumptions and by the Onex Partners and ONCAP Funds. The fair values of these estimates and that have a signiﬁcant inﬂuence on the amounts investments are assessed at each reporting date with changes recognized in the consolidated ﬁnancial statements are further reﬂected in the measurement of the Limited Partners’ Interests, car- described as follows: Business combinations ried interest and investments in joint ventures and associates. The valuation of the non-public investments held by the Onex Partners and ONCAP Funds requires signiﬁcant judge- In a business combination, all identiﬁable assets, liabilities and ment by the Company due to the absence of quoted market val- contingent liabilities acquired are recorded at the date of acqui- ues, inherent lack of liquidity and the long-term nature of such sition at their respective fair values. One of the most signiﬁcant assets. Valuation methodologies include observations of the trad- areas of judgement and estimation relates to the determination ing multiples of public companies considered comparable to the of the fair value of these assets and liabilities, including the fair private companies being valued and discounted cash ﬂows. The value of contingent consideration, if applicable. Land, buildings valuations take into consideration company-speciﬁc items, the and equipment are usually independently appraised while short- lack of liquidity inherent in a non-public investment and the fact term investments are valued at market prices. If any intangible that comparable public companies are not identical to the com- assets are identiﬁed, depending on the type of intangible asset panies being valued. Considerations are necessary because, in the and the complexity of determining its fair value, an indepen- absence of a committed buyer and completion of due diligence dent external valuation expert may develop the fair value, using similar to that performed in an actual negotiated sale process, appropriate valuation techniques, which are generally based on there may be company-speciﬁc items that are not fully known that a forecast of the total expected future net cash ﬂows. These valua- may affect value. In addition, a variety of additional factors are tions are linked closely to the assumptions made by management reviewed by management, including, but not limited to, ﬁnancing regarding the future performance of the assets concerned and any and sales transactions with third parties, current operating per- changes in the discount rate applied. formance and future expectations of the particular investment, In certain circumstances where estimates have been changes in market outlook and the third-party ﬁnancing envi- made, the companies may obtain third-party valuations of certain ronment. In determining changes to the valuations, emphasis is assets, which could result in further reﬁnement of the fair-value placed on current company performance and market conditions. allocation of certain purchase prices and accounting adjustments. For publicly traded investments, the valuation is based on closing market prices less adjustments, if any, for regulatory and/or con- Consolidation of structured entities tractual sale restrictions. Onex indirectly controls and consolidates the operations of the col- The Limited Partners’ Interests and carried interest are lateralized loan obligations (“CLOs”) of Onex Credit Partners. The measured with signiﬁcant unobservable inputs (Level 3 of the CLOs are structured entities for which voting and similar rights are fair value hierarchy). Further information is provided in note 17. not the dominant factor in determining control of the CLOs. Onex Investments in joint ventures and associates designated at fair has used judgement when assessing the many factors to determine value are measured with signiﬁcant unobservable inputs (Level 3 of control, including its exposure through investments in the most the fair value hierarchy), with the exception of Allison Transmission subordinate capital of the CLOs, its role in the formation of the (beginning March 2012), which is measured with signiﬁcant other CLOs, the rights of other investors in the CLOs and its joint control observable inputs (Level 2 of the fair value hierarchy). Further of the asset manager of the CLOs. Onex has determined that it is information is provided in notes 8 and 28. a principal of the CLOs with the power to affect the returns of its investment and, as a result, indirectly controls the CLOs. 102 Onex Corporation December 31, 2013 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S Goodwill impairment tests and recoverability of assets cost reduction opportunities, as well as the estimated number of The Company tests at least annually whether goodwill has suf- units to be manufactured under the contract and other variables. fered any impairment, in accordance with its accounting policies. During 2013, Spirit AeroSystems recognized $1,133 (2012 – The determination of the recoverable amount of a CGU (or group $644) of pre-tax forward-loss charges. of CGUs) to which goodwill is allocated involves the use of esti- mates by management. The Company generally uses discounted Revenue recognition cash ﬂow-based methods to determine these values. These dis- Revenues for Skilled Healthcare Group and ResCare in the health- counted cash ﬂow calculations typically use ﬁve-year projections care segment are substantially derived from U.S. federal, state that are based on the operative plans approved by management. and local government agency programs, including Medicare and Cash ﬂow projections take into account past experience and rep- Medicaid. Laws and regulations under these programs are com- resent management’s best estimate of future developments. Cash plex and subject to interpretation. Management may be required ﬂows after the planning period are extrapolated using estimated to exercise judgement for the recognition of revenue under these growth rates. Key assumptions on which management has based programs. Management of those businesses believes that they are its determination of fair value less costs to sell and value-in-use in compliance with all applicable laws and regulations. Compliance include estimated growth rates, weighted average cost of capital with such laws and regulations is subject to ongoing and future gov- and tax rates. These estimates, including the methodology used, ernment review and interpretation, including the possibility of pro- can have a material impact on the respective values and ulti- cessing claims at lower amounts upon audit, as well as signiﬁcant mately the amount of any goodwill impairment. Note 25 provides regulatory action including revenue adjustments, ﬁnes, penalties details on the signiﬁcant estimates used in the calculation of the and exclusion from programs. Government agencies may condi- recoverable amounts for impairment testing. Likewise, whenever tion their contracts upon a sufﬁcient budgetary appropriation. If a property, plant and equipment and other intangible assets are government agency does not receive an appropriation sufﬁcient to tested for impairment, the determination of the assets’ recoverable cover its contractual obligations, it may terminate the contract or amount involves the use of estimates by management and can defer or reduce reimbursements to be received by the Company. In have a material impact on the respective values and ultimately the addition, previously appropriated funds could also be reduced or amount of any impairment. eliminated through subsequent legislation. Construction contract accounting Income taxes Spirit AeroSystems’ accounting for construction contracts in the The Company, including the operating companies, operates and aerostructures segment involves critical assumptions and esti- earns income in numerous countries and is subject to changing mates which have a signiﬁcant inﬂuence on the amounts recog- tax laws in multiple jurisdictions within these countries. Signiﬁcant nized in the consolidated ﬁnancial statements. The revenue recog- judgements are necessary in determining worldwide income tax nition policy for the aerostructures segment provides a description liabilities. Although management believes that it has made rea- of the critical assumptions and estimates used by the company. A sonable estimates about the ﬁnal outcome of tax uncertainties, no signiﬁcant portion of future revenues in the aerostructures seg- assurance can be given that the ﬁnal outcome of these tax matters ment is expected to be derived from new programs for which the will be consistent with what is reﬂected in the historical income company may be contracted to provide design and engineer- tax provisions. Such differences could have an effect on income tax ing services, recurring production, or both. There are several liabilities and deferred tax liabilities in the period in which such risks inherent in such new programs. In the design and engineer- determinations are made. At each balance sheet date, the Company ing phase, the company may incur costs in excess of our forecasts assesses whether the realization of future tax beneﬁts is sufﬁciently due to several factors, including cost overruns, customer directed probable to recognize deferred tax assets. This assessment requires change orders and delays in the overall program. The company the exercise of judgement on the part of management with respect may also incur higher than expected recurring production costs, to, among other things, beneﬁts that could be realized from avail- which may be caused by a variety of factors, including the future able tax strategies and future taxable income, as well as other posi- impact of engineering changes (or other change orders) or an tive and negative factors. The recorded amount of total deferred inability to secure contracts with suppliers at projected cost lev- tax assets could be reduced if estimates of projected future taxable els. The ability to recover these excess costs from customers will income and beneﬁts from available tax strategies are lowered, or if depend on several factors, including the company’s rights under changes in current tax regulations are enacted that impose restric- its contracts for the new programs. The recognition of earnings and tions on the timing or extent of the Company’s ability to utilize losses under these new contracts requires the company to make future tax beneﬁts. signiﬁcant assumptions regarding its future costs, ability to achieve Onex Corporation December 31, 2013 103 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S The Company, including the operating companies, uses ation model include the fair value of the underlying investments, signiﬁcant judgement when determining whether to recognize the time to expected exit from each investment, a risk-free rate deferred tax liabilities with respect to taxable temporary differ- and an industry comparable historical volatility for each invest- ences associated with investments in subsidiaries, joint ventures ment. The fair value of the underlying investments includes criti- and associates; in particular, whether the Company is able to con- cal assumptions and estimates as described above for Limited trol the timing of the reversal of the temporary differences and Partners’ Interests, carried interest and investments in joint ven- whether it is probable that the temporary differences will not tures and associates. reverse in the foreseeable future. Judgement includes consider- ation of the Company’s future cash requirements in its numerous Earnings per share tax jurisdictions. Legal provisions and contingencies Basic earnings per share is based on the weighted average number of Subordinate Voting Shares outstanding during the year. Diluted earnings per share is calculated using the trea- The Company and its operating companies in the normal course sury stock method. of operations become involved in various legal proceedings, as described in note 31(b). While the Company cannot predict the Dividend distributions ﬁnal outcome of such legal proceedings, the outcome of these Dividend distributions to the shareholders of Onex Corporation matters may have a material effect on the Company’s con- are recognized as a liability in the consolidated balance sheets in solidated ﬁnancial position, results of operations or cash ﬂows. the period in which the dividends are declared and authorized by Management regularly analyzes current information about these the Board of Directors. 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 making the decision regarding the need for provisions, manage- ment considers the degree of probability of an unfavourable out- R E C E N T LY I S S U E D A C C O U N T I N G P R O N O U N C E M E N T S Standards, amendments and interpretations not yet adopted or effective Investment Entity Amendments come and the ability to make a sufﬁciently reliable estimate of the In October 2012, the IASB issued amendments to IFRS 10, Consoli amount of loss. The ﬁling of a suit or formal assertion of a claim or dated Financial Statements, IFRS 12, Disclosure of Interests in Other the disclosure of any such suit or assertion does not automatically Entities and IAS 27, Separate Financial Statements, to include an indicate that a provision may be appropriate. exception to the consolidation requirements for investment enti- Employee benefits ties as deﬁned in the amendments issued by the IASB. The amend- ments are effective for annual periods beginning on or after Onex, the parent company, does not provide pension, other retire- January 1, 2014, with earlier application permitted. The impact of ment or post-retirement beneﬁts to its employees or to those of adopting these amendments is not expected to have a signiﬁcant any of the operating companies. The operating companies that effect on Onex’ consolidated ﬁnancial statements. have pension and non-pension post-retirement beneﬁts account for these beneﬁts in accordance with actuarial valuations. These IFRS 9 – Financial Instruments valuations rely on statistical and other factors in order to antici- In November 2009, the IASB issued IFRS 9, Financial Instruments, pate future events. These factors include key actuarial assump- which represents the ﬁrst phase of its replacement of IAS 39, Finan tions, including the discount rate, expected salary increases and cial Instruments: Recognition and Measurement, and introduces mortality rates. These actuarial assumptions may differ materi- new requirements for the classiﬁcation and measurement of ﬁnan- ally from actual developments due to changing market and eco- cial assets and removes the need to separately account for certain nomic conditions and therefore may result in a signiﬁcant change embedded derivatives. in post-retirement employee beneﬁt obligations and the related In December 2013, the IASB issued updates to IFRS 9 to future expense. Note 32 provides details on the estimates used in incorporate new hedge accounting requirements that increase the accounting for pensions and post-retirement beneﬁts. scope of items that can qualify as a hedged item and change the Stock-based compensation use hedge accounting. The Company’s stock-based compensation accounting for its MIP The effective date for IFRS 9 has been deferred by the options is completed using an internally developed valuation IASB. The Company is currently evaluating the impact of adopting model. The critical assumptions and estimates used in the valu- this standard on its consolidated ﬁnancial statements. requirements of hedge effectiveness testing that must be met to 104 Onex Corporation December 31, 2013 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S IFRIC 21 – Levies and projected earnings multiples. The key inputs to the valua- In May 2013, the IASB issued Interpretation 21, Levies (“IFRIC 21”), tion techniques include assumptions related to future customer which provides guidance on accounting for levies in accordance demand, material and employee-related costs, changes in mix of with IAS 37, Provisions. The interpretation deﬁnes a levy as an out- products and services produced or delivered, and restructuring ﬂow from an entity imposed by a government in accordance with programs. Any non-controlling interests in the acquired com- legislation. IFRIC 21 clariﬁes that a levy is recognized as a liability pany are measured either at fair value or at the non-controlling when the obligating event that triggers payment, as speciﬁed in the interests’ proportionate share of the identiﬁable assets and liabil- legislation, has occurred. IFRIC 21 is effective for annual periods ities of the acquired business. The excess of the aggregate of the beginning on or after January 1, 2014. The Company is currently consideration transferred, the amount of any non-controlling evaluating the impact of adopting this standard on its consolidated interests in the acquired company and, in a business combina- ﬁnancial statements. 2 . A C Q U I S I T I O N S tion 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 During 2013 and 2012 several acquisitions, which were accounted as incurred and related restructuring charges are expensed in the for as business combinations, were completed either directly by periods after the acquisition date. Costs incurred to issue debt Onex or through subsidiaries of Onex. Any third-party borrowings are deferred and recognized as described in note 1. Subsequent in respect of these acquisitions are without recourse to Onex. changes in the fair value of contingent consideration recorded as Business combinations are accounted for using the a liability at the acquisition date are recognized in earnings or loss. acquisition method. The cost of an acquisition is measured as the In certain circumstances where preliminary estimates fair value of the assets given, equity instruments issued and lia- have been made, the companies may obtain third-party valua- bilities incurred or assumed at the date of exchange. Identiﬁable tions of certain assets, which could result in further reﬁnement of assets acquired and liabilities and contingent liabilities assumed the fair value allocation of certain purchase prices and accounting in a business combination are measured initially at fair value at adjustments. The results of operations for all acquired businesses the date of acquisition, irrespective of the extent of any non-con- are included in the consolidated statements of earnings, compre- trolling interests. The fair value is determined using a combina- hensive earnings and equity of the Company from their respective tion of valuation techniques, including discounted cash ﬂows dates of acquisition. 2 013 A C Q U I S I T I O N S Details of the purchase price allocation for the 2013 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 Emerald Expositions(a) USI(b) $ 12 $ – ONCAP(c) $ 1 Other(d) $ 1 57 271 191 633 3 1,167 (96) (721) 16 35 – 33 2 86 (14) (6) 12 11 – 46 26 96 (3) (9) 5 35 2 38 2 83 (2) – Total $ 14 90 352 193 750 33 1,432 (115) (736) Interest in net assets acquired $ 350 $ 66 $ 84 $ 81 $ 581 a) In June 2013, the Company completed the acquisition of Nielsen Expositions from its parent, an afﬁliate of Nielsen Holdings N.V., ownership interest, was made by Onex, Onex Partners III and Onex management. Onex’ equity investment in Emerald Expositions for total consideration of $950. The business, now operating as was $85, for an initial 24% ownership interest. Emerald Expositions, LLC, is a leading operator of large business- to-business tradeshows in the United States across nine end mar- kets. The Company’s equity investment of $350, for an initial 100% b) During 2013, USI completed eight acquisitions located in the United States for total consideration of $66, of which $23 was in the form of certain deferred and/or contingent payments. Onex Corporation December 31, 2013 105 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S c) ONCAP includes acquisitions made by Hopkins Manu facturing Corporation (“Hopkins”), Mister Car Wash, BSN SPORTS Inc. Included in the acquisitions above were gross receivables due from customers of $70, of which $1 of contractual cash ﬂows are (“BSN SPORTS”) (up to the date of disposition in June 2013) and not expected to be recovered. The fair value of these receivables at Caliber Collision Centers (“Caliber Collision”) (up to the date of the dates of acquisition was determined to be $69. disposition in November 2013) for total consideration of $84, of which $8 was non-cash consideration and excludes non-cash bar- Net earnings from the date of acquisition for these acquisitions to gain purchase gains of $2. December 31, 2013 were not signiﬁcant to the Company’s results d) Other includes acquisitions made by ResCare, SGS Interna- tional and The Warranty Group for total consideration of $81, of Goodwill arising from the acquisitions is attributable primarily to which $20 was non-cash consideration and excludes a non-cash non-contractual established customer bases of the acquired com- bargain purchase gain of $1. panies. Goodwill of the acquisitions that is expected to be deduct- for the year ended December 31, 2013. ible for tax purposes is $126. 2 012 A C Q U I S I T I O N S Details of the purchase price allocation for the 2012 acquisitions are as follows: Celestica(a) International(b) JELD-WEN(c) USI(d) KraussMaffei(e) ONCAP(f) Other(g) Total SGS Cash and cash equivalents $ 6 $ 10 $ 3 $ 102 $ 144 $ 10 $ – $ 275 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 22 24 – 26 15 93 (4) (12) 77 – 121 449 99 320 71 1,070 (53) (714) 303 (14) 31 5 3 – 62 104 (12) (10) 82 – 341 1,329 47 1,269 26 3,114 (404) (1,998) 712 (48) 585 372 135 240 215 1,691 (591) (732) 368 – 165 30 12 154 43 414 (75) (164) 175 (7) 2 18 1 23 – 44 (1) (2) 41 – 1,267 2,227 297 2,032 432 6,530 (1,140) (3,632) 1,758 (69) Interest in net assets acquired $ 77 $ 289 $ 82 $ 664 $ 368 $ 168 $ 41 $ 1,689 a) In September 2012, Celestica completed the acquisition of D&H Manufacturing Company. The company is a manufacturer of pre- c) In October 2012, JELD-WEN completed the acquisition of Craft- Master Manufacturing, Inc. (“CMI”). CMI is a manufacturer and cision machined components and assemblies, primarily for the marketer of doors, door facings, and exterior composite trim semiconductor capital equipment market. The purchase price for and panels. This acquisition expands JELD-WEN’s manufactur- this acquisition was $71, net of cash acquired, which was ﬁnanced ing footprint in the United States and gives JELD-WEN access to by Celestica. b) In October 2012, the Company acquired a controlling interest in SGS International, Inc. (“SGS International”). SGS International new and proprietary technology, and increases its focus on envi- ronmentally friendly wood composite exterior products. The pur- chase price for this acquisition was $77, which excludes a non- cash bargain purchase gain of $4. The purchase price was used is a global leader in design-to-print graphic services to branded to fund the purchase of shares and discharge approximately $67 consumer products companies, retailers and the printers that ser- of CMI debt upon closing of the transaction. In conjunction with vice them. The Company’s equity investment of $260, for an initial this transaction, Onex, Onex Partners III, Onex management, cer- 95% ownership interest, was made by Onex, Onex Partners III and tain limited partners and others invested $50 in JELD-WEN for Onex management. Onex’ equity investment in SGS International convertible preferred stock. Onex’ share of the investment in con- was $66 for an initial 24% ownership interest. vertible preferred stock was $12. In addition, SGS International completed the acquisi- In addition, JELD-WEN completed an acquisition in tion of Stevenson Color, Inc. for a purchase price of $29, which January 2012 for total consideration of $1. was ﬁnanced by SGS International. 