ARCHIVED - Financial Statement Discussion and Analysis 2009 - 2010
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Table of contents
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, 2010.
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).
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.
NRC’s 2009-10 Financial Statements were influenced by a number of factors, including Canada’s Economic Action Plan, the global economic downturn, NRC’s 2008 Strategic Review exercise, expenditure restraint measures, and other significant events such as collective agreement negotiations. These factors, taken independently, play a major role in explaining financial account variances from year-to-year, and contributed to changes in NRC’s Net Cost of Operations and Equity position, which increased by $119.8 million and decreased by $10.6 million in 2009-10, respectively.
Statement of Operations
Expenses: NRC incurred total expenses of $1.033 billion in 2009-10, up significantly from $899 million in 2008-09 and $853 million in 2007-08. The main contributor for the substantial increase in spending was related to additional funding received by NRC for the implementation of Canada’s Economic Action Plan. The Economic Action Plan, introduced in January 2009, was the Government’s response to one of the deepest global recessions by delivering billions of dollars in stimulus for the economy as a means of protecting Canadian jobs and income as well as ensuring a prosperous economy of tomorrow. NRC received and spent $128 million in additional appropriations to support scientific research and development activities performed by Canadian organizations, of which $126.6 million was spent on contributions with the remainder spent on personnel and operational costs. In addition to funding provided through parliamentary appropriations, NRC received and spent $16.8 million for Industry Canada’s Community Adjustment Fund (CAF) program. NRC delivered $15.9 million of this funding to contribute to scientific research and development activities performed by Canadian organizations located within restructuring communities, with the remainder spent on personnel and operational costs.
The following chart illustrates NRC’s total expenses categorized by major expense, over the past three fiscal years:
- Personnel: NRC’s total expenses, as detailed in the Notes to the Financial Statements, are made up of 45% (51% in 2008-09) in salaries and employee benefits, which represent NRC’s most significant cost driver. Salaries and employee benefits increased to $468 million in 2009-10, up from $463 million in 2008-09, and $418 million in 2007-08. Many factors explain the $5 million (or 1%) increase in personnel expenses between 2008-09 and 2009-10, including the following most significant: a $15.8 million increase in NRC’s share of the Government’s overall cost of employee benefits such as employer provided pension contributions and health and dental insurance, a $4.4 million increase for the provision of termination benefits related to Strategic Review decisions, a $5.2 million increase in expenses for the Research Associates (RA) program, student employment and term employees, a $14.6 million decrease in the charge for vacation leave and an $18.7 million decrease to the charge for future employee severance benefits. The remainder mainly represents increased salary costs as a result of salary step increases within negotiated salary ranges and an average 1.5% increase in salary rates following collective bargaining agreements entered into in 2009.
- Grants and Contributions: NRC made total net grants and contributions of $281 million in 2009-10, as compared to $133 million in 2008-09 and $142 million in 2007-08. As mentioned above, the majority of the increase is directly related to additional contributions funding from Canada’s Economic Action Plan which provided NRC with an additional $142.5 million to support small and medium-sized enterprises with their innovation efforts through the NRC Industrial Research Assistance Program (NRC-IRAP). This investment will help the Government build a competitive advantage for Canada based on excellence in science and technology. With this support, SMEs are better equipped to perform R&D, commercialize new products and processes, and access global markets.
- Operations:NRC’s operational costs (excluding salaries and employee benefits) decreased by $19 million in 2009-10 from 2008-09 ($9 million from 2007-08). The decrease in costs are mainly attributable to utilities, materials and supplies which decreased by $5.5 million ($5.3 million from 2007-08), professional and special services which decreased by $6.1 million ($4.1 million from 2007-08), and transportation and communication which decreased by $5.7 million ($3.8 million from 2007-08). The decrease in operational costs is forecasted to be maintained for upcoming years given NRC’s implementation of expenditure growth restraint measures within these areas.
Further details on expense variations are explained in the Financial Analysis section.
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 $169.6 million in 2009-10, up from $156.2 million earned in 2008-09 and $154.5 million earned in 2007-08. The sizeable increase in 2009-10 mainly results from a $16.8 million dollar financial arrangement with Industry Canada to administer contributions, under the Community Adjustment Fund (CAF) program, for scientific research and development projects performed by Canadian organizations located within restructuring communities. The inflow from Industry Canada for this project is non-recurring and relates to 2009-10 only.
NRC revenues, illustrated below, which have been adjusted for non-recurring interdepartmental transactions, provide a more accurate representation of revenues earned from NRC’s normal operations. NRC revenues from normal operations decreased by $5.7 million in 2009-10 from 2008-09. The $16.1 million decrease ($13.8 million from 2007-08) in sales of goods and services to external parties was offset by a $7.9 million increase ($9.8 million from 2007-08) in financial arrangements with other government departments and agencies, and a $2.5 million increase ($3.2 million from 2007-08) in revenues from joint project and cost sharing agreements.
