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 unrecorded mark-to-market value of derivative
instruments at April 30, 2006 was $9 million. As noted previously,
we recorded a $2 million mark-to-market loss on interest rate swaps
during the second quarter of 2006. Capitalization April October
2006 2005 Change
-------------------------------------------------------------------------
Long-term debt $ 446 $ 468 (5%) Less: cash and cash equivalents 359
265 35%
-------------------------------------------------------------------------
Net debt 87 203 (57%) Minority interest 16 20 (20%) Shareholders'
equity 1,522 1,425 7%
-------------------------------------------------------------------------
Capital employed(1) $ 1,625 $ 1,648 (1%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Capital employed is a measure of how much of our net assets are
financed by debt and equity. Long-term debt decreased $22 million
over the first half of fiscal 2006, due principally to revaluation
of our US-dollar denominated long-term debt. The US dollar has
depreciated by $0.06 since October 31, 2005, resulting in a further
unrealized gain on our senior unsecured notes of $20 million and
bringing the total cumulative unrealized gain to $144 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)
-------------------------------------------------------------------------
Trailing 4 Quarters Apr 2006 Jan 2006 Oct 2005 Jul 2005
-------------------------------------------------------------------------
Net revenues $ 1,492 $ 369 $ 365 $ 390 $ 368 Operating income
(loss) $ 63 $ 29 $ 43 $ (35) $ 26 Income (loss) from continuing
operations $ 30 $ 18 $ 27 $ (29) $ 14 Net income (loss) $ 42 $ 16 $
55 $ (48) $ 19 Earnings (loss) per share from continuing operations
Basic and diluted $ 0.21 $ 0.13 $ 0.19 $ (0.21) $ 0.10 Earnings
(loss) per share Basic and diluted $ 0.30 $ 0.12 $ 0.38 $ (0.34) $
0.14
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(millions of Canadian dollars, except earnings per share)
-------------------------------------------------------------------------
Trailing 4 Quarters Apr 2005 Jan 2005 Oct 2004 Jul 2004
-------------------------------------------------------------------------
Net revenues $ 1,481 $ 362 $ 369 $ 375 $ 375 Operating income
(loss) $ 163 $ 38 $ 47 $ 11 $ 67 Income (loss) from continuing
operations $ 113 $ 27 $ 30 $ 5 $ 51 Net income (loss) $ 119 $ 30 $
30 $ 9 $ 50 Earnings (loss) per share from continuing operations
Basic and diluted $ 0.79 $ 0.19 $ 0.21 $ 0.03 $ 0.36 Earnings
(loss) per share Basic and diluted $ 0.83 $ 0.21 $ 0.21 $ 0.06 $
0.35
-------------------------------------------------------------------------
-------------------------------------------------------------------------
On a trailing four quarters basis, reported revenues have increased
1% and income from continuing operations is down 73%. Earnings per
share from continuing operations are down by 73%. There were no
unusual seasonal variations in these two 12-month periods.
Operating income for the quarter ended October 2004 was reduced by
$35 million due to valuation and other provisions related to
long-term investments and deferred development costs. Operating
income for the quarter ended October 31, 2005 is net of
restructuring provisions amounting to $67 million and asset
valuation provisions totaling $13 million. Outlook The second
quarter of fiscal 2006 has been strong for all businesses except
the bioanalytical business of MDS Pharma Services, where the
on-going efforts associated with the FDA review and the impact on
business development activities had a significant impact on
earnings. We have redoubled our attention on this issue and will
retain this focus until the FDA is satisfied with our analysis and
conclusions. 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. Continued significant contract wins by our
late-stage businesses and the steady growth of the early-stage
businesses other than bioanalytical are encouraging. The
profitability of more recent contracts is better than that of many
of the older contracts still in backlog. As we complete work on
these older contracts we expect to see a gradual improvement in the
performance of the late-stage business. Our isotopes business has
been very successful in the first half of 2006. We demonstrated our
ability to step-up production of certain critical isotopes to meet
the unexpected supply disruption experienced in the market. We are
hopeful that some of the increase in business we experienced in
recent months will be retained, but it is too early to determine
whether we will be able to maintain an improved market share. Our
cobalt businesses continue to be steady performers, but short-term
supply volatility is still an issue. Expected high levels of
electricity demand in Ontario this summer have caused some of our
suppliers of cobalt to modify their maintenance schedules. Although
this will have little effect in the medium-term, we anticipate
these schedule changes will affect the timing of cobalt deliveries
during the last half of the year. Continued strong sales of
high-end instruments resulted in a substantially higher adjusted
EBITDA margin in MDS Sciex this quarter compared to last year. Our
organic growth is in line with market growth rates and we see no
reason to believe this will change. At this time we see strong
indications of interest from customers in China and India and
improving trends in other major markets. We remain on track to
achieve our targeted improvement of a 150 to 200 basis point
reduction in SG&A expenses as a percent of revenue. For the
