Exhibit 1.2




CONSOLIDATED FINANCIAL STATEMENTS





Report of Independent Registered Accounting Firm on Internal Control





To the Shareholders and Board of Directors of Nordion Inc.





We have audited Nordion Inc.’s internal control over financial reporting as of October 31, 2011, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria).  Nordion Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s annual report on internal control over financial reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.





We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.





A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.





Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.





A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment. Nordion Inc.did not maintain effective internal control over financial reporting in the accounting for income taxes principally related to historical transactions and tax positions.  Specifically, management did not complete a process of evaluating the accounting and reporting of its income tax accounts based on the complex transactions principally arising from prior years.





We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial position of Nordion Inc. as of October 31, 2011 and 2010 and the related consolidated statements of operations, shareholders’ equity, comprehensive income (loss) and cash flows for each of the three years in the period ended October 31, 2011. This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the 2011 financial statements and this report does not affect our report dated December 13, 2011, which expressed an unqualified opinion on those financial statements.





In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, Nordion Inc. has not maintained effective internal control over financial reporting as of October 31, 2011, based on the COSO criteria.







/s/ Ernst & Young LLP


Chartered Accountants


Licensed Public Accountants





Ottawa, Canada


December 13, 2011








Nordion Inc. Fiscal 2011 Annual Report
 1








CONSOLIDATED FINANCIAL STATEMENTS





Independent Auditors’ Report of Registered Public Accounting Firm





To the Shareholders of Nordion Inc.





We have audited the accompanying consolidated financial statements of Nordion Inc., which comprise the consolidated statements of financial position as at October 31, 2011 and 2010, and the consolidated statements of operations, shareholders' equity, comprehensive income (loss) and cash flows for each of the years in the three-year period ended October 31, 2011, and a summary of significant accounting policies and other explanatory information.





Management's responsibility for the consolidated financial statements


Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with United States generally accepted accounting principles, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.





Auditors’ responsibility


Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.





An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.


We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.





Opinion


In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Nordion Inc. as at October 31, 2011 and 2010, and the results of its operations and its cash flows for each of the years in the three-year period ended October 31, 2011 in accordance with United States generally accepted accounting principles.





Other matter


We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Nordion Inc.'s internal control over financial reporting as of October 31, 2011, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated December 13, 2011 expressed an opinion that Nordion Inc. has not maintained effective internal control over financial reporting as of October 31, 2011.








/s/ Ernst & Young LLP


Chartered Accountants


Licensed Public Accountants








Ottawa, Canada


December 13, 2011








Nordion Inc. Fiscal 2011 Annual Report
 2








CONSOLIDATED STATEMENTS OF FINANCIAL POSITIONAs of October 31



(thousands of U.S. dollars, except share amounts)

2011


2010ASSETSCurrent assetsCash and cash equivalents

$
74,067


$
122,802Accounts receivable (Note 4)


38,999



40,471Notes receivable (Notes 9(b) and 9(c))


16,061



16,976Inventories (Note 5)


30,595



26,583Income taxes recoverable (Note 20)


22,857



20,948Current portion of deferred tax assets (Note 20)


7,661



6,105Other current assets (Note 7)


13,842



12,336Assets of discontinued operations (Note 3)


936



11,721Total current assets


205,018



257,942Property, plant and equipment, net (Note 6)


97,690



110,274Deferred tax assets (Note 20)


73,237



80,725Long-term investments (Note 8)


1,473



4,051Other long-term assets (Note 9)


81,245



111,029Total assets

$
458,663


$
564,021LIABILITIES AND SHAREHOLDERS’ EQUITYCurrent liabilitiesAccounts payable

$
13,661


$
13,969Accrued liabilities (Note 11)


52,914



78,057Income taxes payable (Note 20)


13,607



10,065Current portion of long-term debt (Note 12)


4,156



4,050Current portion of deferred revenue(Note 13)


1,820



7,542Liabilities of discontinued operations (Note 3)


4,079



24,052Total current liabilities


90,237



137,735Long-term debt (Note 12)


40,174



40,100Deferred revenue (Note 13)


3,855



9,431Other long-term liabilities (Note 14)


39,619



39,166Total liabilities


173,885



226,432Shareholders’ equityCommon shares at par – Authorized shares: unlimited;  Issued and outstanding shares:  62,378,521 and 67,238,253, respectively; (Note 16)


254,076



273,859Additional paid-in capital


83,159



81,909Accumulated deficit


(216,789
)


(192,539
)Accumulated other comprehensive income


164,332



174,360Total shareholders’ equity


284,778



337,589Total liabilities and shareholders’ equity

$
458,663


$
564,021





Commitments and contingencies (Note 25)


The accompanying notes form an integral part of these consolidated financial statements.







On behalf of the Board:/s/ William D. Anderson
/s/ Robert W. LubaWilliam D. Anderson,
Robert W. Luba,Chairman, Board of Directors
Chairman, Finance and Audit Committee







Nordion Inc. Fiscal 2011 Annual Report
 3








CONSOLIDATED STATEMENTS OF OPERATIONSYears ended October 31



(thousands of U.S. dollars, except per share amounts)

2011


2010

2009Revenues

$
274,027


$
221,968

$
211,697Costs and expensesDirect cost of revenues


126,076



104,677


96,035Selling, general and administration


65,107



100,286


75,240Depreciation and amortization


22,375



28,514


22,680Restructuring charges, net (Note 18)


1,592



62,531


9,306Change in fair value of embedded derivatives (Note 17)


(2,649
)


(13,050
)

(7,922
)Other expenses, net (Note 19)


8,549



25,057


9,157Total costs and expenses


221,050



308,015


204,496Operating income (loss) from continuing operations


52,977



(86,047
)

7,201Interest expense


(2,499
)


(5,522
)

(2,754
)Interest income


10,274



8,590


7,445Equity loss (Note 8)


(128
)


(650
)

(49
)Income (loss) from continuing operations before income taxes


60,624



(83,629
)

11,843Income tax expense (recovery) (Note 20)-current


13,456



(8,306
)

14,387-deferred


3,666



8,493


1,64517,122



187


16,032Income (loss) from continuing operations


43,502



(83,816
)

(4,189
)Loss from discontinued operations, net of income taxes(Note 3)


(26,655
)


(148,194
)

(131,052
)Net income (loss)

$
16,847


$
(232,010
)
$
(135,241
)Basic and diluted income (loss) per share(Note 15)- from continuing operations

$
0.67


$
(0.94
)
$
(0.03
)- from discontinued operations


(0.41
)


(1.66
)

(1.09
)Basic and diluted income (loss) per share

$
0.26


$
(2.60
)
$
(1.12
)





The accompanying notes form an integral part of these consolidated financial statements








Nordion Inc. Fiscal 2011 Annual Report
 4








CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY


Common Shares(thousands of U.S. dollars)

Number


Amount


Additional

Paid-in

Capital


Accumulated (Deficit) Retained

Earnings


Accumulated

Other

Comprehensive Income


TotalBalance as of October 31, 2008


120,137


$
488,908


$
74,894


$
300,777


$
224,534


$
1,089,113Net loss


-



-



-



(135,241
)


-



(135,241
)Other comprehensive income


-



-



-



-



34,890



34,890Stock-based compensation


-



-



3,975



-



-



3,975Other


-



(100
)


(419
)


1,693



-



1,174Balance as of October 31, 2009


120,137



488,808



78,450



167,229



259,424



993,911Net loss


-



-



-



(232,010
)


-



(232,010
)Other comprehensive income


-



-



-



-



21,788



21,788Repurchase and cancellation of Common shares


(52,941
)


(215,304
)


-



(127,844
)


(106,852
)


(450,000
)Stock options exercised


42



327



-



-



-



327Stock-based compensation


-



-



3,538



-



-



3,538Other


-



28



(79
)


86



-



35Balance as of October 31, 2010


67,238



273,859



81,909



(192,539
)


174,360



337,589Net income


-



-



-



16,847



-



16,847Other comprehensive income


-



-



-



-



731



731Repurchase and cancellation of Common shares


(4,860
)


(19,775
)


-



(21,864
)


(10,759
)


(52,398
)Dividends declared


-



-



-



(19,244
)


-



(19,244
)Stock-based compensation


-



-



1,250



-



-



1,250Other


-



(8
)


-



11



-



3Balance as of October 31, 2011


62,378


$
254,076


$
83,159


$
(216,789
)

$
164,332


$
284,778





The accompanying notes form an integral part of these consolidated financial statements.








CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)





Years ended October 31(thousands of U.S. dollars)

2011


2010

2009Net income (loss)

$
16,847


$
(232,010
)
$
(135,241
)Foreign currency translation


10,959



203,227


39,400Reclassification of realized foreign currency translation gain on divestitures


(4,629
)


(42,122
)

(12,065
)Unrealized gain on net investment hedge, net of tax of $nil (2010 ― $nil; 2009 ― $(3,688))


-



2,400


19,957Realized gain on net investment hedge due to divestitures, net of tax of $nil

(2010 ― $16,271; 2009 ― $nil)


-



(130,367
)

-Unrealized gain on available-for-sale assets, net of tax of $(82)

(2010 ― $(123); 2009 ― $nil)


1



485


-Reclassification of realized gain on available-for-sale assets, net of tax of $180

(2010 ― $nil; 2009 ― $nil)


(1,512
)


-


-Reclassification of realized loss on derivatives designated as cash flow hedges, net of tax of

$nil (2010 ― $nil; 2009 ― $(2,318))


-



-


4,727Unrealized gain on derivatives designated as cash flow hedges, net of tax of $(14) (2010 ― $nil; 2009 ― $(586))


41



-


1,432Pension liability adjustments,net of tax of $1,544 (2010 ― $2,532; 2009 ― $5,580)


(4,129
)


(11,869
)

(13,300
)Other


-



34


(5,261
)Other comprehensive income


731



21,788


34,890Comprehensive income (loss)

$
17,578


$
(210,222
)
$
(100,351
)





The accompanying notes form an integral part of these consolidated financial statements.








Nordion Inc. Fiscal 2011 Annual Report
 5








CONSOLIDATED STATEMENTS OF CASH FLOWSYears ended October 31



(thousands of U.S. dollars)

2011


2010

2009Operating activitiesNet income (loss)

$
16,847


$
(232,010
)
$
(135,241
)Loss from discontinued operations, net of income taxes


(26,655
)


(148,194
)

(131,052
)Income (loss) from continuing operations


43,502



(83,816
)

(4,189
)Adjustments to reconcile net loss to cash provided by (used in) operating activities relating to continuing operations (Note 21):Items not affecting current cash flows


27,063



72,644


27,480Changes in operating assets and liabilities


(33,456
)


(48,754
)

75,026Cash provided by (used in) operating activities of continuing operations


37,109



(59,926
)

98,317Cash (used in) provided by operating activities of discontinued operations


(18,592
)


(73,499
)

78,578Cash provided by (used in) operating activities


18,517



(133,425
)

176,895Investing activitiesPurchase of property, plant and equipment


(6,732
)


(7,251
)

(8,853
)Proceeds on sale of long-term investments


1,668



10,552


-Decrease (increase) in restricted cash


26,592



(16,147
)

(4,336
)Cash provided by (used in) investing activities of continuing operations


21,528



(12,846
)

(13,189
)Cash (used in) provided by investing activities of discontinued operations


(18,412
)


633,167


10,131Cash provided by (used in) investing activities


3,116



620,321


(3,058
)Financing activitiesRepayment of long-term debt


-



(221,456
)

(6,237
)Issuance of shares


-



327


-Payment of cash dividends


(19,244
)


-


-Repurchase and cancellation of Common shares


(52,398
)


(450,000
)

-Cash used in financing activities of continuing operations


(71,642
)


(671,129
)

(6,237
)Cash used in financing activities of discontinued operations


(1,193
)


(298
)

(5,499
)Cash used in financing activities


(72,835
)


(671,427
)

(11,736
)Effect of foreign exchange rate changes on cash and cash equivalents


2,467



9,130


19,050Net (decrease) increase in cash and cash equivalents during the year


(48,735
)


(175,401
)

181,151Cash and cash equivalents, beginning of year


122,802



298,203


117,052Cash and cash equivalents, end of year

$
74,067


$
122,802

$
298,203Cash interest paid

$
2,479


$
32,476

$
15,045Cash taxes (refunded) paid

$
(2,775
)

$
526

$
(7,000
)





The accompanying notes form an integral part of these consolidated financial statements.








Nordion Inc. Fiscal 2011 Annual Report
 6





Notes to Consolidated Financial Statements


[All amounts in thousands of U.S. dollars, except where noted]





1.
Nature of Operations





Nordion Inc. (Nordion or the Company) is a global health science company that provides market-leading products and services used for the prevention, diagnosis and treatment of disease. The Company’s operations are organized into three business segments: Targeted Therapies, Sterilization Technologies and Medical Isotopes as well as certain corporate functions and activities reported as Corporate and Other.





2.
Summary of Significant Accounting Policies




Basis of presentation




The consolidated financial statements have been prepared in United States (U.S.) dollars, the Company’s reporting currency, and in accordance with U.S. generally accepted accounting principles (GAAP) applied on a consistent basis.





Principles of consolidation


The consolidated financial statements of the Company reflect the assets and liabilities and results of operations of all subsidiaries and entities of which the Company is the primary beneficiary. All significant intercompany accounts and transactions have been eliminated. The results of operations disposed of are included in the consolidated financial statements up to the date of disposal.





The equity method of accounting is used for investments in entities for which the Company does not have the ability to exercise control, but has significant influence.





