Organic revenue growth of 10% in life sciences and adjusted EBITDA up
69% organically
TORONTO, June 8 /PRNewswire-FirstCall/ - MDS Inc. (TSX: MDS; NYSE: MDZ),
a company providing a range of enabling products and services to the global
life sciences markets, today reported its second quarter 2006 results.
Quarterly Highlights
- 10% organic revenue growth in life sciences
- 28% growth in adjusted EBITDA (69% organic)
- Montreal bioanalytical issues reduced EBITDA by $7 million
- $0.12 in GAAP EPS, $0.22 in adjusted EPS, up 22%
- Appointed David Spaight as President, MDS Pharma Services
- Declared a quarterly cash dividend of $0.0325 per share
For the quarter, MDS's consolidated revenue was $369 million, up 9%
organically over the same period last year. Adjusted EBITDA was $69 million,
up 69% organically, driven by strong results in the isotopes, instruments and
diagnostics businesses. Adjusted earnings per share increased 22% to $0.22
compared to $0.18 in the same period last year. Selling, general and
administrative costs were down $9 million over the second quarter of 2005.
Financial Highlights
% Change
-------------------
($ millions) Q2 2006 Q2 2005 Reported Organic
-------------------------------------------------------------------------
Revenue $369 $362 2% 9%
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Adjusted EBITDA:
$ $69 $54 28% 69%
% 19% 15% na na
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Adjusted EPS $0.22 $0.18 22% na
GAAP EPS $0.12 $0.21 (43%) na
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MDS continued to execute its strategy to focus the Company on its life
sciences businesses. All MDS businesses, with the exception of the
bioanalytical business, delivered organic growth in revenues and adjusted
EBITDA relative to the second quarter of 2005. The instruments, isotopes and
diagnostics businesses all drove overall performance, with organic adjusted
EBITDA growths of 54%, 46% and 38%, respectively. The process of executing on
a value maximizing transaction for the diagnostics business continues and is
expected to result in a transaction in 2006.
"This is our third quarter of organic revenue and adjusted EBITDA growth
at MDS despite challenges with our bioanalytical business in Montreal," said
Stephen P. DeFalco, President and Chief Executive Officer, MDS Inc.
"Completing the FDA review in a high-quality way and concluding the
diagnostics transaction are my top priorities for the remainder of 2006," he
added.
Operating Segment Results
MDS Pharma Services
% Change
-------------------
($ millions) Q2 2006 Q2 2005 Reported Organic
-------------------------------------------------------------------------
Revenue:
Early-stage $78 $84 (7%) 1%
Late-stage 52 53 (2%) 6%
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$130 $137 (5%) 3%
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Adjusted EBITDA:
$ $3 - n/m n/m
% 2% - n/m n/m
-------------------------------------------------------------------------
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MDS Pharma Services revenue for the second quarter increased 3% on an
organic basis over the same period last year. Revenues in the sector continue
to be impacted by the bioanalytical business in Montreal. Excluding the
bioanalytical business, organically, revenue grew by 7% and EBITDA improved by
$9 million. Backlog was up 31% year-over-year to US$400 million and was up 8%
sequentially, as we continue to win late-stage global contracts.
During the second quarter, MDS focused significant resources on
completing the review of certain past studies in its Montreal bioanalytical
facility and invested $7 million in this effort. Under new leadership, the
speed and focus with which the bioanalytical review is being conducted has
improved significantly. MDS activities are expected to take place over the
remainder of the calendar year, with continued impact on the cost structure of
this business.
During the quarter, capacity expansions in our early-stage business
continued with a 42,000 square foot expansion in drug safety assessment
capacity in Lyon, a 50-bed phase one clinic expansion in Lincoln, and the
re-opening of the 55-bed phase one clinic in New Orleans. In addition, the
Company has initiated a 300-bed expansion project in Phoenix to capitalize on
North American demand for phase one clinic capacity. The Phoenix expansion is
slated for completion in mid-2007.
MDS Nordion
% Change
-------------------
($ millions) Q2 2006 Q2 2005 Reported Organic
-------------------------------------------------------------------------
Revenue $83 $75 11% 23%
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Adjusted EBITDA:
$ $25 $18 39% 46%
% 30% 24% na na
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MDS Nordion revenue for the second quarter grew 23% year-over-year on an
organic basis, driven by the strength of the medical imaging business. Results
for the medical imaging business were positively impacted as MDS Nordion
stepped in to offset supply shortages related to a competitor's voluntary
recall of technetium generators. EBITDA increased organically by 46% year-over-
year in the second quarter of 2006.
During the second quarter, MDS Nordion announced two molecular imaging
agreements, one with Molecular Insight Pharmaceuticals to manufacture and
supply Zemiva(TM), a molecular imaging pharmaceutical being developed for
cardiac ischemia, or insufficient blood flow to the heart and the other with
Bradmer Pharmaceuticals Inc. for the development and clinical trial supply of
Neuradiab, a monoclonal antibody conjugated to an isotope used to treat
glioblastoma multiforme, the most common and deadly form of brain cancer.
MDS Sciex
% Change
-------------------
($ millions) Q2 2006 Q2 2005 Reported Organic
-------------------------------------------------------------------------
Revenue $66 $65 2% 8%
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Adjusted EBITDA:
$ $22 $16 38% 54%
% 33% 25% na na
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MDS Sciex revenue for the second quarter grew 8% year-over-year on an
organic basis. Organic EBITDA grew 54% year-over-year, driven by new products
introduced over the last 12 months, particularly the API 4000(TM), API
5000(TM), 3200 Q TRAP(R), and 4800 MALDI TOF/TOF(TM). Growth in Asia and
increasing penetration in the applied markets also positively impacted EBITDA.
In the second quarter of fiscal 2006, more than one-third of revenues were
generated from products introduced in the last 24 months.
MDS Diagnostic Services
% Change
-------------------
($ millions) Q2 2006 Q2 2005 Reported
-------------------------------------------------------------------------
Revenue $90 $85 6%
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Adjusted EBITDA:
$ $29 $21 38%
% 32% 25% na
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MDS Diagnostic Services revenue increased 6% year-over-year to
$90 million. Funding negotiations with the Ontario Ministry of Health
concluded in the second quarter, resulting in a retroactive payment of
$4 million for services provided in the period between April 1, 2005, and
January 31, 2006. EBITDA margins grew 750 basis points (440 basis points
excluding the retroactive payment) compared to the second quarter of 2005.
Corporate
Last September, MDS announced its new strategy to focus on its high-
growth, global life sciences businesses. The full transition to a global life
sciences company is expected to be completed by the end of calendar 2006 with
the conclusion of the alternate ownership structure for the Company's
remaining diagnostics business.
MDS continues to focus on driving operational performance improvements
across each of its core businesses. As we move through the second half of
fiscal 2006, we reconfirm the guidance provided last November that the life
sciences businesses are expected to deliver 6%-9% organic revenue growth; 100
to 200 basis point improvement in selling, general and administrative
expenses; and 150 to 250 basis point improvement in adjusted organic EBITDA
margins. Capital expenditures are expected to be in the $50 to $65 million
range for fiscal 2006.
The Board of Directors declared a quarterly cash dividend of $0.0325 per
share, to shareholders of record as of June 20, 2006. The dividend is payable
on July 4, 2006.
The use of non-GAAP measures section in the MD&A outlines the use of the
terms 'organic' and 'adjusted' in reflecting operating performance of the
Company. We use certain non-GAAP measures so that readers have a better
understanding of the significant events and transactions that have had an
impact on our results. We provide a reconciliation of these non-GAAP measures
to our GAAP financial results in the accompanying MD&A.
Conference Call
MDS will be holding a conference call today at 10:30 am (EDT) to discuss
the second quarter results. This call will be webcast live at www.mdsinc.com
and will also be available in archived format at
www.mdsinc.com/news_events/webcasts_presentations.asp after the call.
About MDS
MDS Inc. (TSX:MDS; NYSE:MDZ) has more than 8,800 highly skilled people in
28 countries. It provides a diverse range of superior products and services to
increase customers' speed, precision and productivity in the drug development
and disease diagnosis processes. MDS is a global, values-driven life sciences
company, recognized for its reliability and collaborative relationships that
help create better outcomes in the treatment of disease. Find out more at
www.mdsinc.com or by calling 1-800-MDS-7222, 24 hours a day.
MDS Forward Looking Statement
This document contains forward-looking statements. Some forward-looking
statements may be identified by words like "expects", "anticipates", "plans",
"intends", "indicates" or similar expressions. The statements are not a
guarantee of future performance and are inherently subject to risks and
uncertainties. The Company's actual results could differ materially from those
currently anticipated due to a number of factors, including, but not limited
to, successful integration of structural changes, including restructuring
plans, acquisitions, technical or manufacturing or distribution issues, the
competitive environment for the Company's products, the degree of market
penetration of the Company's products, and other factors set forth in reports
and other documents filed by the Company with Canadian and US securities
regulatory authorities from time to time.
MANAGEMENT'S DISCUSSION AND ANALYSIS
June 7, 2006
Following is management's discussion and analysis (MD&A) of the results
of operations for MDS Inc. (MDS or the Company) for the quarter ended
April 30, 2006 and its financial position as at April 30, 2006. This MD&A
should be read in conjunction with the consolidated financial statements and
notes that follow. For additional information and details, readers are
referred to the annual financial statements and MD&A for 2005 and the
Company's Annual Information Form (AIF), each of which is published separately
and is available at www.mdsinc.com and at www.sedar.com.
