TORONTO, Dec. 17 /PRNewswire-FirstCall/ -- MDS Inc. (TSX: MDS;
NYSE: MDZ), a leading provider of products and services to the
global life sciences markets, today reported its preliminary and
unaudited fourth quarter and year-end results for the period ended
October 31, 2008. All amounts in this report are preliminary and
unaudited, and do not include the $270 million to $370 million
estimated write-down of MDS Pharma Services goodwill that was
previously announced on December 10, 2008. The Company expects to
file its audited year-end 2008 results, including the MDS Pharma
Services goodwill write-down, with its annual reports in January
2009. For the fourth quarter, MDS reported total revenue of $322
million. Including a $246 million after-tax charge to write off the
MAPLE asset, the Company reported a net loss of $255 million and
loss per share from continuing operations of $2.11. Net revenue was
$295 million and adjusted EBITDA was $37 million, compared with
$307 million and $35 million in the prior year, respectively.
Adjusted earnings per share were $0.02, down from $0.10 in the
prior year. Quarterly Highlights - MDS reported net revenue of $295
million, down 4% from $307 million in the prior year. Excluding the
impact of foreign exchange plus acquisitions and divestitures, net
revenue increased 4%. - MDS delivered adjusted EBITDA of $37
million, up 6% from $35 million in the prior year. - MDS Pharma
Services reported $112 million in net revenue, down from $123
million last year, and $8 million in adjusted EBITDA, up from $1
million in the prior year. - MDS Nordion delivered solid results
with revenue of $84 million, up from $76 million last year.
Adjusted EBITDA was $21 million versus $20 million last year,
including an unrealized embedded derivative charge of $13 million
in 2008 and an unrealized gain of $4 million in 2007. - MDS
Analytical Technologies continued to be impacted by soft demand for
high-end instruments and reported revenue of $99 million and
adjusted EBITDA of $17 million, compared with $108 million and $27
million last year, respectively. - MDS will record a non-cash
after-tax charge of $246 million to write off the net book value of
certain assets related to the MAPLE facilities project. In
addition, the Company expects to record a charge in the range of
$270 million to $370 million to write down MDS Pharma Services
goodwill. - MDS repurchased 1.0 million shares for $12 million
under its Normal Course Issuer Bid during the fourth quarter. As a
result of the reported net loss, driven by the write-down charges,
a debt covenant restricts MDS from further share repurchases for
the foreseeable future. "While 2008 included successes and
disappointments, we have made progress on our improvement
initiatives," said Stephen P. DeFalco, President and Chief
Executive Officer, MDS Inc. "We are taking action to make MDS more
competitive as we head into 2009 and a backdrop of challenging
economic conditions." Operating Segment Results MDS Pharma Services
% Change (millions of U.S. dollars) Q4 2008 Q4 2007 Reported
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Net Revenues: Early-stage 65 66 (2%) Late-stage 47 57 (18%)
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$ 112 $ 123 (9%) Reimbursement revenues 27 20
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Total revenues $ 139 $ 143
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Adjusted EBITDA: $ 8 $ 1 700% 7% 1% -
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For the fourth quarter, MDS Pharma Services net revenue decreased
9% over the prior year. Overall, early-stage revenue was flat with
growth in Phase I and bioanalytical services. This was offset by a
decline in late-stage, which was impacted by customer-driven
delays. Adjusted EBITDA was $8 million, compared with $1 million
last year, and included restructuring savings and a $9 million
improvement related to the impact of foreign exchange. These
benefits were partially offset by inflation and lower revenue. New
business wins of $131 million, compared with $134 million in the
equivalent period last year, resulted in a backlog of $485 million
for the quarter, up 14% from $426 million in the prior year.
Sequentially, new business wins decreased 22% as clients continue
to reprioritize their product pipelines. With more than 40% of the
backlog denominated in currencies outside of the U.S., and a
weakening euro during the quarter, backlog decreased 12%
sequentially. As previously announced, the Company carries out
goodwill testing on an annual basis and has determined that a
write-down of goodwill at MDS Pharma Services is appropriate. This
write-down is due to the decline in the overall stock-market
valuation of the contract-research sector, the uncertain economic
outlook and the delay in profit recovery at MDS Pharma Services.