106 Onex Corporation December 31, 2013 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S d) In December 2012, the Company acquired a controlling interest in USI Insurance Services (“USI”). USI is a leader in the insurance Included in the acquisitions above were gross receivables due from customers of $323, of which $5 of contractual cash ﬂows are brokerage market with a diversiﬁed mix of property and casual- not expected to be recovered. The fair value of these receivables at ty, employee beneﬁts and retirement consulting. The Company’s the dates of acquisition was determined to be $318. total equity investment in USI was $636 for an initial 93% owner- ship interest, which includes $510 from Onex Partners III and $126 Net earnings from the date of acquisition to December 31, 2012 for from Onex as a co-investment. Onex’ total initial equity invest- these acquisitions were not signiﬁcant to the Company’s results ment in USI was $254 for an initial 37% ownership interest. for the year ended December 31, 2012. In addition, USI completed three acquisitions in late December 2012 for total consideration of $28, of which $10 was The Company estimates it would have reported consolidated rev- non-cash consideration. enues of $30,137 and a net loss of $110 for the year ended Decem- In March 2013, $84 of the amount originally invested ber 31, 2012 if the acquisitions completed during 2012 had been by Onex in USI was sold, at Onex’ original cost, to certain lim- acquired on January 1, 2012. The estimates do not reﬂect the ited partners and others as a co-investment. After giving effect impact of operations subsequently classiﬁed as discontinued. The to the co-investment sale, Onex’ total investment in USI is $170 estimated net loss reﬂects the im pact of amortization for intangi- and is comprised of $128 through Onex Partners III and $42 as a bles established upon acquisition. co-investment. e) In December 2012, the Company acquired a controlling inter- est in KraussMaffei AG (“KraussMaffei”). KraussMaffei is a global acquired workforce, non-contractual established customer bases and technological knowledge of the acquired companies. Goodwill leader in the design and manufacture of machinery and systems of the acquisitions that was expected to be deductible for tax pur- Goodwill of the acquisitions was attributable primarily to the for the processing of plastics and rubber used in the injection poses was $72. molding, extrusion and reaction process segments. The Company’s initial equity investment of $358, for an initial 97% ownership 3 . D I S C O N T I N U E D O P E R AT I O N S interest, was made by Onex, Onex Partners III and Onex manage- ment. Onex’ initial equity investment in KraussMaffei was $90 for The following table shows revenue, expenses and net after-tax an initial 25% ownership interest. results from discontinued operations, which represents the results In July 2013, $8 of accounts receivable held by Onex, of TMS International Corp. (“TMS International”). The sales of Onex Partners III and Onex management was converted to addi- CDI in 2012 and BSN SPORTS and Caliber Collision in 2013, as tional equity of KraussMaffei. Onex’ share of the additional equity described in note 23, did not represent separate major lines of was $2. business, and as a result, have not been presented as discontinued f) In December 2012, ONCAP III completed the acquisition of Bradshaw International, Inc. (“Bradshaw”), a California, United States headquartered designer, marketer and category manager of branded and private label kitchen, cooking and cleaning prod- ucts. Onex and ONCAP III have an approximate 92% ownership in Bradshaw, of which Onex’ equity ownership is 28%. Onex and ONCAP III’s total equity investment in Bradshaw was $80, of which Onex’ share was $24. In addition, ONCAP includes acquisitions made by CiCi’s Pizza, Davis-Standard Holdings, Inc. (“Davis-Standard”), operations. Year ended December 31 2013 2012 Revenues Expenses Earnings before income taxes Provision for income taxes Gain, net of tax $ 1,828 (1,797) 31 (12) 242 $ 2,526 (2,489) 37 (11 ) – Net earnings for the year $ 261 $ 26 Hopkins, Mister Car Wash, BSN SPORTS and Caliber Collision for In October 2013, Onex, Onex Partners II and Onex management total consideration of $83, which excludes a non-cash bargain sold their remaining 23.4 million shares of TMS International, of purchase gain of $5. g) Other includes acquisitions made by Carestream Health, CDI (up to the date of disposition in July 2012), ResCare and Skilled which Onex’ portion was approximately 9.3 million shares. The sale was part of an offer made for all outstanding shares of TMS International. The sale was completed at a price of $17.50 cash per share. Onex’ cash cost for these shares was $7.84 per share. Total Healthcare Group for total consideration of $41, of which $2 was cash proceeds received from the sale were $410, resulting in a pre- non-cash consideration. tax gain of $249. Onex recorded a non-cash tax provision of $7 Onex Corporation December 31, 2013 107 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S on the gain. Onex’ share of the cash proceeds was $172, includ- 4 . C A S H A N D C A S H E Q U I VA L E N T S ing carried interest. The gain on the sale is entirely attributable to the equity holders of Onex Corporation, as the interests of the Limited Partners were recorded as a ﬁnancial liability at fair value. Amounts received on account of the carried interest related to this As at December 31 Cash and cash equivalents comprised the following: transaction totalled $25. Consistent with market practice and the Cash at bank and on hand terms of the Onex Partners agreements, Onex is allocated 40% of the carried interest with 60% allocated to management. Onex’ share of the carried interest received was $10 and is included in Onex’ share of the cash proceeds. Management’s share of the car- ried interest was $15. No amounts were paid on account of the MIP for this transaction as the required investment hurdle for Onex was not met. The operations of TMS International are presented as Bank term deposits Commercial paper Money market funds 5 . I N V E N T O R I E S discontinued in the consolidated statements of earnings and cash Inventories comprised the following: ﬂows and the prior period has been restated to report the results of TMS International as discontinued on a comparative basis. As at December 31 The following table shows the summarized aggregate assets and liabilities of discontinued operations: Raw materials Work in progress Finished goods December 31, 2012 January 1, 2012 Real estate held for sale Cash and cash equivalents $ 27 $ 109 2013 $ 1,165 276 1,184 566 2012 $ 1,212 284 714 446 $ 3,191 $ 2,656 2013 $ 1,150 2,168 539 15 2012 $ 1,155 2,625 608 131 $ 3,872 $ 4,519 Other current assets Intangible assets Goodwill Property, plant and equipment and other non-current assets Current liabilities Non-current liabilities 350 147 240 225 989 (310) (377) 376 153 239 168 1,045 (330) (446) During the year ended December 31, 2013, $14,873 (2012 – $13,670) of inventory was expensed in cost of sales. Note 11 provides details on inventory provisions recorded by the Company. 6 . O T H E R C U R R E N T A S S E T S Other current assets comprised the following: Net assets of discontinued operations $ 302 $ 269 As at December 31 2013 2012 The following table presents the summarized aggregate cash ﬂows from (used in) discontinued operations. Current portion of ceded claims recoverable held by The Warranty Group (note 14) $ 129 $ 146 Current portion of prepaid premiums of The Warranty Group Current portion of deferred costs of The Warranty Group (note 9) Income and value added taxes receivable Prepaid expenses Restricted cash Other 424 128 169 144 139 345 392 123 91 205 159 327 $ 1,478 $ 1,443 Year ended December 31 Operating activities Financing activities Investing activities Decrease in cash and cash equivalents for the year Decrease 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 2013 $ 117 (28) (115) (26) (1) 27 – 410 $ 410 108 Onex Corporation December 31, 2013 2012 $ 150 (117) (115) (82) – 109 27 – $ 27 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 7. 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: Land Buildings Machinery and Equipment Construction in Progress At January 1, 2012 Cost Accumulated amortization and impairments Net book amount Year ended December 31, 2012 Opening net book amount Additions Disposals Amortization charge Amortization charge (discontinued operations) Acquisition of subsidiaries Disposition of operating companies Impairment charge(a) Transfers from construction in progress Foreign exchange Other Closing net book amount At December 31, 2012 Cost Accumulated amortization and impairments Net book amount Year ended December 31, 2013 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 Total $ 7,653 (2,551) $ 5,102 $ 5,102 757 (40) (538) (57) 365 (32) (39) – 17 (40) $ 386 − $ 386 $ 386 496 (1) – – 10 (1) – (567) (4) (5) $ 599 (8) $ 591 $ 2,445 (521) $ 1,924 $ 4,223 (2,022) $ 2,201 $ 591 $ 1,924 $ 2,201 75 (19) (126) (3) 85 (8) (18) 94 12 (16) 182 (18) (412) (54) 233 (23) (19) 473 6 (5) 4 (2) – – 37 – (2) – 3 (14) $ 617 $ 627 (10) $ 617 $ 2,000 $ 2,564 $ 314 $ 5,495 $ 2,601 (601) $ 2,000 $ 4,746 (2,182) $ 2,564 $ 314 – $ 314 $ 8,288 (2,793) $ 5,495 $ 617 $ 2,000 $ 2,564 $ 314 $ 5,495 1 (5) – – 3 (1) (4) – (8) (7) 47 (15) (138) (3) 6 (30) (133) 99 (6) (3) 325 (191) (481) (46) 17 (124) (9) 377 (1) – 493 (1) – – 3 (59) – (476) (1) (19) 866 (212) (619) (49) 29 (214) (146) – (16) (29) Closing net book amount $ 596 $ 1,824 $ 2,431 $ 254 $ 5,105 At December 31, 2013 Cost Accumulated amortization and impairments Net book amount $ 609 (13) $ 596 $ 2,544 (720) $ 1,824 $ 4,732 (2,301) $ 2,431 $ 254 – $ 254 $ 8,139 (3,034) $ 5,105 (a) Property, plant and equipment impairments of $16 related to Celestica have been included in other items (note 24) as part of Celestica’s restructuring charges in 2012. Property, plant and equipment cost and accumulated amortization and impairments have been reduced for components retired during 2012 and 2013. At December 31, 2013, property, plant and equipment includes amounts under ﬁnance leases of $126 (2012 – $116) and related accumu- lated amortization of $59 (2012 – $53). During 2013, borrowing costs of $12 (2012 – $20) were capitalized and are included in the cost of additions. Onex Corporation December 31, 2013 109 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 8 . LO 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 joint ventures and associates at fair value through earnings: Onex Partners(a) Other joint venture and associate investments(a) Long-term investments held by The Warranty Group(b) Onex Credit Partners’ investments in corporate loans(c) Investment in Onex Credit Partners funds(d) Other(e) December 31, 2013 December 31, 2012 January 1, 2012 $ 3,369 $ 3,234 135 1,550 1,810 469 231 136 1,628 790 441 195 $ 3,234 128 1,501 – 412 140 $ 7,564 $ 6,424 $ 5,415 a) Investments in joint ventures and associates of these investments in joint ventures and associates is assessed Certain investments in joint ventures and associates, over which the at each reporting date with changes to the values being recorded Company has joint control or signiﬁcant inﬂuence, but not control, through earnings. Details of those investments designated at fair are designated, upon initial recognition, at fair value. The fair value value included in long-term investments are as follows: Balance – January 1, 2012 Purchase of investments Sale of investments Distributions received Increase in fair value of investments, net Balance – December 31, 2012 Sale of investments Distributions received Increase in fair value of investments, net Balance – December 31, 2013 Other Joint Venture and Associate Investments Total Onex Partners $ 3,234 $ 128 $ 3,362 165 (326) (676) 837 7 – (25) 26 172 (326) (701) 863 $ 3,234 $ 136 $ 3,370 (908) (52) 1,095 – (4) 3 (908) (56) 1,098 $ 3,369 $ 135 $ 3,504 Onex Partners includes investments in Allison Transmission, Allison Transmission BBAM, RSI (sold in February 2013) and Tomkins. Other joint ven- In March 2012, Allison Transmission completed an initial public tures and associates accounted for at fair value through earn- offering of approximately 30.0 million shares of common stock ings primarily include investments in certain Onex Real Estate (NYSE: ALSN), including the exercise of the over-allotment option. investments. Investments in joint ventures and associates des- As part of the offering, Onex, Onex Partners II, Onex manage- ignated at fair value are measured with signiﬁcant unobservable ment and certain limited partners sold approximately 15.0 mil- inputs (Level 3 of the fair value hierarchy), with the exception of lion shares, of which Onex’ portion was approximately 4.7 million Allison Transmission (beginning March 2012), which is measured shares. The sale was completed at a price of $23.00 cash per share. with signiﬁcant other observable inputs (Level 2 of the fair value The cash cost for these shares was $8.44 per share. Net proceeds hierarchy). The joint ventures and associates also have ﬁnancing of $326 were received by Onex, Onex Partners II, Onex manage- arrangements that typically restrict their ability to transfer cash ment and certain limited partners. Onex’ share of the net proceeds and other assets to the Company. 110 Onex Corporation December 31, 2013 was $102. Onex’ investment in Allison Transmission is recorded at fair value in the consolidated balance sheets, with changes in fair value recognized in the consolidated statements of earnings. The realized pre-tax gain on the portion of Allison Transmission sold was $200. The Limited Partners’ share of the realized gain was $138, while Onex’ share of the realized gain on the sale was $62. N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S In addition, Onex recorded a non-cash tax provision of $8 on the BBAM realized gain. The tax provision was included in provision for In December 2012, the Company acquired a 50% economic interest income taxes in the consolidated statements of earnings. Onex in BBAM Limited Partnership (“BBAM”). BBAM is one of the world’s recognized a recovery of this tax provision during 2013 as part of leading managers of commercial jet aircraft. The Company’s invest- an evaluation of recent changes in tax law as described in note 16. ment of $165 was made by Onex, Onex Partners III and Onex man- Carried interest was not received for the portion sold since Onex agement. Onex’ share of the investment was $42 for a 13% economic voluntarily reduced the amount of carried interest received. The interest. The investment in BBAM has been designated at fair value carried interest that was voluntarily reduced was received on the through earnings. realizations in Onex Partners II during 2013. No amounts were paid During 2013, BBAM completed distributions of $49. on account of this transaction related to the MIP as the required Onex, Onex Partners III and Onex management’s share of the dis- performance targets had not been met at that time. tributions was $24, of which Onex’ share was $6. In conjunction with Allison Transmission’s initial pub- lic offering in March 2012, a fee of $8 was received from Allison Hawker Beechcraft Transmission as consideration for the early termination of the ser- The decline in the general aviation industry over the past few vices agreement between Allison Transmission and Onex. The fee years resulted in Hawker Beechcraft, previously a joint venture is included in revenue in the consolidated statements of earnings. investment, being unable to meet certain of its ﬁnancial obliga- Allison Transmission began paying quarterly dividends tions. In the second quarter of 2012, Hawker Beechcraft ﬁled for beginning in 2012 following its initial public offering. The Com- bankruptcy protection in the United States. During the ﬁrst quar- pany’s share of the dividends paid during 2013 was $28 (2012 – $13), ter of 2013, Hawker Beechcraft exited bankruptcy protection. As of which Onex’ share was $8 (2012 – $4). part of the restructuring, Onex has a nominal equity interest in In August 2013, Allison Transmission completed a sec- the company. ondary offering to the public of 19.1 million shares of common stock and repurchased 4.7 million shares of common stock, for a RSI total sale of 23.8 million shares of common stock. The secondary In February 2013, Onex, Onex Partners II and Onex management offering includes the full exercise of the over-allotment option. As completed the sale of their entire investment in RSI. The sale was part of the offering and share repurchase, Onex, Onex Partners II, completed for proceeds of $323, of which Onex’ share was $130, Onex management and certain limited partners sold 11.9 million including carried interest. Onex’ investment in RSI was recorded shares of common stock. Onex, Onex Partners II, Onex manage- at fair value in the consolidated balance sheets, with changes in ment and certain limited partners received net proceeds of $252 fair value recognized in the consolidated statements of earnings. for their 11.9 million shares of common stock, of which Onex’ por- The realized pre-tax gain on the sale of RSI, including prior dis- tion was $84, including carried interest. The realized gain on the tributions, was $153. The Limited Partners’ share of the realized portion of Allison Transmission sold by Onex, Onex Partners II, gain was $93, while Onex’ share was $60. In addition, Onex initially Onex management and certain limited partners was $152, of which recorded a non-cash tax provision of $5 on the realized gain. The Onex’ share was $47. tax provision was included in provision for income taxes in the In November and December 2013, Allison Transmission consolidated statements of earnings. Onex recognized a recovery completed secondary offerings to the public for a total of 27.5 mil- of this tax provision during 2013 as part of an evaluation of recent lion shares of common stock. Onex, Onex Partners II, Onex man- changes in tax law as described in note 16. Amounts received on agement and certain limited partners sold 13.75 million shares of account of the carried interest related to this transaction totalled common stock for net proceeds of $333, of which Onex’ portion $8. Onex’ share of the carried interest received was $3 and is was $111, including carried interest. The realized gains on the por- included in Onex’ share of the cash proceeds. Management’s share tion of Allison Transmission sold in November and December 2013 of the carried interest was $5, which was previously recorded as a was $217, of which Onex’ share was $67. liability within other non-current liabilities. No amounts were paid Amounts received related to the carried interest on the on account of the MIP for this transaction as the required invest- 2013 transactions totalled $31, of which Onex’ portion was $12 and ment return hurdle for Onex was not met. management’s portion was $19. No amounts were paid on account of these transactions related to the MIP as the required perfor- Tomkins mance targets had not been met at those times. In December 2012, Tomkins completed a distribution of $1,180 After completion of the secondary offerings and share to its shareholders. The Company’s share of the distribution was repurchases during 2013, Onex, Onex Partners II, Onex manage- $663, of which Onex’ share was $171. ment and certain limited partners continue to own 49.7 million shares of common stock, or approximately 27% in the aggregate, of Allison Transmission’s outstanding common stock. Onex Corporation December 31, 2013 111 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S Financial information of significant investments in joint ventures and associates The tables below present certain balance sheet ﬁnancial information for the Company’s signiﬁcant investments in joint ventures and associates. As at December 31 Current assets Non-current assets Current liabilities Non-current liabilities Allison Transmission(a) Tomkins 2013 $ 607 4,206 4,813 387 2,987 3,374 2012 $ 490 4,376 4,866 378 3,131 3,509 2013 $ 1,686 3,260 4,946 599 2,315 2,914 2012 $ 1,580 3,504 5,084 590 2,550 3,140 Net Assets $ 1,439 $ 1,357 $ 2,032 $ 1,944 Included in the balance sheet ﬁnancial information above are the following items: As at December 31 Cash and cash equivalents included in current assets Current financial liabilities included in current liabilities Non-current financial liabilities included in non-current liabilities Allison Transmission(a) Tomkins 2013 $ 185 302 2,684 2012 $ 80 303 2,855 2013 $ 338 337 1,713 2012 $ 431 339 1,843 The tables below present certain statements of earnings ﬁnancial information for the Company’s signiﬁcant investments in joint ventures and associates. Year ended December 31 Revenues Total expenses (including recovery of (provision for) income taxes) Earnings (loss) from continuing operations Earnings from discontinued operations (net of tax) Net Earnings Other comprehensive earnings (loss) Total Comprehensive Earnings Allison Transmission(a) Tomkins 2013 2012 2013 2012 $ 1,927 (1,762) $ 2,142 (1,628) $ 2,947 (2,811) 165 – 165 23 514 – 514 13 136 – 136 (37) $ 2,923 (2,939) (16) 764 748 15 $ 188 $ 527 $ 99 $ 763 Included in the statements of earnings ﬁnancial information above are the following items: Year ended December 31 2013 2012 2013 2012 Allison Transmission(a) Tomkins Amortization Interest income Interest expense Recovery of (provision for) income taxes $ 204 $ 253 $ 215 $ 269 1 134 (101) 1 152 298 18 143 37 6 286 25 (a) The financial information of Allison Transmission is prepared in accordance with accounting principles generally accepted in the United States. 112 Onex Corporation December 31, 2013 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S b) Long-term investments held by The Warranty Group The fair value of ﬁxed-maturity securities owned by The Warranty The table below presents the fair value of all investments in secu- Group, by contractual maturity, is shown below: rities held by The Warranty Group at December 31: As at December 31 2013 2012 U.S. government and agencies States and political subdivisions Foreign governments Corporate bonds Mortgage-backed securities Other Current portion(1) Non-current portion 2013 $ 102 127 451 660 351 77 $ 1,768 (218) $ 1,550 2012 Years to maturity: $ 136 One or less After one through five After five through ten After ten Mortgage-backed securities Other 130 501 642 360 80 $ 1,849 (221) $ 1,628 $ 218 $ 221 705 338 79 351 77 744 340 104 360 80 $ 1,768 $ 1,849 (1) The current portion is included in short-term investments in the consolidated balance sheets. Fair values generally represent quoted market value prices for securities traded in an active market or estimated using a valua- tion technique. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obliga- tions with or without call or prepayment penalties. At December 31, 2013, certiﬁcates of deposit, money market funds and available-for-sale ﬁxed-maturity securities with a carrying value of $74 (2012 – $47) were on deposit with various insurance departments and regulators to satisfy various regula- Management of The Warranty Group believes that unre- tory requirements. alized losses on individual 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 of The Warranty Group fur- ther believes it has the intent and ability to hold these securities until they fully recover in value. These determinations are based upon an in-depth analysis of individual securities. A portion of The Warranty Group’s investments in secu- rities is invested in residential and commercial mortgage-backed securities and other asset-backed securities. At December 31, 2013, the company had $351 invested in mortgage-backed securi- ties and $77 in other asset-backed securities. The mortgage-backed securities are constructed from pools of mortgages and may have cash ﬂow volatility as a result of changes in the rate at which pre- c) Onex Credit Partners’ investments in corporate loans In March 2012, Onex Credit Partners established its ﬁrst col- lateralized loan obligation (“CLO”). A CLO is a leveraged struc- tured vehicle that holds a widely diversiﬁed collateral asset portfolio and is funded through the issuance of collateralized loan instruments in a series of tranches of secured notes and equity. As of December 31, 2013, Onex Credit Partners had established four CLOs (2012 – two CLOs), which were funded through the issuance of secured notes and/or equity in private placement transactions in an initial aggregate amount of $1,874 (2012 – $848), as described in note 12(g). Onex’ total investment at original cost in the Onex Credit Partners CLOs at December 31, 2013 was $122 (2012 – $58) and has been made in the most subordinated capital of each payments of principal occur with respect to the underlying loans. respective CLO as follows: Excluding limitations on access to lending and other extraordinary economic conditions, prepayments of principal on the underly- ing loans can be expected to accelerate with decreases in market Closing Date interest rates and diminish with increases in interest rates. All of the company’s asset-backed securities are widely held and actively traded in liquid markets. The maximum exposure to loss is limited to the current investment. OCP CLO-1 March 2012 OCP CLO-2 November 2012 OCP CLO-3 March 2013 OCP CLO-4 October 2013 As at December 31, 2013 As at December 31, 2012 $ 32 26 24 40 $ 122 $ 32 26 – – $ 58 During 2013, Onex received distributions from the CLOs of $13 (2012 – $3), excluding investment income earned during the ware- house periods of the CLOs. Onex Corporation December 31, 2013 113 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S The asset portfolio held by the CLOs consists of cash e) Onex Credit Partners CLO warehouse facility and cash equivalents and corporate loans and has been des- In November 2013, Onex Credit Partners established a warehouse ignated to be recorded at fair value. The asset portfolio of each facility in connection with its ﬁfth CLO, OCP CLO-5. Onex pur- CLO is pledged as collateral for its respective secured notes and/ chased $10 of subordinated notes to support the warehouse facil- or equity. The CLOs have reinvestment periods ranging from 3 to 4 ity’s total return swap (“TRS”). The subordinated notes do not have years, during which reinvestment can be made in collateral. Onex a stated rate of interest, but will receive any excess available funds is required to consolidate the operations and results of the Onex from the termination of the TRS. The TRS terminates on the earlier Credit Partners’ CLOs, as more fully described in note 1. of the closing of OCP CLO-5 and November 13, 2014. Onex consoli- At December 31, 2013, the asset portfolio of the Onex Credit dates the warehouse facility for OCP CLO-5, and at December 31, Partners CLOs included $1,810 (2012 – $790) of corporate loans 2013, the TRS was recorded at a fair value of $10 with the change in as follows: OCP CLO-1 OCP CLO-2 OCP CLO-3 OCP CLO-4 As at December 31, 2013 As at December 31, 2012 In February 2014, Onex purchased an additional $30 of subordinated notes to increase the size of the TRS for OCP CLO-5. fair value recognized through earnings. $ 323 499 495 493 $ 320 470 – – 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: $ 1,810 $ 790 As at December 31 d) Investments in Onex Credit Partners funds The investments in Onex Credit Partners funds are recorded at fair value and classiﬁed as fair value through earnings. At December 31, 2013, Onex had $343 (2012 – $328) invested at fair value in a seg- Deferred income taxes (note 16) Defined benefit pensions (note 32) Non-current portion of ceded claims recoverable held by The Warranty Group (note 14) regated Onex Credit Partners unleveraged senior secured loan Non-current portion of prepaid strategy fund and $126 (2012 – $113) invested in other Onex premiums of The Warranty Group Credit Partners funds. Onex’ maximum exposure to losses from Non-current portion of deferred costs its investments in the Onex Credit Partners funds is limited to its of The Warranty Group(a) current investments. During 2013 and 2012, Onex did not provide Other any ﬁnancial or other support to the Onex Credit Partners funds and Onex has no contractual obligation to provide such support 2013 $ 308 301 2012 $ 447 120 241 556 171 523 300 544 150 425 $ 2,100 $ 1,986 in the future. a) Deferred costs of The Warranty Group consist of certain costs of acquiring warranty and credit business including commis- sions, underwriting and sales expenses that result directly from, and are essential to, the acquisition of new business. These charges are deferred and amortized as the related premiums and contract fees are earned. At December 31, 2013, $299 (2012 – $273) of costs were deferred, of which $128 (2012 – $123) has been recorded as current (note 6). 