year- to-date we are 170 basis points below last year's rate,
despite significant investments in Sarbanes-Oxley (SOx) compliance
and the FDA review. SG&A spending for the quarter includes $2
million related directly to our ongoing efforts to ensure
compliance with the SOx regulatory requirements this year. Our SOx
activities will continue throughout the year at approximately this
same quarterly rate. We have essentially completed our assessment
phase and we are now working on remediating identified
deficiencies. We are working closely with our auditors, and have
established a clear plan for their audit procedures to enable them
to complete their work in a timely and effective manner. 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 deficiencies. Overall, we have had a very
strong first half despite challenges in our bioanalytical business.
In the second half our focus will be on the completion of a
transaction involving our diagnostics business, while we take steps
to maintain momentum across all of our businesses. CONSOLIDATED
STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
-------------------------------------------------------------------------
As at April 30 with comparatives at October 31 2006 2005 (millions
of Canadian dollars) (Restated Note 5)
-------------------------------------------------------------------------
ASSETS Current Cash and cash equivalents $ 359 $ 265 Accounts
receivable 267 278 Unbilled revenue 142 115 Inventories 112 163
Income taxes recoverable 7 3 Current portion of future tax asset 18
19 Prepaid expenses and other 28 21 Assets held for sale (note 5) 7
114
-------------------------------------------------------------------------
940 978 Property, plant and equipment (note 3) 416 841 Future tax
asset 117 118 Long-term investments and other (note 2) 213 159
Goodwill 535 541 Other intangibles (note 3) 385 43
-------------------------------------------------------------------------
Total assets $ 2,606 $ 2,680
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY Current Accounts payable and
accrued liabilities $ 270 $ 353 Deferred revenue 121 119 Income
taxes payable 34 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 5) 1 50
-------------------------------------------------------------------------
456 579 Long-term debt 433 455 Deferred revenue 21 26 Unrealized
benefit of future tax asset 54 64 Other long-term obligations 34 42
Future tax liabilities 70 69 Minority interest 16 20
-------------------------------------------------------------------------
$ 1,084 $ 1,255
-------------------------------------------------------------------------
Shareholders' equity Share capital (note 4) 875 847 Retained
earnings 665 604 Currency translation adjustment (18) (26)
-------------------------------------------------------------------------
1,522 1,425
-------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 2,606 $ 2,680
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED) (see note 5 - Discontinued Operations)
-------------------------------------------------------------------------
Three months Six months to April 30 to April 30
-------------------------------------------------------------------------
(millions of Canadian 2006 2005 2006 2005 dollars, except per
(Restated (Restated share amounts) Note 5) Note 5)
-------------------------------------------------------------------------
Net revenues $ 369 $ 362 $ 734 $ 731 Cost of revenues (229) (222)
(457) (448) Selling, general and administration (71) (80) (140)
(151) Research and development (note 6) (1) (9) (7) (16)
Depreciation and amortization (20) (17) (38) (33) Restructuring
charges (note 7) (1) 1 (3) - Other expenses (note 9) (12) - (13) -
Equity earnings (loss) (6) 3 (4) 2
-------------------------------------------------------------------------
Operating income 29 38 72 85
-------------------------------------------------------------------------
Interest expense (5) (4) (8) (9) Dividend and interest income 2 3 4
4
-------------------------------------------------------------------------
Income from continuing operations before income taxes and minority
interest 26 37 68 80 Income taxes (note 14) (5) (8) (18) (19)
Minority interest - net of tax (3) (2) (5) (4)
-------------------------------------------------------------------------
Income from continuing operations 18 27 45 57 Income (loss) from
discontinued operations - net of tax (note 5) (2) 3 26 3
-------------------------------------------------------------------------
Net income $ 16 $ 30 $ 71 $ 60
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted earnings (loss) per share (note 8) - from
continuing operations $ 0.13 $ 0.19 $ 0.32 $ 0.40 - from
discontinued operations (0.01) 0.02 0.18 0.02
-------------------------------------------------------------------------
Basic and diluted earnings per share $ 0.12 $ 0.21 $ 0.50 $ 0.42
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(UNAUDITED)
-------------------------------------------------------------------------
Three months Six months to April 30 to April 30
-------------------------------------------------------------------------
(millions of Canadian dollars) 2006 2005 2006 2005
-------------------------------------------------------------------------
Retained earnings, beginning of period $ 654 $ 621 $ 603 $ 599 Net
income 16 30 71 60 Repurchase of shares - (3) - (8) Dividends -
cash (4) (4) (7) (7) Dividends - stock (1) (2) (2) (2)
-------------------------------------------------------------------------
Retained earnings, end of period $ 665 $ 642 $ 665 $ 642
