TORONTO, Sept. 8 /PRNewswire-FirstCall/ -- MDS Inc. (TSX: MDS;
NYSE: MDZ), a company providing a range of enabling products and
services to the global health and life sciences industries, today
reported its third quarter 2005 results. Third Quarter
Year-over-Year Financial Highlights: - Revenues were $443 million
up marginally from $441 million, and up 3% on a currency-neutral
basis. - Operating income was $30 million compared to $72 million,
and before other items it was $43 million compared to $65 million.
- Basic earnings per share of $0.14 compared to $0.35, and earnings
per share from continuing operations before other items of $0.18
compared to $0.29. - Declared a quarterly cash dividend of $0.0325
per share. Of the $42 million decline in operating income, $20
million is attributable to items related to Proteomics ($14
million) and restructuring ($6 million). The remaining $22 million
comprises $6 million foreign currency impact, the impact of fee
cuts in BC on the diagnostics business, revenue weakness resulting
from the FDA review in the bioanalytical business, and a weakening
in our big pharma end-user markets that impacted the analytical
instruments business, combined with increased spending on change
initiatives. Operating Highlights The Life Sciences segment
generated revenues of $287 million compared to $286 million in the
prior year's quarter. The weakness of the US dollar relative to the
Canadian dollar continued to impact performance in the Life
Sciences segment. Operating income in the quarter was $16 million
compared to $47 million in the prior year, reflecting the impact of
the US dollar, weakness in the bioanalytical and analytical
instruments businesses, spending on change initiatives and other
items. - Pharmaceutical research services revenues were up 6%
year-over-year with revenues of $134 million. Backlog was up 11%
year-over-year to US $315 million, and up sequentially from US $305
million in the last quarter. Growth in our late-stage and early
clinical research businesses was offset by weakness in the
bioanalytical area. - Isotopes revenues were $79 million compared
to $81 million in the third quarter of last year. Cobalt
inventories were high at the quarter-end and significant shipments
are planned in the fourth quarter. - Analytical instruments
revenues were $74 million compared to $78 million in the third
quarter of last year. Health segment revenues were $156 million
compared to $155 million. Operating income declined to $14 million
from $22 million in the prior year, reflecting the impact of fee
cuts in BC and higher spending on change initiatives. - Laboratory
revenues fell 7% to $100 million, primarily as a result of the fee
reductions in BC. - Distribution revenues grew 17% to $56 million.
Corporate On September 1, the Company announced its new strategy
which is intended to drive near-term performance and sustainable
shareholder value creation. As part of this plan the Company
intends to: - Refocus on the global life sciences markets currently
served by our MDS Pharma Services, MDS Sciex and MDS Nordion
businesses. - Evaluate alternatives to maximize shareholder value
available for our Canadian diagnostics business. - Monetize our
interests in Source Medical and MDS Capital. - Aggressively realign
our infrastructure across the entire company, which will result in
a workforce reduction of approximately 500 and a restructuring
charge in Q4 of between $50 and $75 million dollars. The Board of
Directors declared a quarterly cash dividend of $0.0325 per share,
to shareholders of record as of September 16, 2005. The dividend is
payable on October 3, 2005. Outlook "With this plan, we expect to
set MDS firmly on the path to improved performance and shareholder
value creation. The aggressive realignment of infrastructure will
allow us to move forward with a lower cost structure and will lead
to improved operating performance in 2006," said Stephen P.
DeFalco, President and CEO, MDS Inc. "The life sciences markets
offer significant opportunities to MDS and allow us to leverage our
expertise and capabilities in high growth global markets," he
added. MDS will be holding a conference call today at 10:30 am.
This call will be webcast live at http://www.mdsintl.com/, and will
also be available in archived format at
http://www.mdsintl.com/news_present.asp after the call. MDS Inc.
has more than 9,000 highly skilled people in 27 countries. We
provide a diverse range of superior products and services to
increase our customers' speed, precision and productivity in the
drug development and disease diagnosis processes. We are a global,
values-driven life sciences company, recognized for our reliability
and collaborative relationships as we help create better outcomes
in the treatment of disease. Find out more at
http://www.mdsintl.com/ or by calling 1-800-MDS-7222, 24 hours a
day. This document contains forward-looking statements. Some
forward-looking statements may be identified by words like
"expects", "anticipates", "plans", "intends", "indicates" or
similar expressions. The statements are not a guarantee of future
performance and are inherently subject to risks and uncertainties.