Caution regarding forward-looking statements
This MD&A is intended to provide readers with the information that
management believes is required to gain an understanding of MDS's current
results and to assess the Company's future prospects. Accordingly, certain
sections of this report contain forward-looking statements that are based on
current plans and expectations. These forward-looking statements are affected
by risks and uncertainties that are discussed in this document, as well as in
the AIF, that could have a material impact on future prospects. Readers are
cautioned that actual events and results will vary.
From time-to-time, we make written or oral forward-looking statements
within the meaning of certain securities laws, including the "safe harbour"
provisions of the Securities Act (Ontario) and the United States Private
Securities Litigation Reform Act of 1995. We may make such statements in this
document, in other filings with Canadian regulators or the United States
Securities and Exchange Commission, in reports to shareholders or in other
communications. These forward-looking statements include, among others,
statements with respect to our objectives for 2006, our medium-term goals, and
strategies to achieve those objectives and goals, as well as statements with
respect to our beliefs, plans, objectives, expectations, anticipations,
estimates and intentions. The words "may", "could", "should", "would",
"suspect", "outlook", "believe", "plan", "anticipate", "estimate", "expect",
"intend", "forecast", "objective", and words and expressions of similar import
are intended to identify forward-looking statements.
By their very nature, forward-looking statements involve inherent risks
and uncertainties, both general and specific, which give rise to the
possibility that predictions, forecasts, projections and other forward-looking
statements will not be achieved. We caution readers not to place undue
reliance on these statements as a number of important factors could cause our
actual results to differ materially from the beliefs, plans, objectives,
expectations, anticipations, estimates and intentions expressed in such
forward-looking statements. These factors include, but are not limited to,
management of liquidity and funding and operational risks; the strength of the
Canadian and United States economies and the economies of other countries in
which we conduct business; the impact of the movement of the Canadian dollar
relative to other currencies, particularly the US dollar and the Euro; the
effects of changes in monetary policy, including changes in interest rate
policies of the Bank of Canada and the Board of Governors of the Federal
Reserve System in the United States; the effects of competition in the markets
in which we operate; the impact of changes in the laws and regulations and
enforcement thereof; judicial judgments and legal proceedings; our ability to
obtain accurate and complete information from, or on behalf of, our customers
and counter-parties; our ability to successfully realign our organization,
resources and processes; our ability to complete strategic acquisitions and
joint ventures and to integrate our acquisitions and joint ventures
successfully; changes in accounting policies and methods we use to report our
financial condition, including uncertainties associated with critical
accounting assumptions and estimates; operational and infrastructure risks;
other factors that may affect future results including changes in trade
policies, timely development and introduction of new products and services,
changes in our estimates relating to reserves and allowances, changes in tax
laws, technological changes, natural disasters such as hurricanes, the
possible impact on our businesses from public health emergencies,
international conflicts and other developments including those relating to
terrorism; and our success in anticipating and managing the foregoing risks.
We caution that the foregoing list of important factors that may affect
future results is not exhaustive. When relying on our forward-looking
statements to make decisions with respect to the Company, investors and others
should carefully consider the foregoing factors and other uncertainties and
potential events. We do not undertake to update any forward-looking statement,
whether written or oral, that may be made from time to time by us or on our
behalf.
Use of non-GAAP measures
In this MD&A, we describe certain income and expense items that are
unusual or non-recurring. These terms are not defined by generally accepted
accounting principles (GAAP). Our usage of these terms may vary from the usage
adopted by other companies. We identify the impact of these amounts on
operating income and on earnings per share (EPS). We provide this detail so
that readers have a better understanding of the significant events and
transactions that have had an impact on our results.
In addition, terms such as adjusted operating income; adjusted earnings
before interest, taxes, depreciation and amortization (EBITDA); adjusted
EBITDA margin; adjusted EPS; and backlog are not defined by GAAP, and our use
of such terms or measurement of such items may vary from that of other
companies. Where relevant, and particularly for earnings-based measures, we
provide tables in this document that reconcile non-GAAP measures used to
amounts reported on the face of the consolidated financial statements.
We also discuss the results of our operations, isolating variances that
relate to changes in exchange rates and acquisitions. We use the term
"organic" to describe the results presented in this way. To isolate the impact
of currency movements, we eliminate the impact of foreign currency hedging
activities in both the current and prior periods and recalculate the base
figures for the prior period using the exchange rates that were in effect for
the current period.
For our pharmaceutical services business, we provide information about
contract backlog. Backlog measures are not defined by GAAP and our measurement
of backlog may vary from that used by others. While we believe that long-term
backlog trends serve as a useful metric for assessing the growth prospects for
our business, backlog is not a guarantee of future revenues and provides no
information about the timing on which future revenue may be recorded. We
report our backlog in US dollars to reflect the underlying currency of the
majority of such contracts and, therefore, reduce the volatility that would
result from converting the measure to Canadian dollars.
Tabular amounts are in millions of Canadian dollars, except per share
amounts and where otherwise noted.
Introduction
MDS is a global life sciences company that provides market-leading
products and services that our customers need for the development of drugs and
the diagnosis and treatment of disease. We are a leading global provider of
pharmaceutical contract research, medical isotopes for molecular imaging,
radiotherapeutics, and analytical instruments.
Discontinued operations
All financial references in this document exclude those businesses that
we consider to be discontinued. Our discontinued businesses include our
generic radiopharmaceuticals operations, our US laboratory operations, certain
non-strategic pharmaceutical research services operations, and our interests
in Source Medical Corporation (Source) and Calgary Laboratory Services
Partnership (CLS). All financial references for the prior year have been
restated to reflect this treatment. From the amounts reported in our second
quarter 2005 interim report, revenues for 2005 have been reduced by
$78 million and income from continuing operations has been unaffected.
Strategic initiatives
On September 1, 2005, we announced our strategic plan to pursue growth in
the global life sciences market and divest of assets that do not contribute to
the Company's areas of focus. During the second quarter, we completed the sale
of Calgary Laboratory Services for $21 million. Subsequent to the end of the
quarter, we finalized the sale of our pharmaceutics operations in Tampa for
$5 million.
We continue to actively explore alternative ownership structures for our
diagnostics business to maximize value for shareholders and at the present
time we are focused on negotiations with potential purchasers. As well, we
continue to review alternate strategies, including the possibility of
distributing our interest in this business to shareholders in a tax-efficient
manner. We expect that we will complete a transaction affecting this business
before the end of this calendar year.
On February 22, 2006, we announced the successful completion of our
mediation process with Atomic Energy of Canada Limited (AECL) regarding our
MAPLE isotope production facility project. This has resolved a significant
uncertainty for us and enables us to concentrate on further developing the
medical imaging business.
Consolidated operating highlights
Second Quarter Year-to-Date
---------------------------- -------------------
% Change % Change
---------------- ---------
2006 2005 Reported Organic 2006 2005 Reported
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$369 $362 2% 9% Net revenues $734 $731 -
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29 38 (24%) Operating income 72 85 (15%)
Adjustments:
------------
10 - MAPLE settlement 10 -
7 - Valuation provisions 8 -
Mark-to-market on
2 - interest rate swaps 2 -
1 (1) Restructuring charges 3 -
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Adjusted operating
49 37 32% income 95 85 12%
Depreciation and
20 17 amortization 38 33
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$ 69 $ 54 28% 69% Adjusted EBITDA $133 $118 13%
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Adjusted EBITDA
19% 15% margin 18% 16%
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Consolidated revenue for the second quarter of 2006 was $369 million, up
2% from the $362 million reported in the same period in 2005. On an organic
basis, revenues grew by 9%, driven particularly by 23% organic growth in our
isotopes segment. Revenues from our instruments business grew 8% organically
and our pharmaceutical services business realized 3% growth in revenue on an
organic basis, driven by the continued growth in all businesses except
bioanalytical. Diagnostics revenues grew 2% in the quarter, after adjusting
for the retroactive impact of the new Ontario fee arrangement announced in
April.
Adjusted EBITDA of $69 million was up 28% compared to last year and
increased 69% on an organic basis. Results in our isotopes business remained
strong this quarter, and we have seen a substantial improvement in our
instruments business. We are also delivering continued EBITDA margin
improvement in our diagnostics business, which is reporting an adjusted EBITDA
margin of 32% (29% after taking into account the retroactive fees in Ontario),
up 440 basis points from this time last year, excluding the impact of the
retroactive fees.
The impact of the ongoing US Food and Drug Administration (FDA) review of
our Montreal bioanalytical operations remained significant this quarter. The
direct costs we have incurred on the review, combined with depressed revenues
in this business, resulted in consolidated adjusted EBITDA being down by
$7 million year-over-year.
Adjusted operating income for the second quarter of $49 million was 32%
higher than the $37 million achieved in the second quarter of 2005.
Adjustments reported for the quarter include a $10 million charge related to
the exchange of assets associated with the MAPLE settlement, a $2 million
mark-to-market loss on interest rate swaps, $1 million of restructuring
charges, and an equity loss of $7 million related to provisions associated
with the restructuring of MDS Capital Corp. and other investments. Including
these adjusting items, operating income for the second quarter was
$29 million, down from $38 million for the prior year.
Selling, general, and administration (SG&A) expenses for the quarter were
$71 million, down 11% compared to the second quarter of last year and down
$13 million compared to the fourth quarter of 2005 when we announced a series
of initiatives to realign our cost structure to be more globally competitive.
