ARCHIVED - Financial Statement Discussion and Analysis 2008 - 2009

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Introduction

The following Financial Statement Discussion and Analysis (FSD&A) should be read in conjunction with the audited financial statements and accompanying notes for the National Research Council of Canada (NRC) for the fiscal year ended March 31, 2009.

The responsibility for the preparation of the FSD&A rests with the management of NRC. It has been prepared in accordance with the Public Sector Statement of Recommended Practice SORP-1.

The purpose of the FSD&A is to highlight information and provide explanations which enhance the users’ understanding of NRC’s financial position and results of operations, while demonstrating NRC’s accountability for its resources. Additional information on NRC’s performance is available in the NRC Departmental Performance Report (DPR) for 2008-09.

The FSD&A consists of two distinct segments: Highlights; and Discussion and Analysis. Please note that all financial information presented herein is denominated in Canadian dollars, unless otherwise indicated.

Special note regarding forward-looking statements

The words “estimate”, “will”, “intend”, “should”, “anticipate”, and similar expressions are intended to identify forward-looking statements. These statements reflect assumptions and expectations of NRC, based on its experience and perceptions of trends and current conditions. Although NRC believes the expectations reflected in such forward-looking statements are reasonable, they may prove to be inaccurate, and consequently NRC’s actual results could differ materially from expectations set out in this FSD&A. In particular, the risk factors described in the “Risks and Uncertainties” section of this report could cause actual results or events to differ materially from those contemplated in forward-looking statements.

2008-2009 Highlights

Financial Highlights

Statement of Operations

Revenue: Revenue is important to NRC, not only as a means of financing its operating and capital expenditures, but also because it provides an indication of the value that NRC provides to its clients and collaborators. NRC earned total revenues of $156 million in 2008-09, up slightly from $155 million earned in 2007-08 and down from $170 million earned in 2006-07. This decrease in revenue since 2006-07 results from a decrease in financial arrangements with other government departments due to the termination of the Technology Partnership Canada (TPC) program in 2006-07, which was administered by NRC on behalf of Industry Canada.

NRC revenues generated from core services have increased steadily since 2006-07, as demonstrated by the diagram below. In 2008-09 revenue from normal operations accounted for $151 million of the $156 million earned, representing an overall increase of 4.1% since 2006-07.

Revenue from Normal Operatios (in millions)

Further details on revenues are explained in the Financial Analysis section.

Expenses: NRC incurred total expenses of $899 million in 2008-09, up from $853 million in 2007-08 and $847 million in 2006-07. Over the past three fiscal years, NRC’s total expenses have not significantly increased when considering the impact of one-time adjustments within personnel and environmental expenses, having risen 6% since 2006-07. Furthermore, NRC’s major expense components - personnel and grants and contributions, have remained relatively stable. These two categories of expenses are most important to NRC, from both a research program and cost perspective, representing 66% of total expenses.

Expenses (in millions)

  • Personnel: NRC’s total expenses, as detailed in the Notes to the Financial Statements, are made up of 51% in salaries and employee future benefits, which represent NRC’s most significant cost driver. Salaries and employee future benefits increased to $463 million in 2008-09, up from $418 million in 2007-08, and $420 million in 2006-07. The increase in 2008-09 mainly results from one-time retroactive pay charges and adjustments to employee benefits due to negotiations of ten (10) collective agreements at year end, two (2) collective agreements signed during the year, increases to the government-wide rate used to estimate future employee benefits, and normal wage increases.
  • Grants and Contributions: NRC made total net grants and contributions of $133 million in 2008-09, as compared to $142 million in 2007-08 and $143 million in 2006-07. This decrease is not related to continuing transfer payment programs, but rather from the recovery phase of the TPC program and one-time contributions to the TRIUMF laboratory in 2007-08 to address facility conformity costs. When excluding this one-time adjustment and the effect of the TPC program on net expenses, NRC grants and contributions would have totalled $141 million in 2008-09, up slightly from $140 million in 2007-08 and $134 million in 2006-07.

Further details on expense variations are explained in the Financial Analysis section.

Statement of Financial Position

Assets: NRC’s total assets signify its ability to provide future services for Canadians. NRC’s total assets as at March 31, 2009 totalled $821 million, down from $851 million and $859 million as at March 31, 2008 and 2007, respectively. NRC’s largest single component is its capital assets, which represents 71% ($583 million) of the total and accounts for the majority of the decline in NRC’s total assets over the past years.

  • Capital Assets: NRC’s infrastructure is an important element for the successful delivery of its mandate; as such re-investments in capital assets are crucial. In 2008-09, NRC acquired and/or constructed $62.6 million in capital assets, up from $60.9 million in 2007-08 and $62.1 million in 2006-07 (excluding contributed capital leases). The total amount of annual amortization, transfers, disposals, and write-offs were greater than capital asset acquisitions, consequently producing a decline in the total net book value of capital assets over the past three years. NRC’s largest components of capital investments, details provided in the diagram below, are research buildings and facilities as well as machinery, equipment and furniture. Combined, they account for over 83% of the cost (78% of the net book value) of capital investments.

Buildings, Facilities, Machinery, Equipment and Furniture (in millions)

Net debt: The government’s net debt position is often called its “future income requirements” because this indicator provides a measure of the future income required to pay for past transactions and events. NRC’s net debt (financial assets less liabilities) as at March 31, 2009 reached $107 million, up from $71 million as at March 31, 2008 and $72 million as at March 31, 2007. The majority of this increase will be funded by parliamentary appropriations to be provided to NRC in 2009-10.

