In April 2008, the FASB issued Financial Statement Position SFAS
142-3, "Determination of the Useful Life of Intangible Assets"
("FSP 142-3"). FSP 142-3 provides guidance with respect to
estimating the useful lives of recognized intangible assets
acquired on or after the effective date and requires additional
disclosure related to the renewal or extension of the terms of
recognized intangible assets. FSP 142-3 is effective for fiscal
years and interim periods beginning after December 15, 2008. The
adoption is not expected to have a material impact on the
consolidated results of operations and financial position.
International Financial Reporting Standards We have been monitoring
the deliberations and progress being made by accounting standard
setting bodies and securities regulators both in Canada and the
United States with respect to their plans regarding convergence to
International Financial Reporting Standards (IFRS). The Accounting
Standards Board in Canada and the Canadian Securities
Administrators (CSA) have recently confirmed that domestic issuers
will be required to transition to IFRS for fiscal years beginning
on or after January 1, 2011. The CSA in a Concept Paper released on
February 13, 2008, provided a tentative conclusion that allows
domestic issuers who are also Securities and Exchange Commission
(SEC) registrants, like MDS, to continue to report under US GAAP
for a further two years from the transition date for domestic
issuers. Separately, the SEC in late 2007 also eliminated the
requirement of reconciling financial statements to US GAAP for
foreign private issuers that file under IFRS, effective November
15, 2007. We adopted US GAAP as our primary reporting standard for
our consolidated financial statements in fiscal 2007. We commenced
reporting under US GAAP to improve the comparability of our
financial information with that of our competitors, the majority of
whom are US-based multinational companies that report under US
GAAP. If current proposals by the CSA are approved without changes,
the earliest we will be required to adopt IFRS as our primary
reporting standard will be in fiscal 2014. We may adopt IFRS as our
primary reporting standard earlier if the SEC either requires
domestic registrants in the US to transition to IFRS prior to
fiscal 2014 or if it permits domestic registrants to voluntarily
adopt IFRS prior to fiscal 2014 and the majority of our competitors
commence to report under IFRS. Internal Control over Financial
Reporting As a result of our internal controls review during the
preparation of our 2007 annual financial statements, we concluded
that effective internal control over financial reporting was not
maintained with respect to accounting for and disclosure of the
fair value of compensation expense and period-end liabilities for
certain stock-based incentive compensation plans. As this error
resulted in a material audit adjustment to our statements for
fiscal 2007 and a restatement of the 2007 interim financial
statements to correct the Canadian to US GAAP reconciliation tables
in the notes to the financial statements, we concluded that this
constituted a material weakness in the Company's internal control
over financial reporting and that the Company's internal control
over financial reporting was not effective as at October 31, 2007.
Although we believe that the reported material weakness is narrow
in scope and that it does not have a pervasive impact on internal
control over financial reporting at MDS, we will continue to
evaluate our internal control over financial reporting on an
ongoing basis and will upgrade and enhance internal control over
financial reporting as needed. To address the identified material
weakness, management implemented measures in the first quarter of
2008 to remediate the control deficiency, including review of
certain stock-based incentive compensation plans with third-party
compensation experts, the calculation of fair value for these plans
using a Monte Carlo simulation, and a review of accounting
regulations for stock-based compensation plans with third-party
accounting experts. These measures have strengthened internal
control associated with the calculation and reporting of the fair
value of stock-based incentive compensation plan liability and
expense. These measures were implemented prior to the preparation
of the financial statements for the quarter ended January 31, 2008
and will be subject to the Company's assessment of internal
controls in fiscal 2008. Consolidated Statements of Financial
Position (unaudited) 2008 2007 As at April 30 with comparatives at
October 31 Restated (millions of US dollars) (Note 2)
-------------------------------------------------------------------------
ASSETS Current Assets Cash and cash equivalents $ 139 $ 235
Short-term investments - 102 Accounts receivable, net 260 287 Note
receivable 73 - Unbilled revenue 111 99 Inventories, net 117 128
Income taxes recoverable 56 54 Current portion of deferred tax
assets 47 45 Prepaid expenses and other 32 22 Assets held for sale
27 1
-------------------------------------------------------------------------
Total Current Assets 862 973 Property, plant and equipment, net 364
386 Deferred tax assets 31 4 Long-term investments and other 178
290 Goodwill 799 782 Intangible assets, net 510 583
-------------------------------------------------------------------------
Total Assets $ 2,744 $ 3,018
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts
payable and accrued liabilities $ 288 $ 384 Current portion of
deferred revenue 75 71 Income taxes payable 16 57 Current portion
of long-term debt 20 94 Current portion of deferred tax liabilities
33 10 Liabilities related to assets held for sale 12 -
-------------------------------------------------------------------------
Total Current Liabilities 444 616 Long-term debt 280 290 Deferred
revenue 14 17 Other long-term obligations 30 30 Deferred tax
liabilities 139 168
-------------------------------------------------------------------------
Total Liabilities 907 1,121
-------------------------------------------------------------------------
Shareholders' Equity Common shares, at par - Authorized shares:
unlimited; Issued and outstanding shares: 122,036,150 and
122,578,331 for April 30, 2008 and October 31, 2007, respectively.