The Company's actual results could differ materially from those
currently anticipated due to a number of factors, including, but
not limited to, successful integration of structural changes,
including restructuring plans, acquisitions, technical or
manufacturing or distribution issues, the competitive environment
for the Company's products, the degree of market penetration of the
Company's products, and other factors set forth in reports and
other documents filed by the Company with Canadian and US
securities regulatory authorities from time to time. MANAGEMENT'S
DISCUSSION & ANALYSIS OF OPERATING RESULTS & FINANCIAL
POSITION September 8, 2005 This section of the quarterly report
contains management's analysis of the financial performance of the
company and its financial position and it should be read in
conjunction with the consolidated financial statements. Readers are
cautioned that management's discussion and analysis (MD&A)
contains forward-looking statements and that actual events may vary
from management's expectations. Readers are encouraged to consult
the MDS Annual Report and Annual Information Form for fiscal 2004
for additional details regarding risks affecting the business. In
our MD&A and elsewhere we refer to measures such as backlog and
unusual items that are not defined by generally accepted accounting
principles (GAAP). Our use of these terms may not be consistent
with the way these terms are used by others. Where possible, in
particular for earnings per share measures, we provide tables or
other information that enables readers to reconcile between such
non-GAAP measures and standard GAAP measures. While these measures
are not defined by or required by GAAP, we provide this information
to readers to help them better understand the significant events,
transactions, and trends that affect our businesses. All financial
references in this document exclude the discontinued generic
radiopharmaceuticals, US Laboratory, and certain early-stage
pharmaceutical research services operations, and therefore reflect
only our continuing operations, unless otherwise noted. The results
for all prior periods have been restated to conform to this
presentation. Overview Revenues for the third quarter of fiscal
2005 were up $2 million over the same period last year, taking into
account the restatement of results to reflect the discontinuation
of our US laboratories business along with certain early-stage
pharmaceutical research services. For the third quarter, the
average rate of exchange between the Canadian and US dollar was
$1.24 compared to $1.34 last year and our effective translation
rate on revenues was $1.32 versus $1.41, taking into account the
impact of our hedging program. The declining US dollar, combined
with the reduced protection of our hedge portfolio, reduced revenue
by $12 million. Adjusting for this rate fluctuation, revenue growth
was 3%. Operating income for the quarter was $30 million, a
decrease of $42 million over the same period last year. Excluding
the impact of MDS Proteomics (subsequently renamed Protana Inc.)
and other items included in operating income for the third quarter
in both years, operating income was down from $65 million to $43
million, or $22 million. This decrease primarily reflects the
impact of the fee cut in British Columbia (BC), weakness in
analytical instruments and bioanalysis, and incremental spending on
change initiatives. In addition, as the majority of our costs are
denominated in Canadian dollars, we continue to be affected by the
drop in the US dollar, which in this quarter had an impact on
operating income of $6 million in our Life Sciences segment,
compared to the prior-year quarter. Restructuring charges in the
current year, combined with one-time items and items related to
proteomics, impact the comparability of operating income
year-over-year and are set out in the table below. We recorded
basic and diluted earnings per share of $0.14 for the quarter,
which includes a $0.03 gain on discontinued operations resulting
from the sale of our remaining US laboratory business, a $0.03
restructuring charge, and a $0.04 write-off of licensed technology.
Earnings per share from continuing operations before the impact of
MDS Proteomics and other items was $0.18 for the quarter, compared
to $0.29 last year. The US dollar decline accounts for $0.03 of the
drop compared to 2004. The balance of the decline relates to
decreases in operating income for reasons set out in more detail
below. Effective July 1, 2005, Stephen P. DeFalco was appointed
President and CEO, accelerating our senior management transition
plan. Management's priority is to improve the operating performance
of the MDS businesses, in particular MDS Pharma Services,
underscoring our commitment to increasing shareholder value. We are
in a stage of transition, and as such, we will continue to execute
on opportunities to focus on our core products, customers and
markets. On September 1, 2005, we announced our strategic plan,
which will now focus on three core businesses: pharmaceutical
contract research, molecular imaging and radio-therapeutics, and
analytical instruments. As a result of our realignment, assets that
do not contribute to the Company's areas of focus will be evaluated
with a view towards maximizing shareholder value. (Tabular amounts
are in millions of Canadian dollars, except where noted.) Summary
Consolidated Third Nine Results Quarter Months
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2005 2004 Change 2005 2004 Change
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Revenues $ 443 $ 441 - $ 1,313 $ 1,299 1% Operating Income $ 30 $
72 (58%) $ 121 $ 137 (12%) Basic earnings per share $ 0.14 $ 0.35
(60%) $ 0.56 $ 0.30 87%
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Details of items affecting the period-to-period comparability of
operating income and earnings per share are provided in the
following tables. Third Quarter Nine Months
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2005 2004 2005 2004
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Operating income from continuing operations before MDS Proteomics
and other items $ 43 $ 65 $ 134 $ 203 MDS Proteomics - Operations -
(5) - (26) - Writedown of goodwill and other assets - - - (63) -
Gain resulting from reorganiz- ation - 8 - 8
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Operating income from continuing operations, before other items 43
68 134 122 Restructuring (5) - (5) (6) Investment tax credits from
MDS Proteomics - 3 - 3 Patent settlement - - - 14 Gain on sale of
businesses and other - 1 - 4 Write-off of licensed technology (8) -
(8) -
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Operating income $ 30 $ 72 $ 121 $ 137
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Third Quarter Nine Months
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2005 2004 2005 2004
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Earnings per share (EPS) from continuing operations before MDS
Proteomics and other items $ 0.18 $ 0.29 $ 0.61 $ 0.84 MDS
Proteomics - (0.01) - (0.55)
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EPS from continuing operations before other items 0.18 0.28 0.61
0.29 Restructuring (0.03) - (0.03) (0.02) Investment tax credits
from MDS Proteomics - 0.08 - 0.08 Patent settlement - - - 0.06 Gain
on sale of businesses and other - 0.01 - 0.03 Write-off of licensed
technology (0.04) - (0.04) -
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EPS from continuing operations $ 0.11 $ 0.37 $ 0.54 $ 0.44
Discontinued operations 0.03 (0.02) 0.02 (0.14)
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Basic EPS $ 0.14 $ 0.35 $ 0.56 $ 0.30
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Segment results Third Quarter 2005 2004
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Operating Operating Operating Operating Revenues Income Margin
Revenues Income Margin
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Life Sciences $ 287 $ 16 6% $ 286 $ 47 16% Health 156 14 9% 155 22
14%
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443 30 7% 441 69 16% Proteomics - - - 3 n/m
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$ 443 $ 30 7% $ 441 $ 72 16%
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n/m (equal sign) not meaningful Nine Months 2005 2004
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Operating Operating Operating Income Operating Revenues Income
Margin Revenues (Loss) Margin
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Life Sciences $ 851 $ 76 9% $ 844 $ 162 19% Health 462 45 10% 455
56 12%
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1,313 121 9% 1,299 218 17% Proteomics - - - (81) n/m
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$ 1,313 $ 121 9% $ 1,299 $ 137 11%
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Life Sciences Review of operations - Revenues from Life Sciences
businesses for the quarter were: Third Quarter 2005 2004 Change
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Early-stage research $ 83 $ 82 1% Late-stage research 51 45 13%
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Pharmaceutical research services 134 127 6%
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Gamma sterilization 16 17 (6%) Nuclear medicine 54 54 - Therapy
systems 9 10 (10%)
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Isotopes 79 81 (2%)
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Analytical instruments 74 78 (5%)
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$ 287 $ 286 -
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During the quarter, we realized 6% revenue growth in pharmaceutical
research services, led by a 13% increase in late-stage research.
