TORONTO, June 7 /PRNewswire-FirstCall/ -- MDS Inc. (TSX: MDS; NYSE:
MDZ), a company providing products and services to the global life
sciences markets, today reported its second quarter 2007 results.
For the quarter, MDS reported revenues of $273 million, net income
of $736 million, and earnings per share of $5.35, up from $242
million, $14 million and $0.10 respectively over the same period
last year. Earnings per share in the 2007 quarter were driven
principally by the gain generated through the sale of MDS's
diagnostic business. Adjusted EBITDA of $37 million was up from $36
million last year and adjusted earnings per share were $0.11
compared to $0.08 in the second quarter of 2006. Quarterly
Highlights - Completed repositioning to a global life sciences
company - Closed the sale of the Canadian diagnostics business and
recorded a $792 million gain - Completed a $441 million (C$500
million) substantial issuer bid - Completed the largest acquisition
in the Company's history with the $624 million purchase of
Molecular Devices Corporation - Recorded $61 million to cover FDA
review related costs - Provided a $26 million restructuring charge
for MDS Pharma Services - Delivered $273 million in revenues, up
13% over prior year - Earned adjusted EBITDA of $37 million, up
from $36 million last year - Increased adjusted earnings per share
to $0.11, up 38% over prior year "I am pleased that we continued to
make solid progress executing our strategy," said Stephen P.
DeFalco, President and Chief Executive Officer of MDS Inc. "I am
encouraged by the steady improvement at MDS Pharma Services and the
strong start of our newly launched MDS Analytical Technologies
business." Operating Segment Results MDS Pharma Services % Change
-------------------------- ($ millions) Q2 2007 Q2 2006 Reported
Organic
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Revenue: Early-stage $60 $68 (12%) Late-stage 55 45 22%
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$115 $113 2% 0%
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Adjusted EBITDA: $ $3 $3 - 100% % 3% 3% n/a n/a
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For the second quarter, revenue increased 2% on a reported basis
over the same period last year, and was flat organically. Our
late-stage businesses reported strong growth at 22%. This was
offset by a 12% decline in our early-stage segment, which continues
to feel the impact of FDA-related issues at our Montreal site.
Average backlog for the second quarter was $450 million up 12%
year-over-year. During the quarter, the team at our Montreal site
continued to support the independent audit activities for our
bioanalytical clients. Having completed approximately 70% of the
audits, MDS is now able to estimate the financial impact of
customer accommodations related to the FDA review and has provided
$61 million in the quarter to fund the completion of these
activities. MDS Pharma Services expects to have the FDA audits
substantially complete by the end of fiscal 2007. MDS Pharma
Services took another major step toward improving business
performance in recording a $26 million charge to restructure and
streamline our business. MDS Pharma Services will use these funds
to optimize our global network through site consolidations,
workforce reductions, and operational enhancements. These
initiatives include consolidating our North American bioanalytical
LCMS operations into Lincoln and the refocusing of our Montreal
site on early clinical research, ligand binding services,
development and regulatory services and global clinical
development. We believe these actions will create a strong global
foundation to serve our customers more effectively and position us
well for future growth. MDS Pharma Services is also making other
investments to grow the business. Work continues on our 300-bed
expansion in Phoenix and on new information systems for our
pre-clinical and central lab businesses. We also continue to
explore business development activities to accelerate our global
growth. MDS Nordion % Change -------------------------- ($
millions) Q2 2007 Q2 2006 Reported Organic
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Revenue $70 $72 (3%) (2%)
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Adjusted EBITDA: $ $21 $22 (5%) 4% % 30% 31% n/a n/a
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MDS Nordion revenue for the second quarter was $70 million, down 3%
on a reported basis and 2% organically compared to a strong quarter
in 2006, when we benefited last year from a competitor's inability
to ship product. Adjusted EBITDA was $21 million, down 5% as
reported but up 4% organically, as declines in revenue were offset
by productivity initiatives and effective cost controls. During the
quarter, MDS Nordion announced a number of developments related to
the radiotherapeutic business including the establishment of four
European Centres of Excellence for TheraSphere(R) and the signing
of a collaboration agreement with Avid Radiopharmaceuticals, Inc.
to support clinical studies for Avid's novel radiopharmaceuticals
for the diagnosis and monitoring of Alzheimer's disease.
TheraSphere use continued to expand as enrollment of patients grew
in Europe and India. MDS Analytical Technologies % Change
-------------------------- ($ millions) Q2 2007 Q2 2006 Reported
Organic
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Revenue $88 $57 54% 5%
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Adjusted EBITDA: $ $20 $19 5% (32%) % 23% 33% n/a n/a
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MDS Analytical Technologies revenues, which included the results of
Molecular Devices acquisition from March 20, 2007 to the end of the
second quarter, grew 54% to $88 million. Mass spectrometry end user
revenue grew 12%. Year-over-year performance reported for this
business was fueled by our Molecular Devices acquisition and strong
demand in most of our markets, particularly for 4000 series triple
quad products and the Elan DRC products. Adjusted EBITDA of $20
million was up 5% reported, and down 32% organically, over the same
period last year, which included $4 million in benefits related to
R&D tax credits and foreign exchange. In the quarter, MDS
Analytical Technologies introduced a number of new products. A
first-of-its-kind mass spectrometry platform designed to help
pharmaceutical companies accelerate the drug compound screening
process called FlashQuant(TM) was unveiled by the Sciex division
and Applied Biosystems. As well, Applied Biosystems/MDS Sciex
launched enhancements to the ProteinPilot(TM) software and the 4800
MALDI TOF/TOF(TM) mass spectrometer to support biomarker research.
Our new Molecular Devices acquisition also introduced the
Neurotransmitter Transporter Uptake Assay Kit to enable the
screening of three neurotransmitters through one single detection
assay. Asia remains a key region for MDS Analytical Technologies
with continued strength in India and China for our products. We
also continue to accelerate our manufacturing moves in Singapore
and China to strengthen our competitive cost position. Conference
Call MDS will be holding a conference call today at 10:30 am (EDT)
to discuss the second 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. (TSX: MDS; NYSE: MDZ) is a global life
sciences company that provides market-leading products and services
that our customers need for the development of drugs and diagnosis
and treatment of disease. We are a leading global provider of
pharmaceutical contract research, medical isotopes for molecular
imaging, radiotherapeutics, and analytical instruments. MDS has
more than 6,200 highly skilled people in 28 countries. Find out
more at http://www.mdsinc.com/ or by calling 1-888-MDS-7222, 24
hours a day. 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. The use
of non-GAAP measures section in the MD&A outlines the
definition of the terms 'organic' and 'adjusted' as used to explain
the 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS June 5, 2007 Following is
management's discussion and analysis (MD&A) of the results of
operations for MDS Inc. (MDS or the Company) for the quarter ended
April 30, 2007 and its financial position as at April 30, 2007.
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 2006 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/. In addition, the Company's 40-F filing is
available at http://www.edgar.com/. Our MD&A is intended to
enable readers to gain an understanding of MDS's current results
and financial position. To do so, we provide information and
analysis comparing the results of operations and financial position
for the current period to those of the same period in the preceding
fiscal year. We also provide analysis and commentary that we
believe is required to assess the Company's future prospects.