494 493 Additional paid-in capital 75 72 Retained earnings 858 842
Accumulated other comprehensive income 410 490
-------------------------------------------------------------------------
Total shareholders' equity 1,837 1,897
-------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 2,744 $ 3,018
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Incorporated Under The Canada Business Corporations Act See
accompanying notes. CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
-------------------------------------------------------------------------
Three months Six months ended April 30 ended April 30
-------------------------------------------------------------------------
2008 2007 2008 2007 (millions of US dollars, Restated Restated
except per share amounts) (Note 2) (Note 2)
-------------------------------------------------------------------------
Revenues Products $ 169 $ 129 $ 320 $ 234 Services 157 134 302 270
Reimbursement revenues 24 23 50 46
-------------------------------------------------------------------------
Total revenues 350 286 672 550
-------------------------------------------------------------------------
Costs and expenses Direct cost of products (106) (83) (201) (154)
Direct cost of services (101) (82) (193) (172) Reimbursed expenses
(24) (23) (50) (46) Selling, general and administration (75) (61)
(139) (115) Research and development (22) (16) (42) (28)
Depreciation and amortization (23) (18) (50) (32) Restructuring
charges - net (1) (25) (1) (38) Other income (expenses) - net 10
(74) 6 (70)
-------------------------------------------------------------------------
Total costs and expenses (342) (382) (670) (655)
-------------------------------------------------------------------------
Operating income (loss) from continuing operations 8 (96) 2 (105)
Interest expense (6) (8) (12) (14) Interest income 4 10 10 14
Mark-to-market on interest rate swaps - 1 2 1 Equity earnings 10 11
24 25
-------------------------------------------------------------------------
Income (loss) from continuing operations before income taxes 16
(82) 26 (79) Income tax (expense) recovery - current (3) 31 (25) 29
- deferred (2) (4) 27 (5)
-------------------------------------------------------------------------
Income (loss) from continuing operations 11 (55) 28 (55) Income
from discontinued operations - net of income tax - 792 - 808
-------------------------------------------------------------------------
Net income $ 11 $ 737 $ 28 $ 753
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic earnings (loss) per share - from continuing operations $ 0.09
$ (0.40) $ 0.23 $ (0.39) - from discontinued operations - 5.77 -
5.73
-------------------------------------------------------------------------
Basic earnings per share $ 0.09 $ 5.37 $ 0.23 $ 5.34
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Diluted earnings (loss) per share - from continuing operations $
0.09 $ (0.40) $ 0.23 $ (0.39) - from discontinued operations - 5.75
- 5.72
-------------------------------------------------------------------------
Diluted earnings per share $ 0.09 $ 5.35 $ 0.23 $ 5.33
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME (UNAUDITED) Three months Six months ended April 30 ended
April 30 2008 2007 2008 2007 Restated Restated (Note 2) (Note 2)
-------------------------------------------------------------------------
Net income $ 11 $ 737 $ 28 $ 753
-------------------------------------------------------------------------
Foreign currency translation (1) 41 (75) 28 Unrealized gain (loss)
on available-for-sale assets - - 1 (3) Unrealized gain (loss) on
derivatives designated as cash flow hedges, net of tax - 5 (4) 5
Reclassification of realized losses - (2) - (2) Repurchase and
cancellation of Common shares (1) (33) (2) (33)
-------------------------------------------------------------------------
Other comprehensive income (loss) $ (2) $ 11 $ (80) $ (5)
-------------------------------------------------------------------------
Comprehensive income (loss) $ 9 $ 748 $ (52) $ 748
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Statements of Cash Flows (UNAUDITED) Three months Six
months ended April 30 ended April 30 2008 2007 2008 2007 Restated
Restated (millions of US dollars) (Note 2) (Note 2)
-------------------------------------------------------------------------
Operating activities Net income $ 11 $ 737 $ 28 $ 753 Less: Income
from discontinued operations - net of tax - 792 - 808
-------------------------------------------------------------------------
Income (loss) from continuing operations 11 (55) 28 (55)
Adjustments to reconcile net income to cash provided (used in)
operating activities relating to continuing operations: Items not
affecting current cash flow (1) 132 29 160 Changes in non-cash
operating assets and liabilities balances relating to operations
(24) 34 (128) 1
-------------------------------------------------------------------------
Cash provided by (used in) operating activities of continuing
operations (14) 111 (71) 106 Cash used in operating activities of
discontinued operations - (69) - (53)
-------------------------------------------------------------------------
(14) 42 (71) 53
-------------------------------------------------------------------------
Investing activities Acquisitions (2) (603) (2) (603) Purchase of
property, plant and equipment (15) (7) (28) (16) Proceeds on sale
of property, plant and equipment 2 - 3 - Proceeds on sale of
short-term investments - 25 101 151 Purchases of short-term
investments - (15) - (37) Proceeds on sale of long-term investment
4 2 7 13 Other (2) (1) (2) -
-------------------------------------------------------------------------
Cash provided by (used in) investing activities of continuing
operations (13) (599) 79 (492)
-------------------------------------------------------------------------
Cash provided by investing activities of discontinued operations -
929 - 929
-------------------------------------------------------------------------
(13) 330 79 437
-------------------------------------------------------------------------
Financing activities Repayment of long-term debt (1) (1) (81) (7)
Decrease in deferred revenue and other long-term obligations (1)
(1) - - Payment of cash dividends - - - (3) Issuance of shares 4 6
5 10 Repurchase of shares (12) (441) (17) (441)
-------------------------------------------------------------------------
Cash used in financing activities of continuing operations (10)
(437) (93) (441)
-------------------------------------------------------------------------
Cash used in financing activities of discontinued operations - - -
(2)
-------------------------------------------------------------------------
(10) (437) (93) (443)
-------------------------------------------------------------------------
Effect of foreign exchange rate changes on cash and cash
equivalents 32 28 (11) 4
-------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents during the
period (5) (37) (96) 51 Cash and cash equivalents, beginning of
period 144 335 235 247
-------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 139 $ 298 $ 139 $ 298
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (All tabular amounts in millions of US dollars, except
where noted) 1. Basis of Presentation The accompanying unaudited
consolidated financial statements have been prepared by the Company
in United States (US) dollars and in accordance with US generally
accepted accounting principles (US GAAP) for interim financial
reporting, which do not conform in all respects to the requirements
of US GAAP for annual financial statements. Accordingly, these
condensed notes to the unaudited consolidated financial statements
should be read in conjunction with the audited consolidated
financial statements and notes thereto prepared in accordance with
US GAAP that are contained in the Company's amended Annual Report
for the fiscal year ended October 31, 2007, filed on January 29,
2008 with the US Securities and Exchange Commission, the Ontario
Securities Commission, and other securities regulatory authorities
in Canada. These interim consolidated financial statements have
been prepared using accounting policies that are consistent with
the policies used in preparing the Company's audited consolidated
financial statements for the year ended October 31, 2007. There
have been no material changes to the Company's significant
accounting policies since October 31, 2007, except as described
below under "Recently Adopted Accounting Pronouncements". These
policies are consistent with accounting principles generally
accepted in Canada (Canadian GAAP) in all material respects except
as described in Note 19. Use of Estimates In preparing the
Company's consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and
liabilities at the dates of the consolidated financial statements
and the reported amounts of revenue and expenses during the
reporting periods. Actual results could differ from these estimates
and the operating results for the interim periods presented are not
necessarily indicative of the results expected for the full year.
On an ongoing basis, management reviews its estimates to ensure
that these estimates appropriately reflect changes in the Company's
business and new information as it becomes available. If historical
experience and other factors used by management to make these
estimates do not reasonably reflect future activity, the Company's
results of operations and financial position could be materially
impacted. 2. Changes Affecting Fiscal 2008 Consolidated Financial
Statements a. Restatement of 2007 Interim Financial Statements
During the preparation of the 2007 annual financial statements, an
error was identified in the US GAAP reconciliation provided as part
of the fiscal 2007 interim financial statements with respect to
certain stock-based incentive compensation plans for which an
incorrect valuation methodology was utilized. The Company has
corrected this error by restating selling, general and
administration expenses for the three months ended April 30, 2007
with a reduction of $1 million in the accompanying quarterly
consolidated financial statements and reducing the value of accrued
liabilities by a similar amount. The Canadian GAAP financial
statements previously reported were not impacted by the change,
except for the reconciliation to US GAAP (see Note 19). b. Recently
adopted accounting pronouncements On November 1, 2007, the Company
adopted the provisions of the US Financial Accounting Standards
Board (FASB) interpretation # 48 (FIN 48), "Accounting for
Uncertainty in Income Taxes, an Interpretation of FASB Statement #
109". FIN 48 clarifies accounting for uncertainty in income taxes
recognized in an enterprise's financial statements and prescribes a
recognition threshold of more likely than not to be sustained upon
audit examination. As a result of the implementation an adjustment
to the liability for unrecognized tax benefits was not required;
accordingly, no adjustment was made to opening retained earnings at
November 1, 2007. At February 1, 2008, the total amount of
unrecognized tax benefits, including interest and penalties, was
$28 million. Of these unrecognized tax benefits, $21 million, if
recognized, would favourably affect the effective income tax rate
in the future. The amount of unrecognized tax benefits at April 30,
2008, including interest and penalties, is $29 million. The Company
accrues interest and penalties relating to unrecognized tax
benefits in its provision for income taxes. As of February 1, 2008,
the balance of accrued interest and penalties was $5 million.