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
-------------------------------------------------------------------------
Three months Six months to April 30 to April 30
-------------------------------------------------------------------------
(millions of Canadian 2006 2005 2006 2005 dollars) (Restated
(Restated Note 5) Note 5)
-------------------------------------------------------------------------
Operating activities Net income $ 16 $ 30 $ 71 $ 60 Income (loss)
from discontinued operations (2) 3 26 3
-------------------------------------------------------------------------
Income from continuing operations 18 27 45 57 Items not affecting
current cash flow (note 11) 30 23 48 42 Changes in non-cash working
capital balances relating to operations (note 11) 3 (1) (57) (22)
-------------------------------------------------------------------------
Cash provided by operating activities of continuing operations 51
49 36 77 Cash provided by (used in) operating activities of
discontinued operations - 4 (1) 3
-------------------------------------------------------------------------
51 53 35 80
-------------------------------------------------------------------------
Investing activities Increase in deferred development charges (2)
(10) (4) (10) Acquisitions - (2) - (2) Proceeds from Maple
transaction 27 - 27 - Purchase of capital assets (15) (20) (28)
(36) Other 1 (2) (18) (3)
-------------------------------------------------------------------------
Cash provided by (used in) investing activities of continuing
operations 11 (34) (23) (51)
-------------------------------------------------------------------------
Cash used in investing activities of discontinued operations - (1)
- (1)
-------------------------------------------------------------------------
Cash from proceeds on sale of discontinued operations 11 - 86 -
-------------------------------------------------------------------------
Financing activities Repayment of long-term debt (1) (1) (1) (1)
Decrease in deferred revenue and other long-term obligations 1 -
(8) (5) Payment of cash dividends (3) (3) (7) (7) Issuance of
shares 10 1 21 5 Repurchase of shares - (5) - (13) Distribution to
minority interest (2) (1) (9) (8)
-------------------------------------------------------------------------
Cash provided by (used in) financing activities of continuing
operations 5 (9) (4) (29)
-------------------------------------------------------------------------
Effect of foreign exchange rate changes on cash and cash
equivalents (1) 1 - 3
-------------------------------------------------------------------------
Increase in cash position during the period 77 10 94 2 Cash
position, beginning of period 282 288 265 296
-------------------------------------------------------------------------
Cash position, end of period $ 359 $ 298 $ 359 $ 298
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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. (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. A liability will be recognized
in the period in which sufficient information exists to estimate
the range of potential settlement dates that is required to use a
present value technique to estimate fair value. (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. Long-term Investments and
Other Long-term investments and other includes $13 million relating
to the Company's investment in Hemosol Corp. Due to measurement
uncertainty, the Company is not able to determine if proceeds from
the sale of the assets of Hemosol Corp. will be sufficient to
recover the Company's investment. The investment is available for
sale. 3. Intangible Assets 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, net
of applicable taxes. AECL assumed complete ownership of the MAPLE
facilities and is now 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 National Research Universal (NRU) supply agreement and
AECL will acquire all inventories associated with the MAPLE
project. In accordance with CICA Handbook Section 3831,
"Non-monetary Transactions", the Company exchanged the MAPLE asset
for a 40-year supply agreement which has been recorded as an
intangible asset at its fair value of $344 million. This amount
will be amortized on a straight-line basis over a 40-year period
once commercial production of MAPLE isotopes begins. AECL also
acquired $53 million of MAPLE-related inventories which will be
paid for over four years commencing in 2008. As a result of this
agreement, a long-term note receivable for $43 million has been
established and MDS has recorded a $10 million non-cash charge this
quarter. 4. Share Capital and Stock Options The following table
summarizes information on share capital and stock options and
related matters as at April 30, 2006: (number of shares in
thousands) Number Amount
-------------------------------------------------------------------------
Common shares Balance as at October 31, 2005 142,099 $ 847 Issued
during the period 1,696 28
-------------------------------------------------------------------------
Balance as at April 30, 2006 143,795 $ 875
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 7,673 $ 17.76 Activity
during the period: Granted 984 20.08 Exercised (1,511) 13.98
Cancelled or forfeited (559) 20.06
-------------------------------------------------------------------------
Balance as at April 30, 2006 6,587 $ 18.78
-------------------------------------------------------------------------
-------------------------------------------------------------------------
There were 4,039 stock options exercisable as at April 30, 2006. 5.