Sales of goods and services include services of a non-regulatory nature, sales of goods and information products, rights and privileges, as well as revenue derived from the lease and use of property. The significant decrease in sales of goods and services is attributable to many factors, most importantly the effect of the global economic downturn and the transformation of the NRC Canada Institute for Scientific and Technical Information (NRC-CISTI). The reduction in revenue occurred in many of NRC’s Institutes / Branches / Programs (IBP) at varying degrees, depending on the industry they support. Several IBP’s have seen over $1 million of their sales of goods and services decrease in 2009-10. In addition to economic effects, NRC-CISTI is currently under transformation and has experienced a net drop in sales of goods and services of over $3.7 million in 2009-10 as a result of clients adopting alternative service delivery arrangements prior to its full implementation in 2010-11. The transformation of NRC-CISTI is explained further in the Non-Financial Highlights section.
The $7.9 million increase in financial arrangements with other government departments and agencies mainly occurred at NRC’s Centre for Surface Transportation Technology (CSTT) given several factors including incremental work required with the Department of National Defence to support their operational requirements, additional arrangements with Transport Canada as well as supplementary work to support the 2010 Winter Olympics.
Further details on revenues 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, 2010 reached $816.9 million, down from $821.3 million and $851.2 million as at March 31, 2009 and 2008, respectively. NRC’s largest single component of assets are tangible capital assets, which represents 71% ($579.1 million) of the total and also accounts for the majority of the decline.
- Tangible Capital Assets: NRC’s infrastructure is an important element for the successful delivery of its mandate; as such re-investments in tangible capital assets are crucial. In 2009-10, NRC acquired and/or constructed $66.9 million in tangible capital assets, up from $62.6 million in 2008-09 and $60.9 million in 2007-08. The total amount of annual amortization, transfers, disposals, and write-offs were greater than tangible capital asset acquisitions, consequently producing a decline in the total net book value of tangible capital assets over the past three years. NRC’s largest components of tangible capital investments are research buildings and facilities as well as machinery, equipment and furniture. Combined, they account for over 83% of the cost (77% of the net book value) of tangible capital investments. NRC’s most significant tangible capital assets are aging, therefore demonstrating the importance of NRC’s recapitalization program. In March 2008, NRC completed a Building Condition Assessment study, which identifies recapitalization and deferred maintenance funding requirements at an estimated value of $170 million. NRC received and spent $8.7 million in 2009-10 on recapitalization needs, and plans to spend an additional $10.4 million in 2010-11 from funding provided under the Modernization of Federal Laboratories initiative.
Further details on tangible capital asset acquisitions are provided in the Financial Analysis section.
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, 2010 reached $112.1 million, up from $106.7 million as at March 31, 2009 and $71 million as at March 31, 2008. The $5.4 million increase in net debt is primarily due to a $7.8 million reduction in accounts receivables as a result of losses in sales of goods and services, a $4.4 million in additional accrued liabilities for anticipated costs related with the implementation of NRC’s 2008 Strategic Review exercise, offset by a $6.1 million decrease in employee future benefits.
It is important to note that although parliamentary appropriations are not recorded as income within NRC’s Financial Statement, the majority of NRC’s net debt will be paid with future appropriations provided by Parliament.
Equity of Canada: NRC’s equity of Canada as at March 31, 2010 was $480.8 million, down from $491.4 million as at March 31, 2009 and $540.8 million as at March 31, 2008, which illustrates NRC’s net resources (financial and non-financial) that will be used to provide future services for Canadians. NRC’s equity of Canada is comprised of its Non-Financial Assets less its Net Debt.
Canada’s Economic Action Plan: The effects of Canada’s Economic Action Plan can be felt across the scientific research and development community in both financial and non-financial conditions. NRC-IRAP provides financial assistance, along with technical and business advisory services to small and medium-sized enterprises (SMEs) across Canada to help them develop technologies for competitive advantage. NRC-IRAP has received $128 million in 2009-10 and an additional $100 million in 2010-11 under Canada’s Economic Action Plan. This funding has already provided NRC-IRAP with the financial means to assist over 1,700 new clients in 2009-10, representing a four-fold increase over the amount of new funded clients in the previous fiscal year and consequently increasing NRC-IRAP’s ability to stimulate wealth creation for Canada through technology by enhancing the innovation and commercialization capacity of Canadian SMEs.