During the quarter there was an increase to the liability for
interest and penalties by approximately $1 million. MDS is subject
to taxation in Canada and the US, its principal jurisdictions, and
in numerous other countries around the world. With few exceptions,
MDS is no longer subject to examination by Canadian tax authorities
for tax years before 2002, while most tax returns for 2002 and
beyond remain open for examination. Tax returns filed in the US
generally are not subject to examination for years before 2003,
while 2003 and subsequent US tax filings generally remain open for
audit by tax authorities. In certain circumstances, selective
returns in earlier years are also open for examination. 3. Recent
US Accounting Pronouncements a. In September 2006, the FASB issued
Statement of Financial Accounting Standards (SFAS) # 157, "Fair
Value Measurements". SFAS 157 provides guidance for using fair
value to measure assets and liabilities. It also responds to
investors' requests for expanded information about the extent to
which companies measure assets and liabilities at fair value, the
information used to measure fair value, and the effect of fair
value measurements on earnings. SFAS 157 applies whenever other
standards require (or permit) assets or liabilities to be measured
at fair value, and does not expand the use of fair value in any new
circumstances. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007 and is
required to be adopted by the Company on November 1, 2008. The
Company is currently evaluating the effects that the adoption of
SFAS 157 will have on its consolidated results of operations and
financial condition and is not yet in a position to determine such
effects. b. In February 2007, the FASB issued SFAS # 159, "The Fair
Value Option for Financial Assets and Financial Liabilities
Including an Amendment of FASB Statement # 115". This Statement
permits entities to choose to measure many financial instruments
and certain other items at fair value. The objective is to improve
financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply
complex hedge accounting provisions. The Company is required to
adopt the provisions of SFAS 159 effective fiscal 2009 and is
currently evaluating the effects of the adoption of SFAS 159. The
adoption is not expected to have a material impact on the
consolidated results of operations and financial condition. c. In
December 2007, the FASB issued SFAS # 141R, "Business
Combinations", a substantial amendment to SFAS 141. The objective
of this statement is to improve the relevance, representational
faithfulness, and comparability of the information that a reporting
entity provides in its financial reports about a business
combination and its effects. To accomplish that, this statement
establishes principles and requirements for how the acquirer: a)
recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any
non-controlling interest in the acquiree; b) recognizes and
measures the goodwill acquired in the business combination or a
gain from a bargain purchase; and c) determines what information to
disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. The
Company is required to adopt the provisions of SFAS 141R effective
for acquisitions after October 31, 2009. The Company is currently
evaluating the effects that the adoption of SFAS 141R will have on
its consolidated results of operations and financial condition and
is not yet in a position to determine such effects. d. In December
2007, the FASB issued SFAS # 160, "Non-controlling Interests in
Consolidated Financial Statements- an Amendment of ARB # 51". SFAS
160 is effective for fiscal years beginning after December 15,
2008. The objective of this Statement is to improve the relevance,
comparability, and transparency of the financial information that a
reporting entity provides in its consolidated financial statements
related to the non-controlling interest held by others in entities
that are consolidated by the reporting entity. MDS does not
consolidate entities with material non-controlling interests and
the provisions of SFAS 160 are not expected to have a material
impact on the Company's consolidated results of operations and
financial condition. e. In March 2008, the FASB issued SFAS # 161,
"Disclosures about Derivative Instruments and Hedging Activities -
An Amendment of FASB Statement 133 (SFAS 133) SFAS 161 is effective
for fiscal years and interim periods beginning after November 15,
2008. MDS plans to adopt the provisions of SFAS 161 on February 1,
2009. f. In April 2008, the FASB issued Financial Statement
Position SFAS 142-3, "Determination of the Useful Life of
Intangible Assets" (FSP 142-3). FSP 142-3 provides guidance with
respect to estimating the useful lives of recognized intangible
assets acquired on or after the effective date and requires
additional disclosure related to the renewal or extension of the
terms of recognized intangible assets. FSP 142-3 is effective for
fiscal years and interim periods beginning after December 15, 2008.
The adoption is not expected to have a material impact on the
Company's consolidated results of operations and financial
condition. g. MDS has been monitoring the deliberations and
progress being made by accounting standard setting bodies and
securities regulators both in Canada and the United States with
respect to their plans regarding convergence to International
Financial Reporting Standards (IFRS). The Accounting Standards
Board in Canada and the Canadian Securities Administrators (CSA)
have recently confirmed that domestic issuers will be required to
transition to IFRS for fiscal years beginning on or after January
1, 2011. The CSA in a Concept Paper released on February 13, 2008,
provided a tentative conclusion that allows domestic issuers who
are also Securities and Exchange Commission (SEC) registrants, like
MDS, to continue to report under US GAAP for a further two years
from the transition date. Separately, the SEC in late 2007 also
eliminated the requirement of reconciling financial statements to
US GAAP for foreign private issuers that file under IFRS effective
November 15, 2007. MDS adopted US GAAP as the primary reporting
standard for the Company's consolidated financial statements in
fiscal 2007. MDS commenced reporting under US GAAP to improve the
comparability of the financial information with that of its
competitors, the majority of whom are US-based multinational
companies that report under US GAAP. If current proposals by the
CSA are approved without changes, the earliest the company will be
required to adopt IFRS as the primary reporting standard will be in
fiscal 2014. MDS may adopt IFRS as the primary reporting standard
earlier if the SEC either requires domestic registrants in the US
to transition to IFRS prior to fiscal 2014 or if it permits
domestic registrants to voluntarily adopt IFRS prior to fiscal 2014
and the majority of the Company's competitors commence to report
under IFRS. 4. Acquisitions a. Acquisition of Molecular Devices
Corporation On March 20, 2007, MDS completed a tender offer which
resulted in the Company acquiring all of the outstanding shares of
Molecular Devices Corporation (MD), a leading provider of
high-performance measurement tools for high content screening,
cellular analysis and biochemical testing. MD is principally
involved in the design, development, manufacture, sale and service
of bioanalytical measurement systems that accelerate and improve
drug discovery and other life sciences research. The Company
acquired MD primarily to add their leading-edge products to those
of MDS Sciex and to strengthen the Company's position as one of the
top global providers of analytical instrumentation and related
products marketed to life sciences customers. The operations for
this acquisition are reported within the results of the Company's
MDS Analytical Technologies segment (which combines MD with the
previous analytical instruments segment) in the consolidated
financial statements from the date of acquisition. The aggregate
purchase consideration (net of cash acquired of $21 million) was
$600 million, paid in cash from existing cash on hand. Included in
the consideration was $27 million cash cost to buy back outstanding
in-the-money options of MD at the closing date of acquisition.