Use of estimates


The preparation of the consolidated financial statements requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. The Company’s estimates are based on the facts and circumstances available at the time estimates are made, historical experience, risk of loss, general economic conditions and trends, and the Company’s assessments of the probable future outcomes of these matters. Actual results could differ from those estimates. Estimates and assumptions are reviewed periodically, and the effects of changes, if any, are reflected in the consolidated statements of operations in the period in which they are determined.





Cash and cash equivalents


Cash and cash equivalents include cash on hand, balances with banks, demand deposits, and investments with maturities of three months or less at the time the investment is made. The fair value of cash and cash equivalents approximates the carrying amounts shown in the consolidated statements of financial position.





Restricted cash


Restricted cash, which is included in other long-term assets, includes cash held for specific purposes which is not readily available to be used in the Company’s operations related to insurance liabilities.  Historically, restricted cash has also included escrow amounts related to divestitures and collateral for letters of credit issued by the Company.





Allowance for doubtful accounts


The Company maintains an allowance for doubtful accounts based on a variety of factors, including the length of time the receivables are past due, macroeconomic conditions, significant one-time events, historical experience and the financial condition of customers. The Company records a specific reserve for individual accounts when it becomes aware of a customer’s inability to meet its financial obligations, such as in the case of bankruptcy filings or deterioration in the customer’s operating results or financial position. If circumstances related to a customer change, the Company would further adjust estimates of the recoverability of receivables.





Inventories


Inventories of raw materials and supplies are recorded at the lower of cost or market value, determined on a first-in, first-out (FIFO) basis.  Finished goods and work-in-process include the cost of material, labor and manufacturing overhead and are recorded on a FIFO basis at the lower of cost or market. The Company reduces the carrying value of inventories for those items that are potentially excess, obsolete or slow-moving based on changes in customer demand, technology developments or other economic factors.





Property, plant and equipment


Property, plant and equipment, including assets under capital leases, are carried in the accounts at cost less accumulated depreciation.  Gains and losses arising on the disposal of individual assets are recognized in income in the period of disposal.





Nordion Inc. Fiscal 2011 Annual Report
 7





Notes to Consolidated Financial Statements


[All amounts in thousands of U.S. dollars, except where noted]





The costs associated with modifications to facilities owned by others to permit isotope production are deferred and recorded as facility modifications and amortized over the expected contractual production.





Costs, including financing charges and certain design, construction and installation costs, related to assets that are under construction and are in the process of being readied for their intended use are recorded as construction in-progress and are not subject to depreciation.





Depreciation, which is recorded from the date on which each asset is placed into service, is generally provided for on a straight-line basis over the estimated useful lives of the property, plant and equipmentas follows:





Buildings

25 ― 40 yearsEquipment

3 ― 20 yearsFurniture and fixtures

3 ―10 yearsComputer systems

3 ―  7 yearsLeaseholds improvements

Term of the lease plus renewal periods, when renewal is reasonably assured





Asset retirement obligations


The Company records asset retirement obligation costs associated with the retirement of tangible long-lived assets. The Company reviews legal obligations associated with the retirement of these long-lived assets. If it is determined that a legal obligation exists and it is probable that this liability will ultimately be realized, the fair value of the liability for an asset retirement obligation is recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the expected life of the asset. The present value of the asset retirement obligation is accreted with the passage of time to its expected settlement fair value.





Goodwill


Goodwill is not amortized but is tested for impairment, at least annually. The Company tests goodwill during the fourth quarter of each year for impairment, or more frequently if certain indicators are present or changes in circumstances suggest that impairment may exist. The Company first assesses qualitative factors to determine whether it is necessary to perform the two step quantitative goodwill impairment test. If it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, the Company utilizes the two-step quantitative approach.  The first step requires a comparison of the carrying value of the reporting units to the fair value of these units. The Company estimates the fair value of its reporting units through internal analyses and valuation, utilizing an income approach based on the present value of future cash flows. If the carrying value of a reporting unit exceeds its fair value, the Company will perform the second step of the goodwill impairment test to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of a reporting unit’s goodwill with its carrying value. The implied fair value of goodwill is determined in the same manner that the amount of goodwill recognized in a business combination is determined. The Company allocates the fair value of a reporting unit to all of the assets and liabilities of that unit, including intangible assets, as if the reporting unit had been acquired in a business combination. Any excess of the value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill.





Impairment of long-lived assets


The Company evaluates the carrying value of long-lived assets, including property, plant and equipment, for potential impairment when events and circumstances warrant a review. Factors that the Company considers important that could trigger an impairment review include, but are not limited to, significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for the Company’s overall business, significant negative industry or economic trends, a significant adverse legal or regulatory development, a significant decline in the Company’s stock price for a sustained period, and the Company’s market capitalization relative to its net book value. In assessing long-lived assets for impairment, assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities.





The carrying value of a long-lived asset is considered impaired when the anticipated net recoverable amount of the asset is less than its carrying value.  In that event, a loss is recognized in an amount equal to the difference between the carrying value and fair value less costs of disposal by a charge to income.  The anticipated net recoverable amount for a long-lived asset is an amount equal to the anticipated undiscounted cash flows net of directly attributable general and administration costs, carrying costs, and income taxes, plus the expected residual value, if any.





When required, the fair values of long-lived assets are estimated using accepted valuation methodologies, such as discounted future net cash flows, earnings multiples, or prices for similar assets, whichever is most appropriate under the circumstances.





Nordion Inc. Fiscal 2011 Annual Report
 8





Notes to Consolidated Financial Statements


[All amounts in thousands of U.S. dollars, except where noted]





Long-term investments


The Company accounts for long-term investments where it has the ability to exercise significant influence using the equity method of accounting. In situations where the Company does not exercise significant influence over a long-term investee that is not publicly listed, the investments are recorded at cost. Investments in public companies are carried at fair value. The Company periodically reviews these investments for impairment. In the event the carrying value of an investment exceeds its fair value and the decline in fair value is determined to be other than temporary, the Company writes down the value of the investment to its fair value.





Leases


Leases entered into by the Company in which substantially all of the benefits and risks of ownership are transferred to the Company are recorded as obligations under capital leases, and under the corresponding category of property, plant and equipment. Obligations under capital leases reflect the present value of future lease payments, discounted at an appropriate interest rate, and are reduced by rental payments net of imputed interest. Property, plant, and equipment under capital leases are depreciated, to the extent that these assets are in continuing operations, based on the useful life of the asset.  All other leases in continuing operations are classified as operating leases and leasing costs, including any rent holidays, leasehold incentives, and rent concessions, are amortized on a straight-line basis over the lease term.





Revenue recognition


Revenues are recorded when title to goods passes or services are provided to customers, the price is fixed or determinable, and collection is reasonably assured. For the majority of product revenues, title passes to the buyer at the time of shipment and revenue is recorded at that time.





The Company recognizes revenue and related costs for arrangements with multiple deliverables as each element is delivered or completed based upon fair value as determined by vendor-specific objective evidence of selling price or third-party evidence of selling price. If neither vendor-specific objective evidence nor third-party evidence of a selling price is available for any undelivered element, revenue for all elements is calculated based on an estimated selling price method. When a portion of the customer’s payment is not due until acceptance, the Company defers that portion of the revenue until acceptance has been obtained. Revenue for training is deferred until the service is completed.  Revenue for extended service contracts is recognized ratably over the contract period. Provisions for discounts, warranties, rebates to customers, returns and other adjustments are provided for in the period the related sales are recorded.





Warranty costs


A provision for warranties is recognized when the underlying products or services are recorded as revenues. The provision is based on estimated future costs using historical labor and material costs to estimate costs that will be incurred in the warranty period.





Stock-based compensation


The fair value of stock options is recognized as compensation expense on a straight-line basis over the applicable stock option vesting period. The expense is included in selling, general, and administration expenses in the consolidated statements of operations and as additional paid-in capital grouped within shareholders’ equity on the consolidated statements of financial position. The consideration received on the exercise of stock options is credited to share capital at the time of exercise along with the associated amount of additional paid-in capital.





Certain incentive compensation plans of the Company base the determination of compensation to be paid in the future on the price of the Company’s publicly traded shares at the time of payment or time of the grant date. Expenses related to these plans are recorded as a liability and charged to income over the period in which the amounts are earned, based on an estimate of the current fair value of amounts that will be paid in the future.





Pension, post-retirement and other post-employment benefit plans


The Company offers a number of benefit plans that provide pension and other post-retirement benefits. The current service cost of benefit plans is charged to income. Cost is computed on an actuarial basis using the projected benefits method and based on management’s best estimates of investment yields, salary escalation, and other factors.





The Company recognizes the funded status of its defined benefit plans on its consolidated statements of financial position; recognizes gains, losses, and prior service costs or credits that arise during the period that are not recognized as components of net periodic benefit (income) cost as a component of accumulated other comprehensive income, net of tax; measures its defined benefit plan assets and obligations as of the date of the Company’s fiscal year-end consolidated statements of financial position; and discloses additional information in the notes to the consolidated financial statements about certain effects on net periodic benefit (income) cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition assets or obligations.





Nordion Inc. Fiscal 2011 Annual Report
 9





Notes to Consolidated Financial Statements


[All amounts in thousands of U.S. dollars, except where noted]





The expected costs of post-employment benefits, other than pensions, for active employees are accrued in the years in which employees provide service to the Company. Adjustments resulting from plan amendments, experience gains and losses, or changes in assumptions are amortized over the remaining average service term of active employees. Other post-employment benefits are recognized when the event triggering the obligation occurs.





Research and development


The Company conducts various research and development programs and incurs costs related to these activities, including employee compensation, materials, professional services, facilities costs, and equipment depreciation. Research and development programs costs, including those internally processed, are expensed in the periods in which they are incurred.





Clinical trial expenses


Other current assets and Other long-term assets include any clinical trial prepayments made to the clinical research organization (CRO).  Research and development expenses include clinical trial expenses associated with the CRO. The invoicing from the CRO for services rendered can lag several months. We accrue the cost of services rendered in connection with CRO activities based on our estimate of site management, monitoring costs, and project management costs and record them in accrued liabilities.  We maintain regular communication with the CRO to gauge the reasonableness of our estimates. Differences between actual clinical trial expenses and estimated clinical trial expenses recorded have not been material and are adjusted for in the period in which they become known.





Income taxes


Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. The Company provides a valuation allowance against its deferred tax assets when it believes that it is more likely than not that the asset will not be realized.





The Company determines whether it is more likely than not that a tax position will be sustained upon examination. The tax benefit of any tax position that meets the more-likely-than-not recognition threshold is calculated as the largest amount that is more than 50% likely of being realized upon resolution of the contingency. To the extent, a full benefit is not expected to be realized on the uncertain tax position, an income tax liability is established. Interest and penalties on income tax obligations are included in income tax expense.





The calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions that the Company has operated in globally. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from current estimates of the income tax liabilities. If the Company’s estimate of income tax liabilities proves to be less than the ultimate assessment, an additional charge to income tax expense would result. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the income tax liabilities may result in income tax benefits being recognized in the period when it is determined that the estimated income tax liability is no longer required. All of these potential income tax liabilities are included in income taxes payable or netted against income taxes recoverable on the consolidated statements of financial position.





Investment tax credits related to the acquisition of assets are deferred and amortized to income on the same basis as the related assets, while those related to current expenses are included in the determination of income for the year.





Earnings per share


Basic earnings per share is calculated by dividing net income by the weighted average number of Common shares outstanding during the year.





Diluted earnings per share is calculated using the treasury stock method, by dividing net income available to common shareholders by the sum of the weighted average number of Common shares outstanding and all additional Common shares that would have been outstanding shares arising from the exercise of potentially dilutive stock options during the year.





Foreign currency translation


Although the Company reports its financial results in U.S. dollars, the functional currency of the Company’s Canadian operations is Canadian dollars. The functional currencies of the Company’s foreign subsidiaries are their local currencies. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currencies of operations at prevailing year-end exchange rates. Non-monetary assets and liabilities are translated into functional currencies at historical rates. Assets and liabilities of foreign operations with a functional currency other than U.S. dollars are translated into U.S. dollars at prevailing year-end exchange rates, while revenue and expenses of these foreign operations are translated into U.S. dollars at average monthly exchange rates. The Company’s net investments in foreign subsidiaries are translated into U.S. dollars at historical exchange rates.





Nordion Inc. Fiscal 2011 Annual Report
 10





Notes to Consolidated Financial Statements


[All amounts in thousands of U.S. dollars, except where noted]





Exchange gains and losses on foreign currency transactions are recorded in other expenses, net. Upon the sale or upon complete or substantially complete liquidation of an investment in a foreign (non-Canadian functional currency) entity, the amount attributable to that entity and accumulated in the translation adjustment component of the equity is removed from the separate component of equity and reported as part of the gain or loss on sale or liquidation of the investment in the period during which the sale or liquidation occurs.


Exchange gains or losses arising on translation of the Company’s net equity investments in these foreign subsidiaries and those arising on translation of foreign currency long-term liabilities designated as hedges of these investments are recorded in other comprehensive income (OCI). Upon reduction of the Company’s investment in the foreign (non-Canadian) subsidiary, due to a sale or complete or substantially complete liquidation, the amount from the reporting currency translation as well as the offsetting amount from the translation of foreign currency long-term liabilities included in accumulated other comprehensive income (AOCI) is recognized in income.