Equity of Canada: NRC’s equity of Canada as at March 31, 2009 was $491 million, down from $541 million as at March 31, 2008 and $544 million as at March 31, 2007, which illustrates NRC’s net resources (financial and non-financial) that will be used to provide invaluable future services for Canadians. NRC’s equity of Canada is comprised of its Non-Financial Assets ($598 million) less its Net Debt ($107 million). NRC’s largest component of Non-Financial Assets is its capital assets ($583 million).

Non-Financial Highlights

NRC Strategy 2006-2011: In 2008-09, NRC continued implementation of its organizational strategy, Science at Work for Canada. The NRC strategy is intended to help advance priorities identified in the national science and technology (S&T) strategy, which was released by the federal government in 2007. Successful implementation of the NRC strategy is expected to yield the following benefits for Canadians:

  • a greater flow of technologies into high-impact and emerging sectors of the economy, which is expected to help improve the global competitiveness of Canadian industry;
  • NRC making significant contributions to national priorities in health and wellness, sustainable energy and the environment – areas critical to Canada’s future; and
  • NRC providing national access to integrated R&D and innovation support for industry, in an effort to help strengthen the Canadian innovation system.

Integration of NRC activities internally and collaboration with third-parties are integral to the successful implementation of the NRC strategy. Some noteworthy achievements in the organization’s strategy implementation efforts in 2008-09 follow:

Integrated Programs Focused on Areas Critical to Canada: In 2008-09, NRC established and began implementation of integrated R&D and industry support programs in the following sectors, which are key to the Canadian economy: aerospace, automotive, construction, information & communication technologies (ICT), and manufacturing & materials. The underlying aim of NRC program efforts in these key sectors is to help ensure the long-term growth and global competitiveness of Canadian industry. NRC is bringing together scientific and engineering capabilities from across the organization and is working in collaboration with third-parties to address critical needs identified by industry. The NRC role in these sectors includes working with industry to conduct and support R&D, translating research into tangible solutions that can be commercialized by industry, and helping to link small- and medium-sized enterprises (SMEs) in Canada with other national and international sector participants. This latter role of linking SMEs is particularly important as the supply chains of key economic sectors become increasingly integrated globally, while the translation of research into commercial applications has been identified by the government as an important priority for the nation.

Key Industry Sectors

A brief summary of select NRC initiatives in key sector areas follows:

1. Aerospace

Identified challenges of Canadian firms include growing global competition and increasing demand for environmentally friendly aerospace technologies and manufacturing processes. To help address these, NRC undertook the following activities in 2008-09:

  • collaborating with Canadian aerospace SMEs to improve their product and process development capabilities, thereby improving their global competitiveness;
  • building competencies in environmentally sustainable technologies with the aim of developing and transferring green technology solutions to the aerospace industry.

2. Automotive

A priority of the federal government has been to ensure Canada’s automotive sector is positioned for sustainable, long-term success. The development of greener technologies, materials, and processes is seen as being critical to the future of the automotive sector. In support of this priority, NRC identified in 2008-09 opportunities to conduct and support R&D that is expected to yield lighter-weight vehicles (e.g., through the use of light metals, polymer composites, and biomaterials), improve manufacturing processes, and lead to alternative propulsion vehicles (e.g., through fuel cell technologies, biofuels, and electric vehicles). The establishment of a new NRC Centre for Automotive Materials and Manufacturing in London, Ontario is integral to NRC’s efforts these areas.

3. Construction

The Construction sector is a significant source of economic activity and employment, but it also has a significant environmental impact, consuming energy and natural resources, while generating significant quantities of solid waste. The sector is also facing growing productivity challenges in the face of global competition and greater public demand for healthier indoor environments. In 2008-09, NRC began establishing several initiatives to help the sector address these issues, including:

  • facilitating the introduction of fuel cells and hydrogen devices into alternative energy systems for buildings, to help reduce environmental impacts;
  • sensor arrays linked to decision management tools for indoor health-monitoring in commercial spaces, to meet public demand for healthier building environments; and
  • prefabrication, modularization and preassembly, which holds the promise of improved productivity and efficiency.

4. Information & Communication Technologies (ICT)

ICT is a pervasive enabler for many other sectors and has been identified as an important area of focus in the federal S&T strategy. In 2008-09, NRC began implementation of its ICT sector strategy, which involves working collaboratively with industry to create the convergent platform technologies that will ensure global competitiveness for the future. These platform technologies include electronics and photonic materials, devices and systems; communication; knowledge from data; and information/society interface.

5. Manufacturing & Materials

Manufacturing is Canada's largest economic sector and employs more than 2 million people. In Canada, the sector is facing productivity challenges, rising costs (e.g., due to rising energy costs), growing global competition, changing regulatory requirements, and significant demand for greener products. In 2008-09, NRC began putting in place technology platforms designed to help industry cope with these challenges. These platforms include advanced materials, focusing on lighter-weight and more environmentally friendly materials; innovative processes intended to lower fabrication and assembly costs; and decision-aid systems to help meet regulatory and safety needs.

Addressing National Priorities

Also in 2008-09, NRC worked in concert with other government departments to establish national programs that will help Canada deliver on its priorities in the areas of sustainable energy and the environment. The National Bioproducts Program, which is co-led by Agriculture and Agri-Food Canada, Natural Resources Canada and NRC, involves a series of multi-disciplinary and multi-party projects. Project areas within the National Bioproducts Program include chemical & ethanol production from forestry/agricultural biomass; environmentally friendly materials intended for use by industry; energy and chemical production from biomass and municipal waste; and biofuels from marine algae.