Within late-stage research, revenue growth in central laboratory
services was 37%, while global clinical development revenue was
level with last year. In early-stage businesses, early clinical
research (ECR) experienced 13% revenue growth, and toxicology
revenues were level compared to the prior year. Revenue from
bioanalysis continues to be affected by our on-going focus on
resolving outstanding US Food & Drug Administration (FDA)
queries. Revenue from bioanalysis declined 22% compared to the
prior year, which offset growth in other early-stage businesses. An
Operational Quality group has been formed to implement a Quality
Leadership Program (QLP) that formalizes the learning from the
current FDA review of bioanalytical studies conducted in Montreal.
The focus of the QLP is on improving customer quality and services
through continuous process improvements and compliance. Based on
our progress with study reviews in the period, we have
significantly increased the resources performing this work to
ensure that we remain on track to complete all reviews within the
one-year timeframe agreed to with the FDA. Costs related to this
review will continue to be reflected as an operating cost. We
estimate that approximately $4 million will be incurred in fiscal
2006 to complete the review. Our average pharmaceutical research
backlog increased by 3% over the prior quarter and 11% when
compared to the prior year. Average backlog in our early-stage
research business has slipped approximately 8% compared to last
year, while late-stage research has grown by approximately 16%
versus the prior year. The reduction in early-stage backlog
continues to be a result of reduced opportunities to bid on
proposals in the bioanalytical area, partially offset by the growth
in ECR, such as a recently awarded three-year dedicated facility
agreement in our expanded Lincoln, Nebraska site. The growth in our
late-stage backlog business is due to our ability to attract
significant clinical trial management contracts such as a recently
awarded Phase III clinical trial of an anti-malarial drug which
spans 2,550 malaria patients in Asia and Africa. Average Backlog
(millions of US dollars)
------------------------------------------------------- Fiscal 2004
- Quarter 1 $ 240 Quarter 2 265 Quarter 3 285 Quarter 4 300 Fiscal
2005 - Quarter 1 315 Quarter 2 305 Quarter 3 315 Backlog measures
are not defined by GAAP and our measurement of backlog may vary
from that used by others. While we believe that long-term backlog
trends serve as a useful metric for assessing the growth prospects
for our business, backlog is not a guarantee of future revenues and
provides no information about the timing on which future revenue
may be recorded. We report our backlog in US dollars to reflect the
underlying currency of the majority of such contracts and to reduce
the volatility that would result from converting the measure to
Canadian dollars. We are committed to the discovery, development
and analysis of new biomarkers and have recently launched the
Biomarker Alliance, which is an integrated group of top biomarker
service providers poised to maximize the success of drug
candidates, as well as currently marketed products. Our
contribution to the Alliance will be access to global customers, as
well as clinical and analytical expertise. In the third quarter of
last year, we entered into a $10 million, five-year licensing
agreement with Protana Inc. that granted our pharmaceutical
research services access to certain proteomics technology. The
license fee was paid 50% on signing, with the balance paid in
August 2005. We have recorded amortization expense of $2 million on
the cost of this license since inception. Based on our realigned
operational plan for MDS Pharma Services, we have decided to use a
different technology, and we do not expect to recover our
investment in this license. As a result, an $8 million asset
write-off was recorded this quarter. Revenue in our Isotope
business was down 2% compared to the prior year, due mainly to the
time required to process and ship cobalt-60 supply received later
in the quarter. In order to diversify our industrial cobalt supply,
we have signed a US$24 million contract with a Russian company to
complement our existing supply of cobalt. This new agreement has a
term of 13 years. Growth in our nuclear medicine business has been
stable. Revenue for the quarter reflected the sale of two
Iodine-123 (I-123) production systems, offset by shortfalls in
demand for Thallium and Palladium isotopes. Our Isotope business
announced the first commercially available copper-64 (CU-64)
isotope in the quarter, which will be used principally as a
positron emission tomography (PET) imaging isotope to provide
physicians with higher resolution images in diagnostic and
therapeutic medical applications. The impact on the quarterly
revenues from this new product was not significant. Therapy systems
experienced lower shipments of Theratron units in the quarter, due
to a delay in the release of our new Equinox external beam system.
