$0.23 in Adjusted EPS and 10% Organic Growth in Adjusted EBITDA
TORONTO, March 9 /PRNewswire-FirstCall/ -- MDS Inc. (TSX: MDS;
NYSE: MDZ), a company providing a range of enabling products and
services to the global life sciences markets, today reported its
first quarter 2006 results. Quarterly Highlights - 5% organic
revenue growth in life sciences - 10% organic growth in adjusted
EBITDA - MAPLE mediation concluded successfully - Montreal
bioanalytical issues reduce EBITDA by $10 million - $15 million or
260 basis point sequential decline in SG&A - $0.38 in GAAP EPS,
$0.23 in adjusted EPS For the quarter, MDS's consolidated revenue
was $365 million, up 4% organically, over the same period last
year. Adjusted EBITDA was $64 million, up 10% organically, driven
by strong results in the isotopes and diagnostics businesses.
Adjusted earnings per share were $0.23 compared to $0.22 in the
same period last year. Selling, general and administrative costs
declined from the fourth quarter by $15 million or 260 basis points
to 19% of revenues. Financial Highlights % Change
--------------------------- ($ millions) Q1 F2006 Q1 F2005 Reported
Organic
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Revenue $365 $369 (1%) 4%
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Adjusted EBITDA: $ $64 $64 - 10% % 18% 17% NA NA
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Adjusted EPS $0.23 $0.22 5% NA GAAP EPS $0.38 $0.21 80% NA
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In the quarter, MDS continued to focus significant resources on
completing the review of certain past studies in its Montreal
bioanalytical facility and increased expenditures on these
activities to $6 million. Over the past year, MDS has conducted a
review of bioequivalency studies performed in Montreal over the
2000-2004 period and identified those requiring further assessment.
As anticipated, there are a number of follow-up activities that
will take place over the remainder of the fiscal year, with
continued impact on the cost structure of this business. In total,
lower revenue in the Montreal bioanalytical business combined with
the cost of the review, reduced EBITDA in the first quarter by $10
million compared to the first quarter of 2005. MDS continued to
execute its strategy to focus the Company on its Life Sciences
businesses. In the quarter, the Company completed the sale of
Source Medical, substantially completed its 700 person reduction in
headquarters and management staff, and continued with the process
to find an alternate ownership structure for the Company's
diagnostics business. Subsequent to the quarter, MDS reached a
mediated agreement with respect to the MAPLE project. All of MDS's
businesses, with the exception of the bioanalytical business,
delivered organic growth in revenues and adjusted EBITDA relative
to the first quarter of 2005. Diagnostic and medical isotope
businesses drove overall performance with organic adjusted EBITDA
growth of 25% and 63% respectively. "MDS was able to deliver
organic growth in Life Sciences revenues and adjusted EBITDA,
despite continued challenges with our bioanalytical operations in
Montreal," said Stephen P. DeFalco, President and Chief Executive
Officer, MDS Inc. "I am encouraged by the improvement in selling,
general and administration expenses over the fourth quarter of 2005
as we build a more competitive, streamlined cost structure."
Operating Segment Results MDS Pharma Services % Change
--------------------------- ($ millions) Q1 F2006 Q1 F2005 Reported
Organic
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Revenue: Early-stage $78 $88 (11%) (1%) Late-stage 51 50 2% 13%
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Total $129 $138 (7%) 2%
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Adjusted EBITDA: $ $3 $8 (62%) - % 2% 6% NA NA
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Pharmaceutical research services revenue for the first quarter
increased 2% organically, over the same period last year. Excluding
the bioanalytical business, organically, revenue grew by 10% and
EBITDA improved by 33%. Backlog was up 17% year-over-year to US$370
million and was up 9% sequentially, as we continue to win
late-stage global contracts. The Company continued the Montreal
bioanalytical FDA review in the quarter at a cost of $6 million.
This increased cost, and revenues significantly lower than last
year offset adjusted EBITDA growth in all other markets, and
accounted for the decline in EBITDA from $8 million in the first
quarter last year to $3 million this quarter. There are encouraging
signs that our Global Clinical Development (GCD) line of business
is gaining traction from its strategic therapeutic focus on
oncologic/hematologic and metabolic diseases. Nearly half of GCD
new business wins came from these areas in the first quarter of
2006. These successes have been accompanied by opportunities to bid
on larger, high-value studies in these therapeutic areas. MDS
Nordion % Change --------------------------- ($ millions) Q1 F2006
Q1 F2005 Reported Organic
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Revenue $82 $75 9% 19%
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Adjusted EBITDA: $ $28 $25 8% 63% % 34% 33% NA NA
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Isotope revenue for the first quarter grew 19% year-over-year on an
organic basis, driven by the strength of the medical imaging
business. Results for the medical isotope business were positively
impacted due to a competitor's voluntary recall of its technetium
generator line used in cardiac imaging. EBITDA increased
organically by 63% in the first quarter of 2005. The new Equinox
cancer therapy system was launched during the quarter. The
completion of the MAPLE mediation and a supply agreement with
Molecular Insights Pharmaceuticals, Inc. were announced subsequent
to the quarter. MDS Sciex % Change --------------------------- ($
millions) Q1 F2006 Q1 F2005 Reported Organic
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Revenue $71 $74 (4%) 1%
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Adjusted EBITDA: $ $19 $21 (10%) - % 27% 28% NA NA
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Analytical instrument revenue for the first quarter grew 1%
year-over- year on an organic basis. Organic EBITDA was level with
last year but declined 10% as reported from $21 million to $19
million, due principally to currency. Our new products sold
extremely well, particularly the API 5000(TM), the 4800 MALDI
TOF/TOF(TM) and the 3200 Q TRAP(R), and demand in the quarter
outstripped our ability to supply these products. MDS Sciex shipped
the first CellKey(TM) system produced at the new Singapore facility
in the quarter. MDS Diagnostic Services % Change ------------- ($
millions) Q1 F2006 Q1 F2005 Reported
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Revenue $83 $82 1%
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Adjusted EBITDA: $ $20 $16 25% % 24% 20% NA
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MDS Diagnostic Services revenue increased 1% year-over-year to $83
million. EBITDA margins grew 460 basis points to 24% in the first
quarter of 2006, largely due to successful implementation of
LeanSigma initiatives. Funding negotiation with the Ontario
Ministry of Health continued in the first quarter and it continues
to be our expectation that, when concluded, any increases will be
retroactive to March 31, 2005. Corporate Last September, MDS
announced its new strategy to focus on its high-growth, global life
sciences businesses. During the first quarter, a number of items
were concluded in executing this strategy. MDS successfully
divested its interest in Source Medical for $79 million and the
retail business of MDS Capital and entered into an agreement to
sell its interest in Calgary Laboratory Services. The evaluation of
alternate ownership options for the Company's remaining diagnostics
business is proceeding well and is expected to be announced in the
first half of 2006 and completed by the end of fiscal 2006. MDS
continues to focus on operational effectiveness in each of its core
businesses. A $15 million, or 260 basis point, reduction in
selling, general and administration expenses in the quarter
compared to the fourth quarter of last year reflects the impact of
the Company's efforts to reduce layers of management, expedite
decision making and enhance our global competitiveness. Following
the completion of the diagnostics transaction, MDS intends to
change to US dollar/US GAAP reporting. With over 95% of revenues in
Life Sciences sourced from outside of Canada, US dollar/US GAAP
reporting will be a more natural reporting convention for the
Company, and one that will provide shareholders with greater
transparency of operating results and ease of comparability with
global life sciences peers. The use of non-GAAP measures section in
the MD&A outlines the use of the terms 'organic' and 'adjusted'
in reflecting operating performance of the Company. We use certain
non-GAAP measures so that readers have a better understanding of
the significant events and transactions that have had an impact on
our results. We provide a reconciliation of these non-GAAP measures
to our GAAP financial results in the accompanying MD&A. Annual
Shareholder Meeting and Conference Call MDS will hold its Annual
Shareholder Meeting at 4:00 pm ET today at the Design Exchange, 234
Bay Street, Toronto, Ontario, Canada. This meeting will also be
broadcast live at http://www.mdsinc.com/. MDS will be holding a
conference call today at 10:30 am to discuss the first quarter
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. is a global life sciences company that
provides market-leading products and services that our customers
need for the development of drugs and the diagnosis and treatment
of disease. MDS is a global provider of pharmaceutical contract
research, medical isotopes for molecular imaging,