Derivative financial instruments


In the normal course of business, the Company uses derivative financial instruments to manage foreign currency exchange rate risks. Derivative transactions are governed by a uniform set of policies and procedures covering areas such as authorization, counterparty exposure and hedging practices. Positions are monitored based on changes in foreign currency exchange rates and their impact on the market value of derivatives. Credit risk on derivatives arises from the potential for counterparties to default on their contractual obligations to the Company. The Company limits its credit risk by dealing with counterparties that are considered to be of high credit quality. The Company does not enter into derivative transactions for trading or speculative purposes. The Company records derivatives at fair value either as other current assets or accrued liabilities on the consolidated statements of financial position. The Company determines the fair value of the derivative financial instruments using relevant market inputs when no quoted market prices exist for the instruments. The fair value of the derivative financial instruments is determined by comparing the rates when the derivatives are acquired to the market rates at period-end. The key inputs include interest rate yield curves, foreign exchange spot and forward rates. The Company classifies cash flows from its derivative programs as cash flows from operating activities in the consolidated statements of cash flows.





The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. In order for a derivative to qualify for hedge accounting, the derivative must be formally designated as a fair value, cash flow or net investment hedge by documenting the relationship between the derivative and the hedged item. The documentation includes a description of the hedging instrument, the hedged item, the risk being hedged, the Company’s risk management objective and strategy for undertaking the hedge, the method for assessing the effectiveness of the hedge and the method for measuring hedge ineffectiveness. Additionally, the hedge relationship must be expected to be highly effective at offsetting changes in either the fair value or cash flows of the hedged item at both inception of the hedge and on an ongoing basis. The Company assesses the ongoing effectiveness of its hedges on a quarterly basis.





Cash flow hedges


The Company’s hedging activities include a hedging program to hedge the economic exposure from anticipated U.S. dollar denominated sales. The Company hedges a portion of these forecasted foreign denominated sales with forward exchange contracts. These transactions are designated as cash flow hedges and are accounted for under the hedge accounting. The Company hedges anticipated U.S. dollar denominated sales that are expected to occur over its planning cycle, typically no more than 12 months into the future.  The effective portion of the hedge gain or loss is initially reported as a component of accumulated other comprehensive income and subsequently reclassified into revenues when the hedged exposure affects earnings. Any ineffective portion of related gains or losses is recorded in the consolidated statements of operations immediately.





Other derivatives


Derivatives not designated as hedges are recorded at fair value on the consolidated statements of financial position, with any changes in the mark to market being recorded in the consolidated statements of operations. Interest rate swap contracts may be used as part of the Company’s program to manage the fixed and floating interest rate mix of the Company’s total debt portfolio and the overall cost of borrowing. The Company uses short-term foreign currency forward exchange contracts to hedge the revaluations of the foreign currency balances. The Company has also identified embedded derivatives in certain supply contracts.





Comprehensive income


The Company defines comprehensive income as net income plus the sum of the changes in unrealized gains (losses) on derivatives designated as cash flow hedges, unrealized gains (losses) on translation of debt designated as a hedge of the net investment in self-sustaining foreign subsidiaries, unrealized gains (losses) on pension liability adjustments, foreign currency translation gains (losses) on


self-sustaining foreign subsidiaries and an unrealized gain (loss) on translation resulting from the application of U.S. dollar reporting and is presented in the consolidated statements of shareholders’ equity and comprehensive income (loss), net of income taxes.





Recent accounting pronouncements


On April 16, 2010, the FASB issued ASU No. 2010-13, “Stock Compensation (Topic 718), Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades” (ASU 2010-13), which clarifies that a share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity





Nordion Inc. Fiscal 2011 Annual Report
 11





Notes to Consolidated Financial Statements


[All amounts in thousands of U.S. dollars, except where noted]





securities trades must not be considered to contain a market, performance or service condition. An entity should not classify such an award as a liability if it otherwise qualifies for classification in equity. ASU 2010-13 is effective for fiscal years beginning on or after December 15, 2010 and for interim periods within those fiscal years and is to be applied prospectively. The Company adopted ASU 2010-13 on November 1, 2011 and it is not expected to have a significant impact on the Company’s consolidated financial statements.





In January 2010, the FASB issued ASU No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820), Improving Disclosures about Fair Value Measurements” (ASU 2010-06), which provides amendments that clarify existing disclosures and requires new disclosures related to fair value measurements. In particular, ASU 2010-06 requires more disaggregated information on each class of assets and liabilities and further disclosures on transfers between levels 1 and 2 and activity in level 3 fair value measurements. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about activity in level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The Company adopted ASU 2010-06 for level 3 fair value measurements on November 1, 2011.  In May 2011, the FASB also issued ASU 2011-04, “Fair Value Measurement and Disclosures (Topic 820),Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRS,”which amends Topic 820, “Fair Value Measurements and Disclosures,” to converge the fair value measurement guidance in U.S. generally accepted accounting principles and International Financial Reporting Standards. ASU 2011-04 clarifies the application of existing fair value measurement requirements, changes certain principles in Topic 820 and requires additional fair value disclosures. ASU 2011-04 is effective for annual periods beginning after December 15, 2011, and the Company plans to adopt ASU 2011-04 on November 1, 2012.  ASU 2010-06 and ASU 2011-04 are not expected to have a significant impact on the Company’s consolidated financial statements.





In December 2010, the FASB issued ASU No. 2010-28, “When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (a consensus of the FASB Emerging Issues Task Force)” (ASU 2010-28). ASU 2010-28 addresses how companies should test for goodwill impairment when the book value of a reporting entity is zero or negative.  For reporting units with zero or negative carrying amounts, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists.  ASU 2010-28 is effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The Company adopted ASU 2010-28 on November 1, 2011 and it is not expected to have a significant impact on the Company's consolidated financial statements.





In September 2011, the FASB issued ASU No. 2011-08, “Testing Goodwill for Impairment” (ASU 2011-08). ASU 2011-08 provides an entity the option to first assess qualitative factors whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The ASU includes a number of factors to consider in conducting the qualitative assessment.  ASU 2011-08 is effective for fiscal years beginning after December 15, 2011, with early adoption permitted.  The Company adopted ASU 2011-08 effective on October 1, 2011, which had no significant impact on the Company’s consolidated financial statements.





International Financial Reporting Standards (IFRS)


The Company has been monitoring the deliberations and progress being made by accounting standard setting bodies and securities regulators both in the U.S. and Canada with respect to the convergence to IFRS.  The Company currently expects to adopt IFRS as its primary reporting standard when the SEC requires domestic registrants in the U.S. to adopt IFRS.





3.
Divestitures and Discontinued Operations




Sale of MDS Nordion S.A.


On March 31, 2011, the Company completed the sale of MDS Nordion S.A. in Belgium to Best Medical Belgium Inc. (Best Medical) for  nominal proceeds. Pursuant to its share purchase agreement (SPA) signed in February 2011,Nordion left cash of $18.5 million (€ 13 million) as capital in the business.Best Medical acquiredall of Nordion’s Belgian operations and the employees in Belgium, including related benefit and pension plans, with the exception of the TheraSphere® business. Best Medical also acquired the Belgian facilities, including current and future decommissioning and waste disposal requirements.





The Company recorded a total loss of $15.7 million on the sale of MDS Nordion S.A. in the second quarter of fiscal 2011 including net working capital and inventory adjustments of $2.8 million and recognition of a non-cash unrealized foreign currency translation gain of $4.6 million as the sale represented a substantial liquidation of the Company’s Belgian operations. The loss on the sale primarily relates to future losses and cash flow demands of MDS Nordion S.A., that were not accruable under GAAP, and their recognition is only triggered as a result of the sale. In May 2011, the Company finalized the loss on sale without any significant closing adjustments to the amount recorded in the second quarter of fiscal 2011.





Nordion Inc. Fiscal 2011 Annual Report
 12





Notes to Consolidated Financial Statements


[All amounts in thousands of U.S. dollars, except where noted]





The following table details the loss on sale of MDS Nordion S.A.:


Proceeds

$
nominalCapital infusion in cash


(18,478
)Working capital and inventory adjustments


(2,753
)Net negative proceeds


(21,231
)Net liabilities disposed of


3,212Release of unrealized translation gain in accumulated other comprehensive income


4,629Release of unrealized actuarial loss of defined benefit pension in accumulated other comprehensive income


(1,616
)Transaction costs and other accruals


(649
)Loss on sale of MDS Nordion S.A.

$
(15,655
)





The following table details the net assets (liabilities) of MDS Nordion S.A. disposed of:


Accounts receivable

$
4,451Inventories


3,386Property, plant and equipment, net


1,472Other assets


255Accounts payable and accrued liabilities


(7,677
)Other liabilities


(5,099
)Net liabilities

$
(3,212
)








Discontinued operations


The following table details the assets and liabilities of discontinued operations:





As of October 31

2011(a)


2010(b)Accounts receivable

$
869


$
6,053Inventories


-



2,488Property, plant and equipment, net


-



2,800Other assets


67



380Assets of discontinued operations

$
936


$
11,721Accounts payable and accrued liabilities

$
2,967


$
17,709Long-term debt


-



2,318Deferred tax liabilities


5



166Other liabilities


1,107



3,859Liabilities of discontinued operations

$
4,079


$
24,052


(a)
Represents the assets and liabilities remaining after the sales of MDS Nordion S.A. and MDS Pharma Services Early Stage (Early Stage).


(b)
Represents the assets and liabilities of MDS Nordion S.A. and remaining assets and liabilities after the sale of Early Stage.





The following table details the operating results of the Company’s MDS Nordion S.A. discontinued operations:





Years ended October 31

MDS Nordion S.A.2011


2010

2009Revenues

$
7,914


$
18,384

$
19,566Costs and other expenses


12,497



31,852


28,383Impairment of long-lived assets


-



7,286


-Operating loss


(4,583
)


(20,754
)

(8,817
)Loss on the sale of  discontinued operations


(15,655
)


-


-Other, net


(74
)


(139
)

(21
)Income tax recovery


729



1,361


1,377Loss from discontinued operations, net of income taxes

$
(19,583
)

$
(19,532
)
$
(7,461
)








Nordion Inc. Fiscal 2011 Annual Report
 13





Notes to Consolidated Financial Statements


[All amounts in thousands of U.S. dollars, except where noted]





The following table details the operating results of the Company’s MDS Pharma Services and MDS Analytical Technologies discontinued operations:





Years ended

October 31

MDS

Pharma Services


MDS Analytical

Technologies


Total2011


2010

2009


2011


2010

2009


2011


2010

2009Revenues

$
-


$
67,311

$
441,811


$
-


$
80,201

$
359,165


$
-


$
147,512

$
800,976Costs and other expenses


995



114,624


457,015



9,660



81,140


379,654



10,655



195,764


836,669Impairment of long-lived assets


-



13,700


25,699



-



-


-



-



13,700


25,699Impairment of goodwill


-



-


29,890



-



-


-



-



-


29,890Operating loss


(995
)


(61,013
)

(70,793
)


(9,660
)


(939
)

(20,489
)


(10,655
)


(61,952
)

(91,282
)(Loss) gain on the sale of  discontinued operations


-



(59,287
)

(45,531
)


-



5,975


-



-



(53,312
)

(45,531
)Equity (loss) gain(b)


-



-


(244
)


-



14,867


32,739



-



14,867


32,495Other, net(a)


(12
)


(216
)

(3,344
)


(3
)


(26,529
)

(11,716
)


(15
)


(26,745
)

(15,060
)Income tax (expense)  recovery


(2,302
)


15,616


3,741



5,900



(17,136
)

(7,954
)


3,598



(1,520
)

(4,213
)Loss fromdiscontinuedoperations, net of  income taxes

$
(3,309
)

$
(104,900
)
$
(116,171
)

$
(3,763
)

$
(23,762
)
$
(7,420
)

$
(7,072
)

$
(128,662
)
$
(123,591
)


(a) All of the interest on the senior unsecured notes was allocated to discontinued operations as the Company repaid its senior unsecured notes following the completion of the sale of MDS Analytical Technologies in the first quarter of fiscal 2010. As part of the redemption of the senior unsecured notes, the Company made a make-whole payment of $23.3 million, which was included in interest expense in fiscal 2010.





(b)  MDS Analytical Technologies included two joint ventures, AB/MDS and PKI/Sciex. Under the terms of these joint venture arrangements, the Company provided manufacturing, research and development and administrative support for the joint venture partnerships on an outsourced service provider basis. All costs, including selling, general and administration expenses, incurred by the Company for direct materials, labor, travel, consulting, and other related expenses, were billed to the joint ventures at cost and recorded as revenue. The Company did not recognize any profits from the sales to the joint ventures as the amounts were billed without any markups. The joint ventures realized net income when products and services were sold to a third-party customer. The Company recorded its share of realized profits from the joint ventures as equity earnings, which is included in “Loss from discontinued operations, net of income taxes”.





Arbitration with Life Technologies Corporations


As part of the sale of MDS Analytical Technologies completed in Q1 2010, our joint venture partnership with Applied Biosystems, a division of Life Technologies Corporations (Life), was dissolved. A disagreement arose between the former partners (Nordion and Life) as to the appropriate treatment of certain inventory sold by the partnership to Applied Biosystems prior to the dissolution of the joint venture partnership.





A ruling in the arbitration of this matter occurred in July 2011, which resulted in recording of a settlement accrual of $9.5 million (Note 11(c)) and loss from discontinued operations of $6.8 million, net of $2.7 million tax recovery for the year ended October 31, 2011.