114 Onex Corporation December 31, 2013 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 10 . G O O D W I L L A N D I N TA 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, 2012 Cost $ 2,611 $ 658 $ 1,772 Accumulated amortization and impairments (177) (146) (830) Net book amount $ 2,434 $ 512 $ 942 $ 668 (498) $ 170 $ 1,189 (780) $ 409 $ 573 $ 4,860 (7) (2,261) $ 566 $ 2,599 Year ended December 31, 2012 Opening net book amount $ 2,434 $ 512 $ 942 $ 170 $ 409 $ 566 $ 2,599 Additions Disposals Amortization charge Amortization charge (discontinued operations) Acquisition of subsidiaries Disposition of operating companies Impairment charge Foreign exchange Other – (1) – – 2,032 (87) (29) 9 – – – (32) – 401 (3) – 4 9 – (1) (139) (9) 2,032 – (3) 2 (2) 63 – (60) (3) 31 – (7) 1 4 12 (1) (86) – 57 (16) (3) 1 (9) – – – – 3 – – 1 (13) 75 (2) (317) (12) 2,524 (19) (13) 9 (11) Closing net book amount $ 4,358 $ 891 $ 2,822 $ 199 $ 364 $ 557 $ 4,833 At December 31, 2012 Cost $ 4,544 $ 1,066 $ 3,804 Accumulated amortization and impairments (186) (175) (982) Net book amount (1) $ 4,358 $ 891 $ 2,822 $ 629 (430) $ 199 $ 1,196 (832) $ 364 $ 564 $ 7,259 (7) (2,426) $ 557 $ 4,833 Year ended December 31, 2013 Opening net book amount $ 4,358 $ 891 $ 2,822 $ 199 $ 364 $ 557 $ 4,833 Additions Disposals Amortization charge Amortization charge (discontinued operations) Acquisition of subsidiaries Disposition of operating companies Impairment charge Foreign exchange Other – – – – 750 (457) (134) (1) (47) 2 – (39) – 194 (8) (24) (8) 50 – – (328) (7) 341 (205) (9) 4 56 66 (5) (76) (2) 4 (18) (1) (2) 3 22 (1) (83) – 6 (10) (3) – (8) – – – – – (38) (2) (1) (8) 90 (6) (526) (9) 545 (279) (39) (7) 93 Closing net book amount $ 4,469 $ 1,058 $ 2,674 $ 168 $ 287 $ 508 $ 4,695 At December 31, 2013 Cost $ 4,789 Accumulated amortization and impairments (320) $ 1,296 (238) $ 3,891 (1,217) Net book amount (1) $ 4,469 $ 1,058 $ 2,674 $ 658 (490) $ 168 $ 1,171 $ 511 $ 7,527 (884) (3) (2,832) $ 287 $ 508 $ 4,695 (1) At December 31, 2013, trademarks and licenses and customer relationships include amounts determined to have indefinite useful lives of $833 and nil (2012 – $536 and $22), respectively. Onex Corporation December 31, 2013 115 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S Additions to goodwill and intangible assets primarily arose Intellectual property primarily represents the costs of certain through business combinations (note 2). Additions to intangible intellectual property and process know-how obtained in acqui- assets through internal development were $25 (2012 – $16) and sitions. Intangible assets include trademarks, non-competition those acquired separately were $65 (2012 – $59). Included in the agreements, customer relationships, software, contract rights and balance of intangible assets at December 31, 2013 were $176 (2012 – expiration rights obtained in the acquisition of certain facilities. $192) of internally generated intangible assets. Certain intangible 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. 11. 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 – December 31, 2012 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, 2013 Accounts Receivable Provision(a) Inventory Provision(b) $ 81 $ 69 51 (5) (5) (33) – 88 (16) (4) (23) 3 Total $ 150 139 (21) (9) (56) 3 $ 89 $ 117 $ 206 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. 116 Onex Corporation December 31, 2013 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S A summary of provisions presented as liabilities in the consolidated balance sheets detailed by the components of charges and movements is presented below. Current portion of provisions Non-current portion of provisions Balance – December 31, 2012 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, 2013 Current portion of provisions Non-current portion of provisions Restructuring(c) Self-Insurance(d) Warranty(e) Other(f) $ 44 13 $ 57 95 (3) – – (101) – – $ 48 (42) $ 6 $ 71 110 $ 181 237 (1) – (10) (230) – (2) $ 175 (85) $ 90 $ 74 57 $ 131 102 (8) – – (53) – 34 $ 206 (81) $ 125 $ 158 84 $ 242 173 (30) 29 (2) (68) 5 (28) $ 321 (123) $ 198 Total $ 347 264 $ 611 607 (42) 29 (12) (452) 5 4 $ 750 (331) $ 419 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 by the operating com- panies for automobile, workers’ compensation, general liability, operating companies. professional liability and other claims. Provisions are established The operating companies record restructuring provisions for claims based upon an assessment of actual claims and claims relating to employee terminations, contractual lease obligations incurred but not reported. The reserves may be established based and other exit costs when the liability is incurred. The recognition on consultation with third-party independent actuaries using of these provisions requires management to make certain judge- actuarial principles and assumptions that consider a number of ments regarding the nature, timing and amounts associated with factors, including historical claim payment patterns and changes the planned restructuring activities, including estimating sublease in case reserves, and the assumed rate of inﬂation in healthcare income and the net recovery from equipment to be disposed of. costs and property damage repairs. At the end of each reporting period, the operating companies eval- uate the appropriateness of the remaining accrued balances. The restructuring plans are expected to result in cash outﬂows for the e) Warranty provisions are established by the operating compa- nies for warranties offered on the sale of products or services. operating companies between 2014 and 2018. 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. 2013 $ 23 22 3 $ 48 2012 $ 27 28 2 $ 57 f) Other includes contingent consideration, legal, transition and integration, asset retirement and other provisions. Transition and integration provisions are typically to provide for the costs of tran- sitioning the activities of an operating company from a prior par- ent company upon acquisition and to integrate new acquisitions at the operating companies. Onex Corporation December 31, 2013 117 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 12 . LO N G - T E R M D E B T O F O P E R AT I N G C O M PA N I E S , W I T H O U T R E C O U R S E T O O N E X C O R P O R AT I O N Long-term debt of operating companies, without recourse to Onex Corporation, is as follows: As at December 31 Carestream Health(a) Celestica(b) Emerald Expositions(c) Flushing Town Center(d) JELD-WEN(e) KraussMaffei(f) Onex Credit Partners CLOs(g) ResCare(h) SGS International(i) Sitel Worldwide(j) Skilled Healthcare Group(k) Spirit AeroSystems(l) The Warranty Group(m) TMS International(n) Tropicana Las Vegas(o) USI(p) ONCAP companies(q) Revolving credit facility and term loans due 2018 and 2019 Revolving facility and term loan due 2016 and 2017 Redeemable preferred shares Revolving credit facility due 2015 Revolving credit facility and term loan due 2018 and 2020 Senior notes due 2021 Senior construction loan due 2014 Mezzanine loan due 2014 Senior secured notes due 2017 Senior secured revolving credit facility and term loan due 2016 Convertible promissory notes due 2013 Other Senior secured notes due 2020 Other Secured notes due 2023 to 2025 Senior secured revolving credit facility and term loan due 2017 Senior subordinated notes due 2019 Other Senior secured revolving credit facility and term loan due 2017 and 2019 Senior notes due 2020 Revolving credit facility and term loan due 2016 and 2017 Senior unsecured notes due 2018 Senior secured notes due 2017 Mandatorily redeemable preferred shares Revolving credit facility and term loan due 2015 and 2016 Insured loans due 2043 and 2048 Mortgage-backed revolving credit facility and term loan due 2016 Other Revolving credit facility and term loan due 2017 and 2019 Senior subordinated notes due 2017 Senior subordinated notes due 2020 Other Revolving credit facility and term loan due 2016 Redeemable preferred shares Revolving borrowings and senior secured term loan Other Revolving credit facility due 2018 Senior secured revolving credit facility and term loan due 2017 and 2019 Senior notes due 2021 Other Revolving credit facility and term loans due 2015 to 2018 Subordinated notes due 2014 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 118 Onex Corporation December 31, 2013 2013 $ 2,270 – – 2,270 – 424 200 624 407 44 451 452 169 – 59 680 448 2 450 1,723 158 200 2 360 385 210 595 246 290 191 128 855 261 87 67 4 419 538 296 300 18 1,152 246 380 626 – – – 59 1,010 630 16 1,656 772 311 8 1,091 45 (873) 12,183 (213) 11,970 (651) $ 11,319 2012 $ – 1,742 142 1,884 55 – – – 533 39 572 450 60 128 58 696 429 – 429 801 171 200 2 373 400 210 610 245 288 190 113 836 444 – – 5 449 543 296 300 21 1,160 249 410 659 295 21 316 40 1,040 630 15 1,685 879 303 63 1,245 5 (1,120) 10,695 (225) 10,470 (286) $ 10,184 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S Onex Corporation does not guarantee the debt of its operating In connection with the new credit facility, Carestream companies, nor are there any cross-guarantees between operating Health entered into a series of interest rate swap agreements that companies. swap the variable rate portion for ﬁxed rates through December The ﬁnancing arrangements for each operating com- 2017. The agreements have an initial notional amount of $1,150, pany typically contain certain restrictive covenants, which may reducing to $920 during the term of the agreements. include limitations or prohibitions on additional indebtedness, At December 31, 2013, the ﬁrst-lien term loan with payment of cash dividends, redemption of capital, capital spend- $1,804 outstanding was recorded net of the unamortized discount ing, making of investments and acquisitions and sales of assets. of $25. At December 31, 2013, the second-lien term loan with $500 The ﬁnancing arrangements may also require the redemption of outstanding was recorded net of the unamortized discount of $9. indebtedness in the event of a change of control of an operating At December 31, 2013, no amounts were outstanding under the company. In addition, certain ﬁnancial covenants must be met by revolving facility. those operating companies that have outstanding debt. As a result of the reﬁnancing, Carestream Health recog- Future changes in business conditions of an operat- nized debt prepayment charges of $16 in the second quarter of ing company may result in non-compliance with certain cov- 2013, which are included in interest expense in the consolidated enants by that company. No adjustments to the carrying amount statements of earnings. or classiﬁ cation of assets or liabilities of any operating company In February 2011, Carestream Health had entered into have been made in the consolidated ﬁnancial statements with a credit facility. The credit facility consisted of a $1,850 term loan respect to any possible non-compliance. and a $150 revolving facility. The term loan and revolving facility a) Carestream Health bore interest at LIBOR (subject to a ﬂoor of 1.50%) plus a margin of 3.50% or a base rate plus a margin of 2.50%. In June 2013, Carestream Health entered into a new credit facility. At December 31, 2012, $1,748 and nil were outstanding The credit facility consists of a $1,850 ﬁrst-lien term loan, a $500 under the term loan and revolving facility, respectively. The term second-lien term loan and a $150 revolving facility. The ﬁrst-lien loan was recorded net of the unamortized discount of $6. term loan bears interest at LIBOR (subject to a ﬂoor of 1.00%) plus Included in long-term debt at December 31, 2012 was a margin of 4.00% and matures in June 2019. The offering price $142 of redeemable preferred shares, including accumulated and was 98.50% of par to yield 5.40% to maturity. The second-lien unpaid dividends, of which $139 was held by the Company. The term loan bears interest at LIBOR (subject to a ﬂoor of 1.00%) plus redeemable preferred shares accrued annual dividends at a rate a margin of 8.50% and matures in December 2019. The offering of 10%. During 2013, Carestream Health redeemed a total of $148 price was 98.00% of par to yield 10.00% to maturity. The ﬁrst- and (2012 – $127) for all of its remaining redeemable preferred shares, second-lien term loans include optional redemption provisions including $7 (2012 – $41) of accumulated and unpaid dividends. at a range of redemption prices plus accrued and unpaid inter- The redemption of redeemable preferred shares during 2013 est. The revolving facility bears interest at LIBOR (subject to a formed part of Carestream Health’s $750 distribution to its share- ﬂoor of 1.00%) plus a margin of 4.00% and matures in June 2018. holders as described above. Substantially all of Carestream Health’s assets are pledged as col- lateral under the new credit facility. b) Celestica The proceeds from the new credit facility, along with Celestica has a $400 revolving credit facility that matures in cash on hand, were used to fully repay existing debt facilities, fund January 2015. At December 31, 2013, Celestica had no amounts a $750 distribution to shareholders and pay fees and expenses outstanding (2012 – $55) under its revolving credit facility. In addi- associated with the transaction. The Company’s share of the distri- tion, Celestica issued $30 (2012 – $31) of letters of credit under its bution was $695, of which Onex’ share was $303, including carried revolving credit facility at December 31, 2013. interest of $50 and after deducting distributions on account of the The facility has restrictive covenants relating to debt MIP. Onex initially recorded a non-cash tax provision of $38 on the incurrence, the sales of assets and a change of control and also con- distribution. Onex recognized a recovery of this tax provision dur- tains ﬁnancial covenants that require Celestica to maintain certain ing 2013 as part of an evaluation of recent changes in tax law as ﬁnancial ratios. Celestica has pledged certain assets as security for described in note 16. borrowings under its revolving credit facility. Celestica also has Amounts received on account of the carried interest uncommitted bank overdraft facilities available for intraday and related to this transaction totalled $121, of which Onex’ share was overnight operating requirements that totalled $70 (2012 – $70) at $50. Management’s share of the carried interest was $71. In addition, December 31, 2013. amounts on account of the MIP totalled $21 for this transaction. Onex Corporation December 31, 2013 119 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S c) Emerald Expositions respectively. In addition, letters of credit of $5 (2012 – $5) were In June 2013, Emerald Expositions entered into a credit facil- outstanding, which partially reduce the amount available to be ity consisting of a $430 term loan and a $90 revolving facility. The drawn under the senior construction loan. offering price of the term loan was 99.00% of par to yield 5.75% to Substantially all of Flushing Town Center’s assets are maturity. Borrowings under the term loan bear interest at LIBOR pledged as collateral under the senior construction and mezza- (subject to a ﬂoor of 1.25%) plus a margin of 4.25%. The term loan nine loans. requires quarterly repayments, but can be repaid in whole or in part without premium or penalty any time before maturity in June e) JELD-WEN 2020. The revolving facility bears interest at LIBOR plus a margin In October 2011, JELD-WEN completed an offering of $460 in of 4.25% and matures in June 2018. Substantially all of Emerald aggregate principal amount of 12.25% senior secured notes due Expositions’ assets are pledged as collateral under the credit in 2017. JELD-WEN received net proceeds of $448 after original facility. At December 31, 2013, the term loan with $428 outstand- issue discounts. Interest on the senior secured notes is payable ing was recorded net of the unamortized discount of $4 and no semi-annually. The senior secured notes may be redeemed prior amounts were outstanding under the revolving facility. to maturity at various premiums above face value. The senior In January 2014, Emerald Expositions amended its credit secured notes are secured by a second priority lien on the col- facility to increase its term loan by $200 to partially fund an acqui- lateral securing the senior secured revolving credit facility, as sition, as described in note 33. The addition to the term loan con- described below. At December 31, 2013, the senior secured notes tinues to bear interest at the same rate as the existing term loan with $460 (2012 – $460) outstanding were recorded net of the and requires quarterly repayments until maturity in June 2020. unamortized discount of $8 (2012 – $10). In June 2013, Emerald Expositions issued $200 in aggre- In October 2011, JELD-WEN entered into a senior secured gate principal amount of 9.00% senior notes due in June 2021. credit agreement that initially consisted of a $300 revolving credit Interest is payable semi-annually beginning in December 2013. facility maturing in April 2016. The facility contains a $75 sublimit The senior notes may be redeemed by the company at any time at for the issuance of letters of credit and a $100 sublimit for borrow- various premiums above face value. At December 31, 2013, senior ings by a European subsidiary of JELD-WEN. Borrowings under notes of $200 were outstanding. d) Flushing Town Center the facility bear interest at either the Eurodollar rate or a base rate determined as the highest of the overnight Federal Funds rate plus 0.50%, the Eurodollar rate plus 1.00% or the prime rate. A margin In December 2010, Flushing Town Center amended and restat- is added to the Eurodollar and base rate that varies based on ed its senior construction loan and mezzanine loan, increasing JELD-WEN’s consolidated leverage ratio; base rate loan margins the total amount available under the senior construction loan to range from 1.50% to 3.00% and Eurodollar-based loan margins $642, including $25 of letters of credit, and extending the maturity range from 2.50% to 4.00%. In addition, JELD-WEN pays a commit- to December 2013. The loans had two one-year extension options. ment fee ranging from 0.45% to 0.75% on the unused portion of the The loans bear interest at LIBOR plus a margin that ranges between facility and a letter of credit fee ranging from 2.50% to 4.00% on the 1.55% and 3.65%. In conjunction with these amendments, the face amount of outstanding letters of credit. Company purchased $56 and $38 of the senior construction loan In October 2012, JELD-WEN amended its senior secured and mezzanine loan, respectively, from third-party lenders. credit agreement to add a $30 term loan, which matures in April In November 2011, Flushing Town Center amended its 2016. In June 2013, JELD-WEN further amended its senior secured senior construction loan agreement whereby the Company con- credit agreement to increase its term loan to $100 from $30. The tributed an additional $14 in equity, of which $7 was in cash and term loan bears interest at either the Eurodollar rate plus a mar- $7 was in the form of a letter of credit that can be drawn upon gin of up to 3.50% or a base rate plus a margin of up to 2.50% and to fund project costs. In addition, the initial maturity of the loans requires quarterly amortization payments beginning in December was extended to June 2014 and the second extension option was 2013. Proceeds from the addition to the term loan were primar- reduced from one year to six months. As at December 31, 2013, no ily used to repay a portion of the outstanding balance under the amount (2012 – $1) was available under the letter of credit. revolving credit facility. Flushing Town Center is in discussions with its lenders Borrowings under the senior secured credit agreement to reﬁnance its loans prior to maturity in June 2014. are secured by ﬁrst priority liens on substantially all of the present As at December 31, 2013, $409 and $46 (2012 – $541 and and future assets of JELD-WEN and its subsidiary guarantors. $45) of principal plus accrued interest were outstanding under the At December 31, 2013, $70 (2012 – $30) was outstanding senior construction and mezzanine loans, respectively, of which under the revolving credit facility and $99 (2012 – $30) was out- a total of $90 (2012 – $105) was held by the Company. The senior standing under the term loan. The amount available under the construction and mezzanine loans are recorded net of unamor- revolving credit facility was reduced by $38 (2012 – $39) of letters tized debt extinguishment gains of $2 and $2 (2012 − $8 and $6), of credit outstanding at December 31, 2013. 120 Onex Corporation December 31, 2013 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S JELD-WEN is required under the terms of the senior g) Onex Credit Partners’ CLOs secured credit agreement to maintain certain ﬁnancial ratios. The In March 2012, Onex Credit Partners established its ﬁrst collateral- agreement and the indenture governing the senior secured notes ized loan obligation (“CLO”). A CLO is a leveraged structured vehi- also contain certain additional requirements, including limi- cle that holds a widely diversiﬁed collateral asset portfolio and is tations or prohibitions on certain investments, payments, asset funded through the issuance of collateralized loan instruments sales and additional indebtedness. in a series of tranches of secured notes and equity. As of Decem- In October 2011, JELD-WEN issued convertible promis- ber 31, 2013, Onex Credit Partners had established four CLOs sory notes in the amount of $171, all of which were held by the (2012 – two CLOs) which had secured notes and equity outstand- Company. The notes bore interest at a rate of 10% compounded ing in the aggregate amount of $1,870 (2012 – $848) as follows: annually. At December 31, 2012, $128 was outstanding under the convertible promissory notes, including accrued interest, all of As at December 31 2013 2012 which was held by the Company. During 2013, JELD-WEN paid $60 (2012 – $17), including accrued interest, to repurchase a por- tion of the notes, all of which was paid to the Company. Onex’ share of the note repurchase, including accrued interest, was $15. In April 2013, the remaining convertible promissory notes and accrued interest of $72, all of which were held by the Closing date OCP CLO-1 March 2012 $ 327 OCP CLO-2 November 2012 OCP CLO-3 March 2013 OCP CLO-4 October 2013 Company, were converted into additional Series A Convertible Onex’ investment Preferred Stock of JELD-WEN in accordance with the terms of the purchase agreement, of which Onex’ share was $18. 517 512 514 1,870 (122) $ 1,748 $ 327 521 – – 848 (58) $ 790 f) KraussMaffei In December 2012, KraussMaffei issued senior secured notes in the aggregate principal amount of 2325. The senior secured notes are due in December 2020 and bear interest at a ﬁxed annual rate of 8.75%. The senior secured notes may be redeemed by the com- pany on or after December 2015 at various premiums above face value. At December 31, 2013, $448 (2325) (2012 – $429 (2325)) was outstanding under the senior secured notes. In December 2012, KraussMaffei established a 275 revolv- ing credit facility that matures in December 2017. The revolving credit facility may be used for revolving loans of up to 225 as well as for letters of credit. Revolving loans drawn on the facility bear inter- est at LIBOR plus a margin of 5.00% or a base rate plus a margin of 4.00%. Letters of credit drawn on the facility bear interest at a ﬁxed rate of 5.125%. In addition, KraussMaffei pays a commitment fee of 0.50% on the unused portion of the revolving credit facility and cer- tain fees for letters of credit issued. During 2013, KraussMaffei increased the revolving cred- it facility capacity by 225 to a total capacity of 2100. No amounts were drawn under the revolving credit facil- ity at December 31, 2013 and 2012. The amount available under the revolving credit facility was reduced by $70 (251) (2012 – $59 (245)) of letters of credit outstanding at December 31, 2013. Substantially all of KraussMaffei’s assets are pledged as collateral under its senior secured notes and revolving credit facility. The secured notes bear interest at a rate of LIBOR plus a margin and mature between March 2023 and October 2025. The notes and equity of the Onex Credit Partners CLOs are designated at fair value through net earnings upon initial recognition. At December 31, 2013, the fair value of the notes and equity held by investors other than Onex was $1,723 (2012 – $801). The notes of Onex Credit Partners CLOs are secured by, and only have recourse to, the assets of each respective CLO. The notes are subject to redemption provisions, including mandatory redemption if certain coverage tests are not met by each respec- tive CLO. Optional redemption of the notes is available at certain periods and optional repricing of the notes is available subject to certain customary terms and conditions being met by each respective CLO. h) ResCare In December 2010, ResCare issued $200 of senior subordinated notes. The senior subordinated notes bear interest at a rate of 10.75% and are repayable at maturity in January 2019. At Decem- ber 31, 2013, $200 (2012 – $200) was outstanding under the senior subordinated notes. In April 2012, ResCare entered into a new $375 senior secured credit facility, which is available through to April 2017. The senior secured credit facility consists of a $200 revolving credit facility and a $175 term loan. The senior secured credit facility bears interest at LIBOR plus a margin of 2.75%. The term loan requires quarterly principal repayments of $2. The required quarterly principal repayments increase throughout the term until they reach $7 in 2015. Substantially all of ResCare’s assets are pledged as collateral under the senior secured credit facility. Onex Corporation December 31, 2013 121 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S The proceeds from the new senior secured credit facil- j) Sitel Worldwide ity were used to repay ResCare’s former senior secured term loan, Sitel Worldwide’s credit facility initially consisted of a $675 term retire the former senior secured revolving credit facility and pay loan maturing in January 2014 and an $85 revolving credit facility fees and expenses associated with the transaction. At December 31, maturing in January 2013. As a result of repayments and repur- 2013, nil and $158 (2012 – nil and $171) were outstanding under the chases made in 2007 and 2008, no quarterly payments are due revolving credit facility and term loan, respectively. under the term loan until maturity. The term loan and revolving As a result of the 2012 reﬁnancing, ResCare recognized a credit facility bore interest at a rate of LIBOR plus a margin of up charge of $10 during the second quarter of 2012, which was included to 5.5% or prime plus a margin of 4.5%. in interest expense in the consolidated statements of earnings. In May and June 2011, Sitel Worldwide amended its i) SGS International credit facility that governs its term loan and revolving credit facil- ity. The amendments included extending the maturity date on In October 2012, SGS International entered into a credit agree- $228, or 64%, of its term loan from January 2014 to January 2017 ment that consisted of a $400 senior secured term loan and a $75 and extending the maturity on $31, or 36%, of commitments for senior secured revolving credit facility. The senior secured term its revolving credit facility from January 2013 to January 2016. In loan matures in October 2019 and the senior secured revolving the second quarter of 2012, Sitel Worldwide extended the matu- credit facility matures in October 2017. Borrowings under the credit rity date on $30, or 35%, of commitments for its revolving credit agreement bear interest at LIBOR (subject to