Following completion of its detailed assessment to determine the
fair value of the business, MDS expects to record a goodwill
write-down in the range of $270 million to $370 million. During the
fourth quarter, MDS Pharma Services moved its Singapore central lab
operations to a new and expanded facility. The new facility has
doubled the previous capacity for sample storage, processing and
safety testing to better serve current and emerging demand for
laboratory research services in the Asia-Pacific region. In
addition, MDS Pharma Services received two Good Clinical Practice
Journal awards for excellence in clinical-trial management. MDS
Nordion % Change (millions of U.S. dollars) Q4 2008 Q4 2007
Reported
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Revenues $ 84 $ 76 11%
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Adjusted EBITDA: $ 21 $ 20 5% 25% 26% -
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MDS Nordion's revenue for the fourth quarter was $84 million,
compared with $76 million last year driven by strength in
sterilization technologies and medical isotopes. In 2008, foreign
exchange and the sale of non-strategic product lines both had a
negative impact on revenue growth. Adjusted EBITDA was $21 million,
up 5% from $20 million last year. Adjusted EBITDA benefited from
strength in high-margin sterilization technologies volumes and from
increased medical isotope demand due to a nuclear reactor shutdown
in Europe. Additional volume realized as a result of the European
reactor shutdown delivered approximately $6 million of incremental
adjusted EBITDA this quarter. MDS Nordion has a long-term contract
to buy cobalt from a Russian supplier. This contract is denominated
in U.S. dollars and, according to U.S. GAAP, creates an embedded
derivative. The pronounced rise in the U.S. dollar during the
fourth quarter of 2008 resulted in a $13 million loss on this
embedded derivative. A $4 million embedded derivative gain was
recorded in the fourth quarter of 2007 on that same contract.
Excluding the impact of these unrealized embedded derivative
charges, adjusted EBITDA more than doubled year over year. During
the fourth quarter, the Company assessed its MAPLE assets and
determined, based on its dispute with Atomic Energy of Canada
Limited (AECL) and the Government of Canada, that a net write-off
of $246 million was appropriate under applicable accounting rules.
This was driven by the difficulty of projecting a specific outcome
for any dispute of this nature. MDS believes that it has a strong
case against AECL and the Government of Canada with respect to the
MAPLE agreement, which the Company continues to actively pursue. In
addition, MDS has determined that its original accounting in 2006
for the MAPLE transaction as an intangible asset was incorrect and
has restated its historical results to report the MAPLE facilities
as construction-in-progress. The MAPLE write-off includes the
impact of this restatement. MDS Analytical Technologies % Change
(millions of U.S. dollars) Q4 2008 Q4 2007 Reported
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Revenues $ 99 $ 108 (8%)
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Adjusted EBITDA $ 17 $ 27 (37%) 17% 25% -
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MDS Analytical Technologies reported $99 million in revenue, down
8% from $108 million in the prior year. The year-over-year decline
was largely driven by lower shipments of mass spectrometers as
end-user revenue decreased 11%. MDS Analytical Technologies
continues to see strength across Asia and in applied markets for
food, water and environmental testing; however, demand for high-end
instruments, particularly in North America and to a lesser extent
Europe, remains soft. Foreign exchange had a negative impact on
revenue of $3 million during the quarter. For the quarter, MDS
Analytical Technologies reported $17 million for adjusted EBITDA,
compared with $27 million last year. Declines were primarily driven
by lower revenues. To better serve our fastest growing markets and
to further improve profitability, MDS Analytical Technologies is
accelerating the transfer of its manufacturing base from North
America to Asia. These actions and others are expected to generate
approximately $7 million in annualized savings. MDS expects to
record a restructuring charge in the first quarter of 2009 of
roughly $5 million. This restructuring is expected to impact
approximately 200 people. During the fourth quarter, MDS Analytical
Technologies introduced a next-generation mass spectrometry
platform with the launch of two of the most advanced mass
spectrometry systems, the AB SCIEX Triple Quad(TM) 5500 and the AB
SCIEX QTRAP(R) 5500. These two new systems provide researchers with
complete workflow solutions that deliver superior functionality,
speed and performance. The systems were both announced and shipped
to customers in the fourth-quarter. Corporate and Other % Change
(millions of U.S. dollars) Q4 2008 Q4 2007 Reported
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Selling, general and administration $ (9) $ (11) 18%
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Adjusted EBITDA $ (9) $ (13) 31%
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Corporate SG&A expenses were $9 million in the fourth quarter
of 2008 down $2 million from the fourth quarter of 2007, primarily
due to foreign exchange gains and lower incentive and stock-based
compensation costs. During the quarter, MDS also recorded $8
million in write-downs for certain long-term investments and
treated these write-downs as adjusting items. New Disclosure and
Delivery Method for Reporting Financial Results MDS has adopted a
new approach to releasing quarterly financial results. The Company
will no longer use the newswires to issue quarterly Management
Discussion and Analysis (MD&A) and financial statements and
notes. For the Company's first, second and third quarters, MD&A
and financial statements and notes will be posted to the Company's
Website at mdsinc.com and filed with the relevant Canadian and U.S.
securities regulators. Commencing this quarter, for fourth quarter
results, a press release will be issued with expanded disclosure.
