MDS Reports First Quarter Fiscal 2004 Financial Results Results
Reflect Solid Start for the Year TORONTO, March 4
/PRNewswire-FirstCall/ -- MDS Inc. (TSX: MDS, NYSE: MDZ), the
global health and life sciences company, today reported its first
quarter results, delivering growth in all key metrics. First
Quarter Year-over-Year Highlights: - Revenues of $462 million, up
6% from $436 million - Operating income of $58 million, up 18% from
$49 million - Operating margin of 13%, up from 11% - Basic earnings
per share of $0.20, up 18% from $0.17 Earnings per share for the
quarter reflect a $0.02 charge associated with the revaluation of
future income tax balances arising from tax rate increases in
Ontario. "I am pleased with the progress we made in the quarter.
Revenues normalized for foreign currency and sale of businesses
last year grew by 11%, and basic earnings per share grew by 18%,"
said John Rogers, President and CEO of MDS Inc. "Last year we
worked hard toposition our businesses to operate more effectively
and efficiently and it is reflected in the quarter. While I am
pleased with the solid start to the year, our focus on enhancing
our performance will continue as we move through 2004 and 2005," he
added. Life Sciences ------------- Revenues in the Life Sciences
segment increased 10% to $285 million from $259 million for the
same period last year. Excluding the impact of divested businesses,
revenues in the segment grew 13%. Operating income increased 21% to
$57 million from $47 million for the first quarter in 2003.
Operating margin grew from 18% to 20% in the segment. Each business
within this segment contributed to improved performance. Revenues
in the isotopes business increased 16% to $86 million as a result
of increased cobalt supply and solid performance in the nuclear
medicine business. During the quarter, our isotope business
received $32 million from Biogen Idec in lieu of minimum purchase
commitments. This payment was booked as deferred revenue and will
be amortized over the remainder of the contract period. The
analytical instruments business continued to deliver solid growth
with a 12% increase in revenue to $73 million. Demand for all
products remained strong with an orderfrom the Centers for Disease
Control and Prevention and a reduction in the 4000 Q TRAP(TM)
backlog driving performance in the first quarter. On a currency
neutral basis, revenues in our pharmaceutical research business
grew 12%. Reported revenues in this business were negatively
affected by the declining value of the US dollar leading to $126
million in revenues. In our early stage businesses, the early
clinical research and drug safety businesses performed particularly
well. In our late-stage business, we continued to build our backlog
while at the same time increasing our revenues. Health ------
Revenues in the Health segment were $177 million, level
year-over-year. The weaker US dollar reduced our reported revenues
from US-based operations, and offset otherwise good performance
from our Canadian labs and Source Medical. Operating income and
operating margin were also level at $12 million and 7%
respectively, compared to the same period last year. Our Canadian
diagnostics business was negatively impacted by fee reductions in
our British Columbia operations. We continue to be dissatisfied
with the performance of our US laboratory business and are
implementing a plan to reposition this laboratory business in Q2 of
this year. Proteomics ---------- Efforts are underway at MDS
Proteomics as we work to redefine the business model, with a view
to revenue generation and cost management in this business.
Operating losses in the quarter were $11 million, compared with $10
million for the same quarter last year. Corporate --------- After
the quarter, the Company announced a tax reorganization that will
provide tax shelter benefits to MDS Inc. over the next several
years. MDS will pay Hemosol Inc. $16 million cash and other
consideration to access approximately $55-$60 million in present
value benefit over the next several years. The transaction, which
is subject to Hemosol shareholder approval, is expected to close
near the end of our second quarter. We began expensing stock
options on a prospective basis this quarter in accordance with
amendments made by the Canadian Institute of Chartered Accountants.