Discontinued Operations The results of discontinued operations in
the quarter were as follows: Three months to Six months to April 30
April 30
-------------------------------------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
Net revenues $ 18 $ 90 $ 57 $ 176 Cost of revenues (16) (75) (49)
(147) Selling, general and administration (4) (11) (8) (20)
Depreciation and amortization - - (1) (2)
-------------------------------------------------------------------------
Operating income (2) 4 (1) 7 Gain on sale of Source - - 28 - Income
taxes - - - (2) Minority interest - (1) (1) (2)
-------------------------------------------------------------------------
Income (loss) from discontinued operations $ (2) $ 3 $ 26 $ 3
-------------------------------------------------------------------------
Basic earnings (loss) per share $(0.01) $ 0.02 $ 0.18 $ 0.02
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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.
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. 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 was classified as a
discontinued operation. During the quarter 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 received proceeds of
$21 million from the sale. 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. As at April 30, 2006, assets of certain operations are
held for sale and the sale of these operations is expected to occur
within one year. Assets held for sale and related liabilities as at
April 30, 2006 with comparatives as at October 31, 2005 comprised:
2006 2005
-------------------------------------------------------------------------
Accounts receivable $ 1 $ 32 Inventory - 24 Capital assets 4 32
Goodwill 2 26
-------------------------------------------------------------------------
Total assets held for sale(1) 7 114
-------------------------------------------------------------------------
Current liabilities - 38 Other long-term obligations 1 12
-------------------------------------------------------------------------
Liabilities related to assets held for sale $ 1 $ 50
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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. 6. Research and
Development Three months to Six months to April 30 April 30
-------------------------------------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
Gross expenditures $ 14 $ 25 $ 29 $ 48 Investment tax credits (4)
(2) (5) (4) Recoveries from partners (7) (9) (14) (18) Development
costs deferred (2) (5) (3) (10)
-------------------------------------------------------------------------
Research and development expense $ 1 $ 9 $ 7 $ 16
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three months ended April 30, 2006 depreciation and
amortization includes $1 million (2005 - $1 million) related to
research and development. 7. Restructuring Charges An analysis of
the activity in the provision through April 30, 2006 is as follows:
Cumulative Provision Restruc- drawdowns Balance turing
---------------- at April Charge Cash Non-cash 30, 2006
-------------------------------------------------------------------------
2005: Workforce reductions $ 52 $ (38) $ (1) $ 13 Equipment and
other asset writedowns - adjustment 8 - (8) - Contract cancellation
charges 12 (2) - 10
-------------------------------------------------------------------------
$ 72 $ (40) $ (9) $ 23
-------------------------------------------------------------------------
2006: Workforce reductions $ 1 $ (1) $ - $ - Stock option related
charges 2 - (2) -
-------------------------------------------------------------------------
$ 3 $ (1) $ (2) $ -
-------------------------------------------------------------------------
$ 23
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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.