radiotherapeutics, and analytical instruments. MDS Forward Looking
Statement 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 AND ANALYSIS March 8, 2006 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 January 31,
2006 and its financial position as at January 31, 2006. This
MD&A should be read in conjunction with the consolidated
financial statements and notes that follow. For additional
information and details, readers are referred to the annual
financial statements and MD&A for 2005 and the Company's Annual
Information Form (AIF), all of which are published separately and
are available at http://www.mdsinc.com/ and at
http://www.sedar.com/. Caution regarding forward-looking statements
This MD&A is intended to provide readers with the information
that management believes is required to gain an understanding of
MDS's current results and 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. 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. We may make such statements in this document,
in other filings with Canadian regulators or the United States
Securities and Exchange Commission, in reports to shareholders or
in other communications. These forward-looking statements include,
among others, statements with respect to our objectives for 2006,
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", 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, expectation,
anticipations, estimates and intentions expressed in such
forward-looking statements. These factors include, but are not
limited to, management of liquidity and funding and operational
risks; the strength of the Canadian and United States economies and
the economies of other countries in which we conduct business; the
impact of the movement of the Canadian dollar relative to other
currencies, particularly the US dollar and the Euro; the effects of
changes in monetary policy, including 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 impact of
changes in the laws and regulations and enforcement thereof;
judicial judgments and legal proceedings; our ability to obtain
accurate and complete information from, or on behalf of, our
customers and counter-parties; 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; changes in accounting
policies and methods we use to report our financial condition,
including uncertainties associated with critical accounting
assumptions and estimates; operational and infrastructure risks;
other factors that may affect future results including changes in
trade policies, timely development and introduction of new products
and services, changes in our estimates relating to reserves and
allowances, changes in tax laws, technological changes, natural
disasters such as hurricanes, the possible impact on our businesses
from 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. We do not undertake to
update any forward-looking statement, whether written or oral, that
may be made from time to time by us or on our behalf. Use of
non-GAAP measures In this MD&A we describe certain income and
expense items that are unusual or non-recurring. These terms are
not defined by generally accepted accounting principles (GAAP). Our
usage of these terms may vary from the usage adopted by other
companies. We identify the impact of these amounts on operating
income and on earnings per share (EPS). We provide this detail so
that readers have a better understanding of the significant events
and transactions that have had an impact on our results. In
addition, terms such as adjusted operating income; adjusted
earnings before interest, taxes, depreciation and amortization
(EBITDA); EBITDA margin; adjusted EPS; and backlog are not defined
by GAAP, and our use of such terms or measurement of such items may
vary from that of other companies. Where relevant, and particularly
for earnings-based measures, we provide tables in this document
that reconcile non-GAAP measures used to amounts reported on the
face of the consolidated financial statements. We also discuss the
results of our operations, isolating variances that relate to
changes in exchange rates and acquisitions. We use the term
"organic" to describe the results presented in this way. To isolate
the impact of currency movements, we eliminate the impact of
foreign currency hedging activities in both the current and prior
periods and recalculate the base figures for the prior period using
the exchange rates that were in effect for the current period.
Tabular amounts are in millions of Canadian dollars, except per
share amounts and where otherwise noted. Introduction MDS is a
global life sciences company that provides market-leading products
and services that our customers need for the development of drugs
and the diagnosis and treatment of disease. We are a leading global
provider of pharmaceutical contract research, medical isotopes for
molecular imaging, radiotherapeutics, and analytical instruments.
Discontinued operations All financial references in this document
exclude those businesses that we consider to be discontinued. Our
discontinued businesses include our generic radiopharmaceuticals
operations, our US laboratory operations, certain early-stage
pharmaceutical research services operations, and our interests in
Source Medical Corporation (Source) and Calgary Laboratory Services
Partnership (CLS). All financial references for the prior year have
been restated to reflect this treatment. From the amounts reported
in our first quarter 2005 interim report, revenues for 2005 have
been reduced by $74 million and income from continuing operations
has been reduced by $1 million. Segmented reporting In light of our
new strategic plan and our decision to find an alternative
ownership structure for our diagnostics businesses, we have revised
our definition of reportable segments effective this quarter, with
retroactive effect. We now consider each of our underlying
businesses to be a separate reportable segment and we have revised
our financial statements and our MD&A to reflect this. In our
reports for prior periods, we allocated costs incurred centrally
and for the benefit of all business units to our two reportable
segments pro-rata, based on revenues. We have now realigned our
allocation method for these costs to charge each business unit for
the cost of services consumed. Costs that benefit the corporation
generally and which cannot be assigned to a specific business unit
are recorded in a separate segment as "Corporate and other", along
with certain other income and expense items. The new allocation
method has been applied for both current and prior periods.
Strategic initiatives On September 1, 2005, we announced our
strategic plan to pursue growth in the global life sciences market
and divest of assets that do not contribute to the Company's areas
of focus. Since that time, we have completed the sale of our
interest in Source for cash proceeds of $79 million, recording an
after-tax gain of $28 million. We have entered into an agreement to
sell our interest in CLS for cash proceeds of $21 million, which we
expect will close in the second quarter of 2006. We are also well
advanced in discussions to sell certain non-core pharmaceutical
research services businesses and we expect to complete our exit
from these businesses by the end of this fiscal year. In addition,
MDS Capital Corp. completed the sale of its retail funds management
business. We have now substantially completed the majority of our
restructuring initiatives, including the elimination of over 700
positions, with an emphasis on senior management, administrative
and support staff. We are actively exploring alternative ownership
structures for our diagnostics business to maximize value for
shareholders and at the present time we are engaged with a number
of possible buyers for the business. As well, we continue to review
alternate strategies, including the possibility of distributing the
interest in this business to shareholders in a tax-efficient
manner. We expect that we will complete a transaction affecting
this business before the end of this fiscal year. On February 22,
2006, we announced the successful completion of our mediation
process with Atomic Energy of Canada Limited (AECL) regarding our
MAPLE isotope production facility project. Under the terms of the
agreement, title to the facility has been transferred to AECL in
exchange for a cash payment of $25 million and a 40-year supply
agreement that will come into effect once the facility is
operational. Importantly, under the terms of this agreement, MDS
will have no continuing obligation for the capital costs of the
facility, and will not be responsible for future operating costs.
The long-term supply agreement provides for payments to AECL for
the supply of isotopes on the basis of a percentage of revenues.
Although this percentage is modestly higher than what we currently
pay AECL for isotopes supplied by the National Research Universal
Reactor (NRU), we believe that we will be able to mitigate the
impact of this increase with increased sales volumes, price
increases, and production efficiencies. The essential terms of the
existing supply agreement will carry forward to an interim
agreement and remain in effect while AECL completes the MAPLE
facility. When we entered into mediation discussions with AECL we
were facing considerable uncertainty regarding estimated total
costs to complete the project and projected future operating costs.
In completing this settlement, we achieved our goal of shielding
MDS shareholders from further capital costs associated with
completing and commissioning the facility. We have also created a
more economically viable relationship going forward, as we will
avoid substantial operating cost increases related to the operation
of the facility in the future. AECL will be focused on their
primary strength of owning and operating the facilities, while we
will focus on marketing, selling and distributing the isotopes.