NRC’s 2008 Strategic Review: The Government of Canada strategic review process involves a systematic review of all direct program spending and operating costs in departments and agencies, including NRC, to ensure costs are directed to achieve core government priorities. As a result of a strategic review exercise performed in 2008-09, certain NRC programs are being modified to align more closely with national priorities and the objectives of the Government’s science and technology strategy. During the course of this review process, NRC 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. NRC-CISTI undertook two major activities to reduce its expenditures by 60% and progress the realization of NRC’s 2008 Strategic Review:
- A non-profit corporation, Canadian Science Publishing, was created to take-over the Research Press business segment of NRC-CISTI’s operations by 2010-11, and an alternate service delivery arrangement was implemented for the document delivery business segment.
- The Information Intelligence Services Program was amalgamated with the National Science Library Program and the services were aligned with NRC priorities. Alternate service delivery arrangements were implemented where feasible.
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, accountability and transparency in the public sector.
NRC continued its implementation of an organizational-wide business planning process that serves as a crucial mechanism for making both financial and non-financial decisions, which involves planning across the organization on three important levels. The business planning process allows NRC to coordinate financial planning and budgeting, long-term capital planning (including real property), human resource planning, and information technology planning across the organization to achieve the greatest return on investment for Canadians. This improved business planning process was used in the development of setting priorities and aligning scarce resources to strategic and priority areas.
Financial management is an essential component of good governance and has substantial influence on corporate values and culture. The Financial Monitoring Division within NRC’s Finance Branch (NRC-FB), implemented in November 2008, continued its ramp up of activities to further advance its mandate of helping NRC maintain an effective and efficient system of control over financial management. The Financial Monitoring Division is responsible for assessing the design and operating effectiveness of the organization’s control framework to provide timely information for senior management with the intention of addressing identified weaknesses and to strengthen oversight and sound management of public resources entrusted to the organization.
Change in Leadership: A number of changes occurred during 2009-10 within NRC’s senior leadership roles, including the Vice-Presidents of Engineering and Physical Sciences, the Secretary General and the newly appointed President.
NRC’s Strategic Direction: 2009-10 was the final year of NRC’s organizational strategy Science at Work for Canada. Under the leadership of NRC’s new President, work is underway to develop a new strategic plan for the organization that will position NRC as a key S&T leader in Canada. Emphasis will be placed on creating significant benefits for Canadians in the form of competitive technologies, new jobs, sustainable industries and growing sales and exports, while supporting the health of Canadians and the environment.
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. Furthermore, NRC’s parliamentary appropriations have decreased over previous years, with the exception of 2009-10 given funds received from Canada’s Economic Action Plan.
The following illustrates NRC’s available parliamentary appropriations over the past three fiscal years, which include the Main Estimates, the Supplementary Estimates, Transfers, Adjustments and Warrants. The following table excludes statutory appropriations (representing Spending of revenues pursuant to paragraph 5 (1) e of the National Research Council Act, Contributions to employee benefit plans, Spending proceeds from the disposal of surplus Crown assets, Collection agency fees and Losses on foreign exchange).
The $138.2 million increase in 2009-10 to $765.8 million from $627.6 million is mainly related to funding received from Canada’s Economic Action Plan. Without these elements, NRC’s available parliamentary appropriations would have been consistent with the previous fiscal year at $625.8 million with $43.9 million in capital expenditures, $147.1 million in grants and contributions, and $434.8 million in operating expenditures.
Furthermore, NRC owns and manages 189 specialized buildings and facilities across Canada that comprise approximately 560,907 square meters of space. It also has an equipment and informatics base of $609.7 million in cost, with $199 million in net book value ($594 million in cost, with $202.7 million in net book value in 2008-09). NRC’s capacity to fund the upgrade or replacement of these assets from its appropriations is limited, and as a result may need to secure sources of funding external to NRC for this purpose given the results of the Building Condition Assessment study performed in 2008 which concluded funding requirements of $170 million.
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 specified purposes for a limited period of time with the option for renewal. Renewal is conditional on various factors, including performance, achieving desired objectives, linkages to priorities, and availability of funds.
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 numerous initiatives and projects funded on a sunsetting basis, several of which received renewed intentions of support from the Government in the 2010 Federal Budget. Examples of initiatives on a sunsetting basis include the following:
- Technology Cluster Initiatives: Since its inception in 2000-01, NRC has spent over $550 million in technology cluster initiatives. Although the funding for NRC’s technology cluster initiatives terminated in 2009-10, the 2010 Federal Budget confirmed the federal government’s continued support by outlining a plan to provide NRC with $135 million over two years for this initiative. 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).