Accordingly, certain sections of this report contain
forward-looking statements that are based on current plans and
expectations. These forward-looking statements are affected by
risks and uncertainties that are discussed in this document, as
well as in the AIF, and that could have a material impact on future
prospects. Readers are cautioned that actual events and results
will vary. Caution Regarding Forward-Looking Statements From time
to time, we make written or oral forward-looking statements within
the meaning of certain securities laws, including the "safe
harbour" provisions of the Securities Act (Ontario) and the United
States Private Securities Litigation Reform Act of 1995. This
document contains such statements, and we may make such statements
in other filings with Canadian regulators or the United States
Securities and Exchange Commission, in reports to shareholders or
in other communications, including public presentations. These
forward-looking statements include, among others, statements with
respect to our objectives for 2007, 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, expectations,
anticipations, estimates and intentions expressed in such
forward-looking statements. These factors include, but are not
limited to: management of operational risks; the strength of the
Canadian and United States economies and the economies of other
countries in which we conduct business; our ability to secure a
reliable supply of raw materials, particularly cobalt and critical
nuclear isotopes; the impact of the movement of the US dollar
relative to other currencies, particularly the Canadian dollar and
the Euro; changes in interest rate policies of the Bank of Canada
and the Board of Governors of the Federal Reserve System in the
United States; the effects of competition in the markets in which
we operate; the timing and technological advancement of new
products introduced by us or by our competitors; the impact of
changes in laws, trade policies and regulations, and enforcement
thereof; judicial judgments and legal proceedings; our ability to
successfully realign our organization, resources and processes; our
ability to complete strategic acquisitions and joint ventures and
to integrate our acquisitions and joint ventures successfully;
changes in accounting policies and methods we use to report our
financial condition, including uncertainties associated with
critical accounting assumptions and estimates; the possible impact
on our businesses from natural disasters, public health
emergencies, international conflicts and other developments
including those relating to terrorism; and our success in
anticipating and managing the foregoing risks. We caution that the
foregoing list of important factors that may affect future results
is not exhaustive. When relying on our forward-looking statements
to make decisions with respect to the Company, investors and others
should carefully consider the foregoing factors and other
uncertainties and potential events. 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 addition to measures based on generally accepted
accounting principles (GAAP) in this MD&A, we describe certain
income and expense items that are unusual or non-recurring. These
terms are not defined by GAAP and 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). Our executive management assesses the performance of our
businesses based on a review of results calculated in this manner
and 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 to
acquisitions and divestitures. We use the term "organic" to
describe the results presented in this way. To isolate the effect
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.
Substantially all of the business of the Sciex division of MDS
Analytical Technologies is conducted through joint ventures. Under
the terms of these joint ventures, we are entitled to a 50% share
of the net earnings of the worldwide business that we conduct with
our partners in these joint ventures. These earnings include a
share of the profits generated by our partners that are paid to the
joint ventures but which do not qualify as revenues for the joint
ventures. Under Canadian GAAP, we report only our direct revenues
and our share of revenues from the joint ventures and,
consequently, we do not report our share of all end-user revenues,
despite the fact that these other businesses contribute to our
profitability. In order to provide readers with a better
understanding of the drivers of adjusted EBITDA for MDS Analytical
Technologies, in addition to the organic growth of our revenues, we
also report growth in end-user revenues. This figure provides
information about the reported growth of the overall worldwide
business associated with the sale of our products and related
services and from which we share in the profitability. We are
unable to provide the organic growth in this measure because we do
not have access to the underlying currency data. For our
pharmaceutical services business, we provide information about
contract backlog. 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. Tabular amounts are
in millions of United States dollars, except per share amounts and
where otherwise noted. Discontinued Operations All financial
references in this document exclude those businesses that we
consider to be discontinued. Our discontinued businesses include
our diagnostics businesses, certain early-stage pharmaceutical
research services operations, and our interest in Source Medical
Corporation (Source). All financial references for the prior year
have been restated to reflect this treatment. 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.
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. On February 26, 2007, we completed a significant step in
this strategic plan by selling our Canadian diagnostics business to
Borealis Infrastructure Management Inc. MDS received net cash
proceeds (after expenses and taxes) of $929 million and a $65
million non-interest bearing promissory note due in 2009. After
paying transaction costs and income taxes, we have reported a gain
of US$792 million in our second quarter, the details of which are
(US$ millions):
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Net selling price $ 1,129 Less share attributable to minority
interests (112)
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MDS's share of selling price 1,017 Less: Net book value of assets
sold (82) Transaction costs (30) Income taxes (113)
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Gain included in income from discontinued operations $ 792
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On January 29, 2007, we announced another significant step in our
strategic plan with our intent to acquire Molecular Devices
Corporation (MD), a leading provider of high-performance
measurement tools for high-content screening, cellular analysis,
and biochemical testing, in a $624 million cash transaction. This
transaction closed and we recorded the acquisition of MD effective
March 20, 2007. Under this agreement, MDS acquired all of the
Common shares of MD for $35.50 per share. Following the
acquisition, the MD business was combined with that of MDS Sciex to
create MDS Analytical Technologies (MDS AT). The MDS Sciex and
Molecular Devices brands will continue to be used by this new
business unit. This strategic acquisition marks a significant
expansion for MDS. By acquiring Sunnyvale, California-based MD,
with its strong brand recognition and leading-edge products and
capabilities, MDS has strengthened its leadership position as one
of the top global providers of life sciences solutions. We offer
systems that provide high-content screening, and cellular and
biochemical testing for leading drug discovery and life sciences
laboratories in pharmaceutical, biotechnology, academic, and
government institutions. The acquisition has been accounted for
using the purchase method. The total cost of the acquisition was
$624 million, including the cash cost of the tender offer, the cash
cost to acquire outstanding in-the-money options held by employees
of MD and others, and cash transaction costs. The components of the
purchase cost and the preliminary allocation of the costs are as
follows:
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Cash paid for tendered shares $589 Cash paid to acquire vested
options 27 Cash transaction costs 8
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Total cost of acquisition $624
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Allocation of cost of acquisition: Net tangible assets acquired $71
Intangible assets acquired 182 Goodwill 371
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Total $624
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Net tangible assets includes $21 million of acquired cash. MDS Inc.