On a year-to-date basis, our SG&A spending as a percentage of revenues is
170 basis points lower than the average rate for fiscal 2005.
During the quarter, we spent $14 million on research and development
(R&D) activities and expensed $1 million this year, compared to $25 million
and $9 million respectively in the same quarter last year. Settlement of an
audit of investment tax credits from a prior year resulted in a $3 million
reduction in the amount of net R&D expense reported for the period.
Consolidated depreciation and amortization expense increased $3 million
compared to last year. The increase includes amounts related to our new common
business system, on which we began to record depreciation in the third quarter
last year. Capital expenditures for the quarter were $15 million, excluding
adjustments associated with the settlement of the MAPLE claims.
Reported earnings per share from continuing operations were $0.13 for the
quarter, compared to $0.19 in 2005. Adjusted earnings per share from
continuing operations for the quarter increased 22% and were $0.22 compared to
$0.18 earned in the same period last year. Adjusted earnings per share for the
two periods were as follows:
2006 2005 2006 2005
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Basic and diluted EPS from
continuing operations -
as reported $ 0.13 $ 0.19 $ 0.32 $ 0.40
Adjustments:
------------
MAPLE settlement 0.04 - 0.04 -
Mark-to-market on interest
rate swaps 0.01 - 0.01 -
Restructuring charges - (0.01) 0.01 -
Valuation provisions 0.04 - 0.05 -
Quebec tax rate change - - 0.02 -
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Adjusted EPS $ 0.22 $ 0.18 $ 0.45 $ 0.40
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MDS Pharma Services
Financial Highlights
Second Quarter Year-to-Date
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% Change % Change
---------------- ---------
2006 2005 Reported Organic 2006 2005 Reported
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Net revenues:
-------------
$ 78 $ 84 (7%) 1% Early-stage $156 $172 (9%)
52 53 (2%) 6% Late-stage 103 103 -
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$130 $137 (5%) 3% $259 $275 (6%)
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Operating income
(6) (6) - (loss) (10) (5) (100%)
Adjustment:
-----------
1 (1) Restructuring charges - (1)
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Adjusted operating
(5) (7) income (10) (6)
Depreciation and
8 7 amortization 16 14
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$ 3 $ - n/m n/m Adjusted EBITDA $ 6 $ 8 (25%)
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Adjusted EBITDA
2% - margin 2% 3%
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Our pharmaceutical services business grew 3% on an organic basis, and 5%
including acquisitions. We continue to experience healthy organic growth in
all businesses except our bioanalytical business, on which the impact of the
ongoing FDA review remains significant. As was the case in the first quarter,
bioanalytical services is the only revenue line that was not up organically
year-over-year. Excluding the bioanalytical business, organic revenue growth
was 7% in the quarter.
Our early-stage businesses have benefited from strong organic growth in
pharmacology and early clinical research. Drug safety assessment growth has
moderated somewhat from the very strong growth experienced in the last several
quarters. We opened the expansion of our Lyon facility in May and expect this
will faciliate further growth in this business over the coming months.
Late-stage revenues grew 6% organically, balanced between our global
clinical development and global central laboratory businesses. These late-
stage businesses have also continued to be successful in winning new business
and account for the growth in our backlog this quarter. Our average monthly
pharmaceutical research backlog increased to US$400 million for the second
quarter of 2006, an increase of 31% when compared to the average for the
second quarter of fiscal 2005.
Average monthly backlog (millions of US dollars)
---------------------------------------------------------------
Fiscal 2004 - Quarter 1 $ 240
Quarter 2 265
Quarter 3 285
Quarter 4 300
Fiscal 2005 - Quarter 1 315
Quarter 2 305
Quarter 3 315
Quarter 4 340
Fiscal 2006 - Quarter 1 370
Quarter 2 400
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Our review of our Montreal bioanalytical operations continued during the
quarter. During March, the FDA conducted an audit of the facility, directing
particular attention to the studies and processes covered by the review and
the conduct of the review itself. At the conclusion of the FDA visit, we
received observations related to this audit. The observations identified a
number of issues pertaining to the effectiveness and management of the review.
We have continued to work diligently to address the issues raised by the
audit and to meet all FDA expectations. We are committed to resolving all
outstanding issues in a timely manner. In order to enhance this effort, we
have dedicated an experienced project manager from outside the MDS Pharma
Services division to take over management of the review project. To enable us
to accelerate the activities related to the review in Montreal, we have
temporarily suspended all commercial bioanalytical liquid chromatography/mass
spectrometry operations in this facility and work has been moved to our
facility in Lincoln. To date, the impact of the review on our other
pharmaceutical services operations has been limited. Nevertheless, the status
of studies affected by the FDA review has begun to generate a reaction among
our clients. Recently, a limited number of clients advised us that they
received letters from the FDA indicating that submissions containing data from
our Montreal and Blainville facilities would not be processed for approval
until FDA concerns are resolved. At this time, we are unable to judge what
impact, if any, this will have on our business development activities. We are
also not able to estimate the cost we may incur, if any, related to this
development.
The decline in bioanalytical revenues has moderated on an organic basis,
primarily because the impact of the review began to be felt in the Montreal
facility in the second quarter last year. Despite this, the financial and
operational impact of the review was significant in the quarter. The EBITDA
contribution of this business for the quarter was $4 million less than for the
same period last year, and included $5 million of direct spending associated
with the FDA review. We incurred a further $2 million of special consulting
costs to oversee the response to the review and to advise our Board. This
$2 million cost is reflected in the Corporate segment.
Reported EBITDA was impacted by currency changes and the decreased
profits in our bioanalytical business. Excluding the impact of currency and
the drop in bioanalytical profits, adjusted EBITDA for the segment rose
$9 million, including $4 million of tax credits realized as a result of the
completion of on-going tax audits. Adjusted EBITDA was up $4 million
organically, and all business units except Montreal bioanalytical contributed
to growth in adjusted EBITDA this quarter, with particularly good contribution
from our pharmacology and late-stage operations.
Capital expenditures in the pharmaceutical services segment were
$9 million compared to $4 million last year. Capital expenditures were related
principally to our ongoing expansion of our drug safety assessment facility in
Lyon, as well as an expansion of our operations in Bothell.
We are expanding our early clinical capacity to take advantage of
continued strong market demand in this service line. We have increased our
facility expansion plans and added a further 300 beds to our plans for our
Phoenix clinic. In May, we reopened the New Orleans site, restoring 55 beds to
our network. We remain committed to increasing our early clinical research
capacity. When our expansion in Phoenix is completed next year, we will have
over 1,100 early clinical beds in North America. We believe this will position
us well as others in the industry are reducing capacity in this market.
The pharmaceutical industry continues to improve its processes to address
drug safety issues. Most recently, a study being conducted by another industry
participant in Europe involving a monoclonal antibody resulted in severe
adverse reactions in study participants. European regulators have reacted
quickly, increasing the scrutiny of protocols and lengthening the approval
time before new studies can proceed. This action may have a short-term
negative impact on revenues. We have thoroughly reviewed our trial procedures
in light of this development.
MDS Nordion
Financial Highlights
Second Quarter Year-to-Date
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% Change % Change
---------------- ---------
2006 2005 Reported Organic 2006 2005 Reported
-------------------------------------------------------------------------
$ 83 $ 75 11% 23% Net revenues $165 $150 10%
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$ 11 $ 15 (27%) Operating income $ 35 $ 36 (3%)
Adjustment:
-----------
10 - MAPLE settlement 10 -
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Adjusted operating
21 15 40% income 45 36 25%
Depreciation and
4 3 amortization 8 7
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$ 25 $ 18 39% 46% Adjusted EBITDA $ 53 $ 43 23%
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Adjusted EBITDA
30% 24% margin 32% 29%
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Our isotopes business grew 23% year-over-year on an organic basis in the
second quarter, with continued strong performance from medical isotopes. Other
revenues were also up in the second quarter this year, due to higher sales of
production and self-contained irradiator compared to the second quarter of
2005.
During the quarter, we continued to focus on meeting the demands of the
cardiac imaging market and worked, to the extent possible, to see that no
patient needing a cardiac scan was forced to cancel a procedure due to a lack
of the isotopes we produce. We stepped up production early this year, when a
major competitor announced a voluntary recall of technetium generators, used
primarily for cardiac imaging, while they addressed sterility issues at their
primary manufacturing facility. We estimate that approximately $8 million of
high-margin revenues were realized in the quarter from this added production.
Industry production capacity returned to normal early in April, and
accordingly, we do not expect to be able to fully retain the increase in
market share that we have enjoyed over the first half of this year.
The strength in medical isotopes this quarter was partially offset by the
impact from the continuing drop in the value of US dollar. In addition,
although the value of the Euro appears to have stabilized, it remains well
below its value at this time last year.
Organic growth in adjusted EBITDA was 46%, led by the strength in medical
isotopes. The impact of currency fluctuations continues to be a concern for
this business, as a significant portion of revenues is priced in US dollars
and Euros.
Early in the second quarter, we were pleased to report the completion of
mediation with AECL related to the MAPLE reactor project. The agreement
reached with AECL provides the basis for a productive on-going relationship
between us and enables AECL to move forward on the construction project. We
have been relieved of any obligation for capital costs related to the
completion of construction and commissioning of the reactors and the dedicated
production facility, and at the same time, we have achieved a level of
certainty regarding the cost of acquiring isotopes for sale in the future that
was not possible under the earlier agreement.