a ﬂoor of 1.25%) plus facility from January 2013 to January 2016. Borrowings under the a margin of up to 3.75% or a base rate plus a margin of up to 2.75%, extended term loan and revolving credit facility bear interest at a depending on the company’s leverage ratio. In November 2013, rate of LIBOR plus a margin of up to 6.75% or prime plus a margin SGS International amended its credit agreement to reduce the rate of 5.75%. In addition, the credit agreement was amended to lessen at which borrowings under its senior secured term loan bear inter- restrictions with respect to certain covenant levels. est to LIBOR (subject to a ﬂoor of 1.00%) plus a margin of up to Borrowings under the credit facility are secured by sub- 3.25% or a base rate plus a margin of up to 2.25%, depending on stantially all of Sitel Worldwide’s assets. the company’s leverage ratio. In addition, SGS International pays At December 31, 2013, $228 and $18 (2012 – $226 and $19) a commitment fee of 0.50% on the unused portion of the senior were outstanding under the term loan and revolving credit facility, secured revolving credit facility and certain fees for letters of credit respectively. issued. The credit agreement requires mandatory prepayment of Sitel Worldwide is required under the terms of the facil- certain excess cash ﬂows and cash proceeds. ity to maintain certain ﬁnancial ratio covenants. The facility also Substantially all of SGS International’s assets are pledged contains certain additional requirements, including limitations or as collateral under the credit agreement. prohibitions on additional indebtedness, payment of cash divi- In connection with the credit agreement, SGS Interna- dends, redemption of stock, capital spending, investments, acqui- tional entered into an interest rate swap agreement that swapped sitions and asset sales. the variable rate portion for a ﬁxed rate of 1.45% through Decem- In March 2010, Sitel Worldwide completed an offering of ber 2017. The agreement had an initial notional amount of $261, $300 in aggregate principal amount of senior unsecured notes due reducing to $74 during the term of the agreement. In November in 2018. The notes bear interest at an annual rate of 11.50% with no 2013, SGS International settled its previous interest rate swap principal payments due until maturity. Proceeds from the offer- agreement and entered into a new agreement that swapped the ing were used to repay a portion of the indebtedness outstanding variable rate portion for a ﬁxed rate of 1.37% through December under the existing term loan and all of the outstanding balance 2017. The new interest rate swap agreement has an initial notional under the revolving credit facility at that time. In conjunction amount of $230, reducing to $74 during the term of the agreement. with this repayment, the debt covenants of the credit facility were At December 31, 2013, $385 and nil (2012 – $400 and nil) amended to reduce the minimum adjusted EBITDA to interest were outstanding under the senior secured term loan and senior ratio requirement and to change the total debt to adjusted EBITDA secured revolving credit facility, respectively. covenant to a senior secured debt to adjusted EBITDA covenant. At In October 2012, SGS International issued $210 in aggre- December 31, 2013 and 2012, the 2018 senior unsecured notes with gate principal amount of 8.375% senior notes due in October $300 outstanding were recorded net of the unamortized discount 2020. Interest is payable semi-annually beginning in April 2013. of $5 (2012 – $6) and embedded derivative of $5 (2012 – $6) associ- The 2020 senior notes may be redeemed by the company at any ated with the senior unsecured notes. time at various premiums above face value. At December 31, 2013, In April 2012, Sitel Worldwide completed an offering of senior notes of $210 (2012 – $210) were outstanding. $200 in aggregate principal amount of 11.00% senior secured notes due in 2017. The offering price was 96.00% of par to yield 12.00% 122 Onex Corporation December 31, 2013 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S to maturity. The senior secured notes include certain optional and As a result of the amendment to its credit facility agree- mandatory redemption provisions at a range of redemption prices ment in 2012, Skilled Healthcare Group recognized a charge of $2 plus accrued and unpaid interest. The net proceeds were used to during the second quarter of 2012, which was included in interest repay all of the indebtedness outstanding under the non-extended expense in the consolidated statements of earnings. term loan due in 2014 and all of the outstanding balance under its In June 2010, Skilled Healthcare Group entered into an revolving credit facility. At December 31, 2013 and 2012, the 2017 interest rate cap agreement (which expired in December 2011) and senior secured notes with $200 outstanding were recorded net of an interest rate swap agreement. The interest rate swap agreement the unamortized discount of $6 (2012 – $7) and embedded deriva- was for a notional amount of $70 and swapped the variable rate tive of $3 (2012 – $3) associated with the senior secured notes. portion for a ﬁxed rate of 2.3% from January 2012 to June 2013. Included in long-term debt at December 31, 2013 was During 2013, Skilled Healthcare Group entered into a $67 (2012 – $60) of mandatorily redeemable Class B preferred credit facility in connection with insured loans from a department shares, of which $53 (2012 – $48) was held by Onex. The mandato- of the U.S. federal government. The loans, in the amount of $88, rily redeemable Class B preferred shares accrue annual dividends bear interest at rates ranging from 3.39% to 4.55%, amortize over 30 at a rate of 12.00% and are redeemable at the option of the com- to 35 years and are secured by 10 of the company’s nursing facilities. pany on or before July 2018. Also included in long-term debt at At December 31, 2013, $87 was outstanding under the insured loans. December 31, 2013 was $61 (2012 – $53) of mandatorily redeem- In December 2013, Skilled Healthcare Group entered able Class C preferred shares, of which $48 (2012 – $42) was held into a new credit facility. The new credit facility consists of a $62 by Onex. The mandatorily redeemable Class C preferred shares mortgage-backed term loan and a $5 asset-based revolving credit accrue annual dividends at a rate of 16.00% and are redeemable facility. Borrowings under the new credit facility bear interest at at the option of the company on or before July 2018. Outstanding LIBOR (subject to a ﬂoor of 0.75%) plus a margin of 5.95%, mature amounts related to preferred shares at December 31, 2013 and in December 2016 and are secured by 10 of the company’s skilled 2012 include accrued dividends. nursing facilities. At December 31, 2013, $62 and $5 were outstand- ing under the mortgage-backed term loan and revolving credit k) Skilled Healthcare Group facility, respectively. In April 2010, Skilled Healthcare Group completed the ﬁnancing of The proceeds from the insured loans and new credit a credit facility comprised of a $330 term loan and a $100 revolv- facility were used to repay a portion of the term loan under the ing credit facility. The term loan was increased by an additional existing credit facility and pay fees and expenses associated with $30 to fund acquisitions completed in the second quarter of 2010. the transactions. The term loan bore interest at LIBOR (subject to a ﬂoor of 1.50%) plus a margin of 3.75%, and required quarterly principal repay- l) Spirit AeroSystems ments of $1 until maturity in 2016. The revolving credit facility In April 2012, Spirit AeroSystems entered into a new credit agree- bore interest at LIBOR (subject to a ﬂoor of 1.50%) plus a margin ment that consists of a $550 term loan and a $650 revolving credit of 3.75%, and was repayable at maturity in 2015. In April 2012, facility. The term loan bears interest at LIBOR (subject to a ﬂoor Skilled Healthcare Group amended its credit facility agreement of 0.75%) plus a margin of 3.00%. The margin over LIBOR may to increase the term loan by an additional $100. The incremental be decreased to 2.75% in 2013 if certain performance targets are term loan bears interest at LIBOR (subject to a ﬂoor of 1.50%) plus met. The term loan is due in 2019 and replaced the existing senior a margin of 5.25%. As part of the reﬁnancing, the interest rate on secured term loan. The revolving credit facility bears interest the existing term loan was amended to match the interest rate of at LIBOR plus a margin of up to 2.50% depending on the com- the incremental term loan. The amended term loan requires quar- pany’s leverage ratio. The revolving credit facility is due in 2017 terly principal repayments of $2 until maturity in 2016. The inter- and replaced the existing senior secured revolving credit facility. est rate on the existing revolving credit facility was also amended Substantially all of Spirit AeroSystems’ assets are pledged as col- to LIBOR plus a margin of up to 4.50% or a base rate plus a mar- lateral under the new credit agreement. gin of up to 3.50%, depending on the company’s leverage ratio. The proceeds from the new term loan, along with approx- There is no longer a LIBOR ﬂoor on the revolving credit facility. imately $9 of cash, were used to repay Spirit AeroSystems’ existing Substantially all of Skilled Healthcare Group’s assets are pledged senior secured term loan and to pay accrued interest, fees, clos- as collateral under the term loan and revolving credit facility. ing costs and other third-party expenses. At December 31, 2013, nil At December 31, 2013, $244 and $18 (2012 – $412 and $35) and $540 (2012 – nil and $546) was outstanding under the revolv- were outstanding under the term loan and revolving credit facility, ing credit facility and the term loan, respectively. The term loan was respectively. The term loan was recorded net of the unamortized recorded net of the unamortized discount of $2 (2012 – $3). discount of $1 (2012 – $3). Onex Corporation December 31, 2013 123 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S As a result of the 2012 reﬁnancing, Spirit AeroSystems m) The Warranty Group recognized a charge of $10 during the second quarter of 2012, In June 2012, The Warranty Group entered into a new credit facil- which was included in interest expense in the consolidated state- ity that consists of a $250 term loan and a $25 revolving credit ments of earnings. facility, which are available through to June 2016. The term loan In October 2012, Spirit AeroSystems amended its new and revolving credit facility bear interest at LIBOR plus a margin credit agreement to revise its debt covenant ratios such that it did of up to 2.75% based on The Warranty Group’s credit rating. At not have an event of default from the forward-loss charges recog- December 31, 2013, the term loan and revolving credit facility bore nized during the third quarter of 2012 under the company’s long- interest at LIBOR plus a margin of 1.625% (2012 – 1.75%). The term term volume-based pricing contracts. No other amendments were loan will amortize in equal quarterly instalments in an amount made to Spirit AeroSystems’ credit agreement. equal to 1% per annum, with the balance payable on maturity. In August 2013, Spirit AeroSystems amended its credit Substantially all of The Warranty Group’s assets are pledged as agreement to suspend its existing debt covenant ratios until collateral under the credit facility. At December 31, 2013, $246 and December 2014, such that it did not have an event of default from nil (2012 – $249 and nil) were outstanding under the term loan the forward-loss charges recognized during the second quarter of and revolving credit facility, respectively. 2013 under the company’s long-term volume-based pricing con- The proceeds from the new credit facility were used tracts. The amendment requires the company to meet certain primarily to repay the existing term loan, to pay accrued divi- minimum liquidity and borrowing base covenants while the exist- dends on The Warranty Group’s redeemable preferred shares ing debt covenant ratios are suspended. No other amendments and for partial redemption of the redeemable preferred shares were made to Spirit AeroSystems’ credit agreement. outstanding. In June 2012, The Warranty Group redeemed $85 of In September 2009, Spirit AeroSystems completed an its redeemable preferred shares, including $21 of accumulated offering of $300 in aggregate principal amount of 7.50% senior and unpaid dividends. The Company’s share of the redemption, subordinated notes due in 2017. The offering price was 97.804% including accrued and unpaid dividends, was $83, of which Onex’ of par to yield 7.875% to maturity. The net proceeds were used to share was $26. repay $200 in borrowings under its revolving credit facility existing In December 2013 and 2012, The Warranty Group at that time without any reduction of the lenders’ commitment, redeemed $65 (2012 – $50) of its redeemable preferred shares, with the remainder used for general corporate purposes. Interest is including $34 (2012 – $18) of accumulated and unpaid dividends. payable semi-annually beginning in April 2010. The 2017 senior The Company’s share of the redemption, including accrued and subordinated notes may be redeemed prior to maturity at vari- unpaid dividends, was $63 (2012 – $49), of which Onex’ share was ous premiums above face value. At December 31, 2013 and 2012, $20 (2012 – $15). the 2017 senior subordinated notes with $300 outstanding were Included in long-term debt at December 31, 2013 is recorded net of the unamortized discount of $4 (2012 – $4). $380 (2012 – $410) of redeemable preferred shares, of which $369 In November 2010, Spirit AeroSystems completed an (2012 – $399) was held by the Company. The redeemable preferred offering of $300 in aggregate principal amount of 6.75% senior sub- shares accrue annual dividends at a rate of 8% and are automati- ordinated notes due in 2020. The net proceeds were used to repay cally converted into common shares of The Warranty Group for $150 in borrowings under its revolving credit facility existing at that the initial liquidation amount plus accumulated and unpaid divi- time, with the remainder to be used for general corporate purposes. dends upon a liquidation or other triggering event. Interest is payable semi-annually beginning in June 2011. The 2020 senior subordinated notes may be redeemed prior to maturity at n) TMS International various premiums above face value. At December 31, 2013 and 2012, In December 2011, TMS International entered into a senior $300 of senior subordinated notes due in 2020 were outstanding. secured asset-based revolving credit facility with an aggregate If a change in control of Spirit AeroSystems occurs, the principal amount of up to $350. As at December 31, 2012, nil was holders of the 2017 and 2020 senior subordinated notes have the outstanding under the revolving credit facility. In addition, there right to require Spirit AeroSystems to repurchase the senior sub- were $17 of letters of credit outstanding secured by the revolving ordinated notes at a price of 101% plus accrued and unpaid inter- credit facility. est. The 2017 and 2020 senior subordinated notes rank equal in In March 2012, TMS International entered into a senior right of payment and are subordinate to the credit facility. secured term loan for an aggregate principal amount of $300. At December 31, 2012, the senior secured term loan with $298 out- standing was recorded net of the unamortized discount of $3. In October 2013, the Company sold its remaining inter- ests in TMS International, as described in note 3, and as a result, the company has been presented as a discontinued operation. 124 Onex Corporation December 31, 2013 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S o) Tropicana Las Vegas Substantially all of USI’s assets are pledged as collateral In March 2010, Tropicana Las Vegas entered into a credit agree- under the senior secured credit facility. The senior secured credit ment that consisted of a $50 revolving credit facility and a delayed facility contains certain afﬁrmative and negative covenants. The draw $10 term loan. The revolving credit facility and term loan amounts outstanding under the senior secured credit facility are bore interest at a ﬁxed annual rate of 4.00% and 6.00%, respec- subject to mandatory prepayment under speciﬁed circumstances, tively, and were scheduled to mature in March 2014. The term loan including with excess cash ﬂows and certain cash proceeds. required repayment of the principal balance in equal monthly At December 31, 2013, $1,015 and nil (2012 – $1,025 and instalments beginning in January 2013. $20) were outstanding under the senior secured term loan and In July 2012, Tropicana Las Vegas amended its credit senior secured revolving credit facility, respectively. The senior agreement to establish an additional $5 revolving credit facil- secured term loan is recorded net of the unamortized discount of $5 ity and modify certain ﬁnancial and non-ﬁnancial covenants. (2012 – $5). In addition, USI had $1 (2012 – $1) of letters of credit out- Borrowings under the additional revolving credit facility bear standing that were issued under its senior secured revolving credit interest at a ﬁxed annual rate of 5.00% and were scheduled to facility at December 31, 2013. mature in March 2014. In January 2013, in connection with the credit agreement, In December 2012, Tropicana Las Vegas further amend- USI entered into interest rate swap agreements that swapped the ed and restated its credit agreement to transfer its $10 term loan variable rate portion for a ﬁxed rate of 1.30% on a notional amount to its revolving credit facility, maintaining the current borrowing of $200 through December 2013 and swaps the variable rate por- base of $65. The term loan transferred to the revolving credit facil- tion for a ﬁxed rate of 1.715% on a notional amount of $525 through ity bears interest at a ﬁxed annual rate of 6.00%. In addition, the December 2017. amendment and restatement provides for an increase in interest In December 2012, USI issued $630 in aggregate prin- reserves, adjustments to ﬁnancial covenants and the extension of cipal amount of 7.75% senior notes due in January 2021. The 2021 all revolving credit facility borrowings to April 2018. senior notes may be redeemed by the company prior to January At December 31, 2013, $59 (2012 – $40) was outstanding 2016 at 100% of the principal amount plus a make whole premium under the revolving credit facilities. and accrued interest, and may be redeemed on or after January Substantially all of Tropicana Las Vegas’ assets are 2016 at various redemption prices above face value plus accrued pledged as collateral under the agreement. interest. At December 31, 2013 and 2012, senior notes of $630 were outstanding. p) USI In December 2012, USI entered into a senior secured credit facil- q) ONCAP operating companies ity that consists of a $1,025 senior secured term loan and a $150 ONCAP’s operating companies consist of Bradshaw, CiCi’s Pizza, senior secured revolving credit facility. The senior secured revolv- Davis-Standard, EnGlobe, Hopkins, Mister Car Wash, Pinnacle ing credit facility includes sublimits for letters of credit and swing Renewable Energy Group, PURE Canadian Gaming, previously line loans. The senior secured term loan matures in December named Casino ABS, BSN SPORTS (up to the date of disposition in 2019 and the senior secured revolving credit facility matures in June 2013) and Caliber Collision (up to the date of disposition in December 2017. November 2013). Each has debt that is included in the Company’s Borrowings under the senior secured credit facility bear consolidated ﬁnancial statements. There are separate arrangements interest at LIBOR plus a margin of up to 4.00% or a base rate plus for each operating company with no cross-guarantees between the a margin of up to 3.00%, depending on the company’s leverage operating companies, ONCAP or Onex Corporation. ratio. Borrowings under the senior secured term loan were sub- Under the terms of the various credit agreements, com- ject to a LIBOR ﬂoor of 1.25%. In December 2013, USI amended bined term borrowings of $636 are outstanding and combined its credit agreement to reduce the rate at which borrowings under revolving credit facilities of $136 are outstanding. The available the senior secured term loan bear interest to LIBOR plus a mar- facilities bear interest at various rates based on a base ﬂoating gin of 3.25% or a base rate plus a margin of 2.25%. In addition, rate plus a margin. At December 31, 2013, effective interest rates the LIBOR ﬂoor was reduced to 1.00% for borrowings under the ranged from 2.60% to 6.25% on borrowings under the revolving senior secured term loan. In addition, USI pays a quarterly com- credit and term loan facilities. The term loans typically require mitment fee of up to 0.50% per annum, depending on the com- quarterly repayments and are due between 2015 and 2018. The pany’s leverage ratio, on the unused portion of the senior secured companies also have subordinated notes of $311 due between revolving credit facility and certain fees for letters of credit issued. 2014 and 2021 that bear interest at rates ranging from 11.0% to The senior secured term loan requires quarterly instalments of $3. 18.0%, of which the Company owns $269. Onex Corporation December 31, 2013 125 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S During 2013, PURE Canadian Gaming amended its cred- 13 . L E A S E S it facility to increase the amount of its term loan by $70 (C$71). The net proceeds from the amended credit facility were used to repay $54 (C$55) of subordinated debt that bore interest at 8.50% and to repurchase $14 (C$15) of subordinate notes held primar- ily by the Company. Onex’ share of the repurchase of subordinate notes was $6 (C$6). Certain ONCAP operating 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, 2013 was $227, with portions expiring through to 2016. Senior debt is generally secured by substantially all of the assets of the respective operating 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 transactions, a) The Company as lessee Future minimum lease payments are as follows: For the year: 2014 2015 2016 2017 2018 Thereafter 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 Finance Leases Operating Leases $ 24 $ 347 280 213 163 121 569 $ 1,693 19 11 6 3 19 $ 82 (17) 65 (19) $ 46 including foreign exchange options, forwards and swaps. Borrow- to Onex Corporation ings drawn on the line of credit bear interest at a base rate plus a margin of 2.50% or bankers’ acceptance rate (LIBOR for U.S. dol- lar 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 limit- ed partners of ONCAP III to fund the demand. Onex Corporation, the ultimate parent company, is only obligated to fund borrow- ings under the credit facility based on its proportionate share as a limited partner in ONCAP III. At December 31, 2013 and 2012, the amount available under the deemed risk facility was C$25. No amounts were outstanding on the line of credit at December 31, 2013 and 2012. The annual minimum repayment requirements for the next ﬁve years on consolidated long-term debt are as follows: 2014 2015 2016 2017 2018 Thereafter $ 651 329 1,566 1,106 1,111 7,420 $ 12,183 Substantially all of the lease commitments relate to the operating companies. Obligations under ﬁnance leases, without recourse to Onex Corporation, are included in other current and non-current liabilities. Operating leases primarily relate to premises. b) The Company as lessor Certain of the operating companies lease out their investment properties, machinery and/or equipment under operating leases. Future minimum lease payments receivable from lessees under non-cancellable operating leases are as follows: For the year: 2014 2015 2016 2017 2018 Thereafter $ 53 42 31 25 22 127 $ 300 Contingent rents recognized as an expense for lessees and as income for lessors were not signiﬁcant to the Company’s results for the years ended December 31, 2013 and 2012. 126 Onex Corporation December 31, 2013 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 14 . 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, 2013: Property and Casualty(a) Warranty(b) Total Reserves Current portion of reserves, December 31, 2012 Non-current portion of reserves, December 31, 2012 Gross reserves for losses and LAE, December 31, 2012(1) Less current portion of ceded claims recoverable(2) (note 6) Less non-current portion of ceded claims recoverable(2) (note 9) Net reserves for losses and LAE, December 31, 2012 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, 2013 Add current portion of ceded claims recoverable(2) (note 6) Add non-current portion of ceded claims recoverable(2) (note 9) Gross reserves for losses and LAE, December 31, 2013(1) Current portion of reserves, December 31, 2013 $ 85 298 $ 383 (85) (298) – $ – – – $ – 70 240 310 (70) $ 202 31 $ 233 (61) (2) 170 $ 558 (567) (1) $ 160 59 1 220 (184) Non-current portion of reserves, December 31, 2013 $ 240 $ 36 $ 287 329 $ 616 (146) (300) 170 $ 558 (567) (1) $ 160 129 241 530 (254) $ 276 (1) Reserves for losses and LAE represent the estimated ultimate net cost of all reported and unreported losses incurred and unpaid through December 31, 2013 and 2012, as described in note 1. (2) Ceded claims recoverable represent the portion of reserves ceded to third-party reinsurers. a) Property and casualty reserves represent estimated future losses on property and casualty policies. The property and casu- alty reserves and the corresponding ceded claims recoverable were Unearned Premiums The following table provides details of the unearned premiums: acquired on the acquisition of The Warranty Group. The property As at December 31 and 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 recov- erable and warranty reserves are of a current nature. Non-current portion of unearned premiums 2013 2012 $ 2,599 (1,096) $ 2,524 (1,079) $ 1,503 $ 1,445 Onex Corporation December 31, 2013 127 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 15 . 