Direct and incremental third party acquisition costs associated
with the acquisition and included in the aggregate purchase
consideration were $7 million. The acquisition has been accounted
for as a purchase in accordance with SFAS # 141, and the Company
has accordingly allocated the purchase price of the acquisition
based upon the estimated fair values of the assets acquired and
liabilities assumed. The purchase price and related allocations
were finalized in the second quarter of 2008 as follows:
-------------------------------------------------------------------------
April 30, October 31, 2008 2007
-------------------------------------------------------------------------
Net tangible assets $ 21 $ 15 Developed technologies (five-year
weighted average useful life) 161 161 Brands 30 60 Goodwill 388 364
-------------------------------------------------------------------------
Total purchase price $ 600 $ 600
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Since October 31, 2007, the principal change in the purchase price
allocation relates to a lower value placed upon acquired brands of
$30 million. The following table summarizes the components of the
net tangible assets acquired at fair value:
-------------------------------------------------------------------------
April 30, October 31, 2008 2007
-------------------------------------------------------------------------
Inventories $ 40 $ 40 Property, plant and equipment 12 12 Other
assets and liabilities, net (31) (37)
-------------------------------------------------------------------------
Net tangible assets acquired $ 21 $ 15
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The value of brands decreased due to shortened estimates of useful
lives as the final valuation of intangibles was completed in the
second quarter. Net tangible assets increased as a result of the
final valuation of deferred revenue being completed in the second
quarter and there was a decrease in the deferred tax liability
recorded following a decrease in the brand value. The changes in
fair values were reflected in the adjustment of the goodwill
balance. Pro forma information The following unaudited pro forma
information is provided for MDS assuming the acquisition of MD
occurred on November 1, 2006. Three months Six months ended April
30 ended April 30
-------------------------------------------------------------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
Revenues $ 350 $ 308 $ 672 623
-------------------------------------------------------------------------
Income (loss) from continuing operations, net of income taxes 11
(75) 28 (78) Income from discontinued operations, net of income
taxes - 792 - 808
-------------------------------------------------------------------------
Net income $ 11 $ 717 $ 28 $ 730
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per share Basic $ 0.09 $ 5.08 $ 0.23 $ 5.17 Diluted $ 0.09
$ 5.07 $ 0.23 $ 5.16
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The information presented above is for illustrative purposes only
and is not indicative of the results that would have been achieved
had the acquisition taken place as of the beginning of the earliest
period presented. b. Other acquisition In December 2007, MDS
acquired 100% of the stock of a small company that is in the
process of developing a complimentary product to our MDS Analytical
Technologies product portfolio. Consideration for the transaction
was $2 million net of cash acquired, plus an additional $2 million
in cash payments expected in 2008 which have been placed in escrow
according to the agreement. The additional $2 million payment
included in prepaid expenses and other is contingent on the
retention of certain key employees and the completed validation of
the functionality and technical specification of prototypes of the
product acquired. The purchase price and related allocations have
not been finalized and may be revised as a result of adjustments
made to the purchase price, additional information regarding
liabilities assumed, and revisions of preliminary estimates of fair
values made at the date of purchase. In connection with the fair
valuing of the assets acquired and liabilities assumed, MDS
performed assessments of intangible assets using customary
valuation procedures and techniques. A preliminary value of $1
million was assigned to in-process research and development which
has been expensed accordingly. 5. Discontinued Operations and
Assets Held for Sale a. In November 2007, the Company signed an
agreement to sell its external beam therapy and self-contained
irradiator product lines. The sale closed effective May 1, 2008 and
a purchase price adjustment and closing costs will be finalized in
the third quarter. Under the terms of this agreement, Best Medical
International Inc., a provider of radiotherapy and oncology
products, purchased MDS Nordion's external beam therapy and
self-contained irradiator product lines for $15 million in cash.
Best Medical International Inc. acquired these two product lines,
which have combined annualized revenues of approximately $32
million and approximately 150 employees. Once the Company made the
decision to dispose of the product lines, the Company followed the
guidance of SFAS # 144, "Accounting for the Impairment or Disposal
of Long-lived Assets" and recorded a loss on sale of this business
in the amount of $4 million in the first quarter of 2008. Related
to the disposal, $1 million of the loss was allocated to the
impairment of goodwill. In accordance with SFAS # 88, "Employers'
Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits", a pension curtailment
gain of approximately $1 million was recorded as a result of the
transfer of employees to Best Medical International Inc. The
related assets have been reclassified as assets held for sale as of
the second quarter of 2008. Assets held for sale and liabilities
related to assets held for sale comprised: As at As at April 30
October 31
-------------------------------------------------------------------------
2008 2007
-------------------------------------------------------------------------
Assets held for sale Accounts receivable, net $ 5 $ - Inventories,
net 20 - Property, plant and equipment, net 2 - Long-term
investments and other - 1
-------------------------------------------------------------------------
Total assets held for sale $ 27 $ 1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities related to assets held for sale Accounts payable and
accrued liabilities $ 9 $ - Deferred revenue 3 -
-------------------------------------------------------------------------
Total liabilities related to assets held for sale $ 12 $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
b. In October 2006, the Company signed an agreement to sell its
Canadian laboratory services business, MDS Diagnostic Services, in
a C$1.325 billion transaction. The sale of MDS Diagnostic Services
closed in February 2007. This strategic sale was designed to shift
the Company's business focus to the global life sciences market.
The results of discontinued MDS Diagnostic Services in the quarter
and the six months ended April 30, 2007 were as follows:
-------------------------------------------------------------------------
Second Quarter Year-to-date
-------------------------------------------------------------------------
2007 2007
-------------------------------------------------------------------------
Net revenues $ 20 $ 95 Cost of revenues (12) (58) Selling, general
and administration (6) (15)
-------------------------------------------------------------------------
Operating income 2 22 Gain on sale of discontinued operations 905
905 Interest income - 1 Income taxes (114) (117) Minority interest
(1) (4) Equity earnings - 1
-------------------------------------------------------------------------
Income from discontinued operations $ 792 $ 808
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic earnings per share from discontinued operations $ 5.77 $ 5.73
-------------------------------------------------------------------------
-------------------------------------------------------------------------
6. Inventories As at As at April 30 October 31
-------------------------------------------------------------------------
2008 2007
-------------------------------------------------------------------------
Raw materials and supplies $ 78 $ 83 Work-in process 23 34 Finished
goods 30 26
-------------------------------------------------------------------------
131 143 Allowance for excess and obsolete inventory (14) (15)
-------------------------------------------------------------------------
Inventories net $ 117 $ 128
-------------------------------------------------------------------------
-------------------------------------------------------------------------
7. Long-Term Investments and Other As at As at April 30, October
31,
-------------------------------------------------------------------------
2008 2007
-------------------------------------------------------------------------
Financial instrument pledged as security on long-term debt (note a)
$ 42 $ 46 Long-term notes receivable (note c) 40 125 Equity
investments (note d) 6 10 Equity investments in joint ventures
(note d) 23 38 Available for sale investments (note b) 16 24
Deferred pension assets 40 39 Other long-term investments 11 4
Venture capital investments - 4
-------------------------------------------------------------------------
Long-term investments and other $ 178 $ 290
-------------------------------------------------------------------------
-------------------------------------------------------------------------
a. Fair value The financial instrument pledged as security on
long-term debt, which is classified as held to maturity, and the
long-term notes receivable, have fair values that approximate their
carrying value. Other long-term investments, excluding those
classified as available for sale, are recorded at cost. b. Asset
Backed Commercial Paper Included with available for sale
investments is an investment in non-bank sponsored asset backed
commercial paper (ABCP) issued by two trusts with an original cost
of $17 million. These investments matured in September 2007 but as
a result of liquidity issues in the ABCP market, did not settle at
maturity. In September 2007, a Pan-Canadian Investors Committee for
Third Party Asset Backed Commercial Paper (the Committee) was
formed to propose a solution to the liquidity problem in the ABCP
market. Whilst no adjustment was recorded in the first quarter of
2008, an impairment loss of $2 million was recognized in the fourth
quarter of fiscal 2007. In March 2008, the Committee filed with the
Ontario Superior Court of Justice a restructuring arrangement. The
holders of ABCP voted in favour of the Committee's restructuring
plan. The Company has estimated the fair value of its investments
in ABCP using all currently available information and assumptions
that market participants would use in pricing such investments. The
Company reviewed information provided by the Committee, JP Morgan,
DBRS, current investment ratings, valuation estimates of the
underlying assets and general economic conditions. Accordingly, the
Company used a scenario-based probability-weighted discounted cash
flow approach to value its investment at April 30, 2008 and
recognized an impairment loss of $3 million in the second quarter
of 2008 representing a 20% reduction of the face value of the
investments and for a total write-down of $5 million representing a
30% reduction in the fair value of the investment. A change in the
estimate of the composition of the underlying assets may affect the
face value of the investments in the future. c. Long-term notes
receivable In 2006, as a result of a comprehensive mediation
process that resulted in an exchange of assets between the Company
and Atomic Energy of Canada Limited related to the MAPLE reactor
project, a long-term note receivable for $38 million after
discounting was received by the Company. This non- interest bearing
note receivable is repayable over four years commencing in 2008.
