MDS Inc. - Management's Discussion and Analysis of Operating Results and Financial Position
11 Dicembre 2003 - 2:00PM
PR Newswire (US)
MDS Inc. - Management's Discussion and Analysis of Operating
Results and Financial Position This section of the quarterly report
contains management's analysis of the financial performance of the
company and its financial position and it should be read in
conjunction with the financial statements. Readers are cautioned
that management's discussion and analysis contains forward-looking
statements and that actual events may vary from management's
expectations. Readers are encouraged to consult the MDS Annual
Report and Annual Information Form for fiscal 2002 for additional
details regarding risks affecting the business. TORONTO, Dec. 11
/PRNewswire-FirstCall/ -- FISCAL 2003 FOURTH QUARTER - OVERVIEW -
Beginning in the fourth quarter of 2003, we began to account for
our generic radiopharmaceutical business as a discontinued
operation. All financial references in this document are to
continuing operations, unless otherwise noted. In addition, the
results for 2002 have been restated to conform to this
presentation. Our fourth quarter revenues declined by 5% compared
to the same period last year, reflecting the sale of Oncology
Software Solutions ("OSS") earlier this year and the impact of the
declining US dollar on our US operations. Our analytical instrument
business continued to show strong growth, but this was offset by
declines in our remaining businesses. Excluding unusual items,
operating income increased by 16% compared to the prior year.
Shortly before the end of the quarter, we announced initiatives
that resulted in us recording a restructuring charge. The
restructuring charge of $28 million ($20 million after tax) related
to the implementation of change initiatives affecting the provision
of support services, senior management reductions and other
initiatives taking place in the business units, including various
system implementations. This charge included workforce reduction
costs of $17 million related to severance and benefits associated
with the elimination of approximately 220 positions, and a loss of
$11 million on equipment sold as part of a sale lease-back
transaction related to our IBM outsourcing agreement. Basic
earnings per share for the quarter was a loss of $0.03, compared to
earnings of $0.18 for the same quarter last year. This decline was
due to the impact of the restructuring charge and a $22 million
loss on discontinued operations reported during the quarter.
Excluding the impact of these items, earnings per share ("EPS") was
$0.26. (Tabular amounts are in millions of Canadian dollars, except
where noted.) Summary Consolidated Results Fourth Quarter Full Year
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2003 2002 Change 2003 2002 Change
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Revenues $ 449 $ 471 (5%) $ 1,799 $ 1,777 1% Operating income
before unusual items $ 57 $ 49 16% $ 235 $ 219 7% Operating income
$ 29 $ 49 (41%) $ 179 $ 212 (16%) Basic earnings per share $ (0.03)
$ 0.18 (117%) $ 0.34 $ 0.75 (55%) Earnings per share from our core
businesses in the Life Sciences and Health segments was $0.32 for
the fourth quarter, compared to $0.27 last year. Items that impact
the comparability of basic earnings per share for the quarter and
the year-to-date are as follows. We provide the component of basic
earnings per share in this manner to enable readers to better
understand the results of our operations for the year and the
significant items that affect reported results. Fourth Quarter Full
Year
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2003 2002 2003 2002
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EPS from continuing operations before proteomics and unusual items
$ 0.32 $ 0.27 $ 1.13 $ 1.07 MDS Proteomics (0.06) (0.09) (0.24)
(0.27)
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EPS from continuing operations before unusual items 0.26 0.18 0.89
0.80 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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EPS from continuing operations 0.13 0.18 0.50 0.75 Discontinued
operations (0.16) - (0.16) -
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Basic EPS $ (0.03) $ 0.18 $ 0.34 $ 0.75
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Segment Results ---------------------------- Fourth Quarter 2003
2002
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Revenues Operating Operating Revenues Operating Operating Income
Margin Income Margin (Loss) (Loss)
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Life Sciences $ 275 $ 32 12% $ 283 $ 45 16% Health 173 5 3% 188 18
10%
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448 37 8% 471 63 13% Proteomics 1 (8) n/m - (14) n/m
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$ 449 $ 29 6% $ 471 $ 49 10%
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---------------------------- Full Year 2003 2002
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Revenues Operating Operating Revenues Operating Operating Income
Margin Income Margin (Loss) (Loss)
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Life Sciences $ 1,083 $ 192 18% $ 1,053 $ 205 19% Health 715 20 3%
721 59 8%
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1,798 212 12% 1,774 264 15% Proteomics 1 (33) n/m 3 (52) n/m
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$ 1,799 $ 179 10% $ 1,777 $ 212 12%
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Life Sciences - Review of operations - Revenues from Life Sciences
businesses for the quarter were: --------- --------- 2003 2002
Change
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Isotopes $ 75 $ 87 (14%) Analytical instruments 68 57 19%
Pharmaceutical research services 132 139 (5%)
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$ 275 $ 283 (3%)
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Compared to the same period last year, our analytical instruments
business continued to contribute significantly to the overall Life
Sciences segment, with growth of 19%. This increase was offset by
declines in both our isotopes and pharmaceutical research services
businesses. The drop in isotopes revenues reflects the sale of OSS,
which contributed $11 million to revenue in the final quarter of
2002. Excluding the divested business, isotopes sales were down $1
million, a decline of 1% compared to the same quarter last year. As
expected, the fourth quarter was adversely impacted by cobalt
supply constraints; however, we expect additional cobalt supply to
have a favourable impact next year. Growth in the demand for
products within our analytical instruments business remains steady.