4.
Accounts Receivable





As of October 31

2011


2010Trade accounts receivable

$
37,203


$
33,615Other receivables(a)


1,966



6,93939,169



40,554Allowance for doubtful accounts


(170
)


(83
)Accounts receivable

$
38,999


$
40,471




(a)      As of October 31, 2011, other receivables include a $nil (October 31, 2010 ― $3.1 million) receivable related to the sale of Central Labs and $nil (October 31, 2010 ― $1.9 million) for the TSA and other sale related transactions associated with the sale of Early Stage.








Nordion Inc. Fiscal 2011 Annual Report
 14





Notes to Consolidated Financial Statements


[All amounts in thousands of U.S. dollars, except where noted]





5.
Inventories





As of October 31

2011


2010Raw materials and supplies

$
31,611


$
26,211Work-in-process


354



1,141Finished goods


267



1,00232,232



28,354Allowance for excess and obsolete inventory


(1,637
)


(1,771
)Inventories

$
30,595


$
26,583








6.
Property, Plant and Equipment





As of October 31

2011


2010Cost


Accumulated

Depreciation


Cost

Accumulated

DepreciationLand

$
2,834


$
-


$
2,769

$
-Buildings


82,800



43,060



80,928


40,466Equipment


80,627



56,923



82,303


60,625Furniture and fixtures


1,608



1,566



2,358


2,124Computer systems


77,869



73,112



81,780


69,548Leasehold improvements


10,752



1,046



13,543


3,527Facility modifications


36,418



26,462



34,991


22,062Construction in-progress


6,951



-



9,954


-299,859


$
202,169



308,626

$
198,352Accumulated depreciation


(202,169
)






(198,352
)Property, plant and equipment

$
97,690






$
110,274








7.
Other Current Assets




As of October 31, 2011, other current assets include embedded derivative and other derivative assets of $11.8 million (October 31, 2010 ― $10.5 million) (Note 17) as well as prepaid expenses and other of $2.0 million (October 31, 2010 ― $1.8 million).








8.
Long-Term Investments





As of October 31

2011


2010Investment in Celerion(a)

$
1,473


$
1,464Investment in Lumira Capital Corp.(b)


-



1,030Other long-term investments(c)


-



1,557Long-term investments

$
1,473


$
4,051





(a) Investment in Celerion, Inc. (Celerion)


On March 5, 2010, as part of the consideration for the sale of Early Stage, Nordion received approximately 15% of the total common stock of Celerion assuming the conversion of all the outstanding preferred stock and issuance and exercise of permitted stock options. The outstanding preferred stock of Celerion are voting, all owned by third parties, convertible into common stock on a 1:1 basis, subject to certain adjustments, and are subordinated to the Note (Note 9(c)). Nordion’s ability to transfer its Celerion equity and the Note is subject to the consent of Celerion, which is controlled by third-party investors who collectively hold a majority of the outstanding Celerion equity and have no restrictions on selling their interests. These third-party investors also have majority representation on the Board of Directors of Celerion. This investment in Celerion is recorded at cost and has a fair value of $1.5 million as of October 31, 2011. The fair value has been determined based on an estimate of the fair value of the business sold using proceeds on sale and a discounted future cash flow model using cost of equity of comparable companies adjusted for risk.





Pursuant to applicable U.S. accounting rules, a business entity may be subject to consolidation if it is determined to be a variable interest entity (VIE) and if the reporting entity is the primary beneficiary. The Company has determined that Celerion is a VIE but Nordion is not





Nordion Inc. Fiscal 2011 Annual Report
 15





Notes to Consolidated Financial Statements


[All amounts in thousands of U.S. dollars, except where noted]





the primary beneficiary and, therefore, consolidation is not required. The Company continues to assess any reconsideration events and monitor the status of its relationship with Celerion. The fair value of the Company’s investment in Celerion and the Note (Note 9(c)) is currently estimated to be $22.2 million in aggregate. The Company’s maximum exposure to loss is limited to the carrying value of the Note and its investment in Celerion.





(b) Investment in Lumira Capital Corp. (Lumira)


Long-term investments include an investment in Lumira, an investment fund management company, which has long-term investments in development-stage enterprises that have not yet earned significant revenues from their intended business activities or established their commercial viability. Nordion does not have any significant involvement in the day-to-day operations of Lumira other than to obtain its share of earnings and losses. During fiscal 2011, the Company reported equity loss of $0.1 million (2010 ― $0.7 million; 2009 ― $nil) from the investment in Lumira. The Company’s exposure to losses is limited to its investment of $nil (October 31, 2010 ― $1.0 million). During the second quarter of fiscal 2011, the Company received $1.3 million in cash dividends from Lumira which reduced its investment to $nil with the remaining $0.4 million included in dividend income.





(c) Other long-term investments


During the second quarter of fiscal 2011, the Company disposed of its available for sale investment in a marketable equity security for cash proceeds of $1.7 million.








9.
Other Long-Term Assets





As of October 31

2011


2010Restricted cash(a)

$
5,847


$
32,439Financial instrument pledged as security on long-term debt(b)


40,048



39,986Long-term notes receivable(c)


20,721



27,186Pension assets (Note 23)


9,748



8,944Goodwill (Note 10)


2,532



2,474Other(d)


2,349



-Other long-term assets

$
81,245


$
111,029





(a)      Restricted cash


As of October 31, 2011, restricted cash of $5.8 million (October 31, 2010 ― $10.0 million) is related to funds for insurance liabilities. During the fourth quarter of fiscal 2011 $5.0 million of cash proceeds held in escrow related to the sale of MDS Pharma Services Phase II-IV was released to cash.





(b)      Financial instrument pledged as security on long-term debt


The financial instrument pledged as security on long-term debt is classified as held to maturity and is not readily tradable as it defeases the long-term debt from the Government of Canada related to the construction of the MAPLE Facilities. The effective annual interest rate is 7.02% and it is repayable semi-annually over 15 years commencing October 2, 2000. The carrying value as of October 31, 2011 is $44.1 million (October 31, 2010 ―$43.9 million), of which $4.1 million (October 31, 2010 ― $3.9 million) is included in notes receivable in the consolidated statements of financial position. As of October 31, 2011, the fair value is $51.7 million (October 31, 2010 ― $52.4 million), which has been determined using a discounted cash flow model, in which future cash flows are discounted to present value using the current market borrowing rate pertaining to the remaining life of the receivable.





(c)       Long-term notes receivable





Atomic Energy of Canada Limited (AECL)


In fiscal 2006, as a result of a comprehensive mediation process that resulted in an exchange of assets between the Company and AECL related to the MAPLE Facilities, a long-term note receivable of $38.0 million after discounting, was received by the Company. This non-interest bearing note receivable is repayable monthly over four years commencing November 1, 2008. The long-term note receivable is net of an unamortized discount based on an imputed interest rate of 4.45%. The carrying value of the long-term note receivable as of October 31, 2011 is $12.0 million (October 31, 2010 ― $24.0 million), of which the entire $12.0 million (October 31, 2010 ― $13.0 million) is included in notes receivable in the consolidated statements of financial position. As of October 31, 2011, the fair value is $13.3 million (October 31, 2010 ― $25.7 million), which has been determined using a discounted cash flow model, in which future cash flows are discounted to present value using the current market borrowing rate pertaining to the remaining life of the receivable. All scheduled monthly payments due have been received.





Nordion Inc. Fiscal 2011 Annual Report
 16





Notes to Consolidated Financial Statements


[All amounts in thousands of U.S. dollars, except where noted]





Celerion


On March 5, 2010, as part of the consideration for the sale of Early Stage, the Company received the Note with a principal amount of $25.0 million issued by Celerion, which has a five-year term and bears interest at 4% per annum. Celerion can elect to add the interest to the principal amount of the Note. The Note is partially secured with a second-lien interest in certain real estate of Celerion. As part of the sale of Early Stage, the Company also signed a TSA that allowed Celerion to pay for the first three months of TSA services, to a maximum of $1.8 million, by increasing the principal amount of the Note. The carrying value of the Note, including interest and accretion as of October 31, 2011 is $20.7 million (October 31, 2010 – $16.2 million). The fair value of the Note as of October 31, 2011 is $20.7 million, which includes $7.9 million of accreted interest. The fair value has been determined based on discounted cash flows using market rates for secured debt and cost of equity of comparable companies adjusted for risk and any increase in principal amount related to the TSA and interest payments. The current face value of the Note including TSA services and interest is $28.6 million.  The Note is being accreted up to its face value using an effective interest rate of 8% for secured cash flows and 28% for unsecured cash flows.





(d)
Other


Includes the long-term portion of the TheraSphere® clinical trials’ prepayment, the deferred charges relating to the credit facility and other long-term receivables and assets.








10.
Goodwill


As of October 31, 2011, management determined that the fair value of goodwill exceeds its carrying value of $2.5 million (October 31, 2010 ― $2.5 million) resulting in no impairment of goodwill.





In the fourth quarter of fiscal 2010, the Company changed its segment reporting structuring (Note 24) following the completion of its strategic repositioning and allocated goodwill to two of the Company’s business segments: Sterilization Technologies ($1.6 million) and Medical Isotopes ($0.9 million).





During the third quarter of fiscal 2009, management determined that the implied fair values of goodwill for the reporting units within MDS Pharma Services were less than each of its carrying values and the Company wrote off the total remaining goodwill of $36.9 million, which was reported in “Loss from discontinued operations, net of income taxes” (Note 3).








11.
Accrued Liabilities





As of October 31

2011


2010Employee-related accruals(a) (Note 22)

$
6,716


$
11,166FDA provision(b)


8,325



8,620Captive insurance liability (Note 25)


4,492



6,402Restructuring provision (Note 18)


4,004



7,356AECL revenue share and waste disposal


3,004



6,677Accrued transaction costs and closing adjustments for divestitures and discontinued operations


41



13,470Other(c)


26,332



24,366Accrued liabilities

$
52,914


$
78,057





(a)      Includes annual incentive payout accruals of $2.5 million (October 31, 2010 - $6.4 million).





(b)      The FDA provision was established in fiscal 2007 to address certain U.S. Food and Drug Administration (FDA) issues related to the Company’s discontinued bioanalytical operations in its Montreal, Canada, facilities. Although the bioanalytical operations were part of MDS Pharma Services, Nordion has retained this potential liability following the sale of Early Stage. The Company may, where appropriate, reimburse clients who have incurred or will incur third party audit costs or study re-run costs to complete the work required by the FDA and other regulators. Management regularly updates its analysis of this critical estimate based on all currently available information. Based on this analysis, the Company recorded payments of $0.2 million (2010 ― $9.9 million; 2009 ― $10.3 million) for the year ended October 31, 2011. As of October 31, 2011, management believes that the remaining provision of $8.3 million (October 31, 2010 ― $8.6 million) is sufficient to cover any agreements reached with clients for study audits, study re-runs, and other related costs. Included in this potential liability are amounts for two legal claims the Company has been served with related to repeat study costs (Note 26).





Nordion Inc. Fiscal 2011 Annual Report
 17





Notes to Consolidated Financial Statements


[All amounts in thousands of U.S. dollars, except where noted]





(c)      Other includes the settlement accrual for the arbitration with Life (Note 3), derivative liabilities, royalties, tax reassessments and various miscellaneous payables.





12.
Long-Term Debt





As of October 31
Maturity

2011


2010Total long-term debt
2012 to 2015

$
44,330


$
44,150Current portion of long-term debt



(4,156
)


(4,050
)Long-term debt


$
40,174


$
40,100





As of October 31, 2011, debt includes a non-interest-bearing Canadian government loan with a carrying value of $44.1 million (October 31,


2010 ― $43.9 million) discounted at an effective interest rate of 7.02% and repayable at C$4.0 million (US$4.0 million) per year with the remaining balance due April 1, 2015.  The fair value of this financial instrument is $52.1 million (October 31, 2010 ― $53.1 million), which has been determined using a discounted cash flow model, in which future cash flows are discounted to present value using the current market borrowing rate pertaining to the remaining life of the related receivable. A long-term financial instrument has been pledged as full security for the repayment of this debt (Note 9(b)).





Effective June 3, 2011, the Company entered into a $75.0 million unsecured senior revolving three year committed credit facility with the


Toronto Dominion Bank (TD) and a select group of other financial institutions for general corporate purposes. The loan agreement includes customary positive, negative and financial covenants. Under the new credit facility, the Company is able to borrow Canadian and U.S. dollars by the way of Canadian dollar prime rate loans, U.S. dollar base rate loans, U.S. dollar LIBOR loans, the issuance of Canadian dollar banker’s acceptances and letters of credit in Canadian and U.S. dollars. The credit facility is payable in full in three years from the closing date on June 6, 2014; however, the term of the credit facility may be extended on mutual agreement of the lenders for successive subsequent periods. As of October 31, 2011, no amounts were drawn and outstanding, except for $19.7 million (October 31, 2010 - $nil) of the outstanding letters of credit plus applicable interest issued under this credit facility.





Principal repayments


Principal repayments of long-term debt over the next five fiscal years and thereafter are as follows:





2012

$
4,1562013


3,9412014


3,8162015


32,4172016


-Thereafter


-$
44,330








13.
Deferred Revenue





As of October 31

2011


2010Payment in advance of services rendered

$
1,115


$
4,872Deferred credit related to government loan(a)


3,467



5,348Deposits for reimbursable costs(b)


1,093



6,343Other


-



4105,675



16,973Less: current portion


(1,820
)


(7,542
)Long-term portion of deferred revenue

$
3,855


$
9,431




(a)      The deferred credit is related to the Canadian government loan associated with the MAPLE Facilities, which is being amortized over the remaining five-year term of the debt using the sum of the years’ digits method.




