MDS Reports Fiscal 2003 Results Global health and life sciences
company reports strong earnings TORONTO, Dec. 11
/PRNewswire-FirstCall/ -- MDS Inc. (TSX: MDS, NYSE: MDZ), the
global health and life sciences company, today announced its fourth
quarter and full year 2003 financial results. "This was a year
focused on making changes to allow us to manage our businesses in a
more efficient and effective way at MDS. We maintained earnings
growth in fiscal 2003 through our market leading positions. We are
well into the implementation phase on a number of key initiatives
that will contribute to improved performance in 2004 and beyond,"
said John Rogers, President & CEO. "For the coming year, we
anticipate improvement across our entire business; but in
particular an improvement in our pharmaceutical research services
business, improved revenues from our increased cobalt supply, and
continued success in our analytical instruments business.
Additionally, we are well positioned for new opportunities for
organic and acquisitive growth in a number of growing markets,"
Rogers continued. Fiscal Year 2003 ---------------- Fiscal 2003
full year revenues increased to $1.8 billion, a 1% increase over
the prior year. Operating income from continuing operations and
before taking into account unusual items which include the
restructuring charges, unusual gains, and valuation provisions,
increased by 7% to $235 million and earnings per share (EPS) from
continuing operations and before unusual items (see table) grew by
11% to $0.89. The Company significantly improved its cash position
in 2003, increasing its cash from $184 million in 2002 to $260
million in 2003. Our fiscal 2003 results have largely been
sheltered from the impact of the weakening US dollar and this
carried into the fourth quarter. Our strong hedge position has
enabled us to maintain an effective rate for exports this year that
is only slightly below the rate realized in 2002. Unusual items in
2003 included the following pre-tax items: valuation provisions
($77 million); restructuring charges ($28 million); gain on patent
suit ($39 million); and a gain on sale of businesses ($10 million).
The prior year results included a pre-tax loss of $7 million
resulting from the sale of a business. Fiscal 2003 net income and
EPS were positively impacted in the fourth quarter by the release
of tax reserves that are no longer required due to improved
operating results in Europe and the resolution of other tax
uncertainties. In the fourth quarter of 2003, the Company began to
account for its generic radiopharmaceutical business as a
discontinued operation. For fiscal 2003, this business generated
revenues of $15 million and a loss of $22 million, including
provisions for shutdown costs. Operating losses in our proteomics
business were reduced to $33 million in 2003 from $52 million in
2002. The impact on EPS from this business was $0.24 in 2003 as
compared to $0.27 in 2002. Beginning in 2003, we are no longer able
to tax-effect the results of this business, whereas fiscal 2002 EPS
reflected a $10 million tax recovery from the MDS Proteomics
losses. Fourth Quarter -------------- Fourth quarter 2003 revenues
declined 5% to $449 million. Excluding the impact of divested
businesses and adjusting for strong cobalt revenues in Q4 of last
year, this decline is attributable to lower diagnostics and
pharmaceutical research services revenues largely offset by growth
in our analytical instrument business. Operating income before
unusual items increased 20% to $59 million due to continued strong
performance in our analytical instruments business and reduced
spending in our proteomics business, partly offset by lower
operating income in our US diagnostics business. The fourth quarter
results include $28 million of restructuring charges and $22
million in shutdown costs related to our generic
radiopharmaceutical business. These special pre-tax charges total
$50 million compared to the previously announced range of $45-55
million. EPS from continuing operations and before unusual items
for the fourth quarter, improved to $0.26 from $0.18 in 2002 due to
tax adjustments and lower expenditures in our proteomics business.
During the quarter, the Company announced a number of key
initiatives targeted at strengthening our growth and financial
performance over the next several years including: - The reduction
in overall positions at MDS by 450 people over 2004. - A plan to
exit the generic radiopharmaceutical business in Fleurus, Belgium.
- The intent to improve performance in the US diagnostic business,
while looking at how the Company can best participate in the
market. - Revised management compensation plans to incorporate an
expanded set of financial metrics to further align them with
shareholder interests, - A seven-year outsourcing agreement with
IBM, - The implementation of an enterprise-wide common business
system with Oracle, and - The creation of MDS Enterprise Services,
which will provide support services to the entire MDS organization.