The note receivable is net of an unamortized discount based on an
imputed interest rate of 4.5%. The value as at April 30, 2008 is
$48 million, of which $8 million is included in prepaid expenses
and other. The note receivable will be accreted up to its face
amount of C$53 million over a period of four years. A $73 million
note receivable relating to the sale of the diagnostics business
referred to in Note 5 was reclassified from long-term investments
and other to note receivable as it is now due within one year. d.
Equity investments As at As at April 30 October 31
-------------------------------------------------------------------------
2008 2007
-------------------------------------------------------------------------
Lumira Capital Corp $ 6 $ 10 MDS Sciex joint ventures 23 38
-------------------------------------------------------------------------
Equity investments $ 29 $ 48
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Company accounts for its investments in significantly
influenced companies and joint ventures using the equity method of
accounting. The Company owns 45.7% of the outstanding share capital
of Lumira Capital Corp ("Lumira" - formerly MDS Capital Corp.)
Lumira is an investment fund management company that also has
long-term investments in development - stage enterprises that have
not yet earned significant revenues from their intended business
activities or established their commercial viability. The recovery
of invested amounts and the realization of investment returns is
dependent upon the successful resolution of scientific, regulatory,
competitive, political and other risk factors, as well as the
eventual commercial success of these enterprises. These investments
are subject to measurement uncertainty, and adverse developments
could result in further write-downs of the carrying values. In
2007, the Company wrote down this investment to its estimated fair
value and recorded a provision of $6 million in other expenses. In
February 2008, the Company received $4 million in cash from Lumira
as a distribution and reduction in stated capital. The Company
reduced its investment in Lumira accordingly. 8. Restructuring
Charges An analysis of the activity in the provision through April
30, 2008 is as follows: Provision Cumulative drawdowns Balance at
Restructuring ----------------------- April 30, Charge Cash
Non-cash 2008
-------------------------------------------------------------------------
2005: Workforce reductions $ 34 $ (33) $ (1) $ - Equipment and
other asset write-downs - adjustment 7 - (7) - Contract
cancellation charges 10 (2) (8) -
-------------------------------------------------------------------------
$ 51 $ (35) $ (16) $ -
-------------------------------------------------------------------------
2006: Workforce reductions $ 1 $ (1) $ - $ - Contract cancellation
charges (8) (1) 9 -
-------------------------------------------------------------------------
$ (7) $ (2) $ 9 $ -
-------------------------------------------------------------------------
2007: Workforce reductions $ 17 $ (13) $ (2) $ 2 Equipment and
other asset write-downs 2 (1) 2 3 Contract cancellation charges 5
(6) 1 - Other 14 (11) (3) -
-------------------------------------------------------------------------
$ 38 $ (31) $ (2) $ 5
-------------------------------------------------------------------------
$ 5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
In the second quarter of 2008 there was a restructuring charge of
$1 million, and cash utilization of $2 million. The remaining
balance primarily relates to the MDS Pharma Services segment. The
restructuring activities will be completed by the end of 2009. 9.
Other Income (Expenses) Three months Six months ended April 30
ended April 30
-------------------------------------------------------------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
Write-down of investments/ valuation provisions (3) (6) (3) (6)
Gain on sale of investment - - 2 2 Loss on sale of Hamburg clinic -
(4) - (4) Gain (loss) on sale of business - 1 (4) 1 Curtailment
gain on pension 1 - 1 - Acquisition integration costs (1) (1) (1)
(1) FDA provision 10 (61) 10 (61) Foreign exchange gain (loss) (1)
(4) 3 (1) Gain (loss) on embedded derivatives 3 - (1) - Other 1 1
(1) -
-------------------------------------------------------------------------
Other income (expense) - net $ 10 $ (74) $ 6 $ (70)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the second quarter of 2008, a write-down of investments of
$3 million relating to the impairment loss on the Company's
investment in asset-backed commercial paper was taken. In the
second quarter of 2007, the Company recorded a provision of $61
million to reimburse clients who have incurred or will incur third-
party audit costs or study re-run costs to complete the work
required by the US Food and Drug Administration (FDA) or other
regulators. We have utilized approximately $19 million of this
reserve to date, an amount partially offset by the impact of
foreign currency fluctuations on the liability. Although we believe
we have substantially completed the majority of all required site
audits, we still await final reimbursement requests for many of
these audits. Based on information currently available, we believe
that a reserve of approximately $33 million is required to cover
study audits, re-runs and other related costs. Accordingly,
approximately $10 million has been reversed this quarter.
