Profitability improves with strong results across MDS TORONTO,
Sept. 6 /PRNewswire-FirstCall/ -- MDS Inc. (TSX: MDS; NYSE: MDZ), a
company providing products and services to the global life sciences
markets, today reported its third quarter 2007 results. For the
quarter, MDS reported revenues of $321 million, net income of $7
million and earnings per share from continuing operations of $0.07.
Adjusted EBITDA rose to $56 million, up 167% from prior year, and
adjusted earnings per share were $0.14, up from $0.01 in the prior
year. Third quarter results were primarily driven by strong
performance at MDS Analytical Technologies and continued
improvement at MDS Pharma Services. Quarterly Highlights -
Delivered $321 million in revenues, up 24% from $258 million in
prior year - Increased adjusted EPS to $0.14, up from $0.01 in
prior year - Delivered adjusted EBITDA of $56 million, up 167% from
$21 million last year - MDS Analytical Technologies delivered
record performance at Molecular Devices with $55 million in
revenues and $15 million of adjusted EBITDA - MDS Analytical
Technologies delivered strong performance at Sciex with adjusted
EBITDA of $21 million, up 40% from $15 million last year - MDS
Pharma Services delivered their fourth consecutive quarter of
improved profitability with $4 million of adjusted EBITDA versus a
loss of $10 million in the prior year - MDS Nordion delivered a
solid quarter with adjusted EBITDA of $23 million, up 10%
sequentially, but down 8% from $25 million in a strong third
quarter last year. "I am pleased with the solid results that we
delivered across MDS," said Stephen P. DeFalco, President and Chief
Executive Officer of MDS Inc. "The MDS Analytical Technologies team
has been doing a great job of integrating our new business and MDS
Pharma Services has improved profitability for the fourth quarter
in a row." Operating Segment Results MDS Pharma Services % Change
-------------------------- ($ millions) Q3 2007 Q3 2006 Reported
Organic
-------------------------------------------------------------------------
Revenue: Early-stage 62 63 (2%) - Late-stage 56 50 12% -
-------------------------------------------------------------------------
118 113 4% 3%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Adjusted EBITDA: $ 4 (10) n/m n/m % 3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the third quarter, MDS Pharma Services revenue increased 4% on
a reported basis over the same period last year, and was up 3%
organically after adjusting for foreign exchange impact. Our
late-stage businesses continued to deliver strong growth at 12%.
This growth was partially offset by a 2% decline in our early-stage
business. While our results in early-stage continue to show some
weakness, the return of certain bioanalytical and Phase I customers
in the quarter was very encouraging. We are optimistic that this
trend will continue in the next several quarters as we rebuild our
relationships with these customers. Our average backlog for the
third quarter was $420 million, up 5% from the prior year. During
the quarter, the team at our Montreal site made significant
progress in helping our bioanalytical clients complete generic
study audits required by the FDA. We believe substantially all of
the site audit work for generic submissions has now been completed.
Most of our efforts at this time are focused on follow-up questions
and supporting the finalization of our customers' remaining audit
reports. We also continue to work with clients to support any
required review of bioanalytical innovator studies from Montreal.
MDS Pharma Services continues to make progress implementing
previously announced restructuring plans. During the third quarter,
we completed the consolidation of our European bioanalytical
operations from Sittingbourne, UK to Zurich, Switzerland. We have
reduced our workforce while growing our revenues by 5% year to
date. We have Lean Sigma initiatives and other activities underway
to optimize our global network, enhance our productivity, and
improve our ability to serve our customers. MDS Pharma Services has
recently hired industry experts in Phase II - IV, Information
Technology, and Strategy and Corporate Development to enhance
leadership in strategic growth areas. We also hired industry
experts to support the expansion of our Development and Regulatory
Services (DRS) business in Europe. MDS Pharma Services is now able
to offer full-service DRS consulting services to support the
development of new drugs and biopharmaceutical products for clients
in Europe. MDS Pharma Services also continues to make strategic
investments to support our global growth strategy. These
investments include a 300-bed expansion in Phoenix, Arizona for our
Phase I business and several new information systems to enable our
pre-clinical and central lab businesses to serve our customers more
effectively. MDS Nordion % Change -------------------------- ($
millions) Q3 2007 Q3 2006 Reported Organic
-------------------------------------------------------------------------
Revenue 76 79 (4%) (4%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Adjusted EBITDA: $ 23 25 (8%) - % 30 32 - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
MDS Nordion revenues for the third quarter were $76 million, down
4% on a reported and organic basis compared to a strong quarter
last year. Adjusted EBITDA was $23 million, down 8% as reported but
flat organically, as productivity initiatives partially offset
lower revenue and the impact of foreign currency. MDS Nordion
revenue and adjusted EBITDA were up sequentially from the second
quarter 2007 by 9% and 10% respectively. During the quarter, MDS
Nordion announced a new collaboration with the University of Ottawa
Heart Institute, Canada's largest cardiovascular health centre, to
establish a Molecular Imaging Centre of Excellence to advance
cardiology research. MDS Nordion will invest an estimated $2
million in this new Centre that will further cardiology research by
using advanced imaging technology to conduct early disease
detection and treatment assessment. MDS Nordion also experienced
growth in revenues for its innovative liver treatment,
TheraSphere(R), this past quarter. Demand for this product in
Europe continues to accelerate as it has now been added to
treatment formularies in certain European countries that enable
doctors to be reimbursed. MDS Analytical Technologies % Change
-------------------------- ($ millions) Q3 2007 Q3 2006 Reported
Organic
-------------------------------------------------------------------------
Revenue 127 66 92% 11%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Adjusted EBITDA: $ 36 15 140% 73% % 28 23 - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The third quarter marked our first full quarter including the
results of Molecular Devices. MDS Analytical Technologies delivered
strong results this quarter with revenues up 92% to $127 million.
Adjusted EBITDA of $36 million was up 140% reported, and up 73%
organically over the same period last year. The Molecular Devices
acquisition and healthy demand for our Sciex products in most of
our markets drove solid results. We had good sales momentum with
our high-end triple-quad and ion trap instruments. Sciex
contributed $72 million in revenues and $21 million in adjusted
EBITDA in the third quarter. Mass spectrometry end user revenue
grew 10%. In the quarter, Molecular Devices contributed $55 million
in revenues and $15 million in adjusted EBITDA. The integration of
Molecular Devices and Sciex is proceeding well and we intend to
meet or exceed the revenue and adjusted EBITDA targets of $190
million and $45 - $50 million in our first full year of ownership.