However, fourth quarter results will no longer be accompanied by an
MD&A and financial statements and notes. A comprehensive
MD&A with financial statements and notes will be provided on a
year-end basis with the Company's Annual Report, Annual Information
Form and Proxy Circular Filings. These documents are expected to be
filed in January 2009 with the relevant securities regulators, and
will also be posted to mdsinc.com. Conference Call MDS will hold a
conference call today at 9:30 a.m. EST to discuss fourth quarter
2008 results. This call will be Webcast live at
http://www.mdsinc.com/ and will also be available in archived
format at
http://www.mdsinc.com/news_events/webcasts_presentations.asp after
the call. About MDS MDS Inc. (TSX: MDS; NYSE: MDZ) is a global life
sciences company that provides market-leading products and services
that our customers need for the development of drugs and diagnosis
and treatment of disease. We are a leading global provider of
pharmaceutical contract research, medical isotopes for molecular
imaging, radiotherapeutics, and analytical instruments. MDS has
more than 5,000 highly skilled people in 29 countries. Find out
more at http://www.mdsinc.com/ or by calling 1-888-MDS-7222, 24
hours a day. Caution Concerning Forward-Looking Statements This
document contains forward-looking statements. Some forward-looking
statements may be identified by words like "expects",
"anticipates", "plans", "intends", "indicates" or similar
expressions. The statements are not a guarantee of future
performance and are inherently subject to risks and uncertainties.
MDS's actual results could differ materially from those expressed
in the forward-looking statements due to these risks and a number
of other factors, including, but not limited to, successful
implementation of structural changes, including restructuring plans
and acquisitions, technical or manufacturing or distribution
issues, the competitive environment for MDS's products and services
, the degree of market penetration of its products and services,
the ability to secure a reliable supply of raw materials, the
impact of our clients' exercising rights to delay or cancel certain
contracts, the strength of the global economy, the stability of
global equity markets, the availability and cost of financing, the
impact of the movement of the U.S. dollar relative to other
currencies, particularly the Canadian dollar and the euro,
uncertainties associated with critical accounting assumptions and
estimates, and other factors set forth in reports and other
documents filed by MDS with Canadian and U.S. securities regulatory
authorities from time to time, including MDS's quarterly and annual
MD&A, annual information form, and annual report on Form 40-F
for the fiscal year ended October 31, 2007 filed with the
Securities & Exchange Commission. Also note that all financial
data is now shown on a U.S. GAAP basis. MDS converted to U.S. GAAP
reporting with the filing of the Company's 2007 Annual Report and
financial statements on January 29, 2008. Use of Non-GAAP Financial
Measures The use of non-GAAP measures including terms such as net
revenue, adjusted EBITDA, adjusted EPS, new orders and backlog are
used to explain the operating performance of the Company. These
terms are not defined by GAAP and MDS's use may vary from that of
other companies. MDS uses certain non-GAAP measures so that
investors and analysts have a better understanding of the
significant events and transactions that have had an impact on
results or may have an impact on MDS's financial outlook. MDS
provides a description of these non-GAAP measures and a
reconciliation of these non-GAAP measures for actual results to
GAAP financial results in its MD&A and Annual Report. MDS INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (PRELIMINARY AND
UNAUDITED) Results excluding the estimated $270 million - $370
million write-down of MDS Pharma Services goodwill As at October 31
2007 (millions of U.S. dollars) 2008 Restated
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ASSETS Current assets Cash and cash equivalents $ 120 $ 222
Restricted cash 13 13 Short-term investments - 102 Accounts
receivable, net 264 287 Notes receivable 72 - Unbilled revenue 86
99 Inventories, net 85 128 Income taxes recoverable 57 54 Current
portion of deferred tax assets 43 45 Prepaid expenses and other 17
22 Assets held for sale 6 1
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Total current assets 763 973 Property, plant and equipment, net 301
975 Deferred tax assets 58 4 Long-term investments and other assets
127 290 Goodwill(1) 772 782 Intangible assets, net 155 219
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Total assets $ 2,176 $ 3,243
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LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts
payable and accrued liabilities $ 267 $ 384 Current portion of
deferred revenue 79 71 Income taxes payable 14 57 Current portion
of long-term debt 19 94 Current portion of deferred tax liabilities
17 10
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Total current liabilities 396 616 Long-term debt 263 451 Deferred
revenue 10 17 Other long-term obligations 31 30 Deferred tax
liabilities 70 188
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Total liabilities 770 1,302
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Shareholders' equity Common shares 488 493 Additional paid-in
capital 76 72 Retained earnings(1) 621 880 Accumulated other
comprehensive income(1) 221 496
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Total shareholders' equity 1,406 1,941
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Total liabilities and shareholders' equity $ 2,176 $ 3,243
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(1) Subject to finalization of MDS Pharma Services goodwill
impairment charge. MDS INC. CONSOLIDATED STATEMENTS OF OPERATIONS
(PRELIMINARY AND UNAUDITED) Results excluding the estimated $270
million - $370 million write-down of MDS Pharma Services goodwill