The impact of stock options granted during the quarter was
insignificant. Currency fluctuations, especially the weakness in
the US dollar, remain an important risk factor for our Life
Sciences businesses. Our current portfolio of hedges extends part
way into 2005 and we expect our average realized conversion rate on
US-dollar exports to decline moderately over the balance of this
year. While we continue to monitor the forward markets and hedge
when appropriate, should rates remain at current levels we do not
expect to be able to fully mitigate the impact on our results in
2005 and beyond. Outlook ------- "We have made significant strides
in our performance this quarter. We are focused on delivering on
our financial targets and will continue to deal with our
lower-performing businesses, to allocate capital to our
higher-performing businesses, to look for new growth opportunities
and to operate more effectively and efficiently. Looking at the
remainder of the year, we are fully committed to achieving our
targets of 10%-15% growth in earnings, 1% improvement in return on
equity and a 1% improvement in operating margin." added John
Rogers. The MDS Board of Directors has approved the declaration of
a cash dividend of $0.05 per share on the Common shares, payable on
April 1, 2004 to shareholders of record as of March 18, 2004. MDS
will hold its Annual Shareholder Meeting at 4:00 pm EST today at
the Glenn Gould Studio, Canadian Broadcasting Centre, 250 Front
Street West, Toronto, Ontario, Canada. This meeting will also be
broadcast live on the Internet at http://www.mdsintl.com/ at 4:00
pm EST. MDS will be holding a conference call today at 11:00 am.
This call will be webcast live at, http://www.mdsintl.com/, and
will also be available in archived format at
http://www.mdsintl.com/news_present.asp after the call. At MDS
Inc., our more than 10,000 highly skilled people provide enabling
products and services for the development of drugs and the
diagnosis and management of disease. We focus on helping discover
and test new drugs, assisting doctors to diagnose and treat
patients and preventing the spread of disease. Find out more about
MDS Inc. (TSX: MDS; NYSE: MDZ), at http://www.mdsintl.com/ or by
calling 1-888-MDS-7222, 24 hours a day. This document contains
forward-looking statements. Some forward looking statements may be
identified by words like "expects", "anticipates", "plans",
"intends", "indicates" or similar expressions. The statements are
not a guarantee of future performance and are inherently subject to
risks and uncertainties. The Company's actual results could differ
materially from those currently anticipated due to a number of
factors, including, but not limited to, successful integration of
structural changes, including restructuring plans, acquisitions,
technical or manufacturing or distribution issues, the competitive
environmentfor 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 of Operating Results and
Financial Position Introduction This section of the quarterly
report contains management's analysis of the financial performance
of the company and its financial position and it should be read in
conjunction with the consolidated financial statements. Readers are
cautioned that management's discussion and analysis ("MD&A")
contains forward-looking statements and that actual events may vary
from management's expectations. Readers are encouraged to consult
the MDS Annual Report and Annual Information Form for fiscal 2003
for additional details regarding risks affecting the business. In
our MD&A and elsewhere we refer to measures such as backlog and
unusual items that are not defined by generally accepted accounting
principles ("GAAP"). Our use of these terms may not be consistent
with the way these terms are used by others. Where possible, in
particular for earnings per share measures, we provide tables or
other information that enablesreaders to reconcile between such
non-GAAP measures and standard GAAP measures. While these measures
are not defined by or required by GAAP, we provide this information
to readers to help them better understand the significant events,
transactions, andtrends that affect our businesses. All financial
references in this document exclude the discontinued generic
radiopharmaceutical operation, and therefore reflect our continuing
operations, unless otherwise noted. The results for prior periods
have been restated to conform to this presentation. Overview
Revenue and operating income for the first quarter increased by 6%
and 18% respectively, compared to the same quarter last year.
Revenues grew at an 11% rate, normalized for the impact of currency
fluctuations and the sale of Oncology Software Solutions last year.