During the quarter, MDS Analytical Technologies introduced several
new products to support continued growth in this business. The
AquaMax(R) 2000 and AquaMax(R) 4000 series of microplate washers
were launched this quarter. These liquid handling systems provide
researchers with a highly flexible, easy to configure,
multi-application instrument. Another new product introduced this
quarter is a novel food testing methodology that enables
simultaneous testing for melamine and cyanuric acid. This Applied
Biosystems/SCIEX product will help public health laboratories and
food manufacturers improve food safety. Conference Call MDS will be
holding a conference call today at 9:00 am (EDT) to discuss third
quarter 2007 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 September 4, 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
July 31, 2007 and its financial position as at July 31, 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. We provide information and analysis in our
MD&A comparing the results of operations for the current period
to those of the same period in the preceding fiscal year and
comparing our financial position to that at the end of 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", "optimistic", and words and expressions of similar
import are intended to identify forward-looking statements. By
their very nature, forward-looking statements involve inherent
risks and uncertainties, both general and specific, which give rise
to the possibility that predictions, forecasts, projections and
other forward-looking statements will not be achieved. We caution
readers not to place undue reliance on these statements as a number
of important factors could cause our actual results to differ
materially from the beliefs, plans, objectives, expectations,
anticipations, estimates and intentions expressed in such
forward-looking statements. These factors include, but are not
limited to: management of operational risks; the strength of the
Canadian and United States economies and the economies of other
countries in which we conduct business; our ability to secure a
reliable supply of raw materials, particularly cobalt and critical
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 use terms such as
adjusted operating income; adjusted earnings before interest,
taxes, depreciation and amortization (EBITDA); EBITDA margin;
adjusted EPS; operating working capital; and backlog. These terms
are not defined by GAAP and our use of such terms or measurement of
such items may vary from that of other companies. In addition,
measurement of both reported and organic growth is not defined by
GAAP and our use of these terms or measurement of these items may
vary from that of other companies. Where relevant, and particularly
for earnings-based measures, we provide tables in this document
that reconcile the non-GAAP measures used to amounts reported on
the face of the consolidated financial statements. Our executive
management team assesses the performance of our businesses based on
a review of results comprising these non-GAAP measures and GAAP
measures. We also report on our performance to the Company's Board
of Directors based on these GAAP and non-GAAP measures. In
addition, adjusted EBITDA and operating working capital are the
primary metrics for our annual incentive compensation plan for
senior management. We provide this non-GAAP detail so that readers
have a better understanding of the significant events and
transactions that have had an impact on our results and can view
our results through the eyes of management. 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 figures for the prior period
using the exchange rates that were in effect for the current
period. We provide a reconciliation that shows the differences
between reported and organic growth figures highlighting the
variances caused by currency fluctuations and those caused by
business acquisitions or divestitures. 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 as profit
sharing and 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 including
appropriate intercompany eliminations, 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
profitability for the Sciex division of MDS Analytical
Technologies, in addition to the organic growth of our reported
revenues, we also report growth in end-user revenues as reported by
our joint venture partners. This figure provides management and
readers with additional information on the performance of our
global business, including trends in end customer demand and our
performance relative to the overall market. We are unable to
provide the organic growth in this measure because we do not have
access to the underlying currency data. MDS Pharma Services
measures and tracks contract backlog. Contract backlog is a
non-GAAP measure that we define to include the amount of contract
value (excluding amounts associated with the reimbursement of costs
incurred as agent for a customer) associated with confirmed
contracts that has not yet been recognized as revenue. A confirmed
contract is one for which the Company has received customer
acceptance in a manner that is customary for the type of contract
involved. For large, long-term contracts, customer acceptance is
generally evidenced by the receipt of a signed contract or
confirmation awarding the work to MDS. For smaller and short-term
contracts, customer acceptance may be documented in other ways,
including email messages and oral confirmations. Only contracts for
which such acceptances have been received are included in backlog
and the amount of backlog for these contracts is measured based on
the revenue that is expected to be earned by MDS under the contract
terms. A contract is removed from backlog if the Company receives
notice from the customer that the contract has been cancelled,
indefinitely delayed, or reassigned to another service provider.
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 use 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. Acquisition of Molecular Devices
Corporation On March 20, 2007, we completed the acquisition of
Molecular Devices Corporation (MD), a leading provider of
high-performance measurement tools for high-content screening,
cellular analysis, and biochemical testing, in a $622 million cash
transaction. The acquisition was accounted for in our second
quarter using the purchase method based on certain preliminary
estimates relating to the value of the assets and liabilities of
the acquired company. During the third quarter, we continued the
work required to assign final values to the assets and liabilities
acquired, and, we have adjusted the purchase price allocation
reported in the second quarter to reflect the current estimates of
value. The total cost of the acquisition was $622 million,
including the cash cost of the tender offer, the cash cost to
acquire outstanding in-the-money options held by MD employees, and
cash transaction costs. The components of the purchase cost and the
preliminary allocation of the costs are as follows:
-------------------------------------------------------------------------
Cash paid for tendered shares $ 587 Cash paid to acquire vested
options 27 Cash transaction costs 8
-------------------------------------------------------------------------
Total cost of acquisition $ 622
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Allocation of cost of acquisition: Net tangible assets acquired $
36 Intangible assets acquired 221 Goodwill 365
-------------------------------------------------------------------------
Total $ 622
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net tangible assets acquired includes $21 million of acquired cash.