NRC has also engaged with Natural Resources Canada and the Natural Sciences and Engineering Research Council of Canada to establish a Hydrogen and Fuel Cell National Program in 2008-09. Under this program, two industry-driven and multi-party projects have been established that are expected to have applications in a three to five year timeframe in support of Canadian priorities in sustainable energy and the environment.

Integrated Business & Client Services: In 2008-09, NRC undertook important steps to foster improved practices and processes for client relationship management. These included putting in place key client account managers in select areas and initiating the development of training programs to improve staff skills in client and business-related interactions.

Integrated Communications: NRC’s revamped Web site was initiated internally in 2008-09. This site is expected to help NRC communicate more effectively its major programs and offerings for Canada and Canadian industry. Full public launch of the Web site is expected to take place in 2009-10.

Governance: NRC has continued to implement a number of initiatives to improve its corporate governance in keeping with the broad government goal of improved management in the public sector and the NRC strategy.

In 2008-09, NRC Council approved the establishment of the Finance Committee. The Finance Committee joins the Executive Committee of Council and the Human Resources Committee, as the third standing committee under the direction of the NRC Council. The Finance Committee will assume the responsibility for the results of the current year budget reviews including initial budget allocation; the financial situation arising from NRC’s multi-year plans; the NRC long-term capital plan; and other matters that may have a significant impact on NRC’s financial sustainability.

Early in 2009, upon the joint recommendation from the President of NRC and the Comptroller General of Canada, the Treasury Board Secretariat appointed three external members to NRC’s Audit Committee in accordance with the Treasury Board Policy on Internal Audit. The NRC Audit Committee provides the President with independent, objective advice, guidance and assurance on the adequacy of NRC’s risk management, control and accountability processes by providing active oversight on core areas of departmental control and accountability. Previously the Audit, Evaluation and Risk Management Committee, which was a sub-committee of Council, provided this oversight function.

Furthermore, the NRC organizational structure was revised in 2008-09 as a means to support the NRC strategy and provide more effective leadership, decision making and accountability. This new organizational structure required the reallocation of various corporate branches to select portfolios in relation to their area of functionality, consequently allowing each portfolio to more efficiently and effectively govern.

NRC has continued to implement an organizational-wide business planning process that serves as a crucial mechanism for making financial and non-financial resource allocation decisions. Three levels of planning are carried out across the organization on an annual basis:

Level 1 – NRC Business Plan: The NRC Business Plan outlines the key priorities of NRC Senior Executive for the organization as a whole.

Level 2 – NRC Program Plans: In response to the Level 1 NRC Business Plan, NRC Program Plans are developed to detail the organization’s specific objectives in its chosen focus areas.

Level 3 – Institute/Branch/Program (I/B/P) Business Plans: The Directors General of NRC’s R&D institutes, its Technology & Industry Support programs (NRC-IRAP, NRC-CISTI) and its corporate branches, which are collectively referred to as I/B/Ps, develop business plans to identify how they intend to deliver on the objectives of Level 2 NRC Program Plans and contribute to the priorities of NRC as a whole (Level 1 plan).

The information contained in all three levels of plans help NRC with its efforts in financial planning and budgeting, long-term capital planning (including real property), human resource planning, and information technology planning.

Financial Statement Audit of NRC: In 2008-09, NRC’s financial statements were prepared in accordance with Treasury Board accounting policies and year-end instructions issued by the Office of the Comptroller General, which are consistent with Canadian generally accepted accounting principles (GAAP) for the public sector. The financial statements were audited by the Office of the Auditor General. The audit provides added assurance with regards to the accuracy and completeness of NRC’s financial information, therefore providing NRC’s Council and senior management team with reliable information, from which strategic decisions can be taken.

Audit of NRC-IRAP contribution recipients: In 2008-09, the audits completed on a sample of transfer payment recipients provided by NRC-IRAP demonstrated exceptional compliance with the programs terms and conditions. In 2008-09, 95% of the contribution agreements audited received an unqualified or “clean” audit opinion. Current year audit results demonstrate continuing improvement in transfer payment management and build upon significant improvements already achieved in 2007-08, which achieved an unqualified opinion rate of 87%.

Discussion and Analysis

Risks & Uncertainties

As a federal government departmental corporation, NRC funds the majority of its salary, operating and capital expenditures from parliamentary appropriations. The non-salary portion of this funding is fixed, with no indexing for price increases. As a result, the actual funding for NRC, in terms of buying power, has been declining over the past decade.

NRC owns and manages 185 specialized buildings that comprise approximately 560,140 square meters of space. It also has an equipment and informatics base of $597 million in cost, with $204 million in net book value ($585 million in cost, with $197 million in net book value in 2007-08). NRC’s capacity to fund the upgrade or replacement of these assets from its appropriations is limited, and as a result will need to secure sources of funding external to NRC for this purpose.

In addition, since 2004, the federal government has announced a series of budget reductions across federal departments as part of its realignment strategy and initiative to increase its efficiency. The diagram below demonstrates the decline in NRC’s available parliamentary appropriations, representing an overall reduction greater than 4% across the preceding three fiscal years. The implications of budget reductions have proven to be challenging. On a short-term basis, NRC adapted to these changes by reducing investments in certain programs. Nevertheless, in order to help NRC position itself to meet these challenges, modifications to the governance structure and planning process have since been implemented, as described in the Non-Financial Highlights section.