Our isotopes and analytical instruments businesses led overall
growth from their positions of strength in their marketplaces. This
solid performance resulted in an 18% increase in basic earnings per
share to $0.20 compared to the $0.17 reported in the first quarter
of last year. Earnings per share for the quarter include a $0.02
charge associated with the revaluation of future tax liabilities
arising from tax rate increases in Ontario. (Tabular amounts are in
millions of Canadian dollars, except where noted.) Summary of First
Quarter Consolidated Results 2004 2003 Change
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Revenues $ 462 $ 436 6% Operating Income $ 58 $ 49 18% Basic
earnings per share $ 0.20 $ 0.17 18%
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Items that have an impact on the comparability of earnings per
share for the quarter are summarized below: 2004 2003
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Earnings per share from continuing businesses before proteomics $
0.28 $ 0.24 MDS Proteomics $ (0.08) $ (0.07)
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Basic earnings per share $ 0.20 $ 0.17
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Segment Results First Quarter 2004 2003
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Opera- Opera- Opera- Opera- ting ting ting ting Revenues Income
Margin Revenues Income Margin (Loss) (Loss)
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Life Sciences $ 285 $ 57 20% $ 259 $ 47 18% Health 177 127% 177 12
7%
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462 69 15% 436 59 14% Proteomics - (11) n/m - (10) n/m
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$ 462 $ 58 13% $ 436 $ 49 11%
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n/m (equal sign) not meaningful Life Sciences Review of operations
- Revenues from Life Sciences businesses for the quarter were:
First Quarter 2004 2003 Change
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Early-stage research $ 89 $ 85 5% Late-stage research 37 35 6%
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Pharmaceutical research services 126 120 5%
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Gamma sterilization 23 10 130% Nuclear medicine 53 48 10% Therapy
systems 10 16 (38%)
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Isotopes 86 74 16%
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Analytical instruments 73 65 12%
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$ 285 $ 259 10%
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Our Life Sciences revenues grew by 10% compared to the same period
last year, with all the businesses contributing to this growth.
Operating income from Life Sciences businesses was up 21%, with
margins increasing to 20% compared to 18% in the first quarter of
last year. The impact of the declining US dollar was significant
for our Life Sciences businesses in the quarter. The change was
most significant for our US-based operations. Our Canadian
exportrevenues were also affected, although our hedging program
mitigated a portion of the decline in this area. Adjusted for the
impact of the decline in the US dollar, revenues from Life Sciences
grew 14% in the first quarter. Pharmaceutical research service
revenues increased by 5% in the first quarter compared to the same
period last year. In our early stage businesses, pharmacology and
drug safety experienced very strong year-over-year revenue growth.
This growth is indicative of the improved performance we have seen
in these businesses since last year at this time. On a local
currency basis, early clinical research and bioanalytical continued
their growth momentum, with early clinical research showing
particularly strong growth. Combined, these businesses help to
drive overall revenue growth in pharmaceutical research services to
12% on a local currency basis. We continue to focus our business
development team on pursuing growth in this area. In our late-stage
businesses, overall revenue growth compared to last year was 6%.
During the past year, we have focused on building our sales
momentum in pharmaceutical research services and we are encouraged
that we have been able to maintain a strong backlog as we have
grown revenues. As the majority of our revenues in this division
originate in US dollars, we track our backlog in that currency. Our
backlog has grown over the past 5 quarters as shown in the table
below: Average Backlog (millions of US dollars)
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Fiscal 2003 - Quarter 1 $200 Quarter 2 220 Quarter 3 240 Quarter 4
230 Fiscal 2004 - Quarter 1 240
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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. The isotopes business led
overall growth in Life Sciences with a 16% increase in revenue
compared to the same quarter last year. During the quarter, we
received $32 million from Biogen Idec to buy-out certain minimum
purchase commitments. The proceeds have been recorded as deferred
revenue and are being amortized over the remaining 40 months of the
contract. The overall growth in isotopes revenue was mainly a
reflection of increased cobalt shipments during the quarter
compared to 2003 when supply constraints adversely impacted our
results. Nuclear medicine revenues remained strong, increasing by
10% compared to the same period last year. Therapy systems revenues
are down compared to last year but the drop relates solely to the
sale of Oncology Software Solutions in February 2003. As a result
of recent concerns related to the supply of electrical power in
Ontario, we have been advised that the maintenance schedule for
Bruce Power's B reactor may be deferred. The timing of cobalt
discharges from the Bruce B reactor may impact the timing of
shipments to customers, and we therefore expect to see continued
volatility in the quarter-to-quarter revenue trend in this market.