Management will continue to closely monitor the FDA matter and
related provision. 10. Earnings Per Share a. Dilution Three months
Six months ended April 30 ended April 30
-------------------------------------------------------------------------
(number of shares in millions) 2008 2007 2008 2007
-------------------------------------------------------------------------
Weighted average number of Common shares outstanding - basic 122
137 122 141 Impact of stock options assumed exercised - 1 - -
-------------------------------------------------------------------------
Weighted average number of Common shares outstanding - diluted 122
138 122 141
-------------------------------------------------------------------------
-------------------------------------------------------------------------
b. Pro-Forma Impact of Stock-Based Compensation Companies are
required to calculate and disclose, in the notes to the
consolidated financial statements, compensation expense related to
the grant-date fair value of stock options for all grants of
options for which no expense has been recorded in the consolidated
statements of operations. For the Company, this includes those
stock options issued prior to November 1, 2003. For purposes of
these pro-forma disclosures, the Company's net income and basic and
diluted earnings per share would have been: Three months Six months
ended April 30 ended April 30
-------------------------------------------------------------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
Net income $ 11 $ 737 $ 28 $ 753 Compensation expense for options
granted prior to November 1, 2003 - - - (1)
-------------------------------------------------------------------------
Net income - pro-forma $ 11 $ 737 $ 28 $ 752
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Pro-forma basic earnings per share $ 0.09 $ 5.37 $ 0.23 $ 5.34
Pro-forma diluted earnings per share $ 0.09 $ 5.35 $ 0.23 $ 5.33
-------------------------------------------------------------------------
-------------------------------------------------------------------------
11. Share Capital At April 30, 2008, the authorized share capital
of the Company consists of unlimited Common shares. The Common
shares are voting and are entitled to dividends if, as and when
declared by the Board of Directors. The following table summarizes
information on share capital and stock options and related matters
as at April 30, 2008: (number of shares in thousands) Number Amount
-------------------------------------------------------------------------
Common shares Balance as at October 31, 2007 122,578 $ 493 Issued
during the period 330 5 Repurchased during the period (872) (4)
-------------------------------------------------------------------------
Balance as at April 30, 2008 122,036 $ 494
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the second quarter, the Company repurchased and cancelled
619,700 Common shares under a normal course issuer bid for a cost
of $12 million. Of the total cost, $3 million was charged to share
capital, $1 million was charged to other comprehensive income and
$8 million was charged to retained earnings. For the six months
ended April 30, 2008, $4 million was charged to share capital, $2
million was charged to comprehensive income and $11 million was
charged to retained earnings. A share repurchase of 63,200 shares
was entered into on April 30, 2008 and will settle in the first
week of May 2008. The total cost of this repurchase was $1 million.
12. Stock-based Compensation Average C$ options Exercise (number of
stock options in thousands) Number Price
-------------------------------------------------------------------------
Stock options Balance as at October 31, 2007 5,555 $ 19.66 Activity
during the period: Granted 39 20.29 Exercised (330) 16.29 Cancelled
or forfeited (184) 20.87
-------------------------------------------------------------------------
Balance as at April 30, 2008 5,080 $ 19.84
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average US$ options Exercise (number of stock options in thousands)
Number Price
-------------------------------------------------------------------------
Stock options Balance as at October 31, 2007 - $ - Activity during
the period: Granted 12 17.91
-------------------------------------------------------------------------
Balance as at April 30, 2008 12 $ 17.91
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the quarter, the Company granted 30,000 C$ options and
10,000 US$ options (2007 - 280,500 and nil) at an average exercise
price of C$20.50 and US$17.74, respectively (2007 - C$21.84 and US$
nil). These options have a fair value determined using the
Black-Scholes model of C$4.40 and US$4.07 per share respectively
(2007 - C$4.62 and US$ nil) based on the following: C$ options 2008
2007
-------------------------------------------------------------------------
Risk-free interest rate 3.0% 3.9% Expected dividend yield 0.0% 0.0%
Expected volatility 21% 22% Expected time to exercise (years) 4.40
3.25 ------------------------------------------------- -----------
----------- -------------------------------------------------
----------- ----------- US$ options 2008 2007
-------------------------------------------------------------------------
Risk-free interest rate 3.0% - Expected dividend yield 0.0% -
Expected volatility 22% - Expected time to exercise (years) 4.40 -
------------------------------------------------- -----------
----------- -------------------------------------------------
----------- ----------- The stock compensation expense for the six
months ended April 30, 2008 was $3 million (six months ended April
30, 2007 - $1 million), which has been recorded in selling, general
and administration expenses and as additional paid in-capital
within share capital. Incentive Plans The Company has been
utilizing mid-term incentive plans (MTIP) since 2005. The 2006 MTIP
will vest in two equal tranches, based on achieving specified share
price hurdles of C$22.00 and C$26.00 respectively. The term of the
Performance Share Units (PSUs) is three years and payout will occur
at the later of 24 months from the date of grant and achievement of
each share price hurdle. Payout on certain PSUs will be in the form
of Deferred Share Units (DSUs) and the balance will be paid in
cash. During 2006, the price hurdle was met and 50% of the issued
units vested. A payment of $3 million was made related to these
vested units in November 2007. The 2007 MTIP will vest in two equal
tranches, based on achieving specified share price hurdles of
C$25.30 and C$27.50, respectively. The term of the PSUs is three
years and payout will occur at the later of 24 months from the date
of grant and achievement of each share price hurdle. The 2008 MTIP
will vest on December 15, 2010 and the number of PSUs granted will
be determined based on achieving a target rate for 2010 cash
earnings per share of between US $1.17 and US $1.31. The final
number of vested units can range from 0% to 200% of the number of
PSUs granted. Payout will occur not later than 60 days following
the vesting date. The Company records the cost of its MTIP
compensation plans at fair value based on assumptions that are
consistent with those used to determine the fair value of stock
compensation. The table below shows the liability and expense
related to the plans: As at As at April 30, October 31, Liability
2008 2007
-------------------------------------------------------------------------
2006 Plan $ 4 $ 11 2007 Plan 2 3 2008 Plan 2 -
-------------------------------------------------------------------------
Total $ 8 $ 14
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months Six months Expense (Income) ended April 30 ended April
30
-------------------------------------------------------------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
2006 Plan $ 1 $ 2 $ (4) $ 1 2007 Plan 1 - (1) - 2008 Plan 1 - 1 -
-------------------------------------------------------------------------
Total $ 3 $ 2 $ (4) $ 1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
13. Accumulated Other Comprehensive Income As at As at April 30,
October 31, (millions of US dollars) 2008 2007
-------------------------------------------------------------------------
Accumulated other comprehensive income, net of income taxes,
beginning of period $ 490 $ 328 Foreign currency translation (75)
183 Unrealized gain on available-for-sale assets, net of tax 1 (3)
Unrealized gain (loss) on derivatives designated as cash flow
hedges, net of tax (4) 8 Reclassification of realized gains, net of
tax - (4) Adoption of FAS 158 - 11 Repurchase and cancellation of
Common shares (2) (33)
-------------------------------------------------------------------------
Accumulated other comprehensive income, net of income taxes, end of
period $ 410 $ 490
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The foreign currency translation gain in 2007 was mainly a result
of the effect of the strengthening Canadian dollar (approximately
19% for 2007) and the strengthening euro on assets and earnings.
The foreign currency translation loss in 2008 was mainly a result
of the effect of the weakening Canadian dollar (approximately 6%
for the first two quarters of 2008) on Canadian denominated assets.
14. Employee Benefit Plans The Company sponsors various
post-employment benefit plans including defined benefit and
contribution pension plans, retirement compensation arrangements,
and plans that provide extended health care coverage to retired
employees. All defined benefit pension plans sponsored by the
Company are funded plans. Other post-employment benefits are
unfunded. During 2005, the Company amended the terms of certain
post-employment plans such that effective January 1, 2008, and
subject to certain transitional conditions, newly retired employees
will no longer be entitled to extended health care benefits.