- TRIUMF: Although the most recent contribution agreement with TRIUMF (Canada’s National Laboratory for Particle and Nuclear Physics) ended in 2009-10, the 2010 Federal Budget outlined the Government’s intention to contribute an additional $222 million for TRIUMF’s operational costs over the next five years. Since NRC’s involvement in 1976, NRC has provided over $900 million in funding to TRIUMF, with $44 million provided in 2009-10.
- Genomics R&D Initiatives: 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 $59.7 million until 2010-11. NRC’s portion is $18 million ($6 million in each of 2008-09, 2009-10, and 2010-11). 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.
Foreign Currency: NRC purchased over $56 million in goods and services in currencies other than the Canadian dollar in 2009-10 and has for several years, which exposes NRC to an element of risk due to fluctuations in foreign exchange. Every year, the most significant amount (94% in 2009-10) of purchases in foreign currencies is completed in US dollars. Due to the strength of the CDN dollar over the US dollar in 2009-10, NRC’s purchasing power has increased by approximately $1.4 million US when compared to 2008-09 levels.
In addition, NRC received $33.4 million CDN in receipts from foreign currencies in 2009-10, of which $31 million was received in US currency, compared to $47.8 million CDN received in 2008-09. Consequently, the significant decrease in US currency receipts provided a foreign exchange hedge of only 58%, compared to the 87% achieved in the previous year.
Dependence on Revenue: The nature of NRC’s activities permits NRC to generate revenues which it can use 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 2009-10, this percentage has climbed to 25%, which represents a 4% increase from the average previous four fiscal years. The increase mainly results from NRC’s use of revenue based funding to support its operations from $87.2 million in 2008-09 to $110.2 million in 2009-10.
In particular, NRC maintains technology centres that rely on external sources of revenue to fund their operations, namely 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 48% (52% in 2008-09) and 30% (33% in 2008-09) of their operations, respectively. Significant downturns in the industries or federal departments that these groups support could 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 contracts could compromise NRC’s advanced knowledge and technology base, which in the long-term could 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. Furthermore, too much focus on research may compromise NRC’s ability to reinvest in itself.
The following is an analysis that explains the meaning of main items appearing on the financial statements, significant variances, and financial trends.
Due from Consolidated Revenue Fund (CRF): This account represents the amount of cash that NRC is entitled to withdraw 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 was $197.4 million as at March 31, 2010, up from $189.3 million as at March 31, 2009. The $8.1 million increase largely results from a $27.6 million increase in accounts payable and accrued liabilities which are funded by 2009-10 appropriations, a $3.6 million increase in specified purpose account funding, offset by $23.6 million decrease in revenue available for use in subsequent years.
Accounts Receivable: Accounts receivable and advances totalled $18.9 million as at March 31, 2010, a $7.8 million decrease from 2009, is broken down in Note 4 to the financial statements. The two main categories within this line item are receivables from external parties and repayable contributions:
Receivables from external parties
NRC had accounts receivable with external clients worth $15.4 million as at March 31, 2010 ($21.7 million - 2009) with a corresponding allowance for doubtful accounts equal to $856 thousand ($804 thousand - 2009). Write-offs in 2009-10 were $689 thousand ($755 thousand in 2008-09), which is low given the total value of NRC’s external revenues. The sizeable decrease of 29% in accounts receivable from external parties follows the lower level of revenue generated from total sales of goods and services in the year and the more recent loss in sales generated by NRC-CISTI given its transition to an alternative service delivery model occurring in 2010-11.
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 conditionally repayable 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. Although no new contributions have been made since 2008-09, the wind down phase will require the collection of the repayable contributions over the next several years as per repayable contribution agreements in place and conditions therein.
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 approximately 33% of contributions disbursed as at March 31, 2010 (29% as at March 31, 2009). With 215 (239 as at March 31, 2009) projects still being administered, this percentage is expected to increase over the next decade. The NRC-IRAP TPC accounts receivable as at March 31, 2010 was $10.6 million ($13.4 million - 2009) with a corresponding allowance for doubtful accounts of $8.6 million ($11.6 million - 2009), highlighting the high-risk nature of the program.
Aged Accounts Receivable
In 2009-10, 62% (74% in 2008-09 and 80% in 2007-08) of accounts receivable are aged 90 days or below. The significant decrease in the value of receivables aged 90 days or below is due to a decrease in revenue generated by NRC. The increase in receivables aged over 180 days’ results from two receivables with clients under the NRC-IRAP TPC repayable contribution program which account for over $2.4 million of the balance.
The aging of all accounts receivable, gross of allowances, as at March 31 is as follows:
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. NRC’s equity investments decreased from $659 thousand to $252 thousand in 2009-10 following the sale of its equity positions in 5 companies, realizing $3 million in net gains.