Additional details are provided in note 6 to the unaudited
consolidated financial statements. MDS Inc. Consolidated Operating
Highlights Third Quarter Year-to-Date
------------------------------- ---------------------- % Change %
Change ---------------- -------- 2007 2006 Reported Organic 2007
2006 Reported
-------------------------------------------------------------------------
$ 321 $ 258 24% 3% Net revenues $ 844 $ 742 14%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating income 13 5 160% (loss) (64) 30 n/m Adjustments:
------------ 3 2 Restructuring charges 44 4 - - Valuation provision
6 7 Mark-to-market on 1 - interest rate swaps 1 2 - - MAPLE
settlement (3) 9 Loss (gain) on sale - (2) of businesses 1 (2) - -
FDA provision 61 - Acquisition 11 - integration 14 -
-------------------------------------------------------------------------
Adjusted operating 28 5 income 60 50 Depreciation and 28 16
amortization 65 45
-------------------------------------------------------------------------
$ 56 $ 21 167% 190% Adjusted EBITDA $ 125 $ 95 32%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Adjusted EBITDA 17% 8% margin 15% 13%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
n/m = not meaningful Consolidated revenues for the third quarter of
2007 were up 24% on a reported basis to $321 million compared to
$258 million last year. Strong 9% revenue growth at Sciex, combined
with $55 million of revenue from MD in the third quarter, pushed
MDS Analytical Technologies revenues up 92%. MDS Pharma Services
revenues increased 4% compared to the same period in 2006, as our
late-stage MDS Pharma Services businesses continued their strong
growth. MDS Nordion revenues were down 4% on a reported basis
compared to the same period in 2006, as the prior year figures
included the realization of deferred revenue associated with our
Zevalin(R) contract, which expired in February 2007 and therefore
had no impact in the third quarter of fiscal 2007. On an organic
basis, revenues grew by 3%, and adjusted EBITDA grew by 190%, which
reconcile to reported growth as follows: Adjusted Revenue EBITDA
-------------------------------------------------------------------------
Reported growth 24% 167% Growth attributable to the acquisition of
MD (21%) (71%) Impact of currency fluctuations on growth - 94%
-------------------------------------------------------------------------
Organic growth 3% 190%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating income for the third quarter of 2007 was $13 million
compared to $5 million reported for the same period in 2006.
Excluding the impact of MD, operating income for the 2007 quarter
was $17 million, as both MDS Pharma Services and Sciex experienced
solid growth in operating income compared to the prior year.
Excluding the $2 million of the Zevalin(R) deferred revenue in the
prior-year period, MDS Nordion operating income was level with
2006. Adjusted EBITDA for the quarter was $56 million, compared to
$21 million last year and $37 million reported for the second
quarter of fiscal 2007. Adjusted EBITDA increased 167% on a
reported basis. MDS Pharma Services demonstrated continued steady
improvement in adjusted EBITDA, reporting sequential improvement in
adjusted EBITDA for the fourth consecutive quarter. MDS Analytical
Technologies also had a strong quarter on an adjusted EBITDA basis,
both before and after the impact of the MD acquisition. Adjustments
reported for the quarter include $11 million of costs related to
the integration of MDS Analytical Technologies, $10 million of
which relates to amortization of fair value increments recorded for
inventory and order backlog as part of the purchase accounting for
MD. As at July 31, 2007, the fair value increments related to
inventory and order backlog have been fully expensed. Selling,
general, and administration (SG&A) expenses for the quarter
totalled $74 million and 23% of revenues compared to $61 million
and 24% last year. The increase reflects the addition of MD, and
SG&A in the other businesses was level with last year. We spent
$21 million on R&D activities in the third quarter this year
and expensed $9 million, compared to spending of $13 million last
year, of which we expensed $5 million. The majority of the increase
in R&D spending comes from the additional spending in our new
MD business. Consolidated depreciation and amortization expense
increased $12 million compared to the third quarter of last year.
In the third quarter of 2007, we amortized $8 million of intangible
assets acquired as part of the MD transaction. Capital expenditures
for the quarter were $28 million and included $13 million for a
property acquisition related to the expansion of our early-stage
business in Phoenix, Arizona. Income from continuing operations for
the quarter was $8 million, reflecting these strong results from
our businesses and was up 167% compared to $3 million reported for
continuing operations last year. Excluding adjusting items, income
from continuing operations was $17 million or $0.14 per share. The
loss from discontinued operations of $1 million for the third
quarter this year reflects costs associated with the sale of our
Canadian diagnostics businesses. Income from discontinued
operations of $16 million for 2006 reflects the operating results
of our Canadian diagnostics businesses for that period. Earnings
per share from continuing operations were $0.07 for the quarter,
compared to $0.02 in 2006. Adjusted earnings per share from
continuing operations for the quarter were $0.14 compared to $0.01
earned in the same period last year. Earnings per share from
discontinued operations were a loss of $0.01 compared to income of
$0.11 last year. Adjusted earnings per share for the two periods
were as follows: Third Quarter Year-to-date
-------------------------------------------------------------------------
2007 2006 2007 2006
-------------------------------------------------------------------------
Basic and diluted EPS from continuing operations - as reported $
0.07 0.02 $ (0.37) $ 0.11 Adjustments: Restructuring charges 0.01 -
0.26 0.02 Valuation provision - - 0.05 0.04 Mark-to-market on
interest rate swaps 0.01 - - - MAPLE settlement - - (0.02) 0.05
Loss (gain) on sale of long-term investment and businesses - (0.01)
0.01 (0.01) FDA provision - - 0.30 - Acquisition integration 0.05 -
0.06 - Tax rate changes - - - 0.02
-------------------------------------------------------------------------
Adjusted EPS $ 0.14 0.01 $ 0.29 $ 0.23
-------------------------------------------------------------------------
-------------------------------------------------------------------------
MDS Pharma Services Financial Highlights Third Quarter Year-to-Date
------------------------------- ---------------------- % Change %
Change ---------------- -------- 2007 2006 Reported Organic 2007
2006 Reported
-------------------------------------------------------------------------
$ 62 $ 63 (2%) Early-stage $ 188 $ 198 (5%) 56 50 12% Late-stage
166 139 19%
-------------------------------------------------------------------------
118 113 4% 3% Net revenues 354 337 5% (82) (93) Cost of revenues
(248) (252) Selling, general, (32) (33) and administration (98)
(91) Depreciation and (8) (7) amortization (26) (21) Restructuring
(1) (1) charges (35) (1) - - Equity earnings - (1) Other income - 5
(expenses) (65) 5
-------------------------------------------------------------------------
(5) (16) Operating loss (118) (24) Adjustments: - Restructuring 1 1
charges 35 1 Loss (gain) on sale - (2) of a business 4 (2) - - FDA
provision 61 -
-------------------------------------------------------------------------
Adjusted operating (4) (17) loss (18) (25) Depreciation and 8 7
amortization 26 21
-------------------------------------------------------------------------
$ 4 $ (10) n/m n/m Adjusted EBITDA $ 8 $ (4) n/m
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital $ 21 $ 12 expenditures $ 28 $ 26
-------------------------------------------------------------------------
-------------------------------------------------------------------------
MDS Pharma Services revenues grew 4%, based on solid 12% revenue
growth in our late-stage businesses. Early-stage revenues were down
2% compared to the same quarter last year, as weakness in both
early clinical and bioanalytical revenues more than offset
otherwise strong growth in drug safety and discovery/preclinical
revenues. We have been invited to propose on an increasing number
of generic drug studies and as a result, we have seen some strength
in new orders in the early-stage businesses this quarter. In
addition, bioanalytical revenues were modestly higher on a
quarter-over-quarter basis following three quarters of decline. We
believe that these are positive signs of stability returning to our
early-stage businesses, and an indicator that some of the prior
customer uncertainty created by the FDA issues is being resolved.