Three months ended Years ended October 31 October 31
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2007 2007 (millions of U.S. dollars) 2008 Restated 2008 Restated
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Revenues Products $ 161 $ 160 $ 636 $ 564 Services 134 147 579 555
Reimbursement revenues 27 20 100 91
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Total revenues 322 327 1,315 1,210
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Costs and expenses Direct cost of products (91) (97) (387) (360)
Direct cost of services (83) (83) (374) (338) Reimbursed expenses
(27) (20) (100) (91) Selling, general and administration (77) (84)
(279) (265) Research and development (14) (20) (75) (68)
Depreciation and amortization (25) (23) (100) (79) Write-off of
MAPLE facilities (501) - (501) - Forgiveness of MAPLE debt 160 -
160 - Asset impairments - - (11) - Restructuring charges - net (2)
4 (13) (37) Change in fair value of embedded derivatives (13) 4
(14) 4 Impairment of goodwill(1) TBD - TBD - Other income
(expenses) - net (1) (7) 7 (84)
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Total costs and expenses (674) (326) (1,687) (1,318)
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Operating (loss) income from continuing operations(1) (352) 1 (372)
(108) Interest expense (7) (4) (18) (15) Interest income 4 7 17 25
Change in fair value of interest rate swaps - 1 2 1 Equity earnings
11 13 49 53
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(Loss) income from continuing operations before income taxes(1)
(344) 18 (322) (44) Income tax (expense) recovery - current (15)
(9) (39) 25 - deferred 104 8 128 (6)
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(Loss) income from continuing operations(1) (255) 17 (233) (25)
Income (loss) from discontinued operations - net of income tax -
(2) - 806
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Net (loss) income(1) $ (255) $ 15 $ (233) $ 781
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Basic (loss) earnings per share - from continuing operations $
(2.11) $ 0.14 (1.91) $ (0.19) - from discontinued operations - $
(0.01) - 6.12
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Basic (loss) earnings per share(1) $ (2.11) $ 0.13 $ (1.91) $ 5.93
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Diluted (loss) earnings per share - from continuing operations $
(2.11) $ 0.14 $ (1.91) (0.19) - from discontinued operations -
(0.01) - 6.11
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Diluted (loss) earnings per share(1) $ (2.11) $ 0.13 $ (1.91) $
5.92
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(1) Subject to finalization of MDS Pharma Services goodwill
impairment charge. TBD = To Be Determined MDS INC. CONSOLIDATED
STATEMENTS OF CASH FLOWS (PRELIMINARY AND UNAUDITED) Results
excluding the estimated $270 million - $370 million write-down of
MDS Pharma Services goodwill Three months ended Years ended October
31 October 31
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2007 2007 (millions of U.S. dollars) 2008 Restated 2008 Restated
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Operating activities Net (loss) income(1) $ (255) $ 15 $ (233) $
781 Less: Income (loss) from discontinued operations - net of tax -
(2) - 806
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Income (loss) from continuing operations (255) 17 (233) (25)
Adjustments to reconcile net income to cash provided by operating
activities relating to continuing operations Items not affecting
current cash flow(1) 274 (9) 331 181 Net changes in non-cash
working capital balances relating to operations 34 63 (108) 22
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Cash provided by (used in) operating activities of continuing
operations 53 71 (10) 178 Cash used in operating activities of
discontinued operations - (4) - (56)
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53 67 (10) 122
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Investing activities Acquisitions - 1 (18) (600) Purchases of
property, plant and equipment (15) (28) (56) (71) Proceeds on sale
of property, plant and equipment - 4 2 4 Proceeds from sale of
businesses and investments - - 23 13 Proceeds on sale of short-term
investments - - 101 165 Purchases of short-term investments - - -
(118) (Increase) decrease in restricted cash 2 (2) - (5) Other -
(13) - (15)
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Cash provided by (used in) investing activities of continuing
operations (13) (38) 52 (627) Cash provided by investing activities
of discontinued operations - - - 929
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(13) (38) 52 302
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Financing activities Decrease in bank indebtedness (15) - - -
Repayment of long-term debt (8) (10) (89) (18) Decrease in deferred
revenue and other long-term obligations - (3) - (2) Payment of cash
dividends - - - (3) Issuance of shares 1 - 7 15 Repurchase of
shares (12) - (44) (441)
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Cash used in financing activities of continuing operations (34)
(13) (126) (449) Cash used in financing activities of discontinued
operations - - - (2)
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(34) (13) (126) (451)
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Effect of foreign exchange rate changes on cash and cash
equivalents (16) (4) (18) 10
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Net (decrease) increase in cash and cash equivalents during the
period (10) 12 (102) (17) Cash and cash equivalents, beginning of
period 130 210 222 239
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Cash and cash equivalents, end of period $ 120 $ 222 $ 120 $ 222
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(1) Subject to finalization of MDS Pharma Services goodwill
impairment charge. KEY QUARTERLY DISCLOSURES: (PRELIMINARY AND
UNAUDITED) Results excluding the estimated $270 million - $370
million write-down of MDS Pharma Services goodwill MDS Inc.