The following table represents an overview of NRC’s 2009-10 equity holdings and disposal transactions.
|Company||Opening balance (in dollars)||Book value of equity investments sold during the year (in dollars)||Closing balance (in dollars)||Proceeds from sale of equity investments (in dollars)||Gain (loss) on sale of equity investments (in dollars)|
|Luxell Technologies Inc.||14,487||(14,487)||-||24,144||9,657|
|Pure Energy Visions Corp.||1||(1)||-||70,534||70,533|
|Privately held Corporations||14||(1)||13||5,000||4,999|
|Omnitech Consultant Group Inc.||1||-||1||-||-|
|Cequence Energy Ltd.||1||-||1||-||-|
NRC’s intention is to eventually liquidate the remaining equity positions, when conditions permit.
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 2009-10, NRC provided a grant totalling $117 thousand to the recipient of the 2009 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 in Cambridge, Massachusetts to explore cellular processes leading to cholera, a severe diarrheal disease that afflicts or kills many in developing countries.
The endowment fund reached a fair market value of $4.7 million as at March 31, 2010 ($4.6 million as at March 31, 2009). The investments within the portfolio had an average effective return of 5.07%. The endowment fund is presented at an amortized cost of $4.5 million ($4.4 million as at March 31, 2009) on the Statement of Financial Position and not at fair value.
Prepaid Expenses: NRC’s prepaid expenses as at March 31, 2010 were $10.3 million ($12.1 million as at March 31, 2009). The decrease of $1.8 million is mainly attributable to a significant reduction in scientific journal subscriptions within the NRC Canada Institute for Scientific and Technical Information (NRC-CISTI), which reduced its prepaid expenses from $6.3 million to $ 4.3 million. Subscriptions form the primary component of NRC’s prepaid expenses. Canada’s science library subscribes to many of the world’s major scientific and technical journals and databases, and is in the midst of restructuring following the previously mentioned Strategic Review.
Other prepaid expenses include various items such as software license and maintenance, travel and conference reservations, rental fees and security deposits.
Tangible Capital Assets: NRC’s tangible capital asset net book value has decreased from $583.1 million in 2008-09 to $579.1 million in 2009-10. Total tangible capital asset acquisitions totalled $66.9 million, amortization totalled $67.9 million, and net assets transferred, disposed or written-off were $3 million, of which $874 thousand relates to a transfer to inventory for resale.
NRC spent $66.9 million on capital expenditures during 2009-10, including $8.7 million received in funding for the modernization of federal laboratories. This is a slight increase from the $62.6 million spent in 2008-09. Of the $66.9 million in tangible capital asset additions, $26.3 million or 39% relate to purchases of machinery and equipment. The remaining balance is primarily made up of assets under construction ($24 million or 36%) as well as investments in NRC buildings and facilities ($8.4 million or 13%).
The following represents significant tangible capital assets expenditures in 2009-10:
- NRC spent $8.7 million in 2009-10 on specific recapitalization needs of multiple buildings and facilities located across the country. NRC received this extra funding in 2009-10 under the Federal Government’s Modernization of Federal Laboratories initiative. A significant portion of these projects are ongoing and will be completed in 2010-11 with additional funding received under this initiative. The nature of recapitalization and deferred maintenance work completed in 2009-10 varies by infrastructure and includes: upgrades to laboratories to accommodate new equipment, improvements to temperature and humidity controls, replacement of windows, roofing material, electrical and mechanical systems. One significant project includes a $2 million investment on HVAC and emergency system upgrades to improve the performance and efficiency of the Nanofab cleanroom facility at NRC’s Institute for Molecular Sciences (NRC-IMS).
- NRC-IMS also invested $1.5 million to acquire and develop a high-performance evaporation system equipped with e-beam, thermal evaporation sources and an ion-assisted gun. The system will be used for deposition of materials and coatings for mid-IR applications.
- NRC’s National Institute for Nanotechnology (NRC-NINT) incurred $1.3 million to construct the Hitachi Electron Microscopy Innovation Centre (HEMiC) facility which will house three (3) new electron microscopes. The HEMiC program was launched to develop state-of-the-art electron emitters and enable NRC-NINT to develop new approaches to solve industrial problems, enable technology advances and commercialization opportunities for clients and collaborators, as well as draw new partners to the organization.
- NRC’s Corporate Branches incurred $1.3 million in 2009-10 to continue with the development of an integrated reporting tool referred to as Business Intelligence (BI). The reporting tool will be used across the NRC to provide timely financial and non-financial information to stakeholders.
- $1.2 million in tangible capital investment costs were incurred in 2009-10 for NRC’s Information Management Services Branch (NRC-IMSB) to update its server facility to accommodate new Direct Digital Control (DDC) capabilities across NRC buildings within the National Capital Region (NCR). This project will provide building operators with the ability to monitor, control, alarm, and diagnose building equipment such as heating, ventilation and air conditioning remotely.