Organic revenue growth of 3% reconciles to reported growth as
follows: Revenue
-------------------------------------------------------------------------
Reported revenue growth 4% Impact of currency fluctuations on
revenue growth (1%)
-------------------------------------------------------------------------
Organic revenue growth 3%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average monthly pharmaceutical research backlog was $420 million
for the third quarter of 2007, an increase of 5% when compared to
the average for the third quarter of fiscal 2006. Although we saw
some improvement in bid proposals in the quarter, we also
experienced some delays signing contracts and cancellations. As
noted last quarter, a significant contract cancellation occurred
late in April, reducing our backlog to $425 million at the
beginning of May and we have experienced a further decline in
reported backlog for the third quarter. As of July 31, 2007 our
backlog was $410 million. Average monthly backlog during the
quarter
-------------------------------------------------------------------------
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 Quarter 3 420
-------------------------------------------------------------------------
-------------------------------------------------------------------------
We reported an operating loss of $5 million for MDS Pharma
Services, a 69% reduction compared to the operating loss of $16
million reported for the prior year quarter. We are beginning to
realize cost savings from our previously announced restructuring
actions and we expect to see these savings increase as we complete
more of these restructuring initiatives during the fourth quarter.
The operating loss for 2006 included $6 million of costs related to
the FDA review of our Montreal-area bioanalytical facilities,
partially offset by a $2 million gain from the sale of an
agricultural testing business and $3 million related to a Hurricane
Katrina insurance settlement. Adjusted EBITDA for the third quarter
was $4 million, up substantially from the $10 million adjusted
EBITDA loss reported for the third quarter of 2006. Adjustments for
the 2007 quarter related to restructuring activities that we were
not able to provide for previously. Adjustments in the third
quarter last year comprised restructuring charges and the gain from
the sale of the agricultural testing business. During the third
quarter of 2007, we continued to implement portions of our
restructuring plan, initiating the resizing of our St. Laurent
facility, and announcing the closure of our Sittingbourne, UK
facility. To date, these restructuring activities have resulted in
a headcount reduction of approximately 200 employees and we
utilized $5 million of the restructuring reserve established in the
second quarter of 2007 on these activities. Capital expenditures in
the pharmaceutical services segment were $21 million compared to
$12 million last year. The increase in expenditures in fiscal 2007
related to the expansion of our Phoenix, Arizona early clinical
research facility, and included the purchase of the property for
the facility. Expenditures in 2006 related to an ongoing expansion
in Lyon, France as well as an expansion of the Skeletech site in
Bothell, Washington. Regulatory Review of Montreal Bioanalytical
Operations We made significant progress during the quarter helping
our generic customers to complete the study audits required of them
by the FDA. To date, we have been in contact with sponsors
responsible for approximately 85% of the 217 ANDA submissions under
review. Based on our communication with customers and on the work
done at our facility since January, 150 ANDA submissions have been
subjected to third party audits. The FDA imposed a six-month time
limit on completing this work in their January 10, 2007 letter to
ANDA sponsors and we therefore believe that substantially all of
site audit work for these ANDA studies has now been done. Most of
our efforts at this time are focused on follow-up questions and
supporting the finalization of our customers' remaining audit
reports. 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,
Quebec facilities. As of today it is difficult to estimate the full
extent of the FDA's intent relative to innovator studies. To August
29, 2007, we had assisted on 38 study audits for a smaller number
of NDA submissions for which the FDA has requested additional
review. Also during the quarter, we continued to respond to
questions from customers and from European regulators about the
nature of the work being done for the FDA. At this time, we are not
able to assess the impact of possible European regulatory actions.
We are working closely with these regulators to address their
questions utilizing work prepared in the FDA review. During the
second quarter, we approved and recorded a $61 million provision
for 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. During the third quarter, we utilized $5
million of this reserve for such costs. Based on information
currently available, we believe that the existing provision will be
sufficient to cover any agreements reached with clients for study
audits, study re-runs, and other related costs. As our experience
to date has been that sponsors bill us for costs once their audits
are finalized, we expect the utilization of this reserve to
increase significantly in the fourth quarter and continue into
2008. Full and complete resolution of the bioanalytical regulatory
issues remains a key focus for MDS Pharma Services and MDS. We
remain committed to working cooperatively with the FDA, other
regulators, and our customers to address any regulatory concerns
and to support our customers while they complete the study audits.
Although we 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,
although the FDA has approved certain submissions, there can be no
certainty that, in all cases, the study audits conducted by our
clients will be acceptable to the FDA or other regulators, or that
such regulators 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 Phase I operations. MDS Nordion Financial Highlights Third
Quarter Year-to-Date -------------------------------
---------------------- % Change % Change ---------------- --------
2007 2006 Reported Organic 2007 2006 Reported
-------------------------------------------------------------------------
$ 76 $ 79 (4%) (4%) Net revenues $ 213 $ 221 (4%) (39) (40) Cost of
revenues (110) (111) Selling, general, (13) (13) and administration
(36) (37) Research and (1) (1) development (2) (2) Depreciation and
(4) (4) amortization (10) (11) Other income - (expenses) 4 (9)
-------------------------------------------------------------------------
19 21 Operating Income 59 51 Adjustments: - - MAPLE settlement (3)
9 Gain on sale - - of a business (1) -
-------------------------------------------------------------------------
Adjusted operating 19 21 income 55 60 Depreciation and 4 4
amortization 10 11
-------------------------------------------------------------------------
$ 23 $ 25 (8%) - Adjusted EBITDA $ 65 $ 71 (8%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital $ 3 $ - expenditures $ 5 $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
MDS Nordion revenues were down 4% year-over-year on a reported
basis. Revenues for 2006 included $2 million related to an amount
received associated with the 2004 cancellation of the supply
agreement between MDS Nordion and Biogen Idec. This amount was
included in deferred revenue and recognized in income over 40
months, with the final recognition of this occurring in February
2007. Excluding the impact of this item, revenues were nearly level
year-over-year, as stronger medical isotopes revenues offset
weakness in cobalt therapy unit sales. Organic growth in revenues
and adjusted EBITDA reconcile to reported growth as follows:
Adjusted Revenue EBITDA
-------------------------------------------------------------------------
Reported growth (4%) (8%) Impact of currency fluctuations on growth
- (8%)
-------------------------------------------------------------------------
Organic growth (4%) -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating income was $19 million compared to $21 million last year
in the same period and adjusted EBITDA was $23 million compared to
$25 million for the third quarter of 2006. Both were $2 million
lower due to the contract cancellation referred to above. There
were no adjusting items in the third quarter of either year, and
depreciation and amortization was level, year-over-year. Capital
expenditures in the isotopes segment for the quarter were $3
million, compared to none last year. Spending in the quarter
related primarily to the previously 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. We
experienced continued growth in revenues from TheraSphere in the
quarter compared to last year and demand for this product in Europe
remains encouraging. TheraSphere has been added to treatment
formularies in certain European countries, allowing doctors to
charge for the utilization of the product. We are optimistic that
this development will drive increased revenue from this
radiotherapeutic product. We announced a collaboration with the
University of Ottawa Heart Institute in June to launch a molecular
imaging centre of excellence to advance research in cardiology. We
believe this collaboration represents a unique opportunity for
future expansion of MDS Nordion's molecular imaging business. Also
in the quarter, MDS Nordion was granted the C-TPAT Tier 3
designation for cross-border transportation of dangerous goods.