Consolidated operating highlights % Change 2006 2005 Reported
Organic
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Net revenues $ 365 $ 369 (1%) 4%
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Operating income $ 43 $ 47 (9%) Adjustments: Restructuring charges
and other expenses 3 1
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Adjusted operating income 46 48 (4%) Depreciation and amortization
18 16
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Adjusted EBITDA $ 64 $ 64 - 10%
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Adjusted EBITDA margin 18% 17%
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Consolidated revenue for the first quarter of 2006 was $365
million, down marginally from the $369 million reported in the same
period in 2005. On an organic basis, revenues grew by 4%, driven
particularly by 19% growth in our isotopes segment. Revenues from
our instruments business grew 1% organically and our pharmaceutical
services business realized 2% growth in revenue on an organic
basis, driven by the continued growth in all businesses except
bioanalytical. Diagnostics revenues grew 1% in the quarter.
Adjusted EBITDA of $64 million, level with the prior year was up
10% on an organic basis. Strong results in isotopes and a
substantial improvement in the EBITDA margin earned by our
diagnostics business were the principal contributors to this
organic growth. The impact of ongoing issues in our bioanalytical
operations was significant this quarter, as we doubled our
expenditures conducting the US Food and Drug Administration (FDA)
review. These costs, combined with depressed revenues in this
business, resulted in EBITDA being down by approximately $10
million year-over-year. Had we achieved the same level of EBITDA in
bioanalytical that we achieved in the first quarter last year, we
would have reported adjusted EBITDA growth of 31% organically.
Adjusted operating income for 2006 of $46 million was slightly
below that achieved in the first quarter of 2005. Adjustments
include stock option expenses related to the accelerated vesting of
options for certain former executives who left MDS last year and a
valuation provision related to a long-term investment. Reported
operating income for the first quarter was $43 million, down from
$47 million for the prior year, as currency and the ongoing costs
of our bioanalytical review offset the growth in other areas.
Operating income for the quarter included $1 million equity gains
from MDS Health Ventures, partially offsetting the impact of
unusual items. We also recorded a $28 million after-tax gain on the
sale of Source, although this gain is included with the results
from our discontinued operations. Selling, general, and
administration (SG&A) expenses for the quarter were down
substantially compared to the fourth quarter of 2005 when we
announced our restructuring. SG&A for the quarter was $69
million compared to $84 million in the fourth quarter, and down
slightly compared to the first quarter last year, including $2
million spent on our Sarbanes-Oxley (SOx) compliance program in the
quarter. The drop from the fourth quarter reflects the impact of
the initiatives undertaken at the end of last year to realign our
cost structure and to be more globally competitive. The majority of
these initiatives began to have effect in November 2005. SG&A
expense for the current quarter was 19% percent of revenues
compared to 22% in the fourth quarter last year. The magnitude of
the drop since year-end is partially reflective of the higher than
usual SG&A expenses in the fourth quarter. We made good
progress in the quarter towards our goal of reducing our overall
SG&A rate by 150 basis points over the course of 2006. We
remain committed to our high level of investment in research and
development (R&D). During the first quarter, we spent $15
million on R&D activities and expensed $6 million this year,
compared to $23 million and $7 million respectively in the same
quarter last year. Consolidated depreciation and amortization
expense increased $2 million compared to last year. The increase is
principally related to depreciation on our new common business
system, on which we began to record depreciation in the third
quarter last year. Capital expenditures for the quarter were $27
million, including capital costs associated with MAPLE incurred
during the first quarter. Results from discontinued operations
include the after-tax gain resulting from the sale of our interest
in Source, along with the ongoing operations of our other
discontinued businesses. Reported earnings per share were $0.38 for
the quarter, compared to $0.21 in 2005. Adjusted earnings per share
from continuing operations for the quarter were $0.23 compared to
$0.22 earned in the same period last year. Earnings per share from
discontinued operations were $0.19, including the impact of the
Source gain. Adjusted earnings per share for the two periods were
as follows: 2006 2005
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Basic and diluted EPS from continuing operations - as reported $
0.19 $ 0.21 Adjusted for: Restructuring 0.01 0.01 Valuation
provisions and investment writedowns 0.01 - Quebec tax rate change
0.02 -
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Adjusted EPS $ 0.23 $ 0.22
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In addition to the adjustments highlighted above, the decline in
our bioanalytical business reduced earnings per share by
approximately $0.05 for the quarter compared to last year.
Pharmaceutical Services Financial Highlights % Change 2006 2005
Reported Organic
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Early-stage revenues $ 78 $ 88 (11%) (1%) Late-stage revenues 51 50
2% 13%
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$ 129 $ 138 (7%) 2%
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Operating income (loss) (4) 1 (500%) Restructuring charges reversed
(1) -
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Adjusted operating income (5) 1 Depreciation and amortization 8 7
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Adjusted EBITDA $ 3 $ 8 (62%) -
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Adjusted EBITDA margin 2% 6%
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Our pharmaceutical services business grew 2% on an organic basis,
4% after taking into account our Skeletech acquisition. Organic
growth was driven by continued strong results in all businesses
except our Montreal bioanalytical business, for which the impact of
the ongoing FDA review remains significant. Bioanalytical services
is the only revenue line that was not up organically
year-over-year, and revenues excluding bioanalytical were up 10%
organically. Late-stage revenues grew 13% organically, balanced
between our global clinical development and global central
laboratory businesses. Our late-stage businesses were significantly
affected by the weakness in the Euro that began in the fourth
quarter last year. The Euro is down 13% compared to the average
rate for the first quarter of 2005. Our late-stage businesses have
also continued to grow their backlog and account for all of the
growth in our reported balance. Our average monthly pharmaceutical
research backlog continues to expand and averaged US$370 million
for the first quarter of 2006, an increase of approximately 17%
when compared to the average for the first quarter of fiscal 2005.
It is also up 9% sequentially from the fourth quarter last year.
(millions of US dollars)
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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 Quarter
4 340 Fiscal 2006 - Quarter 1 370
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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, therefore, reduce the volatility that would result
from converting the measure to Canadian dollars. The review of our
Montreal bioanalytical operations continued during the quarter. We
have now conducted a data review of all studies within the scope
committed with the FDA. All bio-equivalency studies that were in
scope and conducted over the 2000-2004 period were included in the
review. As anticipated, our findings suggest that certain studies
will require further assessment, which may include follow-up
investigations or analytical review. We continue to work diligently
to ensure that the final results of our review will meet the FDA's
expectations. The financial impact of the Montreal bioanalytical
review has increased steadily since the second quarter of 2005.
Relative to the fourth quarter of 2005, we doubled our expenditures
in this activity in the current quarter to ensure timely progress.
On an organic basis, bioanalytical revenues in the first quarter
declined by nearly one-third year-over-year. Our bioanalytical
business contributed $10 million less EBITDA in the first quarter
compared to the same period last year, of which, $6 million related
to increased direct costs of the review. Reported EBITDA was
impacted by currency changes and the decreased profits in our
bioanalytical business. Excluding the impact of currency and the
drop in bioanalytical profits, adjusted EBITDA for the segment rose
33%. EBITDA was flat organically, although all business units
except Montreal bioanalytical contributed to growth in EBITDA this
quarter, with particularly good contribution from our preclinical
and late-stage operations. Capital expenditures in the
pharmaceutical services segment were $8 million compared to $4
million last year. Capital expenditures were related principally to
our ongoing expansion in Lyon, as well as an expansion of the
Skeletech site in Bothell that had been planned at the time of the
acquisition. We also continued the rebuilding of our New Orleans
facility during the quarter; however, the cost of this is expected
to be covered by insurance proceeds. The rate at which we can
return this facility to full operations is dependent on the
condition of the surrounding neighbourhood and of the city itself,
as this will affect our ability to recruit study participants. We
are now bidding on early clinical studies for the New Orleans site,
although we expect to commence work no earlier than the third
quarter. We are expanding our early clinical capacity to take
advantage of continued strong market demand in this service line.