- NRC’s Institute for Chemical Process and Environmental Technology (NRC-ICPET) continued its tangible capital asset project to construct an Analytical High Resolution Transition Electron Microscope to meet current leading edge research requirements for imaging and analytical characterization of organic and inorganic materials. To date, NRC-ICPET has spent over $3.2 million on this project, for which $1.2 million was spent in 2009-10.
- NRC’s Biotechnology Research Institute (NRC-BRI) invested over $1.1 million in 2009-10 for the construction of a new laboratory for research and development activities related with the production of methane and hydrogen from vegetable produce.
- NRC’s Institute for Aerospace Research (NRC-IAR) incurred over $900 thousand in 2009-10 for a total project cost of $1.5 million to construct an Optically Accessible High Pressure Combustion Rig to test combustion systems in a detailed and non-intrusive manner under realistic gas turbine operating conditions. This facility will be used to support multiple research and development projects, including joint-research, and is considered a key asset for NRC’s advanced combustion test cells.
The following diagram depicts NRC’s distribution of tangible capital asset acquisitions over the last two fiscal years.
Accounts Payable and Accrued Liabilities: NRC’s accounts payable and accrued liabilities as at March 31, 2010 were $144.3 million ($128.8 million as at March 31, 2009). The increase of $15.5 million is mainly due to a significant increase of $25.6 million in payables to suppliers and an $11.4 million increase in payables to other government departments, offset by a $19.1 million decrease in accrued salaries and wages and a $2.3 million decrease in environmental liabilities.
The $25.6 million increase in payables to suppliers and contribution recipients is primarily explained by the additional appropriations received by NRC in 2009-10 for IRAP contributions and infrastructure funding. The $11.4 million increase in payables to other Federal Government departments and agencies is due to an $11.7 million increase in payables for NRC’s portion of employee benefits following the payment of retroactive salaries in 2009-10.
NRC’s accrued salaries, which represents salary earned by personnel as at March 31, 2010 for which they have not received payment, decreased by $19.1 million in comparison with the previous year. A retroactive salary adjustment of $13.7 million was recorded in 2008-09 due to the ongoing negotiations of collective agreements governing a majority of NRC’s employment force. The remaining difference of $5.4 million is primarily explained by a decrease in accrued salaries at year-end given the last pay period of the year coincided with March 31st, which was offset by an allowance recorded for termination benefits due to NRC’s strategic review.
NRC’s environmental liabilities have decreased by $2.3 million from $4.2 million in 2008-09, the decrease represents costs of restorations incurred by NRC during the year. In addition to the liability of $1.9 million as at March 31st, NRC has disclosed a contingent liability in the Notes to the Financial Statements as a result of initial testing performed in 2009-10 on suspected sites. NRC has not recorded a liability for these additional sites in its financial statements given that NRC is currently unable to determine if the sites are likely to require restoration. NRC will continue its restoration and management of existing sites in 2010-11 with funding provided by the Government through the Accelerated Federal Contaminated Sites Action Plan. In addition, NRC will complete detailed testing in 2010-11 on research sites disclosed as contingent liabilities within the Notes to the Financial Statements in order to develop a proper course of action to address existing concerns.
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. However, as a result of collective agreement negotiations finalized in 2009-10, vacation pay and compensatory leave have decreased by $5.9 million in 2009-10 due to additional restrictions imposed on carry-over conditions and management oversight activities taken to manage outstanding vacation liabilities.
Employee Future Benefits: Employee future benefits represent an allowance for severance benefits payable to employees upon termination of employment with the public service. The allowance for employee future benefits is established at year end from the total annual salary cost of NRC’s indeterminate employees. The decrease of $6.1 million results from a 3.65% decrease in the rate used by Government Departments to accrue their portion of the allowance offset by the natural rise in employment wages applicable to NRC’s continuing workforce.
Deferred Revenue: Deferred revenue totalled $79.5 million as at March 31, 2010 as compared to $77.2 million in 2009, and is broken down in Note 9 of the financial statements.
Contributions Related to Leased Tangible Capital Assets
Deferred revenue for contributions related to leased tangible capital assets result from tangible capital assets provided to NRC under a lease agreement with monetary consideration below fair market value. The contributions related to leased tangible capital assets is associated with leases of facilities for $1 per year with the University of Western Ontario to accommodate NRC’s Industrial Materials Institute (NRC-IMI) and NRC’s Institute for Research Construction (NRC-IRC), the University of Alberta to accommodate NRC-NINT, and the University of Prince Edward Island to accommodate NRC’s Institute for Marine Biosciences (NRC-IMB).