This designation, which reflects the highest level of security
clearance for transportation of dangerous goods, is a direct result
of MDS Nordion's commitment to quality and safety and to the
strength of our reputation with regulators in this area. MDS
Analytical Technologies Financial Highlights MDS Nordion Financial
Highlights Third Quarter Year-to-Date
------------------------------- ---------------------- % Change %
Change ---------------- -------- 2007 2006 Reported Organic 2007
2006 Reported
-------------------------------------------------------------------------
$ 127 $ 66 92% 11% Net revenues $ 277 $ 184 51% (71) (41) Cost of
revenues (158) (112) Selling, general, (22) (6) and administration
(41) (13) Research and (8) (4) development (19) (9) Depreciation
and (15) (5) amortization (27) (13) Other income (1) - (expenses)
(2) -
-------------------------------------------------------------------------
10 10 Operating income 30 37 Adjustment: Acquisition 11 -
integration 14 -
-------------------------------------------------------------------------
Adjusted operating 21 10 income 44 37 Depreciation and 15 5
amortization 27 13
-------------------------------------------------------------------------
$ 36 $ 15 140% 73% Adjusted EBITDA $ 71 $ 50 42%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital $ 3 $ 2 expenditures $ 8 $ 5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
MDS Analytical Technologies reported revenues of $127 million for
the third quarter of 2007, compared to $66 million for the same
period last year. Fiscal 2007 revenues included $55 million from
the newly acquired Molecular Devices business. The Sciex division
of MDS Analytical Technologies reported 9% revenue growth compared
to the prior-year period. Growth was strong in the Sciex business
for the quarter, especially in the small molecule markets. Our
high-end triple-quad and ion-trap instruments have maintained
strong sales momentum, across all the geographic markets. Good
strength from our core LC/MS products was augmented by strength
from our ICP/MS product line. Service revenues continue to be a
strong driver of growth and profitability for the worldwide
business, building on the large installed base of equipment, and
for our share of operating income from the Applied Biosystems/Sciex
and MDS/PerkinElmer partnerships. End-user revenues for Sciex
products grew 10% in the third quarter compared to the same period
last year. Organic growth in revenues and adjusted EBITDA reconcile
to reported growth as follows: Adjusted Revenue EBITDA
-------------------------------------------------------------------------
Reported growth 92% 140% Growth attributable to the acquisition of
MD (83%) (100%) Impact of currency fluctuations on growth 1% 33%
-------------------------------------------------------------------------
Organic growth 10% 73%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
MD has been a strong contributor to segment revenues and adjusted
EBITDA since we acquired it. Given the strong start, we believe the
division is on track to meet or exceed the expected $190 million in
revenues and $45 - $50 million in adjusted EBITDA in the first full
year of ownership. MD revenues were up 16% compared to the same
three-month period in their fiscal 2006. MDS acquired Molecular
Devices effective March 20, 2007. During the third quarter we
continued our work to finalize the determination of the fair value
of the assets and liabilities acquired and to finalize the
estimates of the costs associated with the integration actions we
plan to take. The purchase price allocation reflected in the July
31, 2007 statement of financial position and the charges recorded
in the period related to the amortization of intangible assets and
fair value increments have been updated compared to those reported
in April 2007 for changes in the preliminary valuation estimates.
These valuations remain preliminary under purchase accounting
guidelines and are subject to change. In our report for the second
quarter we indicated that the fair value increment for inventory
and the value of pre-acquisition backlog were subject to
significant judgment and that they would be amortized as expenses
to income over a short period. In the third quarter, we expensed
$10 million related to these items as acquisition date inventories
were sold and essentially all order backlog from the
pre-acquisition period has been shipped. We also expensed $8
million of amortization related to intangible assets, primarily
related to MD technologies. We expect to finalize the determination
of the purchase accounting by year-end. One particular area of
focus for MDS Analytical Technologies is the integration of our
manufacturing operations in Asia. We now have our plants in
Singapore and China fully operational and an increasing amount of
our product is being manufactured in Asia. Our integration plan
includes consideration of the appropriate mix of products for these
plants to maximize the economic benefits while protecting our
intellectual property and our access to markets in which trade
protectionism is a factor. Operating income was $10 million for the
third quarter of 2007 compared to an equal amount for the third
quarter of 2006. Operating income for the third quarter this year
includes a $4 million operating loss from MD, reflecting the
purchase-related items discussed above. Operating income for Sciex
was $14 million compared to the $10 million reported last year. The
increase in Sciex operating income relates principally to the
higher sales reported by this division. Adjusted EBITDA for the
quarter was $36 million compared to $15 million last year.
