Net Revenue up 24%, Adjusted EBITDA up 10% TORONTO, June 5
/PRNewswire-FirstCall/ -- MDS Inc. (TSX: MDS; NYSE: MDZ), a leading
provider of products and services to the global life sciences
markets, today reported its second quarter 2008 results for the
period ended April 30, 2008. For the quarter, MDS reported total
revenue of $350 million, net income of $11 million and earnings per
share from continuing operations of $0.09. Net revenue was $326
million and adjusted EBITDA was $34 million, up from $263 million
and $31 million in the prior year, respectively. Adjusted earnings
per share were $0.06, down from $0.11 in the prior year. Quarterly
Highlights - Delivered net revenue of $326 million, up 24% from
$263 million in the prior year. Excluding the impact of foreign
exchange and acquisitions, net revenue increased 5%. - Increased
adjusted EBITDA to $34 million, up 10% from $31 million in the
prior year. - Reported adjusted earnings per share of $0.06, down
from $0.11 in the prior year, impacted by $0.04 of intangible asset
amortization from the Molecular Devices acquisition. - MDS Pharma
Services had another quarter of strong new business wins, up 60%
from prior year to $165 million. The business delivered $128
million in net revenue and a loss of $1 million in adjusted EBITDA
compared to breakeven in the prior year. - MDS Nordion delivered
solid performance in Q2 reporting revenue of $80 million, up 13%
from $71 million in the prior year. Adjusted EBITDA increased 9% to
$24 million versus $22 million last year. - MDS Analytical
Technologies delivered $118 million in revenue compared to $77
million in the prior year. Adjusted EBITDA increased 13% from $15
million to $17 million and was impacted by softening demand for
high-end instruments. - MDS repurchased and cancelled 619,700
Common shares for $12 million under its Normal Course Issuer Bid.
"While we were able to achieve year-over-year revenue and EBITDA
growth, performance was challenged by softening in high-end
instrument sales to pharmaceutical customers in the US market,"
said Stephen P. DeFalco, President and Chief Executive Officer, MDS
Inc. "We are evaluating a number of actions to manage through these
market conditions and to translate our revenue progress at MDS
Pharma Services into accelerated EBITDA growth." Operating Segment
Results MDS Pharma Services % Change ---------- ($ millions) Q2
2008 Q2 2007 Reported
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Net Revenues: Early-stage 68 60 13% Late-stage 60 55 9%
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$ 128 $ 115 11% Reimbursement revenues 24 23
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Total revenues $ 152 $ 138
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Adjusted EBITDA: $ (1) $ - - % (1) % - -
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For the second quarter, MDS Pharma Services net revenue increased
11% over the prior year. Excluding the impact of foreign exchange,
revenue increased approximately 1% as late-stage revenue continues
to be impacted by previously announced contract cancellations.
Adjusted EBITDA was a loss of $1 million compared to nil last year
as unfavourable revenue mix, foreign exchange and investments in
growth offset productivity savings. New business wins of $165
million were up 60% from prior year and increased backlog
sequentially by $36 million to $431 million. Both early-stage and
late-stage contributed to backlog growth, with early-stage backlog
supported by increasing demand at MDS Pharma Services' new Phase I
facility in Phoenix, Arizona. Additional progress has been made
resolving client FDA audits leading to a $10 million benefit from
the revised estimate for future costs. This benefit is not included
in adjusted EBITDA. MDS Nordion % Change ---------- ($ millions) Q2
2008 Q2 2007 Reported
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Revenues $ 80 $ 71 13%
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Adjusted EBITDA: $ 24 $ 22 9% % 30 % 31 -
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MDS Nordion's revenue for the second quarter was $80 million, up
13% from the prior year, primarily driven by foreign exchange and
strength in cobalt sterilization technologies, which contributed 9%
and 4% in revenue growth, respectively. Adjusted EBITDA was $24
million compared to $22 million in the second quarter of 2007.
Subsequent to the quarter, MDS Nordion completed the previously
announced divestiture of two non-strategic product lines. After
quarter end, Atomic Energy of Canada Limited (AECL) announced its
intention to discontinue the MAPLE project at Chalk River, Ontario.
AECL has indicated its commitment to providing ongoing supply of
medical isotopes and the Canadian government has asked AECL to
pursue the extension of the NRU operation beyond its current
license. MDS is reviewing the potential impact of this
announcement. The Company intends to evaluate all options and
pursue appropriate steps to protect the interests of patients, its
customers and its shareholders. MDS Analytical Technologies %
Change ---------- ($ millions) Q2 2008 Q2 2007 Reported
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Revenues $ 118 $ 77 53%
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Adjusted EBITDA $ 17 $ 15 13% % 14 % 19 -
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MDS Analytical Technologies delivered $118 million in revenue, a
53% increase over prior year and $17 million in adjusted EBITDA, a
13% year-over-year increase. Adjusted for acquisitions and foreign
exchange, revenue increased by 15%. Profitability was impacted by
softening demand for high-end instruments, particularly in the
pharmaceutical market. Sciex product lines contributed $8 million
in adjusted EBITDA in the second quarter, flat to prior year. Mass
spectrometry end user revenue, including the impact of foreign
exchange, grew 6% compared to the same period last year. Molecular
Devices (MD) contributed $55 million in revenue and $9 million in
adjusted EBITDA. During the quarter, MDS Analytical Technologies
continued to drive innovation and growth with the launch of the
next-generation Arcturus XT(TM) instrument for laser capture
microdissection. The new Arcturus XT(TM) offers researchers
improved speed, precision and flexibility for their microdissection
experiments. Guidance Primarily as a result of softening demand for
high-end instruments in the pharmaceutical markets and a delay in
achieving targeted profitability at MDS Pharma Services, MDS has
revised its guidance for its 2008 financial performance. For the
full year 2008, the Company now expects to achieve the following
results: (millions of US dollars, except earnings per share)
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2007 Actual Revised 2008 Initial Results Guidance (February 21,
2008)
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Total Revenues $ 1,210 $ 1,350 - 1,400 $ 1,350 - 1,410 Net Revenues
$ 1,119 $ 1,250 - 1,290 $ 1,250 - 1,300 Adjusted EBITDA $ 145 $ 160
- 170 $ 175 - 185 Adjusted EPS $ 0.34 $ 0.27 - 0.33 $ 0.37 - 0.43
Income (loss) from continuing operations $ (33) $ 45 - 55 $ 55 - 65
Basic EPS $ (0.25) $ 0.37 - 0.45 $ 0.45 - 0.53 Capital Expenditures
$ 71 $ 60 - 70 $ 65 - 75 Effective tax rate 41% 10 - 20% 0 - 10%
The above guidance is based on assumptions described in our
MD&A. Conference Call MDS will be holding a conference call
today at 9:30 am EST to discuss second quarter 2008 results. This
call will be webcast live at http://www.mdsinc.com/ and will also
be available in archived format at
http://www.mdsinc.com/news_events/webcasts_presentations.asp after
the call. About MDS MDS Inc. (TSX: MDS; NYSE: MDZ) is a global life
sciences company that provides market-leading products and services
that our customers need for the development of drugs and diagnosis
and treatment of disease. We are a leading global provider of
pharmaceutical contract research, medical isotopes for molecular
imaging, radiotherapeutics, and analytical instruments. MDS has
more than 5,500 highly skilled people in 29 countries. Find out
more at http://www.mdsinc.com/ or by calling 1-888-MDS-7222, 24
hours a day. Caution Concerning Forward-Looking Statements 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.
