Strong and Profitable Finish to Year of Significant Improvements at
MDS TORONTO, Dec. 13 /PRNewswire-FirstCall/ -- MDS Inc. (TSX: MDS;
NYSE: MDZ), a company providing products and services to the global
life sciences markets, today reported its fourth quarter 2007
results. For the quarter, MDS reported total revenues of $338
million, net income of $15 million and earnings per share from
continuing operations of $0.14. Adjusted EBITDA rose to $44
million, up 91% from the prior year, and adjusted earnings per
share were $0.09, up from $0.02 in the prior year. On a
year-over-year basis, the significant decline in the value of the
US dollar negatively impacted adjusted EBITDA by approximately $15
million in the fourth quarter. Quarterly Highlights - Delivered
$318 million in net revenues, up 22% from $260 million in prior
year - Delivered adjusted EBITDA of $44 million, up 91% from $23
million last year - Increased adjusted EPS to $0.09, up from $0.02
in the prior year - MDS Analytical Technologies delivered strong
performance at Molecular Devices with $54 million in revenues and
$11 million of adjusted EBITDA, and at Sciex with adjusted EBITDA
of $21 million, up 40% from $15 million last year - MDS Pharma
Services delivered their fifth consecutive quarter of sequential
improvement in profitability with $5 million of adjusted EBITDA, up
$12 million from a loss of $7 million in the prior year - MDS
Nordion delivered a solid quarter with adjusted EBITDA of $21
million, level with the prior year. "I am pleased that we have
delivered strong year-end results across MDS, finishing a year of
significant improvements to support our global growth strategy,"
said Stephen P. DeFalco, President and Chief Executive Officer of
MDS Inc. "I am especially proud of this operational performance in
a quarter of unprecedented currency headwinds." Operating Segment
Results MDS Pharma Services % Change ----------------------- ($
millions) Q4 2007 Q4 2006 Reported Organic
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Net Revenue: Early-stage 66 70 (6%) - Late-stage 57 52 10% -
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123 122 1% -
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Adjusted EBITDA: $ 5 (7) n/m n/m % 4 n/m
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MDS Pharma Services net revenue increased 1% on a reported basis
over the prior year, and was level with last year after adjusting
for the impact of foreign exchange and divestitures. Adjusted
EBITDA was $5 million versus a loss of $7 million last year, an
improvement of $12 million year-over-year. Despite $4 million of
unfavourable foreign exchange versus the third quarter, MDS Pharma
Services delivered its fifth consecutive quarter of sequential
improvement in profitability. Our late-stage businesses continued
to thrive and net revenues grew by 10% over the prior year. This
growth was partially offset by a 6% decline in our early-stage
business. While results in early-stage revenues continued to show
some weakness, we are encouraged that Bioanalytical and Phase I
customers continued to return this quarter. We saw their return
reflected in the strength of new orders, especially with our
Bioanalytical customers, where new orders increased 85% over this
period last year and were up 33% from the third quarter. Our
average backlog for the fourth quarter was $385 million, down 10%
from the prior year, resulting from an increased conversion of
backlog to revenue and a number of contract cancellations in our
Phase II-IV business. During the quarter, MDS Pharma Services
continued to implement its restructuring plan. Our Montreal team
transferred DMPK operations to Bothell, Washington and LC-MS
operations to Lincoln, Nebraska. The Montreal team also largely
completed the staff reductions at our St. Laurent facility,
including most of the staff supporting the FDA site audits, which
appear to be winding down as we enter 2008. We also consolidated
our central laboratory operations in Europe. We have now
implemented 80% of the restructuring initiatives announced earlier
this year that are designed to put MDS Pharma Services on a
profitable growth trajectory. MDS Pharma Services is continuing to
make strategic investments to accelerate top-line growth. We
recently expanded our central lab operations in Beijing, China to
meet the growing demands from pharmaceutical and biotech companies
conducting clinical trials in China. The 300-bed expansion of our
Phase I business in Phoenix, Arizona is scheduled to open in
January 2008, and we are planning to roll out new information
technology systems to enhance our services for our pre-clinical and
central lab customers. MDS Pharma Services also launched a new
brand campaign in November, which highlights our commitment to
deliver "high-quality services on-time". MDS Nordion % Change
----------------------- ($ millions) Q4 2007 Q4 2006 Reported
Organic
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Revenue 76 76 - (4%)
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Adjusted EBITDA: $ 21 21 - 10% % 28 28 - -
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MDS Nordion's reported revenues for the fourth quarter were $76
million, level with the prior year and down 4% organically.
Adjusted EBITDA was $21 million, level as reported and up 10%
organically. Excluding deferred revenue associated with a supply
agreement in 2006, revenues were up 3% compared to the fourth
quarter of last year. This increase was fueled by the strength of
the Canadian dollar and increased revenue from expanding our
TheraSphere(R) markets. These gains were offset by declines in
cobalt shipments and production irradiator systems. During the
quarter, MDS Nordion signed a 17-year contract for the supply of
cobalt-60 with Rosenergoatom, the operating utility of Russia's
nuclear power plants. This contract expands upon an existing
agreement for cobalt-60 that is used to sterilize hospital medical
supplies. As a result of this agreement, MDS Nordion's capacity
will grow by more than 30 percent over the next 10 years, placing
us in a strong position to meet expected growth in the
sterilization market. Subsequent to quarter-end, MDS Nordion signed
an agreement with Best Medical International Inc., a provider of
radiotherapy and oncology products, to divest its external beam
therapy and self-contained irradiator product lines that have
annualized revenues of $32 million. This sale is a key part of MDS
Nordion's growth strategy to focus its resources on being a leading
innovator in molecular medicine. The transaction is expected to be
finalized in the second quarter of 2008. After quarter end, MDS
Nordion received information from Atomic Energy of Canada Limited
(AECL) that an interruption in the supply of medical isotopes is
expected to extend into early to mid-January 2008. AECL advised MDS
Nordion that this extension of the maintenance shutdown at the
National Research Universal reactor is required to complete an
upgrade of the electrical back-up system to address a regulatory
issue. There is federal legislation pending to accelerate the start
up of the reactor. MDS Nordion is concerned about the impact that
AECL's supply disruption is having on patients, and has been
working with back-up suppliers to offset some of the impact. Based
on the latest update from AECL, the financial impact of this
extended interruption is currently expected to reduce MDS Nordion's
adjusted EBITDA by approximately $8 - $9 million in total for the
first quarter of 2008. MDS Analytical Technologies % Change
----------------------- ($ millions) Q4 2007 Q4 2006 Reported
Organic
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Revenue 119 62 92% 2%
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Adjusted EBITDA: $ 32 15 113% 74% % 27 24 - -
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MDS Analytical Technologies delivered strong results in our second
full quarter, which included Molecular Devices, with revenues up
92% to $119 million. Adjusted EBITDA of $32 million was up 113% as
reported and up 74% organically over the same period last year. Our
results were driven by strong demand for Sciex mass spectrometry
products in most of our markets and by our Molecular Devices
business that we acquired earlier this year. Sciex contributed $65
million in revenues and $21 million in adjusted EBITDA in the
fourth quarter, up 40% from the prior year. Mass spectrometry end
user revenue grew 4%. We continue to have strong sales momentum at
Sciex with our high-end triple-quad and ion trap instruments.
Molecular Devices contributed $54 million in revenues and $11
million in adjusted EBITDA. We believe we will meet or exceed our
projected revenue and adjusted EBITDA targets of $190 million and
$45 - $50 million in our first full year of ownership. During the
quarter, MDS Analytical Technologies continued to drive innovation
and growth with the launch of new products. We announced a
significant advance in high-speed imaging technologies with the
release of the MetaMorph(R) ICS (Integrated Confocal System), in
partnership with VisiTech International. As well, MDS Analytical
Technologies launched an automated toxicology testing application
for drugs of abuse with its joint venture partner Applied
Biosystems. The new Cliquid(TM) Drug Screen and Quant Software for
Routine Forensic Toxicology application can deliver faster results,
more thorough screening and ultimately, more accurate analysis.