Consolidated operating highlights and reconciliation of
consolidated adjusted EBITDA (millions of U.S. dollars) Fourth
Quarter Year-To-Date -----------------------
----------------------- 2008 2007 2008 2007
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322 327 Total revenues 1,315 1,210 (27) (20) Reimbursement revenues
100 91
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$ 295 $ 307 Net revenues $ 1,215 $ 1,119
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Income (loss) from (255) 17 continuing operations(1) (233) (25)
(89) 1 Income tax expense (recovery) (89) (19) 3 (3) Net interest
expense (income) 1 (10) Mark-to-market on interest - (1) rate swaps
(2) (1) 25 23 Depreciation and amortization 100 79
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(316) 37 EBITDA (223) 24 2 (4) Restructuring charges, net 15 37 - -
Asset impairments 11 - 8 2 Valuation provisions 11 8 Loss (gain) on
sale of a - (5) business/investment 3 (4) (Reversal) provision for
- - FDA-related costs (10) 61 2 5 Acquisition integration 4 19
MAPLE write-off and 341 - forgiveness of debt 341 -
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$ 37 $ 35 Adjusted EBITDA $ 152 $ 145
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13% 11% Adjusted EBITDA margin 13% 13%
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(1) Subject to finalization of MDS Pharma Services goodwill
impairment charge. Consolidated net revenues, which exclude
reimbursement revenue, were down 4% on a reported basis in the
fourth quarter of 2008 with declines at MDS Pharma Services and MDS
Analytical Technologies offsetting an increase at MDS Nordion. On a
year over year basis, foreign exchange impacts decreased net
revenue in the fourth-quarter by approximately $13 million and the
sale of certain product lines within MDS Nordion reduced revenue by
roughly $10 million. Excluding the impact of foreign exchange plus
acquisitions and divestitures, net revenue increased 4%. The net
loss from continuing operations, excluding the expected 2008 MDS
Pharma Services goodwill write-down estimated at $270 million to
$370 million, for the fourth quarter of 2008 was $255 million,
compared with income of $17 million last year. Primary drivers for
this decline include the MAPLE write-off of $246 million, $8
million of long-term investment write-downs and a $2 million
in-process R&D expense related to a technology acquisition. The
fourth quarter of 2007 included $5 million of acquisition and
integration costs associated with the Molecular Devices Corporation
acquisition; a $4 million reduction in restructuring relating to
employees who left voluntarily prior to their planned termination;
a $5 million gain resulting from the bankruptcy proceeds of Protana
Inc.; and a $2 million provision related to our investment in
asset-backed commercial paper. Note the above does not include the
pending fourth quarter write-down of MDS Pharma Services goodwill.
The items listed above were treated as adjusting items in
calculating adjusted EBITDA. Adjusted EBITDA of $37 million in the
fourth quarter of 2008 was up $2 million from the fourth quarter of
2007. On a year-over-year basis, foreign exchange gains from the
revaluation of certain assets and liabilities resulted in a $20
million increase in adjusted EBITDA, which was largely offset by a
$17 million reduction due to losses on embedded derivatives.