8. Earnings per Share (a) Dilution Three months to Six months to
April 30 April 30
-------------------------------------------------------------------------
(number of shares in millions) 2006 2005 2006 2005
-------------------------------------------------------------------------
Net income available to Common shareholders $ 16 $ 30 $ 71 $ 60
Weighted average number of Common shares outstanding - basic 143
141 143 141 Impact of stock options assumed exercised 1 1 1 1
-------------------------------------------------------------------------
Weighted average number of Common shares outstanding - diluted 144
142 144 142
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 to Six
months to April 30 April 30
-------------------------------------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
Net income $ 16 $ 30 $ 71 $ 60 Compensation expense for options
granted prior to November 1, 2003 - (1) (2) (3)
-------------------------------------------------------------------------
Net income - pro forma 16 29 69 57
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted earnings per share $ 0.12 $ 0.20 $ 0.49 $ 0.40
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the quarter, the Company granted 49,700 options (2005 -
410,000) at an average exercise price of $19.72 (2005 - $16.76).
These options have a fair value determined using the Black-Scholes
model of $4.39 per share, (2005 - $5.28) based on the following
assumptions: 2006 2005
-------------------------------------------------------------------------
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
-------------------------------------------------------------------------
-------------------------------------------------------------------------
9. Other Expenses Three months to Six months to April 30 April 30
-------------------------------------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
Writedown of other long-term assets $ - $ - $ (1) $ - Unrealized
loss on interest rate swaps (2) - (2) - Loss on sale of Maple
assets (10) - (10) -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other expenses $ (12) $ - $ (13) $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
10. 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). 11. Supplementary Cash Flow Information
Non-cash items affecting net income comprise: Three months to Six
months to April 30 April 30
-------------------------------------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
Depreciation and amortization $ 20 $ 17 $ 38 $ 33 Minority interest
2 3 5 5 Stock option compensation - - 3 1 Deferred revenue (2) -
(5) - Future income taxes (12) (2) (10) - Equity earnings - net of
distribution 8 1 8 2 Writedown of Maple assets 10 - 10 - Other 4 4
(1) 1
-------------------------------------------------------------------------
$ 30 $ 23 $ 48 $ 42
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Changes in non-cash working capital balances relating to operations
include: Three months to Six months to April 30 April 30
-------------------------------------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
Accounts receivable $ (18) $ (23) $ 11 $ (5) Unbilled revenue (41)
20 (27) - Inventories 50 - 51 1 Accounts payable and deferred
revenue 11 5 (86) (11) Income taxes (3) (4) 1 (2) Foreign exchange
and other 4 1 (7) (5)
-------------------------------------------------------------------------
$ 3 $ (1) $ (57) $ (22)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
12. Segmented Information Three months to April 30, 2006
-------------------------------------------------------------------------
Pharma- ceutical Instru- Diag- Corporate Services Isotopes ments
nostics and Other Total
-------------------------------------------------------------------------
Net revenues $ 130 $ 83 $ 66 $ 90 $ - $ 369 Cost of revenues (97)
(43) (38) (51) - (229) Selling, general and administration (29)
(15) (5) (10) (12) (71) Research and development - - (1) - - (1)
Depreciation and amortization (8) (4) (6) (2) - (20) Restructuring
charges (1) - - - - (1) Other expenses - (10) - - (2) (12) Equity
earnings (loss) (1) - - - (5) (6)
-------------------------------------------------------------------------
Operating income (loss) $ (6) $ 11 $ 16 $ 27 $ (19) $ 29
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total assets $ 884 $ 739 $ 188 $ 241 $ 554 $ 2,606
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital expenditures $ 9 $ - $ 2 $ 1 $ 3 $ 15
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months to April 30, 2005
-------------------------------------------------------------------------
Pharma- ceutical Instru- Diag- Corporate Services Isotopes ments
nostics and Other Total
-------------------------------------------------------------------------
Net revenues $ 137 $ 75 $ 65 $ 85 $ - $ 362 Cost of revenues (98)
(37) (37) (50) - (222) Selling, general and administration (38)
(19) (5) (15) (3) (80) Research and development (1) (1) (7) - - (9)
Depreciation and amortization (7) (3) (4) (2) (1) (17)
Restructuring charges 1 - - - - 1 Other expenses - - - - - - Equity