We now expect to launch this new system by year-end. For the
quarter, overall customer shipments of analytical instruments were
up 15%, of which 9% relates to our new MALDI products. Revenues
softened this quarter, mainly due to the impact of the US dollar
and weaker sales of ELAN(R) products. These ICP/MS mass
spectrometer-based products have been subject to greater price
competition and affected by a lull in the semi-conductor
fabrication market. With the recent addition of the API 5000(TM)
and API 3200(TM) triple quads, we now have five triple quad mass
spectrometers in our product lineup. While we have seen some
continued softness in our large pharmaceutical customers'
purchasing patterns, our broad product line has allowed us to
increase sales to other applied markets. We continued to achieve
strong performance from our QTRAP products, with the 4000 QTRAP(R)
being complemented by the new 3200 QTRAP(R) in both biomarker and
small molecule markets. The recently introduced 4800 MALDI TOF/TOF,
based on technology acquired as a result of our purchase of a 50%
interest in AB MALDI TOF business in 2004, has also been well
received by our proteomics and biomarker customers. Overall,
operating income for the Life Sciences segment was $16 million at a
margin of 6%, down from $47 million and 16% respectively in the
prior year. Operating income was negatively affected by the delay
in the shipment of production cobalt supply for the quarter. We
expect cobalt shipments to increase in the fourth quarter. Within
our pharmaceutical research services, operating income was lower
than last year as a result of the combination of the foreign
currency exposure in excess of our US dollar hedges, incremental
FDA review costs, and delayed initiation of awarded projects in
global clinical development. Our analytical instruments operating
income, when compared to prior year, was impacted by the continued
strength of the Canadian dollar, the increased investment in our
CellKey(TM) product as we prepare for a September product launch,
and our investment in the recently launched 4800 MALDI TOF/TOF.
Capital expenditures - Net purchases of capital assets in Life
Sciences amounted to $44 million for the quarter compared to $23
million last year. Year-to-date purchases were $83 million compared
to $75 in the prior year. Included in capital expenditures for the
quarter is $22 million relating to the MAPLE facility, of which $2
million reflects capitalized interest costs. Atomic Energy of
Canada Limited (AECL) has applied to renew its Class I license to
operate the MAPLE 1 and 2 reactors at the Chalk River Laboratories
which expires November 30, 2005. The renewed license would be valid
through to November 30, 2007. Financial responsibility for
construction cost over-runs and portions of pre- and
post-commissioning operating costs for MAPLE are the subject of a
dispute with AECL. A mediator has been appointed and proceedings
are scheduled to be completed prior to the calendar year-end. AECL
is continuing to develop their plan to resolve the power
coefficient issue. This requires approval from the Canadian Nuclear
Safety Commission (CNSC) to restart the reactor and perform power
coefficient tests. At this time, we do not have sufficient
information to reasonably determine the timing of the start of
commercial production in the new facilities. We depend on the
Nuclear Research Universal (NRU) reactor, operated by AECL, for the
supply of the majority of our reactor isotopes. Subsequent to
quarter end, the CNSC announced that the environmental assessment
was complete and that it could now consider the renewed license
application. This would allow the NRU reactor to operate until July
31, 2006, which is beyond its currently scheduled shutdown on
December 31, 2005. The seven-month extension would allow for
further study into the feasibility of a longer-term extension of
the operation of the NRU reactor by the CNSC. The scheduled license
hearing will commence near the end of the fourth quarter. Segment
outlook - We will continue to be challenged by the weak US dollar
this year and will be affected even more in 2006 as our hedge
protection is diminished. To address this issue, we will continue
to focus on our competitive advantages and reduce our cost
structure to deal with the lower value in the US dollar and its
impact on our revenues. The recent tragedy in New Orleans left our
facility in the city flooded, affecting approximately 60 of our
1,100 clinic beds worldwide. We are working to ensure that our
employees are safe, and developing a plan to deal with the work
that was scheduled for the facility. We are also assessing our
insurance coverage to determine what loss, if any, we will incur.