We currently plan to add 120 new early clinical beds this year and
will have another 50 beds available once the New Orleans site
reopens. Bed availability is the primary driver for growth in this
business, and further expansions will be considered as conditions
warrant. Isotopes Financial Highlights % Change 2006 2005 Reported
Organic
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Revenues $ 82 $ 75 9% 19%
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Operating income 24 21 14% Depreciation and amortization 4 4
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Adjusted EBITDA $ 28 $ 25 12% 63%
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Adjusted EBITDA margin 34% 33%
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Our isotopes business grew 19% year-over-year on an organic basis,
driven by very strong sales of medical isotopes. Early in the
quarter, a major competitor announced a voluntary recall of
technetium generators, used primarily for cardiac imaging, while
they address sterility issues at their primary manufacturing
facility. This facility has been out of production since the
announcement and sales volumes for our isotopes business have
increased in this time. We estimate that up to $8 million of
high-margin revenues were realized in the quarter. We expect normal
industry production to resume sometime in the second quarter, and
accordingly, we do not expect to be able to fully retain the
increase in market share beyond the third quarter. The increase in
molybdenum sales combined with higher cobalt shipments this year,
account for the majority of the increase in isotope revenues. The
strength in these markets was partially offset by the impact from
the continuing drop in the value of US dollar and, to a lesser
extent, the drop in the value of the Euro compared to this time
last year. Teletherapy systems and related revenues were down this
year, principally due to lower unit shipments and to the impact of
the declining Euro. Organic growth in EBITDA was 63%, led by the
contribution from both medical isotopes and medical sterilization.
The impact of currency was significant for our isotopes business in
the quarter, and as a result, reported EBITDA for the segment was
$28 million for the first quarter this year compared to $25 million
last year. During the first quarter, we launched our new Equinox
line of therapy system equipment for cancer treatment and
BEXXAR(R), a product we manufacture for GlaxoSmithKline, was
launched in Canada. Capital expenditures in the isotopes segment
were minimal at $1 million, compared to a similar amount last year
and excluding spending on the MAPLE project. Capital costs
associated with the MAPLE project were $14 million in the quarter
(excluding capitalized interest) compared to the $8 million spent
last year. The capital expenditures made in the first quarter of
2006 are fully recoverable from AECL under the terms of the
mediated settlement and will be reversed in the second quarter. The
outlook for our isotopes business is strong. While the technical
issues associated with the reactors have yet to be resolved, the
major uncertainties associated with the MAPLE contract are behind
us and we are able to focus more effectively on our businesses. We
recently announced a new strategic relationship with Molecular
Insights Pharmaceuticals, Inc. that represents a key development
for our radiopharmaceutical and drug development capabilities. A
number of similar opportunities are in active development. We also
received conditional approval from the FDA for a non-registration
trial for our TheraSphere(R) product for liver cancer. We are
proceeding with an application for a randomized Phase III trial
that is intended to support a Pre-Market Approval application for
this product. The product continues to be available in the US under
a humanitarian device exemption. Instruments Financial Highlights %
Change 2006 2005 Reported Organic
-------------------------------------------------------------------------
Revenues $ 71 $ 74 (4%) 1%
-------------------------------------------------------------------------
Operating income 15 18 (17%) Depreciation and amortization 4 3
-------------------------------------------------------------------------
Adjusted EBITDA $ 19 $ 21 (10%) -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Adjusted EBITDA margin 27% 28%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Our instruments business grew 1% on an organic basis. The declining
US dollar reduced reported revenues this quarter compared to the
same period last year. Revenue growth was anchored by strong orders
for the 3200 Q Trap(R) and 4800 MALDI TOF/TOF, along with continued
strength of the higher-end API 4000(TM) and API 5000(TM) models.
Demand outstripped supply for some of our key products in the first
quarter. We introduced an entirely new product late last year, the
CellKey(TM) System. This product is being manufactured at our new
Singapore plant and we shipped the first unit in the quarter.
Organic EBITDA growth was level compared to a strong first quarter
last year, while reported EBITDA for the segment was $19 million
compared to $21 million last year, reflecting the impact of
currency. Capital expenditures in the instruments segment
(excluding capitalized development costs) were $1 million this year
and last. We are encouraged by the strong order flow for our
high-end analytical instrumentation. Orders are good on our new
products and we expect strong shipments in the second quarter.
Signs point to continued strength in the small molecule market
where our high-end triple quad instruments are targeted.
Diagnostics Financial Highlights % Change 2006 2005 Reported
Organic
-------------------------------------------------------------------------
Revenues $ 83 $ 82 1%
-------------------------------------------------------------------------
Operating income 17 14 21% Restructuring charges 1 -
-------------------------------------------------------------------------
Adjusted operating income 18 14 Depreciation and amortization 2 2
-------------------------------------------------------------------------
Adjusted EBITDA $ 20 $ 16 25%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Adjusted EBITDA margin 24% 20%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Our diagnostics business grew 1% on an organic basis. Revenue
growth in this business is contained by the multi-year fee
agreements we operate under in both BC and Ontario. As yet there
has been no new agreement reached to replace the Ontario fee
agreement that expired on March 31, 2005 and we continue to bill
under the old agreement. EBITDA increased to $20 million from the
$16 million reported last year, increasing our EBITDA margin to 24%
from the 20% earned last year. This margin expansion is a direct
result of the cost realignment initiatives launched last fall and
the LeanSigma projects that we currently have underway. Capital
expenditures in the diagnostics segment were $1 million this year
and last. Negotiations continue on the Ontario fee agreement and we
are hopeful that a new agreement will be signed in the near future.
While we are unable to predict the exact outcome of these
negotiations, we expect a moderate fee increase that will be
retroactive to April 1, 2005. In the meantime, we remain focused on
our LeanSigma and competitiveness initiatives to improve the
operating results of this business. Corporate Financial Highlights
2006 2005 % Change
-------------------------------------------------------------------------
Operating costs $ (9) $ (7) 29% Adjustments: Restructuring charges
and other 3 1
-------------------------------------------------------------------------
Adjusted operating costs (6) (6) -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
In September 2005, we announced our intention to liquidate our
investment in MDS Capital Corp. and related investment funds.
During the quarter, we recorded $1 million of equity earnings
related to gains that have been realized as these activities
proceed. These earnings are included in the adjusted operating loss
reported above. We do not expect significant future gains or losses
from the liquidation of these investments. In 2005, we reported a
$2 million equity loss as a result of investment write-downs in the
investment portfolios. During the quarter, we determined that a $1
million long-term receivable related to the sale of our proteomics
operations in Denmark was not collectible and this amount was
written off. Subsequent to the quarter-end, we received $1 million
of bankruptcy proceeds associated with the closure of Protana. This
income will be recorded in the second quarter. The provision
recorded in the quarter is reflected in restructuring charges and
other expenses above, along with a $2 million charge related to the
cost of stock options previously granted to certain retiring
executives. As we reported in our 2005 fourth quarter, we honoured
a financial guarantee of the bank obligations of Hemosol
Corporation, and, together with another secured lender, we have
been providing debtor-in-possession financing to facilitate an
orderly liquidation of Hemosol. To date we have advanced slightly
more than one-third of the $1 million we committed to provide. The
ultimate value of Hemosol and its assets remains uncertain.