Under this agreement, MDS exchanged its interest in the project, along
with certain associated inventories, for $25 million in cash, a non-interest
bearing note due over four years beginning in 2008, and a 40-year supply
agreement containing terms that are similar to those contained in the current
supply agreement with AECL. Since AECL has now assumed full ownership of the
facility, they will be responsible for capital costs associated with
completing construction and commissioning the reactors and for future
operating costs. MDS has retained a commitment to assist AECL to defray the
costs of any material and unusual regulatory changes, should such a change
occur during the life of the current or future supply agreement. This
commitment extends to cover any changes required by international agreements
or treaties related to the use of highly enriched uranium for the reactors.
Under the terms of the agreement, AECL assumed all capital costs
associated with construction from November 1, 2005 onwards. As at
October 31, 2005, the carrying value for our interest in the project totaled
$393 million. This carrying value included construction costs, as well as
interest costs that were capitalized during the construction phase. During the
first quarter of 2006, capital costs amounting to $14 million were incurred on
the project and we recorded these as a capital expenditure as required under
Canadian GAAP. As part of the settlement, AECL assumed these costs and we
reached a settlement for certain earlier costs that we had capitalized prior
to November 1, 2005. Also during the quarter, we updated certain tax credits
claims related to some of the costs incurred on the project.
Taking into account these adjustments, the carrying value of our interest
in the project was $370 million at the time of the settlement. Under the
settlement, we exchanged our interest in the reactor project, along with
related parts and supply inventories having a carrying value of $53 million,
for $25 million in cash, the promissory note having a discounted present value
of $44 million, and the 40-year supply agreement. With the assistance of an
independent valuator we have determined that the fair value of the supply
agreement is $344 million, and accordingly, we recorded a loss of $10 million
resulting from this settlement in the second quarter.
There were no capital expenditures in the isotopes segment in the second
quarter, compared to $8 million last year, which included spending on the
MAPLE project. The cash flow impact associated with the MAPLE settlement and
project have been grouped on a separate line in the cash flow statement this
year due to the unusual nature of these activities.
The MAPLE agreement removes significant uncertainties for us related to
the capital cost of the project and the cost to obtain reactor isotopes in the
future. The commissioning risk remains though, as many of the technical issues
have yet to be resolved. Nevertheless, there have been recent positive
developments, as AECL has received permission to begin the process of powering
up the first reactor to 2 MW for testing purposes. In addition, the Canadian
Nuclear Safety Commission is considering extending the operating licence for
the existing NRU reactor to 2011, which would allow this reactor to continue
to supply us with isotopes while the commissioning of MAPLE proceeds.
We are pleased with the longer-term outlook for the isotopes business.
Demand for our primary medical isotopes remain strong and our ability to
maintain supply levels for the market in the face of a significant production
shortfall from a competitor demonstrates our commitment to security of supply
for our customers. We are also encouraged by the granting of the CE Mark for
our Equinox(TM) cancer treatment equipment and for our Avanza patient
positioning treatment table.
In February, we signed a six-year renewable contract with Molecular
Insight Pharmaceuticals, Inc. (MIP) to manufacture and supply Zemiva(TM), a
molecular imaging pharmaceutical being developed for cardiac ischemia, or
insufficient blood flow to the heart. Zemiva(TM), currently in clinical
trials, is targeted for the emergency department setting. This contract will
enable us to build upon our strong development partnership with MIP through
the use of our significant development and manufacturing capabilities to meet
the commercial market needs of Zemiva(TM). As a result of the contract, we
will expand our Good Manufacturing Practice (GMP) manufacturing capabilities
at our Vancouver facility to support the clinical program and commercial
supply of Zemiva(TM).
More recently, we signed a three-year contract with Bradmer
Pharmaceuticals Inc. (Bradmer) for the development and clinical trial supply
of Neuradiab, a monoclonal antibody conjugated to an isotope and used to treat
glioblastoma multiforme (GBM), the most common and deadly form of brain
cancer. In six clinical trials reported by Bradmer involving over 160
glioblastoma multiforme cancer patients, Neuradiab has demonstrated a
significant survival benefit over historical controls. This new agreement with
Bradmer further demonstrates our capabilities in the growing field of
radiotherapeutics.
Business arrangements such as those with Bradmer and MIP are consistent
with our strategic direction in this business as we focus on broadening our
product offerings in medical imaging and radiotherapeutics. Expertise in
radioisotope production and utilization is a key competency for MDS, and we
plan to leverage this knowledge in new product areas. This expansion into new
areas within the overall radiopharmaceutical value chain will serve to offset
softness in the cyclotron isotopes market that has developed as
radiopharmaceutical manufactures have brought new capacity on stream for
in-house supply, reducing demand for outsourced product.
MDS Sciex
Financial Highlights
Second Quarter Year-to-Date
---------------------------- -------------------
% Change % Change
---------------- ---------
2006 2005 Reported Organic 2006 2005 Reported
-------------------------------------------------------------------------
$ 66 $ 65 2% 8% Net revenues $137 $139 (1%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
$ 16 $ 12 33% Operating income $ 31 $ 30 3%
Depreciation and
6 4 amortization 10 7
-------------------------------------------------------------------------
$ 22 $ 16 38% 54% Adjusted EBITDA $ 41 $ 37 11%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Adjusted EBITDA
33% 25% margin 30% 27%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
In the second quarter, our instruments business grew 8% on an organic
basis, driven by the performance of our high-end triple quad LCMS, ion trap,
and TOF/TOF products. We were able to target our manufacturing capacity on the
high-demand products in the quarter, and as a result, we kept up with the
continued strong market demand in this area. While demand in all markets is
up, there has been a noticeable increase in interest from, and sales to, China
and India, offsetting slower market growth in North America and Europe.
We noted in past reports that applied markets, which include forensics,
food testing and similar applications, were fueling demand for mid-range
products, and this trend became more pronounced this quarter. We continue to
view these markets as attractive channels for our technologies.
Reported EBITDA grew 33% compared to fiscal 2005, and on an organic
basis, adjusted EBITDA growth was 54%. During the quarter, we finalized R&D
tax credit claims from prior years, resulting in the recording of $3 million
of investment tax credits not previously recognized. These credits were
recorded as a reduction in net R&D expenses for the quarter. In addition, we
have recorded a $1 million foreign exchange gain on US-dollar denominated debt
incurred in connection with our acquisition of the MALDI-TOF business in 2004.
Excluding these items, adjusted EBITDA growth was 13% and the adjusted EBITDA
margin was 27%, an improvement of 200 basis points from last year.
Capital expenditures in the instruments segment (excluding capitalized
development costs) were $2 million, this year and last.
For the year-to-date, 40% of our revenues were generated from the sale of
products that we introduced in the last two years. This is a strong indication
of the importance of innovation and product differentiation in this market,
which we were able to achieve because R&D remains a key strategic focus in our
instruments business.
We are encouraged by the continued strength from our high-end instruments
and particularly by the growing interest in this level of technology from
China and India, both of which have a rapidly growing presence in
pharmaceutical development. We are also seeing signs of improved growth in the
proteomics market on which our new products are well positioned to capitalize.
We have gradually ramped up activity in our new Singapore facility as we
prepare it to take on a greater role in our manufacturing value stream. We
recently completed ISO 9000 certification of the Singapore plant.
Cell-based assays, in particular label-free formats catered to by our
CellKey(TM) product line, are gaining more attention in the market, although,
as with any new technology, adoption has been gradual. We are continuing to
devote sales effort to promote CellKey(TM) and we see interest in this new
product growing.
MDS Diagnostics
Financial Highlights
Second Quarter Year-to-Date
---------------------------- -------------------
% Change % Change
---------------- ---------
2006 2005 Reported Organic 2006 2005 Reported
-------------------------------------------------------------------------
$ 90 $ 85 6% 6% Net revenues $173 $167 4%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
$ 27 $ 19 42% 42% Operating income $ 44 $ 33 33%
Adjustment:
-----------
- - Restructuring charges 1 -
-------------------------------------------------------------------------
Adjusted operating
27 19 income 45 33
Depreciation and
2 2 amortization 4 4
-------------------------------------------------------------------------
$ 29 $ 21 38% 38% Adjusted EBITDA $ 49 $ 37 32%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Adjusted EBITDA
32% 25% margin 28% 22%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
A new Ontario fee agreement was reached in April between the Ontario
Association of Medical Laboratories (OAML) and the Ontario Ministry of Health
(MOH), resolving uncertainty for our diagnostics business that has existed
since March 2005, when the previous agreement expired. Under the terms of the
new agreement, base fees will be increased 2% in each year of the three-year
term, beginning April 1, 2005.
The agreement also provides for adjustment funding should certain
industry volume thresholds be reached as a result of accommodating the needs
of long-term care patients and new physicians, among other criteria. Under
this arrangement, funding adjustments could be made to a maximum of 0.8%, 2.9%
and 4.9% over the March 31, 2005 provincial funding cap, for the years ending
March 31, 2006, March 31, 2007, and March 31, 2008, respectively. If earned,
these funding adjustments would be paid annually to OAML members according to
their respective proportional shares of the provincial funding cap.
Completion of the new three-year fee agreement in Ontario is a
substantial step forward for our diagnostics business. The agreement provides
certainty about minimum fees for the industry until March 2008, and provides
for increased fees to cover a portion of the incremental volumes that clinical
laboratories are experiencing as patient volumes grow.