The expectation is that operating costs will be reduced by
approximately $10 million in fiscal 2004 and $40 million in fiscal
2005. Life Sciences ------------- Revenues for 2003 in the Life
Sciences segment increased 3% to $1,083 million from $1,053 million
in fiscal 2002. Operating income for the year was $211 million
before restructuring charges, up 3% from 2002. For the quarter,
revenues decreased to $275 million from $283 million in the same
quarter last year. Operating income, excluding the impact of
restructuring charges, increased 13% to $51 million from $45
million. Our analytical instruments business continues to generate
strong revenue growth, improving 19% compared to the same quarter
last year. Revenues for the isotope business were down $12 million
this quarter relative to last year, reflecting the impact of the
sale of our Oncology Software Solutions business, which generated
$10 million in the fourth quarter of last year, as well as a strong
fourth quarter in our cobalt business in 2002. Cobalt inventories
have now been replenished and we expect stronger cobalt sales
beginning in the first quarter of 2004. Revenues from our
pharmaceutical research services business were down 5% compared to
the same period last year. Key announcements for the quarter: - The
exit of the generic radiopharmaceutical business located in
Fleurus, Belgium. As a result of this decision, the generic
radiopharmaceuticals business is now treated as a discontinued
operation. - Our isotopes business licensed technology to NTP
Radioisotopes, a subsidiary of the South African Nuclear Energy
Corporation. NTP will become a contract supplier of yttrium-90 to
MDS Nordion. - Our isotopes business licensed X-ray blood
irradiation technology from Rad Source Technologies, Inc. to
provide a full breadth of products in the blood irradiation
business. - Our analytical instruments business signed additional
distribution agreements to deliver the new NanoLC system in the
United Kingdom, Sweden, Germany and Canada. - Our pharmaceutical
research business and Iconix Pharmaceuticals, Inc. introduced
Pharmotif(TM) Solutions, a chemogenomics profiling service for
evaluating novel drug candidates. - Our pharmaceutical research
business expanded client access to data on their studies to
pharmacology and late stage clinical trials through MDS Pharma
Express(TM), an electronic data delivery system. After the quarter,
the Centers for Disease Control and Prevention (CDC) agreed to
purchase 36 ELAN DRC ICP-MS systems. These systems, developed
jointly by MDS Sciex and PerkinElmer, will be delivered to state
health laboratories to upgrade their preparedness and response to
bioterrorism, outbreaks of infectious disease, and other public
health threats and emergencies in the US. Health ------ Revenues
for the year in the Health segment decreased slightly to $715
million from $721 million in fiscal 2002, reflecting the impact of
the sale of MDS Matrx in the second quarter of 2002. MDS Matrx
contributed $10 million of revenues in 2002 prior to the sale.
Fourth quarter revenues decreased to $173 million from $188 million
in the same quarter last year. Operating income for the quarter,
excluding the impact of restructuring charges, was $14 million
compared to $18 million last year, as a result of weaker than
expected performance in our US diagnostics business. Key
announcements for the quarter: - Implementation of steps to improve
margins in the US diagnostics business while examining the best way
to participate in this market. - Implementation of a mitigation
plan to offset the impact of fee reductions in the province of
British Columbia. - Steps to improve performance in the diagnostics
business are expected to deliver an improvement in operating income
of 5-8% in 2004. Proteomics ---------- In the Proteomics segment,
operating losses declined to $8 million for the quarter compared to
$14 million in 2002. Our proteomics business continues to focus on
revenue creating opportunities and committed research and
development while moving discussions forward on research
collaborations and third party financing alternatives. Financial
Summary ----------------- Components of operating income from
continuing operations for the quarter and year are summarized
below: Fourth Quarter Full Year -------------- --------- 2003 2002
2003 2002 ---- ---- ---- ---- ($ Millions) Continuing operations,
before proteomics and unusual items $65 $63 $268 $271 Proteomics
(6) (14) (33) (52)
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59 49 235 219 Unusual Items ------------- Valuation provisions (2)
(77) Restructuring charges (28) (28) Gain on patent suit 39 Gain
(loss) on sale of business 10 (7)
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$29 $49 $179 $212
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Components of basic earnings per share for the quarter and year are
summarized below. We provide the components of basic earnings per
share in this manner to enable readers to better understanding the
results of our operations for the year and the significant items
that affect reported results. Fourth Quarter Full Year
-------------- --------- 2003 2002 2003 2002 ---- ---- ---- ----
Continuing operations, before proteomics and unusual items $0.32
$0.27 $1.13 $1.07 Proteomics (0.06) (0.09) (0.24) (0.27)
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0.26 0.18 0.89 0.80 Unusual Items ------------- Valuation
provisions (0.51) Restructuring charges (0.13) (0.13) Gain on
patent suit 0.18 Gain (loss) on sale of business 0.07 (0.05)
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Continuing operations 0.13 0.18 0.50 0.75
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Discontinued operations (0.16) (0.16)
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($0.03) $0.18 $0.34 $0.75
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MDS will be holding a conference call today at 10:00 am. This call
will be webcast live at, http://www.mdsintl.com/, and will also be
available in archived format at
http://www.mdsintl.com/news_present.asp after the call. MDS Inc.