Although we have approximately $21 million of secured claims, there
is risk that the bankruptcy proceeds will not be sufficient to
fully recover this amount. Our carrying value for these claims is
$13 million, and we are actively monitoring the bankruptcy
proceedings to protect our interests. Net interest expense was $1
million, down from the $4 million last year, due primarily to lower
interest costs for our US dollar debt, and higher interest earned
on cash balances. We capitalized $2 million of interest costs
related to the MAPLE construction project in both years. As a
result of the mediation settlement, and because we no longer own
the asset under construction, beginning with the second quarter of
2006 future interest costs will be expensed as incurred. Our
interest expense will increase by $10 million on an annualized
basis, including $5 million of cash interest. Income taxes The
effective tax rate for the first quarter of 2006 was 31% compared
to 26% for the first quarter of last year. Income tax rate
increases enacted by the Province of Quebec in December 2005 have
increased our long-term tax liabilities by $2 million. This impact
has been reported as a future tax expense in the first quarter of
2006, and accounts for the increase in the rate. Discontinued
operations The results of our discontinued businesses for the first
quarter of 2006 and 2005 were as follows: 2006 2005
-------------------------------------------------------------------------
Revenues $ 34 $ 85 Cost of revenues (28) (72) Selling, general and
administrative (4) (10) Depreciation and amortization (1) (2)
-------------------------------------------------------------------------
Net operating income (loss) 1 1 Gain on sale of Source 28 -
Interest expense - - Dividend and interest income - - Income taxes
- - Minority interest (1) (1)
-------------------------------------------------------------------------
Income from discontinued operations $ 28 $ -
-------------------------------------------------------------------------
Basic EPS $ 0.19 $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liquidity and capital resources January 31 October 31 2006 2005
Change
-------------------------------------------------------------------------
Cash and cash equivalents $ 282 $ 265 6% Operating working
capital(1) $ 120 $ 84 43% Current ratio 1.9 1.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
1. Our measure of operating working capital equals accounts
receivable plus unbilled revenue and inventory less accounts
payable, accrued liabilities, and current deferred revenue. The
increased current ratio is mainly due to the payment in the quarter
of accounts payable and accrued liabilities related to our fiscal
2005 restructuring program. Cash flow from continuing operations
was $(1) million compared to $32 million in 2005. The decreased
cash flow from continuing operating activities is primarily related
to payment of year-end accounts payable and accruals. This figure
also excludes the $79 million cash proceeds resulting from the sale
of Source. Our liquidity needs can be satisfied from cash generated
from operations and short-term borrowings against our available
lines of credit. During 2005, we negotiated a $500 million,
five-year committed, revolving credit facility which replaced our
previous $225 million credit facility. No funds were borrowed under
the facility as of January 31, 2006. Cash used in investing
activities (excluding discontinued operations) was $48 million,
including $27 million of capital expenditures and the $20 million
loan guarantee payment associated with Hemosol. Cash used in
financing activities (excluding discontinued operations) during the
quarter was $9 million, a decrease of $11 million versus last year.
The decrease was mainly due to an increase in cash received from
the exercise of stock options and a reduction in shares purchased
under our Normal Course Issuer Bid (NCIB). We have been under a
voluntary blackout period since April 2005, and as a result, we
made no purchases under our NCIB during the quarter. In the first
quarter of 2005, we acquired 522,900 Common shares under our NCIB
for cash consideration of $8 million. We believe that cash flow
generated from operations, coupled with available borrowings from
existing financing sources, will be sufficient to meet our
anticipated capital expenditures, research and development
expenditures and other cash requirements in 2006. 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. Contractual obligations There
have been no material changes in contractual obligations since
October 31, 2005, with the exception of those contained in the
MAPLE settlement agreement, described elsewhere in this document.
There has been no substantive change in any of our long-term debt
or other long-term obligations since October 31, 2005. We have not
entered into any new guarantees of the debt of other 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 certain of these banks to determine the
fair market values of the financial instruments. The net
mark-to-market value of all derivative instruments at January 31,
2006 was $4 million. We recorded no mark-to-market loss on interest
rate swaps during the first quarter of 2006. Capitalization January
October 2006 2005 Change
-------------------------------------------------------------------------
Long-term debt $ 454 $ 468 (3%) Less: cash and cash equivalents 282
265 6%
-------------------------------------------------------------------------
Net debt 172 203 (15%) Minority interest 14 20 (30%) Shareholders'
equity 1,488 1,425 4%
-------------------------------------------------------------------------
Capital employed(1) $ 1,674 $ 1,648 2%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
1. Capital employed is a measure of how much of our net assets are
financed by debt and equity. Long-term debt decreased $14 million
due principally to revaluation of our US-dollar denominated
long-term debt. The US dollar depreciated by $0.04 since October
31, 2005, resulting in a further unrealized gain on this debt of
$13 million and bringing the total cumulative unrealized gain to
$138 million. This unrealized gain is recorded in the currency
translation adjustment account. 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 Canadian
GAAP and prior periods have been restated to reflect the
discontinuance of the operations discussed above. (millions of
Canadian dollars, except earnings per share) Jan 2006 Oct 2005 July
2005 Apr 2005
-------------------------------------------------------------------------
Net revenues $ 365 $ 390 $ 368 $ 362 Operating income (loss) $ 43 $
(35) $ 26 $ 38 Income (loss) from continuing operations $ 27 $ (29)
$ 14 $ 27 Net income (loss) $ 55 $ (48) $ 19 $ 30 Earnings (loss)
per share from continuing operations Basic and diluted $ 0.18 $
(0.21) $ 0.10 $ 0.18 Earnings (loss) per share Basic and diluted $
0.38 $ (0.34) $ 0.14 $ 0.21
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Jan 2005 Oct 2004 Jul 2004 Apr 2004
-------------------------------------------------------------------------
Net revenues $ 369 $ 375 $ 375 $ 369 Operating income $ 47 $ 11 $
67 $ - Income (loss) from continuing operations $ 30 $ 5 $ 51 $
(24) Net income (loss) $ 30 $ 9 $ 50 $ (36) Earnings (loss) per
share from continuing operations Basic and diluted $ 0.21 $ 0.03 $
0.36 $ (0.17) Earnings (loss) per share Basic and diluted $ 0.21 $
0.06 $ 0.35 $ (0.25)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Items that impact the comparability of operating income include: -
The third quarter of 2005 reflected restructuring charges of $5
million and a writedown of licensed technology of $8 million. - The
fourth quarter of 2005 reflected restructuring charges of $67
million and provisions related to long-term investments of $13
million. Outlook Our first quarter in fiscal 2006 has been strong
and we are seeing a number of encouraging signs for the balance of
the year. We completed a number of important steps in our
repositioning and we have tightened our strategic focus. The sale
of Source, the completion of an agreement that resolves
long-standing issues related to the MAPLE project, and the
impending sale of CLS each provide evidence of our commitment to
this focus. Efforts continue to find an alternative ownership
structure for our diagnostics business. We expect to be able to
announce this transaction by mid-year. We will continue to make
progress executing our strategic plan to be a more competitive and
tightly focused participant in the fast-growing global life
sciences markets. Foreign currency remains a critical issue for our
businesses as both the US dollar and the Euro continue to decline
relative to the Canadian dollar. The diminished protection afforded
by our hedges will continue to have an impact on our reported
operating results this year. We will provide analysis of our
results on an organic basis to help provide a clearer understanding
of the trends affecting our businesses. We expect to switch to US
dollar and US GAAP reporting following the completion of a
diagnostics transaction. Recent significant contract wins by our
late-stage businesses and the continued growth of the early-stage
businesses other than bioanalytical are encouraging. We expect the
Montreal bioanalytical review to continue through the rest of the
current fiscal year, resulting in increased costs and depressed
levels of profitability for this business. We have remained in
close contact with all of our bioanalytical customers during the
review period, and we continue to believe that we will see an
increase in work at the Montreal location once the review and
remediation work is completed. This issue has not affected our
other bioanalytical facilities. Fiscal 2006 is an important year
for our isotopes business as a number of major customer contracts
come up for renewal, affecting both the medical isotopes and
sterilization businesses. We are optimistic at this time that we
will be successful in negotiating renewals of all significant
contracts. We are also working aggressively to retain some of the
unusual market share increase that we experienced in the first
quarter as a result of industry supply disruptions. Continued
currency weakness remains a significant risk for our instruments
business as essentially all end-user sales occur in currencies
other than the Canadian dollar, and in particular the US dollar,
which has weakened further since the beginning of the year. At this
time, we expect the currency issues to have an impact on reported
revenues in future quarters; however, we expect organic growth
rates similar to that experienced this quarter while strength
returns to our markets. Instruments revenue growth was strong in
the fourth quarter last year at 20% and more moderate in the first
quarter compared to a strong first quarter in 2005. We have had
good success with our restructuring efforts thus far, reducing our
SG&A spending by $15 million from the fourth quarter of last
year. On a currency neutral basis we achieved an adjusted EBITDA
margin of 15% compared to 14% last year. This compares well with
our targeted improvement of 150 to 200 basis points, a level that
we believe we will achieve over the course of fiscal 2006 as our
revenues grow. SG&A spending for the quarter includes amounts
related directly to our ongoing efforts to ensure compliance with
the US SOx regulatory requirements this year. Our SOx activities
will continue throughout the year at approximately this same
quarterly rate. Our focus is to complete the required SOx
assessments for all of our continuing businesses by year-end and to
put plans in place to address any identified weaknesses. Settlement
of the MAPLE issues results in a significant decrease in our
expectations for capital expenditures. In 2005, we capitalized $63
million related to the MAPLE project, including $59 million of cash
expenditures out of total cash purchases of capital assets of $133
million. We have no further obligations for MAPLE capital
expenditures and expect that our 2006 capital asset purchases will
be in the range of $50-$60 million, focused principally in
pharmaceutical services. The MAPLE settlement was signed in the
second quarter but was retroactive to November 1, 2005. Accounting
rules require that $14 million of capital costs (excluding
capitalized interest) related to MAPLE be accrued in the first
quarter; however, these costs will be reversed in the second
quarter as part of our accounting for the agreement. Our financial
statements for the second quarter will reflect the outcome of the
MAPLE settlement. Under the terms of the agreement, we will
exchange our ownership interest in the project, along with certain
inventories related to the project, for $25 million cash
consideration, a 40-year supply agreement, and a non-interest
bearing note receivable, to be paid over four years beginning in
2008. The carrying value of the project, following the reversal of
the obligation related to capital costs for the period November 1,
2005 to February 22, 2006, is approximately $345 million and the
inventories have a carrying value of $53 million. We will record
the long-term supply agreement in our books at $345 million and the
note receivable at its discounted present value of $43 million. We
will record a non-cash charge of $10 million in the second quarter
as a result of these transactions.