We have been operating under the terms of the previous fee agreement
since April 1, 2005 and we have been performing the lab testing and incurring
the related costs associated with that work since that time. As we do not
recognize any fee increase until such time as a fee agreement is signed, our
results for the second quarter include $3 million of base-level fee
adjustments related to the period prior to February 1, 2006. As the industry
volumes for the year ended March 31, 2006 exceeded the thresholds at which the
adjustment funding is payable, we also recorded $1 million of adjustment fees
in the quarter related to previous periods.
Excluding the retroactive fees included in income in the quarter,
adjusted EBITDA for diagnostics increased to $25 million compared to
$21 million reported last year, and our adjusted EBITDA margin improved to 29%
from 25% last year. We have maintained the margin expansion begun last fall
that is a direct result of the cost realignment initiatives launched in
September last year and the LeanSigma projects that we currently have
underway.
Capital expenditures in the diagnostics segment were $1 million in the
quarter this year.
Corporate
Financial Highlights
Second Quarter Year-to-Date
---------------- ----------------
2006 2005 2006 2005
-------------------------------------------------------------------------
$ (19) $ (1) Operating costs before depreciation $ (28) $ (8)
Adjustments:
------------
7 - Valuation provisions 7 -
2 - Mark-to-market adjustment 3 -
- - Restructuring charges 2 1
-------------------------------------------------------------------------
$ (10) $ (1) Adjusted operating costs $ (16) $ (7)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
In September 2005, we announced our intention to monetize our investment
in MDS Capital Corp. and other investments. During the quarter, we recorded
$7 million as our share of provisions and other losses incurred as these
investments are positioned for sale. We continue to review disposal options
for these holdings.
From time-to-time we enter into derivative contracts to hedge our
exposure to foreign currency exchange rates and interest rates. During the
fourth quarter of 2005, certain interest rate swaps became ineffective for
hedge accounting purposes and, as a consequence, are now subject to mark-to-
market accounting. In the second quarter, we recorded a non-cash loss of
$2 million on these swaps.
Corporate expenditures in the second quarter of 2005 were abnormally low
due to a high level of gains on foreign exchange in the quarter and equity
earnings from MDS Capital Corp., neither of which was repeated this year. As
noted previously, corporate spending in the current quarter included
$2 million of special consulting costs associated with the FDA review.
Interest expense was $5 million for the quarter this year and $4 million
for the prior year. The increase from 2005 reflects the impact of gradually
increasing short-term interest rates and the imputed interest cost on a
government loan associated with the MAPLE project, on which we are no longer
able to capitalize the interest cost. Dividend and interest income was
$2 million compared to $3 million last year.
Income taxes
As the retroactive lab fee increase in Ontario is largely sheltered from
tax, the effective tax rate for the second quarter of 2006 was 19% compared to
22% for the same quarter of last year.
Discontinued operations
The results of our discontinued businesses were as follows:
Second Quarter Year-to-Date
-------------------------------------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
Net revenues $ 18 $ 90 $ 57 $ 176
Cost of revenues (16) (75) (49) (147)
Selling, general and
administration (4) (11) (8) (20)
Depreciation and amortization - - (1) (2)
-------------------------------------------------------------------------
Operating income (loss) (2) 4 (1) 7
Gain on sale of Source - - 28 -
Income taxes - - - (2)
Minority interest - (1) (1) (2)
-------------------------------------------------------------------------
Income (loss) from discontinued
operations $ (2) $ 3 $ 26 $ 3
-------------------------------------------------------------------------
Basic earnings (loss) per share $ (0.01) $ 0.02 $ 0.18 $ 0.02
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liquidity and capital resources
April 30 October 31
2006 2005 Change
-------------------------------------------------------------------------
Cash and cash equivalents $ 359 $ 265 35%
Operating working capital(1) $ 130 $ 84 55%
Current ratio 2.1 1.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Our measure of operating working capital equals accounts receivable
plus unbilled revenue and inventory less accounts payable, accrued
liabilities, and current deferred revenue.
Cash and cash equivalents has risen $94 million since year-end and
$77 million since January 31, 2006. Aside from operating cash flows, the main
components of the increase since January are the cash received on the MAPLE
settlement and from the sale of CLS.
Accounts receivable and inventories are both down from year-end. The
considerable reduction in inventories reflects the sale of $53 million of
MAPLE inventories to AECL on closing of the agreement. Accounts receivable and
unbilled revenue fluctuations reflect ordinary cycles in the businesses.
Accounts payable are down substantially, reflecting payment of normal year-end
accruals, restructuring costs, and the assumption by AECL of liabilities
associated with the MAPLE project.
Excluding the cash provided by the MAPLE settlement, cash used in
investing activities (excluding discontinued operations) was $16 million,
reflecting capital asset additions.
Cash was provided by financing activities (excluding discontinued
operations) during the quarter of $5 million, due to cash proceeds from shares
issued under our various stock purchase plans. In the second quarter of last
year we repurchased 276,100 common shares for $5 million under our Normal
Course Issuer Bid (NCIB). We made no purchases under our NCIB during the
current quarter.
Our liquidity needs can be satisfied from cash generated from operations
and short-term borrowings against our available lines of credit. During 2005,
we negotiated a $500 million, five-year committed, revolving credit facility,
which replaced our previous $225 million credit facility. No funds were
borrowed under the facility as of April 30, 2006. We believe that cash flow
generated from operations, coupled with available borrowings from existing
financing sources, will be sufficient to meet our anticipated capital
expenditures, research and development expenditures and other cash
requirements in 2006. At this time, we do not reasonably expect any presently
known trend or uncertainty to affect our ability to access our current sources
of cash. We remain in compliance with all covenants for our senior unsecured
notes and our bank credit facility.
Contractual obligations
Subsequent to the end of the quarter, we renegotiated a substantial
commitment related to outsourced information technology support. As a result,
long-term obligations under these contracts of $211 million outstanding at the
end of fiscal 2005 have been eliminated. We are currently in negotiation with
alternative providers for these services and expect to enter into replacement
agreements during the third quarter.
There have been no other material changes in contractual obligations
since October 31, 2005, with the exception of those contained in the MAPLE
settlement agreement, described elsewhere in this document.
There has been no substantive change in any of our long-term debt or
other long-term obligations since October 31, 2005. We have not entered into
any new guarantees of the debt of other parties, nor do we have any off-
balance sheet arrangements.
Derivative instruments
We use derivative financial instruments to manage our foreign currency
and interest rate exposure. These instruments consisted of forward foreign
exchange and option contracts and interest rate swap agreements entered into
in accordance with established risk management policies and procedures. All
derivative instrument contracts are with banks listed on Schedules I to III to
the Bank Act (Canada) and the Company utilizes financial information provided
by certain of these banks to determine the fair market values of the financial
instruments.
The unrecorded mark-to-market value of derivative instruments at
April 30, 2006 was $9 million. As noted previously, we recorded a $2 million
mark-to-market loss on interest rate swaps during the second quarter of 2006.
Capitalization
April October
2006 2005 Change
-------------------------------------------------------------------------
Long-term debt $ 446 $ 468 (5%)
Less: cash and cash equivalents 359 265 35%
-------------------------------------------------------------------------
Net debt 87 203 (57%)
Minority interest 16 20 (20%)
Shareholders' equity 1,522 1,425 7%
-------------------------------------------------------------------------
Capital employed(1) $ 1,625 $ 1,648 (1%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Capital employed is a measure of how much of our net assets are
financed by debt and equity.
Long-term debt decreased $22 million over the first half of fiscal 2006,
due principally to revaluation of our US-dollar denominated long-term debt.
The US dollar has depreciated by $0.06 since October 31, 2005, resulting in a
further unrealized gain on our senior unsecured notes of $20 million and
bringing the total cumulative unrealized gain to $144 million. This unrealized
gain is recorded in the currency translation adjustment account.
Quarterly highlights
Following is a summary of selected financial information derived from the
Company's unaudited interim period consolidated financial statements for each
of the eight most recently completed quarters. This financial data has been
prepared in accordance with Canadian GAAP and prior periods have been restated
to reflect the discontinuance of the operations discussed above.
(millions of Canadian dollars, except earnings per share)
-------------------------------------------------------------------------
Trailing
4 Quarters Apr 2006 Jan 2006 Oct 2005 Jul 2005
-------------------------------------------------------------------------
Net revenues $ 1,492 $ 369 $ 365 $ 390 $ 368
Operating income
(loss) $ 63 $ 29 $ 43 $ (35) $ 26
Income (loss)
from continuing
operations $ 30 $ 18 $ 27 $ (29) $ 14
Net income (loss) $ 42 $ 16 $ 55 $ (48) $ 19
Earnings (loss)
per share from
continuing
operations
Basic and
diluted $ 0.21 $ 0.13 $ 0.19 $ (0.21) $ 0.10
Earnings (loss)
per share
Basic and
diluted $ 0.30 $ 0.12 $ 0.38 $ (0.34) $ 0.14
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(millions of Canadian dollars, except earnings per share)
-------------------------------------------------------------------------
Trailing
4 Quarters Apr 2005 Jan 2005 Oct 2004 Jul 2004
-------------------------------------------------------------------------
Net revenues $ 1,481 $ 362 $ 369 $ 375 $ 375
Operating income
(loss) $ 163 $ 38 $ 47 $ 11 $ 67
Income (loss)
from continuing
operations $ 113 $ 27 $ 30 $ 5 $ 51
Net income (loss) $ 119 $ 30 $ 30 $ 9 $ 50
Earnings (loss)
per share from
continuing
operations
Basic and
diluted $ 0.79 $ 0.19 $ 0.21 $ 0.03 $ 0.36
Earnings (loss)
per share
Basic and
diluted $ 0.83 $ 0.21 $ 0.21 $ 0.06 $ 0.35
-------------------------------------------------------------------------
-------------------------------------------------------------------------
On a trailing four quarters basis, reported revenues have increased 1%
and income from continuing operations is down 73%. Earnings per share from
continuing operations are down by 73%. There were no unusual seasonal
variations in these two 12-month periods. Operating income for the quarter
ended October 2004 was reduced by $35 million due to valuation and other
provisions related to long-term investments and deferred development costs.