Adjustments of $11 million for the quarter reflect costs of the MD
acquisition, including $1 million of costs that we have incurred as
we begin to integrate the businesses and $10 million of non-cash
fair market value adjustments applied to inventory and order
backlog as described above. There were no adjustments in the prior
year. Increased SG&A and R&D expenses in MDS Analytical
Technologies for the third quarter of 2007 reflect the additional
costs associated with the MD business. Depreciation and
amortization expense was also up, reflecting $8 million for
amortization of intangible assets acquired as part of the MD
acquisition, along with depreciation on MD property, plant, and
equipment. Capital expenditures (excluding capitalized development
costs) were $3 million this year and $2 million in the third
quarter last year. The MD division of MDS Analytical Technologies
announced the release of the AquaMax 2000 and AquaMax 4000 series
of microplate washers to add speed and flexibility to microplate
washing for bioanalytical assays. In addition, Sciex and its
partner Applied Biosystems announced the release of a new food
testing method for LC/MS to help address recent concerns about
melamine and cyanuric acid in food. This announcement marks the
launch of the first commercially available method to test for these
contaminants simultaneously. Corporate and Other Financial
Highlights Third Quarter Year-to-Date ---------------
----------------- 2007 2006 2007 2006
------------------------------------------------------------------------
$ (7) $ (9) Selling, general, and administration $ (19) $ (25) (2)
(1) Restructuring charges (9) (3) (1) - Other income (expense) (5)
(3) - - Equity earnings - (3)
------------------------------------------------------------------------
(10) (10) EBITDA (33) (34) Adjustments: - - Gain on sale of
investments (2) - 1 - Mark-to-market adjustments 1 2 - - Valuation
provisions 6 7 2 1 Restructuring charges 9 3
------------------------------------------------------------------------
$ (7) $ (9) Adjusted EBITDA $ (19) $ (22)
------------------------------------------------------------------------
------------------------------------------------------------------------
Corporate SG&A expenses were $7 million for quarter this year,
compared to $9 million in the third quarter of 2006. Expenses for
the prior year included $4 million related to the FDA matter and
our initial SOx certification initiative. Other expenses for the
quarter include a $1 million mark-to-market loss on certain debt
derivatives and $2 million of restructuring, both of which were
treated as adjustments to arrive at adjusted EBITDA. Third quarter
interest expense increased from $4 million in 2006 to $6 million in
2007 and interest income in the quarter was $4 million in both
years. Income Taxes Our effective income tax rate for the quarter
was 27% and below our expected rate of 36% due primarily to the
improved performance of certain of our foreign operations,
including the stronger performance this quarter of the late-stage
business in MDS Pharma Services. This resulted in the use of tax
loss carry forwards in these foreign jurisdictions. The tax benefit
of these losses had not previously been recognized in our accounts.
Discontinued Operations The results of our discontinued businesses
for the third quarter of 2007 and 2006 were as follows: Three
months Nine months to July 31 to July 31
-------------------------------------------------------------------------
2007 2006 2007 2006
-------------------------------------------------------------------------
Net revenues $ - $ 82 $ 95 $ 280 Cost of revenues - (49) (57) (180)
Selling, general and administration - (11) (15) (38) Depreciation
and amortization - (2) - (7) Restructuring charges - - - (1) Equity
earnings - 1 1 2
-------------------------------------------------------------------------
Operating income - 21 24 56 Gain on sale of discontinued operations
(1) - 904 24 Dividend and interest income - - 1 1 Income taxes -
(3) (117) (9) Minority interest - net of tax - (2) (4) (7)
-------------------------------------------------------------------------
Income from discontinued operations - net of tax $ (1) $ 16 $ 808 $
65
-------------------------------------------------------------------------
Basic earnings per share $ (0.01) $ 0.11 $ 5.99 $ 0.45
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Diluted earnings per share $ (0.01) $ 0.11 $ 5.98 $ 0.45
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The results from discontinued operations in the third quarter of
2007 reflect expenses associated with the sale of our diagnostic
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 July 31 October 31 Change 2007 2006
-------------------------------------------------------------------------
Cash, cash equivalents and short-term investments $ 314 $ 388 (19%)
Operating working capital(1) $ 81 $ 104 (22%) 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. Cash
and short-term investments totalled $314 million compared to $322
million at the end of April 2007 and $388 million at the end of
October 2006. The increase in capital expenditures to $28 million
this quarter compared to $17 million in total during the first six
months of 2007 accounts for the decrease in cash balances. As at
the date of this report, we have C$17 million in short-term
investments in asset-backed commercial paper (ABCP) that was
purchased subsequent to July 31, 2007. This ABCP is due to mature
on September 7, 2007 and the issuer has been affected by the recent
liquidity issues in these investment markets. While we have not
received notice of the intentions of the issuer on these
investments, this issuer has not honoured maturities of its other
ABCP since August 14th, and we currently expect that this issuer
will extend the maturity on these investments. At the present time,
we do not have sufficient information to determine whether a
write-down in the value of these investments is required, nor do we
know when we will be able to convert these investments into cash.
Operating working capital of $81 million at the end of the third
quarter was up from $75 million at the end of April, but continues
to be down substantially from the October 2006 balance. The decline
since year-end is primarily because accounts payable and accrued
liabilities as at July 31, 2007 reflect the impact of the FDA and
restructuring provisions recorded in the second quarter. These
provisions are offsetting the addition of operating working capital
associated with MD. We expect that our operating working capital
will rise to normal levels in future quarters as these reserves are
utilized. We expect our operating cash inflows to remain strong
during the balance 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. There were no borrowings under this facility as at
July 31, 2007. We do not believe that the liquidity issues
affecting ABCP markets at this time will have any significant
impact on our liquidity. Cash used in investing activities for
continuing operations totalled $101 million for the third quarter
this year, compared to $152 million for 2006, primarily due to
purchases of short-term investments and capital expenditures. The
$28 million of capital expenditures this year includes higher
levels of capital expenditures in MDS Pharma Services for reasons
noted above. Financing activities (excluding discontinued
operations) generated $5 million of cash in the quarter from the
issuance of shares compared to $1 million in the prior year.
Financing activities this year were limited to small regularly
scheduled payments on certain long-term debt, offset by the
proceeds for shares issued under the MDS employee share ownership
and stock option plans. Cash from financing activities for the
prior year was net of a $4 million dividend payment. 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 our 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 July 31, 2007
was nil. We recorded a $1 million mark-to-market loss on interest
rate swaps during the third quarter of 2007. Capitalization July 31
October 31 2007 2006 Change
-------------------------------------------------------------------------
Long-term debt $ 387 $ 394 (2%) Less: cash and cash equivalents and
short-term investments 314 388 (19%)
-------------------------------------------------------------------------
Net debt 73 6 1100% Shareholders' equity 1,778 1,414 26%
-------------------------------------------------------------------------
Capital employed(1) $ 1,851 $ 1,420 30%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 $7 million
due mostly to principal payments. Changes in the value of the
US-dollar denominated debt, the majority of 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. During the third quarter, we de-designated $70
million of the US-dollar debt as a hedge of our US net investment
in accordance with the provisions of CICA Handbook Section 3865 and
entered into foreign exchange contracts to fix the exchange rate
that we will pay to buy the US dollars required to make the
December debt payments. Gains and losses on the foreign exchange
contracts and on this portion of the US-dollar denominated debt are
offsetting. US GAAP Reconciliation Note 17 to our consolidated
financial statements for the third 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. During the third quarter, we continued the work required
to ascribe a fair value to the MD assets acquired and determined
that in-process R&D (IPR&D) had nil fair value because the
cost to complete such projects exceeded the fair value of the
technology as at March 20, 2007. As a result, the US GAAP deduction
of $11 million reported in the second quarter for IPR&D has
been revised to nil. US GAAP adjustments in the quarter increased
net income from continuing operations by $1 million compared to a
decrease in net income from continuing operations of $3 million
reported for the third quarter last year. The decrease for the
prior year was due principally to deferred development costs.