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
-------------------------------------------------------------------------
As at January 31 with comparatives at October 31 (millions of
Canadian dollars) 2006 2005 (Restated Note 3)
-------------------------------------------------------------------------
ASSETS Current Cash and cash equivalents $ 282 $ 265 Accounts
receivable 223 278 Unbilled revenue 101 115 Inventories 160 163
Income taxes recoverable 3 3 Current portion of future tax asset 19
19 Prepaid expenses and other 33 21 Assets held for sale (note 3)
26 114
-------------------------------------------------------------------------
847 978 Property, plant and equipment 861 841 Future tax asset 114
118 Long-term investments and other (note 13) 180 159 Goodwill 532
541 Other intangibles 41 43
-------------------------------------------------------------------------
Total Assets $ 2,575 $ 2,680
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY Current Accounts payable and
accrued liabilities $ 289 $ 353 Deferred revenue 75 119 Income
taxes payable 33 28 Current portion of unrealized benefit of future
tax asset 17 16 Current portion of long-term debt 13 13 Liabilities
related to assets held for sale (note 3) 18 50
-------------------------------------------------------------------------
445 579 Long-term debt 441 455 Deferred revenue 23 26 Unrealized
benefit of future tax asset 60 64 Other long-term obligations 32 42
Future tax liabilities 72 69 Minority interest 14 20
-------------------------------------------------------------------------
$ 1,087 $ 1,255
-------------------------------------------------------------------------
Shareholders' equity Share capital (note 2) 862 847 Retained
earnings 654 604 Currency translation adjustment (28) (26)
-------------------------------------------------------------------------
1,488 1,425
-------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 2,575 $ 2,680
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED) (see note 3 - Discontinued Operations )
-------------------------------------------------------------------------
(millions of Canadian dollars, Three months ended January 31 except
per share amounts) 2006 2005 (Restated Note 3)
-------------------------------------------------------------------------
Net revenues $ 365 $ 369 Cost of revenues (228) (226) Selling,
general and administration (69) (71) Research and development (note
4) (6) (7) Depreciation and amortization (18) (16) Restructuring
charges (note 5) (2) (1) Other expenses (1) - Equity earnings
(loss) 2 (1)
-------------------------------------------------------------------------
Operating income $ 43 $ 47
-------------------------------------------------------------------------
Interest expense (5) (6) Dividend and interest income 4 2
-------------------------------------------------------------------------
Income from continuing operations before income taxes and minority
interest 42 43 Income taxes (13) (11) Minority interest - net of
tax (2) (2)
-------------------------------------------------------------------------
Income from continuing operations 27 30 Income from discontinued
operations - net of tax (note 3) 28 -
-------------------------------------------------------------------------
Net income $ 55 $ 30
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted earnings per share (note 6) - from continuing
operations $ 0.19 $ 0.21 - from discontinued operations 0.19 -
-------------------------------------------------------------------------
Basic and diluted earnings per share $ 0.38 $ 0.21
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(UNAUDITED) Three months ended January 31 (millions of Canadian
dollars) 2006 2005
-------------------------------------------------------------------------
Retained earnings, beginning of period $ 604 $ 600 Net income 55 30
Repurchase of shares - (5) Dividends - cash (4) (4) Dividends -
stock (1) -
-------------------------------------------------------------------------
Retained earnings, end of period $ 654 $ 621
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
-------------------------------------------------------------------------
Three months ended January 31 (millions of Canadian dollars) 2006
2005 (Restated Note 3)
-------------------------------------------------------------------------
Operating activities Net income $ 55 $ 30 Net income from
discontinued operations 28 -
-------------------------------------------------------------------------
Net income from continuing operations 27 30 Items not affecting
current cash flow (note 9) 18 19 Changes in non-cash working
capital balances relating to operations (note 9) (46) (17)
-------------------------------------------------------------------------
Cash provided by (used in) operating activities of continuing
operations (1) 32 Cash used in operating activities of discontinued
operations (1) -
-------------------------------------------------------------------------
(2) 32
-------------------------------------------------------------------------
Investing activities Increase in deferred development charges (2) -
Purchase of capital assets (27) (20) Other (note 13) (19) (2)
-------------------------------------------------------------------------
Cash used in investing activities of continuing operations (48)
(22)
-------------------------------------------------------------------------
Cash from proceeds on sale of discontinued operations 75 -
-------------------------------------------------------------------------
Financing activities Decrease in deferred income and other
long-term obligations (9) (5) Payment of cash dividends (4) (4)
Issuance of shares 11 4 Repurchase of shares - (8) Distribution to
minority interest (7) (7)
-------------------------------------------------------------------------
Cash used in financing activities of continuing operations (9) (20)
-------------------------------------------------------------------------
Effect of foreign exchange rate changes on cash and cash
equivalents 1 2
-------------------------------------------------------------------------
Increase (decrease) in cash position during the period 17 (8) Cash
position, beginning of period 265 296
-------------------------------------------------------------------------
Cash position, end of period $ 282 $ 288
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash position comprises cash and cash equivalents See accompanying
notes.