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 Partners and ONCAP Fund investments. During 2013, the unreal- Other non-current liabilities comprised the following: As at December 31 2013 Spirit AeroSystems advance payments(a) $ 723 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) 300 343 448 284 87 341 2012 $ 834 284 251 577 429 111 366 $ 2,526 $ 2,852 ized carried interest liability increased for a charge for the change in carried interest of $262, as described in note 24, partially offset by carried interest paid on the distributions received from Carestream Health (note 12), the sales of RSI (note 8(a)), TMS Inter national (note 3), BSN SPORTS and Caliber Collision (note 23) and the par- tial dispositions of Allison Transmission (note 8(a)). During 2012, the unrealized carried interest liability was increased for the change in carried interest of $91 (note 24), partially offset by the carried inter- est paid on the sale of CDI (note 23). c) At December 31, 2013, the stock-based compensation liability consisted of $280 (2012 – $391) for the stock-based compensation plans at the parent company and $4 (2012 – $38) for stock option and other share-based compensation plans in place at the operat- ing companies. Included in long-term investments (note 8) is $39 (2012 – $30) related to forward agreements to economically hedge a) Spirit AeroSystems receives advance payments from third par- ties in contemplation of the future performance of services, receipt the Company’s exposure to changes in the trading price of Onex shares associated with the Management DSU Plan and a portion of goods, incurrence of expenditures, or for other assets to be pro- of the Director DSU Plan. vided under its contracts and which are repayable if such obli- gations are not satisﬁed. Advance payments primarily relate to Spirit AeroSystems’ 787 aircraft long-term supply agreement with d) JELD-WEN’s employee stock ownership plan (“ESOP”) was established to allow its employees to share in the success of the The Boeing Company (“Boeing”). As at December 31, 2013, $1,148 company through the ESOP’s ownership of JELD-WEN stock. The (2012 – $1,138) of advance payments had been made, of which $554 company may make discretionary contributions of cash or JELD- has been recognized as revenue and $594 will be settled against WEN shares to the ESOP on behalf of the employees. JELD-WEN future sales of Spirit AeroSystems’ 787 aircraft units to Boeing. Of consolidates the trust established to maintain the ESOP and there- the payments, $82 has been recorded as a current liability. fore reports the liability for the value of JELD-WEN stock and mis- b) Unrealized carried interest due to management of Onex and ONCAP through the Onex Partners and ONCAP Funds is recognized cellaneous 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 partici- as a non-current liability and reduces the Limited Partners’ Interests pants. During 2013, JELD-WEN repurchased stock from the ESOP liability, as described in note 17. The unrealized carried interest is for a cash cost of $16 (2012 – $25). calculated based on current fair values of the Funds’ investments and the overall unrealized gains in each respective Fund in accor- dance with the limited partnership agreements. The liability will be e) Other includes amounts for liabilities arising from indemni- ﬁcations, unearned insurance contract fees, embedded deriva- increased or decreased based upon changes in the fair values and tives on long-term debt, mark-to-market valuations of hedge realizations of the underlying investments in the Onex Partners contracts and the non-current portion of obligations under and ONCAP Funds. The liability will ultimately be settled upon the ﬁnance leases, without recourse to Onex Corporation (note 13). realization of the Limited Partners’ share of the underlying Onex 128 Onex Corporation December 31, 2013 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 16 . I N C O M E TA X E S The reconciliation of statutory income tax rates to the Company’s effective tax rate is as follows: Year ended December 31 Income tax provision (recovery) at statutory rates Changes related to: Income tax rate differential of operating companies Book to tax differences on property, plant and equipment and intangibles Non-taxable gains Unbenefited tax losses Realized gains not expected to be taxable in the foreseeable future Foreign exchange Limited Partners’ Interests Other, including permanent differences Recovery of (provision for) income taxes Classified as: Current Deferred Recovery of (provision for) income taxes 2013 2012 $ (329) $ 17 468 36 (459) 410 (480) (29) 84 (34) (52) 12 (217) 42 – 20 270 (16 ) $ (333) $ 76 $ 172 (505) $ (333) $ 305 (229 ) $ 76 During 2013, as a result of evaluating recent changes in tax law for able future, consistent with the principles outlined in IAS 12, Income the treatment of surplus and upstream loans, Onex determined Taxes. As a result, Onex recorded a $526 recovery of deferred income that its previously recognized deferred tax provisions on gains real- taxes, of which $480 was included in the Company’s deferred ized from the disposition of foreign operating companies are tem- income tax liability at December 31, 2012 and $46 represented tax porary differences which are probable to not reverse in the foresee- provisions established and reversed during 2013. The Company’s deferred income tax assets and liabilities, as presented in the consolidated balance sheets and in other non-current assets (note 9), are presented after taking into consideration the offsetting of balances within the same tax jurisdiction. 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, 2012 Credited (charged) to net earnings Credited (charged) directly to equity Recognition of previously unrecognized benefits Exchange differences Acquisition of subsidiaries Disposition of operating companies Other adjustments Balance – December 31, 2012 Credited (charged) to net earnings Credited (charged) directly to equity Exchange differences Acquisition of subsidiaries Disposition of operating companies Other adjustments Scientific Research and Development $ 1 (2) – – – – – 1 $ – – – – – – – Provisions $ 191 (7) (2) – – 32 – 13 Deferred Revenue $ 151 180 – – 7 – – 7 $ 227 (34) $ 345 (213) 2 1 – (24) 4 – (3) (3) – – 49 1 – (2) 44 – 41 $ 323 (14) – – 40 (2) (9) Balance – December 31, 2013 $ – $ 176 $ 126 $ 338 Property, Plant and Equipment, and Intangibles Tax Losses Other Total $ 190 $ 38 $ 162 $ 733 6 – 2 – 2 – 11 $ 59 18 – 2 – (4) (11) $ 64 25 (2) – (1) 86 (3) 12 251 (3) 2 4 164 (3) 85 $ 279 $ 1,233 (75) (318) (1) (7) 3 (5) (4) 1 (7) 40 (35) (20) $ 190 $ 894 Onex Corporation December 31, 2013 129 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S Deferred Tax Liabilities Balance – January 1, 2012 Charged (credited) to net earnings Charged (credited) directly to equity Exchange differences Acquisition of subsidiaries Disposition of operating companies Other adjustments Balance – December 31, 2012 Credited to net earnings Charged (credited) directly to equity Exchange differences Acquisition of subsidiaries Disposition of operating companies Other adjustments Gains on Sales of Operating Companies $ 523 (2) (1) – – – – $ 520 (490) 1 – – – 7 Pension and Non-Pension Post-Retirement Benefits $ 22 6 (21) – 2 – – $ 9 (82) 82 – – – – Property, Plant and Equipment, and Intangibles $ 745 21 – 1 758 (10) 47 $ 1,562 (211) – 6 160 (123) 31 Foreign Exchange $ 142 (18) – – – – 3 Other $ 97 32 9 12 80 – 21 Total $ 1,529 39 (13) 13 840 (10) 71 $ 127 $ 251 $ 2,469 (11) – (10) – – – (29) (17) – – 10 18 (823) 66 (4) 160 (113) 56 Balance – December 31, 2013 $ 38 $ 9 $ 1,425 $ 106 $ 233 $ 1,811 At December 31, 2013, Onex and its investment holding compa- 17. L I M I T E D PA R T N E R S ’ I N T E R E S T S nies had $903 of non-capital loss carryforwards and $73 of capital loss carryforwards. Deferred income tax assets are recognized for tax loss car- ryforwards to the extent that the realization of the related tax beneﬁt through future taxable income is probable. At December 31, 2013, deductible temporary differences, unused tax losses and unused tax credits for which no deferred tax asset has been recognized were $6,723, of which $3,174 had no expiry, $304 was available to reduce future income taxes between 2014 and 2020, inclusive, and $3,245 was available with expiration dates of 2021 through 2033. At December 31, 2013, the aggregate amount of taxable temporary differences not recognized in association with invest- ments in subsidiaries, joint ventures and associates was $6,092. 130 Onex Corporation December 31, 2013 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, 2012 Limited Partners’ Interests charge(a) Contributions by Limited Partners(b) Distributions paid to Limited Partners(c) Balance – December 31, 2012(d) Limited Partners’ Interests charge(a) Contributions by Limited Partners(b) Distributions paid to Limited Partners(c) Balance – December 31, 2013 Limited Partners’ Interests $ 4,980 929 1,311 (977) $ 6,243 1,855 401 (1,540) $ 6,959 a) The Limited Partners’ Interests charge was reduced for the change in carried interest of $395 for the year ended December 31, 2013 (2012 − $132). Onex’ share of the change in carried interest was $137 for the year ended December 31, 2013 (2012 − $47). b) Management fees received from the Limited Partners were $45 for the year ended December 31, 2013 (2012 – $74). Management fees received during 2013 were reduced by the deferral of a capi- tal call for management fees from Onex Partners III until early 2014. As a result of the expiration of the initial fee period for Onex Partners III in December 2013 the management fees to be received for Onex Partners III in early 2014 will be $10. Contributions by Limited Partners during 2013 consisted primarily of $58 for the N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S USI co-investment sale and $265 for Onex Partners III’s invest- of other classes, to distributions of the residual assets on winding ment in Emerald Expositions (note 2). Contributions by the up and to any declared but unpaid cash dividends. The shares are Limited Part ners during 2012 were primarily for the acquisitions of entitled to receive cash dividends, dividends in kind and stock div- KraussMaffei, SGS International and USI by Onex Partners III, the idends as and when declared by the Board of Directors. investment in BBAM by Onex Partners III and the acquisition of The Multiple Voting Shares and Subordinate Voting Bradshaw by ONCAP III. c) Distributions paid to Limited Partners during 2013 consisted primarily of the proceeds on the realization of RSI (note 8(a)), 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 the sales of TMS International (note 3), BSN SPORTS and Caliber will thereupon be entitled to elect only 20% of the Company’s Collision (note 23), the partial dispositions of Allison Transmission Directors and otherwise will cease to have any general voting (note 8(a)) and distributions received from Allison Transmission, rights. The Subordinate Voting Shares would then carry 100% Carestream Health, JELD-WEN, PURE Canadian Gaming and The of the general voting rights and be entitled to elect 80% of the Warranty Group. Distributions paid to the Limited Partners dur- Company’s Directors. ing 2012 consisted primarily of the proceeds on the realized sale of CDI (note 23), partial disposition of Allison Transmission (note 8), iii) An unlimited number of Senior and Junior Preferred Shares distributions received from Allison Transmission, Carestream issuable in series. The Company’s Directors are empowered to ﬁx Health, Tomkins, The Warranty Group and JELD-WEN, and the the rights to be attached to each series. repurchase of subordinate notes by Mister Car Wash (note 12(q)). d) At December 31, 2012, the current portion of the Limited Part- ners’ Interest was $35 and was included in accounts payable and b) At December 31, 2013, the issued and outstanding share capital consisted of 100,000 Multiple Voting Shares (2012 – 100,000) and 111,444,100 Subordinate Voting Shares (2012 – 114,496,438). The accrued liabilities in the consolidated balance sheet. The current Multiple Voting Shares have a nominal paid-in value in these con- portion at December 31, 2012 included $26 for the Limited Partners solidated ﬁnancial statements. of Onex Partners III’s share of the repayment by JELD-WEN, in late There were no issued and outstanding Senior and Junior December 2012, of a portion of its convertible promissory notes, Preferred shares at December 31, 2013 or 2012. including accrued interest, and excess capital called for acquisi- tions completed in late December 2012. In addition, the current portion at December 31, 2012 included $9 for the Limited Partners c) During 2013, under the Dividend Reinvestment Plan, the Company issued 8,062 Subordinate Voting Shares (2012 – 6,183) at of ONCAP III’s share of the gains on the settlement of foreign an average cost of C$48.33 per share (2012 – C$37.94). In 2013 and exchange contracts in late December 2012 and excess capital called 2012, no Subordinate Voting Shares were issued upon the exercise for an acquisition completed in late December 2012. The restricted of stock options. cash for these distributions was included in other current assets in Onex renewed its Normal Course Issuer Bid in April the consolidated balance sheets at December 31, 2012. 2013 for one year, permitting the Company to purchase on 18 . S H A R E C A P I TA L the Toronto Stock Exchange up to 10% of the public ﬂoat of its Subordinate Voting Shares. The 10% limit represents approxi- mately 8.9 million shares. a) The authorized share capital of the Company consists of: During 2013, the Company repurchased and cancelled i) 100,000 Multiple Voting Shares, which entitle their holders to Voting Shares at a cash cost of $100 (C$102). In addition, the Com- elect 60% of the Company’s Directors and carry such number of pany repurchased 1,000,000 of its Subordinate Voting Shares in a votes in the aggregate as represents 60% of the aggregate votes private transaction for a cash cost of $53 (C$57). The excess of the attached to all shares of the Company carrying voting rights. The purchase cost of these shares over the average paid-in amount was Multiple Voting Shares have no entitlement to a distribution on $141 (C$146), which was charged to retained earnings. As at Decem- winding up or dissolution other than the payment of their nomi- ber 31, 2013, the Company has the capacity under the current Normal under its Normal Course Issuer Bid 2,060,400 of its Subordinate nal paid-in value. Course Issuer Bid to purchase approximately 7.8 million shares. During 2012, the Company repurchased and cancelled ii) An unlimited number of Subordinate Voting Shares, which carry under its Normal Course Issuer Bids 627,061 of its Subordinate one vote per share and as a class are entitled to 40% of the aggre- Voting Shares at a cash cost of $24 (C$24). The excess of the pur- gate votes attached to all shares of the Company carrying voting chase cost of these shares over the average paid-in amount was rights, to elect 40% of the Company’s Directors, and to appoint $22 (C$22), which was charged to retained earnings. the auditors. These shares are entitled, subject to the prior rights Onex Corporation December 31, 2013 131 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S d) The Company has a Director DSU Plan and a Management DSU Plan, as described in note 1. Details of DSUs outstanding under the plans are as follows: Director DSU Plan Management DSU Plan Number of DSUs Weighted Average Price Number of DSUs Weighted Average Price Outstanding at January 1, 2012 Granted Exercised Additional units issued in lieu of compensation and cash dividends Outstanding at December 31, 2012 Granted Additional units issued in lieu of compensation and cash dividends Outstanding at December 31, 2013 Hedged with a counterparty financial institution at December 31, 2013 Outstanding at December 31, 2013 – Unhedged C$ 38.53 – C$ 39.08 C$ 49.94 C$ 51.66 446,388 40,000 – 14,366 500,754 30,537 11,969 543,260 (250,829) 292,431 e) The Company has a Stock Option Plan (the “Plan”) under which options and/or share appreciation rights for a term not exceeding 10 years may be granted to Directors, ofﬁcers and employees for the acquisition of Subordinate Voting Shares of the Company at a price not less than the market value of the shares on the business day preceding the day of the grant. Under the Plan, no options or share appreciation rights may be exercised unless the average market price of the Subordinate Voting Shares for the ﬁve prior business days exceeds the exercise price of the options or the share appre- ciation rights by at least 25% (the “hurdle price”). At December 31, 2013, 15,612,000 Subordinate Voting Shares (2012 – 15,612,000) were reserved for issuance under the Plan, against which options rep- resenting 7,867,175 shares (2012 – 13,294,552) were outstanding, of Outstanding at January 1, 2012 Granted Surrendered Expired Outstanding at December 31, 2012 Granted Surrendered Expired 443,139 – (113,534) 136,399 466,004 – 1,226 467,230 (467,230) – Number of Options 14,036,498 1,025,000 (1,488,620) (278,326) 13,294,552 3,402,000 (8,660,526) (168,851) – C$ 40.11 C$ 37.83 – C$ 49.48 Weighted Average Exercise Price C$ 19.47 C$ 40.26 C$ 18.32 C$ 30.87 C$ 20.96 C$ 56.92 C$ 16.34 C$ 33.51 Outstanding at December 31, 2013 7,867,175 C$ 41.34 which 2,907,441 options were vested. The Plan provides that the During 2013 and 2012, the total cash consideration paid on number of options issued to certain individuals in aggregate may options surrendered was $292 (C$299) and $30 (C$30), respec- not exceed 10% of the shares outstanding at the time the options tively. This amount represents the difference between the market are issued. value of the Subordinate Voting Shares at the time of surrender Options granted vest at a rate of 20% per year from and the exercise price, both as determined under the Plan. The the date of grant with the exception of 2,750,000 of the 3,402,000 weighted average share price at the date of exercise was C$50.81 options granted in December 2013, which vest at a rate of 15% per (2012 – C$38.32) per share. year during the ﬁrst four years and 40% in the ﬁfth year. When an option is exercised, the employee has the right to request that the Company repurchase the option for an amount equal to the dif- ference between the fair value of the stock under the option and its exercise price. Upon receipt of such request, the Company has the right to settle its obligation to the employee by the payment of cash, the issuance of shares or a combination of cash and shares. 132 Onex Corporation December 31, 2013 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S Options outstanding at December 31, 2013 consisted of the following: Month and Year of Grant Number of Options Outstanding Exercise Price Number of Options Exercisable Hurdle Price Remaining Life (years) November 2004 January 2006 December 2006 December 2007 December 2008 December 2009 December 2010 July 2011 December 2011 September 2012 December 2012 December 2013 342,250 115,000 240,000 583,165 543,370 601,240 480,600 60,000 531,750 50,000 917,800 3,402,000 7,867,175 C$ 18.18 C$ 19.25 C$ 29.22 C$ 35.20 C$ 15.95 C$ 23.35 C$ 29.29 C$ 37.37 C$ 33.11 C$ 38.50 C$ 40.35 C$ 56.92 342,250 115,000 226,000 549,831 511,370 447,540 286,400 24,000 211,650 10,000 183,400 – 2,907,441 C$ 22.73 C$ 24.07 C$ 36.53 C$ 44.00 C$ 19.94 C$ 29.19 C$ 36.62 C$ 46.72 C$ 41.39 C$ 48.13 C$ 50.44 C$ 71.15 0.9 2.1 2.9 3.9 4.9 5.9 6.9 7.5 7.9 8.7 8.9 9.9 In January 2014, the Company issued 3,950,000 options to acquire Subordinate Voting Shares with an exercise price of C$57.45 per share. The options vest at a rate of 15% per year during the ﬁrst four years and 40% in the ﬁfth year. 19. N O N - C O N T R O L L I N G I N T E R E S T S The Company’s material non-controlling interests are associated with Celestica and Spirit AeroSystems. There were no dividends paid by Celestica or Spirit AeroSystems during 2013 or 2012. Summarized balance sheet information based on those amounts included in these consolidated ﬁnancial statements for Celestica and Spirit AeroSystems are as follows: As at December 31 Non-controlling interest Current assets Non-current assets Current liabilities Non-current liabilities Net assets Accumulated non-controlling interests Celestica Spirit AeroSystems 2013 89% $ 2,121 518 2,639 $ 1,109 128 1,237 $ 1,402 $ 1,250 2012 90% $ 2,111 548 2,659 1,199 137 1,336 $ 1,323 $ 1,182 2013 84% $ 3,030 2,125 5,155 $ 1,342 2,147 3,489 $ 1,666 $ 1,409 2012 84% $ 3,329 2,042 5,371 1,045 2,221 3,266 $ 2,105 $ 1,776 Financial information on the statements of earnings for Celestica (electronics manufacturing services segment) and Spirit AeroSystems (aerostructures segment) are presented in note 34. Summarized cash ﬂows for Celestica and Spirit AeroSystems are as follows: Year ended December 31 2013 2012 2013 Cash flows from operating activities Cash flows used for financing activities Cash flows used for investing activities $ 153 $ 312 $ 319 (107) (52) (253) (168) (79) (262) 2012 $ 611 (109) (241) Celestica Spirit AeroSystems Onex Corporation December 31, 2013 133 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 2 0 . E X P E N S E S B Y N AT U R E 2 2 . S T O C K - B A S E D C O M P E N S AT I O N E X P E N S E The nature of expenses in cost of sales and operating expenses, Year ended December 31 which excludes amortization of property, plant and equipment, intangible assets and deferred charges, consisted of the following: Year ended December 31 2013 2012 Cost of inventory, raw materials and consumables used $ 14,831 $ 13,567 Employee benefit expense(1) Repairs, maintenance and utilities Benefits and claims incurred by The Warranty Group on warranty agreements Operating lease payments Amortization charges Professional fees Provisions Transportation Other expenses 6,822 784 600 389 157 547 251 566 5,746 636 621 328 173 443 144 440 1,093 $ 26,040 1,086 $ 23,184 (1) Employee beneﬁt expense excludes employee costs capitalized into inventory and internally generated capital assets. Stock-based compensation is Parent company(a) Caliber Collision Celestica Spirit AeroSystems USI JELD-WEN Other 2013 $ 215 50 29 22 21 (7) 19 2012 $ 139 15 36 16 – 17 16 $ 349 $ 239 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(j)). The expense is determined based on the fair value of the liability at the end of each reporting period. 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, 2013 of C$57.35 (2012 – C$41.87), exercise price of the options, remaining life of each option issuance, volatility of each option issuance ranging from 15.78% to 15.98%, an average dividend yield of 0.26% and an average risk-free disclosed separately in the consolidated statements of earnings. rate of 2.41%. The volatility is measured as the historical volatility based on the remaining life of each respective option issuance. 21. I N T E R E S T E X P E N S E O F O P E R AT I N G C O M PA N I E S The fair values for the MIP options are determined Year ended December 31 2013 2012 inputs into the model are the fair value of the underlying invest- Interest on long-term debt of ments, the time to expected exit from each investment, a risk-free operating companies $ 731 $ 443 rate of 1.95% and an industry comparable historical volatility for using an internally developed valuation model. The signiﬁcant Interest on obligations under finance leases of operating companies Other interest expense of operating companies(1) 3 79 3 68 $ 813 $ 514 (1) Other includes debt prepayment expense of $19 (2012 − $22) . each investment. 