Excluding foreign exchange and embedded derivative impacts, higher
cobalt shipment and medical isotope demand increased adjusted
EBITDA at MDS Nordion, which was offset by declines at both MDS
Analytical Technologies and MDS Pharma Services primarily as a
result of lower revenue. Adjusted net income and adjusted earnings
per share reflect the adjustments described above on an after-tax
basis. Earnings Per Share (excluding the estimated $270 million -
$370 million write-down of MDS Pharma Services goodwill) Fourth
Quarter Year-To-Date
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(U.S. dollars) 2008 2007 2008 2007
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Basic earnings (loss) per share from continuing operations - as
reported(1) $ (2.11) $ 0.14 $ (1.91) $ (0.19) Adjusted for (after
tax): Restructuring charges, net 0.01 (0.02) 0.08 0.19 FDA-related
provision - - (0.06) 0.31 Asset impairment - - 0.07 - Valuation
provisions 0.07 0.01 0.09 0.06 Mark-to-market on interest rate
swaps - (0.01) (0.02) (0.01) Loss (gain) on sale of business and
long-term investments - (0.04) 0.01 (0.02) Acquisition integration
and in-process R&D 0.02 0.02 0.02 0.09 MAPLE write-off and
forgiveness of debt 2.03 - 2.02 - Tax rate changes - - (0.09) -
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Adjusted EPS $ 0.02 $ 0.10 $ 0.21 $ 0.43
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(1) Subject to finalization of MDS Pharma Services goodwill
impairment charge. Income from Continuing Operations (excluding the
estimated $270 million - $370 million write-down of MDS Pharma
Services goodwill) Fourth Quarter Year-To-Date
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(U.S. dollars) 2008 2007 2008 2007
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Income (loss) from continuing operations - as reported(1) $ (255) $
17 $ (233) $ (25) Adjusted for (after tax): Restructuring charges,
net 1 (2) 10 25 FDA-related provision - - (7) 41 Asset impairment -
- 8 - Valuation provisions 8 1 11 8 Mark-to-market on interest rate
swaps - (1) (2) (1) Loss (gain) sale of business and long-term
investments - (5) 1 (3) Acquisition integration and in-process
R&D 2 2 3 12 MAPLE write-off and forgiveness of debt 246 - 246
- Tax rate changes - - (11) -
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Adjusted income from continuing operations $ 2 $ 12 $ 26 $ 57
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(1) Subject to finalization of MDS Pharma Services goodwill
impairment charge. MDS Pharma Services Backlog Table (Prior period
backlog amounts have been recalculated per note below) Previously
Reported New Period-End Period-End Orders Orders Backlog
Adjustments Backlog
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Fiscal 2007 - Quarter 1 159 472 24 496 Quarter 2 103 428 35 463
Quarter 3 119 408 37 445 Quarter 4 134 375 51 426 Fiscal 2008 -
Quarter 1 177 395 53 448 Quarter 2 165 431 65 496 Quarter 3 169 486
65 551 Quarter 4 131 485
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In the fourth quarter of 2008, the Company identified certain
adjustments related to the calculation of MDS Pharma Services order
backlog which resulted in an increase to the third quarter 2008
ending backlog of approximately $65 million. The increase in ending
backlog was a result of improper calculation of foreign exchange
impacts and the exclusion of certain orders or portions of orders.
New orders of $131 million in the fourth quarter of 2008 were down
2% from the fourth quarter of 2007, primarily due to lower orders
in preclinical early-stage services. Compared with the fourth
quarter of 2007, period-end backlog was up 14% driven by higher new
order wins, particularly in the first three quarters of 2008, which
were partially offset by a foreign exchange revaluation due to a
decline in the euro at the end of 2008, compared with the end 2007.
Period-ending backlog declined $66 million from the third quarter
of 2008, primarily driven by the impact of foreign exchange due to
a weaker euro in the fourth quarter and a moderate level of
cancellations. MDS Pharma Services Goodwill During the annual
fourth-quarter evaluation of goodwill, MDS determined that the
carrying value of its MDS Pharma Services reporting unit exceeded
its estimated fair value, indicating that its goodwill was
impaired. The Company believes that the decline in overall contract
research sector's market valuations, ongoing economic uncertainty
and the delay in profit recovery at its MDS Pharma Services
business are principal factors that drive the decline in its
estimated fair market value as compared with its book value. The
Company is currently performing the second step of the goodwill
impairment test for its MDS Pharma Services business. This involves
allocating the estimated fair value of the reporting unit to all of
its assets, including intangible assets regardless of whether they
are recorded, and liabilities other than goodwill and comparing the
residual amount to the carrying value of goodwill. The Company is
in the process of finalizing its calculations and, at this time,
believes that the goodwill impairment will be in the range of $270
million to $370 million. The final goodwill impairment charge will
be incorporated into MDS's 2008 year-end reports which are expected
to be filed in January 2009. Restated Results MDS has reviewed its
accounting for the 2006 MAPLE transaction which resulted from a
mediated dispute with AECL, and has determined that the original
accounting treatment was not correct. Instead, the transaction
should have been accounted for as a construction-in-progress, and
when completed, as a capitalized lease over the estimated 40-year
useful life of the MAPLE facilities. Under lease accounting, the
$356 million incurred to build the MAPLE reactors prior to their
transfer to AECL have been reclassified as a