Available Parliamentary Appropriations (in millions)

However, the 2009 federal budget stimulus package contained positive measures for NRC, providing $245 million in additional transfer payment funding and $19 million in capital funding for repairs and maintenance to NRC laboratories over 2009-10 and 2010-11.

Details of other factors influencing NRC’s budget pressures are provided below.

Sunsetting Funding: In order to ensure value for money, a Government of Canada practice is to provide funding for new initiatives on a sunsetting basis. This means that rather than providing a permanent increase in the NRC allotment, the government allocates funding for a limited period of time, with the option for renewal. Renewal is conditional on performance, linkages to priorities and availability of funding.

Although funding is not necessarily provided on an ongoing basis, new government-approved initiatives, such as the establishment of technology cluster sites in communities across Canada, often entail an ongoing commitment from NRC in terms of the construction and maintenance of new specialized facilities and the hiring of staff. There is also an expectation by the communities that support these new initiatives, and in some cases invest in them, that they will exist beyond the particular funding window. These challenges add complexity to the organization’s planning, budgeting and operations.

Currently, NRC has several initiatives and projects funded on a sunsetting basis. Examples include the following:

  • Technology Cluster Initiatives funding: Since its inception in 2000-01, NRC has received approval to spend a total of $554.2 million in technology cluster initiatives funding. As at March 31, 2009 NRC has spent $485.7 million (or 88% of approved funding). The funding for all of NRC’s technology cluster initiatives terminates in fiscal year 2009-10, at which point NRC must request additional support from the federal government. NRC’s technology cluster initiatives play a key role in activities that support the integration of players in Canada’s innovation system. They nurture the growth of local scientific and innovative capability that drives dynamic and competitive industries; and also help to address challenges inherent in the current Canadian industrial structure (predominance of SMEs).
  • Astronomy funding: The funding allocated to Phase I of Canada’s Long-Range Plan for Astronomy and Astrophysics (LRP) ended on March 31, 2008. Since that time, NRC has provided financing from internal sources by temporarily reallocating funds from other research programs to alleviate some of the immediate funding pressures in astronomy. It is anticipated that the future investment implications for Canada’s participation in the astronomy LRP Thirty Meter Telescope (TMT) and other projects of the LRP are $200 million for the period of 2009-10 to 2013-14 and $190 million for the period of 2014-15 to 2018-19. Canada is currently a world leader in astronomy and astrophysics. The field is a Canadian S&T success story in terms of both scientific and economic returns for dollars invested. While Canada’s researchers seek to understand the structure and origins of the universe, NRC has worked to ensure that Canadian industry also benefits. Widespread applications of astronomy-developed technology, such as optical sensors, positioning systems and data management software pervade sectors from security and health care to cameras and computing.
  • TRIUMF: The contribution agreement with TRIUMF, Canada’s National Laboratory for Particle and Nuclear Physics, ends in 2009-10. Since the inception of NRC’s involvement in 1976, NRC has provided over $900 million in funding to TRIUMF, with $44 million remaining in 2009-10. NRC is currently preparing a Memorandum to Cabinet in order to renew the terms and conditions of the federal government’s contributions to TRIUMF.
  • Genomics R&D Initiatives funding: In 2008-09, NRC received approval to renew the Genomics R&D Initiatives (GRDI), which included NRC as well as 5 other federal government departments. Total funding approved, across all government departments, amounts to $19.9 million per fiscal year, until 2010-11. NRC’s portion of the $59.7 million ($19.9 million per year) is $18 million ($6 million per year). GRDI is a federal program that coordinates genomics R&D in 6 federal departments and agencies to support their mandates, public policy objectives and key national interest in human health, agriculture and food safety, environment and natural resources management.

Strategic Review: The Government of Canada strategic review process involves a systematic review of all direct program spending and operating costs in a number of departments and agencies, including NRC, to ensure costs are incurred to achieve core government priorities. As a result of the strategic review, NRC has more closely aligned its programs with the objects of the Government’s science and technology strategy as well as national priorities. In the course of this review process, NRC has considered alternative service delivery models to better position its role in supporting innovation in Canada and to adapt to the rapidly evolving science and technology environment.

Consequently, as part of the implementation of NRC’s strategic review, NRC’s Canada Institute for Scientific and Technical Information (NRC-CISTI) is exploring opportunities from transformation that focuses on alternative service delivery models. The transformation plan is in development for completion and implementation by 2010-11. The plan will build upon NRC-CISTI’s performance strengths and strategies to improve efficiencies and continue to provide relevant and effective services to its clients.

Foreign Currency: NRC purchases over $55 million per year in goods and services in currencies other than the Canadian dollar, which exposes NRC to fluctuations in foreign exchange. The majority of foreign purchases (90% on average over the last six years and 93% over the last two years) are transacted in US dollars. Due to the strengthening of the US dollar, NRC’s purchasing power has declined by approximately $4.3 million US when compared to 2007-08 levels.

The 2008-09 loss in purchasing power was largely negated by the increase in Canadian dollars received from foreign sales. The increase in US sales in 2008-09, provided NRC with a natural hedge of approximately 88%, consequently reducing the impact caused by the rise in value of the US dollar.

Dependence on Revenue: The nature of NRC’s activities permits NRC to generate revenues in order to reinvest in its operations. NRC’s dependence on external sources of funding has been growing since the early 1990s. The portion of NRC’s operating and capital expenditures funded from external sources of income was roughly 11% in 1991-92. In 2008-09, this percentage had climbed to over 22%, consistent with the average over the past three fiscal years.