Consolidated Operating Highlights Second Quarter Year-to-Date
------------------------------- ---------------------- % Change %
Change ---------------- -------- 2007 2006 Reported Organic 2007
2006 Reported
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$ 273 $ 242 13% 1% Net revenues $ 523 $ 484 8%
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Operating income (80) 2 n/m n/m (loss) (77) 25 n/m Adjustments:
------------ 28 1 Restructuring charges 41 2 6 6 Valuation
provision 6 6 Mark-to-market on (1) 2 interest rate swaps - 3 (3) 9
MAPLE settlement (3) 9 Loss on sale of 3 - businesses 1 - 61 - FDA
provision 61 - Acquisition 3 - integration 3 -
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Adjusted operating 17 20 income 32 45 Depreciation and 20 16
amortization 37 29
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$ 37 $ 36 3% (7%) Adjusted EBITDA $ 69 $ 74 (7%)
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Adjusted EBITDA 14% 15% margin 13% 15%
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n/m = not meaningful Consolidated revenues for the second quarter
of 2007 were up 13% to $273 million compared to $242 million last
year. Revenue from the newly acquired MD business from the date of
acquisition to April 30, 2007 amounted to $29 million. Our
late-stage MDS Pharma Services businesses continued their strong
growth, offsetting weakness in early-stage revenues, where we
continue to feel the impact from the US Food and Drug
Administration (FDA) review. MDS Nordion revenues were down
slightly on a reported basis compared with an unusually strong
second quarter in fiscal 2006, when we experienced high shipments
of key isotopes resulting from disruption at a key competitor. On a
reported basis, and excluding the revenues from the MD business,
MDS Sciex was up 4%. The MD business also experienced solid growth
as revenues for the quarter were up 22% compared to a weak quarter
in the same three-month period last year. On an organic basis,
revenues grew by 1%, driven principally by 5% organic growth at MDS
Analytical Technologies. Revenues from MDS Nordion were down 2%
organically but excluding the impact of unusual market conditions
in the second quarter of 2006 MDS Nordion revenues grew 1%
organically. MDS Pharma Services revenues were level with the prior
year on an organic basis, as strong growth in late-stage revenues
was offset by weak early-stage revenues. We reported an operating
loss for the quarter of $80 million compared to operating income of
$2 million reported for the same period in 2006. The operating loss
for the current year includes a $61 million provision to cover
future costs to resolve the outstanding FDA issues associated with
our Montreal-area bioanalytical businesses and a restructuring
charge of $28 million, most of which relates to the MDS Pharma
Services business. Adjusted EBITDA for the quarter was $37 million
compared to $36 million last year and $32 million in the first
quarter of fiscal 2007. Adjusted EBITDA increased 3% on a reported
basis, compared to a strong adjusted EBITDA figure for 2006 that
reflects the impact of the unusual market conditions experienced by
MDS Nordion last year and favourable prior year tax credit
recoveries at MDS Sciex in 2006. Factoring in the impact of foreign
exchange, adjusted EBITDA declined 7% organically. Adjustments
reported for the quarter include $61 million of costs that we
expect to incur to reimburse clients of our Montreal-area
bioanalytical facilities for audit and other costs that they will
pay to comply with the FDA directive issued January 10, 2007. In
addition, we have recorded $28 million of restructuring costs
related mostly to ongoing profit improvement initiatives in MDS
Pharma Services. Other adjusting items included a $3 million gain
resulting from the realization of prior year investment tax credits
related to our investment in the MAPLE project, a $6 million
valuation provision on our interest in MDS Capital Corp., a $3
million loss resulting from the sale of certain businesses,
primarily our Hamburg phase 1 facility, $3 million of integration
costs incurred by MDS AT, and a $1 million mark-to-market gain on
deemed ineffective interest rate swaps. Selling, general, and
administration (SG&A) expenses for the quarter totalled $67
million and 25% of revenues compared to $56 million and 23% last
year. The increase includes the impact from the addition of MD
partway through the quarter, and includes the cost of their sales
and marketing network. In addition, SG&A for the 2007 quarter
includes a foreign exchange loss of $4 million resulting from the
significant weakness in the US dollar over the last few weeks of
the quarter. In the fiscal 2006 quarter we reported a foreign
exchange loss of $2 million. We spent $16 million on R&D
activities in the second quarter this year and expensed $7 million,
compared to spending of $12 million last year, of which we expensed
$1 million. The majority of the increase in R&D spending comes
from the additional spending in our new MD business. The 2006
spending was net of $3 million of prior year investment tax
credits. Consolidated depreciation and amortization expense
increased $4 million compared to last year. Of this increase, $2
million is primarily related to depreciation on our expanded
pre-clinical facility in Lyon, France, our new US central
laboratory, and our new manufacturing facility in Singapore. We
also amortized $2 million of intangible assets acquired as part of
the MD transaction. Capital expenditures for the quarter were $9
million. We reported no capital expenditures in the second quarter
of 2006. We reported a loss from continuing operations for the
quarter due primarily to the after-tax impact of the provisions for
FDA study audit costs, long-term investment valuation, and
restructuring, which amounted to $70 million. Excluding adjusting
items, income from continuing operations was $16 million or $0.11
per share. Results from discontinued operations for this year
include the operating results of our Canadian diagnostics
businesses for the period prior to sale and the gain resulting from
the sale. On April 9, 2007, we completed a substantial issuer bid
and repurchased approximately 22.8 million Common shares for C$500
million (US$ 441 million) at a price of C$21.90 per share. As a
result of this issuer bid, we reduced the number of Common shares
outstanding from approximately 144 million to 122 million. The
basic weighted average number of shares outstanding for the quarter
was 137 million. Reported earnings per share from continuing
operations were a loss of $0.42 for the quarter, compared to a loss
of $0.01 in 2006. Adjusted earnings per share from continuing
operations for the quarter were $0.11 compared to $0.08 earned in
the same period last year. Earnings per share from discontinued
operations were $5.77 compared to $0.11, and included $5.76 related
to the gain on sale of the diagnostics business. Adjusted earnings
per share for the two periods were as follows: Second Quarter
Year-to-date
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2007 2006 2007 2006
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Basic and diluted EPS from continuing operations - as reported $
(0.42) $ (0.01) $ (0.42) $ 0.09 Adjustments: Restructuring charges
0.17 - 0.24 0.01 Valuation provision 0.04 0.04 0.04 0.04 Mark-to
market on interest rate swaps - 0.01 (0.01) 0.01 MAPLE settlement
(0.02) 0.04 (0.02) 0.04 Loss (gain) on sale of long-term investment
and businesses 0.03 - 0.02 0.01 FDA provision 0.29 - 0.29 -
Acquisition integration 0.02 - 0.02 - Tax rate changes - - - 0.02
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Adjusted EPS $ 0.11 $ 0.08 $ 0.16 $ 0.22
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MDS Pharma Services Financial Highlights Second Quarter
Year-to-Date ------------------------------- ----------------------
% Change % Change ---------------- -------- 2007 2006 Reported
Organic 2007 2006 Reported
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$ 60 $ 68 (12%) Early-stage $ 126 $ 135 (7%) 55 45 22% Late-stage
110 89 11%
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$ 115 $ 113 2% - Net Revenue $ 236 $ 224 5%
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(78) (80) Cost of revenues (166) (159) Selling, general, (34) (29)
and administration (66) (58) Depreciation and (9) (7) amortization
(18) (14) Restructuring (26) (1) charges (34) - - (1) Equity
earnings - (1) Other income (65) - (expenses) (65) -
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(97) (5) Operating loss (113) (8) Adjustments: Restructuring 26 1
charges 34 - 4 - Loss on sale of a business 4 - 61 - FDA provision
61 -
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Adjusted operating (6) (4) loss (14) (8) Depreciation and 9 7
amortization 18 14
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$ 3 $ 3 - 100% Adjusted EBITDA $ 4 $ 6 (33%)
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Capital $ 5 $ 7 expenditures $ 7 $ 14
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MDS Pharma Services revenues grew 2% on a reported basis and was
level with last year on an organic basis. Reported revenue growth
was strong in our late-stage businesses, reflecting continued
strong sales activity, improved discipline around managing revenues
from change orders initiated by our clients, and efficiency gains
in operations. This strong growth in our late-stage businesses more
than offset weakness in early-stage businesses, where growth
continues to be constrained by our bioanalytical business in
Montreal. Average monthly pharmaceutical research backlog was $450
million for the second quarter of 2007, an increase of
approximately 12% when compared to the average for the second
quarter of fiscal 2006. A significant contract cancellation
occurred late in the quarter, reducing our backlog to $425 million
at the beginning of the third quarter. Average monthly backlog