Conference Call MDS will be holding a conference call today at 9:30
am (EDT) to discuss fourth quarter 2007 results. This call will be
webcast live at http://www.mdsinc.com/ and will also be available
in archived format at
http://www.mdsinc.com/news_events/webcasts_presentations.asp after
the call. About MDS MDS Inc. (TSX: MDS; NYSE: MDZ) is a global life
sciences company that provides market-leading products and services
that our customers need for the development of drugs and diagnosis
and treatment of disease. We are a leading global provider of
pharmaceutical contract research, medical isotopes for molecular
imaging, radiotherapeutics, and analytical instruments. MDS has
more than 5,500 highly skilled people in 28 countries. Find out
more at http://www.mdsinc.com/ or by calling 1-888-MDS-7222, 24
hours a day. Forward-Looking Statement This document contains
forward-looking statements. Some forward-looking statements may be
identified by words like "expects", "anticipates", "plans",
"intends", "indicates" or similar expressions. The statements are
not a guarantee of future performance and are inherently subject to
risks and uncertainties. The Company's actual results could differ
materially from those currently anticipated due to a number of
factors, including, but not limited to, successful integration of
structural changes, including restructuring plans, acquisitions,
technical or manufacturing or supply or distribution issues, the
competitive environment for the Company's products, the degree of
market penetration of the Company's products, and other factors set
forth in reports and other documents filed by the Company with
Canadian and US securities regulatory authorities from time to
time. The use of non-GAAP measures section in the MD&A outlines
the definition of the terms 'organic' and 'adjusted' as used to
explain the operating performance of the Company. We use certain
non-GAAP measures so that readers have a better understanding of
the significant events and transactions that have had an impact on
our results. We provide a reconciliation of these non-GAAP measures
to our GAAP financial results in the accompanying MD&A.
MANAGEMENT'S DISCUSSION AND ANALYSIS December 12, 2007 Following is
management's discussion and analysis (MD&A) of the results of
operations for MDS Inc. (MDS or the Company) for the quarter ended
October 31, 2007 and its financial position as at October 31, 2007.
This MD&A should be read in conjunction with the consolidated
financial statements and notes that follow, all of which have been
prepared in accordance with Canadian generally accepted accounting
principles. For additional information and details, readers are
referred to the annual consolidated financial statements and
MD&A for 2006 and the Company's Annual Information Form (AIF),
all of which are published separately and are available at
http://www.mdsinc.com/ and at http://www.sedar.com/. In addition,
the Company's 40-F filing is available at http://www.edgar.com/.
Our MD&A is intended to enable readers to gain an understanding
of MDS's current results and financial position. We provide
information and analysis in our MD&A comparing the results of
operations for the current period to those of the same period in
the preceding fiscal year and comparing our financial position to
that at the end of the preceding fiscal year. We also provide
analysis and commentary that we believe is required to assess the
Company's future prospects. Accordingly, certain sections of this
report contain forward-looking statements that are based on current
plans and expectations. These forward-looking statements are
affected by risks and uncertainties that are discussed in this
document, as well as in the AIF, and that could have a material
impact on future prospects. Readers are cautioned that actual
events and results will vary. Caution Regarding Forward-Looking
Statements From time to time, we make written or oral
forward-looking statements within the meaning of certain securities
laws, including the "safe harbour" provisions of the Securities Act
(Ontario) and the United States Private Securities Litigation
Reform Act of 1995. This document contains such statements, and we
may make such statements in other filings with Canadian regulators
or the United States Securities and Exchange Commission, in reports
to shareholders or in other communications, including public
presentations. These forward-looking statements include, among
others, statements with respect to our objectives for 2007, our
medium-term goals, and strategies to achieve those objectives and
goals, as well as statements with respect to our beliefs, plans,
objectives, expectations, anticipations, estimates and intentions.
The words "may", "could", "should", "would", "suspect", "outlook",
"believe", "plan", "anticipate", "estimate", "expect", "intend",
"forecast", "objective", "optimistic", and words and expressions of
similar import are intended to identify forward-looking statements.
By their very nature, forward-looking statements involve inherent
risks and uncertainties, both general and specific, which give rise
to the possibility that predictions, forecasts, projections and
other forward-looking statements will not be achieved. We caution
readers not to place undue reliance on these statements as a number
of important factors could cause our actual results to differ
materially from the beliefs, plans, objectives, expectations,
anticipations, estimates and intentions expressed in such
forward-looking statements. These factors include, but are not
limited to: management of operational risks; the strength of the
Canadian and United States economies and the economies of other
countries in which we conduct business; our ability to secure a
reliable supply of raw materials, particularly cobalt and critical
nuclear isotopes; the impact of the movement of the US dollar
relative to other currencies, particularly the Canadian dollar and
the Euro; changes in interest rate policies of the Bank of Canada
and the Board of Governors of the Federal Reserve System in the
United States; the effects of competition in the markets in which
we operate; the timing and technological advancement of new
products introduced by us or by our competitors; the impact of
changes in laws, trade policies and regulations, and enforcement
thereof; judicial judgments and legal proceedings; our ability to
successfully realign our organization, resources and processes; our
ability to complete strategic acquisitions and joint ventures and
to integrate our acquisitions and joint ventures successfully; new
accounting policies and guidelines that impact the methods we use
to report our financial condition; uncertainties associated with
critical accounting assumptions and estimates; the possible impact
on our businesses from natural disasters, public health
emergencies, international conflicts and other developments
including those relating to terrorism; and our success in
anticipating and managing the foregoing risks. We caution that the
foregoing list of important factors that may affect future results
is not exhaustive. When relying on our forward-looking statements
to make decisions with respect to the Company, investors and others
should carefully consider the foregoing factors and other
uncertainties and potential events. We do not undertake to update
any forward-looking statement, whether written or oral, that may be
made from time to time by us or on our behalf. Use of Non-GAAP
Measures In addition to measures based on generally accepted
accounting principles (GAAP), in this MD&A we use terms such as
adjusted operating income; adjusted earnings before interest,
taxes, depreciation and amortization (EBITDA); EBITDA margin;
adjusted net income; adjusted EPS; net revenue; operating working
capital; and backlog. These terms are not defined by GAAP and our
use of such terms or measurement of such items may vary from that
of other companies. In addition, measurement of both reported and
organic growth is not defined by GAAP and our use of these terms or
measurement of these items may vary from that of other companies.
Where relevant, and particularly for earnings-based measures, we
provide tables in this document that reconcile the non-GAAP
measures used to GAAP measures reported on the face of the
consolidated financial statements. Our executive management team
assesses the performance of our businesses based on a review of
results comprising GAAP measures and these non-GAAP measures. We
also report on our performance to the Company's Board of Directors
based on these measures. In addition, adjusted EBITDA and operating
working capital are the primary metrics for our annual incentive
compensation plan for senior management. We provide this non-GAAP
detail so that readers have a better understanding of the
significant events and transactions that have had an impact on our
results and can view our results through the eyes of management. We
also discuss the results of our operations, isolating variances
that relate to changes in exchange rates and to acquisitions and
divestitures. We use the term "organic" to describe the results
presented in this way. To isolate the effect of currency movements,
we eliminate the impact of foreign currency hedging activities in
both the current and prior periods and recalculate the figures for
the prior period using the exchange rates that were in effect for
the current period. We provide a reconciliation that shows the
differences between reported and organic growth figures
highlighting the variances caused by currency fluctuations and
those caused by business acquisitions or divestitures.
Substantially all of the business of the Sciex division of MDS
Analytical Technologies is conducted through two joint ventures.