To benefit from the Asia-Pacific region as an emerging market for
clinical trials, MDS Pharma Services has opened new Global Clinical
Development facilities in Australia and Malaysia. In addition, we
have selected ClinInvent Research, a Mumbai-based contract research
organization, as our preferred partner for the Indian subcontinent
to anchor MDS's presence in the fast-growing Indian market. With
this relationship, MDS Pharma Services will gain access to
ClinInvent Research's local end-to-end capabilities in clinical
trials management. Subsequent to quarter-end, we acquired SkeleTech
Inc., a therapeutically focused contract research organization
providing pre-clinical discovery and development services in bone
and central nervous system biologies, for gross proceeds of US$9
million. Included in the purchase price is US$2 million contingent
consideration, payable to the vendors if certain profitability
levels of the acquired business are attained. We expect that our
sales of Triple Quad products will be strong in the fourth quarter
and we will continue to explore growth opportunities for our
products in the applied markets. We anticipate continued pricing
pressure combined with a weaker semi-conductor market for our
products sold through the joint venture partnership with Perkin
Elmer Inc. We intend to capitalize on the expansion of our
radiopharmaceutical services with the addition of strategic
partnerships to co-develop and manufacture novel
radiopharmaceuticals to treat and diagnose disease. Our launch of
Copper-64 this quarter is tangible evidence of our efforts in this
field. We are pleased that the US Energy Act of 2005, which
included an amendment for the supply of a key component used in the
production of our radioisotopes, was signed into law subsequent to
the quarter-end. This will facilitate our continued commitment to
providing the worldwide medical community with a reliable and
steady supply of medical isotopes used in the diagnoses and
treatment of disease. MDS Nordion introduced a new pallet food
irradiator, Quadura(TM) system, targeted to importers and exporters
of exotic fruits and vegetables. We believe that the Quadura system
will provide an economical and environmentally friendly
disinfestation treatment to satisfy the quarantine security
requirements of international markets. We expect to make up the
third quarter shortfall in shipments and processing of cobalt-60 in
the fourth quarter and our self-contained irradiator backlog
remains strong. Health Review of operations - Revenues from Health
businesses in the quarter were: Third Quarter 2005 2004 Change
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Diagnostics $ 100 $ 107 (7%) Distribution 56 48 17%
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$ 156 $ 155 1%
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We continue to see incremental volume growth in BC, which has
contributed to better than expected results in that market;
however, diagnostics revenue decreased by 7% when compared to the
prior year, mainly due to the impact of the BC fee cut. The
existing agreement with the Ontario Ministry of Health expired on
March 31, 2005 and negotiations between the Ministry and the
Ontario Association of Medical Laboratories are behind schedule. We
will continue to bill under the old agreement while the new
agreement is negotiated. During the quarter, together with the
University Health Network (UHN), we signed a lab services contract
with 10 hospitals located in Northeastern Ontario. This contract
will complement the operation of our testing lab in the region and
the management of two local hospital labs. Distribution revenues
increased by 17% compared to the prior year mainly due to
significant new distribution contracts awarded in Quebec and
Western Canada, combined with the addition of new product lines.
Operating income for the segment was $14 million at a margin of 9%,
down from $22 million and 14% respectively in the prior year. The
BC fee reduction (which was deferred to July 1 in the prior year)
is the major driver behind the reduction in operating income,
despite cost management initiatives in Ontario and BC realized in
the quarter. Strong revenue growth for Distribution was experienced
this quarter, however this business is experiencing tighter margins
on the new distribution contracts. Capital expenditures - Health
businesses purchased $2 million of capital assets during the
quarter compared to $4 million for the quarter last year.
Year-to-date net purchases were $8 million compared to $18 million
in the prior year. Segment outlook - We will be carefully
monitoring the contract negotiations in Ontario, and expect that a
new contract will be retroactive to April 1, 2005. Within
Distribution, higher capital expenditures are planned for the
fourth quarter due to infrastructure improvements for warehousing
and technology required in part, to support incremental business
from new and existing suppliers. Modest revenue growth is expected
in this segment; however significant growth in operating income is
not expected. Corporate For the quarter, selling, general and
administration expenses (SG&A) were $83 million compared to $73
million last year. Spending on SG&A is up 2% from last year as
a percentage of revenues. SG&A includes a $7 million ($24
million year-to-date) increased level of expenditures on various
change initiatives, including work on our common business system
and support services. As announced on September 1, 2005, these
activities are currently being realigned and this level of spending
is expected to drop. Included in SG&A is spending on our
Sarbanes Oxley Compliance program during the quarter of $2 million,
($5 million year-to-date). Research and development (R&D)
expenses for the quarter were $7 million ($24 million
year-to-date), which was an increase of $1 million from the prior
year ($27 million year-to-date). The majority of the increase was
due to our continued investment in our new CellKey(TM) product,
4800 MALDI TOF/TOF instruments, and other future mass spectrometers
products within the Life Sciences segment. During the quarter, we
utilized $1 million of our restructuring reserve to pay certain
retirement obligations and severance related to senior management
retirements. The Company's reported income tax rate for this
quarter was 31% (14% in the prior year). The increase is mainly due
to the recognition of certain purchased MDS Proteomics tax assets
purchased in the prior year. Investment in change Investment in
change includes the implementation costs of a common business
system (CBS) based on an Oracle platform and improvements to our
information technology (IT) infrastructure. Total Capitalized
Expensed
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Total incurred to October 31, 2004 $ 39 $ 33 $ 6 Q1 2005 7 5 2 Q2
2005 6 5 1 Q3 2005 12 8 4
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Total $ 64 $ 51 $ 13
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Effective August 1, 2005, we added our analytical instruments
business to the Oracle platform. We have revised some timelines
that affect implementation of the system within MDS Pharma
Services. As a result, the first phase of implementation will
commence in the first quarter of fiscal 2006 for early-stage sites
and the second quarter of fiscal 2006 for our late-stage sites. On
May 1, 2005, we began to amortize costs capitalized to our CBS
initiative over a seven-year period. Amortization recorded in the
quarter was $1 million. Restructuring Consistent with our realigned
operational plan for MDS Pharma Services, the clinical pharmacology
unit in Munich, Germany was closed in the quarter. A restructuring
charge of $3 million was recognized consisting of fixed asset
writedowns, employee severance, and other exit related costs. As
discussed in the prior quarter, we realigned the operating
structure of our Canadian bioanalytical laboratories. We recognized
a restructuring charge of $2 million in the third quarter, which
consisted of employee severance and benefit costs for terminated
employees. Discontinued operations We completed the sale of our
interest in the South Florida laboratory partnership in the
quarter, which concluded our exit from the US diagnostic market. A
gain of $6 million was recorded in discontinued operations. Net
revenue from this business was $10 million for the quarter. Also in
the quarter, we sold our Executive Health business. No gain or loss
was recorded on this transaction and the results are included with
discontinued operations. Certain early-stage pharmaceutical
research service businesses, comprising our Pharmaceutics and
Biopharmaceutics/Biosafety operations, were classified as
discontinued operations in the quarter. These businesses included
operations in: Tampa, Florida; Bothell, Washington; and Blainville,
Quebec. In addition, the in vitro Pharmacology site in Geneva,
Switzerland, and our fermentation business in Taipei, Taiwan were
classified as discontinued and are in the process of being closed.