during the quarter
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Fiscal 2005 - Quarter 1 $ 315 Quarter 2 305 Quarter 3 315 Quarter 4
340 Fiscal 2006 - Quarter 1 370 Quarter 2 400 Quarter 3 400 Quarter
4 430 Fiscal 2007 - Quarter 1 450 Quarter 2 450
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We have reported an operating loss of $97 million for MDS Pharma
Services, reflecting the impact of charges totalling $61 million
related to reimbursing customers for costs they will incur to
comply with the FDA requirements. This provision includes $1
million of costs incurred during the quarter. In the second quarter
of 2006, we incurred $5 million, which was included in SG&A for
the period. Reported results for the quarter also reflect
restructuring charges of $26 million and a loss of $4 million from
the sale of a facility. Both of these charges result from efforts
currently underway to streamline our global operations. In
addition, the cost of revenues is net of a favourable settlement of
$5 million of outstanding investment tax credits related to work
done in previous years. Results for the prior year quarter include
$2 million of similar claims. These credits are partially offset by
foreign exchange losses of $3 million resulting from the weakness
of the US dollar against both the Canadian dollar and the Euro
(2006 - nil). Capital expenditures in the pharmaceutical services
segment were $5 million compared to $7 million last year. Fiscal
2007 expenditures include the expansion of our Phoenix early
clinical research facility. Expenditures in 2006 related to an
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. Profit improvement initiatives We believe we are now
on a path that will result in final resolution of the outstanding
FDA issues at our Montreal area facilities. We have also
accelerated our profit improvement initiatives by eliminating less
profitable sites, reducing facility costs, and structuring our
workforce to most effectively serve our customers. We believe these
actions will position MDS Pharma Services for growth and improved
profitability in the months ahead. During the second quarter of
2007, we implemented certain portions of our operating improvement
plan, finalizing the sale of our phase 1 clinical facility in
Hamburg, Germany. Also during the quarter, senior management
approved a significant restructuring plan and we began actions to
implement this plan in May. As a result of the approval of the plan
in April, we have recorded $26 million of restructuring charges,
including severance of $17 million, equipment write-offs of $3
million, a $2 million provision to reduce the carrying value of
certain real estate to our estimate of its current market value,
and $4 million for other costs of the restructuring. We expect to
record a further $6 million in future quarters, as we complete our
withdrawal from certain leased facilities and complete the
headcount reductions. Reflected in this plan is a decision not to
re-open LCMS bioanalytical operations in the Montreal area and, as
a direct result, we will reduce the size of our St. Laurent
operations and facility to improve its operational efficiency, as
it focuses on early clinical operations. In the first quarter, we
reported losses totalling $8 million related to restructuring
activities, bringing our total expenses year-to-date to $34
million. Restructuring costs in the prior year period were $1
million. FDA review of bioanalytical operations The January 2007
letters issued by the FDA to sponsors of ANDA (generic drugs) and
NDA (innovative drugs) applications has provided direction and a
path forward that we expect will result in final resolution of the
outstanding FDA issues associated with bioequivalence testing
conducted in our St. Laurent and Blainville facilities during the
period January 1, 2000 to December 31, 2004. Subsequent to issuing
the letters setting out the path forward, during the second quarter
the FDA provided us with Establishment Inspection Reports closing
the 2004 inspections which gave rise to these issues. In the
January letters, the FDA directed sponsors of 217 approved and
pending generic drug submissions that contain study data produced
in these facilities during that period to take one of three actions
to address FDA concerns about the accuracy and validity of these
bioanalytical studies: 1) repeat their bioanalytical studies; 2)
re-analyze their original study samples at a different
bioanalytical facility; or 3) independently audit original study
results. To date, we have been in contact with sponsors responsible
for approximately 80% of the 217 ANDA submissions under review. Of
these, approximately 83% have third party audits underway or are
expected to commence third party audits. A small number of the
sponsors we have been in touch with (representing 6% of the total
ANDAs under review) have indicated that they will repeat the
studies without auditing the original study data first. The
remaining sponsors have either not yet indicated their preferred
course of action, indicated they do not intend any action, or have
yet to contact us. In addition to the ANDA reviews ordered by the
FDA, we have recently been advised by certain clients that some
European regulators may follow a similar path to that taken by the
FDA. We expect the number of studies subject to these reviews to be
limited. In addition to generic studies, the FDA has requested
information regarding submitted NDA applications for innovative
drugs that contain data from bioanalytical studies conducted from
January 2000 to December 2004 in our St. Laurent and Blainville
facilities. Although it is difficult to estimate the full extent of
the FDA's intent relative to innovator studies, we expect NDA
sponsors to take action similar to the three actions set out for
generic studies and expect that this will impact a substantially
lower number of studies than the work done for sponsors of ANDA
submissions. We have approved a reimbursement policy for clients
who have incurred or will incur third party audit costs to complete
the work required by the FDA and other regulators. In addition, we
are supporting the sponsors who are conducting audits by providing
their third party auditors with space at our St. Laurent facility,
access to all of the relevant files and study materials, and
support from our technical staff. Based on the audit work conducted
at our facility to date, we have estimated a total cost to complete
this work of $61 million, including the expected reimbursements to
clients, audit support costs, and the expected amount of refunds
that will be issued to clients for studies on which an unqualified
third party audit opinion cannot be obtained. Full and complete
resolution of the FDA issues remains a key focus for MDS Pharma
Services and MDS. We remain committed to working cooperatively with
the FDA and our customers to address all of the FDA's concerns and
to assist our customers while they complete the study audits.
Although we have recorded a provision in our second quarter that
reflects our current best estimate of the costs we expect to incur
with respect to this work and for obligations we have to clients,
there can be no assurance at this time that we will not incur costs
that exceed the amounts we have currently estimated. In addition,
there can be no certainty that the study audits conducted by our
clients will be acceptable to the FDA or that the FDA will not
require additional work. We also are unable to judge what further
impact this situation will have on our business development
activities, particularly for our bioanalytical and early clinical
operations. MDS Nordion Financial Highlights Second Quarter
Year-to-Date ------------------------------- ----------------------
% Change % Change ---------------- -------- 2007 2006 Reported
Organic 2007 2006 Reported
-------------------------------------------------------------------------
$ 70 $ 72 (3%) (2%) Net revenues $ 137 $ 142 (4%) (37) (37) Cost of
revenues (71) (71) Selling, general, (12) (13) and administration
(23) (24) Research and - - development (1) (1) Depreciation and (3)
(4) amortization (6) (7) Other income 4 (9) (expenses) 4 (9)
-------------------------------------------------------------------------
22 9 Operating Income 40 30 Adjustments: (3) 9 MAPLE settlement (3)
9 Gain on sale of a (1) - business (1) -
-------------------------------------------------------------------------
Adjusted operating 18 18 income 36 39 Depreciation and 3 4
amortization 6 7
-------------------------------------------------------------------------
$ 21 $ 22 (5%) 4% Adjusted EBITDA $ 42 $ 46 (9%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital $ 1 $ - expenditures $ 2 $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
MDS Nordion revenues were down 3% year-over-year on a reported
basis, as they are being compared to unusually strong results in
the second quarter of 2006. The 2006 results were driven by strong
sales of medical isotopes during a period when a major competitor
announced a voluntary recall of its products used primarily for
cardiac imaging. While this same competitor had similar
difficulties in the second quarter of 2007, their outage period did
not extend as long and therefore had less of an impact on our 2007
results. We estimate that revenues in the second quarter of 2006
were approximately $2 million higher than the current year as a
result of this situation. Excluding the impact of this situation on
both years, revenues were up 1% organically. Operating income was
$22 million compared to $9 million last year in the same period,
due largely to special items. Adjusted EBITDA was $21 million this
year compared to $22 million in 2006, and the adjusted EBITDA
margin for the quarter was 30%, down slightly from last year on
lower medical isotope revenues. SG&A expenses and depreciation
and amortization were down slightly compared to the prior year.