(TSX: MDS; NYSE: MDZ) partners with and enables other leading
health sciences organizations to enhance the health of people
around the world. MDS' services, products and instruments help to
discover and bring new drugs to market faster and we assist
thousands of doctors to diagnose and treat patients every day. MDS
has more than 10,000 highly skilled and dedicated people on five
continents. Detailed information about our company is available at
http://www.mdsintl.com/ or by calling 1-888-MDS-7222, 24 hours a
day. 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. MDS Inc.
Incorporated under the Canada Business Corporations Act
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (unaudited)
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As at October 31
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(millions of Canadian dollars) 2003 2002
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ASSETS Current Cash and cash equivalents $ 263 $ 194 Accounts
receivable 274 328 Inventories 199 153 Income taxes recoverable 9
21 Prepaid expenses 30 25
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775 721 Capital assets 776 740 Future tax assets 23 35 Long-term
investments and other (note 2) 217 261 Goodwill 774 785
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$ 2,565 $ 2,542
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LIABILITIES AND SHAREHOLDERS' EQUITY Current Bank indebtedness $ 3
$ 10 Accounts payable and accrued liabilities 355 317 Deferred
revenue 35 63 Income taxes payable 14 17 Current portion of
long-term debt 9 13
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416 420 Long-term debt 533 602 Deferred revenue 34 41 Other
long-term obligations 23 18 Future tax liabilities 70 51 Minority
interest 63 56
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1,139 1,188
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Shareholders' equity Share capital (note 5) 816 805 Retained
earnings 572 543 Cumulative translation adjustment 38 6
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1,426 1,354
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$ 2,565 $ 2,542
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See accompanying notes MDS Inc. CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
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Three months to Year ended October 31 October 31
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(millions of Canadian dollars, except per share amounts) 2003 2002
2003 2002
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Net revenues $ 449 $ 471 $ 1,799 $ 1,777 Cost of revenues (279)
(286) (1,114) (1,092) Selling, general and administration (75) (93)
(333) (330) Research and development (15) (18) (42) (57)
Depreciation and amortization (19) (25) (78) (87) Restructuring
charges - net (note 4) (28) - (28) - Other income (expense) - net
(2) - (28) (7) Equity earnings and investment gains (2) - 3 8
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Operating income 29 49 179 212 Interest expense (8) (4) (28) (17)
Dividend and interest income 3 1 9 6 Minority interest (1) (2) (7)
(5)
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Income before income taxes 23 44 153 196 Income taxes (5) (19) (83)
(91)
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Income from continuing operations 18 25 70 105 Loss from
discontinued operations - net of tax (note 3) (22) - (22) -
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Net Income (loss) $ (4) $ 25 $ 48 $ 105
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Earnings (loss) per share (note 5) Basic $ (0.03) $ 0.18 $ 0.34 $
0.75 Diluted $ (0.03) $ 0.17 $ 0.34 $ 0.74 See accompanying notes
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (unaudited)
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Three months to Year ended October 31 October 31
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(millions of Canadian dollars) 2003 2002 2003 2002
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Retained earnings, beginning of period $ 583 $ 528 $ 543 $ 457 Net
income (loss) (4) 25 48 105 Repurchase of shares and options - (3)
(5) (6) Dividends - cash (4) (5) (10) (10) - stock (3) (2) (4) (3)
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Retained earnings, end of period $ 572 $ 543 $ 572 $ 543
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MDS Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
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Three months to Year ended October 31 October 31
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(millions of Canadian dollars) 2003 2002 2003 2002
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Operating activities Net income (loss) $ (4) $ 25 $ 48 $ 105 Items
not affecting current cash flow (note 7) 45 88 194 169
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41 113 242 274 Changes in non-cash working capital balances