The Bruce facility,along with Ontario Power Generation's Pickering
reactors and Hydro Quebec are our primary sources of cobalt. The
analytical instruments business continued to show solid performance
with 12% revenue growth compared to the first quarter of 2003. The
4000 QTRAP(TM) represented a significant portion of the analytical
instruments growth this quarter as we caught-up on a manufacturing
backlog discussed in prior quarters. The ELAN(R) line of inorganic
analyzers also showed solid growth compared to the first quarter of
2003, due mainly to the recent order to supply equipment to the
Centers for Disease Control and Prevention in the United States. We
have good order backlog in all lines. Capital expenditures -
Purchases of capital assets in Life Sciences amounted to $21
million for the quarter compared to $19 million last year. Segment
outlook - We expect isotope revenue to grow at modest levels and
our general contractor, Atomic Energy of Canada Limited, continues
to advise us that they are cautiously optimistic that the
commissioning of the MAPLE reactors will resume later this year. We
are pleased with the continued solid performance of our analytical
instruments business and expect the demand for the products in this
business to remain strong andthat we will be able to maintain good
backlogs for our key products. We also continue to focus on
developing new products to ensure that we maintain our current
growth trajectory. We look forward to increased revenue growth in
our pharmaceutical research services business as the business
development team executes on their mandate, and as we continue to
direct our resources to growth areas. Currency fluctuations,
especially the weakness in the US dollar, remain an important risk
factor for our Life Sciences businesses. Our current portfolio of
hedges extends part way into 2005 and we expect our average
realized conversion rate on US-dollar exports to decline moderately
over the balance of this year. While we continue to monitor the
forward marketsand hedge when appropriate, should rates remain at
current levels, we do not expect to fully mitigate the impact that
US dollar fluctuations could have on our overall results in 2005
and beyond. Health Review of operations - Revenues from Health
businesses in the quarter were: First Quarter 2004 2003 Change
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Canadian laboratories $ 100 $ 98 2% US laboratories 30 36 (17%)
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Diagnostics 130 134 (3%) Distribution 47 43 9%
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$ 177 $ 177 -
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Revenues in our Canadian diagnostic business increased slightly
this quarter compared to the same quarter last year. The reduced
level of growth this quarter reflects the negative impact of the 8%
fee reduction announced by the Province of British Columbia,
effective September 1, 2003. This reduction was offset by increased
patient volumes and by slightly higher fee levels in Ontario.
Activities aimed at mitigating the impact of the British Columbia
fee cut enabled us to maintain our margin in the Health segment.
Revenues from US laboratories declined 17% in the current quarter
due to the decline in the US dollar exchange rate. In US dollar
terms, revenues from this component of the business were level with
last year. We continue to review our strategic options in the US
diagnostic business, in particular for our under-performing
locations. Revenues from our Distribution business showedimproved
growth compared to the same quarter last year and the highest level
of growth in recent years. This business delivers a modest but
reliable operating margin and a respectable return on our
investment. We are continuing to explore our strategicoptions for
this investment. Capital expenditures - Health businesses purchased
$1 million of capital assets during the quarter compared to $5
million for the quarter last year. Segment outlook - We continue to
execute on cost reduction strategies that will mitigate the impact
of British Columbia lab reform. In January we learned that we had
been unsuccessful in a bid situation for the specimen collection,
supply chain management and courier services that support the
hospital laboratories in Saskatchewan. This is not a significant
component of our Canadian business. We have not been pleased with
the performance of our US laboratory business. We are implementing
our plan to reposition our US laboratory business in Q2 of this
year. This will have a positive impact on our Diagnostics business.