Other income for the quarter this year includes a $3 million
settlement of investment tax credits related to expenditures on the
MAPLE project in prior years and the release of a $1 million
provision for indemnifications granted to the purchaser of our
Therapy Systems business when it was sold in 2003 and on which the
indemnification period has lapsed. Each of these items has been
treated as an adjusting item. Capital expenditures in the isotopes
segment were $1 million, compared to none last year. During the
quarter, MDS Nordion announced plans to invest $6 million to expand
our Belgian production facility to meet the growing demand for
Glucotrace(R), a medical imaging agent used extensively in positron
emission tomography (PET) scans. During the quarter, we continued
to deliver TheraSphere to dose patients in India and Europe for the
treatment of liver cancer. We also established centres of
excellence with medical centres in four European countries where
oncologists will be trained in the use of the product and related
techniques. In April, MDS Nordion announced a collaboration
agreement with Avid Radiopharmaceuticals, Inc. to support clinical
studies of Avid's novel radiopharmaceuticals designed to diagnose
and monitor Alzheimer's disease. MDS Nordion will provide the
radiolabelling for Avid's proprietary compounds under the terms of
the collaboration. MDS Analytical Technologies Financial Highlights
Second Quarter Year-to-Date -------------------------------
---------------------- % Change % Change ---------------- --------
2007 2006 Reported Organic 2007 2006 Reported
-------------------------------------------------------------------------
$ 88 $ 57 54% 5% Net revenues $ 150 $ 118 27% (49) (33) Cost of
revenues (87) (71) Selling, general, (14) (4) and administration
(19) (7) Research and (7) (1) development (11) (5) Depreciation and
(7) (5) amortization (12) (8) Other income (1) - (expenses) (1) -
-------------------------------------------------------------------------
10 14 Operating income 20 27 Adjustment: Acquisition 3 -
integration 3 -
-------------------------------------------------------------------------
Adjusted operating 13 14 income 23 27 Depreciation and 7 5
amortization 12 8
-------------------------------------------------------------------------
$ 20 $ 19 5% (32%) Adjusted EBITDA $ 35 $ 35 -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital $ 2 $ 2 expenditures $ 5 $ 3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The second quarter of 2007 includes the results of MDS Sciex, along
with the results of the newly acquired Molecular Devices business
for the 41-day period from the close of the acquisition on March
20, 2007 to the quarter-end. MDS Analytical Technologies grew 54%
as reported, including the addition of MD, and 5% on an organic
basis. End-user revenues in the markets served by our joint
ventures grew 12% in the quarter. Growth remains strong in most
end-user markets and our 4000 series instruments have maintained
strong sales momentum. Services revenues continue to be a strong
driver of growth and profitability for the worldwide business and
for our share of operating income from the MDS/Applied Biosystems
partnership, although accounting rules prevent us from reporting
this revenue in our financial results. Instrument sales to
customers in inorganic markets also continued their first quarter
strength with strong orders received in the second quarter this
year, led by sales of our Elan DRC products. We are very pleased
with the results from the Molecular Devices division. On a
comparable three-month period covering our fiscal quarter, MD
reported revenues were 22% higher this year than a weak period last
year. MD was also a solid contributor to adjusted EBITDA in the
quarter. MDS acquired Molecular Devices effective March 20, 2007,
and we are currently conducting work to determine the fair value of
the assets and liabilities of the acquired company and to finalize
our integration planning and determine the costs associated with
the actions we intend to take. The purchase price allocation
reflected in the April 30, 2007 statement of financial position and
the charges recorded in the period related to the amortization of
intangible assets and fair value increments are preliminary and
subject to change. In particular, the fair value increment for
inventory and the value of backlog, are subject to significant
judgment and amortize as expenses to income over a short period. We
therefore expect to record further charges in the third quarter
related to these items as acquisition date inventories are sold and
backlog from the pre-acquisition period is shipped. We expect to
advance the determination of the final purchase accounting
substantially in the third quarter and to finalize this by
year-end. Operating income was $10 million for the second quarter
of 2007 compared to $14 million in the second quarter of 2006.
Reported operating income for 2007 includes the results for MD from
the date of acquisition, partially offset by $2 million of
inventory provisions and $3 million of integration costs and
purchase accounting adjustments. The 2006 quarterly operating
income included $3 million of R&D tax credits related to claims
filed in previous years and a $1 million foreign exchange gain on
the revaluation of US dollar debt. Adjusted EBITDA for the quarter
was $20 million compared to $19 million last year. Adjustments of
$3 million for the quarter reflect costs of the acquisition,
including $1 million of costs we have incurred as we begin to
integrate the businesses and $2 million of non-cash fair market
value adjustments applied to inventory as part of the purchase
accounting that are expensed as those inventories are sold. There
were no adjustments in the prior year. Organic adjusted EBITDA fell
32% compared to a strong second quarter last year. This decline is
primarily driven by the investment tax credits and foreign exchange
gains recorded last year and the inventory provision recorded this
year. Increased expenses in MDS Analytical Technologies for the
second quarter of 2007 included higher SG&A expenses reflecting
the additional costs associated with the MD business, including
their global sales and marketing network. R&D expense was
higher for 2007, due to the additional R&D costs incurred by
the MD division, for which no costs qualify for deferral, and due
to the recording of prior year investment tax credit in 2006, which
offset a portion of the R&D expense otherwise reported for that
quarter. Depreciation and amortization expense was also up,
reflecting amortization of intangible assets acquired as part of
the MD acquisition. Capital expenditures (excluding capitalized
development costs) were $2 million this year and last. MDS
Analytical Technologies announced a number of product innovations
during the second quarter, including strong product launches from
the Molecular Devices product lines. MDS Sciex and its joint
venture partners introduced enhancements to the Protein Pilot(TM)
software and the 4800 MALDI TOF/TOF(TM) mass spectrometer to
support biomarker research; and the FlashQuant(TM), a new
technology platform that combines triple-quadrupole mass
spectrometry with MALDI technology to streamline the identification
of viable drug candidates through better analysis of the
absorption, distribution, metabolism, and excretion properties of
compounds (ADME). Molecular Devices announced the first live cell
kinetic neurotransmitter transport uptake assembly kit, which aims
to improve the quality of assay results while reducing processing
time and cost. Corporate and Other Financial Highlights Second
Quarter Year-to-Date ---------------- --------------- 2007 2006
2007 2006
-------------------------------------------------------------------------
$ (7) $ (10) Selling, general, and administration $ (12) (16) (2) -
Restructuring charges (7) (2) (5) (2) Other income (expense) (4)
(3) - (4) Equity earnings - (3)
-------------------------------------------------------------------------
(14) (16) EBITDA (23) (24) Adjustments: - - Gain on sale of
investments (2) - (1) 2 Mark-to-market adjustments - 3 6 6
Valuation provisions 6 6 2 - Restructuring charges 7 2
-------------------------------------------------------------------------
$ (7) $ (8) Adjusted EBITDA $ (12) $ (13)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Corporate SG&A expenses were $3 million lower this year
compared to 2006, reflecting the conclusion of our initial SOx
certification initiative, and continuing efforts to contain head
office spending. Restructuring charges in the quarter relate to
costs incurred as we completed our exit from the diagnostics
business and included staff and facility reductions in our
Corporate offices. Other expense for the quarter includes a $1
million mark-to-market gain on certain debt derivatives and a $6
million valuation provision related to MDS Capital Corp. As efforts
to date to sell the remaining business have not been successful,
ongoing operations are being restructured, and we no longer expect
to fully recover the carrying value of the investment. Interest
expense, which included $2 million of interest resulting from our
one-month utilization of our revolving credit facility, increased
from $4 million to $8 million as we no longer are able to
capitalize interest incurred related to the MAPLE project. Interest
income increased to $10 million from $1 million as a result of
interest earned on higher cash balances in the current year quarter
and on the cash proceeds resulting from the sale of the diagnostics
business. Income taxes Our effective income tax rate for the
quarter was 27%, below our expected rate of 36% due primarily to
losses incurred in foreign jurisdictions for which no tax benefit
can be recognized. In addition, we are not able to recognize a tax
benefit on the valuation provision recorded on MDS Capital Corp.