MDS's actual results could differ materially from those expressed
in the forward-looking statements due to these risks and a number
of other factors, including, but not limited to, successful
implementation of structural changes, including restructuring plans
and acquisitions, technical or manufacturing or distribution
issues, the competitive environment for MDS's products and
services, the degree of market penetration of its products and
services, the ability to secure a reliable supply of raw materials,
the impact of our clients' exercising rights to cancel certain
contracts, the strength of the Canadian and US economies, the
impact of the movement of the US dollar relative to other
currencies, particularly the Canadian dollar and the euro,
uncertainties associated with critical accounting assumptions and
estimates, and other factors set forth in reports and other
documents filed by MDS with Canadian and US securities regulatory
authorities from time to time, including MDS's quarterly and annual
MD&A, annual information form, and annual report on Form 40-F
for the fiscal year ended October 31, 2007 filed with the
Securities & Exchange Commission. Also note that all financial
data is now shown on a US GAAP basis. MDS converted to US GAAP
reporting with the filing of its 2007 annual report and financial
statements on January 29, 2008. Use of Non-GAAP Financial Measures
The use of non-GAAP measures including terms such as net revenue,
adjusted EBITDA, adjusted EPS, new orders and backlog are used to
explain the operating performance of the Company. These terms are
not defined by GAAP and MDS's use may vary from that of other
companies. MDS uses certain non-GAAP measures so that investors and
analysts have a better understanding of the significant events and
transactions that have had an impact on results or may have an
impact on MDS's financial outlook. MDS provides a description of
these non-GAAP measures and a reconciliation of these non-GAAP
measures for 2007 actual results to GAAP financial results in the
MD&A of its 2007 annual report. MANAGEMENT'S DISCUSSION AND
ANALYSIS June 5, 2008 Following is management's discussion and
analysis (MD&A) of the results of operations for MDS Inc. (MDS
or the Company) for the quarter ended April 30, 2008 and its
financial position as at April 30, 2008. This MD&A should be
read in conjunction with the unaudited consolidated financial
statements and notes that follow. In 2007, MDS chose to adopt
United States generally accepted accounting principles (US GAAP)
for financial reporting. As a result of this change, the Company
restated to US GAAP its previously filed financial statements for
the four quarters of 2007. With US GAAP as our primary basis of
accounting, we will reconcile our US GAAP earnings to Canadian
generally accepted accounting principles (Canadian GAAP). This
reconciliation will be done as required by applicable Canadian
regulations on an annual and quarterly basis for fiscal 2008 and
2009. The results discussed in this MD&A are based on US GAAP.
To supplement the US GAAP MD&A included in this document,
please refer to our separately filed Canadian Supplement to this
MD&A that restates, based on financial information of MDS
reconciled to Canadian GAAP, those parts of our MD&A that would
contain material differences if they were based on financial
statements prepared in accordance with Canadian GAAP. For
additional information and details, readers are referred to the
2007 annual financial statements and MD&A and the Company's
2007 Annual Information Form (AIF), all of which are published
separately and are available at http://www.mdsinc.com/ and at
http://www.sedar.com/. In addition, the Company's 40-F filing is
available at http://www.sec.gov/. Our MD&A is intended to
enable readers to gain an understanding of MDS's current results
and financial position as at and for the period ended April 30,
2008. To do so, we provide information and analysis comparing the
results of operations and financial position for the current
interim period to those of the same period in the preceding fiscal
year. We also provide analysis and commentary that we believe is
required to assess the Company's future prospects. Accordingly,
certain sections of this report contain forward-looking statements
that are based on current plans and expectations. These
forward-looking statements are affected by risks and uncertainties
that are discussed in this document, as well as in the AIF, and
that could have a material impact on future prospects. Readers are
cautioned that actual events and results will vary. Caution
Regarding Forward-looking Statements From time to time, we make
written or oral forward-looking statements within the meaning of
certain securities laws, including the "safe harbour" provisions of
the Securities Act (Ontario) and the United States Private
Securities Litigation Reform Act of 1995. This document contains
such statements, and we may make such statements in other filings
with Canadian regulators or the United States Securities and
Exchange Commission (SEC), in reports to shareholders or in other
communications, including public presentations. These
forward-looking statements include, among others, statements with
respect to our objectives for 2008, our medium-term goals, and
strategies to achieve those objectives and goals, as well as
statements with respect to our beliefs, plans, objectives,
expectations, anticipations, estimates and intentions. The words
"may", "could", "should", "would", "suspect", "outlook", "believe",
"plan", "anticipate", "estimate", "expect", "intend", "forecast",
"objective", "optimistic", and words and expressions of similar
import are intended to identify forward-looking statements. By
their very nature, forward-looking statements involve inherent
risks and uncertainties, both general and specific, which give rise
to the possibility that predictions, forecasts, projections and
other forward-looking statements will not be achieved. We caution
readers not to place undue reliance on these statements as a number
of important factors could cause our actual results to differ
materially from the beliefs, plans, objectives, expectations,
anticipations, estimates and intentions expressed in such
forward-looking statements. These factors include, but are not
limited to: management of operational risks; the strength of the
Canadian and United States' economies and the economies of other
countries in which we conduct business; our ability to secure a
reliable supply of raw materials, particularly cobalt and critical
medical isotopes; the impact of the movement of the US dollar
relative to other currencies, particularly the Canadian dollar and
the euro; changes in interest rate policies of the Bank of Canada
and the Board of Governors of the Federal Reserve System in the
United States; the effects of competition in the markets in which
we operate; the timing and technological advancement of new
products and services introduced by us or by our competitors; the
impact of our clients' exercising rights to cancel certain
contracts; the impact of changes in laws, trade and import/export
policies and regulations, and enforcement thereof; judicial
judgments and legal proceedings; our ability to successfully
realign our organization, resources and processes; our ability to
complete strategic acquisitions and joint ventures and to integrate
our acquisitions and joint ventures successfully; new accounting
policies and guidelines that impact the methods we use to report
our financial condition; uncertainties associated with critical
accounting assumptions and estimates; the possible impact on our
businesses from natural disasters, public health emergencies,
international conflicts and other developments including those
relating to terrorism; and our success in anticipating and managing
the foregoing risks. We caution that the foregoing list of
important factors that may affect future results is not exhaustive.
When relying on our forward-looking statements to make decisions
with respect to the Company, investors and others should carefully
consider the foregoing factors and other uncertainties and
potential events. Use of Non-GAAP Measures In addition to measures
based on generally accepted accounting principles (GAAP) in this
MD&A, we use terms such as adjusted operating income; adjusted
earnings before interest, taxes, depreciation and amortization
(EBITDA); adjusted EBITDA margin; adjusted net income, adjusted
earnings per share (EPS); operating working capital; net revenue;
new orders and backlog. These terms are not defined by GAAP and our
use of such terms or measurement of such items may vary from that
of other companies. In addition, measurement of growth is not
defined by GAAP and our use of these terms or measurement of these
items may vary from that of other companies. Where relevant, and
particularly for earnings-based measures, we provide tables in this
document that reconcile the non-GAAP measures used to amounts
reported on the face of the consolidated financial statements. Our
executive management team assesses the performance of our
businesses based on a review of results comprising GAAP measures
and these non-GAAP measures. We also report on our performance to
the Company's Board of Directors based on these GAAP and non-GAAP
measures. In addition, adjusted EBITDA and operating working
capital are the primary metrics for our annual incentive
compensation plan for senior management. We provide this non-GAAP
detail so that readers have a better understanding of the
significant events and transactions that have had an impact on our
results, and can view our results through the eyes of management.
Throughout this report, when we refer to total revenues we mean
revenues including reimbursement revenues. We use the term net
revenues to mean revenues excluding such amounts. All revenue
growth figures and adjusted EBITDA margin figures are based on net
revenues. We use net revenues to measure the growth and
profitability of MDS and MDS Pharma Services because the
pass-through invoicing of reimbursable out-of-pocket expenses
varies from period-to-period, is not a reliable measure of the
underlying performance of the business, and does not have an impact
on net income or cash flows in any significant way. Management
assesses and rewards the performance of MDS Pharma Services and the
segment's senior management team using metrics that are based on
net revenues. MDS Pharma Services measures and tracks contract
backlog. Contract backlog is a non-GAAP measure that we define to
include the amount of contract value associated with confirmed
contracts that have not yet been recognized as net revenue. A
confirmed contract is one for which the Company has received
customer commitment in a manner that is customary for the type of
contract involved. For large, long-term contracts, customer
commitment is generally evidenced by the receipt of a signed
contract or confirmation awarding the work to MDS. For smaller and
short-term contracts, customer commitment may be communicated in
other ways, including email messages and oral confirmations. Only
contracts for which such commitments have been received are
included in backlog and the amount of backlog for these contracts
is measured based on the net revenue that is expected to be earned
by MDS under the contract terms. A contract is removed from backlog
if the Company receives notice from the customer that the contract
has been cancelled, indefinitely delayed, or reassigned to another
service provider. As at January 31, 2008, we started to report new
orders, which are the confirmed contracts for which we have
received a customer commitment within the fiscal quarter. We have
also started to report period ending backlog which measures our
backlog at the period ending date and we continue to report the
average backlog which is the average of the three month end backlog
balances for the interim period. Substantially all of the Sciex
brand products of MDS Analytical Technologies are sold through two
joint ventures. Under the terms of these joint ventures, we are
entitled to a 50% share of the net earnings of the worldwide
business that we conduct with our partners in these joint ventures.
These earnings include a share of the profits generated by our
partners that are paid from the joint ventures as profit sharing.