Defined Benefit Pension Plans: Three months Six months ended April
30 ended April 30
-------------------------------------------------------------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
Service cost $ 1 $ 1 $ 2 $ 2 Interest cost 3 2 6 4 Expected return
on plan assets (4) (3) (8) (6) Recognition of actuarial gains - (1)
- (1) Curtailment gain (1) - (1) -
-------------------------------------------------------------------------
$ (1) $ (1) $ (1) $ (1)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other Benefit Plans: Three months Six months ended April 30 ended
April 30
-------------------------------------------------------------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
Service cost $ - $ - $ - $ - Interest cost 1 1 1 1 Expected return
on plan assets - - - -
-------------------------------------------------------------------------
$ 1 $ 1 $ 1 $ 1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
MDS has recorded a curtailment gain of $1 million related to the
transfer of staff from MDS to Best Medical International Inc. as a
result of the sale of the external beam therapy and self-contained
irradiator product lines, as per Note 5. 15. Supplementary Cash
Flow Information Non-cash items affecting net income comprise:
Three months Six months ended April 30 ended April 30
-------------------------------------------------------------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
Depreciation and amortization $ 23 $ 18 $ 50 $ 32 Stock option
compensation 2 - 3 1 Deferred revenue 1 - - (2) Deferred income
taxes (15) 31 (27) 47 Equity earnings - net of distribution (2) 9
10 9 Write-down of investments 3 10 3 10 Loss on disposal of
equipment and other assets 2 4 4 2 Mark-to-market of derivatives
(3) (1) 1 (1) FDA provision (reversal) (10) 61 (10) 61 Other (2) -
(5) 1
-------------------------------------------------------------------------
$ (1) $ 132 $ 29 $ 160
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Prior year comparatives have been reclassified to conform to the
current year presentation Changes in non-cash operating assets and
liabilities balances relating to operations include: Three months
Six months ended April 30 ended April 30 (millions of US dollars)
2008 2007 2008 2007
-------------------------------------------------------------------------
Accounts receivable $ 13 $ (5) $ 20 $ 8 Unbilled revenue (7) 27
(13) 11 Inventories (3) (3) (2) (7) Prepaid expenses and others 11
35 (1) 11 Accounts payable and accrued liabilities (25) 1 (92) (13)
Income taxes (19) (21) (46) (9) Deferred income 4 - 4 - Other
operating asset and liabilities 2 - 2 -
-------------------------------------------------------------------------
$ (24) $ 34 $ (128) $ 1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Prior year comparatives have been reclassified to conform to the
current year presentation 16. Segment Information In accordance
with SFAS No 131, "Disclosures About Segments of an Enterprise and
Related Information", the Company operates within three business
segments - pharmaceutical services, isotopes and analytical
technologies. These segments are organized predominantly around the
products and services provided to customers identified for the
businesses. Three months ended April 30, 2008
-------------------------------------------------------------------------
MDS MDS Pharma MDS Analytical Corporate Services Nordion
Technologies and Other Total
-------------------------------------------------------------------------
Product revenues $ - $ 76 $ 93 $ $ 169 Service revenues 128 4 25
157 Reimbursement revenues 24 - - 24
-------------------------------------------------------------------------
Total revenues 152 80 118 350 Direct product cost - (42) (64) (106)
Direct service cost (95) (2) (4) (101) Reimbursed expenses (24) - -
(24) Selling, general and administration (33) (13) (22) (7) (75)
Research and development - (2) (20) - (22) Depreciation and
amortization (8) (3) (12) - (23) Restructuring charges - net (1) -
- - (1) Other income (expenses) - net 9 3 - (2) 10 Equity earnings
- - 10 - 10
-------------------------------------------------------------------------
Segment earnings (loss) $ - $ 21 $ 6 $ (9) $ 18
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total assets $ 793 $ 692 $ 820 $ 412 $ 2,717
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital expenditures $ 9 $ 3 $ 1 $ 2 $ 15
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total assets exclude assets held for sale. In segment reporting,
equity earnings are included in the determination of segment
earnings (loss). Excluding equity earnings of $10 million (2007 -
$11 million) results in operating earnings of $8 million (2007 -
$96 million loss). Three months ended April 30, 2007
-------------------------------------------------------------------------
MDS MDS Pharma MDS Analytical Corporate Services Nordion
Technologies and Other Total
-------------------------------------------------------------------------
Product revenues $ - $ 67 $ 62 $ - $ 129 Service revenues 115 4 15
- 134 Reimbursement revenues 23 - - - 23
-------------------------------------------------------------------------
Total revenues 138 71 77 - 286 Direct product cost - (35) (48) -
(83) Direct service cost (80) (1) (1) - (82) Reimbursed expenses
(23) - - - (23) Selling, general and administration (32) (12) (11)
(6) (61) Research and development - (1) (15) - (16) Depreciation
and amortization (10) (3) (4) (1) (18) Restructuring charges - net
(23) - - (2) (25) Other income (expenses) - net (68) 1 (1) (6) (74)
Equity earnings - - 11 - 11
-------------------------------------------------------------------------
Segment earnings (loss) $ (98) $ 20 $ 8 $ (15) $ (85)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total assets $ 810 $ 660 $ 819 $ 435 $ 2,724
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital expenditures $ 5 $ 1 $ 1 $ - $ 7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Six months ended April 30, 2008
-------------------------------------------------------------------------
MDS MDS Pharma MDS Analytical Corporate Services Nordion
Technologies and Other Total
-------------------------------------------------------------------------
Product revenues $ - $ 135 $ 185 $ - $ 320 Service revenues 248 5
49 - 302 Reimbursement revenues 50 - - - 50
-------------------------------------------------------------------------
Total revenues 298 140 234 - 672 Direct product cost - (76) (125) -
(201) Direct service cost (183) (2) (8) - (193) Reimbursed expenses
(50) - - - (50) Selling, general and administration (62) (24) (41)
(12) (139) Research and development - (2) (40) - (42) Depreciation
and amortization (17) (6) (27) - (50) Restructuring charges - net
(1) - - - (1) Other income (expenses) - net 14 (5) (2) (1) 6 Equity
earnings - - 24 - 24
-------------------------------------------------------------------------
Segment earnings (loss) $ (1) $ 25 $ 15 $ (13) $ 26
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total assets $ 793 $ 692 $ 820 $ 412 $ 2,717
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital expenditures $ 15 $ 6 $ 3 $ 4 $ 28
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total assets exclude assets held for sale. In segment reporting,
equity earnings are included in the determination of segment
earnings (loss). Excluding equity earnings of $24 million (2007 -
$25 million) results in an operating earnings of $2 million (2007 -
105 million loss) Six months ended April 30, 2007
-------------------------------------------------------------------------
MDS MDS Pharma MDS Analytical Corporate Services Nordion
Technologies and Other Total
-------------------------------------------------------------------------
Product revenues $ - $ 134 $ 100 $ - $ 234 Service revenues 236 4
30 - 270 Reimbursement revenues 46 - - - 46
-------------------------------------------------------------------------
Total revenues 282 138 130 - 550 Direct product cost - (69) (85) -
(154) Direct service cost (169) (2) (1) - (172) Reimbursed expenses
(46) - - - (46) Selling, general and administration (65) (23) (17)
(10) (115) Research and development - (2) (26) - (28) Depreciation
and amortization (18) (6) (7) (1) (32) Restructuring charges - net
(31) - - (7) (38) Other income (expenses) - net (66) 1 (2) (3) (70)
Equity earnings - - 25 - 25
-------------------------------------------------------------------------
Segment earnings (loss) $ (113) $ 37 $ 17 $ (21) $ (80)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total assets $ 810 $ 660 $ 819 $ 435 $ 2,724