Income from discontinued operations were taxed at an effective rate
of 13%, reflecting capital gains tax rates on the gain on sale of
the diagnostics business. In addition, we have realized available
tax loss carryforwards not previously recognized. Discontinued
Operations The results of our discontinued businesses for the
second quarter of 2007 and 2006 were as follows: Second Quarter
Year-to-date
-------------------------------------------------------------------------
2007 2006 2007 2006
-------------------------------------------------------------------------
Net revenues $ 20 $ 98 $ 95 $ 198 Cost of revenues (12) (63) (58)
(131) Selling, general and administration (5) (12) (14) (27)
Depreciation and amortization - (2) - (5) Restructuring charges - -
- (1) Equity earnings - - 1 1
-------------------------------------------------------------------------
Operating income 3 21 24 35 Gain on sale of discontinued operations
905 - 905 24 Dividend and interest income - 1 1 1 Income taxes
(114) (3) (117) (6) Minority interest (1) (3) (4) (5)
-------------------------------------------------------------------------
Income from discontinued operations - net of tax $ 793 $ 16 $ 809 $
49
-------------------------------------------------------------------------
Basic earnings per share $ 5.77 $ 0.11 $ 5.74 $ 0.34
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Diluted earnings per share $ 5.75 $ 0.11 $ 5.73 $ 0.34
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The results from discontinued operations for 2007 reflect only the
Canadian diagnostic services business. The results from
discontinued operations for 2006 include results from the Canadian
diagnostic services business and certain small MDS Pharma Services
businesses discontinued in 2005. Liquidity and Capital Resources
April 30 October 31 2007 2006 Change
-------------------------------------------------------------------------
Cash, cash equivalents and short-term investments $ 322 $ 388 (17%)
Operating working capital(1) $ 75 $ 104 (28%) Current ratio 1.6 2.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Our measure of operating working capital equals accounts
receivable plus unbilled revenue and inventory less accounts
payable, accrued liabilities, and current deferred revenue. During
the past year, we utilized $66 million of cash, mostly to fund the
acquisition of Molecular Devices and our share repurchase. Net cash
proceeds from the sale of the diagnostics business amounted to $929
million, while net cash outflows to purchase Molecular Devices and
fund the share repurchase totalled $1,044 million. These
investments were partially offset by cash generated by operations
in the period of $54 million. We expect our operating cash inflows
to remain strong during the latter half of this year and throughout
fiscal 2008. Cash outflows will include FDA settlements with our
customers and the payment of severance obligations associated with
our restructuring activities. In addition, we will make a principal
repayment of $79 million on our long-term debt in December 2007.
These liquidity needs can be satisfied from cash generated from
operations and cash on hand. We also have available a C$500
million, five-year committed, revolving credit facility to fund our
liquidity requirements. On February 6, 2007 we drew C$500 million
from this facility to ensure that we had adequate funds on hand to
complete our planned acquisition of MD, in the event we were unable
to close the sale of the diagnostics business prior to taking up MD
shares under our tender offer. We repaid this borrowing in March
from the proceeds resulting from the sale of the diagnostics
business and there were no borrowings under this facility as at
April 30, 2007. Cash used in financing activities (excluding
discontinued operations) during the quarter was $437 million versus
$5 million received from financing activities last year. Current
year financing activities included $441 million used for the share
repurchase. Given the execution of our issuer bid, we made no
purchases under our normal course issuer bid during the quarter. We
believe that cash flow generated from operations, coupled with
available borrowings from existing financing sources, will be
sufficient to meet our anticipated requirements for acquisitions,
capital expenditures, research and development expenditures, FDA
settlements, restructuring costs and operations in 2007 and 2008.
At this time, we do not reasonably expect any presently known trend
or uncertainty to affect our ability to access our current sources
of cash. We remain in compliance with all covenants for our senior
unsecured notes and our bank credit facility. Contractual
Obligations There have been no material changes in contractual
obligations since October 31, 2006 other than those arising from
the acquisition of MD, and there has been no substantive change in
any of our long-term debt or other long-term obligations since that
date. We have not entered into any new guarantees of the debt of
third parties, nor do we have any off-balance sheet arrangements.
The acquisition of MD has added $6 million of annual commitments
related to operating leases and approximately $14 million of
inventory purchase commitments in 2007. 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 assist in the determination
of fair market values of the financial instruments. The net
mark-to-market value of all derivative instruments at April 30,
2007 was an asset of $2 million. We recorded a $1 million
mark-to-market gain on interest rate swaps during the second
quarter of 2007. Capitalization April 30 October 31 2007 2006
Change
-------------------------------------------------------------------------
Long-term debt $ 384 $ 394 (3%) Less: cash and cash equivalents and
short-term investments 322 388 (17%)
-------------------------------------------------------------------------
Net debt 62 6 933% Shareholders' equity 1,722 1,414 22%
-------------------------------------------------------------------------
Capital employed(1) $ 1,784 $ 1,420 26%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Debt to Total Capital 18% 22%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Capital employed is a measure of how much of our net assets is
financed by debt and equity. Long-term debt decreased $10 million
due to $6 million of principal payments in December and currency
re-valuation. Changes in the value of the US-dollar denominated
debt, which is treated as a hedge in the US net investment, are
reflected in Accumulated Other Comprehensive Income in the
Statement of Financial Position. The current portion of the
long-term debt is $93 million compared to $20 million at October
31, 2006, reflecting the transfer to current portion of $79 million
of long-term debt which will be repaid in December 2007. US GAAP
Reconciliation Note 17 to our consolidated financial statements for
the second quarter of 2007 contains a reconciliation of results
reported in Canadian GAAP to the net income we would report in US
GAAP. The only material reconciling item in the quarter and the
year-to-date is deferred development costs that are capitalized for
Canadian purposes and expensed under US GAAP and the write off of
acquired in-process research and development. The net impact of
these items was a $4 million increase in the loss from continuing
operations in the quarter for US GAAP purposes (2006-$1million).