134 Onex Corporation December 31, 2013 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 2 3 . O T H E R G A I N S Year ended December 31 Sale of Caliber Collision(a) Sale of BSN SPORTS(b) Sale of CDI(c) a) Caliber Collision 2013 $ 386 175 – $ 561 2012 $ – – 59 $ 59 and as a result operating results up to the date of disposition have not been presented as a discontinued operation. The cash pro- ceeds recorded in the consolidated statement of cash ﬂows for the sale of BSN SPORTS were reduced for BSN SPORTS’ cash and cash equivalents of $3 at the date of sale. During the fourth quarter of 2013, $6 of additional pro- ceeds were received by ONCAP II, of which Onex’ share was $3. These additional proceeds were recognized as a gain during the fourth quarter of 2013, net of a $1 reduction in the escrow receiv- able. At December 31, 2013, $15 remains receivable for escrow and In November 2013, ONCAP II sold its interests in Caliber Collision working capital adjustments, of which Onex’ share was $7. for net proceeds of $437, of which Onex’ share was $193. Included in Under the terms of the MIP, management members par- the net proceeds amount is $4 held in escrow and for working capi- ticipated in the realizations the Company achieved on the sale tal adjustments, which are expected to be settled during 2014. Onex’ of BSN SPORTS. Amounts paid on account of this transaction share of the amounts held in escrow and for working capital adjust- related to the MIP totalled $6. In addition, management of ONCAP ments is $2. The Company recorded a gain of $386 on the transac- received $18 in carried interest, which included a net payment of tion, of which Onex’ gain was $171. The gain on the sale is entirely $7 of carried interest by Onex and management of Onex. attributable to the equity holders of Onex Corporation, as the inter- est of the Limited Partners was recorded as a ﬁnancial liability at fair c) CDI value. Caliber Collision did not represent a separate major line of In July 2012, Onex, Onex Partners I and Onex management com- business, and as a result operating results up to the date of disposi- pleted the sale of their entire investment in CDI. The sale was tion have not been presented as a discontinued operation. The cash completed for net proceeds of $91, of which Onex’ share was $24, proceeds recorded in the consolidated statement of cash ﬂows for including carried interest. Included in the net proceeds amount the sale of Caliber Collision were reduced for Caliber Collision’s cash was $9 held in escrow and for working capital adjustments, which and cash equivalents of $7 at the date of sale. is expected to be settled during 2014. Onex’ share of the amounts Under the terms of the MIP, management members par- held in escrow and for working capital adjustments is $2, exclud- ticipated in the realizations the Company achieved on the sale ing carried interest. The Company recorded a pre-tax gain of $59 of Caliber Collision. Amounts paid on account of this transac- in the third quarter of 2012 on the transaction. In addition, Onex tion related to the MIP totalled $12. In addition, management of recorded a non-cash tax provision of $2 on the gain. Onex rec- ONCAP received $42 in carried interest, which included a net pay- ognized a recovery of this tax provision during 2013 as part of an ment of $8 of carried interest by Onex and management of Onex. evaluation of recent changes in tax law as described in note 16. b) BSN SPORTS The gain on the sale is entirely attributable to the equity holders of Onex Corporation as the interest of the Limited Partners was In June 2013, ONCAP II sold its interests in BSN SPORTS for net recorded as a ﬁnancial liability at fair value. The cash proceeds proceeds of $236, of which Onex’ share was $114. Included in the recorded in the consolidated statement of cash ﬂows for the sale of net proceeds amount is $16 held in escrow and for working capi- CDI were reduced for CDI’s cash and cash equivalents of $11 at the tal adjustments, which are expected to be settled by June 2015. date of sale. Onex’ share of the amounts held in escrow and for working capi- At December 31, 2013, $9 remains receivable for escrow tal adjustments is $8. During the fourth quarter of 2013, $1 of the and working capital adjustments, of which Onex’ share was $2. additional amounts held in escrow was received, of which Onex’ Amounts received on account of the carried interest share was less than $1. The Company recorded a pre-tax gain of related to this transaction totalled $8. Consistent with market $170 on the transaction, of which Onex’ pre-tax gain was $82. In practice and the terms of the Onex Partners agreements, Onex is addition, Onex initially recorded a non-cash tax provision of $7 allocated 40% of the carried interest with 60% allocated to man- on the gain. Onex recognized a recovery of this tax provision dur- agement. Onex’ share of the carried interest received was $3 and ing 2013 as part of an evaluation of recent changes in tax law as is included in Onex’ share of the cash proceeds. Management’s described in note 16. The gain on the sale is entirely attributable share of the carried interest was $5, which was previously record- to the equity holders of Onex Corporation, as the interest of the ed as a liability within other non-current liabilities. No amounts Limited Partners was recorded as a ﬁnancial liability at fair value. were paid on account of the MIP for this transaction as the BSN SPORTS did not represent a separate major line of business, required investment return hurdle for Onex was not met. Onex Corporation December 31, 2013 135 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 2 4 . O T H E R I T E M S Year ended December 31 Restructuring(a) Transition, integration and other(b) Transaction costs(c) Carried interest due to Onex and ONCAP management(d) Change in fair value of contingent consideration(e) Spirit AeroSystems severe weather event(f) Meridian Aviation(g) Foreign exchange loss (gain) Other(h) 2013 $ 93 73 23 262 104 30 (32) 18 (122) iv) Carestream Health’s restructuring charges for 2013 related primarily to the reorganization of its European sales and service functions and the relocation and closure of a ﬁlm ﬁnishing plant. Carestream Health’s 2012 restructuring plans were primarily related to the sale of a portion of its Molecular Imaging business. b) Transition, integration and other expenses are typically to pro- vide 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. c) Transaction costs are incurred by Onex and its operating com- panies to complete business acquisitions, and typically include 2012 $ 103 27 46 91 (2 ) (146 ) – (7) (66) a) Restructuring charges recorded at the operating companies were: Emerald Expositions (note 2) and acquisitions completed by the $ 449 $ 46 advisory, legal and other professional and consulting costs. Transaction costs for 2013 were primarily due to the acquisition of operating companies. Transaction costs for 2012 were primarily 2012 due to the acquisitions of SGS International, USI, KraussMaffei and Bradshaw (note 2). d) Carried interest reﬂects the change in the amount of carried interest due to Onex and ONCAP management through the Onex Partners and ONCAP Funds. Unrealized carried interest is calcu- lated based on current fair values of the Funds’ investments and the overall unrealized gains in each respective Fund in accor- dance 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 ultimately be settled upon the realiza- tion of the Limited Partners’ share of the underlying investments in each respective Onex Partners and ONCAP Fund. e) During the year ended December 31, 2013, a net charge of $104 (2012 – net recovery of $2) was recognized in relation to the esti- mated change in fair value of contingent consideration related to acquisitions completed by the Company. The fair value of contin- gent consideration liabilities is typically based on the estimated future ﬁnancial performance of the acquired business. Financial targets used in the estimation process include certain deﬁned ﬁnancial targets and realized internal rates of return. The total estimated fair value of contingent consideration liabilities at December 31, 2013 was $200 (December 31, 2012 – $83). Year ended December 31 JELD-WEN(i) Celestica(ii) Sitel Worldwide(iii) Carestream Health(iv) Other 2013 $ 31 28 14 10 10 $ 35 44 15 6 3 $ 93 $ 103 i) JELD-WEN’s restructuring charge for 2013 was primarily related to the closure of facilities. JELD-WEN’s restructuring charge for 2012 was primarily due to the realignment of administrative and sales departments to reduce general and administrative costs and the termination of certain contracts. ii) During the second quarter of 2012, Celestica announced that it would wind down its manufacturing services for a signiﬁcant customer by the end of 2012. As a result, Celestica incurred restructuring charges of $28 during 2013 (2012 – $44, which included $16 of property, plant and equipment impair- ments). Celestica’s restructuring plans primarily consist of actions to consolidate facilities and reduce its workforce. iii) 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. 136 Onex Corporation December 31, 2013 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S f) On April 14, 2012, Spirit AeroSystems’ Wichita, Kansas facility was hit by a tornado, which caused signiﬁcant damage to several In February and July 2013, Onex, Onex Partners III and Onex management invested a total of $32 and $25, respectively, buildings and disruption of utilities and resulted in a complete in Meridian Aviation. Onex’ share of the investments in Meridian suspension of production for eight days. Spirit AeroSystems’ pro- Aviation was $8 and $6, respectively. These investments are pri- duction equipment and work-in-process generally remained marily for deposits, fees and other expenses associated with the intact and the company resumed production on April 23, 2012, purchase of the six commercial passenger aircraft. although some inefﬁciencies continued thereafter as a result of In April 2013, the ﬁrst commercial passenger aircraft the damage and repair efforts. was delivered by Meridian Aviation to the lessee. Debt ﬁnancing In October 2012, Spirit AeroSystems agreed to a settle- was obtained by Meridian Aviation to ﬁnance the purchase of ment of $235 with its insurers for all claims related to the tornado the aircraft. for property damage, clean-up, recovery costs and business inter- During the fourth quarter of 2013, Meridian Aviation ruption expenses, net of any deductibles. The settlement resolves executed sale agreements for three of the six commercial pas- all contingencies surrounding the storm damage proceeds and, senger aircraft under its existing purchase agreement, including as a result of the settlement, Spirit AeroSystems recorded a net the novation of the associated leases to the purchaser. The sale gain of $146 during 2012. This gain is net of costs incurred dur- agreements were for two aircraft delivered in 2013 and one aircraft ing 2012. Future costs will be recorded as they are incurred. Spirit scheduled for delivery in 2014. Meridian Aviation recorded a net AeroSystems’ current estimates of the future charges will likely gain of $32 comprised of the sale of the two aircraft delivered in change as the various repair and build-back options are evalu- 2013 and a fair value adjustment covering the remaining four air- ated. While Spirit AeroSystems believes that most past and future craft scheduled for delivery to the company. The debt ﬁnancing costs relating to the tornado will be covered by the insurance set- undertaken by Meridian Aviation with the delivery of the ﬁrst tlement, there can be no assurance that the insurance proceeds commercial aircraft was fully repaid upon completion of the sale will completely cover all costs that may be incurred. Under the transaction. terms of the settlement agreement, Spirit AeroSystems assumes all risk related to the effects of the tornado on the company; how- ever, the risk is believed to be minimal as full production resumed h) Other for the years ended December 31, 2013 and 2012 includes: (i) net realized and unrealized gains of $24 (2012 – $25) recorded on April 23, 2012 with some logistical inefﬁciency. on investments in securities held by the operating companies; (ii) During 2013, Spirit AeroSystems incurred $30 of addi- gains of $9 (2012 – $16) on the sale of tax losses (as described in tional costs related to the April 2012 tornado that hit its Wichita, note 31(o)); (iii) $15 of gains from JELD-WEN on the sale of non- Kansas facility. core assets; (iv) $14 of other income from equity-accounted invest- ments; and (v) non-cash bargain purchase gains of $3 (2012 – $9) g) In February 2013, Onex and Onex Partners III established Meridian Aviation Partners Limited (“Meridian Aviation”), an air- related to acquisitions (as described in note 2). During 2013, in connection with the settlement of class action lawsuits, Celestica craft investment company based in Ireland. Aircraft purchased by recorded other income of $24 for the receipt of damages related to Meridian Aviation will be leased to commercial airlines and man- certain purchases made by the company in prior periods. In addi- aged by BBAM, one of the world’s largest managers of commercial tion, other for the year ended December 31, 2012 includes a gain of jet aircraft and an Onex and Onex Partners III investment. Meridian $15 on the repurchase of preferred shares by Sitel Worldwide. Aviation executed a purchase agreement in February 2013 for six commercial passenger aircraft for delivery between April 2013 and May 2015, with a list price value of more than $1,400. Meridian Aviation executed leases in February 2013 with a major interna- tional commercial airline in respect of these six aircraft. An Onex Partners III afﬁliate has guaranteed certain payment obligations arising on each aircraft delivery date. Onex Corporation December 31, 2013 137 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 2 5 . I M PA I R M E N T O F G O O D W I L L , I N TA N G I B L E A S S E T S A N D LO N G - L I V E D A S S E T S , N E T Year ended December 31 Skilled Healthcare Group(a) Tropicana Las Vegas(b) CiCi’s Pizza(c) Flushing Town Center(d) Celestica(e) Other, net(f) 2013 $ 95 91 57 43 – 33 $ 319 2012 $ 12 – 16 – 18 19 $ 65 a) During 2013, Skilled Healthcare Group recorded non-cash goodwill impairments of $93 and a non-cash intangible asset impairment of $2 due to the expected future revenue growth impacts on its long-term care facilities from the ongoing shift of seniors from Medicare to Medicare Advantage, which pays a lower per diem rate than Medicare, and future decreases in home health care reimbursement rates. The impairments were calculated on a value-in-use basis using discount rates ranging from 9.0% to 12.0%. The recoverable amounts calculated for the long-term care and home health care groups of CGUs were $77 and nil, respec- c) During the fourth quarters of 2013 and 2012, CiCi’s Pizza recorded non-cash goodwill and intangible asset impairment charges of $33 (2012 – $16) and $24 (2012 – nil), respectively. The impairments were primarily due to a decrease in projected future earnings and a reduction in the exit multiple due to market risks. d) During 2013, Flushing Town Center recorded non-cash impair- ments of $43 associated with its retail space and parking structures. e) In the fourth quarter of 2012, Celestica recorded non-cash im- pairments of $18 as a result of its annual impairment testing of goodwill, intangible assets and property, plant and equipment. f) Other in 2013 includes net impairments of $33 related to EnGlobe, JELD-WEN, Sitel Worldwide, The Warranty Group and USI. Other in 2012 includes impairments of $19 related to Carestream Health, JELD-WEN, Spirit AeroSystems, The Warranty Group and BSN SPORTS. 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- tively. The recoverable amounts were Level 3 measurements in the mented basis in note 34. fair value hierarchy as a result of signiﬁcant other unobservable inputs used in determining the recoverable amounts. During 2012, Skilled Healthcare Group recorded a non- cash impairment charge of $12 to impair certain of its property, plant and equipment. The recoverable amount was a Level 3 mea- surement in the fair value hierarchy as a result of signiﬁcant other unobservable inputs used in determining the recoverable amount. b) Due to a decline in the recoverable amount of Tropicana Las Vegas, measured in accordance with IAS 36, Impairment of Assets, Tropicana Las Vegas recorded non-cash long-lived asset impairments of $91 during 2013. The impairments were calculated In measuring the recoverable amounts for goodwill and intan- gible assets at December 31, 2013, signiﬁcant estimates include the growth rate and discount rate, which ranged from 0.0% to 10.3% and 8.4% to 20.0% (2012 – 0% to 8.1% and 8.8% to 18.0%), respectively. 26. NET EARNINGS PER SUBORDINATE VOTING SHARE The weighted average number of Subordinate Voting Shares for the purpose of the earnings per share calculations was as follows: Year ended December 31 2013 2012 on a fair value less costs to sell basis using market comparable Weighted average number of shares transactions. The recoverable amount calculated was $245 and outstanding (in millions): was a Level 3 measurement in the fair value hierarchy as a result of signiﬁcant other unobservable inputs used determining the Basic Diluted 113 113 115 115 recoverable amount. 138 Onex Corporation December 31, 2013 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 2 7. F I N A N C I A L I N S T R U M E N T S Financial assets held by the Company, presented by ﬁnancial statement line item, were as follows: December 31, 2013 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 $ – $ 3,191 $ – $ – $ – $ – $ 3,191 361 – 1 4,030 53 68 – 146 1,814 69 325 – – 1,550 1 – – – 32 – – 3,619 136 – 130 – – 7 49 2 754 3,619 290 7,475 255 Total $ 4,445 $ 5,288 $ 1,876 $ 32(a) $ 3,885(b) $ 58 $ 15,584 Fair Value through Net Earnings Recognized Designated Available- for-Sale Held-to- Maturity Loans and Receivables Derivatives Used for Hedging Total December 31, 2012 Assets as per balance sheet Cash and cash equivalents $ – $ 2,656 $ – $ – $ – $ – $ 2,656 Short-term investments Accounts receivable Other current assets Long-term investments Other non-current assets Total 349 – – 3,855 – 78 – 160 793 31 303 – – 1,628 1 – – 1 22 – – 3,838 130 – 153 – – 17 30 – 730 3,838 308 6,328 185 $ 4,204 $ 3,718 $ 1,932 $ 23(a) $ 4,121(b) $ 47 $ 14,045 (a) Fair value of held-to-maturity assets, which are measured at amortized cost at December 31, 2013, was $32 (2012 – $23). (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, 2013 Liabilities as per balance sheet Accounts payable and accrued liabilities $ – $ – $ 4,014 $ 19 $ 4,033 Provisions Other current liabilities Long-term debt(a) Obligations under finance leases Other non-current liabilities Limited Partners’ Interests Total (a) Long-term debt is presented gross of financing charges. 187 21 – – 451 – $ 659 – – 1,723 – 4 6,959 $ 8,686 30 349 10,460 65 86 – – 14 – – 32 – 217 384 12,183 65 573 6,959 $ 15,004 $ 65 $ 24,414 Onex Corporation December 31, 2013 139 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S Fair Value through Net Earnings Recognized Designated Financial Liabilities at Amortized Cost Derivatives Used for Hedging Total December 31, 2012 Liabilities as per balance sheet Accounts payable and accrued liabilities $ – $ – $ 4,352 $ 2 $ 4,354 Provisions Other current liabilities Long-term debt(a) Obligations under finance leases Other non-current liabilities Limited Partners’ Interests Total (a) Long-term debt is presented gross of financing charges. – 32 – – 393 – – 9 801 – 3 6,243 37 281 9,894 67 69 – – 10 – – 11 – 37 332 10,695 67 476 6,243 $ 425 $ 7,056 $ 14,700 $ 23 $ 22,204 Long-term debt recorded at fair value through net earnings at December 31, 2013 of $1,723 (2012 – $801) has contractual amounts due on maturity of $1,748 (2012 – $816). The gains (losses) recognized by the Company related to ﬁnancial assets and liabilities were as follows: Year ended December 31 2013 2012 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 Financial Liabilities at Amortized Cost Interest expense of operating companies Derivatives Used for Hedging Total gains (losses) recognized Earnings (Loss) Comprehensive Earnings(1) Earnings (Loss) Comprehensive Earnings (Loss) (1) $ (976)(a) n/a $ (95)(a) n/a 75 (1) 1 – (12) (813) (31) $ (43) n/a n/a n/a n/a n/a n/a (23) $ (1,757) $ (66) n/a 84 – 1 – (11) (514) 4 $ (531) n/a $ 23 n/a n/a n/a n/a n/a n/a 23 $ 46 (1) Amounts recognized in comprehensive earnings (loss) are presented gross of the income tax effect. a) Primarily consists of Limited Partners’ Interests charge of $1,855 (2012 – $929), carried interest charge of $262 (2012 – $91) and increase in value of investments in joint ventures and associates at fair value of $1,098 (2012 – $863). 140 Onex Corporation December 31, 2013 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 2 8 . FA I R VA 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, 2013 and 2012 are based on relevant market prices and information available at those dates. The carrying values of cash and cash equivalents, short-term investments, accounts receiv- able, 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 at December 31, 2013 was $12,478 (2012 – $10,905). The fair value of consolidated long-term debt measured at amortized cost is a Level 2 measurement in the fair value hierarchy and is calculated by discounting the expected future cash ﬂows using an observ- able discount rate for instruments of similar maturity and credit risk. For certain operating companies, an adjustment is made by management for that operating company’s credit risk, resulting in a Level 3 measurement in the fair value hierarchy. 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. Transfers between the three levels of the fair value hierarchy are recognized on the date of the event or change in circumstances that caused the transfer. There were no signiﬁcant transfers between the three levels of the fair value hierarchy during 2013 and 2012. 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, 2013 was as follows: Financial assets at fair value through earnings Investments in debt Investments in equities Investments in joint ventures and associates Other Available-for-sale financial assets Investments in debt Investments in equities Total financial assets at fair value Level 1 Level 2 Level 3 Total $ – $ 2,335 $ – $ 2,335 23 – 520 – 107 38 1,262 122 1,769 – – 2,242 – – – 61 3,504 642 1,769 107 $ 650 $ 5,526 $ 2,242 $ 8,418 The allocation of ﬁnancial assets in the fair value hierarchy, excluding cash and cash equivalents, at December 31, 2012 was as follows: Financial assets at fair value through earnings Investments in debt Investments in equities Investments in joint ventures and associates Other Available-for-sale financial assets Investments in debt Investments in equities Other Level 1 Level 2 Level 3 Total $ – $ 1,254 $ – $ 1,254 15 – 516 – 82 – 33 1,447 78 1,739 – 111 – 1,923 – – – – 48 3,370 594 1,739 82 111 Total financial assets at fair value $ 613 $ 4,662 $ 1,923 $ 7,198 Onex Corporation December 31, 2013 141 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S The allocation of ﬁnancial liabilities in the fair value hierarchy at December 31, 2013 was as follows: Financial liabilities at fair value through net earnings Limited Partners’ Interests Unrealized carried interest due to Onex and ONCAP management Onex Credit Partners’ long-term debt Other Total financial liabilities at fair value Level 1 Level 2 Level 3 Total $ – – – 9 $ 9 $ – – – 9 $ 9 $ 6,959 $ 6,959 343 1,723 302 343 1,723 320 $ 9,327 $ 9,345 The allocation of ﬁnancial liabilities in the fair value hierarchy at December 31, 2012 was as follows: Level 1 Level 2 Level 3 Total Financial liabilities at fair value through net earnings Limited Partners’ Interests $ – $ – $ 6,243 $ 6,243 Unrealized carried interest due to Onex and ONCAP management Onex Credit Partners’ long-term debt Other – – 3 – – 18 251 801 165 251 801 186 Total financial liabilities at fair value $ 3 $ 18 $ 7,460 $ 7,481 Details of ﬁnancial assets and liabilities measured at fair value Financial assets and liabilities measured at fair value with sig- with signiﬁcant unobservable inputs (Level 3), excluding invest- niﬁ cant unobservable inputs (Level 3) are recognized in the ments in joint ventures and associates designated at fair value consolidated statements of earnings in the following line items: through earnings (note 8(a)) and Limited Partners’ Interests desig- (i) interest expense of operating companies; (ii) increase in value nated at fair value (note 17), are as follows: of investments in joint ventures and associates at fair value, net; Balance – January 1, 2012 Total losses in net earnings Transfer out of Level 3 Additions Settlements Balance – December 31, 2012 Total losses in net earnings Transfer out of Level 3 Additions Acquisition of subsidiaries Settlements Other Balance – December 31, 2013 Financial Liabilities at Fair Value through Net Earnings $ 388 102 (54) 809 (28) $ 1,217 339 (7) 1,002 29 (215) 3 $ 2,368 Unrealized losses in net earnings (loss) for liabilities held at the end of the reporting period $ 339 (iii) other items; and (iv) Limited Partners’ Interests charge. The valuation of investments in joint ventures and associates measured at fair value with signiﬁcant other observable inputs (Level 2) of the fair value hierarchy are substantially based on the quoted market price for the underlying security, less a discount to reﬂect restrictions on a market participant’s ability to freely trade the security. The valuation of investments in debt securities mea- sured at fair value with signiﬁcant other observable inputs (Level 2) is generally determined by obtaining quoted market prices or dealer quotes for identical or similar instruments in inactive markets, or other inputs that are observable or can be corroborated by observ- able market data. The valuation of ﬁnancial assets and liabilities mea- sured at fair value with signiﬁcant unobservable inputs (Level 3) is reassessed quarterly utilizing available market data to deter- mine if the fair value should be adjusted. The valuation of invest- ments in the Onex Partners and ONCAP Funds is reviewed and approved by the General Partner of the respective Funds each quarter. The General Partners of the Onex Partners and ONCAP Funds are indirectly controlled by Onex Corporation. 142 Onex Corporation December 31, 2013 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S The fair value measurements for investments in joint Valuation methodologies may include observations of the trad- ventures and associates, Limited Partners’ Interests and unreal- ing multiples of public companies considered comparable to the ized carried interest are primarily driven by the underlying fair private companies being valued and discounted cash ﬂows. The value of the investments in the Onex Partners and ONCAP Funds. following table presents the signiﬁcant unobservable inputs used A change to reasonably possible alternative estimates and assump- to value the Company’s private securities that impact the valua- tions used in the valuation of non-public investments in the Onex tion of (i) investments in joint ventures and associates; (ii) unre- Partners and ONCAP Funds (as described in note 1) may have a alized carried interest liability due to Onex and ONCAP manage- signiﬁcant impact on the fair values calculated for these ﬁnancial ment; (iii) stock-based compensation liability for the MIP; and assets and liabilities. A change in the valuation of the underlying (iv) Limited Partners’ Interests at December 31, 2013. investments may have multiple impacts on 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 MIP exercise hurdles. For example, an increase in the fair value of an investment in an associate would have the fol- lowing impacts on Onex’ consolidated ﬁnancial statements: i) an increase in the unrealized value of investments in joint ventures and associates at fair value in the consolidated state- Valuation Technique Significant Unobservable Inputs Inputs Market comparable EBITDA multiple 6.0x–12.5x companies Discounted cash flow Weighted average 11.6%–18.0% cost of capital Exit multiple 4.6x–9.1x ments of earnings with a corresponding increase in long-term In addition, the Company has one investment that is valued based investments in the consolidated balance sheets; on a multiple of book value. ii) a charge would be recorded for the Limited Partners’ share of the fair value increase of the investment in associate on the Limited Partners’ Interests line in the consolidated state- ments of earnings with a corresponding increase to the Limited Partners’ Interests in the consolidated balance sheets; Generally, EBITDA represents maintainable operating earnings, which considers adjustments including those for the deduction of ﬁnancing costs, taxes, non-cash amortization, non-recurring items and the impact of any discontinued activities. EBITDA is a iii) a change in the calculation of unrealized carried interest in measurement that is not deﬁned under IFRS. 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 other non-current liabilities in the consolidated balance sheets; and v) a change in the fair value of the vested investment rights held under the MIP, resulting in a charge being recorded on the stock-based compensation line in the consolidated state- ments of earnings and a corresponding increase to other non- current liabilities in the consolidated balance sheets. The long-term debt recorded at fair value in the OCP CLOs is rec- ognized at fair value using third-party pricing information with- out adjustment by the Company. The valuation methodology is based on a projection of the future cash ﬂows expected to be real- ized from the underlying collateral of the OCP CLOs. During 2013, the Company recorded a loss of $5 (2012 – $7 gain) attributable to changes in the credit risk of the long-term debt in the OCP CLOs. Onex Corporation December 31, 2013 143 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 2 9. 