The decision to exit these operations enables us to concentrate on
our core competencies and focus our resources and growth efforts on
areas that offer strategic synergies for MDS Pharma Services. The
net assets of the discontinued operations that were classified as
assets available for sale had a net carrying value of $18 million
at quarter-end. Liquidity and capital resources Our cash position
at July 31, 2005 was $274 million, down 8% from $298 million at
April 30, 2005. Operating working capital was $159 million, an
increase of $7 million from April mainly due to the receipt of
cobalt inventory at quarter-end and proceeds from the sale of US
labs included in the accounts receivable balance. Cash flow from
operating activities before non-cash working capital balances for
the quarter was $38 million, compared to $48 million in the third
quarter last year, reflecting the lower operating income. Cash used
for investing activities was $40 million in the quarter, which is a
decrease of $18 million compared to the prior year. The acquisition
of tax losses in the prior year offset by the increase in purchased
capital assets this year accounts for most of this difference. Cash
used in financing activities was $7 million compared to $5 million
in the prior year. On June 17, 2005, we filed a Notice of Intention
to make a normal course issuer bid to purchase up to 12,382,572
Common Shares from time to time. The bid commenced June 21, 2005
and will expire on June 20, 2006. The shares will be purchased for
cancellation through the facilities of the Toronto Stock Exchange
at market price. During the quarter, no shares were acquired.
During the quarter, we negotiated a new $500 million, five-year
committed, revolving credit facility which replaces our previous
$225 million credit facility. At quarter-end, this facility remains
undrawn. The weighted average interest rate on fixed long-term debt
was 5.61% and the weighted average term to maturity is five years.
Financial instruments We use derivative financial instruments to
manage foreign currency and interest rate exposure. These
instruments consist of forward foreign exchange and option
contracts and interest-rate swap agreements. All derivative
instrument contracts are with banks listed on Schedule I to the
Bank Act (Canada) and the Company utilizes financial information
provided by certain Schedule I banks to determine the fair market
values of the financial instruments. At quarter-end, the net
mark-to-market value of all derivative instruments was $8 million
($29 million - 2004). The decrease is a reflection of the 14%
decrease in the weighted average exchange rate combined with our
reduced hedge portfolio. Quarterly highlights Following is a
summary of selected consolidated financial information derived from
the Company's unaudited interim period consolidated financial
statements for each of the eight most recently completed quarters.
This financial data has been prepared in accordance with GAAP and
prior periods have been restated to reflect the discontinuance of
the operations discussed above. (Millions of Canadian dollars,
except Earnings per share) Fiscal 2005
----------------------------------------------------- July Apr Jan
----------------------------------------------------- Net revenues
$ 443 $ 433 $ 437 Operating income 30 40 51 Income from continuing
operations 15 28 33 Net income $ 19 $ 30 $ 30 Earnings per share
from continuing operations Basic $ 0.11 $ 0.20 $ 0.23 Diluted $
0.11 $ 0.20 $ 0.23 Earnings per share Basic $ 0.14 $ 0.21 $ 0.21
Diluted $ 0.14 $ 0.21 $ 0.21
-----------------------------------------------------
----------------------------------------------------- (Millions of
Canadian dollars, except Earnings per share) Fiscal Fiscal 2004
2003
-------------------------------------------------------------------------
Oct July Apr Jan Oct
-------------------------------------------------------------------------
Net revenues $ 437 $ 441 $ 433 $ 425 $ 413 Operating income 14 72 3
62 33 Income from continuing operations 7 53 (24) 33 23 Net income
$ 9 $ 50 $ (36) $ 28 $ (4) Earnings per share from continuing
operations Basic $ 0.05 $ 0.37 $ (0.16) $ 0.22 $ 0.16 Diluted $
0.05 $ 0.37 $ (0.16) $ 0.22 $ 0.16 Earnings per share Basic $ 0.06
$ 0.35 $ (0.25) $ 0.19 $ (0.03) Diluted $ 0.06 $ 0.35 $ (0.25) $
0.19 $ (0.03)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Items that impact the comparability of operating income include: -
The fourth quarter of 2003 reflected restructuring charges of $28
million. - The second quarter of 2004 reflected charges related to
the writedown of our investment in MDS Proteomics to net realizable
value, partially offset by other net gains, leading to a net charge
of $62 million. - The fourth quarter of 2004 reflected
restructuring charges of $7 million and valuation provisions
totaling $35 million. - The third quarter of 2005 reflected
restructuring charges of $5 million and a writedown of licensed
technology of $8 million. Risks and Uncertainties We continue to
guarantee a bank loan of $20 million on behalf of an investee,
Hemosol Corp. (the "Borrower") until June 30, 2007. This loan is
secured by a fixed and floating charge over all assets of the
Borrower. The success of the Borrower to execute its therapeutic
protein strategy is dependent, among other things, on obtaining
sufficient funding in the fourth quarter to continue as a going
concern. There can be no assurance that the Borrower will be able
to obtain adequate financing in the future or that the terms of
such financing will be favorable. At this point in time, we believe
the assets of the Borrower have sufficient value to fully repay the
related debt. The carrying value of this investment was previously
reduced to nil. To determine the assets available for sale from the
operations classified as discontinued operations, we are required
to make estimates and assumptions that affect the reported amounts
of assets and liabilities and, therefore, these amounts are subject
to measurement uncertainty. Subsequent Events and Outlook We remain
committed to our strategic plan to focus resources on opportunities
within the global Life Sciences market. This involves a continuous
evaluation of our existing asset base to maximize shareholder
value. Our near-term business plan results in the repositioning of
our pharmaceutical research services with an emphasis on