relating to operations (note 7) 38 (51) (2) (88)
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79 62 240 186
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Investing activities Acquisitions - (1) (8) (16) Purchase of
capital assets (37) (46) (121) (152) Proceeds on sale of business -
- 31 23 Other 2 (8) (48) (54)
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(35) (55) (146) (199)
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Financing activities Issuance of long-term debt - 4 563 69
Repayment of long-term debt - (8) (541) (11) Increase (decrease) in
deferred revenue and other long-term obligations 1 2 (7) (11)
Payment of cash dividends (5) (5) (10) (10) Issuance of shares 6 1
8 5 Repurchase of shares and options (2) (2) (7) (5) Distributions
to minority interest (1) (3) (11) (10)
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(1) (11) (5) 27
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Effect of foreign exchange rate changes on cash and cash
equivalents (3) 2 (13) (1)
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Increase in cash position during the period 40 (2) 76 13 Cash
position, beginning of period 220 186 184 171
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Cash position, end of period $ 260 $ 184 $ 260 $ 184
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Cash position comprises cash and cash equivalents less bank
indebtedness. See accompanying notes
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MDS Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All tabular
amounts in millions of Canadian dollars, except where noted)
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1. Accounting Policies These consolidated financial statements of
MDS Inc. ("MDS" or "the Company") have been prepared on a basis
consistent with the Company's annual financial statements for the
year ended October 31, 2002, and should be read in conjunction with
the accounting policies and other disclosures in those annual
financial statements. These financial statements do not include all
of the disclosures required by generally accepted accounting
principles applicable to annual financial statements. 2. Long-term
Investments The company's share of losses of significantly
influenced companies and partnership included in operating income
for the period was $2 million (2002 - nil). 3. Discontinued
Operations On October 24, 2003, MDS Board of Directors approved a
plan for an orderly exit of its generic radiopharmaceutical
manufacturing facility in Fleurus, Belgium. Pursuant to the CICA
recommendation, Section 3475 "Disposal of Long- lived Assets and
Discontinued Operations", the revenues and expenses of the business
have been netted and reported as 'loss from discontinued
operations' on the Consolidated Statements of Income. Figures for
2002 have been restated to reflect this presentation. The revenues
and pre-tax loss of the discontinued operations, presented in the
Consolidated Statements of Income, were as follows: Three months to
Year ended October 31 October 31
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2003 2002 2003 2002
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Revenues $ 4 $ 4 $ 15 $ 15
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Loss from discontinued operations $ (22) $ - $ (22) $ -
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The $22 million pre-tax/after tax loss on disposal of the Fleurus
operation reflects provisions for the estimated costs directly
associated with the shutdown. In addition to a net operating loss
of $1 million, the loss for 2003 reflects provisions for workforce
reductions totaling $14 million, asset write-offs of $3 million;
and provisions for contractual obligations and other liabilities of
$4 million. 4. Restructuring charges Cumulative drawdowns
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Provision Restruc- balance at turing October charge Cash Non-cash
31, 2003
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Restructuring activities: Workforce reductions $ 17 $ - $ - $ 17
Equipment and other write-downs 11 11 -
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$ 28 $ - $ 11 $ 17
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During the quarter, MDS recorded restructuring charges of $28
million (after-tax $20 million) relating to the implementation of
certain change initiatives affecting the provision of support
services, senior management reductions and other initiatives taking
place in the business units, including system implementations. This
charge included workforce reduction charges of $17 million related
to the cost of severance and benefits associated with approximately
220 employees. The workforce reduction was primarily in the Life
Science and Health Segments in North America and Europe. The
provision is expected to be substantially utilized by mid-2004.