In particular, NRC maintains technology centres that rely on external sources of revenue to fund the majority of their operations, namely NRC’s Centre for Surface Transportation (NRC-CSTT) and NRC’s Canadian Hydraulics Centre (NRC-CHC). In addition, NRC’s two largest institutes – NRC’s Institute for Aerospace Research (NRC-IAR) and NRC-CISTI – rely on external sources of revenue to fund over 52% (45% in 2007-08) and 33% (35% in 2007-08) of their operations, respectively. Significant downturns in the industries or federal departments that these groups support will greatly impact NRC’s ability to continue operations at current levels.

Finally, it is important to note that NRC must strike a fine balance between providing contract research services that generate needed revenue and performing the government-funded research that keeps NRC at the leading-edge of science, technology and innovation. Too much emphasis on revenue generating contract research could compromise NRC’s advanced knowledge and technology base, which in the long-term will reduce NRC’s ability to serve industry and respond to the needs of the nation in critical fields such as energy, the environment, health and wellness, and other priority areas outlined in the NRC strategy. Furthermore, too much focus on research may compromise NRC’s ability to reinvest in itself.

Financial Analysis

The following is an analysis that explains the meaning of certain financial statement items, significant variances, and financial trends.

Assets

Due from Consolidated Revenue Fund (CRF): This line item represents the amount of cash that NRC is entitled to draw from the federal government treasury. This includes cash to discharge its liabilities for which NRC has already received an appropriation, as well as revenue received but not spent. NRC’s due from CRF is $189.3 million as at March 31, 2009, down from $204.8 million as at March 31, 2008. The $15.5 million decrease results from a $19.3 million decrease in accounts payable, funded by 2008-09 appropriations, offset by $3.5 million increase in revenue available for use in subsequent years.

Accounts Receivable:

NRC-IRAP TPC Repayable Contributions

The NRC-IRAP Technology Partnerships Canada (TPC) program has been administered by NRC on behalf of Industry Canada since 1998. This program provides conditionallyrepayable contributions to small and medium-sized enterprises (SMEs) to support the pre-commercialization phase of their technology development. This conditional repayment program in most cases requires quarterly repayments of the contribution based on a percentage of the recipient’s gross revenue. This program terminated on March 31, 2006, however has continued to fund existing agreements during its wind-down phase.

The NRC-IRAP TPC program supports small start-up firms, whose future success is often entirely dependent on one technology. Failure to bring the technology to market, at times, can result in the firm ceasing operations. Even with the very high-risk nature of this program, NRC has received repayments amounting to approximately29% of contributions disbursed as at March 31, 2009 (25% as at March 31, 2008). With 239 (280 as at March 31, 2008) projects still being administered, this percentage is expected to increase over the next decade.

The NRC-IRAP TPC accounts receivable as at March 31, 2009 was $13.4 million ($9.9 million - 2008) with a corresponding allowance for doubtful accounts of $11.6 million ($8.3 million - 2008), highlighting the high-risk nature of the program.

Receivables from external parties

NRC had accounts receivable with external clients worth $21.7 million as at March 31, 2009 ($20.9 million - 2008) with a corresponding allowance for doubtful accounts equal to $804 thousand ($1.1 million - 2008). Write-offs in 2008-09 were $755 thousand ($938 thousand in 2007-08), which is low given the total value of NRC’s revenues.

Aged Accounts Receivable

In 2008-09, 74% (80% in 2007-08 and 2006-07) of accounts receivable are aged 90 days or below. NRC has successfully focused on collecting its outstanding receivables over the past years, with NRC-IRAP TPC accounting for the large majority of receivables over 90 days. The aging of all accounts receivable, gross of allowances, as at March 31 is as follows:

Aged Receivables (in millions)

Equity Investments: As part of its mandate to promote industrial innovation in Canada, NRC provides financial assistance to firms through access to equipment, intellectual property and incubation space in its laboratories and Industrial Partnership Facilities. Since these companies are often in their infancy and cannot afford to pay the full cost of the assistance received, NRC, on occasion, takes an equity position in the company in return for the assistance provided. This helps the firms survive the critical technology development stage. It is not management’s intention to hold equity investments over the long-term. NRC will consider timely opportunities for divestiture of equity investments by taking into account the interests, market liquidity and expected future growth of the company.
The full value recorded on the statement of financial position reflects NRC's investment in publicly traded companies as its shares in privately held corporations are deemed to have no market value. Details of NRC’s investment in public companies are as follows:

Company Name Number of Shares (in 000’s) Amount Recorded in Financial Statements (in 000’s) Market Value as at March 31, 2009 (in 000’s)
PharmaGap Inc. 1,305 393 209
Chemaphor Inc. 1,260 252 189
Luxell Technologies Inc. 241 14 2
Pure Energy Visions Corp. 210 - (1) 21
Omnitech Consultant Group Inc. 866 - (1) -
Imris Inc. 796 - (1) 2,387
Sabretooth Energy Inc. 4 - (1) 1
Total 4,682 $ 659 $ 2,809
  1. – recorded at nominal value (one dollar)

NRC’s equity investments, presented on the Statement of Financial Position at $659 thousand, reached a fair market value of $2.8 million as at March 31, 2009, which represents a decrease of $1.2 million from the previous fiscal year. The decrease can be attributed to IMRIS Inc., which had a decrease in stock value by $1.1 million since March 31, 2008.