Under US GAAP, we report our direct revenues from sales to the
joint ventures as revenues and we report our share of the profits
of the joint ventures as equity earnings. We do not report our
share of all end-user revenues, despite the fact that these
revenues contribute substantially to our profitability. In order to
provide readers with a better understanding of the drivers of
profitability for the Sciex products, we report growth in end-user
revenues as reported by our joint venture partners. This figure
provides management and readers with additional information on the
performance of our global business, including trends in customer
demand and our performance relative to the overall market. Tabular
amounts are in millions of United States (US) dollars, except per
share amounts and where otherwise noted. Adoption of US GAAP
Effective with the reporting of our fiscal 2007 annual results, we
adopted US GAAP as our primary reporting standard for our
consolidated financial statements. We have adopted US GAAP to
improve the comparability of our financial information with that of
our competitors, the majority of whom are US-based multinational
companies. All figures for prior periods contained in these
documents have been revised to reflect the adoption of US GAAP as
our reporting standard. Introduction MDS is a global life sciences
company that provides market-leading products and services that our
customers use for the development of drugs and the diagnosis and
treatment of disease. Through our three business segments, we are a
leading global provider of pharmaceutical contract research
services (MDS Pharma Services), medical isotopes for molecular
imaging, sterilization, and radiotherapeutics (MDS Nordion), and
analytical instruments (MDS Analytical Technologies). Each of these
business segments sells a variety of products and services to
customers in markets around the world. Discontinued Operations All
financial references in this document exclude those businesses that
we consider to be discontinued. The results of discontinued
operations relate to the diagnostics business we sold in 2007. All
financial references for the prior year have been restated to
reflect this treatment. Subsequent Event - MAPLE Reactor On May 16,
2008, Atomic Energy of Canada Limited (AECL), a Canadian crown
corporation, and the Government of Canada, publicly announced their
intention to discontinue the development work on the MAPLE reactors
located at Chalk River laboratories, effective immediately. The
MAPLE reactors were to replace AECL's current National Research
Universal reactor (NRU) and provide MDS Nordion with a long-term
source of supply of medical isotopes. AECL and the Government of
Canada have also publicly announced that they will continue to
supply medical isotopes using the NRU and will pursue an extension
of the NRU operation beyond its current expiry date of October 31,
2011. MDS has substantial financial interests in the success of the
MAPLE reactor project, primarily through a related 40-year supply
agreement with AECL, as a result of an exchange of non-monetary
assets in February 2006 (see below). The Company was neither
consulted nor informed in advance by AECL or the Canadian
government about their decision. AECL's announcement and position
represents a different perspective on the contract than that held
by MDS. The Company intends to evaluate all options and pursue
appropriate steps to protect the interests of patients, its
customers and its shareholders. On February 22, 2006, the Company
had announced an agreement resulting from a comprehensive mediation
process with AECL related to the MAPLE reactor project. Under the
agreement, AECL paid the Company $22 million, and assumed ownership
of the MAPLE facilities and took responsibility for all costs
associated with completing the project and the future production of
medical isotopes from the MAPLE facilities. The parties retained
certain rights related to existing claims. In addition, AECL
acquired $47 million of MAPLE-related inventories in exchange for a
non-interest bearing note having a net present value of $38
million, to be repaid over four years commencing in 2008. The
agreement requires AECL to supply medical isotopes to MDS Nordion
over a 40-year period, upon the MAPLE facilities meeting certain
operational criteria, in exchange for a fixed percentage of the
selling price. In accordance with SFAS # 153, "Exchanges of
Non-monetary Assets", the Company exchanged the MAPLE asset for the
40-year supply agreement which was recorded as an intangible asset
at its fair value of $308 million. This amount is to be amortized
on a straight-line basis over a 40-year period once commercial
production of MAPLE isotopes begins. The Company recorded a loss on
this transaction of $36 million in 2006. As a result of the May 16,
2008 announcement by AECL and the Government of Canada, MDS is
reviewing the impact on its business from an operational and
financial reporting perspective. The Company will evaluate all
options and pursue appropriate steps to protect the interests of
patients, its customers and its shareholders. The principal US GAAP
reporting exposure for MDS related to the announcement is its
intangible asset associated with the 40-year supply agreement
currently carried at $342 million (revalued at the April 30, 2008
exchange rate). MDS will continue to evaluate the intangible asset
for possible impairment and the relevant financial reporting
implications based upon the progress of any dialogue, negotiations
or legal proceedings between AECL, the Government of Canada and the
Company. MDS Inc. Consolidated operating highlights and
reconciliation of consolidated adjusted EBITDA Second Quarter
Year-to-date --------------- --------------- 2008 2007 2008 2007
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350 286 Total revenues 672 550 (24) (23) Reimbursement revenues
(50) (46)
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$ 326 $ 263 Net revenues $ 622 $ 504
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Income (loss) from continuing 11 (55) operations 28 (55) 5 (27)
Income tax expense (recovery) (2) (24) 2 (2) Net interest expense 2
- - (1) Mark-to-market on interest rate swaps (2) (1) 23 18
Depreciation and amortization 50 32
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41 (67) EBITDA 76 (48) 1 25 Restructuring charges, net 1 38 3 6
Valuation provisions 3 6 - 3 Loss on sale of a business/investment
2 1 (Reversal) provision for FDA-related (10) 61 costs (10) 61 (1)
3 Acquisition integration 2 3
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$ 34 $ 31 Adjusted EBITDA $ 74 $ 61
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10% 12% Adjusted EBITDA margin 12% 12%
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Consolidated net revenues which exclude reimbursement revenues
associated with reimbursed expenses in the MDS Pharma Services
segment, were up 24% on a reported basis to $326 million for the
second quarter of 2008 compared to $263 million last year. The
Molecular Devices (MD) business of MDS Analytical Technologies,
which was acquired in the second quarter of 2007, increased net
revenues by $26 million in the second quarter of 2008, compared to
the 41 day post-acquisition period in the second quarter of 2007.
Foreign exchange impacts increased net revenue in the second
quarter of 2008 compared to the second quarter of 2007 by
approximately $25 million or 10%. Excluding the impact of the MD
acquisition and foreign exchange, net revenues increased $12
million or 5% with growth across all businesses. MDS Pharma
Services net revenues increased 11% compared to the same period in
2007, with growth in both early-stage and late-stage net revenues.
MDS Nordion revenues were also up 13% compared to the same period
in 2007. MDS Analytical Technologies revenues were up $41 million,
including the $26 million increase associated with MD. Income from
continuing operations for the second quarter of 2008 was $11
million compared to a loss of $55 million reported for the same
period in 2007. The second quarter of 2008 included $7 million of
after tax income from the revision of our best estimate of the
remaining Food and Drug Administration (FDA) provision related to
our Montreal Bioanalytical business. The $55 million loss for the
second quarter of 2007 includes the after tax provision set-up for
FDA-related costs, a restructuring charge and a long-term
investment valuation. These items amounted to $66 million on an
after-tax basis. Adjusted EBITDA for the quarter was $34 million,
up 10% compared to $31 million reported for last year. MDS Nordion
adjusted EBITDA increased by $2 million. MDS Analytical
Technologies adjusted EDITDA grew $2 million to $17 million. MD
contributed $9 million of adjusted EBITDA in the second quarter of
2008 compared to $7 million in the 41 days post-acquisition period
in the second quarter of 2007. MDS Pharma Services reported a loss
of $1 million in the quarter versus breakeven last year. In the
second quarter of 2008, we experienced a negative impact of
approximately $4 million on adjusted EBITDA from the net impact of
foreign exchange, due to the year-over-year weakness of the US
dollar; however, this was partially offset by a $3 million
reduction in the foreign exchange loss on the revaluation of net
monetary assets. Adjustments reported for the second quarter of
2008 include income of $10 million due to a revision of our best
estimate of the provision associated with the FDA issue, $3 million
expense related to an additional 20% provision against an
investment in asset-backed commercial paper (ABCP), $1 million
expense related to facilities restructuring charges and $1 million
related to final adjustments of MD integration costs. In the second
quarter of 2007, adjustments included a $61 million charge related
to the FDA provision, $25 million of restructuring costs related
mostly to profit improvement initiatives in MDS Pharma Services, a
$6 million valuation provision related to a long-term equity
investment, a $3 million loss resulting primarily from the sale of
our Hamburg Phase 1 facility, and $3 million of integration costs
incurred by MDS Analytical Technologies. Selling, general, and
administration (SG&A) expenses for the quarter totalled $75
million and 23% of net revenues compared to $61 million and 23%
last year. The increase includes the impact from the acquisition of
MD partway through the second quarter in 2007, as well as the
impact of foreign exchange. We spent $22 million on R&D
activities in the second quarter this year, compared to spending of
$16 million last year. The majority of the increase in R&D
spending comes from the impact of a full quarter of MD compared to
the 41 day post-acquisition period in the second quarter of 2007.