-------------------------------------------------------------------------
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, 2005, 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. Prior year's amounts have been restated to
reflect the results of discontinued operations, and a change in the
way the Company reports segmented information. (a) Accounting
Policy Changes (i) Non-monetary Transactions In June 2005, the CICA
issued Handbook Section 3831 - Non-monetary Transactions (Section
3831) to revise and replace the current standards on non-monetary
transactions. The Company has chosen early adoption of this policy,
as permitted, effective with the interim period commencing August
1, 2005. Retroactive application is not permitted. The new section
requires all non-monetary transactions to be measured at the fair
value of the asset given up or the asset received, whichever is
more reliable, unless the transaction lacks commercial substance,
among other exceptions. The commercial substance requirement is met
when an entity's future cash flows are expected to change
significantly as a result of the transaction. Adoption of this
Handbook Section did not have an impact on the Company's results
from operations or financial position of the Company for the period
(see note 14a). (ii) Asset Retirement Obligations The Company
adopted CICA Handbook Section 3110 - Asset Retirement Obligations
(AROs), on November 1, 2004. This section describes how to
recognize and measure liabilities related to legal obligations of
retiring property, plant and equipment. The Company has identified
an asset retirement obligation relating to decommissioning costs of
a facility located in Kanata, Ontario (see note 14c). (b)
Measurement Uncertainty To determine the assets held for sale
related to those operations classified as discontinued operations,
we are required to make estimates and assumptions that affect the
reported amounts of these assets and liabilities and, therefore,
these amounts are subject to measurement uncertainty. 2. Share
Capital and Stock Options The following table summarizes
information on share capital and stock options and related matters
as at January 31, 2006: (number of shares in thousands) Number
Amount
-------------------------------------------------------------------------
Common shares Balance as at October 31, 2005 142,099 $ 847 Issued
during the period 991 15
-------------------------------------------------------------------------
Balance as at January 31, 2006 143,090 $ 862
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the quarter, the Company did not repurchase or cancel any
Common shares. Average Exercise (number of shares in thousands)
Number Price
-------------------------------------------------------------------------
Stock options Balance as at October 31, 2005 7,674 $ 17.76 Activity
during the period: Granted 934 19.98 Exercised (898) 12.25
Cancelled or forfeited (246) 20.48
-------------------------------------------------------------------------
Balance as at January 31, 2006 7,464 $ 18.61
-------------------------------------------------------------------------
-------------------------------------------------------------------------
There were 4,589 stock options exercisable as at January 31, 2006.
3. Discontinued Operations The results of discontinued operations
in the quarter were as follows: Three months ended January 31 2006
2005
-------------------------------------------------------------------------
Revenues $ 34 $ 85 Cost of revenues (28) (72) Selling, general and
administrative (4) (10) Depreciation and amortization (1) (2)
-------------------------------------------------------------------------
Net operating income (loss) 1 1 Gain on sale of Source 28 -
Minority interest (1) (1)
-------------------------------------------------------------------------
Income from discontinued operations $ 28 $ -
-------------------------------------------------------------------------
Basic EPS $ 0.19 $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Company has committed to a plan to divest a number of business
operations that are no longer part of the Company's strategic plan.
During the quarter, the Company sold its interest in Source Medical
Corporation for gross cash proceeds of $79 million and recognized a
gain of $28 million. No income taxes were reported on this gain as
the gain for tax purposes was fully sheltered by available capital
loss carryovers. In 2005, the Company approved a plan to divest of
its Pharmaceutics, Fermentation Biopharmaceutics/Biosafety, and in
vitro Pharmacology operations within the MDS Pharma Services
business. Also in 2005, the Company's partner in Calgary Laboratory
Services LP (CLS) exercised its right to buy out the Company's
partnership interest, and as a result, this interest has been
classified as a discontinued operation (see note 14b). In
accordance with Section 3475 of the CICA Handbook, long-lived
assets classified as held for sale are measured at the lower of
carrying value and fair value less costs to sell. At January 31,
2006, assets of certain operations are held for sale. The sale of
these operations is expected to occur within one year. Assets held
for sale and related liabilities as at January 31, 2006 and 2005
comprised: Three months ended January 31 2006 2005
-------------------------------------------------------------------------
Accounts receivable $ 4 $ 30 Inventory 1 25 Capital assets 15 33
Goodwill 6 26
-------------------------------------------------------------------------
Total assets held for sale(1) 26 114
-------------------------------------------------------------------------
Current liabilities 7 32 Other long-term obligations 11 16
-------------------------------------------------------------------------
Liabilities related to assets held for sale $ 18 $ 48
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Assets held for sale have been classified as current as the
Company has signed agreements where such assets are expected to be
disposed of within the current fiscal period. 4. Research and
Development Three months ended January 31 2006 2005
-------------------------------------------------------------------------
Gross expenditures $ 15 $ 23 Investment tax credits (1) (2)
Recoveries from partners (7) (9) Development costs deferred (1) (5)
-------------------------------------------------------------------------
Research and development expense 6 7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the quarter, depreciation and amortization includes $1 million
(2005 - $1 million) related to research and development. 5.
Restructuring Charges An analysis of the activity in the provision
through January 31, 2006 is as follows: Provision Cumulative
drawdowns Balance at Restructuring ---------------------- Jan. 31,
Charge Cash Non-cash 2006
-------------------------------------------------------------------------
2004: Workforce reductions $ 14 $ (13) $ (1) $ - Equipment and
other asset writedowns - adjustment (1) - 1 -
-------------------------------------------------------------------------
$ 13 $ (13) $ - $ -
-------------------------------------------------------------------------
2005: Workforce reductions $ 52 $ (38) $ (1) $ 13 Equipment and
other asset writedowns - adjustment 8 - (8) - Contract cancellation
charges 12 (1) - 11
-------------------------------------------------------------------------
$ 72 $ (39) $ (9) $ 24
-------------------------------------------------------------------------
2006: Stock option related charges $ 2 $ - $ (2) $ -
-------------------------------------------------------------------------
$ 24
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Company has continued to utilize the reserves established in
prior years relating to change initiatives affecting support
services, senior management reductions, and system implementations.
During the quarter, the Company made payments of $17 million in
severance and other employee related costs as part of the
restructuring initiative. 6. Earnings per Share a) Dilution Three
months ended January 31 (number of shares in millions) 2006 2005
-------------------------------------------------------------------------
Net income available to Common shareholders $ 55 $ 30 Weighted
average number of Common shares outstanding - basic 143 142 Impact
of stock options assumed exercised 1 -
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Weighted average number of Common shares outstanding - diluted 144
142
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b) Pro Forma Impact of Stock-Based Compensation Compensation
expense related to the fair value of stock options granted prior to
November 1, 2003 is excluded from the determination of net income
and is, instead, calculated and disclosed on a pro forma basis in
the notes to the consolidated financial statements. Compensation
expense for purposes of these pro forma disclosures is determined
in accordance with a methodology prescribed in CICA Handbook
Section 3870 "Stock-Based Compensation and Other Stock-Based
Payments". The Company used the Black-Scholes option valuation
model to estimate the fair value of options granted. For purposes
of these pro forma disclosures, the Company's net income and basic
and diluted earnings per share would have been: Three months ended
January 31 2006 2005
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Net income $ 55 $ 30 Compensation expense for options granted prior
to November 1, 2003 (1) (2)
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Net income - pro forma 54 28
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Basic and diluted earnings per share $ 0.38 $ 0.20
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During the quarter, the Company granted 934,450 options (2005 -
950,850) at an average exercise price of $19.98 (2005 - $17.81).
These options have a fair value determined using the Black-Scholes
model of $4.13 per share, (2005- $6.19) based on the following
assumptions: 2006 2005
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Risk-free interest rate 3.9 % 3.8 % Expected dividend yield 0.7 %
0.7 % Expected volatility 0.23 0.34 Expected time to exercise
(years) 3.25 5.25
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7. Other Expenses The company recorded a provision for a $1 million
long-term asset based on its assessment of the carrying value of
the asset to the present value of expected future cash flows. 8.