We continue to be pleased with sales of the API 4000(TM),
QSTAR(TM), QTRAP4000(TM) and ELAN(R) models. Both mature and new
products have seen strong demand. Pharmaceutical research services
revenues declined by 5% in the fourth quarter compared to the same
period last year. We saw continued weakness in pharmacology
services and in US-based late stage services, which have offset
revenue growth in the early clinical research and bioanalytical
businesses. We continue to focus our business development team on
increasing growth in this area. Changing foreign exchange rates had
limited net effect on Life Sciences revenues in the fourth quarter
as most of our export revenues are hedged and the increase in the
Euro offset a portion of the effect of the decline in the US dollar
for our foreign operations. Excluding the impact of unusual items,
the operating margin from Life Sciences businesses was 19% in the
current quarter, up from the 16% realized in the same period last
year. Depreciation and amortization for the segment was $11 million
this year compared with $13 million last year. Capital expenditures
- Purchases of capital assets in Life Sciences amounted to $30
million for the quarter compared to $36 million last year. The
decrease reflects reduced spending on the MAPLE facility and the
completion of our new cyclotron early during 2003. Segment outlook
- The Life Sciences segment has continued to benefit from
significant growth in our analytical instruments business. Although
the demand for these products remains strong, we expect percentage
growth in analytical instruments in 2004 to be less than that
experienced in recent quarters. Our competitors have introduced new
products that can be expected to have some impact in the market. We
continue to focus on developing new products to strengthen our
competitive position by meeting our customer needs. We expect our
pharmaceutical research services business will achieve higher
revenues next year due to our increased capacity and efforts taken
to redeploy resources to foster growth. We are pleased to see
increased backlog in our late-stage business. While backlog is not
guaranteed, it is normally a reliable indicator of future business.
Commissioning of the reactors and the attached processing facility
requires regulatory approval and will be followed by a process of
product acceptance testing by our customers and us, and by
associated regulatory approval processes for our customers. While
we have experienced a number of delays due to regulatory and other
issues, these steps are scheduled for completion over the course of
2004. Production will be transitioned from Atomic Energy of Canada
Limited's (AECL) existing NRU reactor to MAPLE over this time. Our
overall investment in MAPLE stands at $304 million. We will no
longer capitalize construction-related costs once full transition
from NRU occurs. Our investment to date exceeds initial budgets for
the project and we are in discussion with AECL to resolve issues
related to cost overruns on the project. A significant portion of
our Life Sciences revenues are generated from export sales and a
large portion of these exports are priced in US dollars. The
appreciation of the Canadian dollar over the last several quarters
has had only limited impact on our results thus far because we
maintain an active hedging program for our US dollar cash inflows.
We currently have hedges in place covering approximately two-thirds
of our expected cash inflows for 2004. These hedges will help us
maintain an effective realized exchange rate for our export
revenues that is only slightly lower than the effective rate
realized in 2003. Barring a significant further drop in the value
of the US dollar, we do not expect the change in the exchange rate
to have a material impact on our reported revenue growth or
operating results in 2004. Health - Review of operations - Revenues
from Health businesses in the quarter were: --------- ---------
2003 2002 Change
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Canadian laboratories 97 104 (7%) US laboratories 31 39 (21%)
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Diagnostics 128 143 (10%) Distribution 45 45 -
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Total 173 188 (8%)
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Revenues in our Canadian Diagnostics business decreased by 7% this
quarter compared to the same quarter last year. The final quarter
of 2002 included retroactive fee adjustments in British Columbia
that followed the signing of new fee agreements. The decline in
revenues this year resulted from the lack of these one-time
adjustments and to the 8% fee reduction, announced by the Province
of British Columbia and effective September 1, 2003. Revenues from
US laboratories denominated in US dollars, declined 7% in the
current quarter due primarily to a revised revenue agreement
affecting one of our partnerships. In Canadian dollar terms,
revenues declined by 21% compared to the same period last year, due
largely to changing exchange rates. The US Diagnostics business has
not met our expectations for growth or profitability. Accordingly,
we are taking steps to improve margins while examining the best way
to participate in this market. Revenue from Source Medical has
returned to normal levels from the most recent two quarters, as the
demand for supplies resulting from the Severe Acute Respiratory
Syndrome outbreak has subsided. Excluding unusual items, the
operating margin for the Health segment was 8% compared to 10% in
2002. Operating losses in the US were a major cause of the
decrease. In addition, BC fee reductions began in September, while
the full impact of our steps to mitigate any loss from this change
will not be evident until next year. Depreciation and amortization
for the Health segment was $4 million compared to $7 million for
the fourth quarter last year. Capital expenditures and long-term
investments - Health businesses purchased $7 million of capital
assets during the quarter compared to $4 million for the quarter
last year. In October we exchanged our investment in Inphact, Inc.