Under the terms of these joint ventures, we are entitled to a 50%
share of the net earnings of the worldwide business that we conduct
with our partners in these joint ventures. These earnings include a
share of the profits generated by our partners that are paid to the
joint ventures as profit sharing and which do not qualify as
revenues for the joint ventures. Under Canadian GAAP, we report
only our direct revenues and our share of revenues from the joint
ventures after deducting appropriate intercompany eliminations,
and, consequently, we do not report our share of all end-user
revenues, despite the fact that these other businesses contribute
to our profitability. In order to provide readers with a better
understanding of the drivers of profitability for the Sciex
division of MDS Analytical Technologies, in addition to the organic
growth of our reported revenues, we also report growth in end-user
revenues as reported to us by our joint venture partners. This
figure provides management and readers with additional information
on the performance of our global business, including trends in end
customer demand and our performance relative to the overall market.
We are unable to provide the organic growth in this measure because
we do not have access to the underlying currency data. MDS Pharma
Services measures and tracks contract backlog. Contract backlog is
a non-GAAP measure that we define to include the amount of contract
value associated with confirmed contracts that has not yet been
recognized as revenue. A confirmed contract is one for which the
Company has received customer acceptance in a manner that is
customary for the type of contract involved. For large, long-term
contracts, customer acceptance is generally evidenced by the
receipt of a signed contract or confirmation awarding the work to
MDS. For smaller and short-term contracts, customer acceptance may
be documented in other ways, including email messages and oral
confirmations. Only contracts for which such acceptances have been
received are included in backlog and the amount of backlog for
these contracts is measured based on the revenue that is expected
to be earned by MDS under the contract terms. A contract is removed
from backlog if the Company receives notice from the customer that
the contract has been cancelled, indefinitely delayed, or
reassigned to another service provider. Amounts are in millions of
United States dollars, except per share amounts and where otherwise
noted. Discontinued Operations All financial references in this
document exclude those businesses that we consider to be
discontinued. Our discontinued businesses include our diagnostics
businesses, certain early-stage pharmaceutical research services
operations, and our interest in Source Medical Corporation
(Source). All financial references for the prior year have been
restated to reflect this treatment. Change in Presentation Related
to Reimbursement of Out-of-Pocket Costs MDS Pharma Services incurs
certain out-of-pocket costs on behalf of its customers for which
the Company has a right to reimbursement. These include stipends
paid to study participants in early-stage clinical trials, courier
costs associated with the delivery of study samples to central
laboratories, and other out-of-pocket costs, mostly related to
travel. The Company has the right to bill customers for
reimbursement of these amounts but is generally not entitled to a
mark-up or other form of profit margin related to these activities.
In financial reports filed for prior periods, the amount of the
reimbursement was offset against the related out-of-pocket cost,
and, because these amounts offset, neither a revenue nor an expense
item was reported associated with this activity. During the fourth
quarter, management determined that this presentation was
inconsistent with competitor disclosures, generally prepared in
accordance with US GAAP. In addition, management has determined
that this presentation is consistent with Canadian GAAP. Therefore,
we determined that it would be appropriate to present the financial
statements contained in this interim report reflecting separate,
but offsetting, revenue (reimbursement revenue) and expense items
(reimbursed expenses) for these reimbursable out-of-pocket costs.
We have revised the consolidated revenue and expenses reported for
the current period and for the comparable period in 2006, along
with the revenues and expenses reported for the MDS Pharma Services
segment for these periods. In addition, consolidated revenues
reported in the Quarterly Highlights table later in this MD&A
have been similarly revised. This change has no impact on operating
income, net income, earnings per share, cash flows, or any
captioned item on the consolidated statements of financial
position. Throughout this report, when we refer to total revenues
we mean revenues including reimbursement revenues. We use the term
net revenues to mean revenues excluding such amounts. All revenue
growth figures and adjusted EBITDA margin figures are based on net
revenues. We use net revenues to measure the growth and
profitability of MDS and MDS Pharma Services because the
pass-through invoicing of reimbursable out-of-pocket expenses
varies from period-to-period, is not a reliable measure of the
underlying performance of the business, and does not impact net
income or cash flows in any significant way. Management assesses
and rewards the performance of MDS Pharma Services and the
segment's senior management team using metrics that are based on
net revenues. Introduction MDS is a global life sciences company
that provides market-leading products and services that our
customers use for the development of drugs and the diagnosis and
treatment of disease. Through our three business segments, we are a
leading global provider of pharmaceutical contract research
services (MDS Pharma Services), medical isotopes for molecular
imaging and radiotherapeutics (MDS Nordion), and analytical
instruments (MDS Analytical Technologies). Each of these business
segments sells a variety of products and services to customers in
markets around the world. MDS Inc. Consolidated Operating
Highlights Fourth Quarter Fiscal Year
---------------------------------- ------------------------ %
Change % Change ------------------ --------- 2007 2006 Reported
Organic 2007 2006 Reported
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$ 318 $ 260 22% (1%) Net revenues $1,162 $1,002 16% Reimbursement
20 25 revenues 91 105
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Total $ 338 $ 285 revenues $1,253 $1,107
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Operating 25 18 39% income (loss) (39) 48 n/m Adjustments:
------------ Restructuring (4) (11) charges, net 40 (7) Valuation 2
- provision 8 6 Mark-to-market on interest (2) (2) rate swaps (1) 1
MAPLE (3) - settlement (6) 9 Gain on sale (5) - of businesses (4)
(2) - - FDA provision 61 - Acquisition 5 - integration 19 -
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Adjusted operating 18 5 260% income 78 55 42% Depreciation and 26
18 amortization 91 63
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Adjusted $ 44 $ 23 91% 177% EBITDA $ 169 $ 118 43%
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Adjusted EBITDA margin on net 14% 9% revenue 15% 12%
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n/m = not meaningful Consolidated net revenues, which exclude
reimbursement revenues associated with reimbursed expenses in the
MDS Pharma Services segment, were up 22% on a reported basis to
$318 million for the fourth quarter of 2007 compared to $260
million last year. The Molecular Devices (MD) division of MDS
Analytical Technologies, which was acquired earlier this year,
added $54 million of net revenue in the quarter, pushing net
revenue growth for MDS Analytical Technologies to 92% compared to
the fourth quarter of 2006. MDS Pharma Services net revenues
increased 1% compared to the same period in 2006, as 10% growth in
our late-stage businesses continued to be offset by declines in the
early-stage businesses. MDS Nordion net revenues were level
compared to the same period in 2006 on a reported basis, and up 3%
excluding the impact of deferred revenue realized last year
associated with our Zevalin(R) contract, which expired in February
2007. On an organic basis, net revenues were down by 1% while
adjusted EBITDA grew by 177%, which reconcile to reported growth as
follows: Net Adjusted Revenue EBITDA
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Reported growth 22% 91% Growth attributable to the acquisition of
MD (21%) (48%) Impact of Hamburg clinic sale 1% 4% Impact of
currency fluctuations on growth (3%) 130%
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Organic growth (1%) 177%
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Operating income for the fourth quarter of 2007 was $25 million
compared to $18 million reported for the same period in 2006.