When new capital leases are recognized, NRC will establish a non-financial tangible capital asset as well as corresponding deferred revenue equal to the fair market 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. As at March 31, 2010 this balance was $50.6 million ($53.1 million as at March 31, 2009). The balance decreased by $2.5 million in the current year to account for revenue 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 the funds will be expended in the coming year(s) on the project. At the end of 2009-10, this amount totalled $20.6 million ($17.1 million as at March 31, 2009), representing an increase of 20% over the previous year. This increase is largely due to a $1.7 million and a $790 thousand increase in unspent funds received by NRC-NINT and NRC-IMI, respectively during 2009-10 as a result of significant joint projects and cost sharing agreements.
NRC had other deferred revenues of $8.3 million as at March 31, 2010 ($7 million as at March 31, 2009). Other deferred revenue consists primarily of Research Press subscriptions at $4.7 million ($5.7 million in 2008-09), conference and seminar registration at $1.3 million ($375 thousand in 2008-09), and funds received in advance in accordance with the sale of specialized inventory at $1 million.
- 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. Deferred revenue from research press has diminished in 2009-10 given the upcoming transformation in 2010-11, and will no longer appear in the NRC financial statements in the future as this activity will be borne by the new service provider.
- 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 from conference and seminar registration has increased in 2009-10 given NRC’s involvement with the upcoming 2010 World Tunnel Congress held in Vancouver, British Columbia.
- Sale of specialized inventory: NRC was contracted in 2008 to design and build specialized equipment used by the astronomy industry. The deferred revenue recorded in 2009-10 results from cash received to date in accordance with contract milestones. The legal transfer of ownership is scheduled to take place in 2010-11, at which point NRC will recognize the balance as revenue earned.
NRC’s total revenues were $169.6 million in 2009-10, compared to $156.2 million in 2008-09. Recent trends in revenue components are shown in the following chart. Despite the fact that NRC’s total revenue increased in 2009-10, NRC’s revenue from normal operations actually decreased by $5.7 million as discussed in the Highlights section.
Services of a Non-Regulatory Nature: In 2009-10, 29% or $49.6 million (42% or $65.6 million in 2008-09) 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. As discussed in the Highlights section the primary causes for the decrease of $16 million are largely attributable to the global economic downturn and the transformation of NRC-CISTI. More specifically NRC-CISTI experienced a $4.4 million decrease, three (3) IBP’s have had a decrease of more than $1.5 million and two (2) IBP’s have had a drop of more than $1 million in services of non-regulatory nature. The main cause of the $4.4 million decrease at NRC-CISTI is due to clients transitioning to new suppliers prior to the full implementation of the alternative service delivery model. The remaining decrease in services of a non-regulatory nature is due to multiple IBP’s experiencing a reduction in revenue in 2009-10.
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 $11.7 million in 2009-10, as compared to $11.3 million in 2008-09. The largest component of revenue derived from the sale of goods and information products are research press journals sold through Canada’s scientific library. Research press income earned in 2009-10 was $8 million, compared to $7.2 million in 2008-09.
Rights and Privileges: Royalty revenue is earned from companies that license the rights to use NRC technologies. Royalties are typically based on a percentage of the licensee’s sales. In 2009-10, NRC generated $8.9 million in royalties, down slightly from $9.6 million in 2008-09. The main contributor of revenue earned from this income stream is NRC’s Institute for Biological Sciences (NRC-IBS) which generates over $4 million annually in royalties.
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 $4.4 million in 2009-10, compared to $4.3 million in 2008-09. The year over year consistency demonstrates NRC’s ability to continuously attract external stakeholders to utilize NRC facilities, laboratories and research equipment.
Financial Arrangements with Other Government Departments and Agencies: NRC undertakes research and administers funding on behalf of other federal government departments through NRC programs. The incremental costs associated with this work are reimbursed to NRC. In 2009-10, the amount of work undertaken for other government departments was significant, totalling $70.3 million ($46.1 million in 2008-09). Excluding the effect of transfer payment programs administered by NRC on behalf of Industry Canada (CAF and TPC), which increased by $16.3 million in 2009-10, financial arrangements with other government departments and agencies have increased by $7.9 million. Of this amount, $5.3 million is a result of additional work completed by NRC-CSTT as explained in the Highlights section, with the remainder spread across multiple IBP’s.
Revenues from Joint Project and Cost Sharing Agreements: NRC receives income in the course of collaborative research projects that involve cost sharing arrangements for work that is likely to lead to new expertise or technology. In 2009-10, collaborative funding across all sectors at NRC earned $18.7 million ($16.2 million in 2008-09). Revenue from joint research projects are recognized in accordance with expenses or until the project is complete. Consequently, revenues fluctuate as NRC resources are dedicated and used to deliver the terms set out in each agreement. As such, the increase achieved in 2009-10 on revenues from joint projects and cost sharing agreements demonstrate NRC’s progress and additional resources dedicated to such projects over the previous fiscal year.