construction-in-progress and no gain or loss was recorded. As a
result, the $36 million pre-tax loss and associated income taxes
previously reported in 2006 have been reversed and the 2007 balance
sheet has been restated. From 2006 to 2008, $147 million of
additional costs incurred by AECL in their efforts to complete the
project were recorded in construction-in-progress and a
corresponding amount was recorded as a long-term non-cash financing
liability. In addition, $25 million of implicit interest expense
associated with MDS construction costs during the period should
have been capitalized, resulting in an increase in net income in
each period subsequent to the 2006 transaction with AECL. Prior to
the write-off of the MAPLE facilities in the fourth quarter 2008,
the restatement increases net assets approximately $38 million and
2008 net income by about $4 million. Selected Line Items from
Consolidated Statement of Financial Position (excluding the
estimated $270 million - $370 million write-down of MDS Pharma
Services goodwill) October 31, 2008 October 31, 2007
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Previously (millions of U.S. dollars) Reported Reported Adjustments
Restated
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ASSETS Property, plant and equipment $ 301 $ 386 $ 589 a $ 975
Intangible assets 155 583 (364)b 219 Other(1) 1,720 2,049 - 2,049
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Total assets 2,176 3,018 225 3,243
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LIABILITIES AND SHAREHOLDERS' EQUITY Long-term debt $ 263 $ 290 $
161 c $ 451 Deferred tax liabilities 70 168 20 d 188 Retained
earnings(1) 621 842 38 e 880 Accumulated other comprehensive
income(1) 221 490 6 496 Other 1,001 1,228 - 1,228
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Total liabilities and shareholders' equity $ 2,176 $ 3,018 $ 225 $
3,243
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(1) Subject to finalization of MDS Pharma Services goodwill
impairment charge. Notes for adjustments (a) Recording of
construction-in-progress and capitalized interest for capital lease
accounting: $589 million (b) Reversal of intangible assets for
long-term supply agreement recognized in 2006: $(364) million (c)
Recording of financial liability relating to lease accounting: $161
million (d) Deferred tax liabilities relating to capitalized
interest and reversal of loss on non-monetary transaction: $20
million (e) Fiscal 2007 P&L adjustment for capitalized interest
and taxes: $8 million Fiscal 2006 P&L adjustment for reversal
of loss on non-monetary transaction, capitalized interest and
taxes: $30 million Total impact on retained earnings as of October
31, 2007: $38 million Selected Line Items from Consolidated
Statements of Operations (excluding the estimated $270 million -
$370 million write-down of MDS Pharma Services goodwill)
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Fourth Quarter October 31, Fourth Quarter 2008 October 31, 2007
-------------------------------------------------------------------------
Prev- iously (millions of U.S. dollars) Reported Reported Adj.
Restated
-------------------------------------------------------------------------
Revenue $ 322 $ 327 $ 327 Costs and expenses (674) (326) (326)
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Operating loss from continuing operations (352) 1 1 Interest
expense (7) (7) 3 e (4) Interest income 4 7 7 Change in fair value
of interest rate swaps - 1 1 Equity earnings 11 13 13 Income tax
(expense) recovery - current (15) (9) (9) - deferred 104 9 (1)e 8
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Income (loss) from continuing operations(1) (255) 15 2 17
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Income (loss) from discontinued operations - (2) (2)
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Net (Loss) Income(1) $ (255) $ 13 $ 2 $ 15
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Basic (loss) earnings per share from continuing operations(1)
(2.11) 0.12 0.02 0.14 from discontinued operations - (0.01) -
(0.01)
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Basic (loss) earnings per share (2.11) 0.11 0.02 0.13
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Diluted (loss) earnings per share from continuing operations(1)
(2.11) 0.12 0.02 0.14 from discontinued operations - (0.01) -
(0.01)
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Diluted (loss) earnings per share $ (2.11) $ 0.11 0.02 $ 0.13
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Year- to-Date October 31, Year-To-Date 2008 October 31, 2007
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Prev- iously (millions of U.S. dollars) Reported Reported Adj.
Restated
-------------------------------------------------------------------------
Revenue $ 1,315 $ 1,210 $ 1,210 Costs and expenses (1,687) (1,318)
(1,318)
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Operating loss from continuing operations (372) (108) (108)
Interest expense (18) (27) 12 e (15) Interest income 17 25 25
Change in fair value of interest rate swaps 2 1 1 Equity earnings
49 53 53 Income tax (expense) recovery - current (39) 25 25 -
deferred 128 (2) (4)e (6)
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Income (loss) from continuing operations(1) (233) (33) 8 (25)
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Income (loss) from discontinued operations - 806 806
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Net (Loss) Income(1) $ (233) $ 773 $ 8 $ 781
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Basic (loss) earnings per share from continuing operations(1)
(1.91) (0.25) 0.06 (0.19) from discontinued operations - 6.12 -
6.12
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Basic (loss) earnings per share (1.91) 5.87 0.06 5.93
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Diluted (loss) earnings per share from continuing operations(1)