Proteomics Review of operations - The operating loss for the first
quarter was $11 million compared to $10 million last year. This
loss includes $2 million of depreciation and amortization and a $2
million writedown in the value of an investment in a
development-stage proteomics company. The cash operating costs
associated with the current level of business have been reduced 15%
since last year. Segment outlook - During 2003, MDS Proteomics
focused on research collaborations with its existing partners
including Cephalon, Abgenix, and Optimol, as well as developing new
collaborations. MDS Proteomics does not expect to enter any new
agreements of this nature in 2004. Over the past several months MDS
Proteomics has been active in developing a strategy that will add
near term revenues while continuing to align business operations
with its evolving business plan. MDS Proteomics is developing plans
to launch two service-based businesses, which will leverage
existing capabilities and assets in the rapidly growing areas of
protein analysis and biomarker development. MDS Proteomics believes
these new businesses have near term revenue generating potential
that should accelerate the transition to sustainability. MDS
Proteomics is in discussions with its partners, stakeholders and
third parties to secure the funding required to successfully
implement its service-based business plan. Corporate Net interest
expense of $5 million remained level with the first quarter of
2003, primarily reflecting the fixed interest on the US$311 million
private placement debt issued in December of 2002. Our effective
tax rate for the quarter was 45%, level with last year. Tax expense
for the quarter includes a $3 million revaluation charge for
certain net future tax liabilities related to tax rate increases in
Ontario. Selling, general, and administrative expenses increased to
20% of revenues for the quarter compared to 19% last year. This
increase is temporary and reflects the investment in various change
initiatives announced last year, including work on our common
business system and our evolution towards a shared-services
approach for support services. Research and development spending in
the quarter of $14 million is in line with last year and remains
largely focused in analytical instruments and proteomics. Our
annualized return on equity (excluding the impact of MDS
Proteomics) was 10% for the quarter, up 1% from last year.
Discontinued operations In the fourth quarter of 2003, we announced
our intention to withdraw from the generic radiopharmaceutical
manufacturing business in Europe and accordingly now account for
this business as a discontinued operation. The results of these
operations for the quarter included revenue of $3 million compared
to the $4 million generated in the same quarter last year. The
operation also reported a net loss of $1 million compared to
breakeven in the same quarter last year. We expect to substantially
complete the exit of this business by the end of the year.
Liquidity and capital resources Our cash position at January 31,
2004 was $245 million, down from $260 million at October 31, 2003.
Operating working capital was $142 million, an increase of $59
million from October. The major reason for this change was the
utilization of cash to pay various year-end accruals and
restructuring obligations that were recorded in the fourth quarter
last year. Events subsequent to the end of the quarter On February
12, 2004we announced that we had concluded an agreement with
Hemosol Inc. that will enable us to gain access to tax losses,
unclaimed tax deductions and income tax credits owned by that
company exceeding $300 million in return for a cash payment of $16
million. Under the agreement, and through a series of transactions,
we will transfer assets and operations that form part of our
Ontario laboratory business into a partnership. We will then
transfer a limited partnership interest in this business to Hemosol
inreturn for non-voting and voting shares of Hemosol. At the same
time, the existing assets and business of Hemosol will be
transferred to a new company to be called Hemosol Corp. The
existing Hemosol will be renamed when the transaction is complete.
Following this transfer, we will own 99.56% of the equity of the
renamed company and approximately 47.5% of the voting shares. We
will retain control of the day-to-day operations of the Ontario
labs business under this arrangement. In addition, the operating
agreements of the labs partnership will ensure that our share of
the cash generated by the business flows to us in a timely manner.