Excluding the impact of MD, which had an operating loss of $2
million after deducting $11 million in expenses for integration and
amortization, operating income for the fourth quarter of 2007 was
$27 million, an increase of 50% over the same period last year. All
businesses experienced growth in operating income compared to the
prior year. Adjusted EBITDA for the quarter was $44 million, up 91%
compared to $23 million reported for last year. On a year-over-year
basis, the significant decline in the value of the US dollar
negatively impacted adjusted EBITDA by $15 million due to both the
foreign exchange impact on our operating activities and the impact
of foreign exchange on certain monetary assets and liabilities. MDS
Pharma Services delivered continued improvement in adjusted EBITDA,
reporting sequential improvement in adjusted EBITDA for the fifth
consecutive quarter. MDS Analytical Technologies also had a strong
quarter on an adjusted EBITDA basis, with and without the impact of
the MD acquisition. Adjustments reported for the quarter include $5
million of costs related to the integration of MDS Analytical
Technologies, including $2 million related to amortization of fair
value increments recorded for deferred revenue from service
contracts. Although we report this deferred revenue adjustment as
an operating income adjustment in this non-GAAP measure, our
GAAP-based income statement reports this amount as a reduction in
revenues. Other adjustments for the quarter include an additional
$3 million of investment tax credits realized as we settled prior
year claims associated with the MAPLE facility and a $2 million
mark-to-market adjustment on interest rate hedges. We also released
$4 million of restructuring reserves related primarily to severance
costs for employees who left voluntarily prior to their planned
termination. In early August 2007, we invested in $17 million of
asset-backed commercial paper that has since been affected by the
recent liquidity disruption in that market. We recorded a valuation
provision of $2 million as an adjusting item to reflect our
estimate of the current value of that asset. The provision reflects
management's best estimate of the likely impairment based on a
risk-adjusted estimate of expected future cash flows. Continuing
uncertainties regarding the value of the assets, the nature and
timing of future cash flows, and the outcome of the restructuring
of this financial market may impact the amount that MDS will
ultimately realize on this investment. In October, we were advised
that we were entitled to receive $5 million of bankruptcy proceeds
resulting from the final liquidation of Protana Inc. (formerly MDS
Proteomics Inc.). This recovery is included in other income and it
has been treated as an adjusting item. Selling, general, and
administration (SG&A) expenses for the quarter totaled $92
million or 29% of net revenues compared to $59 million and 23% last
year. The increase in SG&A of $33 million includes $17 million
resulting from the addition of MD during the year. Also, the
significant $0.12 drop in the value of the US dollar compared to
the Canadian dollar following our July quarter-end resulted in
consolidated foreign exchange losses from the translation of
certain monetary assets and liabilities of $11 million, compared to
a $1 million loss in the prior-year quarter. We spent $22 million
on research and development (R&D) activities in the fourth
quarter this year and expensed $8 million, compared to spending of
$14 million last year, of which we expensed $7 million. The
majority of the increase in R&D spending comes from the
spending in our new MD business. Consolidated depreciation and
amortization expense increased $8 million compared to the fourth
quarter of last year. In the fourth quarter of 2007, we amortized
$6 million of intangible assets acquired as part of the MD
transaction. In total, we recorded $161 million of intangible
assets related to acquired technology, reagents, and intellectual
property that we currently estimate will be amortized over a
weighted average useful life of 6 years. Capital expenditures for
the quarter were $28 million, compared to $14 million in the fourth
quarter of 2006. Income from continuing operations for the quarter
was $17 million, reflecting these strong results from our
businesses and was up 21% compared to $14 million reported for
continuing operations last year. The loss from discontinued
operations of $2 million for the fourth quarter this year reflects
costs associated with the sale of our Canadian diagnostics
businesses. Income from discontinued operations of $33 million for
2006 reflects the operating results of our Canadian diagnostics
businesses for that period. Earnings per share from continuing
operations were $0.14 for the quarter, compared to $0.10 in 2006.
Adjusted earnings per share from continuing operations for the
quarter were $0.09 compared to $0.02 earned in the same period last
year. Earnings per share from discontinued operations were a loss
of $0.01 compared to income of $0.23 last year. Adjusted earnings
per share for the two periods were as follows: Fourth Quarter
Fiscal Year
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2007 2006 2007 2006
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Basic EPS from continuing operations - as reported $ 0.14 $ 0.10 $
(0.26) $ 0.21 Adjustments: Restructuring charges, net (0.02) (0.05)
0.24 (0.04) Valuation provision 0.01 - 0.06 0.05 Mark-to-market on
interest rate swaps (0.01) - (0.01) - MAPLE settlement (0.01) -
(0.03) 0.04 Gain on sale of long-term investment and businesses
(0.04) - (0.02) - FDA provision - - 0.31 - Acquisition integration
0.02 - 0.09 - Tax rate changes - (0.03) - (0.03)
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Adjusted EPS $ 0.09 $ 0.02 $ 0.38 $ 0.23
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MDS Pharma Services Financial Highlights Fourth Quarter Fiscal Year
---------------------------------- ------------------------ %
Change % Change ------------------ --------- 2007 2006 Reported
Organic 2007 2006 Reported
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$ 66 $ 70 (6%) Early-stage $ 254 $ 268 (5%) 57 52 10% Late-stage
223 191 17%
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123 122 1% - Net revenues 477 459 4% Reimbursement 20 25 revenues
91 105
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143 147 Total revenues 568 564 Cost of (78) (91) revenues (326)
(343) Reimbursed (20) (25) expenses (91) (105) Selling, general,
and (40) (37) administration (138) (128) Depreciation and (9) (9)
amortization (35) (30) Restructuring 4 1 charges, net (31) - Equity
earnings - - (loss) - (1) Other income - (1) (expenses) (65) 4
-------------------------------------------------------------------------
- (15) Operating loss (118) (39) Adjustments: Restructuring (4) (1)
charges, net 31 - Loss (gain) on sale of a - - business 4 (2) - -
FDA provision 61 -
-------------------------------------------------------------------------
Adjusted (4) (16) n/m operating loss (22) (41) n/m Depreciation and
9 9 amortization 35 30
-------------------------------------------------------------------------
Adjusted $ 5 $ (7) n/m n/m EBITDA $ 13 $ (11) n/m
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital $ 20 $ 9 expenditures $ 48 $ 35
-------------------------------------------------------------------------
-------------------------------------------------------------------------
MDS Pharma Services net revenues grew 1% as a result of continued
revenue growth from our late-stage businesses. Late-stage revenues
grew 10% compared to the fourth quarter of 2006; however, this
growth was largely offset by weaker early-stage revenues, which
were down 6% compared to the same quarter last year. Weakness in
revenues from bioanalytical and discovery/preclinical services more
than offset otherwise strong growth in drug safety testing. Phase I
revenues were level with the fourth quarter last year and are
gaining momentum sequentially. Organic growth in net revenue was
nil for the quarter, which reconciles to reported growth as
follows: Net Revenue
-------------------------------------------------------------------------
Reported net revenue growth 1% Impact of Hamburg clinic sale 3%
Impact of currency fluctuations on revenue growth (4%)
-------------------------------------------------------------------------
Organic net revenue growth -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Early-stage contract awards were strong this quarter compared to
last year; however, we experienced some order weakness and a higher
than normal level of contract cancellations relating to compound
failures and customer mergers affecting our late-stage businesses.
Combined with the improved conversion of contract backlog, this
weakness contributed to an overall decrease in average monthly
pharmaceutical research backlog to $385 million, down 10% compared
to the fourth quarter of 2006. We are encouraged by the strength of
new bioanalytical orders, which doubled compared to the fourth
quarter of 2006, as well as the improved quality of our period-end
backlog resulting from our focus on bidding on contracts that
enable us to achieve reliable profitability. Average monthly
backlog during the quarter
-------------------------------------------------------------------------
Fiscal 2005 - Quarter 1 $ 315 Quarter 2 305 Quarter 3 315 Quarter 4
340 Fiscal 2006 - Quarter 1 370 Quarter 2 400 Quarter 3 400 Quarter
4 430 Fiscal 2007 - Quarter 1 450 Quarter 2 450 Quarter 3 420
Quarter 4 385
-------------------------------------------------------------------------
-------------------------------------------------------------------------
MDS Pharma Services broke even at an operating income level for the
quarter, compared to a loss of $15 million for the same period last
year. Operating income for the current quarter includes $3 million
of investment tax credits (ITCs) resulting from the settlement of
prior-year claims. MDS Pharma Services also experienced
approximately $6 million of unfavourable foreign currency impact in
the quarter compared to the prior year. Fourth quarter 2006
operating income reflects $8 million of spending on the US Food and
Drug Administration (FDA) review of our Montreal bioanalytical
operations. Spending on this matter during the fourth quarter of
2007 amounted to $6 million, and this was charged to the reserve
established for this purpose. Adjusted EBITDA for the fourth
quarter was $5 million, up substantially from the $7 million
adjusted EBITDA loss reported for the fourth quarter of 2006.