Endowment Fund Investments: The Holmes Endowment Fund is an investment bequeathed to NRC in July 1994. Up to two-thirds of the endowment fund's yearly net income is used to finance the H.L. Holmes award on an annual basis. The award covers a one- or two-year period and provides the opportunity to Canadian post-doctoral students to study at world famous graduate schools or research institutes under outstanding researchers. In 2008-09, NRC granted $99 thousand to the recipient of the 2007 NRC H.L. Holmes Award. The recipient is using the total award of $198 thousand to fund two years of collaborative research at the Harvard Medical School, ending in July 2009.

The endowment fund reached a fair market value of $4.6 million as at March 31, 2009 ($4.5 million as at March 31, 2008). The investments within the portfolio had an average effective return of 4.5%. The endowment fund is presented at an amortized cost of $4.4 million ($4.3 million as at March 31, 2008) on the Statement of Financial Position and not at fair value.

Market Value of Investments (in millions)

Prepaid Expenses: NRC’s prepaid expenses as at March 31, 2009 are $12.1 million ($13.6 million as at March 31, 2008). The decrease of $1.5 million is attributable to a significant reduction in scientific journal subscriptions, which reduced its prepaid expenses from $8.4 million to $ 6.3 million. Subscriptions form the primary component of NRC’s prepaid expenses. NRC’s Canada Institute for Scientific and Technical Information (NRC-CISTI), Canada’s science library, subscribes to many of the world’s major scientific and technical journals and databases.

Prepaid Expenses (in millions)

Capital Assets: NRC’s capital asset net book value has decreased from $596 million in 2007-08 to $583 million in 2008-09. This $13 million dollar decrease occurred given that NRC’s amortization for the year of $69.4 million, in addition to $5.7 million in capital asset net book value that was transferred, disposed or written-off, exceeded acquisitions of $62.6 million. The most significant component of capital assets transferred, disposed or written-off occurred with NRC’s re-evaluation of a contributed capital lease. Consequently, $4.1 million of the $5.7 million has had no impact on NRC’s Statement of Operations due to a corresponding $4.1 million reduction in deferred revenue for contributions related to leased capital assets.

Acquisitions

NRC spent $62.6 million on capital expenditures during 2008-09, a slight increase from the
$60.9 million spent in 2007-08. Of the $62.6 million in capital asset additions, $30 million or 48% relate to purchases of machinery and equipment. The remaining balance is primarily made up of assets under construction ($17.9 million or 29%) as well as investments in NRC buildings and facilities ($7.9 million or 13%).

The following represents significant capital assets expenditures in 2008-09:

  • The completion of the energy retrofit project for NRC’s Institute for Chemical Process and Environmental Technology (NRC-ICPET). NRC spent $4 million on this project over 2007-08 and 2008-09, of which $1.4 was expended in 2008-09. The energy retrofit project will improve the operating efficiency and effectiveness of the building, therefore transferring the current investment into future cost savings for NRC.
  • NRC-ICPET initiated a project to construct a $3.4 million dollar High Resolution Transmission Electron Microscope. To date, NRC-ICPET has spent $2 million for the acquisition and construction of the microscope which, once complete, will be unique worldwide, therefore continuing NRC’s ability to provide leading edge research, technology and innovation.
  • NRC’s Institute for Research Construction (NRC-IRC) finalized the construction of a new facility in 2008-09 used primarily to support activities within the Indoor Air Research and Development Initiative, which is part of the Clean Air Agenda. Costs incurred up to March 31, 2009 for the construction of this facility amounts to over $1.9 million, of which $861 thousand was spent in 2008-09.
  • NRC’s oldest property located on Sussex Drive in Ottawa, Ontario continued to receive multiple renovation projects in 2008-09. In total, $1.3 million in funding was applied to restore the property in 2008-09. Of this amount, $798 thousand was used to fund a renovation to laboratory space used by NRC’s Steacie Institute for Molecular Sciences (NRC-SIMS) in order to provide seismic stability and appropriate atmospheric temperature, humidity and pressure required for the $1.4 million dollar laser system acquired in 2008-09. The Coherent Legend-Cryo laser system represents the backbone of a new capability at NRC for studying ultra-fast electronic processes in molecules.
  • NRC’s Institute for Microstructural Sciences (NRC-IMS) spent $1.8 million to construct an instrument used to audit, commission and support automated projection lithography, which is the core to fabricating semiconductor wafers for photonic applications.
  • NRC’s Institute for Marine Biosciences (NRC-IMB) acquired a High-Field High-Resolution Magnetic Resonance Spectrometer at a cost of $1.4 million. The spectrometer will be utilized for a multitude of projects and research sectors, such as Marine Biosciences in addition to Health and Wellness.

The following diagram depicts NRC’s distribution of capital asset acquisitions over the preceding two fiscal years.

Capital Asset Acquisitions

Liabilities

Accounts Payable and Accrued Liabilities: NRC’s accounts payable and accrued liabilities as at March 31, 2009 are $124.6 million ($127.8 million as at March 31, 2008). The decrease of $3.2 million is mainly due to a significant decrease of $18.6 million dollars in payables to suppliers and contribution recipients, a $940 thousand dollar decrease in contractor holdbacks, offset by a $17.1 million dollar increase in accrued salaries and wages.