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 July Apr Jan Oct Quarters 2007 2007 2007 2006
-------------------------------------------------------------------------
Net revenues $ 1,104 $ 321 $ 273 $ 250 $ 260 Operating income
(loss) $ (46) $ 13 $ (80) $ 3 $ 18 Income (loss) from continuing
operations $ (37) $ 8 $ (57) $ (2) $ 14 Net income (loss) $ 804 $ 7
$ 736 $ 14 $ 47 Earnings (loss) per share from continuing
operations Basic and diluted $ (0.27) $ 0.07 $ (0.42) $ (0.02) $
0.10 Earnings (loss) per share Basic and diluted $ 5.85 $ 0.06 $
5.36 $ 0.10 $ 0.33
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(millions of US dollars, except earnings per share)
-------------------------------------------------------------------------
Trailing Four July Apr Jan Oct Quarters 2006 2006 2006 2005
-------------------------------------------------------------------------
Net revenues $ 999 $ 258 $ 242 $ 242 $ 257 Operating income (loss)
$ (9) $ 5 $ 2 $ 23 $ (39) Income (loss) from continuing operations
$ (18) $ 3 $ (2) $ 14 $ (33) Net income (loss) $ 39 $ 19 $ 14 $ 47
$ (41) Earnings (loss) per share from continuing operations Basic
and diluted $ (0.12) $ 0.02 $ (0.01) $ 0.10 $ (0.23) Earnings
(loss) per share Basic and diluted $ (0.27) $ 0.13 $ 0.10 $ 0.33 $
(0.29)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 third quarter marks the first full quarter following
our transition to a global life sciences company - the first full
quarter with MD and without our diagnostics business. We are very
pleased with the results we achieved this quarter. Both MDS
Analytical Technologies businesses delivered strong results in the
third quarter. Efforts to integrate these businesses are tracking
well to plan and we continue to believe that the MD business will
meet or exceed our target revenues of $190 million and adjusted
EBITDA of between $45 million and $50 million in its first 12
months of MDS ownership. Continued growth from these businesses is
expected to be generated, in part, from the new products announced
by both businesses this year and from synergies we expect to
realize as we integrate the businesses and expand our production
capabilities in Asia. As we stated in our report for our second
quarter, 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 Sciex and Molecular Devices businesses to
realize the significant synergies we believe are available to these
businesses. We are pleased with the results from our MDS Pharma
Services business. In the three months ended July 31, 2007, they
delivered their fourth consecutive quarter of sequential
improvement in adjusted EBITDA. They have completed several key
steps in restructuring the business, including the downsizing of
our St. Laurent operation and the transfer of operations from
Sittingbourne to Zurich. Additional actions are underway for
completion by year-end, including the transfer of certain
discovery/preclinical operations from St. Laurent to Bothell, and
central laboratory services from Hamburg to Baillet. These actions
and other restructuring moves will provide significant savings in
the fourth quarter and throughout 2008. As stated earlier, revenue
growth throughout this year has been strong in our late-stage and
preclinical businesses. In our remaining early-stage businesses, we
believe that significant progress has been made completing FDA
related study audits for the ANDA studies. Although uncertainty
remains related to NDA studies and potential EMEA actions, we
currently believe that we have adequate reserves to cover the
expected costs. Our early-stage businesses are also focused on
serving our customers more effectively and we are seeing positive
signs that we are regaining their trust. We have seen an increased
number of invitations to bid on new projects, including some from
customers who left us in 2006. This renewed growth in early-stage,
combined with productivity from restructuring and other efficiency
improvements, is expected to deliver improved profitability in 2008
and beyond. MDS Nordion has continued solid performance so far this
year and has been able to grow both revenues and adjusted EBITDA
after taking into account foreign exchange and the unusual market
conditions that existed in the first half of 2006. New product
developments and new commercial relationships provide opportunities
to expand in the molecular imaging market. We see continued strong
demand for TheraSphere in Europe, and we believe the potential for
this innovative therapy is high. We continue to monitor currency
markets and there has been significant volatility in the value of
the US dollar all year. Although we have hedged a significant
portion of our net US-dollar cash flows from our Canadian-based
businesses this year, currency markets will continue to have an
impact on our reported results. We continue to report organic
measures of revenue and adjusted EBITDA growth to help readers
understand the impact of these market dynamics. We also continue to
monitor the markets in our industry for appropriate acquisition
opportunities. We remain focused on our three businesses and will
pursue only those acquisition opportunities that are reasonably
priced and synergistic with our existing businesses. CONSOLIDATED
STATEMENTS OF FINANCIAL POSITION (UNAUDITED) 2007 2006 As at July
31 with comparatives at October 31 (Revised (millions of US
dollars) Note 7)
-------------------------------------------------------------------------
ASSETS Current Cash and cash equivalents $ 224 $ 253 Short-term
investments 90 135 Accounts receivable 265 229 Unbilled revenue 110
121 Inventories 124 86 Income taxes recoverable 54 42 Prepaid
expenses and other 25 21 Assets held for sale (note 7) 1 196
-------------------------------------------------------------------------
893 1,083 Property, plant and equipment 356 339 Future tax assets 5
37 Long-term investments and other 233 170 Goodwill 784 417
Intangibles 563 338
-------------------------------------------------------------------------
Total assets $ 2,834 $ 2,384
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY Current Accounts payable and
accrued liabilities $ 330 $ 239 Deferred revenue 88 93 Income taxes
payable 54 8 Future tax liabilities 9 - Current portion of
long-term debt 93 20 Liabilities related to assets held for sale
(note 7) - 114
-------------------------------------------------------------------------
574 474 Long-term debt 294 374 Deferred revenue 16 17 Other
long-term obligations 26 23 Future tax liabilities 145 82 Minority
interest 1 -
-------------------------------------------------------------------------
$ 1,056 $ 970
-------------------------------------------------------------------------
Shareholders' equity Share capital (note 5) 499 572 Retained
earnings 930 495 Cumulative translation adjustment n/a 347
Accumulated other comprehensive income (note 4) 349 n/a
-------------------------------------------------------------------------
1,778 1,414
-------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 2,834 $ 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 Nine months to July
31 to July 31