Operating income for the quarter ended October 31, 2005 is net of
restructuring provisions amounting to $67 million and asset valuation
provisions totaling $13 million.
Outlook
The second quarter of fiscal 2006 has been strong for all businesses
except the bioanalytical business of MDS Pharma Services, where the on-going
efforts associated with the FDA review and the impact on business development
activities had a significant impact on earnings. We have redoubled our
attention on this issue and will retain this focus until the FDA is satisfied
with our analysis and conclusions.
Foreign currency remains a critical issue for our businesses as both the
US dollar and the Euro continue to decline relative to the Canadian dollar.
The diminished protection afforded by our hedges will continue to have an
impact on our reported operating results this year. We will provide analysis
of our results on an organic basis to help provide a clearer understanding of
the trends affecting our businesses. We expect to switch to US dollar and US
GAAP reporting following the completion of a diagnostics transaction.
Continued significant contract wins by our late-stage businesses and the
steady growth of the early-stage businesses other than bioanalytical are
encouraging. The profitability of more recent contracts is better than that of
many of the older contracts still in backlog. As we complete work on these
older contracts we expect to see a gradual improvement in the performance of
the late-stage business.
Our isotopes business has been very successful in the first half of 2006.
We demonstrated our ability to step-up production of certain critical isotopes
to meet the unexpected supply disruption experienced in the market. We are
hopeful that some of the increase in business we experienced in recent months
will be retained, but it is too early to determine whether we will be able to
maintain an improved market share. Our cobalt businesses continue to be steady
performers, but short-term supply volatility is still an issue. Expected high
levels of electricity demand in Ontario this summer have caused some of our
suppliers of cobalt to modify their maintenance schedules. Although this will
have little effect in the medium-term, we anticipate these schedule changes
will affect the timing of cobalt deliveries during the last half of the year.
Continued strong sales of high-end instruments resulted in a
substantially higher adjusted EBITDA margin in MDS Sciex this quarter compared
to last year. Our organic growth is in line with market growth rates and we
see no reason to believe this will change. At this time we see strong
indications of interest from customers in China and India and improving trends
in other major markets.
We remain on track to achieve our targeted improvement of a 150 to 200
basis point reduction in SG&A expenses as a percent of revenue. For the year-
to-date we are 170 basis points below last year's rate, despite significant
investments in Sarbanes-Oxley (SOx) compliance and the FDA review. SG&A
spending for the quarter includes $2 million related directly to our ongoing
efforts to ensure compliance with the SOx regulatory requirements this year.
Our SOx activities will continue throughout the year at approximately this
same quarterly rate. We have essentially completed our assessment phase and we
are now working on remediating identified deficiencies. We are working closely
with our auditors, and have established a clear plan for their audit
procedures to enable them to complete their work in a timely and effective
manner. Our focus is to complete the required SOx assessments for all of our
continuing businesses by year-end and to put plans in place to address any
identified deficiencies.
Overall, we have had a very strong first half despite challenges in our
bioanalytical business. In the second half our focus will be on the completion
of a transaction involving our diagnostics business, while we take steps to
maintain momentum across all of our businesses.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(UNAUDITED)
-------------------------------------------------------------------------
As at April 30 with comparatives at October 31 2006 2005
(millions of Canadian dollars) (Restated
Note 5)
-------------------------------------------------------------------------
ASSETS
Current
Cash and cash equivalents $ 359 $ 265
Accounts receivable 267 278
Unbilled revenue 142 115
Inventories 112 163
Income taxes recoverable 7 3
Current portion of future tax asset 18 19
Prepaid expenses and other 28 21
Assets held for sale (note 5) 7 114
-------------------------------------------------------------------------
940 978
Property, plant and equipment (note 3) 416 841
Future tax asset 117 118
Long-term investments and other (note 2) 213 159
Goodwill 535 541
Other intangibles (note 3) 385 43
-------------------------------------------------------------------------
Total assets $ 2,606 $ 2,680
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities $ 270 $ 353
Deferred revenue 121 119
Income taxes payable 34 28
Current portion of unrealized benefit
of future tax asset 17 16
Current portion of long-term debt 13 13
Liabilities related to assets held for
sale (note 5) 1 50
-------------------------------------------------------------------------
456 579
Long-term debt 433 455
Deferred revenue 21 26
Unrealized benefit of future tax asset 54 64
Other long-term obligations 34 42
Future tax liabilities 70 69
Minority interest 16 20
-------------------------------------------------------------------------
$ 1,084 $ 1,255
-------------------------------------------------------------------------
Shareholders' equity
Share capital (note 4) 875 847
Retained earnings 665 604
Currency translation adjustment (18) (26)
-------------------------------------------------------------------------
1,522 1,425
-------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 2,606 $ 2,680
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(see note 5 - Discontinued Operations)
-------------------------------------------------------------------------
Three months Six months
to April 30 to April 30
-------------------------------------------------------------------------
(millions of Canadian 2006 2005 2006 2005
dollars, except per (Restated (Restated
share amounts) Note 5) Note 5)
-------------------------------------------------------------------------
Net revenues $ 369 $ 362 $ 734 $ 731
Cost of revenues (229) (222) (457) (448)
Selling, general and
administration (71) (80) (140) (151)
Research and development
(note 6) (1) (9) (7) (16)
Depreciation and amortization (20) (17) (38) (33)
Restructuring charges (note 7) (1) 1 (3) -
Other expenses (note 9) (12) - (13) -
Equity earnings (loss) (6) 3 (4) 2
-------------------------------------------------------------------------
Operating income 29 38 72 85
-------------------------------------------------------------------------
Interest expense (5) (4) (8) (9)
Dividend and interest income 2 3 4 4
-------------------------------------------------------------------------
Income from continuing
operations before income
taxes and minority interest 26 37 68 80
Income taxes (note 14) (5) (8) (18) (19)
Minority interest - net of tax (3) (2) (5) (4)
-------------------------------------------------------------------------
Income from continuing
operations 18 27 45 57
Income (loss) from
discontinued operations -
net of tax (note 5) (2) 3 26 3
-------------------------------------------------------------------------
Net income $ 16 $ 30 $ 71 $ 60
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted
earnings (loss) per
share (note 8)
- from continuing
operations $ 0.13 $ 0.19 $ 0.32 $ 0.40
- from discontinued
operations (0.01) 0.02 0.18 0.02
-------------------------------------------------------------------------
Basic and diluted
earnings per share $ 0.12 $ 0.21 $ 0.50 $ 0.42
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(UNAUDITED)
-------------------------------------------------------------------------
Three months Six months
to April 30 to April 30
-------------------------------------------------------------------------
(millions of Canadian
dollars) 2006 2005 2006 2005
-------------------------------------------------------------------------
Retained earnings,
beginning of period $ 654 $ 621 $ 603 $ 599
Net income 16 30 71 60
Repurchase of shares - (3) - (8)
Dividends - cash (4) (4) (7) (7)
Dividends - stock (1) (2) (2) (2)
-------------------------------------------------------------------------
Retained earnings,
end of period $ 665 $ 642 $ 665 $ 642
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
-------------------------------------------------------------------------
Three months Six months
to April 30 to April 30
-------------------------------------------------------------------------
(millions of Canadian 2006 2005 2006 2005
dollars) (Restated (Restated
Note 5) Note 5)
-------------------------------------------------------------------------
Operating activities
Net income $ 16 $ 30 $ 71 $ 60
Income (loss) from
discontinued operations (2) 3 26 3
-------------------------------------------------------------------------
Income from continuing
operations 18 27 45 57
Items not affecting
current cash flow (note 11) 30 23 48 42
Changes in non-cash working
capital balances relating
to operations (note 11) 3 (1) (57) (22)
-------------------------------------------------------------------------
Cash provided by operating
activities of continuing
operations 51 49 36 77
Cash provided by (used in)
operating activities of
discontinued operations - 4 (1) 3
-------------------------------------------------------------------------
51 53 35 80
-------------------------------------------------------------------------
Investing activities
Increase in deferred
development charges (2) (10) (4) (10)
Acquisitions - (2) - (2)
Proceeds from Maple
transaction 27 - 27 -
Purchase of capital assets (15) (20) (28) (36)
Other 1 (2) (18) (3)
-------------------------------------------------------------------------
Cash provided by (used in)
investing activities of
continuing operations 11 (34) (23) (51)
-------------------------------------------------------------------------
Cash used in investing
activities of discontinued
operations - (1) - (1)
-------------------------------------------------------------------------
Cash from proceeds on sale
of discontinued operations 11 - 86 -
-------------------------------------------------------------------------
Financing activities
Repayment of long-term debt (1) (1) (1) (1)
Decrease in deferred revenue
and other long-term
obligations 1 - (8) (5)
Payment of cash dividends (3) (3) (7) (7)
Issuance of shares 10 1 21 5
Repurchase of shares - (5) - (13)
Distribution to minority
interest (2) (1) (9) (8)
-------------------------------------------------------------------------
Cash provided by (used in)
financing activities of
continuing operations 5 (9) (4) (29)
-------------------------------------------------------------------------
Effect of foreign exchange
rate changes on cash and
cash equivalents (1) 1 - 3
-------------------------------------------------------------------------
Increase in cash position
during the period 77 10 94 2
Cash position, beginning
of period 282 288 265 296
-------------------------------------------------------------------------
Cash position, end of
period $ 359 $ 298 $ 359 $ 298
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash position comprises cash and cash equivalents
See accompanying notes
-------------------------------------------------------------------------
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tabular amounts in millions of Canadian dollars, except where noted)
-------------------------------------------------------------------------
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, 2005, except as
disclosed below, 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.