Fiscal 2007 adjustments reflect the release of restructuring
provisions related to severance for employees who resigned prior to
being terminated and to whom no severance was therefore paid.
Fiscal 2006 operating income was adjusted downwards by $1 million
to eliminate a net recovery of certain restructuring costs as the
related restructuring initiatives were completed below budget.
During the fourth quarter of 2007, we continued to implement our
restructuring plan, largely completing the staff reductions at our
Montreal facility, including a substantial reduction of staff
supporting the FDA audits and other audits being conducted by our
clients. We made substantial progress on the consolidation of
central laboratory operations in Europe and completed the closure
of our Sittingbourne, UK facility. During the quarter, we also
completed the transfer of certain operations from Montreal to our
Bothell, Washington and Lincoln, Nebraska facilities. To date,
these restructuring activities have resulted in a headcount
reduction of approximately 400 employees and we have utilized $15
million of the restructuring reserve established in the second
quarter of 2007 on these activities. The remaining reserve is $11
million and we anticipate further headcount reductions affecting
100 positions in the first half of next year. Capital expenditures
in the pharmaceutical services segment were $20 million compared to
$9 million last year. Late in the quarter, our Beijing, China
central laboratory facility moved to larger and more modern
facilities, resulting in a significant increase in testing
capacity. The new facility also provides for more kit production
space and can accommodate a wider range of specialized clinical
testing services. Regulatory Review of Montreal Bioanalytical
Operations The six-month time limit imposed by the FDA for generic
audits has passed, and we believe we have substantially completed
all site audits for generic customers that were required of them by
the FDA. We continue to receive a limited number of study audit
requests from innovator customers and expect we may continue to
receive these requests in low numbers in the coming months. We have
responded to questions from European regulators about the nature of
the work that was done for the FDA. Although we are not able to
assess the potential impact of possible foreign regulatory actions,
if any, at this time we are satisfied with the progression of these
discussions. During the second quarter, we approved and recorded a
$61 million provision for a reimbursement policy for clients who
have incurred or will incur third party audit costs or study re-run
costs to complete the work required by the FDA and other
regulators. We have utilized $11 million of this reserve for such
costs, an amount that was partially offset by a foreign currency
translation gain on the US-dollar denominated components of the
cost estimate. We await reimbursement requests for the majority of
the generic and innovator study audits that were completed in our
facility. Based on information currently available, we believe that
the remaining reserve of $55 million will be sufficient to cover
any agreements reached with clients for study audits, study
re-runs, and other related costs. Full and complete resolution of
the bioanalytical regulatory issues has been a key area of focus
for MDS Pharma Services and MDS. We remain committed to working
cooperatively with the FDA, other regulators, and our customers to
address any regulatory concerns and to support our customers with
further follow up, if any. The remaining reserve reflects our
current best estimate of the costs we expect to incur with respect
to this work and for obligations we have to clients. There can be
no assurance at this time that the full balance of this reserve
will be required, or that costs will not exceed the amounts we have
currently estimated. MDS Nordion Financial Highlights Fourth
Quarter Fiscal Year ----------------------------------
------------------------ % Change % Change ------------------
--------- 2007 2006 Reported Organic 2007 2006 Reported
-------------------------------------------------------------------------
$ 76 $ 76 - (4%) Net revenues $ 289 $ 297 (3%) Cost of (40) (39)
revenues (150) (150) Selling, general, and (15) (14) administration
(51) (51) Research and - (2) development (2) (4) Depreciation and
(3) (4) amortization (13) (15) Restructuring 2 charges - 2 Other
income 3 - (expenses) 7 (9)
-------------------------------------------------------------------------
21 19 11% Operating Income 80 70 14% Adjustments: (3) - MAPLE
settlement (6) 9 Restructuring (2) charges - (2) Gain on sale of -
- a business (1) -
-------------------------------------------------------------------------
Adjusted operating 18 17 6% income 73 77 (5%) Depreciation and 3 4
amortization 13 15
-------------------------------------------------------------------------
Adjusted $ 21 $ 21 - 10% EBITDA $ 86 $ 92 (7%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital $ 3 $ - expenditures $ 8 $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
MDS Nordion revenues were level year-over-year on a reported basis.
Revenues for 2006 included $2 million related to deferred revenue
associated with the 2004 cancellation of the supply agreement
between MDS Nordion and Biogen Idec. Excluding the impact of this
item, revenues were up 3% compared to the fourth quarter of 2006,
largely due to the strength of the Canadian dollar this year and
increased revenue associated with our expanding TheraSphere(R)
markets. These increases were offset by declines in cobalt
shipments and the prior-year sale of a production irradiator that
was not repeated in the current-year quarter. Organic growth in
revenues and adjusted EBITDA reconcile to reported growth as
follows: Net Adjusted Revenue EBITDA
-------------------------------------------------------------------------
Reported growth - - Impact of currency fluctuations on growth (4%)
10%
-------------------------------------------------------------------------
Organic growth (4%) 10%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating income was $21 million compared to $19 million last year
in the same period and adjusted EBITDA was level at $21 million.
There was one adjusting item in the fourth quarter of each year. In
the fourth quarter of 2007, we recorded ITCs totaling $3 million as
we settled prior-year claims for R&D associated with the MAPLE
facility. The adjustment for 2006 was for unused restructuring
reserves associated with our European generic radiopharmaceutical
manufacturing business, the closure of which was completed at the
end of last year. Capital expenditures in the isotopes segment for
the quarter were $3 million, compared to none last year. Late in
the quarter, MDS Nordion announced the signing of a 17-year, $83
million agreement for the supply of cobalt-60 with Rosenergoatom,
the operating utility of Russia's nuclear power plants. This
contract, together with an existing agreement signed in 2005,
provides for a 30% increased supply of cobalt-60 to MDS Nordion by
2016. Cobalt-60 is primarily used for the sterilization of hospital
medical supplies to help prevent patient infection and disease by
reducing harmful bacteria. Subsequent to the year-end, we announced
the signing of an agreement to sell our external beam therapy and
self-contained irradiator product lines. The sale is a key part of
MDS Nordion's strategy to focus its resources on being a leading
innovator in molecular medicine. Under the terms of this agreement,
Best Medical International Inc., a provider of radiotherapy and
oncology products, will purchase MDS Nordion's external beam
therapy and self-contained irradiator product lines. Best Medical
International Inc. will acquire these two product lines with
combined annualized revenues of approximately US$32 million at an
adjusted EBITDA margin of 5% and approximately 150 employees. The
transaction, which is subject to the usual closing conditions, is
expected to close in the second quarter of 2008. We anticipate that
we will report a loss on disposal of this business, including all
costs associated with the disposal, in the range of $4 million to
$6 million. MDS Analytical Technologies Financial Highlights Fourth
Quarter Fiscal Year ----------------------------------
------------------------ % Change % Change ------------------
--------- 2007 2006 Reported Organic 2007 2006 Reported
-------------------------------------------------------------------------
$ 119 $ 62 92% 2% Net revenues $ 396 $ 246 61% Cost of (60) (39)
revenues (218) (151) Selling, general, and (23) (3) administration
(64) (16) Research and (8) (5) development (27) (14) Depreciation
and (14) (5) amortization (41) (18) Other income (1) - (expenses)
(3) -
-------------------------------------------------------------------------
13 10 30% Operating income 43 47 (9%) Adjustment: Acquisition 5 -
integration 19 -
-------------------------------------------------------------------------
Adjusted operating 18 10 80% income 62 47 32% Depreciation and 14 5
amortization 41 18
-------------------------------------------------------------------------
Adjusted $ 32 $ 15 113% 74% EBITDA $ 103 $ 65 58%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital $ 2 $ 2 expenditures $ 10 $ 7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
MDS Analytical Technologies reported revenues of $119 million for
the fourth quarter of 2007, compared to $62 million for the same
period last year. Fourth quarter revenues for the current year
include $54 million of revenues from the newly acquired Molecular
Devices business (MD). This amount is net of a $2 million purchase
price adjustment related to assigning fair value to deferred
service contracts that were on the acquisition date balance sheet
of MD. Excluding this adjustment, MD revenues were up 15% compared
to the same three-month period in 2006, and have totalled $140
million since the acquisition date. MD has been a strong
contributor to segment revenues and adjusted EBITDA since it was
combined with Sciex. Given the strong start, we believe the
division is on track to exceed the expected $190 million in
revenues and $45 - $50 million in adjusted EBITDA in the first full
year of MDS ownership. Sciex grew revenues by 5%, and the small
molecule markets continued to be an area of strength for the
business. Our high-end triple-quad and ion-trap instruments have
maintained strong sales momentum, across most markets. Good
strength from our core LC/MS products was augmented by continued
strength from our ICP/MS product line, although the proteomics
markets continued to perform below expectations. End-user revenues
for Sciex products grew 4% in the fourth quarter compared to the
same period last year. Organic growth in revenues and adjusted
EBITDA reconcile to reported growth as follows: Net Adjusted
Revenue EBITDA
-------------------------------------------------------------------------
Reported growth 92% 113% Growth attributable to the acquisition of
MD (87%) (73%) Impact of currency fluctuations on growth (3%) 34%
-------------------------------------------------------------------------
Organic growth 2% 74%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating income was $13 million for the fourth quarter of 2007
compared to $10 million for the fourth quarter of 2006, an increase
of 30%, all of which results from the Sciex business. On an
operating income basis, MD lost $2 million in the fourth quarter
because of the acquisition-related items. Adjusted EBITDA for the
quarter was $32 million compared to $15 million last year.