Post Employment Obligations The Company sponsors various
post-employment benefit plans including defined benefit and
contribution pension plans, retirement compensation arrangements,
and plans that provide extended health care coverage to retired
employees. All defined benefit pension plans sponsored by the
Company are funded plans. Other post-employment benefits are
unfunded. During 2005, the Company amended the terms of certain
post-employment plans such that effective January 1, 2008, and
subject to certain transitional conditions, newly retired employees
will no longer be entitled to extended health care benefits. The
post employment obligation expense for the quarter was $1 million
(2005 - $1 million). 9. Supplementary Cash Flow Information
Non-cash items affecting net income comprise: Three months ended
January 31 2006 2005
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Depreciation and amortization $ 18 $ 17 Minority interest 3 2 Stock
option compensation 3 1 Deferred income (3) - Future income taxes 2
2 Equity earnings - net of distribution - 1 Other (5) (4)
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$ 18 $ 19
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Changes in non-cash working capital balances relating to operations
include: Three months ended January 31 2006 2005
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Accounts receivable $ 29 $ 18 Unbilled revenue 14 (20) Inventories
1 1 Accounts payable and deferred revenue (83) (12) Income taxes 4
2 Foreign exchange and other (11) (6)
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$ (46) $ (17)
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10. Segmented Information Three months ended January 31, 2006
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Pharma- Corporate ceutical Instru- Diag- and Services Isotopes
ments nostics Other Total
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Net revenues $ 129 $ 82 $ 71 $ 83 $ - $ 365 Cost of revenues (93)
(40) (44) (51) - (228) Selling, general and administration (33)
(13) (3) (13) (7) (69) Research and development - (1) (5) - - (6)
Depreciation and amortization (8) (4) (4) (2) - (18) Restructuring
charges - net 1 - - (1) (2) (2) Other income (expenses) - - - - (1)
(1) Equity earnings - - - 1 1 2
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Operating income (loss) $ (4) $ 24 $ 15 $ 17 $ (9) $ 43
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Capital expenditures $ 8 $ 12 $ 1 $ 1 $ 5 $ 27
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Three months ended January 31, 2005
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Pharma- Corporate ceutical Instru- Diag- and Services Isotopes
ments nostics Other Total
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Net revenues $ 138 $ 75 $ 74 $ 82 $ - $ 369 Cost of revenues (93)
(38) (42) (53) - (226) Selling, general and administration (37)
(11) (5) (13) (5) (71) Research and development - (1) (7) - 1 (7)
Depreciation and amortization (7) (4) (3) (2) - (16) Restructuring
charges - net - - - - (1) (1) Other income (expenses) - - - - - -
Equity earnings (loss) - - 1 - (2) (1)
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Operating income (loss) $ 1 $ 21 $ 18 $ 14 $ (7) $ 47
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Capital expenditures $ 4 $ 8 $ 2 $ - $ 6 $ 20
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There have been a number of changes within our senior leadership
team, including the appointment of a new President and Chief
Executive Officer, which together with the recent global
restructuring and realignment initiatives necessitated a review of
the way we report segmented results. The strategic direction to
focus on Pharmaceutical Services, Isotopes, and Instruments
businesses requires the Company to change its segment disclosure to
reflect the way in which the chief operating decision maker
evaluates the results of each segment pursuant to "CICA HB Section
1701". The Company has continued to disclose its diagnostics
business in the segmented results, as it currently does not meet
the criteria for classification as a discontinued operation. We
have also changed the methodology of allocating certain central
expenses based on factors that reflect the drivers of such costs
within each segment. Consequently, the Company is now disclosing
non-allocated corporate costs separately, reflecting certain items
that cannot be assigned to a specific business unit within any of
the above segments. 11. Financial Instruments The carrying amounts
and fair values for all derivative financial instruments are as
follows: Three months ended January 31 2006 2005
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Carrying Fair Carrying Fair amount Value amount Value
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Asset (liability) position: Currency forward and option - asset $ 2
$ 6 $ - $ 30 Currency forward and option - liabilities $ - $ - $
(1) $ (2) Interest rate swap and option contracts $ (2) $ (2) $ - $
2
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As of January 31, 2006, the Company had outstanding foreign
exchange contracts and options in place to sell up to US$108
million, and in certain circumstances up to US$158 million, at a
weighted average exchange rate of C$1.19 maturing over the next 6
months. The Company also had interest rate swap contracts that
economically convert a notional amount of US$80 million of debt
from a fixed to a floating interest rate. For accounting purposes,
the changes in fair value in interest rate swaps are charged to
income, as they are not eligible for hedge accounting. Foreign
exchange options not eligible for hedge accounting are included in
accounts payable and are marked to market each period. A $2 million
unrealized gain has been recorded in selling, general and
administrative expenses this period to mark these options to their
fair market value. 12. Income Taxes A reconciliation of expected
income taxes to reported income tax expense is provided below. The
effective rate for the quarter was 31% (2005 - 26%). Three months
ended January 31 2006 2005
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Expected income taxes expense at MDS's 35% statutory rate $ 15 $ 15
Increase (decrease) to tax expense as a result of: Benefit of tax
losses previously not recognized (4) (4) Impact of Quebec tax rate
increase on future tax balances 2 -
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Reported income tax expense $ 13 $ 11
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13. Guarantees The Company undertook to guarantee a rental lease on
behalf of an investee, Protana Inc. (the Lessor). As a result of
Protana Inc. going into receivership, MDS will commence monthly
lease payments, effective March 2006. Payment will continue until a
new tenant is in position or February 2007. As the guarantee was
accrued for in 2005 there will be no further impact to the income
statement. In 2003, the Company undertook to guarantee a $20
million bank loan on behalf of an investee, Hemosol Corp. (the
Borrower), in exchange for warrants in the Borrower. This loan was
secured by a fixed and floating charge over all assets of the
Borrower. Under the guarantee, MDS was subrogated to and took an
assignment of the rights and remedies of the bank under the loan.
In this quarter, the Borrower entered receivership and as a result,
the Borrower's bank requested payment by the Company of the amounts
due on the bank loan. On December 8, 2005, the Company remitted $20
million to the bank and, in turn, assumed the loan and the senior
security position held by the bank. Due to measurement uncertainty,
the Company is not able to determine if sufficient proceeds from
the sale of the assets of the Borrower will be available to recover
the Company's investment. The investment is available for sale and
is included in investments and other. 14. Subsequent Events a) On
February 22, 2006 MDS announced the conclusion of a comprehensive
mediation process with Atomic Energy of Canada Limited (AECL)
related to the MAPLE reactor project. Under the new agreement, AECL
immediately paid MDS $25 million. AECL assumed complete ownership
of the MAPLE facilities and will be responsible for all costs
associated with completing the project and the production of
medical isotopes. MDS and AECL have entered into a 40-year supply
agreement similar to the current NRU supply agreement and AECL will
acquire all inventories associated with the MAPLE project. MDS's
carrying value of the MAPLE project, after adjustments and the $25
million payment from AECL, will be approximately $345 million. This
investment will be reclassified from a capital asset under
construction to an intangible asset, to reflect the exchange of
MDS's interest in the facility for the new supply agreement. This
amount will be amortized on a straight-line basis over a 40-year
period once commercial production of MAPLE isotopes begins. AECL
will also acquire $53 million of MAPLE-related inventories which
will be paid for over four years beginning in 2008. As a result of
this agreement, MDS will record an approximate $10 million non-cash
charge in the second quarter. b) On February 2, 2006, MDS, through
its subsidiary, Bow Valley Diagnostic Services Inc., signed an
agreement to sell its partnership interest in Calgary Laboratory
Services, to its partner, the Calgary Health Region. MDS' proceeds
from the sale will be $21 million. The agreement is subject to a
number of conditions, but is expected to close on April 1, 2006. c)
Subsequent to the quarter end, the Canadian Nuclear Safety
Commission completed its review for the decommissioning of the
facility at Kanata, Ontario. The estimated asset retirement
obligation is $15 million. 15. Comparative Figures Certain figures
for the previous year have been reclassified to conform with the
current year's financial statement presentation. In addition,
segmented information for 2005 has been restated to reflect the
discontinued operations reported. DATASOURCE: MDS Inc. CONTACT:
Investor & Media Inquiries, Sharon Mathers, Vice-President,
Investor Relations, (416) 675-6777 ext. 2695,
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