The $18.6 million dollar decrease in payables to suppliers and contribution recipients is primarily due to a considerable decrease in outstanding transfer payments administered by NRC-IRAP, which funds approximately $87 million per year in transfer payments to outside organisations. The decrease of $940 thousand dollars in contractor holdbacks is due to a reduction in the amount of large construction projects in progress.

NRC’s accrued salary, which represents salary earned by personnel as at March 31, 2009 for which they have not received payment, increased by $17.1 million in comparison with the previous year. A retroactive salary adjustment of $13.7 million was recorded subsequent to the negotiations of the following collective agreements: Research Officers and Research Council Officers (RO/RCO), Librarian (LS), Translator (TR), Information Services (IS), Technical Category (TO), Operational Category (OP, Purchasing and Supply (PG), Administrative Support Group (AD), Administrative Services (AS), and Computer Systems Administration (CS). The remaining difference is explained by the number of earned pay days within the normal pay period at March 31, 2009 and by an allowance recorded for termination benefits following the strategic review exercise.

Vacation Pay and Compensatory Leave: Vacation pay and compensatory leave have steadily increased over the past years due to the natural rise in employment wages. The increase from $40.2 million as at March 31, 2008 to $48.9 million as at March 31, 2009 also results from vacation allowance adjustments following collective agreement negotiations during the fiscal year.

Vacation Pay, Compensatory Leave and Employee Future Benefits (in millions)

Employee Future Benefits: Employee future benefits have also steadily increased over the years, however have increased sharply by $14 million in 2008-09 over 2007-08. The allowance for employee future benefits is established at year end from the total annual salary cost of NRC’s indeterminate employees. Consequently, the steady increase results from the natural rise in employment wages applicable to NRC’s continuing workforce. In addition, an increase in the allowance rate used to estimate employee future benefits across all government departments and agencies increased by 3.7% in 2008-09, therefore accounting for $9.6 million of the increase over 2007-08.

Deferred Revenue:

Contributions Related to Leased Capital Assets

Deferred revenue is recognized for contributions related to leased capital assets. When new capital leases are recognized, NRC will establish a non-financial capital asset as well as corresponding deferred revenue equal to the value of the capital lease. Over time and as the asset is used, NRC recognizes equal amounts of amortization and revenue (lease inducement revenue). As a result, no impact occurs on NRC’s net cost of operations or its Equity of Canada.

The contributions related to leased capital assets is associated with leases of facilities for $1 per year with the University of Alberta to accommodate NRC’s National Institute for Nanotechnology (NRC-NINT), the University of Prince Edward Island to accommodate NRC-IMB, and the University of Western Ontario to accommodate NRC’s Industrial Materials Institute (NRC-IMI) and NRC-IRC. As at March 31, 2009 this balance was $53.1 million ($59.8 million as at March 31, 2008). The balance decreased by $6.7 million in the current year, as a result of a $4.1 million dollar write-down on the valuation of the related contributed capital, and $2.6 million dollars in revenue which was recognized in accordance with the useful life of the related asset.

Specified Purpose Accounts

NRC undertakes collaborative work with clients for the mutual benefit of both parties. Funding provided by the collaborator is placed in a Specified Purpose Account (SPA) and used over the duration of the project. Amounts remaining in the SPA at year-end are recorded as deferred revenue as it is expected that it will be used in the coming years on the project. At the end of 2008-09, this amount totalled $17.1 million ($14.5 million as at March 31, 2008), representing an increase of 18% over the previous year. The principal cause of this increase is due to a sizeable research collaboration, in the amount of $1.6 million received in 2008-09 by NRC-NINT.
Other

Other deferred revenue consists primarily of research press deferred revenue, as well as conference and seminar registration deferred revenue. NRC had other deferred revenues of $7 million as at March 31, 2009 ($6.9 million as at March 31, 2008).

  • Research Press:NRC-CISTI publishes research journals that are available for purchase on a subscription basis. When NRC receives payment for the subscription, it records the amount as deferred revenue and then recognizes the revenue each month as the journal is issued.
  • Conference and Seminar Registration: NRC conducts many conferences and seminars which often require registration many months in advance of the conference date. Receipts from registration are recorded as deferred and recognized when the conference takes place.

Deferred Revenue (in millions)

Environmental liability: NRC’s environmental liability has increased from $100 thousand to $4.2 million in 2008-09. In 2008-09, NRC recognized an estimated contingent liability of $4.1 million for decontamination and restoration costs of an NRC research site.

Furthermore, in 2008-09 NRC completed a historical review for all research sites occupied by NRC in order to determine the risk of contamination. This preliminary planning phase is critical to ensure that NRC directs further attention and resources on research sites which demonstrate the largest potential for contamination.

Revenues

NRC’s revenues were $156 million in 2008-09, compared to $155 million in 2007-08. Recent trends in revenue components are shown in the following graph. Despite the fact that NRC’s total revenue remained consistent in 2008-09 when compared to the previous year, NRC’s revenue from normal operations in fact increased by $5 million as discussed in the “Highlights” section.

Revenues (in millions)

Services of a Non-Regulatory Nature: In 2008-09, 42% or $65.6 million (40% or $62.9 million in 2007-08) of NRC revenues were generated from services of a non-regulatory nature, which primarily consists of research services provided directly to industry and academic clients. The increase of $2.7 million is largely attributable to NRC-IAR which received an increase in demand for research services within the fields of simulator model development and flight data, and NRC’s Administrative Services and Property Management Branch (NRC-ASPM) which generated additional revenues as a result of its role in the management and production of large multinational scientific conferences held in 2008-09.