Excluding growth attributable to the acquisition of MD and the
impact of currency fluctuations on growth adjusted EBITDA grew by
74% as a result of improved gross margins, increased development
costs deferred and a $2 million gain on the sale of land. The
adjustment for integration costs of $5 million for the quarter
includes $2 million of deferred service contract revenue
adjustments. There were no adjustments in the prior year. Increased
SG&A and R&D expenses in MDS Analytical Technologies for
the fourth quarter of 2007 reflect the additional costs associated
with the MD business. Depreciation and amortization expense was
also up, reflecting $6 million for amortization of intangible
assets acquired as part of the MD acquisition, plus the inclusion
of depreciation on MD property, plant, and equipment. Capital
expenditures (excluding capitalized development costs) were $2
million this year and last year. During the fourth quarter, MDS
Analytical Technologies announced the launch of a significant
advance in high-speed imaging technologies with the release of the
MetaMorph(R) ICS (Integrated Confocal System), in partnership with
VisiTech International, a manufacturer of confocal hardware. This
turnkey, confocal microscope is the first of its kind in the
imaging industry. It has the capability to obtain high resolution
images in multiple dimensions to support researchers in their
exploration of live cell and functional imaging without the
limitations inherent in other high-speed imaging technologies. The
division also introduced a new automated toxicology testing
application for drugs of abuse. The new Cliquid(TM) Drug Screen and
Quant Software for Routine Forensic Toxicology applications equips
toxicology laboratories for the first time with a built-in library
of 1,200 compounds and a search reporting function designed to
screen hundreds of drugs in less than 20 minutes. This software
application is an improvement over existing toxicology testing
methods. It enables faster delivery of results, more thorough
screening and, ultimately, more accurate analysis to be used as
evidence in criminal court cases. Corporate and Other Financial
Highlights Fourth Quarter Fiscal Year ----------------
---------------- 2007 2006 2007 2006
-------------------------------------------------------------------------
$ (14) $ (5) Selling, general, and administration $ (33) (30) - 8
Restructuring charges (9) 5 5 2 Other income (expense) - (1) - (1)
Equity earnings - (4)
-------------------------------------------------------------------------
(9) 4 EBITDA (42) (30) Adjustments: (5) - Gain on sale of
investments (7) - (2) (2) Mark-to-market adjustments (1) 1 2 -
Valuation provisions 8 6 - (8) Restructuring charges 9 (5)
-------------------------------------------------------------------------
$ (14) $ (6) Adjusted EBITDA $ (33) $ (28)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Corporate SG&A expenses were $14 million for the quarter this
year, including a $4 million of foreign exchange loss on balance
sheet translation. Other income for the quarter includes a $2
million mark-to-market gain on certain interest rate derivatives
and a $2 million valuation provision for asset-backed commercial
paper we own and which is not currently liquid. Also included in
other income is $5 million of bankruptcy proceeds resulting from
the wind-up of Protana Inc., a successor company to MDS Proteomics.
We were advised by the liquidator of these proceeds late in the
fourth quarter and we expect to receive the funds in the first half
of 2008. Other income for the fourth quarter in 2006 included a $2
million mark-to-market gain and an $8 million release of
restructuring reserves originally set aside in 2005 for expected
contract cancellation costs. We were able to negotiate termination
of this contract without penalty during 2006 and as a consequence,
this reserve was no longer required. All of these items were
treated as adjustments to arrive at adjusted EBITDA for the
quarter. Fourth quarter interest expense increased from $6 million
in 2006 to $7 million in 2007 and interest income in the quarter
was $7 million this year compared to $4 million last year. Income
Taxes Our effective income tax rate for the quarter was 32% and
below our expected rate of 36% due to the fact that the bankruptcy
proceeds that we recorded in the quarter relating to the wind-up of
Protana Inc. are not subject to income tax. Discontinued Operations
The results of our discontinued businesses for the fourth quarter
of 2007 and 2006 were as follows: Three months to October 31 Year
ended October 31
-------------------------------------------------------------------------
2007 2006 2007 2006
-------------------------------------------------------------------------
Net revenues $ - $ 82 $ 95 $ 362 Cost of revenues - (45) (57) (225)
Selling, general and administration (1) (15) (16) (53) Depreciation
and amortization - (3) - (10) Restructuring charges - - - (1) Other
expenses - (3) - (3) Equity earnings - 1 1 3
-------------------------------------------------------------------------
Operating income (loss) (1) 17 23 73 Gain on sale of discontinued
operations - - 904 24 Dividend and interest income - 1 1 2 Income
tax recovery (expense) - 16 (117) 7 Minority interest - net of tax
(1) (1) (5) (8)
-------------------------------------------------------------------------
Income (loss) from discontinued operations - net of tax $ (2) $ 33
$ 806 $ 98
-------------------------------------------------------------------------
Basic earnings per share $ (0.01) $ 0.23 $ 6.12 $ 0.68
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Diluted earnings per share $ (0.01) $ 0.23 $ 6.10 $ 0.68
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The results from discontinued operations in the fourth quarter of
2007 reflect expenses associated with the sale of our diagnostics
business. The results from discontinued operations for 2006 include
results from the Canadian diagnostic services business and certain
small MDS Pharma Services businesses discontinued in 2005.