We will continue to report the Ontario lab operations on a
consolidated basis and expect our reported financial results and
financial position to be largely unchanged, except for the impact
of the reduced taxes for our Ontario lab operations. We expect the
reorganization to close by the end of our second quarter. On
closing, we will report tax assets at their cost base of
approximately $18 million including costs to complete the
transaction. MDS will have an interest in Hemosol Corp. equal to
its existing interest in Hemosol after these transactions are
completed. We expect that we will dispose of this interest over
time, as market conditions permit. Our existing guarantee of
Hemosol's bank debt will be transferred to the new company, along
with the assets that form the security for this debt. As part of
the consideration paid related to the reorganization, wehave agreed
to surrender 0.5 million of the warrants that we currently hold in
Hemosol related to this guarantee and to reduce our future
entitlement to 2 million additional warrants that we will earn if
the guarantee remains outstanding for specified periods. Outlook We
are pleased with our results for this quarter and believe that our
core businesses are beginning the year off well. We will continue
to focus our efforts on aligning our core operations to meet the
growing demand for our products and services. The change
initiatives we announced in 2003 are underway, and are essential to
achieving our growth and operating targets. We expect to see the
benefits of these changes later this year and beyond. Changes in
accounting policy We have prospectively adopted the fair value
based method for stock options granted after November 1, 2003. This
adoption was pursuant to CICA Handbook Section 3870 "Stock-Based
Compensation and Stock Bonus Payments", which permitted stock
prospective treatment (see note 1 to the consolidated financial
statements). The stock options granted during the first quarter of
2004 had no material impact to our results of operations and
financial position. On November 1, 2003, CICA Accounting Guideline
13 came into effect. The guideline sets out specific new criteria
that must be met in order to apply hedge accounting to a derivative
instrument. We maintain an active hedging program designed to
manage our Canadian operations' exposure to fluctuations in the US
dollarexchange rate relative to the Canadian dollar, on conversion
of US dollar denominated revenues (see note 1 to consolidated
financial statements). The adoption of this guideline has had an
immaterial impact on our results of operations and financial
position.
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MDS Inc.
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(Incorporated under the Canada Business Corporations Act)
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
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As at January 31 with comparatives at October 31 (millions of
Canadian dollars) 2004 2003
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ASSETS Current Cash and cash equivalents $ 248 $ 263 Accounts
receivable 322 274 Inventories 166 199 Income taxes recoverable 10
9 Prepaid expenses 40 30
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786 775 Capital assets 789 776 Future tax assets 20 23 Long-term
investments and other 218 217 Goodwill 776 774
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Total Assets $ 2,589 $ 2,565
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LIABILITIES AND SHAREHOLDERS' EQUITY Current Bank indebtedness $ 3
$ 3 Accounts payable and accrued liabilities 322 355 Deferred
revenue 24 35 Income taxes payable 23 14 Current portion of
long-term debt 9 9
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381 416 Long-term debt 536 533 Deferred revenue (note 2) 57 34
Other long-term obligations 24 23 Future tax liabilities 76 70
Minority interest 60 63
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$ 1,134 $ 1,139
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Shareholders' equity Share capital (note 5) 821 816 Retained
earnings 600 572 Currency translation adjustment 34 38
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1,455 1,426
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Total liabilities and shareholders' equity $ 2,589 $ 2,565
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See accompanying notes MDS Inc. CONSOLIDATED STATEMENTS OF INCOME
(Restated - note 3)
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Three months ended January 31 (millions of Canadian dollars, except
per share amounts) 2004 2003
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Net revenues $ 462 $ 436 Cost of revenues (278) (270) Selling,
general and administration (94) (85) Research and development (14)
(14) Depreciation and amortization (18) (20) Equity earnings and
investment gains - 2
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Operating income $ 58 $ 49
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Interest expense (7) (8) Dividend and interest income 2 3
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Income from continuing operations before income taxes and minority
interest 53 44 Income taxes (23) (19) Minority interest - net of
tax (1) (1)
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Income from continuing operations 29 24 Loss from discontinued
operations - net of tax (note 3) (1) -
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Net income $ 28 $ 24
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Earnings per share (note5) Basic $ 0.20 $ 0.17 Diluted $ 0.19 $
0.17
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See accompanying notes CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
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Three months ended January 31
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(millions of Canadian dollars) 2004 2003
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Retained earnings, beginning of period $ 572 $ 543 Net income 28 24
Repurchase of shares and options - (1)
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Retained earnings, end of period $ 600 $ 566
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MDS Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS
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Three months ended January 31
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(millions of Canadian dollars) 2004 2003
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Operating activities Net income $ 28 $ 24 Items not affecting
current cash flow (note 6) 29 21
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57 45 Changes in non-cash working capital balances relating to
operations (note 6) (60) (19)
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(3) 26
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Investing activities Acquisitions (2) - Purchase of capital assets
(28) (24) Other (1) (19)
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(31) (43)
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Financing activities Issuance of long-term debt - 565 Repayment of
long-term debt (1) (519) Increase (decrease) in deferred income and
other long-term obligations 23 (5) Issuance of shares 4 1
Distribution to minority interest (4) (3)
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22 39
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Effect of foreign exchange rate changes on cash and cash
equivalents (3) (3)
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Increase (decrease) in cash position during the period (15) 19 Cash
position, beginning of period 260 184
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Cash position, end of period $ 245 $ 203
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Cash position comprises cash and cash equivalents less bank
indebtedness. See accompanying notes.