Consolidated depreciation and amortization expense increased $5
million compared to last year. We also amortized $9 million of
intangible assets acquired as part of the purchase of MD in the
second quarter of 2008 compared to $2 million in the second quarter
of 2007. Capital expenditures for the quarter were $15 million
compared to $7 million in the second quarter of 2007. Other income
for the quarter includes the $10 million FDA provision release, $3
million ABCP provision and a $3 million embedded derivative gain.
Other income for the second quarter of 2007 includes a $61 million
FDA provision charge, $6 million valuation provision, $3 million
loss on sale of business and a foreign exchange loss of $4 million
related to the revaluation of certain monetary assets and
liabilities in the quarter, compared to a $1 million loss in the
second quarter of 2008. Results from discontinued operations for
2007 include the operating results of our Canadian diagnostics
businesses for the period prior to sale and the gain resulting from
the sale of the business. In the second quarter of 2008, we
repurchased $12 million or 0.6 million shares as part of our Normal
Course Issuers Bid (NCIB). In the second quarter of 2007, we
completed a substantial issuer bid and repurchased approximately
22.8 million Common shares for C$500 million (US$ 441 million) at a
price of C$21.90 per share. As a result of this substantial issuer
bid, we reduced the number of Common shares outstanding in the
second quarter of 2007 from approximately 144 million to 122
million, and we have 122 million Common shares outstanding as of
the second quarter 2008. Reported earnings per share from
continuing operations were $0.09 for the quarter, compared to a
loss of $0.40 in 2007. Adjusted earnings per share from continuing
operations for the quarter were $0.06 compared to $0.11 earned in
the same period last year. Increased amortization of the intangible
assets related to the MD acquisition reduced the second quarter of
2008 adjusted EPS by $0.04 compared to the second quarter of 2007.
Earnings per share from discontinued operations were nil compared
to $5.77 which included $5.76 related to the gain on sale of the
diagnostics business in the second quarter of 2007. Adjusted
earnings per share and adjusted income from continuing operations
for the two periods were as follows: Earnings Per Share Second
Quarter Year-to-date
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2008 2007 2008 2007
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Basic earnings (loss) per share from continuing operations - as
reported $ 0.09 $ (0.40) $ 0.23 $ (0.39) Adjusted for:
Restructuring charges, net 0.01 0.15 0.01 0.23 FDA-related
provision (0.06) 0.29 (0.06) 0.29 Valuation provisions 0.03 0.04
0.03 0.04 Mark-to-market on interest rate swaps - - (0.02) - MAPLE
investment tax credits - (0.02) - (0.02) Loss sale of business and
long-term investments - 0.03 - 0.02 Acquisition integration (0.01)
0.02 0.01 0.02 Tax rate changes - - (0.09) -
-------------------------------------------------------------------------
Adjusted EPS $ 0.06 $ 0.11 $ 0.11 $ 0.19
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income from Continuing Operations Second Quarter Year-to-date
-------------------------------------------------------------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
Income (loss) from continuing operations - as reported $ 11 $ (55)
$ 28 $ (55) Adjusted for (after tax): Restructuring charges, net 1
21 1 33 FDA-related provision (7) 40 (7) 40 Valuation provisions 3
5 3 5 Mark-to-market on interest rate swaps - - (2) - MAPLE
investment tax credits - (2) - (2) Loss sale of business and
long-term investments - 4 - 2 Acquisition integration (1) 2 1 2 Tax
rate changes - - (11) -
-------------------------------------------------------------------------
Adjusted income from continuing operations $ 7 $ 15 $ 13 $ 25
-------------------------------------------------------------------------
-------------------------------------------------------------------------
MDS Pharma Services Financial Highlights Second Quarter
-------------------------------------- % of net % of net 2008
revenues 2007 revenues
-------------------------------------------------------------------------
Early-stage $ 68 53% $ 60 52% Late-stage 60 47% 55 48%
-------------------------------------------------------------------------
Net revenues 128 100% 115 100% Reimbursement revenues $ 24 - $ 23 -
-------------------------------------------------------------------------
Total revenues 152 - 138 - Cost of revenues (95) (74%) (80) (70%)
Reimbursed expenses (24) - (23) - Selling, general, and
administration (33) (26%) (32) (28%) Depreciation and amortization
(8) (6%) (10) (9%) Restructuring charges (1) (1%) (23) (20%) Other
income (expense) 9 7% (68) (58%)
-------------------------------------------------------------------------
Operating income (loss) - - (98) (85%) Adjustments: Reversal
(provision) for FDA-related costs (10) (8%) 61 53% Restructuring
charges 1 1% 23 20% Loss (gain) on sale of a business - - 4 3%
-------------------------------------------------------------------------
(9) (7%) (10) (9%) Depreciation and amortization 8 6% 10 9%
-------------------------------------------------------------------------
Adjusted EBITDA $ (1) (1%) $ - 0%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Margins: Gross margin 26% 30% Adjusted EBITDA - 0%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital expenditures $ 9 $ 5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Year-to-date -------------------------------------- % of net % of
net 2008 revenues 2007 revenues
-------------------------------------------------------------------------
Early-stage $ 131 53% $ 126 53% Late-stage 117 47% 110 47%
-------------------------------------------------------------------------
Net revenues 248 100% 236 100% Reimbursement revenues $ 50 - $ 46 -
-------------------------------------------------------------------------
Total revenues 298 - 282 - Cost of revenues (183) (74%) (169) (72%)
Reimbursed expenses (50) - (46) - Selling, general, and
administration (62) (25%) (65) (28%) Depreciation and amortization
(17) (7%) (18) (8%) Restructuring charges (1) - (31) (13%) Other
income (expense) 14 6% (66) (27%)
-------------------------------------------------------------------------
Operating income (loss) (1) - (113) (48%) Adjustments: Reversal
(provision) for FDA-related costs (10) (4%) 61 25% Restructuring
charges 1 - 31 13% Loss (gain) on sale of a business (2) (1%) 4 2%
-------------------------------------------------------------------------
(12) (5%) (17) (8%) Depreciation and amortization 17 7% 18 8%
-------------------------------------------------------------------------
Adjusted EBITDA $ 5 2% $ 1 0%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Margins: Gross margin 26% 28% Adjusted EBITDA 2% -%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital expenditures $ 15 $ 7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
In the second quarter of 2008, MDS Pharma Services net revenues
increased by 11% as reported versus the prior year quarter. The
impact on revenue of the change in foreign exchange rates from the
second quarter of 2007 to the second quarter of 2008 was an
increase of approximately $11 million or 10%. Both our early-stage
and late-stage businesses had slightly higher revenue excluding the
impact of foreign exchange. The late-stage increase was primarily a
result of increases in our central lab business which was partially
offset by the impact of contract cancellations in Phase II-IV
related to failures of compounds that occurred in prior quarters.