Liquidity and Capital Resources October 31 October 31 Change 2007
2006
-------------------------------------------------------------------------
Cash, cash equivalents and short-term investments $ 350 $ 388 (10%)
Operating working capital(1) $ 55 $ 104 (47%) Current ratio 1.6 2.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Our measure of operating working capital equals accounts
receivable plus unbilled revenue and inventory less accounts
payable, accrued liabilities, and current deferred revenue. Cash
and short-term investments totalled $350 million compared to $314
million at the end of July 2007 and $388 million at the end of
October 2006. The increase in cash primarily results from an
increase in accounts payable at year-end. As at the date of this
report, we had $17 million in short-term investments in
asset-backed commercial paper (ABCP) that was purchased in August
2007. This ABCP was due to mature on September 7, 2007 and the
issuer has been affected by the recent liquidity issues in these
investment markets. We received notice on the roll-over date that
the sponsor of these obligations would be unable to meet its
obligations. At the present time, we have only limited access to
information that would help us to determine the amount and timing
for the repayment of these obligations. As a result, we have
estimated that a write-down in the value of these investments is
required, and accordingly, we recorded a $2 million provision in
the fourth quarter. In addition, while these investment vehicles
would ordinarily qualify as cash equivalents, we believe that the
current market conditions are such that it is no longer appropriate
to record these investments as current assets. We have therefore
classified these commercial paper assets as long-term investments
that are available for sale. Operating working capital of $55
million at the end of the fourth quarter was down from $81 million
at the end of July, and down substantially compared to the October
2006 balance of $104 million. The decline since the 2006 year-end
reflects higher than usual accounts payable and accrued liabilities
as at October 31, 2007. This reflects, in part, the balance that
remains unpaid from the FDA and restructuring provisions recorded
in the second quarter, along with an increase in trade payables at
year-end, partially driven by increased capital expenditures in the
fourth quarter. The FDA and restructuring provisions are offsetting
the addition of operating working capital associated with MD. We
expect that our operating working capital will rise to normal
levels in future quarters as these reserves are utilized and
accounts payable drop to normal levels. We expect our operating
cash inflows to remain strong throughout fiscal 2008. Cash outflows
are expected to include FDA-related reimbursements to our customers
and the payment of severance obligations associated with our
restructuring activities. In addition, we will make a principal
repayment of $79 million on our long-term debt in December 2007. We
believe that these liquidity needs can be satisfied from cash
generated by operations and cash on hand. We also have available a
C$500 million, five-year, committed, revolving credit facility to
fund our liquidity requirements. There were no borrowings under
this facility as at October 31, 2007. We do not believe that the
current liquidity issues affecting the ABCP markets will have any
significant impact on our liquidity. Cash used in investing
activities for continuing operations totalled $48 million for the
fourth quarter this year, compared to $11 million for 2006,
primarily due to capital expenditures. The $28 million of capital
expenditures this year includes higher levels of capital
expenditures in MDS Pharma Services related to investments in
information systems to support growth in MDS Pharma Services, the
300-bed expansion of our Phoenix, Arizona Phase I clinic and the
build-out of our central laboratory in Beijing, China. Financing
activities (excluding discontinued operations) used $13 million of
cash in the quarter, primarily for scheduled debt repayments,
compared to $5 million in the prior year. Cash used in financing
activities for the prior year included a $3 million dividend
payment. We believe that cash flow generated from operations,
coupled with available borrowings from existing financing sources,
will be sufficient to meet our anticipated requirements for
acquisitions, capital expenditures, research and development
expenditures, FDA settlements, restructuring costs and operations
in 2008. At this time, we do not reasonably expect any presently
known trend or uncertainty to affect our ability to access our
current sources of cash. We remain in compliance with all covenants
for our senior unsecured notes and our bank credit facility.
Contractual Obligations In October 2007, we signed a 17-year, $83
million cobalt supply agreement in the normal course of business.
Aside from this, there have been no material changes in contractual
obligations since October 31, 2006 other than those arising from
the acquisition of MD, and there has been no substantive change in
any of our long-term debt or other long-term obligations since that
date. We have not entered into any new guarantees of the debt of
third parties, nor do we have any off-balance sheet arrangements.
The acquisition of MD has added $6 million of annual commitments
related to operating leases and approximately $14 million of
inventory purchase commitments in 2007. Derivative Instruments We
use derivative financial instruments to manage our foreign currency
and interest rate exposure. These instruments consist of forward
foreign exchange and option contracts and interest rate swap
agreements entered into in accordance with our established risk
management policies and procedures. All derivative instrument
contracts are with banks listed on Schedules I to III to the Bank
Act (Canada) and the Company utilizes financial information
provided by certain of these banks to assist in the determination
of fair market values of the financial instruments. The net
mark-to-market value of all derivative instruments at October 31,
2007 was a net liability of $6 million. We recorded a $2 million
mark-to-market gain on interest rate swaps during the fourth
quarter of 2007. Capitalization October 31, October 31 2007 2006
Change
-------------------------------------------------------------------------
Long-term debt $ 384 $ 394 (3%) Less: cash and cash equivalents and
short-term investments 350 388 (10%)
-------------------------------------------------------------------------
Net debt 34 6 466% Shareholders' equity 1,929 1,414 36%
-------------------------------------------------------------------------
Capital employed(1) $ 1,963 $ 1,420 38%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Debt to Total Capital 17% 22%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Capital employed is a measure of how much of our net assets is
financed by debt and equity. Long-term debt decreased $10 million
due to principal payments, and the current portion of the long-term
debt is $94 million compared to $20 million at October 31, 2006.
The increase in the current portion reflects the inclusion of $79
million of long-term debt that will be repaid in December 2007.
During the third quarter, we de-designated $70 million of the
US-dollar debt as a hedge of our US net investment in accordance
with the provisions of CICA Handbook Section 3865 and entered into
foreign exchange contracts to fix the exchange rate that we will
pay to buy the US dollars required to make the December debt
payments. Gains and losses on the foreign exchange contracts and on
this portion of the US-dollar denominated debt are offsetting.
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 and the
inclusion of reimbursement revenues in the MDS Pharma Services
segment, both of which are discussed above. (millions of US
dollars, except earnings per share)
-------------------------------------------------------------------------
Fiscal 2007 Oct 2007 July 2007 Apr 2007 Jan 2007
-------------------------------------------------------------------------
Gross revenues $ 1,253 $ 338 $ 346 $ 296 $ 273 Net revenues $ 1,162
$ 318 $ 321 $ 273 $ 250 Operating income (loss) $ (39) $ 25 $ 13 $
(80) $ 3 Income (loss) from continuing operations $ (34) $ 17 $ 8 $
(57) $ (2) Net income (loss) $ 772 $ 15 $ 7 $ 736 $ 14 Earnings
(loss) per share from continuing operations Basic and diluted $
(0.26) $ 0.14 $ 0.07 $ (0.42) $ (0.02) Earnings (loss) per share
Basic and diluted $ 5.86 $ 0.13 $ 0.06 $ 5.36 $ 0.10
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(millions of US dollars, except earnings per share)
-------------------------------------------------------------------------
Fiscal 2006 Oct 2006 July 2006 Apr 2006 Jan 2006
-------------------------------------------------------------------------
Gross revenues $ 1,107 $ 285 $ 280 $ 268 $ 274 Net revenues $ 1,002
$ 260 $ 258 $ 242 $ 242 Operating income (loss) $ 48 $ 18 $ 5 $ 2 $
23 Income (loss) from continuing operations $ 29 $ 14 $ 3 $ (2) $
14 Net income (loss) $ 127 $ 47 $ 19 $ 14 $ 47 Earnings (loss) per
share from continuing operations Basic and diluted $ 0.21 $ 0.10 $
0.02 $ (0.01) $ 0.10 Earnings (loss) per share Basic and diluted $
0.89 $ 0.33 $ 0.13 $ 0.10 $ 0.33
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Items that impact the comparability of operating income include: -
Results for the quarter ended April 30, 2007 reflect a $792 million
net gain from the sale of our diagnostics businesses, the 41 days
of operating results of Molecular Devices, $61 million of charges
related to assisting clients in respect of the FDA review, and $28
million of restructuring charges. - Results for the quarter ended
January 31, 2007 reflect the impact of restructuring charges
totaling $13 million. - Results for the quarter ended April 30,
2006 reflect a loss of $9 million resulting from the completion of
the MAPLE settlement. Outlook On November 30 and December 5, 2007,
we announced that MDS Nordion was experiencing an interruption in
supply of medical isotopes from our primary supplier, Atomic Energy
of Canada Limited while they completed a scheduled shutdown and an
upgrade to the electrical system of the National Research Universal
reactor. Our supplier advised us that they are working closely with
industry regulators on this matter. They also advised us that
production was scheduled to recommence in early to mid-January.