(b)      For the year ended October 31, 2011, $3.3 million of deferred revenue for facilities and equipment paid by a customer was released upon the contract cancellation.





Nordion Inc. Fiscal 2011 Annual Report
 18





Notes to Consolidated Financial Statements


[All amounts in thousands of U.S. dollars, except where noted]





14.
Other Long-Term Liabilities





As of October 31

2011


2010Post-retirement obligations (Note 23)

$
18,259


$
18,145Asset retirement obligation (Note 27)


11,691



10,598Captive insurance liability (Note 25)


2,616



3,860Restructuring provision (Note 18)


3,617



4,153Other


3,436



2,410Other long-term liabilities

$
39,619


$
39,166








15.
Earnings Per Share




The following table illustrates the reconciliation of the denominator in the computations of the basic and diluted earnings per share:




(number of shares in thousands)

2011


2010

2009Weighted average number of Common shares outstanding – basic


64,719



89,279


120,137Impact of stock options assumed exercised


90



1


-Weighted average number of Common shares outstanding – diluted


64,809



89,280


120,137Basic and diluted income (loss) per share from continuing operations

$
0.67


$
(0.94
)
$
(0.03
)Basic and diluted loss per share from discontinued operations


(0.41
)


(1.66
)

(1.09
)Basic and diluted income (loss) per share

$
0.26


$
(2.60
)
$
(1.12
)








16.
Share Capital




As of October 31, 2011 the authorized share capital of the Company consists of unlimited Common shares. The Common shares are voting and are entitled to dividends if and when declared by the Company’s Board of Directors.





Summary of share capital


Common Shares(number of shares in thousands)

Number


AmountBalance as of October 31, 2008


120,137


$
488,908Other


-



(100
)Balance as of October 31, 2009


120,137



488,808Issued


42



327Repurchased and cancelled


(52,941
)


(215,304
)Other


-



28Balance as of October 31, 2010


67,238



273,859Repurchased and cancelled


(4,860
)


(19,775
)Other


-



(8
)Balance as of October 31, 2011


62,378


$
254,076





In January 2011, the Company announced a re-initiation of a normal course issuer bid (NCIB), which was authorized by the Toronto Stock Exchange (TSX) to purchase for cancellation up to 5,677,108 Common shares.  During fiscal 2011, the Company repurchased and cancelled 4,860,132 common shares for a total cost of $52.4 million.





In January, June and September 2011, the Company also declared quarterly dividends at $0.10 per share, which were paid on April 1, July 5 and October 1, 2011 each in the amount of $6.4 million to the Company’s shareholders of record on March 17, July 17 and September 23, 2011, respectively.




17.
Financial Instruments and Financial Risk




Derivative instruments


The Company uses foreign currency forward exchange contracts to manage its foreign exchange risk.  The Company enters into foreign exchange contracts to hedge anticipated U.S. dollar denominated sales that are expected to occur over its planning cycle, typically no more than 12 months into the future.  The Company also uses short-term foreign currency forward exchange contracts to hedge the revaluations of the foreign currency balances, which have not been designated as hedges.





Nordion Inc. Fiscal 2011 Annual Report
 19





Notes to Consolidated Financial Statements


[All amounts in thousands of U.S. dollars, except where noted]





The Company has identified embedded derivatives in certain of its supply contracts as a result of the currency of the contract being different from the functional currency of the parties involved.  Changes in the fair value of the embedded derivatives are recognized in the consolidated statements of operations.





The Company does not use derivatives for trading or speculative purposes and is not a party to leveraged derivatives.  See further discussion of derivative financial instruments accounting in Note 2, Summary of Significant Accounting Policies.





The following table provides the fair value of all Company derivative instruments:





As of October 31

2011


2010Fair Value


Fair ValueAssetsEmbedded derivatives(a)

$
11,584


$
10,520Foreign currency forward contracts under cash flow hedges(b)

$
88


$
-Foreign currency forward contracts not under hedging relationships(c)

$
183


$
-LiabilitiesEmbedded derivatives(a)

$
370


$
1,955Foreign currency forward contracts under cash flow hedges(b)

$
57


$
-Foreign currency forward contracts not under hedging relationships(c)

$
148


$
-


(a) As of October 31, 2011 and October 31, 2010, total notional amounts for the Company’s certain supply contracts identified for embedded derivatives were approximately over $300 million and $700 million, respectively.


(b) As of October 31, 2011 and October 31, 2010, total notional amounts for the Company’s foreign currency forward contracts under cash flow hedges were approximately over $36.5 million and $nil, respectively.


(c) As of October 31, 2011 and October 31, 2010, total notional amounts for the Company’s foreign currency forward contracts not under hedging relationships were approximately over $13.0 million and $nil, respectively.





The following table summarizes the activities of the Company’s derivative instruments:





Years ended October 31

2011


2010

2009Realized loss on foreign currency forward contracts undercash flow hedges

$
219


$
-

$
-Unrealized gain on foreign currency forward contractsunder cash flow hedges

$
(55
)

$
-

$
-Realized gain on foreign currency forward contracts notunder cash flow hedges

$
(327
)

$
-

$
-Unrealized loss on foreign currency forward contracts notunder cash flow hedges

$
10


$
-

$
-Unrealized gain on embedded derivatives recorded in change in fair value of embedded derivatives(a)

$
(2,649
)

$
(13,050
)
$
(7,922
)Reclassification of realized gain recorded in OCI relating to netinvestment hedge

$
-


$
(146,638
)
$
-Unrealized gain recorded in OCI relating to net investment hedges(b)

$
-


$
(2,400
)
$
(23,645
)


(a)
Excludes unrealized loss (gain) for embedded derivatives related to the discontinued operations of $nil (2010 ― $0.5 million; 2009 ― $(1.1) million) for the year ended October 31, 2011.


(b)
No ineffectiveness was recorded in income for the year ended October 31, 2011, 2010 and 2009 relating to the net investment hedge.





Foreign currency contracts


The Company’s hedging activities include a hedging program to hedge the economic exposure from anticipated U.S. dollar denominated sales. The Company hedges a portion of these forecasted foreign denominated sales with currency forward contracts. These transactions are designated as cash flow hedges and are accounted for under the hedge accounting. The effective portion of the hedge gain or loss is initially reported as a component of accumulated other comprehensive income and subsequently reclassified into revenues when the hedged exposure affects earnings. Any ineffective portion of related gains or losses is recorded in the consolidated statements of operations immediately.  As of October 31, 2011, the Company had foreign currency forward contracts of approximately $0.1 million (October 31, 2010 ― $nil)





Credit risk


Certain of the Company’s financial assets, including cash and cash equivalents, are exposed to credit risk. The Company may, from time to time, invest in debt obligations and commercial paper of governments and corporations.  Such investments are limited to those issuers





Nordion Inc. Fiscal 2011 Annual Report
 20





Notes to Consolidated Financial Statements


[All amounts in thousands of U.S. dollars, except where noted]





carrying an investment-grade credit rating.  In addition, the Company limits the amount that is invested in issues of any one government or corporation.





The Company is also exposed, in its normal course of business, to credit risk from its customers. As of October 31, 2011, accounts receivable is net of an allowance for uncollectible accounts of $0.2 million (October 31, 2010 ― $0.1 million).





Credit risk on financial instruments arises from the potential for counterparties to default on their contractual obligations to the Company. The Company is exposed to credit risk in the event of non-performance, but does not anticipate non-performance by any of the counterparties to its financial instruments.  The Company limits its credit risk by dealing with counterparties that are considered to be of high credit quality.  In the event of non-performance by counterparty, the carrying value of the Company’s financial instruments represents the maximum amount of loss that would be incurred.





Valuation methods and assumptions for fair value measurements


Cash and cash equivalents, accounts receivable, notes receivable, income taxes recoverable, accounts payable, accrued liabilities, and income taxes payable have short periods to maturity and the carrying values contained in the consolidated statements of financial position approximate their estimated fair value.





Fair value hierarchy


The fair value of the Company’s financial instruments is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of financial instruments is determined by reference to quoted market prices for the same financial instrument in an active market (Level 1). If Level 1 fair values are not available, the Company uses quoted prices for identical or similar instruments in markets which are non-active, inputs other than quoted prices that are observable and derived from or corroborated by observable market data such as quoted prices, interest rates, and yield curves (Level 2), or valuation techniques in which one or more significant inputs are unobservable (Level 3).





The following table discloses the Company’s financial assets and liabilities measured at fair value on a recurring basis:





As of October 31, 2011Description

Level 1


Level 2


Level 3


TotalCash equivalents

$
100


$
-


$
-


$
100Derivative assets(Note 7)

$
-


$
446


$
11,409


$
11,855Derivative liabilities(Note 11(c))

$
-


$
575


$
-


$
575





As of October 31, 2010Description

Level 1


Level 2


Level 3


TotalCash equivalents

$
7,600


$
-


$
-


$
7,600Available for sale(Note 8(c))

$
1,557


$
-


$
-


$
1,557Derivative assets(Note 7)

$
-


$
6


$
10,514


$
10,520Derivative liabilities(Note 11(c))

$
-


$
1,955


$
-


$
1,955





The following table presents the changes in the Level 3 fair value category:


Year ended October 31, 2011Description

As of October 31 2010


Net Realized/

Unrealized Gains

(Losses) included in


Purchases, Sales, Issuance and

(Settlements), net


Transfers in

and/or out of Level 3


As of

October 31

2011Earnings


OtherDerivative assets (Note 7)

$
10,514


$
-


$
895


$
-


$
-


$
11,409







Year ended October 31, 2010Description

As of October 31 2009


Net Realized/

Unrealized Gains

(Losses) included in


Purchases, Sales, Issuance and

(Settlements), net


Transfers in

and/or out of Level 3


As of

October 31

2010Earnings


OtherDerivative assets (Note 7)

$
-


$
-


$
-


$
10,514


$
-


$
10,514Asset backed commercial paper

$
10,713


$
(299
)

$
-


$
(10,414
)

$
-


$
-


Nordion Inc. Fiscal 2011 Annual Report
 21





Notes to Consolidated Financial Statements


[All amounts in thousands of U.S. dollars, except where noted]





18.
Restructuring Charges




During the fourth quarter of fiscal 2011, Nordion realigned its current resources including management, administrative and operations workforce across the organization to focus on driving the long-term performance of the Company, and to support strategic priorities and growth initiatives. As a result of this restructuring activity, the Company recorded a restructuring charge of $0.8 million (2010 - $nil; 2009 - $nil) relating to workforce reductions for the year ended October 31, 2011.





In fiscal 2010 and 2009, the Company undertook a number of restructuring activities associated with its strategic repositioning activities. As a result of these activities, for the year ended October 31, 2011, the Company recorded $0.4 million (2010 - $42.2 million; 2009 - $9.3 million) primarily for the extension of certain key corporate employees retained and $0.4 million (2010 - $7.2 million; 2009 - $nil) for contract cancellation charges which represent future rent payments, net of estimated sublease revenue, related to the Company’s former corporate office space in Toronto, Canada.





The fiscal 2010 and 2009 restructuring activities have been substantially completed and the remaining fiscal 2011 and 2010 restructuring provisions are expected to be utilized in the first quarter of fiscal 2012, except for future rental payments related to the Company’s former corporate office space in Toronto, which may extend over 3 years. A conditional lease termination agreement offer related to its former Toronto office that the Company signed in September 2011 was expired when the landlord failed to obtain its Board’s approval in November 2011.





As of October 31, 2011, the restructuring provision of $7.6 million (October 31, 2010 ― $11.5 million) is included in accrued liabilities (Note 11) and other long-term liabilities (Note 14) in the consolidated statements of financial position.





The table below provides an analysis of the Company’s restructuring activities related to its continuing operations until October 31, 2011.


Expenses





Cumulative

Activities


Balance

as of

October 312011


2010

2009


Total


Cash

Non-Cash


2011Workforce reductions

$
1,217


$
42,161

$
9,306


$
52,684


$
(49,031
)
$
(1,000
)

$
2,653Contract cancellation charges


375



7,175


-



7,550



(3,793
)

1,211



4,968Other


-



13,195


-



13,195



(13,181
)

(14
)


-Restructuring charges

$
1,592


$
62,531

$
9,306


$
73,429


$
(66,005
)
$
197


$
7,621




19.
Other Expenses, Net





Years ended October 31

2011


2010

2009Research and development

$
5,629


$
4,533

$
4,035Write-down of investments and other long-term assets


-



1,632


938(Gain) loss on sale of investment


(1,691
)


1,054


-Foreign exchange loss(a)


4,336



32,003


4,735Other(b)


275



(14,165
)

(551
)Other expenses, net

$
8,549


$
25,057

$
9,157




(a) The foreign exchange loss for the year ended October 31, 2010 was primarily a result of the revaluation of the $450.0 million of proceeds from the sale of MDS Analytical Technologies (Note 3) that were held in a Canadian dollar functional currency entity in U.S. dollars to fund the substantial issuer bid. The offset to this non-cash revaluation loss is reflected as foreign currency translation gain in AOCI as part of shareholders’ equity.





(b) Included in other is TSA revenue of $0.5 million (2010 ― $14.0 million; 2009 ― $0.6 million) for the year ended October 31, 2011, relating to the sales of MDS Pharma Services Phase II-IV, Central Labs and Early Stage.