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 TA L D I S C LO 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 and OCP CLOs included in the long-term investments line in the con- solidated balance sheets consist primarily of investments in debt securities. The investments in debt securities are subject to credit risk. A description of the investments held by The Warranty Group and OCP CLOs is included in note 8. At December 31, 2013, Onex Corporation, the ultimate parent company, held approximately $1,400 of cash and cash equivalents in short-term high-rated money market instruments. In addition, Celestica had approximately $545 of cash and cash equivalents. Celestica’s current portfolio consists of bank deposits and certain money market funds that hold primarily U.S. govern- ment 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, 2013, the aging of consolidated accounts receivable was as follows: Current 1–30 days past due 31–60 days past due >60 days past due Liquidity risk Accounts Receivable $ 2,806 373 89 371 $ 3,639 In completing acquisitions, it is generally Onex’ policy to ﬁnance a signiﬁcant portion of the purchase price with debt pro- vided by third-party lenders. This debt, sourced exclusively on the strength of the acquired companies’ ﬁnancial condition and pros- pects, is assumed by the acquired company at closing and is with- out recourse to Onex Corporation, the ultimate parent company, or to its other operating companies or partnerships. The foremost consideration, however, in developing a ﬁnancing structure for an acquisition is identifying the appropriate amount of equity to invest. In Onex’ view, this should be the amount of equity that maximizes the risk/reward equation for both shareholders and the acquired company. Accounts payable for the operating companies are pri- marily due within 90 days. The repayment schedules for long- term debt and ﬁnance leases of the operating companies have been disclosed in notes 12 and 13. Onex Corporation, the ultimate parent company, has no debt and does not guarantee the debt of the operating companies. Market risk Market risk is the risk that the future cash ﬂows of a ﬁnancial instrument will ﬂuctuate due to changes in market prices. The Company is primarily exposed to ﬂuctuations in the foreign cur- rency exchange rate between the Canadian and U.S. dollars and ﬂuctuations in LIBOR and the U.S. prime interest rate. Foreign currency exchange rates Onex’ operating companies operate autonomously as self-sustain- ing companies. The functional currency of substantially all of Onex’ operating companies is the U.S. dollar. However, certain operat- ing companies conduct business outside the United States and as a result are exposed to currency risk on the portion of business that is not based on the U.S. dollar. To manage foreign currency risk, cer- tain operating companies use forward contracts to hedge all or a portion of forecasted revenues and/or costs outside of their func- tional currencies. The Company’s exposure on ﬁnancial instruments to the Canadian/U.S. dollar foreign currency exchange rate is pri- marily at the parent company, through the holding of Canadian- Liquidity risk is the risk that Onex and its operating companies dollar-denominated cash and cash equivalents. A 5% strengthen- will have insufﬁcient funds on hand to meet their respective ing (5% weakening) of the Canadian dollar against the U.S. dollar obligations as they come due. The operating companies operate at December 31, 2013 would result in a $2 increase ($2 decrease) in autonomously and generally have restrictions on cash distribu- net earnings. As all of the Canadian-dollar-denominated cash and tions to shareholders under their ﬁnancing agreements. Onex cash equivalents at the parent company are designated as fair value needs to be in a position to support its operating companies through net earnings, there would be no effect on other compre- when and if it is appropriate and reasonable for Onex as an equity hensive earnings. owner with paramount duties to act in the best interests of Onex In addition, Celestica has exposure to the U.S. dollar/ shareholders. Maintaining sufﬁcient liquidity at Onex is impor- Canadian dollar foreign currency exchange rate. A 5% strengthen- tant because Onex, as a holding company, generally does not have ing (5% weakening) of the Canadian dollar against the U.S. dollar guaranteed sources of meaningful cash ﬂow. at December 31, 2013 would result in a $5 increase ($4 decrease) in other comprehensive earnings of Celestica and a $3 increase ($3 decrease) in net earnings. 144 Onex Corporation December 31, 2013 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S Interest rates Regulatory risk The Company is exposed to changes in future cash ﬂows as a Certain of Onex’ operating companies and investment advisor result of changes in the interest rate environment. The parent afﬁliates may be subject to extensive governmental regulations company is exposed to interest rate changes primarily through and oversight with respect to their business activities. The failure its cash and cash equivalents, which are held in short-term term to comply with applicable regulations, obtain applicable regulato- deposits and commercial paper. Assuming no signiﬁcant chang- ry approvals or maintain those approvals so obtained may subject es in cash balances held by the parent company from those at the applicable operating company to civil penalties, suspension December 31, 2013, a 0.25% increase (0.25% decrease) in the inter- or withdrawal of any regulatory approval obtained, injunctions, est rate (including the Canadian and U.S. prime rates) would operating restrictions and criminal prosecutions and penalties, result in a minimal impact on annual interest income. As all of the which could, individually or in the aggregate, have a material Canadian dollar cash and cash equivalents at the parent company adverse effect on Onex’ consolidated ﬁnancial position. are designated as fair value through net earnings, there would be no effect on other comprehensive earnings. Capital disclosures The operating companies’ results are also affected by Onex considers the capital it manages to be the amounts it has changes in interest rates. A change in the interest rate (includ- in cash, cash equivalents and short-term investments, the invest- ing the LIBOR and U.S. prime interest rate) would result in a ments made by it in the operating companies, Onex Real Estate and change in interest expense being recorded due to the variable- Onex Credit Partners. Onex also manages the capital of other inves- rate portion of the long-term debt of the operating companies. tors in the Onex Partners, ONCAP and Onex Credit Partners Funds. At December 31, 2013, approximately 50% (2012 – 38%) of the operating companies’ long-term debt had a ﬁxed interest rate or Onex’ objectives in managing capital are to: the interest rate was effectively ﬁxed by interest rate swap con- • preserve a ﬁnancially strong parent company with substantial tracts. The long-term debt of the operating companies is without liquidity and no, or a limited amount of, debt so that funds are recourse to Onex Corporation, the ultimate parent company. available to pursue new acquisitions and growth opportunities In addition, The Warranty Group holds substantially as well as support expansion of its existing businesses. Onex all of its investments in interest-bearing securities, as described does not generally have the ability to draw cash from its operat- in note 8(b). A 0.25% increase in the interest rate would decrease ing companies. Accordingly, maintaining adequate liquidity at the fair value of the investments held by $13 and result in a cor- the parent company is important; responding decrease to other comprehensive earnings of The • achieve an appropriate return on capital commensurate with Warranty Group. However, as the investments are reinvested, the level of assumed risk; a 0.25% increase in the interest rate would increase the annual • build the long-term value of its operating companies; interest income recorded by The Warranty Group by $5. • control the risk associated with capital invested in any particu- Commodity risk lar business or activity. All debt ﬁnancing is within the operating companies and each operating company is required to support Certain of Onex’ operating companies have exposure to commod- its own debt. Onex does not normally guarantee the debt of the ities. In particular, aluminum, titanium and raw materials such operating companies and there are no cross-guarantees of debt as carbon ﬁbre used to manufacture composites are the princi- between the operating companies; and pal raw materials for Spirit AeroSystems’ manufacturing opera- • have appropriate levels of committed limited partner and other tions. To limit its exposure to rising raw materials prices, Spirit investors capital available to invest along with Onex’ capital. AeroSystems has entered into long-term supply contracts directly This allows Onex to respond quickly to opportunities and pur- with its key suppliers of raw materials and collective raw materials sue acquisitions of businesses it could not achieve using only sourcing contracts arranged through certain of its customers. its own capital. The management of limited partner and other In addition, silver is a signiﬁcant commodity used in investors capital also provides management fees to Onex and Carestream Health’s manufacturing of x-ray ﬁlm. The company’s the ability to enhance Onex’ returns by earning a carried inter- management continually monitors movements and trends in the est on the proﬁts of limited partners. silver market and enters into collar and forward agreements when considered appropriate to mitigate some of the risk of future price At December 31, 2013, Onex, the parent company, had $1,400 of ﬂuctuations, generally for periods of up to a year. cash and cash equivalents on hand and $343 of near-cash items in a segregated unleveraged fund managed by Onex Credit Partners. Onex, the parent company, has a conservative cash management policy that limits its cash investments to short-term high-rated money market products. Onex Corporation December 31, 2013 145 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S At December 31, 2013, Onex had access to $3,023 of uncalled committed limited partner capital for acquisitions b) Onex and its operating companies are or may become par- ties to legal, product liability and warranty claims arising from through the Onex Partners and ONCAP Funds, including $1,936 the ordinary course of business. Certain operating companies, as of capital commitments raised for Onex Partners IV during 2013. conditions of acquisition agreements, have agreed to accept cer- The strategy for risk management of capital has not changed nies. The operating companies have recorded provisions based signiﬁcantly since December 31, 2012. on their consideration and analysis of their exposure in respect tain pre-acquisition liability claims against the acquired compa- 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 AT I N G C O M PA N I E S A N D C O N C E N T R AT I O N O F C R E D I T R I S K A number of operating companies, by the nature of their busi- nesses, individually serve major customers that account for a large portion of their revenues. During 2013 and 2012, one customer in the aerostructures segment represented approximately 18% (2012 – 18%) of the Company’s consolidated revenues. Accounts receivable from the signiﬁcant customer at December 31, 2013 totalled $146 (2012 – $119). 31. C O M M I T M E N T S , C O N T I N G E N C I E S A N D R E L AT E D PA R T Y T R A N S A C T I O N S a) Contingent liabilities in the form of letters of credit, letters of guarantee and surety and performance bonds are primar- ily provided by certain operating companies to various third par- ties and include certain bank guarantees. At December 31, 2013, the amounts potentially payable in respect of these guarantees totalled $337. In addition, an Onex Partners III afﬁliate has guar- anteed certain payment obligations arising on each aircraft deliv- ery date for Meridian Aviation, as described in note 24(g). The Company, which includes the operating companies, has total commitments as at December 31, 2013 of approximately $335 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 companies, has commitments with respect to real estate operating leases, which are disclosed in note 13. The aggregate commitments for capital assets at December 31, 2013 amounted to $725 with the majority expected to be incurred between 2014 and 2016. 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 therefore there can be no assurance that their resolution will not have an adverse effect on Onex’ consolidated ﬁnancial position. c) The operating companies are subject to laws and regulations concerning the environment and to the risk of 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, 2013, $1,475 (2012 – $1,475) has been invested of the $1,655 of total capital committed. Onex has invest- ed $346 (2012 – $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, 2013 was $20 (2012 – $20). There were no additional amounts invested by Onex management and Directors in Onex Partners I investments during 2013 and 2012. 146 Onex Corporation December 31, 2013 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S Prior to November 2006, Onex received annual manage- interest achieved by Onex on gains could be recovered from Onex if ment fees based on 2% of the capital committed to Onex Partners I subsequent Onex Partners II investments do not exceed the overall by investors other than Onex and Onex management. The annual target return level of 8%. Consistent with market practice and Onex management fee was reduced to 1% of the net funded commitments Partners I, Onex, as sponsor of Onex Partners II, is allocated 40% at the end of the initial fee period in November 2006, when Onex of the carried interest with 60% allocated to Onex management. established a successor fund, Onex Partners II. Carried interest is Carried interest received from Onex Partners II has fully vested received on the overall gains achieved by Onex Partners I investors, for Onex management. For the year ended December 31, 2013, other than Onex and Onex management, to the extent of 20% of the $75 (2012 – nil) has been received by Onex as carried interest while gains, provided that those investors have achieved a minimum 8% Onex management received $110 (2012 – nil) with respect to the car- return on their investment in Onex Partners I over the life of Onex ried interest. Partners I. The investment by Onex Partners I investors for this pur- pose takes into consideration management fees and other amounts paid by Onex Partners I investors. f) In December 2009, Onex completed the closing of Onex Partners III with funding commitments totalling approxi- Consistent with market practice, Onex, as sponsor mately $4,300. Onex Partners III provides committed capital of Onex Partners I, is allocated 40% of the carried interest with for Onex-sponsored acquisitions not related to Onex’ operating 60% allocated to Onex management. Carried interest received companies at December 31, 2003 or to ONCAP, Onex Partners I from Onex Partners I has fully vested for Onex management. For or Onex Partners II. As at December 31, 2013, approximately the year ended December 31, 2013, no amounts were received as $3,596 (2012 – $3,189) has been invested, of which Onex’ share carried interest related to Onex Partners I. During 2012, $3 was was $783 (2012 – $684). Onex had a $1,000 commitment for the received by Onex as carried interest while Onex management period from January 1, 2009 to June 30, 2009. On December 31, received $5 with respect to the carried interest. 2008, Onex gave notice to the investors of Onex Partners III that Onex’ commitment would be decreasing to $500 effective July 1, e) In August 2006, Onex completed the closing of Onex Part- ners II with funding commitments totalling $3,450. Onex Part- 2009. In December 2009, Onex notiﬁed the investors of Onex Part- ners III that it would be increasing its commitment to $800 effec- ners II provided committed capital for Onex-sponsored acquisi- tive June 16, 2010. In November 2011, Onex notiﬁed the investors tions not related to Onex’ operating companies at December of Onex Partners III that it would be increasing its commitment to 31, 2003 or to ONCAP or Onex Partners I. As at December 31, $1,200 effective May 15, 2012. Onex controls the General Partner 2013, $2,944 (2012 – $2,944) has been invested of the $3,450 of and Manager of Onex Partners III. Onex management has com- total capital committed. Onex has funded $1,164 (2012 – $1,164) mitted, as a group, to invest a minimum of 1% of Onex Partners of its $1,407 commitment. Onex controls the General Partner III, which may be adjusted annually up to a maximum of 6%. At and Manager of Onex Partners II. The total amount invested in December 31, 2013, Onex management and Directors had com- Onex Partners II’s remaining investments by Onex management mitted 6% (2012 – 5%). The total amount invested in Onex and Directors at December 31, 2013 was $51 (2012 – $72). There Partners III’s investments by Onex management and Directors were no additional amounts invested by Onex management and at December 31, 2013 was $140 (2012 – $119), of which $21 (2012 – Directors in Onex Partners II investments during 2013 and 2012. $60) was invested in the year ended December 31, 2013. Prior to November 2008, Onex received annual man- Prior to December 2013, Onex received annual man- agement fees based on 2% of the capital committed to Onex Part- agement fees based on 1.75% of the capital committed to Onex ners II by investors other than Onex and Onex management. The Partners III by investors other than Onex and Onex manage- annual management fee was reduced to 1% of the net funded com- ment. The annual management fee was reduced to 1% of the mitments at the end of the initial fee period in November 2008, net funded commitments at the end of the initial fee period in when Onex established a successor fund, Onex Partners III. Carried December 2013. Onex has obtained approval for an extension of interest is received on the overall gains achieved by Onex Partners II the commitment period for Onex Partners III into 2014 to enable investors, other than Onex and Onex management, to the extent of further amounts to be invested through the Fund. Carried inter- 20% of the gains, provided that those investors have achieved a min- est is received on the overall gains achieved by Onex Partners III imum 8% return on their investment in Onex Partners II over the life investors, other than Onex and Onex management, to the extent of Onex Partners II. The investment by Onex Partners II investors for of 20% of the gains, provided that those investors have achieved a this purpose takes into consideration management fees and other minimum 8% return on their investment in Onex Partners III over amounts paid by Onex Partners II investors. the life of Onex Partners III. The investment by Onex Partners III The returns to Onex Partners II investors, other than investors for this purpose takes into consideration management Onex and Onex management, are based upon all investments made fees and other amounts paid by Onex Partners III investors. through Onex Partners II, with the result that the initial carried Onex Corporation December 31, 2013 147 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S The returns to Onex Partners III investors, other than the overall target return level of 8%. Consistent with market Onex and Onex management, are based upon all investments practice and Onex Partners I, Onex Partners II and Onex Partners III, made through Onex Partners III, with the result that the initial car- Onex, as sponsor of Onex Partners IV, will be allocated 40% of the ried interest achieved by Onex on gains could be recovered from carried interest with 60% allocated to Onex management. Carried Onex if subsequent Onex Partners III investments do not exceed interest received from Onex Partners IV will vest equally over the overall target return level of 8%. Consistent with market prac- 6 years from the effective date of Onex Partners IV, which will tice and Onex Partners I and Onex Partners II, Onex, as sponsor be 6 years from the due date of the ﬁrst capital call for Onex Part- of Onex Partners III, will be allocated 40% of the carried interest ners IV. As at December 31, 2013, no amount had been received as with 60% allocated to Onex management. Carried interest received carried interest related to Onex Partners IV. from Onex Partners III will be fully vested for Onex management in December 2014. As at December 31, 2013, no amount had been received as carried interest related to Onex Partners III. h) In May 2006, ONCAP completed the closing of ONCAP II with funding commitments totalling C$574. ONCAP II provided com- mitted capital for ONCAP-sponsored acquisitions of small and g) During the fourth quarter of 2013, Onex completed certain closings of Onex Partners IV with funding commitments totalling medium-sized businesses requiring between C$20 and C$75 of initial equity capital. As at December 31, 2013, C$483 (2012 – approximately $3,136 at December 31, 2013, including Onex’ com- C$470) has been invested of the approximately C$574 of total mitment of $1,200. Onex Partners IV is to provide committed capi- capital committed. Onex has invested C$221 (2012 – C$215) of tal for future Onex-sponsored acquisitions not related to Onex’ its C$252 commitment. Onex controls the General Partner and operating companies at December 31, 2003, or to ONCAP, Onex Manager of ONCAP II. The total amount invested in ONCAP II’s Partners I, Onex Partners II or Onex Partners III. As at Decem- remaining investments by management of Onex and ONCAP and ber 31, 2013, no amounts had been funded. Onex controls the Directors at December 31, 2013 was C$29 (2012 – C$39), of which General Partner and Man ager of Onex Partners IV. Onex man- $1 (2012 – nil) was invested in the year ended December 31, 2013. agement has committed, as a group, to invest a minimum of Prior to July 2011, ONCAP received annual management 2% of Onex Partners IV, which may be adjusted annually up to a fees based on 2% of the capital committed to ONCAP II by investors maximum of 8%. At December 31, 2013, Onex management and other than Onex and management of Onex and ONCAP. The annual Directors had committed 8%. management fee was reduced to 2% of the investment amount at During the initial fee period of Onex Partners IV, Onex the end of the initial fee period in July 2011, when ONCAP estab- will receive annual management fees based upon 1.75% of up to lished a successor fund, ONCAP III. Carried interest is received on $3,000 on capital committed to Onex Partners IV by investors other the overall gains achieved by ONCAP II investors other than man- than Onex and Onex management and 1.5% on capital committed agement of ONCAP, to the extent of 20% of the gains, provided to Onex Partners IV by investors other than Onex and Onex man- that those investors have achieved a minimum 8% return on their agement in excess of $3,000. At December 31, 2013, no management investment in ONCAP II over the life of ONCAP II. The investment fees had been called from Onex Partners IV. The annual manage- by ONCAP II investors for this purpose takes into consideration ment fee is reduced to 1% of the net funded commitments at the management fees and other amounts paid by ONCAP II investors. earlier of the end of the commitment period or if Onex establishes The returns to ONCAP II investors, other than manage- a successor fund. Carried interest is received on the overall gains ment of Onex and ONCAP, are based upon all investments made achieved by Onex Partners IV investors, other than Onex and Onex through ONCAP II, with the result that the initial carried interests management, to the extent of 20% of the gains, provided that those achieved by ONCAP on gains could be recovered if subsequent investors have achieved a minimum 8% return on their investment ONCAP II investments do not exceed the overall target return level in Onex Partners IV over the life of Onex Partners IV. The invest- of 8%. The ONCAP management team is entitled to that portion of ment by Onex Partners IV investors for this purpose takes into con- the carried interest realized in the ONCAP Funds that equates to sideration management fees and other amounts paid by Onex Part- a 12 percent carried interest on both limited partners’ and Onex ners IV investors. capital. Carried interest received from ONCAP II has fully vested The returns to Onex Partners IV investors, other than for ONCAP management. For the year ended December 31, 2013, Onex and Onex management, are based upon all investments ONCAP management received $60 (C$63) with respect to the car- made through Onex Partners IV, with the result that the initial car- ried interest. No amounts of carried interest were received by ried interest achieved by Onex on gains could be recovered from ONCAP management for the year ended December 31, 2012. Onex if subsequent Onex Partners IV investments do not exceed 148 Onex Corporation December 31, 2013 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S i) In September 2011, ONCAP completed the closing of ONCAP III with funding commitments totalling C$800, excluding com- mitments from management of Onex and ONCAP. ONCAP III provides committed capital for ONCAP-sponsored acquisitions same price. Amounts invested under the minimum investment requirement in Onex Partners’ transactions are allocated to meet the 1.5% Onex investment requirement under the MIP. The invest- ment rights to acquire the remaining 5⁄6ths vest equally over six of small and medium-sized businesses requiring less than $125 years with the investment rights vesting in full if the Company of initial equity capital. As at December 31, 2013, C$253 (2012 – disposes of all of an investment before the seventh year. C$253) has been invested of the approximately C$800 of total cap- Under the MIP, the investment rights related to a par- ital committed. Onex has invested C$74 (2012 – C$74) of its C$252 ticular acquisition are exercisable only if the Company realizes in commitment. Onex controls the General Partner and Manager cash the full return of its investment and earns a minimum 15% of ONCAP III. ONCAP management has committed, as a group, per annum compound rate of return for that investment after giv- to invest a minimum of 1% of ONCAP III. The commitment from ing effect to the investment rights. management of Onex and ONCAP and Directors may be increased Under the terms of the MIP, the total amount paid by by an additional 5% of ONCAP III. At December 31, 2013, man- management members in 2013, including amounts invested under agement of ONCAP and Onex and Directors had committed to 6% the minimum investment requirements of the Onex Partners and (2012 – 6%). The total amount invested in ONCAP III’s remaining ONCAP Funds to meet the 1.5% MIP requirement, was $4 (2012 – investments by management of Onex and ONCAP and Directors $13). Investment rights exercisable at the same price for 7.5% of the at December 31, 2013 was C$24 (2012 – C$24), of which nil (2012 – Company’s interest in acquisitions were issued at the same time. C$7) was invested in the year ended December 31, 2013. Realizations under the MIP distributed in 2013 were $39 (2012 – ONCAP receives annual management fees based on less than $1). 