Early-stage increased revenue was primarily a result of increased
activity in Phase I including the impacts of our new Phoenix
facility and increased demand in bioanalytical services. New orders
in the second quarter of 2008 of $165 million were up 60% compared
to the same period last year. We saw a $36 million or 9% increase
in period end backlog and a 13% increase in average backlog from
the first quarter of 2008. Period-end backlog was up 1% compared to
the same period in 2007; however average backlog was down 10%. In
the second quarter of 2007 we experienced a high level of contract
cancellations at the end of the quarter. Average monthly backlog
Period New Average End Orders Backlog Backlog
-------------------------------------------------------------------------
Fiscal 2007 - Quarter 1 159 450 472 Quarter 2 103 450 428 Quarter 3
119 420 408 Quarter 4 134 385 375 Fiscal 2008 - Quarter 1 177 360
395 Quarter 2 165 405 431
-------------------------------------------------------------------------
-------------------------------------------------------------------------
MDS Pharma Services had an operating income of nil for the quarter,
compared to a loss of $98 million for the same period last year. In
the second quarter of 2007, we recorded a $61 million provision for
customer reimbursements related to the FDA review of our Montreal
bioanalytical operations and a $23 million restructuring charge to
improve profitability at MDS Pharma Services. Based on costs
incurred to date and our best estimated future liability, we
reversed $10 million of the FDA provision to income in the second
quarter of 2008. As well, during the same period, a $1 million
restructuring charge was incurred related to facility closures. In
both 2007 and 2008, the FDA charge, revision of our best estimate
and the restructuring charges were treated as adjusting items. In
the second quarter of 2007, the $4 million loss on the sale of our
Hamburg facility was also an adjusting item. MDS Pharma Services
adjusted EBITDA for the second quarter of 2008 decreased by $1
million to a loss of $1 million compared to the same period in
2007. This decrease was primarily the result of higher margin
services reported in our late-stage business in the second quarter
of 2007, increased investments for growth in certain areas of our
business in 2008, and the impact of the previously announced
contract cancellations, all of which offset the impact of savings
achieved from our restructuring activities that were initiated in
the second quarter of 2007. The negative impact of foreign exchange
on our operations resulting from the decline of the US dollar from
the second quarter of 2007 to the second quarter of 2008 of
approximately $3 million offset the unfavourable impact of the $3
million on the revaluation of certain assets and liabilities in the
second quarter of 2007. In addition, we reported a $2 million
provision release associated with a customer settlement in the
second quarter of 2008 and $2 million of income related to
refundable tax credits in the second quarter of 2007. SG&A of
$33 million in the second quarter of 2008 was $1 million higher
than the second quarter of 2007 due primarily to the negative
impact of foreign exchange on spending from the strengthening of
the Canadian dollar, British pound and the euro over the same
period. During the second quarter of 2008, we continued to work
toward completion of our restructuring plan announced in 2007 and
these plans are now over 95% complete. Capital expenditures in the
pharmaceutical services segment were $9 million compared to $5
million in the second quarter of 2007. Regulatory Review of
Montreal Bioanalytical Operations The six-month time limit imposed
by the FDA for generic audits has passed, and we believe we have
substantially completed all required site audits for generic
customers. We continue to receive a limited number of study audit
requests from innovator customers and expect we may continue to
receive these requests in low numbers in the coming months. We have
responded to questions from European regulators about the nature of
the work that was done for the FDA. We believe the European
regulators are satisfied with the work completed for the FDA and do
not expect to incur any significant costs associated with actions,
if any of European regulators. During the second quarter of 2007,
we approved and recorded a $61 million provision to 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. We have utilized $19 million of this reserve for
such costs, an amount that was partially offset by a foreign
currency translation gain on the US-dollar denominated components
of the cost estimate. Although we believe we have substantially
completed the majority of all required site audits, we still await
final reimbursement requests for many of these audits. Based on
information currently available, we believe a reserve of $33
million is required to cover any agreements reached with clients
for study audits, study re-runs, and other related costs.
Accordingly, approximately $10 million has been reversed this
quarter and is included in other income. MDS Nordion Financial
Highlights Second Quarter -------------------------------------- %
of net % of net 2008 revenues 2007 revenues
-------------------------------------------------------------------------
Product revenues $ 76 95% $ 67 94% Service revenues 4 5% 4 6%
-------------------------------------------------------------------------
Net revenues 80 100% 71 100% Cost of product revenues (42) (53%)
(35) (49%) Cost of service revenues (2) (3%) (1) (1%) Selling,
general, and administration (13) (16%) (12) (18%) Research and
development (2) (3%) (1) (1%) Depreciation and amortization (3)
(4%) (3) (4%) Other income (expense) 3 4% 1 1%
-------------------------------------------------------------------------
Operating income 21 25% 20 28% Adjustments: Loss (Gain) on a sale
of a business - - (1) (1%)
-------------------------------------------------------------------------
21 25% 19 27% Depreciation and amortization 3 4% 3 4%
-------------------------------------------------------------------------
Adjusted EBITDA $ 24 30% $ 22 31%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Margins: Gross margin 45% 50% Adjusted EBITDA 30% 31%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital expenditures $ 3 $ 1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Year-to-date -------------------------------------- % of net % of
net 2008 revenues 2007 revenues
-------------------------------------------------------------------------
Product revenues $ 135 96% $ 134 97% Service revenues 5 4% 4 3%
-------------------------------------------------------------------------
Net revenues 140 100% 138 100% Cost of product revenues (76) (54%)
(69) (50%) Cost of service revenues (2) (1%) (2) (1%) Selling,
general, and administration (24) (17%) (23) (17%) Research and
development (2) (1%) (2) (1%) Depreciation and amortization (6)
(4%) (6) (4%) Other income (expense) (5) (4%) 1 1%
-------------------------------------------------------------------------
Operating income 25 19% 37 27% Adjustments: Loss (Gain) on a sale
of a business 4 3% (1) (1%)
-------------------------------------------------------------------------
29 21% 36 26% Depreciation and amortization 6 4% 6 4%
-------------------------------------------------------------------------
Adjusted EBITDA $ 35 25% $ 42 30%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Margins: Gross margin 44% 49% Adjusted EBITDA 25% 30%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital expenditures $ 6 $ 2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
MDS Nordion revenues were up 13% from the second quarter of 2007 on
a reported basis, inclusive of a foreign exchange impact of $6
million related to the decline of the US dollar in the second
quarter of 2008 compared to the second quarter of 2007. The
remaining $3 million increase was due to the shipment of a cobalt
sterilization system and higher sales across most product lines,
which were partially offset by higher sales of medical isotopes in
the second quarter of 2007 which occurred as a result of a supply
disruption at a competitor. Operating income in the second quarter
of 2008 was $21 million compared to $20 million last year and
adjusted EBITDA was $24 million this year compared to $22 million
in 2007. The second quarter of 2008 includes a $3 million gain on
embedded derivatives, while the second quarter 2007 included $4
million related to higher medical isotope revenues during a period
of competitor disruption. Excluding these items, improvements in
profitability were driven by growth and productivity. SG&A in
the second quarter of 2008 increased by $1 million to $13 million
compared to the same period last year primarily related to the
decline of the US dollar compared to the Canadian dollar over the
same period. R&D investment increased by $l million in the
second quarter of 2008. Other income for the second quarter of 2007
included the release of a $1 million provision related to a
business sold in 2003. This item has been treated as an adjusting
item. Capital expenditures for MDS Nordion were $3 million,
compared to $1 million last year driven by investments to expand
capacity in Europe for our Glucotrace(R) product. Effective May 1,
2008, we completed the sale of our external beam therapy and
self-contained irradiator product lines to Best Medical
International Inc. The expected $4 million loss was previously
recorded in the first quarter of 2008. The operating results for
these product lines were reported in the MDS Nordion segment in the
second quarter of 2008. MDS Analytical Technologies Financial
Highlights Second Quarter -------------------------------------- %
of net % of net 2008 revenues 2007 revenues
-------------------------------------------------------------------------
Product revenues $ 93 79% $ 62 81% Service revenues 25 21% 15 19%
-------------------------------------------------------------------------
Net revenues 118 100% 77 100% Cost of product revenues (64) (54%)
(48) (63%) Cost of service revenues (4) (3%) (1) (1%) Selling,
general, and administration (22) (19%) (11) (14%) Research and
development (20) (17%) (15) (20%) Depreciation and amortization
(12) (10%) (4) (5%) Restructuring charges - - - - Other income
(expense) net - - (1) (1%)
-------------------------------------------------------------------------
Operating income (loss) (4) (3%) (3) (4%) Adjustments: Equity
earnings 10 8% 11 14% Acquisition integration (1) (1%) 3 4%
-------------------------------------------------------------------------
5 4% 11 14% Depreciation and amortization 12 10% 4 5%
-------------------------------------------------------------------------
Adjusted EBITDA $ 17 14% $ 15 19%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Margins: Gross margin 42% 36% Adjusted EBITDA 14% 19%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital expenditures $ 1 $ 1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Year-to-date -------------------------------------- % of net % of
net 2008 revenues 2007 revenues
-------------------------------------------------------------------------
Product revenues $ 185 79% $ 100 77% Service revenues 49 21% 30 23%
-------------------------------------------------------------------------
Net revenues 234 100% 130 100% Cost of product revenues (125) (53%)
(85) (65%) Cost of service revenues (8) (3%) (1) (1%) Selling,
general, and administration (41) (18%) (17) (13%) Research and
development (40) (17%) (26) (20%) Depreciation and amortization
(27) (12%) (7) (5%) Restructuring charges - - (2) (2%) Other income
(expense) net (2) (1%) - -
-------------------------------------------------------------------------
Operating income (loss) (9) (4%) (8) (6%) Adjustments: Equity
earnings 24 10% 25 19% Acquisition integration 2 1% 3 3%
-------------------------------------------------------------------------
17 7% 20 16% Depreciation and amortization 27 12% 7 5%
-------------------------------------------------------------------------
Adjusted EBITDA $ 44 19% $ 27 21%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Margins: Gross margin 43% 34% Adjusted EBITDA 19% 21%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital expenditures $ 3 $ 4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Sciex brand channel of MDS Analytical Technologies carries out
the majority of its business through joint ventures. Currently, MDS
generates the majority of its income associated with these joint
ventures from the net income of the joint ventures, and not from
its sales to the joint ventures. Under US GAAP, we equity account
for the joint ventures and therefore the majority of the income
related to the Sciex brand channel is reflected in equity earnings,
which represent our share of the net income of the joint ventures.