cost-effective operations for the remaining businesses within MDS
Pharma Services. Subsequent to the quarter-end, we announced a plan
to reduce our global workforce by 500 employees to reduce costs and
operate more efficiently in our competitive environment. We expect
to report costs of $50 million to $75 million in the fourth quarter
associated with these activities. These restructuring plans target
primarily overhead and support costs and we remain committed to
providing high quality products and services from all areas of our
businesses, and to support the affected employees. Our Board of
Directors will review recommendations for the appropriateness of
alternative ownership structures for the Diagnostic businesses for
the pursuit of maximum value for our shareholders. CONSOLIDATED
STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
-------------------------------------------------------------------------
As at July 31 with comparatives at October 31 (millions of Canadian
dollars) 2005 2004
-------------------------------------------------------------------------
ASSETS Current Cash and cash equivalents $ 274 $ 296 Accounts
receivable 287 299 Unbilled revenue 107 83 Inventories 192 181
Income taxes recoverable 25 16 Current portion of future tax asset
19 14 Prepaid expenses and other 29 24
-------------------------------------------------------------------------
933 913
-------------------------------------------------------------------------
Assets available for sale (note 3) 20 20 Capital assets 838 793
Future tax asset 113 123 Long-term investments and other 174 160
Goodwill 664 665 Other intangible assets 44 54
-------------------------------------------------------------------------
Total assets $ 2,786 $ 2,728
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY Current Accounts payable and
accrued liabilities $ 325 $ 319 Deferred revenue 102 101 Income
taxes payable 64 49 Current portion of unrealized benefit of future
tax asset 17 13 Current portion of long-term debt 6 6
-------------------------------------------------------------------------
514 488 Liabilities related to assets held for sale (note 3) 2 2
Long-term debt 488 488 Deferred revenue 30 41 Unrealized benefit of
future tax asset 68 82 Other long-term obligations 46 48 Future tax
liabilities 63 60 Minority interest 20 22
-------------------------------------------------------------------------
1,231 1,231
-------------------------------------------------------------------------
Shareholders' equity Share capital (note 2) 840 833 Retained
earnings 657 600 Currency translation adjustment 58 64
-------------------------------------------------------------------------
1,555 1,497
-------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 2,786 $ 2,728
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Incorporated under the Canada Business Corporations Act. See
accompanying notes CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(see note 3 - Discontinued Operations) Three months Nine months to
July 31 to July 31
-------------------------------------------------------------------------
(millions of Canadian dollars, except per share amounts) 2005 2004
2005 2004
-------------------------------------------------------------------------
Net revenues $ 443 $ 441 $ 1,313 $ 1,299 Cost of revenues (292)
(281) (854) (814) Selling, general and administration (83) (73)
(251) (226) Research and development (7) (6) (24) (27)
Restructuring (note 4) (5) - (5) (6) Depreciation and amortization
(18) (19) (52) (51) Other income (expense) - net (note 6) (8) 9 (8)
(39) Equity earnings - 1 2 1
-------------------------------------------------------------------------
Operating income 30 72 121 137 Interest expense (7) (6) (17) (20)
Dividend and interest income 3 3 9 7
-------------------------------------------------------------------------
Income from continuing operations before income taxes and minority
interest 26 69 113 124 Income taxes (note 12) (8) (10) (29) (60)
Minority interest - net of tax (3) (6) (8) (2)
-------------------------------------------------------------------------
Income from continuing operations 15 53 76 62 Income (loss) from
discontinued operations - net of tax (note 3) 4 (3) 3 (20)
-------------------------------------------------------------------------
Net income $ 19 $ 50 $ 79 $ 42
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per share (note 5) Basic $ 0.14 $ 0.35 $ 0.56 $ 0.30
Diluted $ 0.14 $ 0.35 $ 0.56 $ 0.30
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Three months Nine months to July 31 to July 31
-------------------------------------------------------------------------
(millions of Canadian dollars) 2005 2004 2005 2004
-------------------------------------------------------------------------
Retained earnings, beginning of period $ 642 $ 557 $ 600 $ 572 Net
income 19 50 79 42 Repurchase of shares - - (8) - Dividends - cash
(3) - (11) (5) Dividends - stock (1) - (3) (2)
-------------------------------------------------------------------------
Retained earnings, end of period $ 657 $ 607 $ 657 $ 607
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three months Nine
months to July 31 to July 31
-------------------------------------------------------------------------
(millions of Canadian dollars) 2005 2004 2005 2004
-------------------------------------------------------------------------
Operating activities Net income $ 19 $ 50 $ 79 $ 42 Items not
affecting current cash flow (note 9) 19 (2) 60 119
-------------------------------------------------------------------------
38 48 139 161 Changes in non-cash working capital balances relating
to operations (note 9) (13) (8) (28) (28)
-------------------------------------------------------------------------
25 40 111 133
-------------------------------------------------------------------------
Investing activities Acquisitions - - (2) (2) Acquisitions of tax
assets - (16) - (19) Increase in deferred development charges (4)
(4) (14) (4) Purchase of capital assets (36) (27) (81) (81)
Purchase of technology license (note 6) - (5) - (5) Proceeds on
sale of business and investment - 3 - 12 MDS Proteomics
reorganization - (18) - (18) Other - 9 (1) (5)
-------------------------------------------------------------------------
(40) (58) (98) (122)
-------------------------------------------------------------------------