Equipment and other asset write- downs of $11 million primarily
related to certain computer equipment, subject to a sale and
leaseback agreement. Immediate recognition of a loss is required
because the fair value of the computer equipment is less than its
carrying value. 5. Earnings Per Share a) Dilution Three months to
Year ended October 31 October 31
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(number of shares in millions) 2003 2002 2003 2002
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Net income (loss) available to Common shareholders $ (4) $ 25 $ 48
$ 105
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Weighted average number of Common shares outstanding - basic 141
140 141 140 Impact of stock options 1 2 1 2
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Weighted average number of Common shares outstanding - diluted 142
142 142 142
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Basic earnings per share is calculated by dividing the net earnings
by the weighted average number of Common shares outstanding during
the period. Diluted earnings per share is calculated by dividing
net earnings available to Common shareholders by the sum of the
weighted average number of Common shares out standing and all
additional common shares that would have been outstanding if
potentially dilutive Common shares had been issued during the
period. b) Pro Forma Impact of Stock-Based Compensation Companies
are required to calculate and disclose, on a pro forma basis,
compensation expense related to the fair value of stock options at
the grant date in the notes to the consolidated financial
statements. Compensation expense for purposes of these pro forma
disclosures is to be determined in accordance with a methodology
prescribed in CICA Handbook Section 3870 "Stock-Based Compensation
and other Stock-Based Payments". The Company has used the Black-
Scholes option valuation model to estimate the fair value of
options granted based on the following assumptions: 2003
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Risk free interest rate 5.5% Expected dividend yield 1.0% Expected
volatility .357 Expected time until exercise 5.25 Options granted
during the quarter totalled 57,000 (2002 - 5,000). For purposes of
these pro forma disclosures, the Company's net income and basic and
diluted earnings per share would have been: Three months to Year
ended October 31 October 31
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2003 2002 2003 2002
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Pro forma net income (loss) available to Common shareholders $ (8)
$ 24 $ 40 $ 98
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Pro forma earnings (loss) per share - basic $ (0.05) $ 0.17 $ 0.28
$ 0.70 - diluted $ (0.05) $ 0.17 $ 0.28 $ 0.69
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c) Discontinued Operations The earnings per share impact of
discontinued business is as follows: Three months to Year ended
October 31 October 31
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2003 2002 2003 2002
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Earnings per share, continuing operations $ 0.13 $ 0.18 $ 0.50 $
0.75 Earnings per share, discontinued operations (0.16) - (0.16) -
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Basic earnings per share $ (0.03) $ 0.18 $ 0.34 $ 0.75
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6. Income taxes Significant adjustments to the statutory rate
comprise: Three months to Year ended October 31 October 31
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2003 2002 2003 2002
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Combined Canadian federal and provincial rate 36.8% 38.4% 36.8%
38.4% Expected provision for taxes at statutory rate $ 8 $ 17 $ 56
$ 75 Increase (decrease) as a result of: Restructuring charges 4 -
4 - Excess to tax reserve no longer required (9) - (9) - Investment
dispositions and write-downs - - 18 2 Other (1) (3) 2 5
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$ 2 $ 14 $ 71 $ 82 MDS Proteomics losses not recognized 3 5 12 9
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Income tax expense reported $ 5 $ 19 $ 83 $ 91
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Effective tax rate, as reported 21.7% 43.2% 54.2% 46.4%
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7. Supplementary Cash Flow Information Non-cash items affecting net
income (loss) comprise: Three months to Year ended October 31
October 31
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2003 2002 2003 2002
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Depreciation and amortization $ 19 $ 25 $ 78 $ 87 Minority interest
1 2 7 5 Future income taxes 9 61 32 73 Equity earnings (net of