Our reported revenues are related to products manufactured and
services performed for the joint ventures and are not a direct
indicator of end-customer revenues. We include equity earnings in
our calculation of adjusted EBITDA, however, under US GAAP, these
earnings are not included in operating income. The second quarter
of 2007 includes the results of the Sciex brand channel, along with
the results of the MD business for the 41-day period from the close
of the acquisition on March 20, 2007 to the quarter-end. MDS
Analytical Technologies revenue grew by $41 million to $118 million
in the second quarter of 2008, compared to the same period in the
prior year. The second quarter of 2008 includes $55 million of
revenue from the MD brand channel compared to $29 million reported
for the 41-day post-acquisition period in the second quarter of
2007. MD revenues were up $4 million or 8% in the second quarter of
2008, compared to the same three-month period in 2007. In the first
full year since the acquisition, the MD brand channel generated
$220 million of revenue which was 16% above our first-year target
of $190 million. Sciex revenues to the joint venture were up $15
million or 31%, including $8 million of impact from foreign
exchange due to the decline in the US dollar compared to the
Canadian dollar. End-user revenues for Sciex products grew 6% in
the second quarter including the impact of foreign exchange.
Compared to the same period last year unit volume declined as
pharmaceutical customers reduced capital spending for large
instruments in the quarter. MDS Analytical Technologies reported an
operating loss of $4 million for the second quarter of 2008
compared to a $3 million loss in the second quarter of 2007. Equity
earnings, which are not included in operating income and represent
our share of earnings from the Sciex joint ventures was $10 million
for the second quarter of 2008 versus $11 million for the second
quarter of 2007. Reported operating income for the second quarter
of 2007 includes the results for MD from the date of acquisition,
and $3 million of integration costs and purchase accounting
adjustments. During the second quarter of 2008, $1 million of
integration cost were reversed as part of the finalization of the
MD purchase price allocation. Adjusted EBITDA for the quarter was
$17 million compared to $15 million during the same period last
year. Adjustments of $1 million of income in the second quarter of
2008 and $3 million of expense for the second quarter of 2007
reflect integration costs related to the MD acquisition. The Sciex
brand channel delivered $8 million of adjusted EBITDA, flat with
prior year, driven by the impact of lower customer sales of our
larger, higher margin products which was offset primarily by the
impact of higher end-user service revenue in the second quarter of
2008. Adjusted EBITDA for the MD brand channel was $9 million in
the second quarter of 2008, up $2 million from the $7 million
reported for the 41-day post-acquisition period in the second
quarter of 2007. MD profitability was also impacted by soft demand
for high margin, high-end instruments and by transition expenses
related to our manufacturing shift to Asia. In the first full year
of ownership MD has delivered $46 million in adjusted EBITDA which
met the target of $45-$50 million in adjusted EBITDA. SG&A
increased for the second quarter of 2008 by $11 million to $22
million reflecting the full quarter of costs associated with the MD
business. R&D expense increased $5 million to $20 million for
the second quarter of 2008 compared to the same period in 2007, due
to the R&D costs incurred by the MD brand channel and increased
investment in Sciex products that will launch within the next 12
months. Depreciation and amortization expense was also up,
reflecting, a complete quarter of intangible assets amortization
related to the MD acquisition. Capital expenditures were $1 million
this year and last. During the quarter, MDS Analytical Technologies
continued to drive innovation and growth with the launch of the
next-generation Arcturus XT(TM) instrument for laser capture
microdissection (LCM). The new Arcturus XT(TM) offers researchers
improved speed, precision and flexibility for their microdissection
experiments. Corporate and Other Financial Highlights Second
Quarter Year-to-Date ---------------- -------------- 2008 2007 2008
2007
-------------------------------------------------------------------------
$ (7) $ (6) Selling, general, and administration $ (12) $ (10) -
(1) Depreciation and amortization (1) - (2) Restructuring charges
(7) (2) (6) Other expense (1) (3)
-------------------------------------------------------------------------
(9) (15) Operating income (13) (21) Adjustments: - - Gain on sale
of investments - (2) 3 6 Valuation provisions 3 6 - 2 Restructuring
- 7 - 1 Depreciation and amortization - 1
-------------------------------------------------------------------------
$ (6) $ (6) Adjusted EBITDA $ (10) $ (9)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Corporate SG&A expenses were $7 million in the second quarter
of 2008 and compared to $6 million in the second quarter of 2007.
Other expense for the second quarter of 2008 include an additional
$3 million provision to write down the value of ABCP. This
increased the provision from 10% to 30% on $17 million of ABCP that
we hold. The second quarter of 2007 included a $6 million valuation
provision related to Lumira Capital Corp. Both of these were
treated as adjusting items. The 2007 $2 million charge related to
restructuring in the corporate functions was also an adjusting
item. In the second quarter of 2008 net interest expense was $2
million compared to net interest income of $2 million in the second
quarter of 2007. The $4 million decrease is primarily a result of
lower interest earned on lower cash balances. Income taxes Our
effective tax rate this quarter was 31%. Our tax expense was
reduced by $2 million of tax credits relating to research and
development that we recognized during the quarter. The tax benefit
recorded this quarter on the ABCP provision reflects the fact that
any tax loss arising on ABCP will be treated as a capital loss.
Discontinued Operations The results of our discontinued businesses
for the second quarter of 2007 were as follows: Second Quarter
Year-to-date
-------------------------------------------------------------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
Net revenues $ - $ 20 $ - $ 95 Cost of revenues (12) (58) Selling,
general and administration (6) (15)
-------------------------------------------------------------------------
Operating income - 2 - 22 Gain on sale of discontinued operations
905 905 Interest income - 1 Income taxes (114) (117) Minority
interest (1) (4) Equity earnings - 1
-------------------------------------------------------------------------
Income from discontinued operations - 792 - 808
-------------------------------------------------------------------------
Basic EPS from discontinued operations $ - $ 5.77 $ - $ 5.73
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The results from discontinued operations for 2007 reflect only the
Canadian diagnostic services business. Liquidity and Capital
Resources April 30, October 31, 2008 2007 Change
-------------------------------------------------------------------------
Cash, cash equivalents and short-term investments $ 139 $ 337 (59%)
Operating working capital(1) $ 125 $ 59 112% Current ratio
(excludes net assets held for sale) $ 1.9 $ 1.6 19%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Our measure of operating working capital equals accounts
receivable plus unbilled revenue and inventory less accounts
payable, accrued liabilities, and current deferred revenue. During
the second quarter of 2008, $5 million of cash was used, including
$12 million related to share repurchases under our NCIB. For the
first six months of 2008, $198 million of cash and short-term
investments were utilized including $89 million of scheduled
long-term debt principle and interest repayments, $65 million of
income taxes related to the 2007 gain on the sale of the
diagnostics business, an increase in operating working capital as a
result of year end compensation payouts and decreases in our
accounts payable balances. The increase in the current ratio is
primarily attributable to the reduction of current liabilities
related to the payment of long term debt and income taxes payable
and the movement of a $73 million note receivable to current. We
expect to have net operating cash inflows for the remainder of
fiscal 2008. Expected cash outflows include FDA-related
reimbursements to our customers and the payment of severance
obligations associated with restructuring activities. In addition
to cash generated by operations and cash on hand, we have available
a C$500 million, five-year, committed, revolving credit facility,
that expires in July, 2010, to fund our liquidity requirements.
There were no borrowings under this facility as at April 30, 2008.
Cash used by investing activities for continuing operations
totalled $13 million for the second quarter of 2008, compared to
outflows of $599 million for the second quarter of 2007, of which
$603 million is related to the MD acquisition. Capital expenditures
for the quarter totalled $15 million, compared to $7 million of
expenditures in the second quarter of 2007. Financing activities
(excluding discontinued operations) used $10 million of cash in the
quarter, primarily driven by $12 million of purchases under our
existing NCIB during the quarter which retired 0.6 million Common
shares representing less than 1% of our outstanding Common shares.