Prior year's amounts have been restated to reflect the results of
discontinued operations, and a change in the way the Company reports
segmented information.
(a) Accounting Policy Changes
(i) Non-monetary Transactions
In June 2005, the CICA issued Handbook Section 3831 - Non-
monetary Transactions (Section 3831) to revise and replace the
current standards on non-monetary transactions. The Company has
chosen early adoption of this policy, as permitted, effective
with the interim period commencing August 1, 2005. Retroactive
application is not permitted.
The new section requires all non-monetary transactions to be
measured at the fair value of the asset given up or the asset
received, whichever is more reliable, unless the transaction
lacks commercial substance, among other exceptions. The
commercial substance requirement is met when an entity's future
cash flows are expected to change significantly as a result of
the transaction.
Adoption of this Handbook Section did not have an impact on the
Company's results from operations or financial position of the
Company for the period.
(ii) Asset Retirement Obligations
The Company adopted CICA Handbook Section 3110 - Asset
Retirement Obligations (AROs), on November 1, 2004. This section
describes how to recognize and measure liabilities related to
legal obligations of retiring property, plant and equipment.
The Company has identified an asset retirement obligation
relating to decommissioning costs of a facility located in
Kanata, Ontario. A liability will be recognized in the period in
which sufficient information exists to estimate the range of
potential settlement dates that is required to use a present
value technique to estimate fair value.
(b) Measurement Uncertainty
To determine the assets held for sale related to those operations
classified as discontinued operations, we are required to make estimates
and assumptions that affect the reported amounts of these assets and
liabilities and, therefore, these amounts are subject to measurement
uncertainty.
2. Long-term Investments and Other
Long-term investments and other includes $13 million relating to the
Company's investment in Hemosol Corp. Due to measurement uncertainty, the
Company is not able to determine if proceeds from the sale of the assets
of Hemosol Corp. will be sufficient to recover the Company's investment.
The investment is available for sale.
3. Intangible Assets
On February 22, 2006 MDS announced the conclusion of a comprehensive
mediation process with Atomic Energy of Canada Limited (AECL) related to
the MAPLE reactor project. Under the new agreement, AECL immediately paid
MDS $25 million, net of applicable taxes. AECL assumed complete ownership
of the MAPLE facilities and is now responsible for all costs associated
with completing the project and the production of medical isotopes. MDS
and AECL have entered into a 40-year supply agreement similar to the
current National Research Universal (NRU) supply agreement and AECL will
acquire all inventories associated with the MAPLE project.
In accordance with CICA Handbook Section 3831, "Non-monetary
Transactions", the Company exchanged the MAPLE asset for a 40-year supply
agreement which has been recorded as an intangible asset at its fair
value of $344 million. This amount will be amortized on a straight-line
basis over a 40-year period once commercial production of MAPLE isotopes
begins. AECL also acquired $53 million of MAPLE-related inventories which
will be paid for over four years commencing in 2008. As a result of this
agreement, a long-term note receivable for $43 million has been
established and MDS has recorded a $10 million non-cash charge this
quarter.
4. Share Capital and Stock Options
The following table summarizes information on share capital and stock
options and related matters as at April 30, 2006:
(number of shares in thousands) Number Amount
-------------------------------------------------------------------------
Common shares
Balance as at October 31, 2005 142,099 $ 847
Issued during the period 1,696 28
-------------------------------------------------------------------------
Balance as at April 30, 2006 143,795 $ 875
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the quarter, the Company did not repurchase or cancel any
Common shares.
Average
Exercise
(number of shares in thousands) Number Price
-------------------------------------------------------------------------
Stock options
Balance as at October 31, 2005 7,673 $ 17.76
Activity during the period:
Granted 984 20.08
Exercised (1,511) 13.98
Cancelled or forfeited (559) 20.06
-------------------------------------------------------------------------
Balance as at April 30, 2006 6,587 $ 18.78
-------------------------------------------------------------------------
-------------------------------------------------------------------------
There were 4,039 stock options exercisable as at April 30, 2006.
5. Discontinued Operations
The results of discontinued operations in the quarter were as follows:
Three months to Six months to
April 30 April 30
-------------------------------------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
Net revenues $ 18 $ 90 $ 57 $ 176
Cost of revenues (16) (75) (49) (147)
Selling, general and administration (4) (11) (8) (20)
Depreciation and amortization - - (1) (2)
-------------------------------------------------------------------------
Operating income (2) 4 (1) 7
Gain on sale of Source - - 28 -
Income taxes - - - (2)
Minority interest - (1) (1) (2)
-------------------------------------------------------------------------
Income (loss) from discontinued
operations $ (2) $ 3 $ 26 $ 3
-------------------------------------------------------------------------
Basic earnings (loss) per share $(0.01) $ 0.02 $ 0.18 $ 0.02
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Company has committed to a plan to divest a number of business
operations that are no longer part of the Company's strategic plan.
In 2005, the Company approved a plan to divest of its Pharmaceutics,
Fermentation Biopharmaceutics/Biosafety, and in vitro Pharmacology
operations within the MDS Pharma Services business. The Company's partner
in Calgary Laboratory Services LP (CLS) exercised its right to buy out
the Company's partnership interest, and as a result, this interest was
classified as a discontinued operation.
During the quarter MDS, through its subsidiary Bow Valley Diagnostic
Services Inc., signed an agreement to sell its partnership interest in
Calgary Laboratory Services to its partner, the Calgary Health Region.
MDS received proceeds of $21 million from the sale.
In accordance with Section 3475 of the CICA Handbook, long-lived assets
classified as held for sale are measured at the lower of carrying value
and fair value less costs to sell. As at April 30, 2006, assets of
certain operations are held for sale and the sale of these operations is
expected to occur within one year.
Assets held for sale and related liabilities as at April 30, 2006 with
comparatives as at October 31, 2005 comprised:
2006 2005
-------------------------------------------------------------------------
Accounts receivable $ 1 $ 32
Inventory - 24
Capital assets 4 32
Goodwill 2 26
-------------------------------------------------------------------------
Total assets held for sale(1) 7 114
-------------------------------------------------------------------------
Current liabilities - 38
Other long-term obligations 1 12
-------------------------------------------------------------------------
Liabilities related to assets held for sale $ 1 $ 50
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Assets held for sale have been classified as current as the Company
has signed agreements where such assets are expected to be disposed
of within the current fiscal period.
6. Research and Development
Three months to Six months to
April 30 April 30
-------------------------------------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
Gross expenditures $ 14 $ 25 $ 29 $ 48
Investment tax credits (4) (2) (5) (4)
Recoveries from partners (7) (9) (14) (18)
Development costs deferred (2) (5) (3) (10)
-------------------------------------------------------------------------
Research and development expense $ 1 $ 9 $ 7 $ 16
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three months ended April 30, 2006 depreciation and amortization
includes $1 million (2005 - $1 million) related to research and
development.
7. Restructuring Charges
An analysis of the activity in the provision through April 30, 2006 is
as follows:
Cumulative Provision
Restruc- drawdowns Balance
turing ---------------- at April
Charge Cash Non-cash 30, 2006
-------------------------------------------------------------------------
2005:
Workforce reductions $ 52 $ (38) $ (1) $ 13
Equipment and other asset
writedowns - adjustment 8 - (8) -
Contract cancellation charges 12 (2) - 10
-------------------------------------------------------------------------
$ 72 $ (40) $ (9) $ 23
-------------------------------------------------------------------------
2006:
Workforce reductions $ 1 $ (1) $ - $ -
Stock option related charges 2 - (2) -
-------------------------------------------------------------------------
$ 3 $ (1) $ (2) $ -
-------------------------------------------------------------------------
$ 23
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Company has continued to utilize the reserves established in prior
years relating to change initiatives affecting support services, senior
management reductions, and system implementations.
8. Earnings per Share
(a) Dilution
Three months to Six months to
April 30 April 30
-------------------------------------------------------------------------
(number of shares in millions) 2006 2005 2006 2005
-------------------------------------------------------------------------
Net income available to Common
shareholders $ 16 $ 30 $ 71 $ 60
Weighted average number of Common
shares outstanding - basic 143 141 143 141
Impact of stock options assumed
exercised 1 1 1 1
-------------------------------------------------------------------------
Weighted average number of Common
shares outstanding - diluted 144 142 144 142
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(b) Pro Forma Impact of Stock-Based Compensation
Compensation expense related to the fair value of stock options granted
prior to November 1, 2003 is excluded from the determination of net
income and is, instead, calculated and disclosed on a pro forma basis in
the notes to the consolidated financial statements. Compensation expense
for purposes of these pro forma disclosures is determined in accordance
with a methodology prescribed in CICA Handbook Section 3870 "Stock-Based
Compensation and Other Stock-Based Payments". The Company used the
Black-Scholes option valuation model to estimate the fair value of
options granted.