(1.91) (0.25) 0.06 (0.19) from discontinued operations - 6.11 -
6.11
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Diluted (loss) earnings per share $ (1.91) $ 5.86 0.06 $ 5.92
-------------------------------------------------------------------------
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(1) Subject to finalization of MDS Pharma Services goodwill
impairment charge. Notes for adjustments (a) Recording of
construction in progress and capitalized interest for capital lease
accounting: $589 million (b) Reversal of intangible assets for
long-term supply agreement recognized in 2006: $(364) million (c)
Recording of financial liability relating to lease accounting: $161
million (d) Deferred tax liabilities relating to capitalized
interest and reversal of loss on non-monetary transaction: $20
million (e) Fiscal 2007 P&L adjustment for capitalized interest
and taxes: $8 million Fiscal 2006 P&L adjustment for reversal
of loss on non-monetary transaction, capitalized interest and
taxes: $30 million Total impact on retained earnings as of October
31, 2007: $38 million Write-off of MAPLE facilities In the fourth
quarter, MDS assessed the MAPLE facilities net assets in light of
its dispute with AECL and the Government of Canada, and determined
that a net write-off of $246 million was appropriate under
applicable accounting rules, given the difficulty of projecting a
specific outcome for any dispute of this nature. After restating
the MAPLE facilities transaction, the write-off includes $501
million of construction-in-progress and $160 million of long-term
financing liabilities. This write-off also resulted in the
recognition of $95 million of deferred tax assets. Debt Covenants
Impact on Normal Course Issuer Bid MDS long-term senior unsecured
notes, which mature in several tranches up to 2014, contain a
covenant that restricts the Company's use of cash for certain
purposes if cumulative net income from the date of issuance of the
notes falls below a predefined amount. The restrictions on the use
of cash include the repurchase of shares, payment of dividends and
investments in businesses that the Company does not control. While
MDS had no plans to pay dividends or invest in non-controlled
businesses, the Company has repurchased shares in the past two
years. In 2008, MDS purchased 2.9 million shares for $44 million
under its Normal Course Issuer Bid. In 2007, MDS used $441 million
to purchase 22.8 million shares under its substantial issuer bid.
With the write-off of certain MAPLE net assets and the expected
write-down of MDS Pharma Services goodwill, its cumulative net
income is expected to be below the amount defined in the covenant.
At this time, the Company cannot determine when it will overcome
this restriction. Guidance (excluding the estimated $270 million -
$370 million write-down of MDS Pharma Services goodwill)
-------------------------------------------------------------------------
2008 (millions of U.S. Preliminary dollars, except per 2007
September 2008 Unaudited share amount) Actual Results Guidance
Results
-------------------------------------------------------------------------
Total revenue $ 1,210 $ 1,330 - 1,350 $ 1,315 Net revenue $ 1,119 $
1,230 - 1,250 $ 1,215 Adjusted EBITDA $ 145 $ 160 - 170 $ 152
Adjusted EPS $ 0.43 $ 0.27 - 0.33 $ 0.21 Income (loss) from
continuing operations(1) $ (25) $ 18 - 28 $ (233) Basic EPS(1) $
(0.19) $ 0.15 - 0.23 $ (1.91) Capital expenditures $ 71 $ 50 - 60 $
56 Effective tax rate(1) 43% 10% - 20% 28%
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(1) Subject to finalization of MDS Pharma Services goodwill
impairment charge. Given the impact of the MAPLE write-off and the
expected write-down of MDS Pharma Services goodwill, MDS expects
the loss from continuing operations and the loss per share to be
significantly below its annual guidance range. These write-offs are
also expected to have a significant impact on the Company's 2008
effective tax rate. The table above compares preliminary unaudited
2008 results, excluding the write-down of MDS Pharma Services
goodwill with the annual guidance MDS provided in September, 2008.
An updated comparison of audited 2008 results to annual guidance
will be included in the Company's MD&A which is expected to be
filed in January 2009. The Company's preliminary full-year
performance on total revenue and net revenue is expected to be
below the low end of its September 2008 guidance by $15 million as
a result of impact of foreign exchange from the strengthening of
the U.S. dollar in the latter part of the fourth quarter of 2008,
lower than expected demand for high-end instruments at MDS
Analytical Technologies and lower revenue at MDS Pharma Services as
a result of higher-than-expected, customer-driven project delays
and cancellations. Preliminary adjusted EBITDA and adjusted EPS are
expected to be $152 million and $0.21, below the low end of the
Company's guidance range by $8 million and $0.06, respectively.
Excluding the impact of the significant strengthening of the U.S.
dollar in the latter part of the fourth quarter of 2008, which
resulted in a $13 million loss on embedded derivatives and a $9
million gain from the revaluation of certain assets and
liabilities, MDS's results are expected to be $4 million below
guidance primarily as a result of the shortfalls in revenue at MDS
Analytical Technologies and MDS Pharma Services as described above.
Preliminary 2008 capital expenditures are expected to be $56
million and within the guidance range MDS provided in September
2008. In 2008, MDS provided annual guidance to facilitate the
transition to U.S. GAAP. Moving forward, the Company does not
intend to issue guidance. DATASOURCE: MDS Inc. CONTACT: Investor
Inquiries: Kim Lee, (416) 213-4721, ; Media Inquiries: Janet Ko,
(416) 213-4167,
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