Cash used in financing activities for the prior year of $437
million included a $441 million share repurchase. We believe that
cash flow generated from operations, coupled with available
borrowings from existing financing sources, will be sufficient to
meet our anticipated requirements for operations, capital
expenditures, research and development expenditures, FDA
settlements, restructuring costs and potential acquisitions in
2008. At this time, we do not reasonably expect any presently known
trend or uncertainty to affect our ability to access our current
sources of cash. We remain in compliance with all covenants for our
senior unsecured notes and our bank credit facility. In the third
quarter of 2008, we received $15 million in cash from the May 1,
2008 sale of our external beam therapy and self-contained
irradiator product lines. Asset Backed Commercial Paper (ABCP) The
Company owns investments in non-bank sponsored ABCP issued by two
trusts with an original cost of $17 million. These investments
matured in September 2007, but as a result of liquidity issues in
the ABCP market, they did not settle at maturity. In September
2007, a Pan-Canadian Investors Committee for Third Party Asset
Backed Commercial Paper (the Committee) was formed to propose a
solution to the liquidity problem in the ABCP market. At that time,
the Company performed a probability-weighted discounted cash flow
adjustment valuation reflecting the uncertainties in the timing and
the amount of its investment to be recovered. This analysis was
performed for both a short-term and long-term hold scenario and
based on this, MDS took a provision of 10% or $2 million in the
fourth quarter 2007. In March 2008, the Committee filed with the
Ontario Superior Court of Justice a restructuring arrangement to
convert the ABCP into various long-term floating rate notes with
maturities matching the maturities of the underlying assets. A
substantial majority of ABCP holders voted in favour of the
Committee's restructuring plan, subject to final judicial approval.
The Company has revised its valuation of its investment in ABCP to
reflect the additional information available in the market and to
consider the impact of the Committee's restructuring plan to
convert the ABCP into various long-term floating rate notes with
revised maturities. The DBRS rating for the majority of the new
notes is expected to be AA and BB. The Company has continued to use
a scenario-based probability-weighted discounted cash flow approach
to value its investment at April 30, 2008 which considered the
revised credit quality of the investments, estimated renegotiated
maturity dates of approximately five to eight years, estimated
coupon rates of 3.1% to 3.6% and estimated restructuring fees. As a
result of this valuation, the Company revised its fair value
estimates for the ABCP it holds to be 70% of the face value. As a
result, in the second quarter of 2008 an additional provision of $3
million was recorded to bring the total reserve to $5 million or
30% of face value. Contractual Obligations There have been no
material changes in contractual obligations since October 31, 2007
and there has been no substantive change in any of our long-term
debt or other long-term obligations since that date. We have not
entered into any new guarantees of the debt of third parties, nor
do we have any off-balance sheet arrangements. Derivative
Instruments We use derivative financial instruments to manage our
foreign currency and interest rate exposure. These instruments
consisted of forward foreign exchange and option contracts and
interest rate swap agreements entered into in accordance with
established risk management policies and procedures. All derivative
instrument contracts are with banks listed on Schedules I to III to
the Bank Act (Canada) and the Company utilizes financial
information provided by these banks to assist in the determination
of fair market values of the financial instruments. The net
mark-to-market value of all derivative instruments at April 30,
2008 was a liability of $2 million. In addition to the above
derivatives, isotope supply agreements include terms that result in
the creation of an embedded currency derivative under SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities". The
fair value of this derivative at April 30, 2008 is an asset of $2
million. Capital Structure April 30, October 31, 2008 2007 Change
-------------------------------------------------------------------------
Long-term debt $ 300 $ 384 (22%) Less: cash and cash equivalents
and short-term investments (139) (337) (59%)
-------------------------------------------------------------------------
Net debt 161 47 243% Shareholders' equity 1,837 1,897 (3%)
-------------------------------------------------------------------------
Capital employed(1) $ 1,998 $ 1,944 3%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Capital employed is a measure of how much of our net assets is
financed by debt and equity. Long-term debt decreased $84 million
primarily due to $80 million of repayment of the long-term debt in
the first quarter 2008 and the revaluation of our Canadian dollar
dominated long-term debt to reflect the strength of the US dollar
at the end of the second quarter of 2008, compared to our 2007
fiscal year end. Quarterly Highlights Following is a summary of
selected 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 US GAAP and prior periods have
been restated to reflect the discontinuance of the operations
discussed above. (millions of US dollars, except earnings per
share)
-------------------------------------------------------------------------
Trailing Four Apr Jan Oct July Quarters 2008 2008 2007 2007
-------------------------------------------------------------------------
Net revenues $ 1,237 $ 326 $ 296 $ 307 $ 308 Operating income
(loss) (1) 8 $ (6) $ 1 $ (4) Income from continuing operations $ 50
$ 11 $ 17 $ 15 $ 7 Net income $ 48 $ 11 $ 17 $ 13 $ 7 Earnings per
share from continuing operations Basic and diluted $ 0.41 $ 0.09 $
0.14 $ 0.12 $ 0.06 Earnings per share Basic $ 0.39 $ 0.09 $ 0.14 $
0.11 $ 0.05 Diluted $ 0.39 $ 0.09 $ 0.14 $ 0.11 $ 0.05
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(millions of US dollars, except earnings per share)
-------------------------------------------------------------------------
Trailing Four Apr Jan Oct July Quarters 2007 2007 2006 2006
-------------------------------------------------------------------------
Net revenues $ 995 $ 263 $ 241 $ 250 $ 241 Operating income (loss)
$ (129) $ (96) $ (9) $ (3) $ (21) Income (loss) from continuing
operations $ (45) $ (55) $ - $ 12 $ (2) Net income $ 812 $ 737 $ 16
$ 45 $ 14 Earnings (loss) per share from continuing operations
Basic and diluted $ (0.33) $ (0.40) $ 0.00 $ 0.08 $ (0.01) Earnings
per share Basic $ 5.88 $ 5.37 $ 0.11 $ 0.30 $ 0.10 Diluted $ 5.86 $
5.35 $ 0.11 $ 0.30 $ 0.10
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Items that impact the comparability of operating income include: -
Results for the quarter ended April 30, 2008 reflect income of $10
million from the reduction of the FDA provision - Results for the
quarter ended January 31, 2008 reflect a $11 million gain from the
reduction of future Canadian income tax rates - Results for the
quarter ended April 30, 2007 reflect a $792 million net gain from
the sale of our diagnostics businesses, 41 days of operating
results of Molecular Devices, $61 million of charges related to
assisting clients in respect to the FDA review, and $25 million of
restructuring charges. - Results for the quarter ended January 31,
2007 reflect the impact of restructuring charges totalling $13
million. Outlook In recent quarters, we have seen strong growth in
new order wins at MDS Pharma Services including $342 million in new
orders reported in the first half of 2008. While we expect these
new orders to begin driving increased revenue in the second half of
2008, attention continues to be focused on restoring profitability
by streamlining and strengthening the solid platforms we have
throughout our business. We are continuing to invest in building
our global business development capability to accelerate growth in
key global markets. This has included hiring experienced staff, new
sales incentive programs, training and a focus on winning more
profitable business. These initiatives include corresponding growth
investments in facilities such as our Phoenix Phase I facility and
our Beijing central laboratory, as well as investments in
customer-facing systems designed to achieve our On-Time,
High-Quality brand promise. At the same time, we have streamlined
our infrastructure through our restructuring initiatives announced
in 2007. These savings have allowed us to offset the unfavorable
impact of inflation and foreign exchange while we incur the above
investments to drive growth. We anticipate increases in adjusted
EBITDA in the second half of 2008 and beyond as higher revenues
from our increasing backlog leveraged this improved cost structure.
In addition, we will continue to implement new productivity
initiatives to further improve profitability. MDS Nordion returned
to more traditional levels of revenue and adjusted EBITDA in the
second quarter of 2008 after a first quarter disruption in the
supply of medical isotopes, related to the shutdown of our
supplier's reactor and cobalt shipment delays in the Asia region.
We remain encouraged by the ongoing global expansion of our
TheraSphere(R) product line and continue to seek new partnerships
for growth in medical isotopes. Our expanded contract for cobalt
supply with Rosenergoatom positions MDS Nordion well to serve
continued growth in cobalt sterilization demand in the long term.
We are encouraged by the projected outlook for expected growth in
our global markets and we are focusing on being positioned in these
markets to capitalize on these opportunities. On May 16, 2008, AECL
and the Government of Canada publicly announced their intention to
discontinue the development work on the MAPLE reactors. At the same
time, AECL and the Government of Canada also publicly announced
that they will continue to supply medical isotopes from the current
NRU, and will pursue a license extension of the NRU operation past
its current expiry date of October 31, 2011. MDS Nordion is
assessing the situation and intends to take appropriate steps to
protect the interest of patients, its customers and its
shareholders. Our integration of MDS Analytical Technologies is
tracking well to plan and MD exceeded our first year target of $190
million in revenue, reaching $220 million. MD adjusted EBITDA for
the first twelve months was $46 million and met our first year
target for adjusted EBITDA of between $45 million and $50 million.