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 US dollars, except earnings per share)
-------------------------------------------------------------------------
Trailing Four Apr Jan Oct July Quarters 2007 2007 2006 2006
-------------------------------------------------------------------------
Net revenues $ 1,041 $ 273 $ 250 $ 260 $ 258 Operating income
(loss) $ (54) $ (80) $ 3 $ 18 $ 5 Income (loss) from continuing
operations $ (42) $ (57) $ (2) $ 14 $ 3 Net income (loss) $ 815 $
736 $ 14 $ 47 $ 19 Earnings (loss) per share from continuing
operations Basic and diluted $ (0.32) $ (0.42) $ (0.02) $ 0.10 $
0.02 Earnings (loss) per share Basic and diluted $ 5.92 $ 5.36 $
0.10 $ 0.33 $ 0.13
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(millions of US dollars, except earnings per share)
-------------------------------------------------------------------------
Trailing Four Apr Jan Oct July Quarters 2006 2006 2005 2005
-------------------------------------------------------------------------
Net revenues $ 972 $ 242 $ 242 $ 257 $ 231 Operating income (loss)
$ (2) $ 2 $ 23 $ (39) $ 12 Income (loss) from continuing operations
$ (14) $ (2) $ 14 $ (33) $ 7 Net income (loss) $ 35 $ 14 $ 47 $
(41) $ 15 Earnings (loss) per share from continuing operations
Basic and diluted $ (0.09) $ (0.01) $ 0.10 $ (0.23) $ 0.05 Earnings
(loss) per share Basic and diluted $ (0.24) $ 0.10 $ 0.33 $ (0.29)
$ 0.10
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Items that impact the comparability of operating income include: -
Results for the quarter ended April 30, 2007 reflect a $792 million
net gain from the sale of our diagnostics businesses, the 41 days
of operating results of Molecular Devices, $61 million of charges
related to assisting clients in respect of the FDA review, and $28
million of restructuring charges. - Results for the quarter ended
January 31, 2007 reflect the impact of restructuring charges
totalling $13 million. - Results for the quarter ended April 30,
2006 reflect a loss of $9 million resulting from the completion of
the MAPLE settlement. - Results for the quarter ended October 31,
2005 reflect restructuring charges of $47 million and valuation
provisions on certain long-term investments totalling $11 million.
Outlook Our second quarter in 2007 included three significant
transactions that complete our transition to a global life sciences
company. In addition, we made meaningful progress in resolving the
outstanding FDA matter, assisting a majority of our generic
pharmaceutical clients to conduct the study audits required by the
FDA. We believe our businesses are well positioned for growth. We
launched MDS Analytical Technologies during the quarter, combining
the Molecular Devices acquisition with our MDS Sciex division.
Since then, the business has announced several new products and
attended a highly successful Society for Biomolecular Sciences
conference in April. Customer interest in our newly expanded
product line is strong and we have seen continued strength in
orders. Our goal is to maintain an ongoing supply of high-quality
products and services as we introduce exciting new technologies to
increase our customers' productivity. Our focus for the balance of
the year is to continue to serve our customers well as we drive a
smooth integration of the MDS Sciex and Molecular Devices
businesses. We believe that there are significant synergies
available to these businesses as they become one. We will achieve
these as rapidly as possible, while maintaining the hard-earned
reputation of both businesses for providing superior solutions to
meet our customers' complex needs. In recent quarters, management
of MDS Pharma Services has focused significant attention on
resolving the FDA issue at our Montreal site. With this matter on a
path to final resolution, management has renewed its attention on
customers and building for the future. A substantial realignment of
the business has begun and we recorded a charge in the second
quarter for this. Looking forward, attention is focused on
sustaining the strong performance of our late-stage businesses and
restoring the growth and profitability of our early-stage business
by building on the solid platforms we have in early clinical
research and drug safety. We are working hard to reassure our
clients that they can rely on MDS Pharma Services for work that is
of the highest quality. MDS Nordion has posted solid performance so
far this year and has continued to grow its business outside of its
traditional medical isotopes platforms. New commercial
relationships with companies like Avid Radiopharmaceuticals and
others provide opportunities to expand in the molecular imaging
market. We see continued strong demand for TheraSphere in Europe
and, more recently, in India and we believe the potential for this
innovative therapy is high. We are also investing to serve the
rapidly growing market for PET scans by expanding our capacity to
manufacturer Glucotrace, an imaging agent, in Europe. We believe
these initiatives, combined with others that are in earlier stages
of development, position this business well for the future. We
continue to monitor currency markets and there has been significant
volatility in the value of the US dollar since year-end. Although
we have hedged a significant portion of our net US-dollar cash
flows from our Canadian-based businesses, currency markets will
continue to have an impact on our reported results and we will
continue to report organic measures of revenue and adjusted EBITDA
growth to help readers understand the impact of these market
dynamics. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
2007 2006 As at April 30 with comparatives at October 31 (Revised
(millions of US dollars) Note 7)
-------------------------------------------------------------------------
ASSETS Current Cash and cash equivalents $ 301 $ 253 Short-term
investments 21 135 Accounts receivable 244 229 Unbilled revenue 111
121 Inventories 152 86 Income taxes recoverable 63 42 Prepaid
expenses and other 24 21 Assets held for sale (note 7) 1 196
-------------------------------------------------------------------------
917 1,083 Property, plant and equipment 337 339 Future tax assets -
37 Long-term investments and other 218 170 Goodwill 782 417
Intangibles 519 338
-------------------------------------------------------------------------
Total assets $ 2,773 $ 2,384
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY Current Accounts payable and
accrued liabilities $ 340 $ 239 Deferred revenue 92 93 Income taxes
payable 56 8 Future tax liabilities 8 - Current portion of
long-term debt 93 20 Liabilities related to assets held for sale
(note 7) - 114
-------------------------------------------------------------------------
589 474 Long-term debt 291 374 Deferred revenue 16 17 Other
long-term obligations 26 23 Future tax liabilities 129 82
-------------------------------------------------------------------------
$ 1,051 $ 970
-------------------------------------------------------------------------
Shareholders' equity Share capital (note 5) 462 572 Retained
earnings 923 495 Cumulative translation adjustment n/a 347
Accumulated other comprehensive income (note 4) 337 n/a
-------------------------------------------------------------------------
1,722 1,414
-------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 2,773 $ 2,384
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes N/A - Not applicable. Effective November 1,
2006, certain new accounting pronouncements issued by the Canadian
Institute of Chartered Accountants (CICA) were adopted by the
Company (see note 3). Certain financial statement categories were
rendered not applicable by these new pronouncements. CONSOLIDATED
STATEMENTS OF INCOME (UNAUDITED) Three months Six months to April
30 to April 30
-------------------------------------------------------------------------
2007 2006 2007 2006 (millions of US dollars, (Revised (Revised
except per share amounts) Note 7) Note 7)
-------------------------------------------------------------------------
Net revenues $ 273 $ 242 $ 523 $ 484 Cost of revenues (164) (150)
(324) (301) Selling, general and administration (67) (56) (120)
(105) Research and development (note 8) (7) (1) (12) (6)
Depreciation and amortization (20) (16) (37) (29) Restructuring
charges - net (note 9) (28) (1) (41) (2) Other expenses - net (note
11) (67) (11) (66) (12) Equity earnings - (5) - (4)
-------------------------------------------------------------------------
Operating income (loss) (80) 2 (77) 25
-------------------------------------------------------------------------
Interest expense (8) (4) (14) (7) Dividend and interest income 10 1
14 3
-------------------------------------------------------------------------
Income (loss) from continuing operations before income taxes (78)
(1) (77) 21 Income taxes recovery (expense) (note 16) 21 (1) 18 (9)
-------------------------------------------------------------------------
Income (loss) from continuing operations (57) (2) (59) 12 Income
from discontinued operations - net of tax (note 7) 793 16 809 49
-------------------------------------------------------------------------
Net income $ 736 $ 14 $ 750 $ 61
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic earnings (loss) per share (note 10) - from continuing
operations $ (0.42) $ (0.01) $ (0.42) $ 0.09 - from discontinued
operations 5.77 0.11 5.74 0.34
-------------------------------------------------------------------------
Basic earnings per share $ 5.35 $ 0.10 $ 5.32 $ 0.43
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Diluted earnings (loss) per share (note 10) - from continuing
operations $ (0.41) $ (0.01) $ (0.42) $ 0.09 - from discontinued