Financing activities Increase (repayment) of long-term debt 1 (2) -
(3) Increase (decrease) in deferred income and other long-term
obligations (4) (3) (9) 11 Payment of cash dividends (4) - (11) (5)
Issuance of shares 2 2 7 10 Repurchase of shares - - (13) -
Distribution to minority interest (2) (2) (10) (9)
-------------------------------------------------------------------------
(7) (5) (36) 4
-------------------------------------------------------------------------
Effect of foreign exchange rate changes on cash and cash
equivalents (2) (4) 1 (5)
-------------------------------------------------------------------------
Increase (decrease) in cash position during the period (24) (27)
(22) 10
-------------------------------------------------------------------------
Cash position, beginning of period 298 297 296 260
-------------------------------------------------------------------------
Cash position, end of period $ 274 $ 270 $ 274 $ 270
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (All tabular
amounts in millions of Canadian dollars, except where noted)
-------------------------------------------------------------------------
1. Accounting Policies These consolidated financial statements of
MDS Inc. ("MDS" or "the Company") have been prepared on a basis
consistent with the Company's annual financial statements for the
year ended October 31, 2004, except as disclosed below, and should
be read in conjunction with the accounting policies and other
disclosures in those annual financial statements. These financial
statements do not include all of the disclosures required by
generally accepted accounting principles applicable to annual
financial statements. Consolidation of Variable Interest Entities
In 2004, the Accounting Standards Board of the Canadian Institute
of Chartered Accountants ("CICA") issued Accounting Guideline 15,
"Consolidation of Variable Interest Entities" ("AcG-15"), which
applies to fiscal years beginning on or after November 1, 2004.
AcG-15 establishes specific criteria to determine if an investee is
a variable interest entity and if the equity-holder should
consolidate the investee's results. This guidance was introduced to
harmonize the Canadian accounting treatment with the United States
("US") accounting treatment. The adoption of AcG-15 has had no
impact on the Company's operations and financial position. The
Company will analyze these investments on a quarterly basis.
Measurement Uncertainty In the determination of assets available
for sale from the operations classified as discontinued operations,
we are required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and, therefore, these
amounts are subject to measurement uncertainty. Capital Assets On
May 1, 2005, the Company commenced the amortization of costs
capitalized to the Common Business System initiative. The
capitalized costs will be amortized on a straight-line basis over
seven years, which is a change from our existing policy on computer
systems given the nature of this particular initiative.
Amortization recorded in the quarter was $1 million. 2. Share
Capital The following table summarizes information on share capital
and related matters at July 31, 2005:
-------------------------------------------------------------------------
(number of shares in thousands) Outstanding Exercisable
-------------------------------------------------------------------------
Common shares 141,756 n/a Stock options 7,950 3,826
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the quarter, the Company did not repurchase any Common
shares. 3. Discontinued Operations and Assets Held for Sale During
the quarter, the Company completed the sale of the US laboratory
partnership interest located in South Florida. A net gain of $6
million was realized on this sale which was classified in
discontinued operations. The Company has now fully exited the US
diagnostics market. The Company's Board of Directors has formally
approved a plan to divest of the Pharmaceutics and
Biopharmaceutics/Biosafety operations within the MDS Pharma
Services business and thus these operations are classified as
discontinued operations beginning in the third quarter. The
businesses included operations at: Tampa, Florida; Bothell,
Washington and Blainville, Quebec. In addition, the in vitro
Pharmacology site in Geneva, Switzerland, and the Fermentation
business in Taipei, Taiwan have also been classified as
discontinued operations. The decision to exit these operations was
made to concentrate on MDS's core competencies and focus resources
and growth efforts on areas that offer strategic synergies for the
Company. The results of discontinued operations in the quarter were
as follows: Three months Nine months to July 31 to July 31
-------------------------------------------------------------------------
2005 2004 2005 2004
-------------------------------------------------------------------------
Revenues $ 14 $ 28 $ 51 $ 105
-------------------------------------------------------------------------
Income (loss) from discontinued operations - net of tax $ 4 $ (3) $
3 $ (20)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
In accordance with Section 3475 of the CICA Handbook, long-lived
assets classified as held for sale should be measured at the lower
of carrying amount and fair value less costs to sell. Long-lived
assets to be disposed of other than by sale should continue to be
classified as held and used until disposed of. At July 31, 2005,
the Company has classified operations of Tampa, Blainville, Bothell
and Taipei as held for sale in accordance with Section 3475 of the
CICA Handbook. The sale of these operations is expected to occur
within one year. No provision for impairment in value has been
recorded for these operations. The following table provides the
assets and related liabilities held for sale as at July 31, 2005
and October 31, 2004:
-------------------------------------------------------------------------
2005 2004
-------------------------------------------------------------------------
Accounts receivable $ 7 $ 7 Inventory 1 1
-------------------------------------------------------------------------
Capital assets 12 12
-------------------------------------------------------------------------
Total assets held for sale $ 20 $ 20
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Accounts payable
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