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 Six months to
April 30 April 30
-------------------------------------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
Net income $ 16 $ 30 $ 71 $ 60
Compensation expense for options
granted prior to November 1, 2003 - (1) (2) (3)
-------------------------------------------------------------------------
Net income - pro forma 16 29 69 57
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted earnings per
share $ 0.12 $ 0.20 $ 0.49 $ 0.40
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the quarter, the Company granted 49,700 options (2005 - 410,000)
at an average exercise price of $19.72 (2005 - $16.76). These options
have a fair value determined using the Black-Scholes model of $4.39 per
share, (2005 - $5.28) based on the following assumptions:
2006 2005
-------------------------------------------------------------------------
Risk-free interest rate 3.9 % 3.8 %
Expected dividend yield 0.7 % 0.7 %
Expected volatility 0.23 0.34
Expected time to exercise (years) 3.25 5.25
-------------------------------------------------------------------------
-------------------------------------------------------------------------
9. Other Expenses
Three months to Six months to
April 30 April 30
-------------------------------------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
Writedown of other long-term
assets $ - $ - $ (1) $ -
Unrealized loss on interest rate
swaps (2) - (2) -
Loss on sale of Maple assets (10) - (10) -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other expenses $ (12) $ - $ (13) $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
10. Post Employment Obligations
The Company sponsors various post-employment benefit plans including
defined benefit and contribution pension plans, retirement compensation
arrangements, and plans that provide extended health care coverage to
retired employees. All defined benefit pension plans sponsored by the
Company are funded plans. Other post-employment benefits are unfunded.
During 2005, the Company amended the terms of certain post-employment
plans such that effective January 1, 2008, and subject to certain
transitional conditions, newly retired employees will no longer be
entitled to extended health care benefits.
The post employment obligation expense for the quarter was $1 million
(2005 - $1 million).
11. Supplementary Cash Flow Information
Non-cash items affecting net income comprise:
Three months to Six months to
April 30 April 30
-------------------------------------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
Depreciation and amortization $ 20 $ 17 $ 38 $ 33
Minority interest 2 3 5 5
Stock option compensation - - 3 1
Deferred revenue (2) - (5) -
Future income taxes (12) (2) (10) -
Equity earnings - net of
distribution 8 1 8 2
Writedown of Maple assets 10 - 10 -
Other 4 4 (1) 1
-------------------------------------------------------------------------
$ 30 $ 23 $ 48 $ 42
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Changes in non-cash working capital balances relating to operations
include:
Three months to Six months to
April 30 April 30
-------------------------------------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
Accounts receivable $ (18) $ (23) $ 11 $ (5)
Unbilled revenue (41) 20 (27) -
Inventories 50 - 51 1
Accounts payable and deferred
revenue 11 5 (86) (11)
Income taxes (3) (4) 1 (2)
Foreign exchange and other 4 1 (7) (5)
-------------------------------------------------------------------------
$ 3 $ (1) $ (57) $ (22)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
12. Segmented Information
Three months to April 30, 2006
-------------------------------------------------------------------------
Pharma-
ceutical Instru- Diag- Corporate
Services Isotopes ments nostics and Other Total
-------------------------------------------------------------------------
Net revenues $ 130 $ 83 $ 66 $ 90 $ - $ 369
Cost of revenues (97) (43) (38) (51) - (229)
Selling, general
and administration (29) (15) (5) (10) (12) (71)
Research and
development - - (1) - - (1)
Depreciation and
amortization (8) (4) (6) (2) - (20)
Restructuring
charges (1) - - - - (1)
Other expenses - (10) - - (2) (12)
Equity earnings
(loss) (1) - - - (5) (6)
-------------------------------------------------------------------------
Operating income
(loss) $ (6) $ 11 $ 16 $ 27 $ (19) $ 29
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total assets $ 884 $ 739 $ 188 $ 241 $ 554 $ 2,606
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital
expenditures $ 9 $ - $ 2 $ 1 $ 3 $ 15
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months to April 30, 2005
-------------------------------------------------------------------------
Pharma-
ceutical Instru- Diag- Corporate
Services Isotopes ments nostics and Other Total
-------------------------------------------------------------------------
Net revenues $ 137 $ 75 $ 65 $ 85 $ - $ 362
Cost of revenues (98) (37) (37) (50) - (222)
Selling, general
and administration (38) (19) (5) (15) (3) (80)
Research and
development (1) (1) (7) - - (9)
Depreciation and
amortization (7) (3) (4) (2) (1) (17)
Restructuring
charges 1 - - - - 1
Other expenses - - - - - -
Equity earnings
(loss) - - - 1 2 3
-------------------------------------------------------------------------
Operating income
(loss) $ (6) $ 15 $ 12 $ 19 $ (2) $ 38
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total assets $ 1,025 $ 753 $ 214 $ 310 $ 466 $ 2,768
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital
expenditures $ 4 $ 8 $ 2 $ - $ 6 $ 20
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Six months to April 30, 2006
-------------------------------------------------------------------------
Pharma-
ceutical Instru- Diag- Corporate
Services Isotopes ments nostics and Other Total
-------------------------------------------------------------------------
Net revenues $ 259 $ 165 $ 137 $ 173 $ - $ 734
Cost of revenues (190) (83) (82) (102) - (457)
Selling, general
and administration (62) (28) (8) (23) (19) (140)
Research and
development - (1) (6) - - (7)
Depreciation and
amortization (16) (8) (10) (4) - (38)
Restructuring
charges - - - (1) (2) (3)
Other expenses - (10) - - (3) (13)
Equity earnings
(loss) (1) - - 1 (4) (4)
-------------------------------------------------------------------------
Operating income
(loss) $ (10) $ 35 $ 31 $ 44 $ (28) $ 72
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital
expenditures $ 17 $ - $ 3 $ 2 $ 6 $ 28
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Six months to April 30, 2005
-------------------------------------------------------------------------
Pharma-
ceutical Instru- Diag- Corporate
Services Isotopes ments nostics and Other Total
-------------------------------------------------------------------------
Net revenues $ 275 $ 150 $ 139 $ 167 $ - $ 731
Cost of revenues (191) (75) (79) (103) - (448)
Selling, general
and administration (75) (30) (10) (28) (8) (151)
Research and
development (1) (2) (14) - 1 (16)
Depreciation and
amortization (14) (7) (7) (4) (1) (33)
Restructuring
charges 1 - - - (1) -
Other expenses - - - - - -
Equity earnings
(loss) - - 1 1 - 2
-------------------------------------------------------------------------
Operating income
(loss) $ (5) $ 36 $ 30 $ 33 $ (9) $ 85
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital
expenditures $ 8 $ 12 $ 4 $ - $ 12 $ 36
-------------------------------------------------------------------------
-------------------------------------------------------------------------
13. Financial Instruments
The carrying amounts and fair values for all derivative financial
instruments are as follows:
Three months to April 30
2006 2005
-------------------------------------------------------------------------
Carrying Fair Carrying Fair
amount Value amount Value
-------------------------------------------------------------------------
Asset (liability) position:
Currency forward and option
- asset $ 2 $ 9 $ 3 $ 13
Currency forward and option
- liabilities $ - $ (1) $ (3) $ -
Interest rate swap and option
contracts $ (5) $ (4) $ - $ 1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As of April 30, 2006, the Company had outstanding foreign exchange
contracts and options in place to sell up to US$151 million, and in
certain circumstances up to US$226 million, at a weighted average
exchange rate of C$1.1714 maturing over the next 7 months. The Company
also had interest rate swap contracts that economically convert a
notional amount of US$80 million of debt from a fixed to a floating
interest rate. For accounting purposes, the changes in fair value in
interest rate swaps are charged to income in 2006, whereas hedge
accounting was applied in 2005.
Foreign exchange options and interest rate swaps not eligible for hedge
accounting are included in accounts payable and are marked to market each
period. A $2 million unrealized loss and a $1 million unrealized gain
have been recorded in selling, general and administration in the period
to mark these interest rate swaps and options, respectively, to their
fair market value.
14. Income Taxes
A reconciliation of expected income taxes to reported income tax expense
is provided below. The effective rate for the quarter was 19%
(2005 - 22%).
Three months to April 30
2006 2005
-------------------------------------------------------------------------
Expected income taxes expense at MDS's 35%
statutory rate $ 9 $ 13
Decrease to tax expense as a result of:
Benefit of tax losses previously not recognized (4) (5)
-------------------------------------------------------------------------
Reported income tax expense $ 5 $ 8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
15. Commitments
As at October 31, 2005, MDS had a remaining five-year commitment of
$211 million related to the outsourcing of the information technology
infrastructure. Subsequent to the quarter end, MDS renegotiated the
contract with the current service provider and intends to transition such
services to new vendors starting late in the third quarter of 2006. At
this time, the financial impact cannot be determined. The current
outsourcing partner will support MDS throughout the transition period.
16. Subsequent Event
Subsequent to the quarter end, MDS finalized the sale of its
pharmaceutics operations in Tampa, Florida for proceeds of $5 million.
17. Comparative Figures
Certain figures for the previous year have been reclassified to conform
with the current year's financial statement presentation. In addition,
segmented information for 2005 has been restated to reflect the
discontinued operations reported.
SOURCE MDS Inc.
CONTACT: Investor & Media Inquiries, Sharon Mathers, Vice-President,
Investor Relations and External Communications, (416) 675-6777 ext. 4721,
sharon.mathers@mdsinc.com/