operations 5.75 0.11 5.72 0.34
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Diluted earnings per share $ 5.34 $ 0.10 $ 5.30 $ 0.43
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See accompanying notes CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(UNAUDITED) Three months Six months to April 30 to April 30
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(millions of US dollars) 2007 2006 2007 2006
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Retained earnings, beginning of period $ 505 $ 428 $ 495 $ 385 Net
income 736 14 750 61 Repurchase of shares (318) - (318) - Dividends
- cash - (3) (3) (6) Dividends - stock - (1) (1) (2)
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Retained earnings, end of period $ 923 $ 438 $ 923 $ 438
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See accompanying notes CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME (UNAUDITED) Three Six months to months to April 30 April 30
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(millions of US dollars) 2007 2007
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Net income $ 736 $ 750 Other comprehensive income (loss) - net of
income tax: Unrealized gains (losses) on derivatives designated as
cash flow hedges, net of tax of $3 7 4 Reclassification of gains
(losses) on derivatives designated as cash flows hedges to net
income (2) (1) Unrealized gains (losses) on translation of debt
designated as a hedge of self-sustaining foreign operations, net of
tax of $3 14 3 Foreign currency translation gains (losses) on
self-sustaining foreign operations (21) (5) Translation gains
(losses) resulting from the application of US dollar reporting 64 9
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62 10
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Comprehensive income $ 798 $ 760
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See accompanying notes CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) Three months Six months to April 30 to April 30
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2007 2006 2007 2006 (Revised (Revised (millions of US dollars) Note
7) Note 7)
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Operating activities Net income $ 736 $ 14 $ 750 $ 61 Income from
discontinued operations - net of tax 793 16 809 49
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Income (loss) from continuing operations (57) (2) (59) 12
Adjustments to reconcile net income to cash provided by operating
activities relating to continuing operations (note 13) Items not
affecting current cash flow 82 20 95 32 Changes in non-cash working
capital balances relating to operations 98 (10) 70 (53)
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Cash provided by (used in) operating activities of continuing
operations 123 8 106 (9) Cash provided by (used in) operating
activities of discontinued operations (69) 21 (53) 34
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54 29 53 25
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Investing activities Acquisitions (note 6) (603) - (603) - Increase
in deferred development charges - (2) (2) (3) Proceeds from MAPLE
transaction - 24 - 24 Purchase of property, plant and equipment
(note 14) (9) - (17) (22) Proceeds on sale of short-term
investments 25 - 151 - Purchases of short-term investments (15) -
(37) - Proceeds on sale of long-term investment - - 13 - Other 1 1
- (16)
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Cash provided by (used in) investing activities of continuing
operations (601) 23 (495) (17)
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Cash provided by investing activities of discontinued operations
929 9 929 77
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Financing activities Repayment of long-term debt (1) (1) (7) (1)
Decrease in deferred revenue and other long-term obligations (1) -
- (9) Payment of cash dividends - (3) (3) (6) Issuance of shares 6
9 10 19 Repurchase of shares (441) - (441) -
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Cash provided by (used in) financing activities of continuing
operations (437) 5 (441) 3
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Cash used in financing activities of discontinued operations - (1)
(2) (8)
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Effect of foreign exchange rate changes on cash and cash
equivalents 16 8 4 17
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Increase (decrease) in cash and cash equivalents during the period
(39) 73 48 97 Cash and cash equivalents, beginning of period 340
248 253 224
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Cash and cash equivalents, end of period $ 301 $ 321 $ 301 $ 321
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See accompanying notes NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (All tabular amounts in millions of US Dollars, except
where noted) 1. Basis of Presentation These interim consolidated
financial statements of MDS Inc. (MDS or the Company) have been
prepared in accordance with Canadian generally accepted accounting
principles (GAAP) and follow the same accounting policies and
methods of application as the Company's consolidated financial
statements for the year ended October 31, 2006, except as described
in Note 3. Under GAAP, additional disclosures are required in the
annual financial statements and accordingly, these interim
consolidated financial statements should be read in conjunction
with the audited consolidated financial statements for the year
ended October 31, 2006 and the accompanying notes on pages 32 to 63
of the Company's annual report. Prior year amounts have been
revised to reflect the results of discontinued operations. 2.
Reporting Currency The Company has historically prepared its
consolidated financial statements in Canadian dollars and in
accordance with Canadian generally accepted accounting principles
(GAAP). Effective November 1, 2006, the Company adopted the United
States (US) dollar as the reporting currency for presentation of
its consolidated financial statements. A significant portion of
revenues, expenses and assets and liabilities are denominated in US
dollars and the international focus of the Company's sales and
operations is continuing to increase; consequently, the Company
believes that investors will gain a better understanding of the
operating results when presented in US dollars. The Company will
continue to report its financial results for fiscal 2007 in
accordance with Canadian GAAP. In accordance with Canadian
generally accepted accounting principles, the Company is required
to restate all amounts presented in US dollars, using the current
rate method whereby all revenues, expenses and cash flows for each
year (or period) are translated into the reporting currency using
the rates in effect at the date of the transactions, and assets and
liabilities are translated using the exchange rate at the end of
that year or period. All resulting exchange differences are
reported as a separate component of shareholders' equity. The
functional currency of each of the Company's operations is
unchanged. Assets and liabilities of the Company's operations
having a functional currency other than US dollars are translated
into US dollars using the exchange rate in effect at the end of the
period, and revenues and expenses are translated at the average
rate during the period. As a result of the change in the reporting
currency, the Company has recorded a cumulative translation
adjustment balance of $347 million as at October 31, 2006. All
comparative financial information has been restated to reflect the
Company's results as if they had been historically reported in US
dollars. 3. Changes in Accounting Policies The Company adopted the
Canadian Institute of Chartered Accountants (CICA) Handbook
Sections 1530, "Comprehensive Income"; 3855, "Financial Instruments
- Recognition and Measurement"; 3861, Financial Instruments -
Disclosure and Presentation" and 3865, "Hedges" on November 1,
2006. The adoption of these new standards resulted in changes in
the accounting for financial instruments and hedges, as well as the
recognition of certain transition adjustments, that have been
recorded in opening accumulated comprehensive income as described
below. The comparative interim consolidated financial statements
have not been restated, except for the presentation of translation
gains or losses on self-sustaining foreign operations. With the
adoption of these standards, the Company's accounting for financial
instruments is now largely harmonized with US GAAP for this area.
The principal changes in the accounting for financial instruments
and hedges due to the adoption of these accounting standards are
described below. (a) Comprehensive Income Comprehensive income is
composed of the Company's net income and other comprehensive
income. Other comprehensive income includes unrealized exchange
gains and losses on translation of self-sustaining foreign
operations, translation gains and losses resulting from the
application of US dollar reporting, unrealized gains and losses on
translation of debt designated as a hedge, and changes in the fair
market value of derivative instruments designated as cash flow
hedges, net of applicable income taxes. The components of
comprehensive income are disclosed in the consolidated statement of
comprehensive income. DATASOURCE: MDS Inc. CONTACT: For further MDS
information contact: Investor Inquiries: Sharon Mathers, Senior
Vice-President, Investor Relations and External Communications,
(416) 213-4721, ; Media Inquiries: Catherine Melville, Director,
External Communications, (416) 675-6777 ext. 32265,
Copyright