Sales of Goods and Information Products: As part of its goal to disseminate scientific and technical information of importance to industry, NRC has publications and certified reference materials that it sells to clients. Total sales of goods and information products totalled $11.3 million in 2008-09, as compared to $11.8 million in 2007-08. The largest component of revenue derived from sales of goods and information products was due to research press journals sold through Canada’s scientific library. Research press income earned in 2008-09 was $4.7 million, compared to $6.5 million in 2007-08. This $1.8 million dollar decrease was offset by an increase of $1.3 million in sales of other goods and information products, such as National Construction Codes distributed by NRC-IRC, which had an increase over $550 thousand in 2008-09 due to its implementation of new innovative Construction Code products.

Rights and Privileges: Royalty revenue is earned from companies that license the rights to use NRC technology. Royalties are typically based on a percentage of the licensee’s sales. In 2008-09, NRC generated $9.6 million in royalties, up slightly from $9.5 million in 2007-08 and up significantly from $6.7 million in 2006-07. The stabilization of royalty revenues in 2008-09 and 2007-08 is primarily associated with NRC’s Institute for Biological Sciences (NRC-IBS) which has earned yearly revenues of over $5 million in the past two fiscal years, from which its largest royalties are earned through its licence for the Meningitis C vaccine.

Lease and Use of Property: Facilitating access to NRC researchers and facilities is an important part of technology transfer at NRC. To this end, NRC provides laboratory space to companies on a commercial basis, often as part of a collaboration or technology transfer agreement. Revenue from lease and use of property amounted to $4.3 million in 2008-09, as well as 2007-08. This consistency demonstrates NRC’s ability to continuously attract external stakeholders for access to NRC facilities, laboratories and research equipment.

Financial Arrangements with Other Departments and Agencies: NRC undertakes research on behalf of other federal government departments. The incremental costs associated with this work are reimbursed to NRC. In 2008-09, the amount of work undertaken for other government departments was significant, totalling $46.1 million ($46.6 million in 2007-08). Excluding the effect of the NRC-IRAP TPC program with Industry Canada, which declined by $2.5 million, financial arrangements with other departments and agencies would have actually increased by $2 million in 2008-09.

Revenues from Joint Project and Cost Sharing Agreements: NRC also receives income through collaborative research projects that involve cost sharing arrangements for work that is likely to lead to new expertise or technology. In 2008-09, collaborative funding across all sectors at NRC earned a total of $16.2 million ($15.5 million in 2007-08). Revenue from joint research projects are not recognized until expenses are incurred or until the project is complete. As such, revenue can fluctuate slightly depending on the number of on-going projects at year end.

Expenses

As noted in the Highlights section, NRC’s expenses increased from $853 million in 2007-08 to $899 million in 2008-09, made up of 51% (49% in 2007-08) in salaries and employee benefits.

Expenses (in millions)

Salaries and Employee Future Benefits: Salaries and employee future benefits have increased by $44.6 million in 2008-09, from $418.5 million in 2007-08 to $463.1 million in 2008-09. A main cause of this increase is the negotiation of ten (10) collective agreements at year end, and two (2) during the fiscal year, which resulted in significant one time adjustments. NRC has recognized over $19 million dollars of one-time expenses in 2008-09 to recognize retroactive pay increments earned and adjustments to employment benefits. In addition, the increase in the allowance for employee future benefits was responsible for $14 million dollars. The remaining balance is represented by general pay increments received by employees in the year and the implementation of the Research Associate (RA) program in 2007-08. The RA program which incurred $10.4 million in 2008-09, compared to $7 million in 2007-08 replaced the previous Postdoctoral Fellowship program.

Grants and Contributions: Grants and contributions decreased by $9.9 million in 2008-09, from $142.5 million in 2007-08 to $132.6 million in 2008-09. As mentioned in the “Highlights” section, this decrease is not attributable to continuing transfer payment programs, however mainly results from the NRC-IRAP TPC program and one-time contributions to the TRIUMF laboratory in 2007-08. Net contributions from NRC-IRAP of $77.3 million ($80.6 million in 2007-08) and contributions to the TRIUMF laboratory for particle and nuclear physics of $43.5 million ($51.5 million in 2007-08) comprise 91% (93% in 2007-08) of the contributions made by NRC in the current fiscal year. In addition, contributions made through NRC Herzberg Institute of Astronomy (NRC-HIA) to support international telescopes of $10.5 million ($9.2 million in 2007-08) make up the majority of the remaining balance.

Professional and Special Services: Professional and special services increased by $2.1 million in 2008-09, from $58 million in 2007-08 to $60.1 million in 2008-09. This 3.6% increase results from multiple small increments over various types of professional and special services received. Significant transactions occurring in 2008-09 within professional and special services include the recognition of an environmental liability in the amount of $4.1 million, and a $4.6 million decrease due to the termination of the NRC Postdoctoral Fellowship (PDF) program in 2007-08. The PDF program has been replaced with the aforementioned RA program, which is classified under salary and employee benefit cost.

Transportation and Communication: Transportation and communication expenses increased by $1.9 million in 2008-09, from $28.1 million in 2007-08 to $30 million in 2008-09. This 6.8% increase is attributable to a rise in travel costs and increased travel needs.

Bad Debts: NRC’s bad debt expense increased from $6.4 million in 2007-08 to $9.1 million in 2008-09. The increase of $2.7 million is related to write-offs recorded in the year for bad debts within the NRC-IRAP TPC program.

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