In the past quarter at MDS Analytical Technologies, we have begun
to see deferrals of capital expenditures for high-end instruments
by pharmaceutical customers. This has negatively affected our
second quarter results as these high-end instruments also command
higher margins. We expect this market softness to continue into the
second half 2008. In order to improve our profitability we are
evaluating a number of cost-reduction activities to be implemented
in the third quarter of 2008. Primarily as a result of softening
demand for high-end instruments in the pharmaceutical markets and a
delay in achieving targeted profitability at MDS Pharma Services,
we have revised our guidance as outlined in the table below. MDS
Inc. 2008 Guidance (millions of US dollars, except earnings per
share)
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2007 Revised Initial Actual 2008 2008 Results Guidance Guidance
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Total Revenues $ 1,210 $ 1,350 - 1,400 $ 1,350 - 1,410 Net Revenue
$ 1,119 $ 1,250 - 1,290 $ 1,250 - 1,300 Adjusted EBITDA $ 145 $ 160
- 170 $ 175 - 185 Adjusted EPS $ 0.34 $ 0.27 - 0.33 $ 0.37 - 0.43
Income (loss) from continuing operations $ (33) $ 45 - 55 $ 55 - 65
Basic EPS $ (0.25) $ 0.37 - 0.45 $ 0.45 - 0.53 Capital Expenditures
$ 71 $ 60 - 70 $ 65 - 75 Effective tax rate 41% 10 - 20% 0 - 10%
Our revised 2008 guidance is based on the following assumptions:
Net revenues for 2008 are expected to grow in the range of 12% -
15% based on: the net impact of the Molecular Devices acquisition,
foreign exchange, the divestiture of the MDS Nordion external beam
therapy and self-contained irradiator product lines, and increased
revenues across all three business units due to expected market
growth and improved sales execution. The decline in the higher end
of the guidance range by $10 million from our Initial 2008 Guidance
issued on February 21, 2008 to our Revised 2008 Guidance is
primarily a result of lower expected revenue in MDS Analytical
Technologies as pharmaceutical customers have started to reduce
capital expenditures. Total revenue is a GAAP measure that includes
a forecast for reimbursement revenues, which are then excluded from
the calculation of net revenues. Adjusted EBITDA is expected to
grow at 10% to 17% and to be in the range of $160 - $170 million
driven by: productivity improvements, particularly in MDS Pharma
Services, revenue growth across MDS, and the full-year impact of
the acquisition of Molecular Devices. The $15 million decline in
the low and high end of our range in adjusted EBITDA guidance from
our Initial 2008 Guidance to our Revised 2008 Guidance is a result
of lower than expected demand from our pharmaceutical customers on
large instruments which results in lower gross profit and lower
equity earnings from our joint venture, and a delay in achieving
targeted profitability at MDS Pharma Services. For 2008, the
adjusting items used in calculating adjusted EBITDA include; the
revision of our best estimate of the remaining FDA provision, the
provision for ABCP, the loss on the sale of MDS Nordion's divested
product lines and certain other items. Adjusted earnings per share
(adjusted EPS) for 2008 are expected to be in the range of $0.27 -
$0.33. In addition to the adjusting items outlined above, adjusted
EPS also excludes an expected 2008 gain on deferred taxes
associated with future Canadian income tax rates. Income from
continuing operations and basic EPS for 2008 primarily reflects
adjusted EBITDA growth and the income tax gain described above.
Capital expenditures in 2008 are expected to be lower than 2007 as
we are reducing spending based on lower forecast profitability for
the remainder of the year. The expected effective tax rate in 2008
is in the range of 10% - 20% reflecting an expected gain associated
with the reduction of future Canadian income tax rates, the use of
foreign tax loss carry-forwards and research and development
investment tax credits. The expected effective tax rate range is
ten percentage points higher in our Revised 2008 Guidance compared
to our Initial 2008 Guidance due to changes in earnings and a lower
than expected gain associated with the reduction of future Canadian
income tax rates. Our income from continuing operations and basic
EPS could be materially reduced, including the possibility of a
significant loss in 2008, if we determine there is an impairment of
the intangible asset associated with the MAPLE reactors or if we
implement a significant second half restructuring plan as part of
cost reduction initiatives. The above items could also affect our
effective tax rate. Canadian GAAP Reconciliation Note 19 to our
consolidated financial statements for the second quarter of 2008
contains a reconciliation of results reported in US GAAP to the
results based on Canadian GAAP. The material reconciling items for
net income in the quarter are deferred development costs that are
capitalized for Canadian GAAP purposes and expensed under US GAAP,
a difference in the methodologies used to value certain stock-based
compensation programs and certain contracts that under US GAAP have
an embedded derivative associated with them. In the second quarter
of 2007 the differences relate to treatment of Income Tax Credits,
deferred development costs and stock-based compensation plans. Our
Canadian Supplement to this MD&A provides descriptions and
reconciliations of the material differences between this MD&A
based on US GAAP and the financial information for the quarter
based on Canadian GAAP Accounting Changes In July 2006, the US
Financial Accounting Standards Board (FASB) issued FASB
interpretation # 48 (FIN 48), "Accounting for Uncertainty in Income
Taxes, an Interpretation of FASB Statement # 109". FIN 48 clarifies
the accounting for uncertainty in income taxes by prescribing the
recognition threshold a tax position is required to meet before
being recognized in the financial statements. It also provides
guidance on de-recognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. FIN 48
was adopted by the Company in the first quarter of fiscal 2008. We
adopted FIN 48 in the first quarter of 2008 and we did not have to
record any change to liabilities for uncertain tax positions. For
additional information see Note 2 of our unaudited interim
financial statements. Recent Accounting Pronouncements In September
2006, the FASB issued Statement of Financial Accounting Standards
(SFAS) # 157, "Fair Value Measurements". SFAS 157 provides guidance
for using fair value to measure assets and liabilities. It also
responds to investors' requests for expanded information about the
extent to which companies measure assets and liabilities at fair
value, the information used to measure fair value, and the effect
of fair value measurements on earnings. SFAS 157 applies whenever
other standards require (or permit) assets or liabilities to be
measured at fair value, and does not expand the use of fair value
in any new circumstances. SFAS 157 is effective for financial
statements issued for fiscal years beginning after November 15,
2007 and is required to be adopted by the Company on November 1,
2008. The Company is currently evaluating the effect that the
adoption of SFAS 157 will have on its consolidated results of
operations and financial condition and is not yet in a position to
determine such effects. In February 2007, the FASB issued SFAS #
159, "The Fair Value Option for Financial Assets and Financial
Liabilities Including an Amendment of FASB Statement # 115". This
Statement permits entities to choose to measure many financial
instruments and certain other items at fair value. The objective is
to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without having
to apply complex hedge accounting provisions. The Company is
required to adopt the provisions of SFAS 159 effective fiscal 2009
and is currently evaluating the effect of the adoption of SFAS 159.
The adoption is not expected to have a material impact on the
consolidated results of operations and financial condition. In
December 2007, the FASB issued SFAS # 141R, "Business Combinations"
a substantial amendment to SFAS 141. The objective of this
Statement is to improve the relevance, representational
faithfulness, and comparability of the information that a reporting
entity provides in its financial reports about a business
combination and its effects. To accomplish that, this statement
establishes principles and requirements for how the acquirer: a)
recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any
non-controlling interest in the acquiree; b) recognizes and
measures the goodwill acquired in the business combination or a
gain from a bargain purchase; and c) determines what information to
disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. The
Company is required to adopt the provisions of SFAS 141R effective
for acquisitions after October 31, 2009. The Company is currently
evaluating the effect that the adoption of SFAS 141R will have on
its consolidated results of operations and financial condition and
is not yet in a position to determine such effects. In December
2007, the FASB issued SFAS # 160, "Non-controlling Interests in
Consolidated Financial Statements- an Amendment of ARB # 51". SFAS
160 is effective for fiscal years beginning after December 15,
2008. The objective of this Statement is to improve the relevance,
comparability, and transparency of the financial information that a
reporting entity provides in its consolidated financial statements
related to the non-controlling interest held by others in entities
that are consolidated by the reporting entity. MDS does not
consolidate entities with material non-controlling interests and
the provisions of SFAS 160 are not expected to have a material
impact on its consolidated results of operations and financial
condition. In March 2008, the FASB issued SFAS # 161, "Disclosures
about Derivative Instruments and Hedging Activities - An Amendment
of FASB Statement 133 (SFAS 133). SFAS 161 is effective for fiscal
years and interim periods beginning after November 15, 2008. MDS
plans to adopt the provisions of SFAS 161 on February 1, 2009.
DATASOURCE: MDS Inc. CONTACT: Investor Inquiries: Kim Lee, (416)
213-4721, ; Media Inquiries: Janet Ko, (416) 213-4167,
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