Nordion Inc. Fiscal 2011 Annual Report
 22





Notes to Consolidated Financial Statements


[All amounts in thousands of U.S. dollars, except where noted]





20.
Income Taxes




Income tax provision




The components of the Company’s income (loss) from continuing operations before income taxes and the related provision for income taxes are presented below:





Years ended October 31

2011


2010

2009Canadian

$
57,453


$
(61,247
)
$
5,314Foreign


3,171



(22,382
)

6,529Income (loss) from continuing operations before income taxes

$
60,624


$
(83,629
)
$
11,843





The components of the income tax expense are as follows:





Years ended October 31

2011


2010

2009Canadian income tax expense (recovery)Current

$
12,851


$
(9,615
)
$
2,485Deferred


3,666



(6,998
)

1,452Foreign income tax expenseCurrent


605



1,308


11,903Deferred


-



15,492


192Income tax expense

$
17,122


$
187

$
16,032





A reconciliation of expected income taxes to reported income tax expenses is provided below.




Years ended October 31

2011


2010

2009Expected income tax expense (recovery) at the 27% (2010 – 30%;2009 – 32%) statutory rate

$
16,372


$
(25,050
)
$
3,792Increase (decrease) in taxes as a result of:Change in valuation allowance on deferred tax assets


(406
)


19,599


10,335Other investment write downs


(109
)


-


-Tax (benefit) liability arising on utilization of R&D tax credits


(438
)


(11
)

1,032Net changes in reserves for uncertain tax positions(a)


1,398



(10,217
)

3,455Foreign earnings taxed at rates different from the statutory rate


(1,166
)


1,726


(1,252
)Stock-based compensation


471



269


1,277Impact of income tax rate changes


-



1,065


-Deferred tax rate differential


788



(562
)

-Non-deductible foreign exchange losses


-



6,950


-Provision to previously filed tax returns


(671
)


4,188


-Impact of non-deductible expenses and other differences


883



2,230


(2,607
)Reported income tax expense

$
17,122


$
187

$
16,032


(a) Excludes net changes in reserves for uncertain tax positions related to discontinued operations.





Deferred tax assets and liabilities




Components of the deferred tax assets and liabilities consist of the following temporary differences:





As of October 31

2011


2010Tax benefit of losses carried forward

$
99,498


$
116,684Tax basis in excess of book value


9,756



9,304Investment tax credits


65,283



52,150Provisions and reserves


(2,195
)


1,981Other comprehensive income


8,609



6,830Deferred tax assets before valuation allowance


180,951



186,949Valuation allowance


(100,053
)


(100,119
)Net deferred tax assets

$
80,898


$
86,830





No deferred income taxes have been provided on undistributed earnings, or relating to cash held in foreign jurisdictions as the Company has estimated that any income or withholding taxes on repatriation would not be significant.





Nordion Inc. Fiscal 2011 Annual Report
 23





Notes to Consolidated Financial Statements


[All amounts in thousands of U.S. dollars, except where noted]





Included within the tax benefit of losses carried forward are deferred tax assets relating to capital losses carried forward for continuing operations of $41.1 million (2010 ― $41.2 million; 2009 ― $2.7 million). The amount of valuation allowance recorded against these assets is $41.1 million (2010 ― $41.2 million; 2009 ― $2.7 million).





Tax losses carried forward


As of October 31, 2011, the Company has deferred tax assets relating to net operating loss carryovers for continuing operations of $58.4 million (2010 ― $75.5 million; 2009 ― $40.4 million). These tax assets relate to $181.3 million (2010 ― $256.7 million; 2009 ―$126.3 million) of gross tax loss carryovers from continuing operations. Of the total losses, $181.3 million (2010 ― $256.7 million; 2009 ―$126.3 million) will expire in various years between 2012 and 2031.





Tax contingencies


At October 31, 2011, the gross reserves for uncertain tax positions excluding accrued interest and penalties were $9.4 million (October 31, 2010 ― $7.8 million) as noted in the following reconciliation.  The Company estimates that the total amounts of unrecognized tax benefits will decrease by $2.1 million during the year ended October 31, 2012.





2011


2010Gross unrecognized tax benefits, beginning of year, November 1

$
7,842


$
45,539Additions for tax positions from prior years


218



-Reductions for tax positions from prior years


(1,177
)


(36,003
)Additions for tax positions related to the current year


2,346



663Reduction for tax positions related to discontinued operations


-



(4,124
)Currency translation adjustment


148



1,767Gross unrecognized tax benefits, end of year, October 31

$
9,377


$
7,842





The Company accrues an estimate for interest and penalties related to uncertain tax positions in income tax expense.  At October 31, 2011, accrued interest and penalties related to uncertain tax positions totaled $2.8 million (October 31, 2010 ― $2.7 million).





The Company is subject to taxation in its principal jurisdiction of Canada and in numerous other countries around the world.  With few exceptions, the Company is no longer subject to examination by Canadian tax authorities for years prior to 2004. However, most tax returns for 2004 and beyond remain open to examination by various tax authorities.




21.     Supplementary Cash Flow Information




Items not affecting cash flows comprise the following:




Years ended October 31

2011


2010

2009Depreciation and amortization

$
22,375


$
28,514

$
22,680Stock option compensation


1,229



2,768


2,736Deferred income taxes


3,666



8,493


1,645Equity loss, including cash distribution of $951 (2010 ― $3,034; 2009 ― $nil)


1,079



3,684


49Change in fair value of embedded derivatives


(2,649
)


(13,050
)

(7,922
)Write-down of investments and other long-term assets


-



1,632


938Loss on sale of investments


-



1,054


-Foreign currency transactional loss


1,623



26,341


2,501Otherincluding foreign currency translation adjustments


(260
)


13,208


4,853$
27,063


$
72,644

$
27,480





Changes in operating assets and liabilities comprise the following:




Years ended October 31

2011


2010

2009Accounts receivable

$
1,159


$
1,726

$
39,264Inventories


(4,012
)


(3,697
)

(2,972
)Other current assets and long term assets


5,206



(3,569
)

59,962Accounts payable and accrued liabilities


(26,178
)


(2,864
)

(24,672
)Income taxes


2,951



(37,216
)

(2,082
)Deferred income and other long-term obligations


(12,582
)


(3,134
)

5,526$
(33,456
)

$
(48,754
)
$
75,026








Nordion Inc. Fiscal 2011 Annual Report
 24





Notes to Consolidated Financial Statements


[All amounts in thousands of U.S. dollars, except where noted]





22.
Stock-Based Compensation




Stock option plan


At the Company’s annual and Special Meeting of Shareholders held on March 8, 2007, shareholders approved the Company’s 2007 Stock Option Plan (the Plan), which replaced the Company’s 2006 Stock Option Plan.  Under the Plan, which conforms to all current regulations of the New York and Toronto stock exchanges, the Company may issue shares on the exercise of stock options granted to eligible employees, officers, directors and persons providing on-going management or consulting services to the Company.  The exercise price of stock options issued under the Plan equals the market price of the underlying shares on the date of the grant.  All options issued under the Plan are granted and priced on the date on which approval by the Board of Directors of the Company is obtained or a later date set by the Board of Directors in its approval.  As of October 31, 2011, 6,160,000 Common shares have been reserved for issuance under the Plan.





Stock-based compensation expense related to the Company’s stock option plan for the year ended October 31, 2011 is $1.2 million (2010 ― $3.5 million; 2009 - $4.0 million), of which $1.2 million (2010 ― $0.2 million; 2009 - $2.8 million) is included in selling, general and administration expenses and $nil (2010 ― $2.5 million; 2009 - $nil) is in restructuring charges (Note 18) in “Income (loss) from continuing operations”, and $nil (2010 ― $0.8 million; 2009 - $1.2 million) is included in “Loss from discontinued operations, net of income taxes”.





During the year ended October 31, 2011, the Company granted 808,700 (2010 – 1,174,000) C$ stock options, respectively, at a weighted average exercise price of $10.32 (2010 - C$9.66). All options granted in fiscal 2011 have a seven year term and either become exercisable ratably (a graded-vesting schedule) over a three-year period (764,300 options) or vest 100% after three years from the grant date (44,400 options).





Canadian Dollar Options


Number (000s)


Weighted Average

Exercise

Price

(C$)


Weighted

Average

Remaining Contractual Life (Years)

Aggregate Intrinsic Value (C$ thousands)Outstanding as of October 31, 2009


3,482


$
19.95



3.5

$
-Granted


1,174



9.66Exercised


-



-Cancelled or forfeited


(996
)


20.63Expired


(129
)


14.49Outstanding as of October 31, 2010


3,531


$
16.53



3.9

$
2,067Granted


809



10.32Exercised


-



-Cancelled or forfeited


(1,801
)


19.80Expired


(116
)


21.74Outstanding as of October 31, 2011


2,423


$
11.78



5.3

$
-Vested and expected to vest as at October 31, 2010(a)


3,386


$
16.82



4.1

$
1,813Vested and expected to vest as at October 31, 2011(a)


2,182


$
11.98



5.2

$
-Exercisable as at October 31, 2010


2,356


$
19.95



2.5

$
-Exercisable as at October 31, 2011


440


$
20.11



1.9

$
-


(a)   The expected to vest amount represents the unvested options as at October 31, 2011 and 2010, respectively, less estimated forfeitures.





Canadian dollar options outstanding as of October 31, 2011 comprise the following:




Options Outstanding


Options ExercisableRange of Exercise Prices

(C$)
Weighted Average

Remaining Contractual Life (Years)


Number

(000s)


Weighted Average Exercise Price

(C$)


Number

(000s)


Weighted

Average

Exercise

Price

(C$)$09.65 - $10.19

5.71



1,181


$
9.66



-


$
-$10.20 - $18.81

6.30



876



10.98



74



17.95$18.82 - $20.10

1.14



180



19.50



180



19.50$20.11 - $21.74

1.74



75



21.26



75



21.26$21.75 - $22.50

2.59



111



21.77



111



21.775.32



2,423


$
11.78



440


$
20.11





Nordion Inc. Fiscal 2011 Annual Report
 25





Notes to Consolidated Financial Statements


[All amounts in thousands of U.S. dollars, except where noted]





United States Dollar Options


Number (000s)


Weighted

Average

Exercise

Price

(US$)


Weighted

Average

Remaining Contractual Life (Years)

Aggregate Intrinsic Value (US$ thousands)Outstanding as of October 31, 2009


1,155


$
15.49



5.7

$
-Granted


-



-Exercised or released


(43
)


6.14Cancelled or forfeited


(310
)


15.77Outstanding as of October 31, 2010


802


$
15.88



4.6

$
15Granted


-



-Exercised or released


-



-Cancelled or forfeited


(645
)


15.91Outstanding as of October 31, 2011


157


$
15.72



3.6

$
8Vested and expected to vest as at October 31, 2010


802


$
15.88



2.6

$
15Vested and expected to vest as at October 31, 2011


157


$
15.72



3.6

$
8Exercisable as at October 31, 2010


802


$
15.88



4.6

$
15Exercisable as at October 31, 2011


157


$
15.72



3.6

$
8







United States dollar options outstanding as of October 31, 2011 comprise the following:




Options Outstanding
Options ExercisableRange of Exercise Prices

(US$)
Weighted

Average

Remaining

Contractual

Life (Years)

Number

(000s)

Weighted Average Exercise Price

(US$)
Number

(000s)

Weighted Average Exercise

Price

(US$)$6.13 - $6.15
4.13

3
$
6.15
3
$
6.15$14.35 - $17.74
3.54

154

15.91
154

15.913.55

157
$
15.72
157
$
15.72





The Company utilizes the Black-Scholes option valuation model to estimate the fair value of the options granted based on the following assumptions:




2011
2010
2009Risk-free interest rate
1.94%
2.1%
1.7%Expected dividend yield
3.75%
0.0%
0.0%Expected volatility
0.304
0.365
0.311Expected time until exercise (years)
3.64
3.64
4.20





The weighted average fair values of options granted are estimated to be C$1.83 per Common share in fiscal 2011, C$2.91 per Common share in fiscal 2010, and US$1.47 per Common share in fiscal 2009.





The Black-Scholes option valuation model used by the Company to determine fair values was developed for use in estimating the fair value of freely traded options that are fully transferable and have no vesting restrictions. This model requires the use of assumptions, including future stock price volatility and expected time until exercise. The Company uses historical volatility to estimate its future stock price volatility. The expected time until exercise is based upon the contractual term, taking into account expected employee exercise and expected post-vesting employment termination behavior.





The following table summarizes the intrinsic value of options exercised and the fair values of shares vested:




2011

2010

2009Aggregate intrinsic value of options exercised
C$
-
C$
-
C$
-US$
-
US$
62
US$
-Aggregate grant-date fair value of shares vested
C$
-
C$
5,920
C$
3,657US$
-
US$
4,518
US$
1,566








Nordion Inc. Fiscal 2011 Annual Report
 26





Notes to Consolidated Financial Statements


[All amounts in thousands of U.S. dollars, except where noted]





As of October 31, 2011, the total remaining unrecognized compensation expense related to non-vested stock options amounted to approximately C$3.0 million and US$nil, which will be amortized over the weighted average remaining requisite service period of approximately 25 months and nil months, respectively, for the C$ and US$ stock options.





Incentive plans




Deferred share units (DSU)


During the year ended October 31, 2011, the Company granted 85,447 (2010 – nil; 2009 – nil) DSU to senior executive officers of the Company, which vest 100% after three years from the grant date. Vesting is time based and not dependent on a performance measure. Vested DSU are payable upon termination of employment and will be settled in cash equal to the number of vested units multiplied by the five-day average closing TSX share price up to and including the termination date. The Company records compensation expense and the corresponding liability each period based on vested units and changes in the market price of Common shares.