2% of the capital committed to ONCAP III by investors other than Onex and management of Onex and ONCAP. The annual manage- ment fee is reduced to 1.5% of the net funded commitments at the k) Members of management and the Board of Directors of the Company invested $2 in 2013 (2012 – $1) in Onex’ investments earlier of the end of the commitment period or if ONCAP estab- made outside of Onex Partners and ONCAP at the same cost as lishes a successor fund. Carried interest is received on the overall Onex and other outside investors. Those investments by manage- gains achieved by ONCAP III investors, other than management of ment and the Directors are subject to voting control by Onex. ONCAP, to the extent of 20% of the gains, provided that those inves- tors have achieved a minimum 8% return on their investment in ONCAP III over the life of ONCAP III. The investment by ONCAP l) Each member of Onex management is required to reinvest 25% of the proceeds received related to their share of the MIP invest- III investors for this purpose takes into consideration management ment rights and carried interest to acquire Onex shares in the fees and other amounts paid by ONCAP III investors. market until the management member owns one million Onex The returns to ONCAP III investors, other than manage- Subordinate Voting Shares and/or management DSUs. During ment of Onex and ONCAP, are based upon all investments made 2013, Onex management reinvested C$18 (2012 – less than C$1) to through ONCAP III, with the result that the initial carried interests acquire Onex shares. achieved by ONCAP on gains could be recovered if subsequent ONCAP III investments do not exceed the overall target return level of 8%. The ONCAP management team is entitled to that por- m) Certain operating companies have made loans to certain direc- tors or ofﬁcers of the individual operating companies, typically for tion of the carried interest that equates to a 12% carried interest on the purpose of acquiring shares in those operating companies. The both limited partners and Onex capital. Carried interest received total value of the loans outstanding as at December 31, 2013 was from ONCAP III will vest equally over 5 years ending in July 2016 $37 (2012 – $36). for ONCAP management. As at December 31, 2013, no amount had been received as carried interest related to ONCAP III. n) Onex Corporation, the ultimate parent company, receives fees from certain operating companies for services provided. The fees j) Under the terms of the MIP, management members of the Company invest in all of the operating entities acquired or invested from consolidated operating companies are eliminated in these consolidated ﬁnancial statements. During 2013, fees of $2 (2012 – in by the Company. $2) were received from non-consolidated operating companies The aggregate investment by management members and included with revenues in these consolidated ﬁnancial state- under the MIP is limited to 9% of Onex’ interest in each acquisi- tion. The form of the investment is a cash purchase for 1⁄6th (1.5%) of the MIP’s share of the aggregate investment, and investment rights for the remaining 5⁄ 6ths (7.5%) of the MIP’s share at the ments. In addition, during 2012 a fee of $8 was received from Allison Transmission as consideration for the early termination of the services agreement between Allison Transmission and Onex, as discussed in note 8(a). Onex Corporation December 31, 2013 149 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S o) During 2013 and 2012, Onex entered into the sale of entities, the sole assets of which were certain tax losses, to companies con- 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 trolled by Mr. Gerald W. Schwartz, who is Onex’ controlling share- holder. Onex has signiﬁcant non-capital and capital losses avail- able; however. Onex does not expect to generate sufﬁcient taxable income to fully utilize these losses in the foreseeable future. As such, no beneﬁt has been recognized in the consolidated ﬁnancial statements for these losses. In connection with these transactions, Deloitte & Touche LLP, an independent accounting ﬁrm retained by Onex’ Audit and Corporate Governance Committee, provided opinions that the values received by Onex for the tax losses were fair. Onex’ Audit and Corporate Governance Committee, all the members of which are independent Directors, unanimously approved the transactions. The following transactions were com- pleted during 2013 and 2012: • In 2013, Onex received $9 in cash for tax losses of $89. The entire $9 was recorded as a gain and included in other items in the consolidated statements of earnings. • In 2012, Onex received $16 in cash for tax losses of $166. The entire $16 was recorded as a gain and included in other items in the consolidated statements of earnings. p) In November 2013, Onex repurchased in a private transaction 1,000,000 of its Subordinate Voting Shares that were held indirectly by Mr. Gerald W. Schwartz, who is Onex’ controlling shareholder. The private transaction was approved by the Board of Directors of the Company. The shares were repurchased at a cash cost of C$56.50 per Subordinate Voting Share or $53 (C$57), which represents a slight discount to the trading price of Onex shares at that date. q) The Company’s key management consists of the senior execu- tives of Onex, ONCAP and its signiﬁcant operating companies. Also included are the Directors of Onex Corporation. Aggregate payments to the Company’s key management were as follows: Year ended December 31 2013 Short-term employee benefits and costs $ 154 Post-employment benefits Other long-term benefits Termination benefits Share-based payments(i) 1 1 3 441 $ 600 2012 $ 115 2 – 6 66 $ 189 (i) Share-based payments include $288 paid on the exercise of Onex stock options (note 18), $88 of carried interest paid to Onex management (note 31(e)) and The operating companies have a number of deﬁned beneﬁt and deﬁned contribution plans providing pension, other retirement and post-employment beneﬁts to certain of their employees. The non-pension post-retirement beneﬁts include retirement and termination beneﬁts, health, dental and group life. The plans at the operating companies are independent and surpluses within certain plans cannot be used to offset deﬁcits in other plans. The beneﬁt payments from the plans are typically made from trustee- administered funds; however, there are certain unfunded plans primarily related to non-pension post-retirement beneﬁts that are funded as the beneﬁt payment obligations are required. Onex Corporation, the ultimate parent company, does not provide pen- sion, other retirement or post-retirement beneﬁts to its employees and does not have any obligations and has not made any guaran- tees with respect to the plans of the operating companies. The plans are exposed to market risks, such as changes in interest rates, inﬂation and ﬂuctuations in investment values. The plan liabilities are calculated using a discount rate set with refer- ence to corporate bond yields; if the plan assets fail to achieve this yield, this will create or further a plan deﬁcit. A decrease in cor- porate bond yields would have the effect of increasing the beneﬁt obligations; however this would be partially offset by a fair value increase in the value of debt securities held in the plans’ assets. For certain plans, the beneﬁt obligations are linked to inﬂation, and higher inﬂation will result in a greater beneﬁt obligation. The plans are also exposed to non-ﬁnancial risks such as the membership’s mortality and demographic changes, as well as regulatory changes. An increase in the life expectancy will result in an increase in the beneﬁt obligations. The total costs during 2013 for deﬁned contribution pen- sion plans and multi-employer plans were $132 (2012 – $114). Accrued beneﬁt obligations and the fair value of the plan assets for accounting purposes are measured at Decem- ber 31 of each year. The most recent actuarial valuations of the largest pension plans for funding purposes was in 2013, and the next required valuations will be as of 2014. The Company estimates that in 2014 the minimum funding requirement for the deﬁned beneﬁt pension plans will be $37. In 2013, 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 $32 of amounts paid under the MIP to management of Onex (note 31(j)). During contributed to their deﬁned contribution plans, were $264 (2012 – 2013, Onex, the parent company, received carried interest of $75 (note 31(e)). $196). Included in the total was $35 (2012 – $28) contributed to multi-employer plans. 150 Onex Corporation December 31, 2013 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 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 2013 2012 2013 2012 2013 2012 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 (gain) loss from demographic assumptions Actuarial (gain) loss from financial assumptions Foreign currency exchange rate changes Acquisitions Dispositions Plan amendments Settlements/curtailments Reclassification of plans Other Closing benefit obligations Plan assets: Opening plan assets Interest income Actual return on plan assets in excess of interest income Contributions by employer Contributions by plan participants Benefits paid Foreign currency exchange rate changes Acquisitions Dispositions Settlements/curtailments Reclassification of plans Other Closing plan assets $ 1,590 $ 1,351 $ 876 $ 601 $ 173 $ 179 13 66 3 (50) – (154) (6) – – (13) – 124 – 9 64 – (27) 22 134 17 – – – – 19 1 13 26 – (22) 1 (74) 4 – (28) (2) – (124) 7 11 25 – (23) (3) 77 5 210 – (7) – (19) (1) 5 6 – (8) (2) (16) (5) – (6) 2 – – (7) 7 8 – (19) (34) 15 2 – – 16 (1) – – $ 1,573 $ 1,590 $ 677 $ 876 $ 142 $ 173 $ 1,710 $ 1,510 $ 443 $ 311 $ – $ – 72 10 18 3 (50) (10) – – – 119 2 72 97 26 – (27) 19 1 – – 15 (3) $ 1,874 $ 1,710 11 23 32 – (22) (1) – (20) (1) (119) (3) $ 343 11 23 35 – (23) 2 108 – (7) (15) (2) – – 12 – (8) – – – (4) – 1 – – 19 – (19) – – – – – – $ 443 $ 1 $ – Onex Corporation December 31, 2013 151 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S Asset Category Quoted Market Prices: Equity investment funds Debt investment funds Other investment funds Equity securities Debt securities Non-Quoted Market Prices: Equity investment funds Other investment funds Equity securities Debt securities Real estate Other Percentage of Plan Assets 2013 7% 16% 1% 8% 6% – 1% 20% 36% 2% 3% 2012 8% 19% – 8% 2% 1% 1% 20% 36% 2% 3% 100% 100% Equity securities do not include direct investments in the shares of the Company or its subsidiaries, but may be invested indirectly as a result of the inclusion of the Company’s and its subsidiaries’ shares in certain market investment funds. The funded status of the plans of the operating 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 2013 2012 2013 2012 2013 2012 Deferred benefit amount: Plan assets, at fair value Accrued benefit obligation $ 1,874 (1,573) $ 1,710 (1,590) Deferred benefit amount – asset (liability) $ 301 $ 120 $ 343 (677) $ (334) $ 443 (876) $ (433) $ 1 (142) $ (141) $ – (173) $ (173) The deferred beneﬁt asset of $301 (2012 – $120) is included in the Company’s consolidated balance sheets within other non-current assets (note 9). The total deferred beneﬁt liabilities of $475 (2012 – $606) are included in the Company’s consolidated balance sheets within other non-current liabilities (note 15) and other current liabilities. Of the total deferred beneﬁt liabilities, $27 (2012 – $29) was recorded as a current liability. 152 Onex Corporation December 31, 2013 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S The following assumptions were used to account for the plans: Pension Benefits Non-Pension Post-Retirement Benefits Year ended December 31 2013 2012 2013 2012 Accrued benefit obligation Weighted average discount rate(a) Weighted average rate of compensation increase 2.1%–4.9% 0.3%–4.1% 2.4%–4.6% 0.3%–6.6% 1.3%–4.9% 0.0%–4.6% 1.2%–4.4% 0.0%–4.4% (a) Weighted average discount rate includes inflation, where applicable to a benefit plan. Assumed healthcare cost trend rates Initial healthcare cost rate Cost trend rate declines to Year that the rate reaches the rate it is assumed to remain at 2013 6.7%–8.5% 4.5% 2030 2012 6.9%–9.0% 4.5%–5.0% Between 2020 and 2030 The assumptions underlying the discount rates, rates of compensation increase and healthcare cost trend rates have a signiﬁcant effect on the amounts reported for the pension and post-retirement beneﬁt plans. A 1% change in these assumed rates would increase (decrease) the beneﬁt obligations at December 31, 2013 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, 2013 1% Increase 1% Decrease 1% Increase 1% Decrease 1% Increase 1% Decrease Discount rate Rate of compensation increase Healthcare cost trend rate $ (245) $ 3 n/a $ 297 $ (5) n/a $ (84) $ 19 n/a $ 102 $ (17) n/a $ (13) $ 1 $ 14 $ 16 $ (1) $ (12) The sensitivity analysis above is based on changing one assump- a) Emerald Expositions tion while holding all other assumptions constant. In practice, this In January 2014, Emerald Expositions completed the acquisi- is unlikely to occur, and changes in certain assumptions may be tion of George Little Management, LLC (“GLM”) for $335 in cash correlated. When calculating the sensitivity of the deﬁned bene- consideration. GLM is an operator of business-to-business trade- ﬁt obligation to changes in signiﬁcant actuarial assumptions, the shows in the United States. In conjunction with the transaction, same method used for calculating the beneﬁt obligation liabilities Onex, Onex Partners III and Onex management invested $140 in in the consolidated ﬁnancial statements has been applied. Emerald Expositions, of which Onex’ share was $34. The remain- 3 3 . S U B S E Q U E N T E V E N T S Onex and certain operating companies have entered 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. der of the purchase price and transaction costs were funded by Emerald Expositions through an amendment to its credit facility, as described in note 12. b) Onex Partners IV In February 2014, Onex completed an additional closing of Onex Partners IV with funding commitments totalling approximately $600. After completion of this closing and including the closings of Onex Partners IV completed during 2013, the total funding com- mitments for Onex Partners IV were approximately $3,700, which includes Onex’ commitment of $1,200. Onex Corporation December 31, 2013 153 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 3 4 . I N F O R M AT I O N B Y I N D U S T R Y A N D G E O G R A P H I C S E G M E N T Onex’ reportable segments operate through autonomous compa- nies and strategic partnerships. Reportable segments have been determined based on the industries and different products and services offered. The Company had seven reportable segments in 2013 and 2012: electronics manufacturing services; aerostructures; healthcare; insurance provider; customer care services; build- ing products; and other. The electronics manufacturing services segment consists of Celestica, which provides supply chain solu- tions, including manufacturing services to electronics original equipment manufacturers and service providers. The aerostruc- tures segment consists of Spirit AeroSystems, which is an aircraft parts designer and manufacturer of commercial aerostructures. The healthcare segment consists of Carestream Health, a leading global provider of medical imaging and healthcare information technology solutions; CDI (sold in July 2012); ResCare, a leading U.S. provider of residential training, education and support ser- vices for people with disabilities and special needs; and Skilled Healthcare Group, which operates skilled nursing and assisted living facilities in the United States. The insurance provider seg- ment consists of The Warranty Group, which underwrites and administers extended warranties on a variety of consumer goods and also provides consumer credit and other specialty insurance products. The customer care services segment consists of Sitel Worldwide, which provides customer care outsourcing services for a broad range of industry end markets. The building products segment consists of JELD-WEN, one of the world’s largest manu- facturers of interior and exterior doors, windows and related prod- ucts for use primarily in the residential and light commercial new construction and remodelling markets. Other includes Allison Transmission, a leading designer and manufacturer of fully-auto- matic transmissions for on-highway trucks and buses, off-highway equipment and defence vehicles worldwide; BBAM (acquired in December 2012), a manager of commercial jet aircraft; Emerald Expositions (acquired in June 2013), a leading operator of busi- ness-to-business tradeshows in the United States; KraussMaffei (acquired in December 2012), a global leader in the design and manufacture of machinery and systems for the processing of plas- tics and rubber; Meridian Aviation Partners Limited (established in February 2013), an aircraft investment company established by Onex Partners III; RSI (sold in February 2013); SGS International (acquired in October 2012), a global leader in design-to-print graphic services to the consumer products packaging industry; Tomkins, a global manufacturer of belts and hoses for the indus- trial and automotive markets; Tropicana Las Vegas, one of the most storied casinos in Las Vegas; USI (acquired in December 2012), a leading U.S. provider of insurance brokerage services; as well as Onex Real Estate, the operating companies of ONCAP II (BSN SPORTS up to June 2013 and Caliber Collision up to November 2013) and ONCAP III, the collateralized loan obligations of Onex Credit Partners and the parent company. In addition, the other seg- ment includes TMS International, which has been presented as a discontinued operation. Allison Transmission, BBAM, RSI (sold in February 2013), Tomkins and certain Onex Real Estate investments are recorded at fair value through net earnings, as described in note 1. 154 Onex Corporation December 31, 2013 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 2013 Industry Segments Revenues $ 5,796 $ 5,961 $ 4,902 $ 1,168 $ 1,438 $ 3,457 $ 5,087 $ 27,809 Electronics Manufacturing Services Aero- structures Healthcare Insurance Provider Customer Care Services Building Products Consolidated Total Other 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 Increase in value of investments in joint ventures and associates at fair value, net Stock-based compensation (expense) recovery Other gains Other items Impairment of goodwill, intangible assets and long-lived assets, net Limited Partners’ Interests charge Earnings (loss) before income taxes and discontinued operations Recovery of (provision for) income taxes Earnings (loss) from continuing operations Earnings from discontinued operations(a) (5,337) (221) 1 (60) (12) (3) – (29) – (4) – – 131 (13) 118 – (5,848) (243) – (162) (3,406) (836) 2 (119) (28) (70) – (22) – (27) – – (439) (101) (540) – (148) (222) – (8) – (143) (95) – (73) (44) (117) – (600) (380) – (3) (12) (6) – (4) – 9 (1) – 171 (59) 112 – (936) (372) 1 (28) (2,855) (449) 2 (112) (23) (97) – – – (17) (1) – (35) 14 (21) – (18) (79) – 7 – (9) (13) – (69) (16) (85) – (2,861) (1,696) 100 (135) (296) (336) 1,098 (293) 561 (258) (209) (1,855) (1,093) 552 (541) 261 (21,843) (4,197) 106 (619) (537) (813) 1,098 (349) 561 (449) (319) (1,855) (1,407) 333 (1,074) 261 Net earnings (loss) for the year $ 118 $ (540) $ (117) $ 112 $ (21) $ (85) $ (280) $ (813 ) Total assets Long-term debt(b) Property, plant and equipment additions Intangible assets with indefinite life Goodwill additions from acquisitions Goodwill Net earnings (loss) attributable to: $ 2,639 $ – $ 45 $ – $ – $ 60 $ 1,128 $ 269 $ – $ – $ 3 $ 5,155 $ 3,707 $ 3,009 $ 4,898 $ 255 $ 613 $ 740 $ 2,483 $ 17,372 $ 661 $ 6,177 $ 102 $ 2 $ 33 $ 89 $ 326 $ 36,867 $ 11,970 $ 866 $ 253 $ 16 $ 36 $ 259 $ 777 $ 1,341 $ 20 $ 3 $ – $ – $ 727 $ 750 $ 784 $ 306 $ 118 $ 109 $ 3,089 $ 4,469 Equity holders of Onex Corporation $ 12 $ (84) $ (69) $ 101 $ (15) $ (66) $ (233) $ (354) Non-controlling interests Net earnings (loss) for the year 106 (456) (48) 11 (6) (19) (47) (459) $ 118 $ (540) $ (117) $ 112 $ (21) $ (85) $ (280) $ (813 ) (a) Represents the after-tax results of TMS International, as described in note 3. (b) Long-term debt includes current portion, excludes finance leases and is net of financing charges. Onex Corporation December 31, 2013 155 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 2012 Industry Segments 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 Increase in value of investments in joint ventures and associates at fair value, net Stock-based compensation expense Other gains Other items Impairment of goodwill, intangible assets and long-lived assets Limited Partners’ Interests charge Earnings (loss) before income taxes and discontinued operations Recovery of (provision for) income taxes Earnings (loss) from continuing operations Earnings from discontinued operations(a) Electronics Manufacturing Services Aero- structures Healthcare Insurance Provider Customer Care Services Building Products Other Consoli- dated Total $ 6,507 $ 5,404 $ 4,947 $ 1,205 $ 1,429 $ 3,168 $ 2,257 $ 24,917 (5,988) (226) 1 (70) (11) (5) – (36) – (42) (18) – (5,038) (228) – (130) (29) (83) – (16) – 150 (2) – 112 6 118 – 28 17 45 – (3,402) (885) 3 (128) (160) (191) – (11) – (42) (17) – 114 (44) 70 – (621) (402) – (4) (15) (5) – (2) – 11 (4) – (920) (368) 1 (29) (25) (100) – (1) – (4) – – (2,561) (449) 3 (101) (19) (63) – (17) – (33) (7) – (1,378) (718) (19,908) (3,276) 52 (76) (59) (67) 863 (156) 59 (86) (17) (929) 60 (538) (318) (514) 863 (239) 59 (46) (65) (929) 163 (54) 109 – (17) (3) (20) – (79) 12 (255) (10) 66 (76) (67) (265) (10) – 26 26 Net earnings (loss) for the year $ 118 $ 45 $ 70 $ 109 $ (20) $ (67) $ (239) $ 16 Total assets(b) Long-term debt(b) (c) $ 2,659 $ 5,371 $ 3,971 $ 4,903 $ 632 $ 2,626 $ 16,140 $ 36,302 $ 55 $ 1,133 $ 2,540 $ 258 $ 725 $ 547 $ 5,212 $ 10,470 Property, plant and equipment additions(b) $ 98 $ 225 $ 120 $ 4 $ 23 $ 91 $ 196 $ 757 Intangible assets with indefinite life $ – $ – $ 256 $ 16 $ 36 $ 259 $ 548 $ 1,115 Goodwill additions from acquisitions $ 26 $ – $ 23 $ – $ – $ – $ 1,983 $ 2,032 Goodwill(b) $ 60 $ 3 $ 852 $ 304 $ 118 $ 113 $ 2,908 $ 4,358 Net earnings (loss) attributable to: Equity holders of Onex Corporation $ 13 $ 7 $ 18 $ 62 $ (14) $ (47) $ (167) $ (128) Non-controlling interests 105 38 52 47 (6) (20) (72) 144 Net earnings (loss) for the year $ 118 $ 45 $ 70 $ 109 $ (20) $ (67) $ (239) $ 16 (a) Represents the after-tax results of TMS International, as described in note 3. (b) Total assets, long-term debt, property, plant and equipment additions and goodwill in the other segment include discontinued operations. (c) Long-term debt includes current portion, excludes finance leases and is net of financing charges. Geographic Segments 2013 2012 Canada U.S. Europe Asia and Oceania Other(1) Total Canada U.S. Europe Asia and Oceania Other(1) Total $ 998 $ 16,844 $ 5,148 $ 3,609 $ 1,210 $ 27,809 $ 1,340 $ 14,496 $ 4,372 $ 3,701 $ 1,008 $ 24,917 $ 378 $ 3,443 $ 763 $ 466 $ 55 $ 5,105 $ 358 $ 3,730 $ 838 $ 456 $ 113 $ 5,495 Revenue(2) Property, plant and equipment Intangible assets $ 286 $ 3,694 $ 593 $ 49 $ 73 $ 4,695 $ 322 $ 3,733 $ 696 $ 63 $ 19 $ 4,833 Goodwill $ 198 $ 3,600 $ 489 $ 146 $ 36 $ 4,469 $ 224 $ 3,429 $ 518 $ 153 $ 34 $ 4,358 (1) Other consists primarily of operations in Central and South America, Mexico and Africa. (2) Revenues are attributed to geographic areas based on the destinations of the products and/or services. 156 Onex Corporation December 31, 2013 SHAREHOLDER INFORMATION Year-end Closing Share Price As at December 31 (in Canadian dollars) 2013 2012 2011 2010 2009 Toronto Stock Exchange $ 57.35 $ 41.87 $ 33.18 $ 30.23 $ 23.60 Shares Registrar and Transfer Agent The Subordinate Voting Shares of CST Trust Company the Company are listed and traded P.O. Box 700 on the Toronto Stock Exchange. Postal Station B Website: www.onex.com Auditors Share Symbol OCX Dividends Montreal, Quebec H3B 3K3 PricewaterhouseCoopers llp (416) 682-3860 Chartered Professional Accountants or call toll-free throughout Canada and the United States 1-800-387-0825 Duplicate Communication Registered holders of Onex Corporation shares may receive more than one copy Dividends on the Subordinate Voting www.canstockta.com Shares are payable quarterly on or or inquiries@canstockta.com of shareholder mailings. Every eﬀort about January 31, April 30, July 31 and 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 2013 the indicated dividend rate for certiﬁcates or dividend cheques names and/or addresses, multiple each Subordinate Voting Share was should be directed to the Registrar mailings result. Shareholders who C$0.15 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 We encourage individuals to receive Onex’ be made to combine the accounts for provides shareholders of record who are shareholder communications electroni- mailing purposes. resident in Canada a means to reinvest cally. You can submit your request online cash dividends in new Subordinate Voting by visiting CST Trust Company’s website Shares Held in Nominee Name Shares of Onex Corporation at a market- www.canstockta.com/electronicdelivery To ensure that shareholders whose related price and without payment of or contacting them at 1-800-387-0825. shares are not held in their name receive brokerage commissions. To participate, all Company reports and releases registered shareholders should contact Investor Relations Contact on a timely basis, a direct mailing list Onex’ share registrar, CST Trust Company. Requests for copies of this report, is maintained by the Company. If you Non-registered shareholders who wish other annual reports, quarterly reports would like your name added to this list, to participate should contact their and other corporate communications please forward your request to Investor investment dealer or broker. should be directed to: Relations at Onex. Corporate Governance Policies A presentation of Onex’ corporate governance policies is included in the Investor Relations Onex Corporation 161 Bay Street P.O. Box 700 Annual Meeting of Shareholders Onex Corporation’s Annual Meeting of Shareholders will be held on May 15, Management Information Circular Toronto, Ontario M5J 2S1 2014 at 10:00 a.m. (Eastern Daylight Time) that is mailed to all shareholders and is available on Onex’ website. (416) 362-7711 investor@onex.com at Toronto Region Board of Trade, 77 Adelaide Street West, Toronto, Ontario. Typesetting by Moveable Inc. www.moveable.com Printed in Canada

Continue reading text version or see original annual report in PDF format above