As noted in the Highlights section, NRC’s expenses increased from $899.4 million in 2008-09 to $1.033 billion in 2009-10. The two major categories of expenses are salaries and employee benefits (45% of total expenses in 2009-10, 51% in 2008-09) and grants & contributions (27% of total expenses in 2009-10, 15% in 2008-09).
Salaries and Employee Benefits: Salaries and employee benefits include such costs as gross salaries and wages, overtime pay, retroactive salary adjustments, employee entitlements and allowances, severance pay, pension and medical benefits. Total NRC salaries and employee benefits have increased by $5.2 million in 2009-10, from $463.1 million in 2008-09 to $468.3 million in 2009-10. As discussed in the Highlights section, the main cause of this increase is due to the employee collective bargaining agreements which increased NRC’s overall salary wage envelope and increased employment benefit charges allocated to NRC in 2009-10 given that retroactive payments were provided during the year. NRC also recorded a non-recurring one-time charge for anticipated termination benefits as a result of NRC’s 2008 Strategic Review. These elements were offset by a one-time retroactive pay charge for salaries in 2008-09, a decrease in employee severance benefits and the moratorium on external hiring implemented by NRC in 2009-10 to control expenditure growth.
Grants and Contributions: Grants and contributions increased significantly by $148.6 million in 2009-10, from $132.6 million in 2008-09 to $281.2 million in 2009-10. As mentioned in the Highlights section, this increase is directly related to additional contributions funding from Canada’s Economic Action Plan which provided NRC with additional funds to support small and medium-sized enterprises with their innovation efforts through the NRC-IRAP.
The following chart illustrates NRC’s net grants and contributions categorized by major program.
Utilities, Materials and Supplies: Utilities, materials and supplies include expenditures such as electricity, natural gas, serial renewals, electronic data processing (EDP) equipment with cost under $5,000, fuel, software, laboratory equipment and laboratory products. Utilities, material and supply costs decreased by $5.6 million from $89.6 million in 2008-09 to $84 million in 2009-10. The decrease primarily results from a $3.4 million decrease in natural gas expenses given reduced consumption and cost levels as well as a $1.1 million decrease in serial renewals due to cost reduction measures taken by NRC-CISTI and the strong CDN dollar.
Amortization: Tangible capital assets are expected to yield benefits over several accounting periods. As such, NRC’s use of these assets to provide services is recognized on a straight-line basis over the estimated useful life of each asset class. This cost, which reached $67.9 million in 2009-10 ($69.4 million in 2008-09), is referred to as amortization.
Professional and Special Services: Professional and special services decreased by $6.1 million in 2009-10, from $60.1 million in 2008-09. The 10% decrease was mainly caused by the recognition of an environmental liability in 2008-09 in the amount of $4.1 million. As discussed in the accounts payable and accrued liabilities section, $2.3 million in restoration costs were incurred by NRC in 2009-10 to reduce previously recognized environmental liabilities. The remaining amount results from expenditure restraint measures implemented by NRC in 2009-10.
Transportation and Communication: Transportation and communication expenses decreased by $5.7 million in 2009-10, down from $30 million in 2008-09. The 19% decrease is mainly attributable to NRC’s effort of reducing travel costs, achieving $5.5 million in cost avoidance in 2009-10. In addition to travel restrictions imposed internally, the 2009 Federal Budget imposed a two year travel expenditure ceiling, capped at 2008-09 levels, on all federal departments and agencies. The decrease in transportation and communication spending is expected to remain at lower levels in the future.
Repairs and Maintenance: NRC has a significant amount of tangible capital investments, such as buildings, facilities, and research equipment. The repair and maintenance costs incurred of $18.6 million in 2009-10 ($17.4 million in 2008-09) represent expenditures related with the maintenance of such assets. The increase of $1.2 million or 7% is mainly due to an increase in aircraft repair costs.
Bad Debts: NRC’s bad debt expense decreased from $9.1 million in 2008-09 to $6 million in 2009-10. The decrease of $3.1 million is largely related to a decrease of $2.9 million in the allowance for doubtful accounts on outstanding receivables under the NRC-IRAP TPC program.
Other: Other expenses of $13.9 million ($13.5 million in 2008-09) include, but are not limited to rental charges of $4.9 million ($5.1 million in 2008-09), losses on disposal of tangible capital assets of $2.2 million ($1.1 million in 2008-09) and award costs of $3.1 million ($2.3 million in 2008-09).
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