for a 19.9% interest in Evolved Digital Systems Inc., a listed
Canadian company. Segment outlook - British Columbia lab reform
will have a significant impact on our operations. We have already
experienced an 8% fee reduction beginning September 1, 2003. A
further 12% fee reduction is expected to come into effect on April
1, 2004. In the fourth quarter, we implemented cost reduction
strategies that will mitigate approximately 50% of the fee
reductions next year. The combined impact of our restructuring
activities, net of the impact of BC lab reform, is expected to
result in a 5% to 8% increase in operating income from our Canadian
Diagnostics business in 2004. Proteomics - Review of operations -
Spending reductions enabled us to reduce the operating loss from
our proteomics business to $8 million for the fourth quarter of
2003, compared to $14 million last year. This loss includes $2
million of depreciation and amortization. A $2 million foreign
exchange gain on the revaluation of the US dollar debt component of
the Cephalon convertible note was offset by a $2 million dollar
write down in the value of an investment in a development-stage
proteomics company. Capital expenditures - MDS Proteomics did not
purchase any capital assets in the quarter, compared to $6 million
in the same period last year. Segment outlook - We continue to
manage spending on proteomics research activities to focus on key
obligations and research projects. Work with our existing partners
on previously signed agreements continues as we actively
investigate new collaborations with financial and scientific
partners. Corporate - Net interest expense of $5 million was $2
million higher than the fourth quarter of 2002, reflecting the
higher fixed interest on the US$311 million private placement debt
issued in December of 2002. Our effective tax rate for the quarter
was 22% compared to 43% last year. The rate of tax on our core
businesses before unusual items was 38% in 2002 versus 37% this
year. In the fourth quarter of 2002 we ceased recognizing the
benefit of tax losses generated by MDS Proteomics. In the fourth
quarter of 2003 we were able to release $10 million of tax
reserves, reflecting the improvement in European operations and the
resolution of some other tax uncertainties. Discontinued Operations
- During the fourth quarter of 2003, we approved a plan for an
orderly exit from our generic radiopharmaceutical business located
in Belgium. This business is subject to increased regulatory
standards that would require an investment not warranted by the
prospects for the business. It is our intention to continue to use
the Belgian facility to support the remaining radioisotopes
business. In the fourth quarter we reported a loss from
discontinued operations of $22 million, which includes a $1 million
net operating loss and provisions totaling $21 million associated
with the shutdown. These operations were at breakeven in 2002.
Liquidity and Capital Resources - Our cash position at October 31,
2003 was $260 million, up $40 million from July 2003. Operating
working capital was $86 million, a decrease of $53 million from
July. The decrease in working capital was mainly attributable to
$31 million of severance and related benefits provided for as part
of the restructuring activity and $7 million of obligations related
to the discontinued operations. All of our foreign operations are
considered self-sustaining. Unrealized gains and losses on foreign
net assets and related hedges resulting from exchange rate shifts
are recorded in the cumulative translation adjustment ("CTA")
account in shareholders' equity. The weakened US dollar has had a
significant impact on the reported value of our US dollar
denominated debt and we treat this debt as a hedge against the
value of our US dollar denominated net assets. During the quarter,
the unrealized foreign exchange gain on this debt increased by $27
million. The unrealized loss on foreign net assets increased by $34
million. The resulting net unrealized loss of $7 million was
recorded in the CTA account. Outlook - In 2004 and beyond we remain
committed to the growth strategy that has been key to our success.
While recent growth has been slower than expected in some areas, we
remain encouraged about the prospects for our businesses. In
addition, we continue to screen acquisition opportunities that
would complement our core businesses. We expect growing demand for
our products and services from Life Sciences customers to drive
improved revenue growth next year. Our restructuring initiatives
are expected to generate $10 million of cost reductions in 2004 and
$40 million in 2005. It will be important for us to achieve these
savings to improve our operating margins. This is particularly true
for 2005 and subsequent years. In those years we will face the
challenge of a weaker US dollar without the benefit of the strong
hedge position that we enjoyed in 2003 and that will continue to
shelter our revenues next year. We expect to invest $100 million to
$125 million of capital in our core businesses next year plus
approximately $50 million in each of 2004 and 2005 in technology
projects and change initiatives. Combined, these initiatives will
enable a new platform for growth for MDS. DATASOURCE: MDS Inc.
CONTACT: Sharon Mathers, Vice-President, Investor Relations, (416)
675-6777 x 2695,
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