The DSU expense for the year ended October 31, 2011 is $0.2 million (2010 ― $nil; 2009 - $nil), which is included in selling, general and administration expenses in “Income (loss) from continuing operations”.





Mid-term incentive plans


The Company records the costs of its MTIP plans at fair value based on assumptions that are consistent with those used to determine the fair value of stock option compensation. The table below shows the liability and expense related to the MTIP plans of the Company. There has not been MTIP since fiscal year 2009.





Liability(a)

As of October 312011


20102006 Plan

$
508


$
9302007 Plan


-



-2008 Plan


-



-2009 Plan


-



-Total

$
508


$
930





(Income) Expense(b)

Years ended October 312011


2010

20092006 Plan

$
(197
)

$
(28
)
$
-2007 Plan


-



-


-2008 Plan


-



3,988


(2,256
)2009 Plan


-



6,101


-Total

$
(197
)

$
10,061

$
(2,256
)


(a) The MTIP liability is included in the employee-related accruals in accrued liabilities in the consolidated statements of financial position (Note 11).





(b) The MTIP (income) expense for the year ended October 31, 2011 is $(0.2) million (2010 ― $10.1 million; 2009 - $(2.3) million), of which $(0.2) million (2010 ― $nil; 2009 -$(1.1) million) is included in selling, general and administration expenses and $nil (2010 ― $5.6 million; 2009 - $nil) is included in restructuring charges (Note 18) in “Income (loss) from continuing operations”, and $nil (2010 ― $4.5 million; 2009 - $(1.2) million) is included in “Loss from discontinued operations, net of income taxes”.





23.
Employee Benefits




The Company sponsors various post-employment benefit plans including defined benefit and contribution pension plans, retirement compensation arrangements, and plans that provide extended health care coverage to retired employees.





Defined benefit pension plans


The Company sponsors defined benefit pension plans for certain employees in Canada and the U.S.. The Canadian plan is based on the highest three or six average consecutive years of wages and requires employee contributions. The U.S. plan is based on the participants’ 60 highest consecutive months of compensation and their years of service. The pension plan in the U.S. is related to MDS Pharma Services and the Company has retained this pension plan subsequent to the sale of Early Stage.





All plans are funded and the Company uses an October 31st measurement date for its plans. The most recent actuarial valuation for the Nordion pension plan for funding purposes was as of January 1, 2011. Based on this actuarial valuation, the Company expects funding requirements of approximately $11 million, including approximately $3 million of current service cost contributions, in each of the next five years to fund the solvency deficit. This is primarily a result of a decline in real interest rates although asset values have increased. The actual funding requirements over the five-year period will be dependent on subsequent annual actuarial valuations. These amounts are





Nordion Inc. Fiscal 2011 Annual Report
 27





Notes to Consolidated Financial Statements


[All amounts in thousands of U.S. dollars, except where noted]





estimates, which may change with actual investment performance, changes in interest rates, any pertinent changes in government regulations, and any voluntary contributions.





The Company’s defined benefit pension liability in Belgium was assumed by Best Medical upon the completion of the sale of MDS Nordion S.A. (Belgium) on March 31, 2011 (Note 3) and, accordingly, is reported as discontinued operations.





The components of net periodic pension (income) cost for these plans for fiscal 2011, 2010 and 2009 are as follows:




Domestic Plan


International PlanYears ended October 31

2011


2010


2009


2011


2010

2009Components of net periodic pension costService cost

$
2,719


$
1,980


$
1,352


$
-


$
97

$
196Interest cost


11,994



12,045



10,291



610



689


734Expected return on plan assets


(16,044
)


(15,579
)


(13,215
)


(706
)


(687
)

(676
)Recognized actuarial (gain) loss


-



-



(961
)


258



344


198Net periodic pension (income) cost(a)

$
(1,331
)

$
(1,554
)

$
(2,533
)

$
162


$
443

$
452







The following weighted average assumptions are used in the determination of the net periodic benefit (income) cost and the projected benefit obligation:




Domestic Plan


International PlanYears ended October 31

2011


2010


2009


2011


2010

2009Projected benefit obligationDiscount rate


5.40
%


5.40
%


6.50
%


4.50
%


5.24
%

5.75
%Expected return on plan assets


6.00
%


6.50
%


6.90
%


8.00
%


8.00
%

8.00
%Rate of compensation increase


3.50
%


3.50
%


3.75
%


n/a



n/a


4.50
%Benefit costDiscount rate


5.40
%


6.50
%


7.25
%


5.24
%


5.75
%

7.50
%Expected return on plan assets


6.50
%


6.90
%


6.75
%


8.00
%


8.00
%

8.00
%Rate of compensation increase


3.50
%


3.75
%


3.75
%


n/a



4.50
%

4.50
%





Discount rate assumptions have been, and continue to be, based on the prevailing long-term, market interest rates at the measurement date.





The changes in the projected benefit obligation, fair value of plan assets, and the funded status of the plans are as follows:




Domestic Plan


International PlanAs of October 31

2011


2010


2011


2010Change in projected benefit obligationProjected benefit obligation, beginning of year

$
215,167


$
178,296


$
11,720


$
13,021Service cost - pension


3,910



3,135



-



966Interest cost


11,994



12,045



610



689Benefits paid


(8,224
)


(7,661
)


(649
)


(819
)Actuarial loss


1,621



18,124



1,248



689Curtailment gain(a)


-



-



-



(1,957
)Foreign currency exchange rate changes


4,981



11,228



-



(869
)Projected benefit obligation, end of year


229,449



215,167



12,929



11,720Change in fair value of plan assetsFair value of plan assets, beginning of year


224,111



191,867



8,826



8,184Actual return on plan assets


10,252



20,594



703



1,355Benefits paid


(8,224
)


(7,661
)


(649
)


(819
)Employer contributions


6,681



6,222



118



106Employee contributions


1,191



1,133



-



-Foreign currency exchange rate changes


5,186



11,956



-



-Fair value of plan assets, end of year


239,197



224,111



8,998



8,826Funded status – over/(under) at end of year

$
9,748


$
8,944


$
(3,931
)

$
(2,894
)








Nordion Inc. Fiscal 2011 Annual Report
 28





Notes to Consolidated Financial Statements


[All amounts in thousands of U.S. dollars, except where noted]





(a) On March 5, 2010, the Company completed the sale of Early Stage (Note 3), which resulted in the termination of employees’ services earlier than expected in the U.S. plan. A curtailment gain of $2.0 million is recorded for the year ended October 31, 2010, which is included in “Total comprehensive loss” in the consolidated statements of shareholders’ equity and comprehensive loss and reduces the projected benefit obligation by $2.0 million as of October 31, 2010.





The funded status, measured as the difference between the fair value of plan assets and the projected benefit obligation, for the Canadian plan is included in other long-term assets (Note 9) and the funded status of the U.S. plan is included in other long-term liabilities (Note 14) in the consolidated statements of financial position.





A reconciliation of the funded status to the net plan assets (liabilities) recognized in the consolidated statements of financial position is as follows:


Domestic Plan


International PlanAs of October 31

2011


2010


2011


2010Projected benefit obligation

$
229,449


$
215,167


$
12,929


$
11,720Fair value of plan assets


239,197



224,111



8,998



8,826Plan assets in excess of (less than) projected benefit obligation


9,748



8,944



(3,931
)


(2,894
)Unrecognized net actuarial loss


30,212



22,635



5,268



4,275Net amount recognized at year end

$
39,960


$
31,579


$
1,337


$
1,381Long-term pension plan assets

$
9,748


$
8,944


$
-


$
-Non-current liabilities


-



-



(3,931
)


(2,894
)Accumulative other comprehensive loss


30,212



22,635



5,268



4,275Net amount recognized at year end

$
39,960


$
31,579


$
1,337


$
1,381





The following table illustrates the amounts in accumulated other comprehensive income that have not yet been recognized as components of pension expense:




As of October 31

2011


2010Net actuarial loss

$
35,480


$
26,910Deferred income taxes


(8,847
)


(6,992
)Accumulated other comprehensive loss - net of tax

$
26,633


$
19,918





The weighted average asset allocation of the Company’s pension plans is as follows:




Target


Domestic Plan


International PlanAsset Category



2011


2010


2011


2010Cash

0.0
%


0.1
%


0.1
%


0.0
%


0.6
%Fixed income

44.0
%


48.2
%


44.9
%


100.0
%


31.2
%Equities

56.0
%


51.7
%


55.0
%


0.0
%


68.2
%Total

100.0
%


100.0
%


100.0
%


100.0
%


100.0
%





The Company maintains target allocation percentages among various asset classes based on investment policies established for the pension plans, which are designed to maximize the total rate of return (income and appreciation) after inflation, within the limits of prudent risk taking, while providing for adequate near-term liquidity for benefit payments. The Company’s expected return on asset assumptions are derived from studies conducted by actuaries and investment advisors. The studies include a review of anticipated future long-term performance of individual asset classes and consideration of the appropriate asset allocation strategy given the anticipated requirements of the plans to determine the average rate of earnings expected on the funds invested to provide for the pension plans benefits. While the study gives appropriate consideration to recent fund performance and historical returns, the assumption is primarily a long-term, prospective rate.





The following table provides a basis of fair value measurement for plan assets held by the Company’s pension plans that are measured at fair value on a recurring basis. See also the discussion of fair value hierarchy in Note 17.





As of October 31, 2011

Level 1


Level 2


Level 3


TotalCash and cash equivalents

$
191


$
-


$
-


$
191Debt securities


-



115,269



-



115,269Equity securities


-



132,735



-



132,735Other


-



-



-



-Total

$
191


$
248,004


$
-


$
248,195








Nordion Inc. Fiscal 2011 Annual Report
 29





Notes to Consolidated Financial Statements


[All amounts in thousands of U.S. dollars, except where noted]





Expected future benefit payments are as follows:




Years ended October 31

Domestic Plan


International Plan2012

$
9,005


$
4852013


9,521



5002014


10,075



5412015


10,813



5592016


11,412



5902017 – 2021


65,709



3,840$
116,535


$
6,515





Other benefit plans


Other benefit plans include a supplemental retirement arrangement, a retirement/termination allowance and post-retirement benefit plans, which include contributory health and dental care benefits and contributory life insurance coverage. All non-pension post-employment benefit plans are unfunded.





The components of net periodic cost for these plans are as follows:




Years ended October 31

2011


2010

2009Components of net periodic costCurrent service cost

$
191


$
276

$
162Interest cost


768



790


734Recognized actuarial (gain) loss


(229
)


348


(416
)Recognized past service cost


(50
)


(48
)

(42
)Curtailment gain recognized


-



(486
)

-Net periodic cost

$
680


$
880

$
438





The weighted average assumptions used to determine the net periodic pension cost and projected benefit obligation for these plans are as follows:




Years ended October 31

2011


2010

2009Projected benefit obligationDiscount rate


5.11
%


5.13
%

6.09
%Rate of compensation increase


3.91
%


3.96
%

4.12
%Initial health care cost trend rate


9.06
%


9.10
%

9.12
%Ultimate health care cost trend rate


4.50
%


4.50
%

4.85
%Years until ultimate trend rate is reached


10



11


13Benefit costDiscount rate


5.16
%


6.08
%

7.15
%Rate of compensation increase


3.86
%


4.05
%

4.12
%





Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage point change in assumed health care cost trend rates would have had the following impact in fiscal 2011:




1% Increase


1% DecreaseChange in net benefit cost

$
85


$
(69
)Change in projected benefit obligation

$
1,180


$
(976
)








Nordion Inc. Fiscal 2011 Annual Report
 30





Notes to Consolidated Financial Statements


[All amounts in thousands of U.S. dollars, except where noted]





The changes in the projected benefit obligation and the funded status of the plans are as follows:




As of October 31

2011


2010Change in projected benefit obligationProjected benefit obligation – beginning of year

$
15,251


$
12,801Service cost


191



276Interest cost


768



790Benefits paid


(856
)


(924
)Actuarial (gain) loss


(1,398
)


1,992Curtailment gain


-



(487
)Foreign currency exchange rate changes


372



803Projected benefit obligation – end of year

$
14,328


$
15,251Funded status – under at end of year

$
(14,328
)

$
(15,251
)





A reconciliation of the funded status to the net plan liabilities recognized in the consolidated statements of financial position is as follows:




As of October 31

2011


2010Projected benefit obligation

$
(14,328
)

$
15,251Fair value of plan assets


-



-Plan assets less than projected benefit obligation


(14,328
)


(15,251
)Unrecognized actuarial gains


(2,097
)


(811
)Unrecognized past service costs


(282
)


(324
)Net amount recognized at year end

$
(16,707
)

$
(16,386
)Non-current liabilities

$
(14,328
)

$
(15,251
)Accumulative other comprehensive income


(2,379
)


(1,135
)Net amount recognized at year end

$
(16,707
)

$
(16,386
)





The other benefit plan liabilities related to continuing operations are included within other long-term liabilities (Note 14).





As of October 31, 2011, the unrecognized actuarial gains and past service costs of $2.4 million (October 31, 2010 ― $1.1 million), net of tax of $0.6 million (October 31, 2010 ― $0.3 million) are included in accumulated other comprehensive income.





Based on the actuarial assumptions used to develop the Company’s benefit obligations as of October 31, 2011, the following benefit payments are expected to be made to plan participants:





Years ended October 312012

$
7232013


6972014


7622015


8272016


8412017 ― 2021


5,018Total

$
8,868





During fiscal 2012, the Company expects to contribute approximately $2.6 million and $0.7 million to the Company’s pension plans and other benefit plans, respectively.