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MDS Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All tabular
amounts in millions of Canadian dollars, except where noted)
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1. Accounting Policies These consolidated financial statements of
MDS Inc. ("MDS" or "the Company") have been prepared on a basis
consistent with the Company's annual financial statements for the
year ended October 31, 2003, 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. Changes in
accounting policy In September 2003, the CICA amended CICA Handbook
Section 3870, "Stock- Based Compensation and other Stock-Based
Payments" ("Section 3870") to allow companies who voluntarily adopt
the fair value based method for all awards to do so (i)
retroactively with restatement of prior periods, (ii) retroactively
without restatement of prior periods, or (iii) prospectively.
Prospective adoption is only permitted if the fair value method is
adopted in fiscal years beginning before January 1, 2004. We have
prospectively adopted the fair value for our fiscal period
beginning November 1, 2003, and therefore will continue to report
the impact of stock options granted prior to fiscal 2004 in our pro
forma note disclosure to the consolidated financial statements. The
impact of stock options granted during the quarter has had an
impact on the Company's results of operations and financial
position. In December 2001, the Accounting Standards Board of the
CICA issued Accounting Guideline 13, "Hedging Relationships"
("AcG-13"), which applies to fiscal years beginning on or after
July 1, 2003. AcG-13 establishes specific criteria for derivatives
to qualify for hedge accounting. Hedge accounting is a method for
recognizing the gains, losses, revenues and expenses associated
with the separate components in a hedging relationship, such that
those gains, losses, revenue and expenses associated with the
separate components are recognized in income in the same period
when they would otherwise be recognized in different periods. A
derivative will qualify as a hedge if the hedging relationship is
designated and formally documented at inception. AcG-13 requires
the documentation to identify the particular risk management
objective and strategy for undertaking the hedge transaction, along
with the specific asset, liability or cash flow being hedged, as
well as how effectiveness is being assessed. The derivative must be
highly effective in offsetting either changes in the fair value of
on-balance sheet items or changes in the amount of future cash
flows both at inception and over the life of the hedge for hedge
accounting to continue. Hedge accounting is discontinued if a
hedging relationship becomes ineffective; however, the hedge
accounting applied to a hedging relationship in prior periods is
not reversed. The adoption of AcG-13 has had an insignificant
impact on our results of operations and financial position. 2.
Deferred Revenue During the quarter, the Company received $32
million from Biogen Idec as consideration for amending a supply
agreement to buy-out certain minimum purchase commitments. The
transaction was recorded as deferred revenue and is being amortized
over the remaining 40 months of the contract; consequently, in the
first quarter of 2004, the Company has recognized revenue of $2
million relating to this contract. To reflect the amount to be
amortized in the balance of fiscal 2004, the Company has
reclassified $7 million as current deferred revenue. 3.
Discontinued Operations On October 24, 2003, MDS Board of Directors
approved a plan for an orderly exit of its generic
radiopharmaceutical manufacturing facility in Fleurus, Belgium. The
company has restated prior period results to reflect the required
separate disclosure of the results of the discontinued operation.
The Company reported revenue of $3 million during the first quarter
of 2004 (2003 - $4), and a net loss (after-tax) of $1 million (2003
- nil). The $14 million provision included in accounts payable and
accrued other, which was recorded in the fourth quarter of 2003,
remains unchanged at January 31, 2004 as the Company expects to
begin making payments later during 2004. 4. Restructuring Charges
The Company recorded restructuring charges of $17 million during
the fourth quarter of 2003 relating to the implementation of
certain workforce reductions. During the first quarter of 2004, the
Company made payments of $4 million for severance and benefit costs
associated with the streamlining of business processes, primarily
in Life Sciences and Health segments in North America and Europe.