While we are working closely with our global supply network to
lessen the impact of this shutdown, we will not be able to fully
mitigate the impact of this supply disruption on our results. We
currently estimate the impact of this disruption on adjusted EBITDA
at $8 to $9 million in total for the first quarter of 2008. We
closed our 2007 fiscal year strongly, with all businesses showing
growth over the prior year. Despite the supply issues at MDS
Nordion, we believe that the Company is well positioned as we enter
fiscal 2008. Our integration of MDS Analytical Technologies is
tracking well to plan and we continue to believe that the MD
business will exceed our first year targets of $190 million in
revenue and adjusted EBITDA of between $45 million and $50 million.
We are pleased by the continued pace of new product launches and we
will continue to drive innovation in this business next year. Our
MetaMorph(R) ICS microscope launch this quarter was well received
and is an example of our commitment to provide leading-edge
technology to our customers in the drug development industry.
Strong sales of FLIPR Tetra and Image Express during the year have
contributed to positive momentum as we enter fiscal 2008. Continued
growth from our many new platforms is expected. We also anticipate
continuing strong adjusted EBITDA margins from MDS Analytical
Technologies as we complete our integration and drive further
migration of our production capabilities to Asia. We are pleased
with the continuing improvement in profitability at MDS Pharma
Services. The business has now delivered five straight quarters of
sequential improvement in adjusted EBITDA. By year-end, the
business had implemented 80% of the restructuring initiatives
announced earlier in the year, although the timing of completing
these steps meant that the savings from these activities were only
partially realized this year. We expect adjusted EBITDA in this
business to improve further in fiscal 2008 because of the actions
we took this year. We have been very pleased with the performance
of our late-stage operations this year, which produced strong
revenue growth and solid adjusted EBITDA. Although a number of
contract cancellations have resulted in reduced reported backlog at
year-end, our focus on bidding only on contracts from which we can
achieve solid profitability has improved the quality of the
remaining backlog. In addition, the increase in bioanalytical
orders in the fourth quarter increases our level of confidence that
our customers in this line of business are returning. MDS Nordion
has continued solid performance this year and has been able to grow
both revenues and adjusted EBITDA after taking into account foreign
exchange, the Biogen Idec deferred revenue, and the unusual market
conditions that existed in the first half of 2006. Our expanded
contract for cobalt supply with Rosenergoatom positions MDS Nordion
well to serve continued growth in cobalt sterilization. It is also
evidence of our strength in establishing new business relationships
on a global basis. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(UNAUDITED) As at October 31 2007 2006 (Revised (millions of US
dollars) Note 17)
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ASSETS Current Cash and cash equivalents $ 259 $ 253 Short-term
investments 91 135 Accounts receivable 284 229 Unbilled revenue 99
121 Inventories 134 86 Income taxes recoverable 54 42 Current
portion of future tax assets 45 - Prepaid expenses and other 21 21
Assets held for sale (note 7) 1 196
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988 1,083 Property, plant and equipment 390 339 Future tax assets 4
37 Long-term investments and other 284 170 Goodwill 797 417
Intangibles 601 338
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Total assets $ 3,064 $ 2,384
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LIABILITIES AND SHAREHOLDERS' EQUITY Current Accounts payable and
accrued liabilities $ 391 $ 239 Deferred revenue 71 93 Income taxes
payable 57 8 Future tax liabilities 10 - Current portion of
long-term debt 94 20 Liabilities related to assets held for sale
(note 7) - 114
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623 474 Long-term debt 290 374 Deferred revenue 16 17 Other
long-term obligations 29 23 Future tax liabilities 182 82 Minority
interest 1 -
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$ 1,141 $ 970
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Shareholders' equity Share capital (note 5) 502 572 Retained
earnings 945 495 Cumulative translation adjustment n/a 347
Accumulated other comprehensive income (note 4) 476 n/a
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1,923 1,414
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Total liabilities and shareholders' equity $ 3,064 $ 2,384
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See accompanying notes N/A - Not applicable. Effective November 1,
2006, certain new accounting pronouncements issued by the Canadian
Institute of Chartered Accountants (CICA) were adopted by the
Company (see note 3). Certain financial statement categories were
rendered not applicable by these new pronouncements. CONSOLIDATED
STATEMENTS OF INCOME (UNAUDITED) Three months to October 31 Year
ended October 31
-------------------------------------------------------------------------
(millions of 2007 2006 2007 2006 US dollars, except (Revised
(Revised per share amounts) Note 17) Note 17)
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Net revenues $ 318 $ 260 $ 1,162 $ 1,002 Reimbursement revenues 20
25 91 105
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Total revenues 338 285 1,253 1,107 Cost of revenues (178) (169)
(694) (644) Reimbursed expenses (20) (25) (91) (105) Selling,
general and administration (92) (59) (286) (225) Research and
development (note 8) (8) (7) (29) (18) Depreciation and
amortization (26) (18) (91) (63) Restructuring charges - net (note
9) 4 11 (40) 7 Other income (expenses) - net (note 11) 7 1 (61) (6)
Equity earnings (loss) - (1) - (5)
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Operating income (loss) 25 18 (39) 48 Interest expense (7) (6) (27)
(21) Dividend and interest income 7 4 25 15
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Income (loss) from continuing operations before income taxes 25 16
(41) 42 Income taxes recovery (expense) (note 16) (8) (2) 7 (13)
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Income (loss) from continuing operations 17 14 (34) 29 Income
(loss) from discontinued operations - net of tax (note 7) (2) 33
806 98
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Net income $ 15 $ 47 $ 772 $ 127
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Basic earnings (loss) per share (note 10) - from continuing
operations $ 0.14 $ 0.10 $ (0.26) $ 0.21 - from discontinued
operations (0.01) 0.23 6.12 0.68
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Basic earnings per share $ 0.13 $ 0.33 $ 5.86 $ 0.89
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Diluted earnings (loss) per share (note 10) - from continuing
operations $ 0.14 $ 0.10 $ (0.25) $ 0.21 - from discontinued
operations (0.01) 0.23 6.10 0.68
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Diluted earnings per share $ 0.13 $ 0.33 $ 5.85 $ 0.89
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See accompanying notes CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(UNAUDITED) Three months to October 31 Year ended October 31
-------------------------------------------------------------------------
(millions of US dollars) 2007 2006 2007 2006
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Retained earnings, beginning of period $ 930 $ 452 $ 495 $ 385 Net
income 15 47 772 127 Repurchase of shares - - (318) - Dividends -
cash - (3) (3) (13) Dividends - stock - (1) (1) (4)
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Retained earnings, end of period $ 945 $ 495 $ 945 $ 495
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See accompanying notes CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME (UNAUDITED) Three months Year ended to October 31 October 31
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(millions of US dollars) 2007 2007
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Net income $ 15 $ 772
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Other comprehensive income (loss) - net of income tax: Unrealized
gains on derivatives designated as cash flow hedges, net of tax 4 8
Reclassification of losses on derivatives designated as cash flow
hedges to net income (2) (4) Unrealized foreign currency gains on
debt designated as a hedge operations, net of tax 12 5 Unrealized
foreign currency gain (loss) on translation 111 124
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Other comprehensive income 125 133
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Comprehensive income $ 140 $ 905
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See accompanying notes DATASOURCE: MDS Inc. CONTACT: Investor
Inquiries, Sharon Mathers, Senior Vice-President, Investor
Relations and External Communications, (416) 213-4721, ; Media
Inquiries, Catherine Melville, Director, External Communications,
(416) 675-6777 ext. 32265,
Copyright