During fiscal 2011, the Company contributed $1.2 million to defined contribution pension plans on behalf of its employees (2010 ― $3.5 million; 2009 ― $7.6 million).





24.
Segmented Information




Nordion operates as a global life sciences company with three business segments: Targeted Therapies, Sterilization Technologies and Medical Isotopes. These segments are organized predominantly around the products and services provided to customers identified for the businesses.  Segmented information has been restated for prior years to conform to the new basis of segmentation.





Nordion Inc. Fiscal 2011 Annual Report
 31





Notes to Consolidated Financial Statements


[All amounts in thousands of U.S. dollars, except where noted]





The accounting policies of the segments are the same as those described in the summary of significant accounting policies. There are no significant inter-segment transactions. Segmented earnings are computed by accumulating the segment’s operating income, interest costs, other expenses and foreign exchange translations. The corporate segment results include the incremental cost of corporate overhead in excess of the amount allocated to the other operating segments, as well as certain other costs and income items that do not pertain to a business segment. Management does not track or allocate assets on a business segment basis.  Accordingly, assets and additions to assets


are not disclosed on a business segment basis in the following financial information.  Related expenses, such as depreciation, are allocated to each segment and reported appropriately herein.





The information presented below is for continuing operations.


Year ended October 31, 2011Targeted Therapies


Sterilization Technologies


Medical Isotopes


Corporate

and Other


TotalRevenues

$
61,832


$
108,662


$
103,533


$
-


$
274,027Direct cost of revenues


25,619



47,308



53,149



-



126,076Selling, general and administration(a)


15,785



15,007



14,337



7,806



52,935Other expense (income), net (b)


5,519



207



(38
)


4,552



10,240Segment earnings (loss)

$
14,909


$
46,140


$
36,085


$
(12,358
)

$
84,776Depreciation and amortization


8,530



6,719



7,088



38



22,375Restructuring charges, net


















1,592AECL arbitration and legal costs


















12,172Gain on sale of investment


















(1,691
)Change in fair value of embedded derivatives


















(2,649
)Operating income from continuing operations

















$
52,977


(a)
excludes AECL arbitration and legal costs of $12.2 million


(b)
excludes gain on sale of investment of $1.7 million





Year ended October 31, 2010Targeted Therapies


Sterilization Technologies


Medical Isotopes


Corporate

and Other


TotalRevenues

$
60,818


$
103,556


$
57,594


$
-


$
221,968Direct cost of revenues


30,017



41,642



33,018



-



104,677Selling, general and administration(a)


13,260



14,447



15,134



48,238



91,079Other expense, net(b)


4,487



13



-



17,871



22,371Segment earnings (loss)

$
13,054


$
47,454


$
9,442


$
(66,109
)

$
3,841Depreciation and amortization


6,693



5,156



4,698



11,967



28,514Restructuring charges, net


















62,531AECL arbitration and legal costs


















9,207Loss on sale of investments


















1,054Impairment of long-lived assets


















1,632Change in fair value of embedded derivatives


















(13,050
)Operating loss from continuing operations

















$
(86,047
)


(a)
excludes AECL arbitration and legal costs of $9.2 million


(b)
excludes impairment of long-lived assets of $1.6 million and loss on sale of investment of $1.1 million





Nordion Inc. Fiscal 2011 Annual Report
 32





Notes to Consolidated Financial Statements


[All amounts in thousands of U.S. dollars, except where noted]





Year ended October 31, 2009Targeted Therapies

Sterilization Technologies

Medical Isotopes

Corporate

and Other

TotalRevenues
$
39,372

$
78,322

$
94,003

$
-

$
211,697Direct cost of revenues

19,785


33,037


43,213


-


96,035Selling, general and administration(a)

9,770


11,997


13,361


38,168


73,296Other expense, net(b)

4,262


515


733


2,709


8,219Segment earnings (loss)
$
5,555

$
32,773

$
36,696

$
(40,877
)
$
34,147Depreciation and amortization

4,960


4,255


3,862


9,603


22,680Restructuring charges, net













9,306AECL arbitration and legal costs













1,944Impairment of long-lived assets













938Change in fair value of embedded derivatives













(7,922
)Operating earnings from continuing operations












$
7,201


(a)
excludes AECL arbitration and legal costs of $1.9 million


(b)
excludes impairment of long-lived assets of $0.9 million







Revenues by geographic location are summarized below:




Years ended October 31

Canada

US

Europe

Other

Total2011
$
6,360

$
178,213

$
26,565

$
62,889

$
274,0272010
$
6,775

$
136,834

$
20,831

$
57,528

$
221,9682009
$
6,721

$
127,351

$
15,301

$
62,324

$
211,697





All Property, plant and equipment for continuing operations and goodwill of the Company is located in Canada. All of the goodwill is carried in Canada and allocated to Sterilization Technologies, $1.6 million, and Medical Isotopes, $0.9 million.





Significant customers


For the year ended October 31, 2011, one major customer in Medical Isotopes segment accounted for $60.8 million or 22% (2010 ― $20.6 million or 9%; 2009 ― $38.4 million or 17%) of the Company’s revenues.





25.
Commitments and Contingencies




Leases and other commitments




The Company is obligated under non-cancelable operating leases, primarily for its offices and equipment. These leases generally contain customary scheduled rent increases or escalation clauses and renewal options.





The Company is also obligated under outsourcing agreements related to certain aspects of its information technology and human resources support functions. Actual amounts paid under these outsourcing agreements could be higher or lower than the amounts shown below as a result of changes in volume and other variables. In addition, early termination of these outsourcing agreements by the Company could result in the payment of termination fees, which are not reflected in the table below.





As of October 31, 2011, the Company is obligated under non-cancelable operating leases, primarily for its premises and equipment leases and other long-term contractual commitments to make minimum annual payments of approximately:




Years ended October 31

Operating

Leases


Other Contractual

Commitments2012

$
3,563


$
42,3612013


3,062



52,2052014


2,058



74,3412015


1,917



61,1042016


1,935



71,703Thereafter


5,335



233,597$
17,870


$
535,311








Nordion Inc. Fiscal 2011 Annual Report
 33





Notes to Consolidated Financial Statements


[All amounts in thousands of U.S. dollars, except where noted]





Net rental expense for premises and equipment leases for the year ended October 31, 2011 was $1.3 million (2010 ― $16.6 million; 2009 ― $19.9 million).





Contractual commitments


Included in other contractual commitments is over $490 million associated with long-term supply arrangements primarily with domestic and international suppliers of isotopes. Other contractual commitments also include a $2.3 million (2010 ― $5.4 million) relating to the outsourcing of the information technology infrastructure. The terms of these long-term supply or service arrangements range from 1 to 13 years. The amounts purchased under these contractual commitments for the year ended October 31, 2011 are $45.9 million (2010 ― $47.3 million; 2009 ― $56.3 million).




Net sales of certain products of the Company are subject to royalties payable to third parties. Royalty expense recorded in direct cost of revenues for the year ended October 31, 2011 amounted to $1.6 million (2010 ― $3.6 million; 2009 ― $5.8 million).





Captive insurance liability


The Company is self-insured for up to the first $5 million of costs incurred relating to a single liability claim in a year and to $10 million in aggregate claims arising during an annual policy period. The Company provides for unsettled reported losses and losses incurred but not reported based on an independent review of all claims made against the Company. Accruals for estimated losses related to captive insurance are $7.1 million as of October 31, 2011 (2010 ― $10.3 million) which are recorded in accrued liabilities (Note 11) and other long-term liabilities (Note 14).





Retained liabilities related to Early Stage


Subsequent to the sale of Early Stage, Nordion has retained litigation claims and other costs associated with the U.S. FDA’s review of the Company’s bioanalytical operations (Note 11) and certain other contingent liabilities in Montreal, Canada. Nordion has also retained certain liabilities related to pre-closing matters, a defined benefit pension plan for certain U.S. employees, and lease obligations for two office locations in King of Prussia, Pennsylvania and Bothell, Washington. The cost of future lease payments offset by expected sublease revenue, where applicable, is estimated at approximately $1.8 million.





Indemnities and guarantees


In connection with various divestitures that the Company underwent, Nordion has agreed to indemnify various buyers for actual future damage suffered by the buyers related to breaches, by Nordion, of representations and warranties contained in the purchase agreements. In addition, Nordion has retained certain existing and potential liabilities arising in connection with such operations related to periods prior to the closings. To mitigate Nordion’s exposure to these potential liabilities, the Company maintains errors and omissions and other insurance. Nordion is not able to make a reasonable estimate of the maximum potential amount that the Company could be required to pay under these indemnities. The Company has not made any significant payments under these types of indemnity obligations in the past, however, the Company has had discussions with buyers related to certain indemnities provided.





26.
Litigation




During fiscal 2009, the Company was served with a Complaint related to repeat study and mitigation costs of $10 million and lost profits of $70 million. This action relates to certain bioequivalence studies carried out by the Company’s former MDS Pharma Services business unit at the Montreal, Canada facility from January 1, 2000, to December 31, 2004. The Company maintains reserves in respect of repeat study costs as well as errors and omissions insurance. Nordion has assessed this claim and has accrued amounts related to the direct costs associated with the repeat study costs in the FDA provision (Note 11). No specific provision has been recorded related to the claim for lost profit, other than insurance deductible liabilities included in accrued liabilities. The Company has filed an Answer and intends to vigorously defend this action.





During fiscal 2009, the Company was served with a Statement of Claim related to repeat study and mitigation costs of $5.0 million


(C$5 million) and loss of profit of $30.1 million (C$30 million). This action relates to certain bioequivalence studies carried out by the Company’s former MDS Pharma Services business unit at the Montreal, Canada facility from January 1, 2000, to December 31, 2004. The Company maintains reserves in respect of repeat study costs as well as errors and omissions insurance. Nordion has assessed this claim and has accrued amounts related to the direct costs associated with the repeat study costs in the FDA provision (Note 11). No specific provision has been recorded related to the claim for lost profit, other than insurance deductible liabilities included in accrued liabilities. The Company has filed a Statement of Defence and intends to vigorously defend this action.





The Company is involved in an arbitration related to the MAPLE Facilities and an associated lawsuit with AECL and the Government of Canada.  AECL and the Government of Canada unilaterally announced in fiscal 2008 their intention to discontinue the development work on the MAPLE Facilities.  At the same time, AECL and the Government of Canada also publicly announced that they would continue to supply medical isotopes from the current NRU reactor, and would pursue a license extension of the NRU reactor operations past the





Nordion Inc. Fiscal 2011 Annual Report
 34





Notes to Consolidated Financial Statements


[All amounts in thousands of U.S. dollars, except where noted]





expiry date, at the time, of October 31, 2011.  On July 8, 2008, Nordion served AECL with a notice of arbitration proceedings seeking an order to compel AECL to fulfill its contractual obligations under an agreement entered into with AECL in February 2006 (the 2006 Agreement) to complete the MAPLE Facilities and, in the alternative and in addition to such order, seeking significant monetary damages.  In the lawsuit,Nordionis claiming $1.6 billion (C$1.6 billion) in damages from AECL and the Government of Canada.Nordion’s current emphasis is on arbitration proceedings which continue broadly along the planned schedule. Due to changes in scheduling, the Company now expects hearings for the arbitration to extend into the second quarter of fiscal 2012 and expects a decision from the panel thereafter.  Under the arbitration provisions, the parties have limited appeal rights as to matters of law.  In addition to the legal proceedings initiated by Nordion against AECL and the Government of Canada, the Company is currently exploring supply alternatives to mitigate the lack of supply from AECL, for both the long-term supply of reactor-based medical isotopes and isotopes produced by other modalities.  The Company has also urged the Government of Canada and AECL to consult with international experts and obtain their assistance toward activating the MAPLE Facilities project.








27.
Asset Retirement Obligation (ARO)


The Company’s ARO represents the present value of future remediation costs, which are recorded in other long-term liabilities (Note 14) and increased the carrying amounts of the related assets in property, plant and equipment, net in the consolidated statements of financial position. The capitalized future site remediation costs are depreciated and the ARO is accreted over the life of the related assets which is included in depreciation and amortization expense in “Operating income (loss) from continuing operations”.





During the fourth quarter of fiscal 2010, the Company reassessed cost estimates and other assumptions used in the valuation of ARO based on new information available and changes in circumstances including regulatory requirements and established $5.5 million of additional ARO for its facility in Kanata, Ontario.





The fair value of the ARO is determined based on estimates. Considerable management judgment is required in estimating these obligations. The key assumptions include credit adjusted risk free interest rate, timing and the estimate of the remediation activities. Changes in these assumptions based on future information may result in adjustments to the estimated obligations over time.





A reconciliation of the ARO for the years ended October 31, 2011 and 2010 is as follows:




As of October 31

2011


2010Asset retirement obligation – beginning of year

$
10,598


$
4,474Liability incurred


-



-Liability settled


-



-Incremental ARO


-



5,457Accretion expense


843



396Foreign exchange and other


250



271Asset retirement obligation – end of year

$
11,691


$
10,598





The Company has pledged a $15.5 million (October 31, 2010 ― $15.1 million) letter of credit in support of future site remediation costs.





28.
Comparative Figures




Certain figures for the prior period have been reclassified to conform to the current period’s consolidated financial statements presentation.






Nordion Inc. Fiscal 2011 Annual Report