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital expenditures $ 7 $ 2 $ 4 $ 3 $ 16
-------------------------------------------------------------------------
-------------------------------------------------------------------------
17. Financial Instruments The carrying amounts and fair values for
all derivative financial instruments are as follows: As at April 30
As at October 31 2008 2007
-------------------------------------------------------------------------
Carrying Fair Carrying Fair Amount Value Amount Value
-------------------------------------------------------------------------
Asset (liability) position: Currency forward and option - assets $
- $ - $ 7 $ 7 Currency forward and option - liabilities $ (2) $ (2)
$ (12) $ (12) Interest rate swap and option contracts $ - $ - $ (1)
$ (1)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As of April 30, 2008, the Company had outstanding foreign exchange
contracts in place to sell $54 million at a weighted average
exchange rate of C$1.0143 maturing over the next twelve months. In
addition to the above derivatives, isotope supply agreements
totalling $123 million include terms that result in the creation of
an embedded currency derivative under SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities". Under the rules
contained in SFAS 133, we have determined the value of this
derivative and marked it to market as at April 30, 2008. The supply
contract is denominated in US dollars and due to currency movements
between the US and Canadian dollar we have recorded an unrealized,
mark-to-market gain of $3 million on the contract in the second
quarter of 2008 ($1 million loss year to date). There was no
significant mark-to-market adjustment required for the second
quarter of 2007. 18. Income Taxes The Company's effective tax rate
this quarter was 31%. The tax expense was reduced by $2 million of
tax credits relating to research and development that were
recognized during the quarter. The tax benefit recorded this
quarter on the ABCP provision reflects the fact that any tax loss
arising on ABCP will be treated as a capital loss. Three months to
April 30
-------------------------------------------------------------------------
2008 2007
-------------------------------------------------------------------------
Expected income tax expense (recovery) at MDS's 33% (2007 - 35%)
statutory rate $ 5 $ (28) Increase (decrease) to tax expense as a
result of: Tax credits for research and development (2) (5)
Valuation provisions 1 2 Foreign losses not recognized - 4 Other 1
-
-------------------------------------------------------------------------
Reported income tax expense (recovery) $ 5 $ (27)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
19. Differences Between Canadian and US Generally Accepted
Accounting Principles US GAAP accounting principles used in the
preparation of these consolidated financial statements conform in
all material respects to Canadian GAAP, except as set out below. a.
Accounting for equity interests in joint ventures - The Company
owns 50% interests in two partnerships that are subject to joint
control. Under US GAAP, the Company records its share of earnings
of these partnerships as equity earnings. Under Canadian GAAP, the
Company proportionately consolidates these businesses. Under the
proportionate consolidation method of accounting, MDS recognizes
its share of the results of operations, cash flows, and financial
position of the partnerships on a line-by-line basis in its
consolidated financial statements and eliminates its share of all
material intercompany transactions with the partnerships. While
there is no impact on net income from continuing operations or
earnings per share from continuing operations as a result of this
difference, there are numerous presentation differences affecting
the disclosures in these consolidated financial statements and in
certain of the supporting notes. b. Research and development - The
Company expenses research and development costs as incurred. Under
Canadian GAAP, the Company is required to capitalize development
costs provided certain conditions are met. Such capitalized costs
are referred to as deferred development costs and they are
amortized over the estimated useful life of the related products,
generally periods ranging from three to five years. c. Investment
tax credits - The Company records non-refundable investment tax
credits as a reduction in current income tax expense in the year in
which the tax credits are earned. The majority of non- refundable
investment tax credits earned by MDS are related to research and
development expenditures. Under Canadian GAAP, non-refundable
investment tax credits are recorded as a reduction in the expense
or the capital expenditure to which they relate. d. Embedded
derivatives - Under SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities", certain contractual terms are
considered to behave in a similar fashion to a derivative contract
and parties to the contracts are therefore required to separate the
accounting for these embedded derivatives from the accounting for
the host contract. Once separated, these embedded derivatives are
subject to the general derivative accounting guidelines outlined in
SFAS 133, particularly the requirement to mark these derivatives to
market. For MDS, these terms typically relate to the currency in
which the contract is denominated. Canadian GAAP is largely aligned
with SFAS 133 for most embedded derivatives; however, Canadian GAAP
provides exemptions for contracts that are written in a currency
that is not the functional currency of one of the substantial
parties to the contract but which is a currency in Common usage in
the economic environment of one of the contracting parties. The
Company has elected to use this exemption available under Canadian
GAAP in accounting for certain cobalt supply contracts entered into
with a supplier located in Russia. The affected contracts are
denominated in US dollars. e. Currency forward and option contracts
- The Company currently designates the majority of the forward
foreign exchange contracts it enters into as hedges of future
anticipated cash inflows. In prior years, these contracts did not
qualify for treatment as hedges and, accordingly, such contracts
were carried at fair value and changes in fair value were reflected
in earnings. Under Canadian GAAP, all such contracts were eligible
for hedge accounting, and as a result, gains and losses on these
contracts were deferred and recognized in the period in which the
cash flows to which they relate were incurred. f. Comprehensive
income - US GAAP requires that a statement of other comprehensive
income and accumulated other comprehensive income be displayed with
the same prominence as other financial statements. Under Canadian
GAAP, statements of other comprehensive income and accumulated
other comprehensive income were not required for years prior to the
Company's 2007 fiscal year. g. Pensions - Under US GAAP, the net
funded status of pension plans sponsored by a company are fully
reflected in the consolidated assets or liabilities of the Company.
The amount by which plan assets exceed benefit obligations or
benefit obligations exceed plan assets, on a plan- by-plan basis,
is reflected as an increase in assets or liabilities, with a
corresponding adjustment to accumulated other comprehensive income.
Under Canadian GAAP, only the net actuarial asset or liability is
reflected in the consolidated financial statements. h. Stock-based
compensation - Under US GAAP, certain equity-based incentive
compensation plans are accounted for under the liability method
using a fair value model to determine the amount of the liability
at each period end. Under Canadian GAAP, these plans are accounted
for under the liability method using intrinsic value to measure the
liability at each period end. i. As per Note 3 (g): The Accounting
Standards Board announced that Canadian Generally Accepted
Accounting Principles for publicly accountable enterprises will be
replaced with International Financial Reporting Standards (IFRS)
for fiscal years beginning on or after January 1, 2011. While
domestic issuers will be required to make the transition by 2011,
the CSA in a Concept Paper provided a tentative conclusion allowing
domestic issuers who are also SEC registrants, like MDS, to
continue to report under US GAAP for two years from the transaction
date of 2011. Early conversion to IFRS for fiscal years beginning
on or after January 1, 2009 may also be permitted. DATASOURCE: MDS
Inc. CONTACT: PRNewswire - - 06/05/2008
Copyright