distribution) 2 - - (3) Write-down of investments 2 - 77 - (Gain)
loss on sale of business - - (12) 7 Equipment and other asset
write-downs 11 - 11 - Other 1 - 1 -
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$ 45 $ 88 $ 194 $ 169
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Changes in non-cash working capital balances relating to operations
include: Three months to Year ended October 31 October 31
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2003 2002 2003 2002
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Accounts receivable $ 21 $ (19) $ 50 $ (37) Inventories (13) 14
(49) (4) Accounts payable and deferred income 49 (3) 11 (33) Income
taxes (14) (39) 8 (14) Other (5) (4) (22) -
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$ 38 $ (51) $ (2) $ (88)
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8. Segmented Information
------------------------------------------- Three Months ended
October 31, 2003 ------------------------------------------- Life
Sciences Health Proteomics Total
------------------------------------------- Net revenues $ 275 $
173 $ 1 $ 449 Operating income (loss) before restructuring 51 14
(8) 57 Restructuring activities (19) (9) - (28) Revenues by
products and services: Medical isotopes 75 Analytical equipment 68
Pharmaceutical research services 132 Clinical laboratory services
128 Distribution and other 45 Proteomics 1
------------------------------------------- Three Months ended
October 31, 2002 ------------------------------------------- Life
Sciences Health Proteomics Total
------------------------------------------- Net revenues $ 283 $
188 $ - $ 471 Operating income (loss) before restructuring 45 18
(14) 49 Restructuring activities - - - - Revenues by products and
services: Medical isotopes 87 Analytical equipment 57
Pharmaceutical research services 139 Clinical laboratory services
143 Distribution and other 45 Proteomics -
------------------------------------------- Year ended October 31,
2003 ------------------------------------------- Life Sciences
Health Proteomics Total -------------------------------------------
Net revenues $ 1,083 $ 715 $ 1 $ 1,799 Operating income (loss)
before restructuring 211 29 (33) 207 Restructuring activities (19)
(9) - (28) Revenues by products and services: Medical isotopes 309
Analytical equipment 270 Pharmaceutical research services 504
Clinical laboratory services 532 Distribution and other 183
Proteomics 1 Total assets at October 31 $ 1,951 $ 428 $ 186 $ 2,565
------------------------------------------- Year ended October 31,
2002 ------------------------------------------- Life Sciences
Health Proteomics Total -------------------------------------------
Net revenues $ 1,053 $ 721 $ 3 $ 1,777 Operating income (loss)
before restructuring 205 59 (52) 212 Restructuring activities - - -
- Revenues by products and services: Medical isotopes 328
Analytical equipment 217 Pharmaceutical research services 508
Clinical laboratory services 531 Distribution and other 190
Proteomics 3 Total assets at October 31 $ 1,915 $ 448 $ 179 $ 2,542
9. Guarantees Guarantees of the indebtedness of other parties
include a guarantee, signed in the first quarter of 2003, of a $20
million bank loan on behalf of an investee, Hemosol Inc. (the
"Borrower"), in exchange for warrants in the Borrower. This loan is
secured by a fixed and floating charge over all the assets of the
Borrower. Under the guarantee, MDS will be subrogated to and take
an assignment of the rights and remedies of the bank under the
loan. As at October 31, 2003, the bank loan was fully drawn. 10.
Financial Instruments As of October 31, 2003, the Company had
outstanding foreign exchange contracts and options in place to sell
up to US$481 million at a weighted average rate of C$1.52 maturing
over the next 21 months. The Company also had interest rate swap
con tracts that exchanged a notional amount of US$80 million of
debt from a fixed to a floating interest rate and an option to
enter into a swap contract that would exchange a notional amount of
US$157 million of debt from a fixed to a floating interest rate.
Foreign exchange and interest rate swap contracts are treated as
hedges for accounting purposes. As at October 31, 2003, the
carrying amounts and fair values for derivative financial
instruments are as follows:
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2003 2002
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Carrying Fair Carrying Fair Amount Value Amount Value
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Net asset (liability) position: Currency forward and option
contracts $ - $ 56 $ - $ 3 Interest rate swap and option contracts
$ - $ (4) $ - $ (1) DATASOURCE: MDS Inc. CONTACT: Sharon Mathers,
Vice-President, Investor Relations, (416) 675-6777 x 2695,
Copyright