earnings (loss) - - - 1 2 3
-------------------------------------------------------------------------
Operating income (loss) $ (6) $ 15 $ 12 $ 19 $ (2) $ 38
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total assets $ 1,025 $ 753 $ 214 $ 310 $ 466 $ 2,768
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital expenditures $ 4 $ 8 $ 2 $ - $ 6 $ 20
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Six months to April 30, 2006
-------------------------------------------------------------------------
Pharma- ceutical Instru- Diag- Corporate Services Isotopes ments
nostics and Other Total
-------------------------------------------------------------------------
Net revenues $ 259 $ 165 $ 137 $ 173 $ - $ 734 Cost of revenues
(190) (83) (82) (102) - (457) Selling, general and administration
(62) (28) (8) (23) (19) (140) Research and development - (1) (6) -
- (7) Depreciation and amortization (16) (8) (10) (4) - (38)
Restructuring charges - - - (1) (2) (3) Other expenses - (10) - -
(3) (13) Equity earnings (loss) (1) - - 1 (4) (4)
-------------------------------------------------------------------------
Operating income (loss) $ (10) $ 35 $ 31 $ 44 $ (28) $ 72
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital expenditures $ 17 $ - $ 3 $ 2 $ 6 $ 28
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Six months to April 30, 2005
-------------------------------------------------------------------------
Pharma- ceutical Instru- Diag- Corporate Services Isotopes ments
nostics and Other Total
-------------------------------------------------------------------------
Net revenues $ 275 $ 150 $ 139 $ 167 $ - $ 731 Cost of revenues
(191) (75) (79) (103) - (448) Selling, general and administration
(75) (30) (10) (28) (8) (151) Research and development (1) (2) (14)
- 1 (16) Depreciation and amortization (14) (7) (7) (4) (1) (33)
Restructuring charges 1 - - - (1) - Other expenses - - - - - -
Equity earnings (loss) - - 1 1 - 2
-------------------------------------------------------------------------
Operating income (loss) $ (5) $ 36 $ 30 $ 33 $ (9) $ 85
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital expenditures $ 8 $ 12 $ 4 $ - $ 12 $ 36
-------------------------------------------------------------------------
-------------------------------------------------------------------------
13. Financial Instruments The carrying amounts and fair values for
all derivative financial instruments are as follows: Three months
to April 30 2006 2005
-------------------------------------------------------------------------
Carrying Fair Carrying Fair amount Value amount Value
-------------------------------------------------------------------------
Asset (liability) position: Currency forward and option - asset $ 2
$ 9 $ 3 $ 13 Currency forward and option - liabilities $ - $ (1) $
(3) $ - Interest rate swap and option contracts $ (5) $ (4) $ - $ 1
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As of April 30, 2006, the Company had outstanding foreign exchange
contracts and options in place to sell up to US$151 million, and in
certain circumstances up to US$226 million, at a weighted average
exchange rate of C$1.1714 maturing over the next 7 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 in 2006,
whereas hedge accounting was applied in 2005. Foreign exchange
options and interest rate swaps not eligible for hedge accounting
are included in accounts payable and are marked to market each
period. A $2 million unrealized loss and a $1 million unrealized
gain have been recorded in selling, general and administration in
the period to mark these interest rate swaps and options,
respectively, to their fair market value. 14. Income Taxes A
reconciliation of expected income taxes to reported income tax
expense is provided below. The effective rate for the quarter was
19% (2005 - 22%). Three months to April 30 2006 2005
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Expected income taxes expense at MDS's 35% statutory rate $ 9 $ 13
Decrease to tax expense as a result of: Benefit of tax losses
previously not recognized (4) (5)
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Reported income tax expense $ 5 $ 8
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15. Commitments As at October 31, 2005, MDS had a remaining
five-year commitment of $211 million related to the outsourcing of
the information technology infrastructure. Subsequent to the
quarter end, MDS renegotiated the contract with the current service
provider and intends to transition such services to new vendors
starting late in the third quarter of 2006. At this time, the
financial impact cannot be determined. The current outsourcing
partner will support MDS throughout the transition period. 16.
Subsequent Event Subsequent to the quarter end, MDS finalized the
sale of its pharmaceutics operations in Tampa, Florida for proceeds
of $5 million. 17. 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: PRNewswire --
June 8
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