The Company expects to substantially utilize the remaining $13
million of restructuring charges by mid- 2004. 5. Earnings per
Share a) Dilution Three months ended January 31
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(number of shares in millions) 2004 2003
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Net income available to Common shareholders $ 28 $ 24
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Weighted average number of Common shares outstanding - basic 141
141 Impact of stock options assumed exercised 2 2
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Weighted average number of Common shares outstanding - diluted 143
143
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Basic earnings per share is calculated by dividing the net earnings
by the weighted average number of common shares outstanding during
the period. Diluted earnings per share is calculated by dividing
net earnings available to Common shareholders by the sum of the
weighted average number of Common shares outstanding and all
additional Common shares that would have been outstanding if
potentially dilutive Common shares had beenissued during the
period. 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 in prior years. For purposes of these pro forma
disclosures, the Company's net income and basic and diluted
earnings per share would have been: Three months ended January 31
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2004 2003
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Pro forma net income available to Common shareholders $ 26 $ 23 Pro
forma earnings per share - basic $ 0.18 $ 0.16 - diluted $ 0.18 $
0.16
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During the quarter, the Company granted 935,000 options (2003 -
1,328,500) at an average exercise price of $19.65 (2003 - $21.71).
These options have a Black Scholes value of $7.37 per share, based
on the following assumptions:
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2004 2003
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Risk-free interest rate 5.5 % 5.5 % Expected dividend yield 1.0 %
1.0 % Expected volatility 0.350 0.354 Expected time to exercise
(years) 5.25 5.25
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c) Discontinued Operations The results of discontinued operations
had no impact on the Company's earnings per share during the first
quarter of 2004 and 2003. 6. Supplementary Cash Flow Information
Non-cash items affecting net income comprise: Three months ended
January 31
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2004 2003
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Depreciation and amortization $ 18 $ 20 Minority interest 1 1
Future income taxes 8 2 Equity earnings (loss) - net of
distribution - (2) Other 2 -
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$ 29 $ 21
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Changes in non-cash working capital balances relating to operations
include: Three months ended January 31
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2004 2003
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Accounts receivable $ (48) $ 31 Inventories 32 (15) Accounts
payable and deferred income (43) (36) Income taxes 8 3 Foreign
exchange and other (9) (2)
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$ (60) $ (19)
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7. Segmented Information Three months ended January 31
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2004 2003
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Life Life Scien- Prote- Scien- Prote- ces Health omics Total ces
Health omics Total
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Net revenues $ 285 $ 177 $ - $ 462 $ 259 $ 177 $ - $ 436 Operating
income (loss) 57 12 (11) 47 12 (10) 49 Revenues by products and
services: Medical isotopes 86 74 Analytical equipment 73 65
Pharmaceutical research services 126 120 Clinical laboratory
services 130 134 Distribution and other 47 43 Proteomics - -
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8. Financial Instruments As of January 31, 2004,the Company had
outstanding foreign exchange contracts and options in place to sell
up to US$403 million at a weighted average rate of C$1.51 maturing
over the next 18 months. The Company also had interest rate swap
contracts that exchanged a notional amount of US$80 million of debt
from a fixed to a floating interest rate. Foreign exchange and
interest rate swap contracts are treated as hedges for accounting
purposes. The carrying amounts and fair values for derivative
financial instruments are as follows: Three months to January 31
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2004 2003
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Carrying Fair Carrying Fair amount Value amount Value
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Net asset (liability) position: Currency forward and option
contracts $ - $ 44 $ - $ 6 Interest rate swap and option contracts
$ - $ 1 $ - $ (1)
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DATASOURCE: MDS Inc. CONTACT: Sharon Mathers, Vice-President,
Investor Relations, (416) 675-6777 x 2695,
Copyright