-------------------------------------------------------------------------
2007 2006 2007 2006 (millions of US dollars, (Revised (Revised
except per share amounts) Note 7) Note 7)
-------------------------------------------------------------------------
Net revenues $ 321 $ 258 $ 844 $ 742 Cost of revenues (192) (174)
(516) (475) Selling, general and administration (74) (61) (194)
(166) Research and development (note 8) (9) (5) (21) (11)
Depreciation and amortization (28) (16) (65) (45) Restructuring
charges - net (note 9) (3) (2) (44) (4) Other income (expenses) -
net (note 11) (2) 5 (68) (7) Equity earnings - - - (4)
-------------------------------------------------------------------------
Operating income (loss) 13 5 (64) 30 Interest expense (6) (4) (20)
(11) Dividend and interest income 4 4 18 7
-------------------------------------------------------------------------
Income (loss) from continuing operations before income taxes 11 5
(66) 26 Income taxes recovery (expense) (note 16) (3) (2) 15 (11)
-------------------------------------------------------------------------
Income (loss) from continuing operations 8 3 (51) 15 Income (loss)
from discontinued operations - net of tax (note 7) (1) 16 808 65
-------------------------------------------------------------------------
Net income $ 7 $ 19 $ 757 $ 80
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic earnings (loss) per share (note 10) - from continuing
operations $ 0.07 $ 0.02 $ (0.37) $ 0.11 - from discontinued
operations (0.01) 0.11 5.99 0.45
-------------------------------------------------------------------------
Basic earnings per share $ 0.06 $ 0.13 $ 5.62 $ 0.56
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Diluted earnings (loss) per share (note 10) - from continuing
operations $ 0.07 $ 0.02 $ (0.38) $ 0.11 - from discontinued
operations (0.01) 0.11 5.98 0.45
-------------------------------------------------------------------------
Diluted earnings per share $ 0.06 $ 0.13 $ 5.60 $ 0.56
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(UNAUDITED)
-------------------------------------------------------------------------
Three months Nine months to July 31 to July 31
-------------------------------------------------------------------------
(millions of US dollars) 2007 2006 2007 2006
-------------------------------------------------------------------------
Retained earnings, beginning of period $ 923 $ 438 $ 495 $ 385 Net
income 7 19 757 80 Repurchase of shares - - (318) - Dividends -
cash - (4) (3) (10) Dividends - stock - (1) (1) (3)
-------------------------------------------------------------------------
Retained earnings, end of period $ 930 $ 452 $ 930 $ 452
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME (UNAUDITED)
-------------------------------------------------------------------------
Three Nine months months to to July 31 July 31
-------------------------------------------------------------------------
(millions of US dollars) 2007 2007
-------------------------------------------------------------------------
Net income $ 7 $ 757
-------------------------------------------------------------------------
Other comprehensive income (loss) - net of income tax: Unrealized
gains on derivatives designated as cash flow hedges, net of tax - 4
Reclassification of losses on derivatives designated as cash flow
hedges to net income - (2) Unrealized gains on translation of debt
designated as a hedge of self-sustaining foreign operations, net of
tax 10 (7) Foreign currency translation losses on self-sustaining
foreign operations (14) (18) Translation gains resulting from the
application of US dollar reporting 16 25
-------------------------------------------------------------------------
Other comprehensive income 12 2
-------------------------------------------------------------------------
Comprehensive income $ 19 $ 759
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) Three months Nine months to July 31 to July 31
-------------------------------------------------------------------------
2007 2006 2007 2006 (Revised (Revised (millions of US dollars) Note
7) Note 7)
-------------------------------------------------------------------------
Operating activities Net income $ 7 $ 19 $ 757 $ 80 Income (loss)
from discontinued operations - net of tax (1) 16 808 65
-------------------------------------------------------------------------
Income (loss) from continuing operations 8 3 (51) 15 Adjustments to
reconcile net income to cash provided by operating activities
relating to continuing operations (note 13) Items not affecting
current cash flow 41 17 136 49 Changes in non-cash working capital
balances relating to operations (41) (24) 29 (77)
-------------------------------------------------------------------------
Cash provided by (used in) operating activities of continuing
operations 8 (4) 114 (13) Cash provided by (used in) operating
activities of discontinued operations 1 17 (52) 51
-------------------------------------------------------------------------
9 13 62 38
-------------------------------------------------------------------------
Investing activities Acquisitions (note 6) 2 - (601) - Purchase of
intangibles (1) - (1) - Increase in deferred development charges
(5) (3) (7) (6) Proceeds from MAPLE transaction - - - 24 Purchase
of property, plant and equipment (note 14) (28) (17) (45) (39)
Proceeds on sale of short-term investments 14 - 165 - Purchases of
short-term investments (81) (134) (118) (134) Proceeds on
divestitures - 2 13 2 Other (2) - (2) (16)
-------------------------------------------------------------------------
Cash used in investing activities of continuing operations (101)
(152) (596) (169)
-------------------------------------------------------------------------
Cash provided by investing activities of discontinued operations -
4 929 81
-------------------------------------------------------------------------
Financing activities Repayment of long-term debt (1) - (8) (1)
Decrease in deferred revenue and other long-term obligations 1 - 1
(9) Payment of cash dividends - (4) (3) (10) Issuance of shares 5 5
15 24 Repurchase of shares - - (441) -
-------------------------------------------------------------------------
Cash provided by (used in) financing activities of continuing
operations 5 1 (436) 4
-------------------------------------------------------------------------
Cash used in financing activities of discontinued operations - (1)
(2) (9)
-------------------------------------------------------------------------
Effect of foreign exchange rate changes on cash and cash
equivalents 10 (10) 14 7
-------------------------------------------------------------------------
Decrease in cash and cash equivalents during the period (77) (145)
(29) (48) Cash and cash equivalents, beginning of period 301 321
253 224
-------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 224 $ 176 $ 224 $ 176
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 recorded a cumulative translation adjustment
balance of $347 million as at October 31, 2006. DATASOURCE: MDS
Inc. 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