3. Changes in Accounting Policies The Company adopted the Canadian
Institute of Chartered Accountants (CICA) Handbook Sections 1530,
"Comprehensive Income"; 3855, "Financial Instruments - Recognition
and Measurement"; 3861, Financial Instruments - Disclosure and
Presentation" and 3865, "Hedges" on November 1, 2006. The adoption
of these new standards resulted in changes in the accounting for
financial instruments and hedges, as well as the recognition of
certain transition adjustments, that have been recorded in opening
accumulated comprehensive income as described below. The
comparative interim consolidated financial statements have not been
restated. With the adoption of these standards, the Company's
accounting for financial instruments is now largely harmonized with
US GAAP for this area. The principal changes in the accounting for
financial instruments and hedges due to the adoption of these
accounting standards are described below. (a) Comprehensive Income
Comprehensive income is composed of the Company's net income and
other comprehensive income. Other comprehensive income includes
unrealized exchange gains and losses on translation of
self-sustaining foreign operations, translation gains and losses
resulting from the application of US dollar reporting, unrealized
gains and losses on translation of debt designated as a hedge, and
changes in the fair market value of derivative instruments
designated as cash flow hedges, net of applicable income taxes. The
components of comprehensive income are disclosed in the
consolidated statement of comprehensive income. (b) Financial
Assets and Financial Liabilities Under the new standards, all
financial instruments are classified into one of the following five
categories: held-for-trading, held-to-maturity investments, loans
and receivables, available-for-sale financial assets or other
financial liabilities. All financial instruments, including
derivatives, are included on the consolidated statement of
financial position and are measured at fair value except for loans
and receivables, held-to-maturity investments and other financial
liabilities which are measured at amortized cost. Held for trading
financial investments are recorded at cost as they are initiated
and are subsequently measured at fair value and all gains and
losses are included in net income in the period in which they
arise. Available-for-sale financial instruments are also initially
recorded at cost and are subsequently measured at fair value with
revaluation gains and losses included in other comprehensive income
until the instrument is disposed, derecognized, or impaired. As a
result of the adoption of these standards, the Company has
classified its cash and cash equivalents as held-for-trading.
Short-term investments are classified as available-for-sale
investments. Accounts receivable, and long-term note receivables
are classified as loans and receivables. The financial instrument
pledged as security on long-term debt is classified as a
held-to-maturity investment. Accounts payable, long-term debt and
capital lease obligations have been classified as other financial
liabilities, all of which are measured at amortized cost. (c)
Derivatives and Hedge Accounting Derivatives ----------- All
derivative instruments, including embedded derivatives, are
recorded in the statement of financial position at fair value
unless exempted from derivative treatment as a normal purchase and
sale. All changes in their fair value are recorded in income unless
cash flow hedge accounting is used, in which case the changes in
fair value associated with the effective portions of the hedge is
recorded in other comprehensive income. The Company has elected to
apply this accounting treatment for all embedded derivatives in
host contracts entered into on or after November 1, 2003. The
impact of the change in the accounting policy related to embedded
derivatives was not material. Hedge Accounting ---------------- At
the inception of a hedging relationship, the Company documents the
relationship between the hedging instrument and the hedged item, as
well as the risk management objectives and strategy for undertaking
various hedge transactions. This process includes linking all
derivatives to specific assets and liabilities on the consolidated
statement of financial position or to specific firm commitments or
forecasted transactions. The Company also assesses, both at the
inception of the hedge and on an ongoing basis, whether the
derivatives that are used are effective in offsetting changes in
fair values or cash flows of hedged items. Under the previous
standards, derivatives that met the requirements for hedge
accounting were generally accounted for on an accrual basis. Under
the new standards, all derivatives are recorded at fair value. All
gains and losses from changes in the fair value of derivatives not
designated as a part of a hedging relationship are recognized in
the statement of income. These gains and losses are reported in
other income (expense). When derivatives are designated as hedges,
the Company classifies them either as: (i) hedges of the change in
fair value of recognized assets or liabilities or firm commitments
(fair value hedges); (ii) hedges of the variability in highly
probable future cash flows attributable to a recognized asset or
liability, or a forecasted transaction (cash flow hedges); or (iii)
hedges of net investments in a foreign operation (net investment
hedges). Cash flow hedge --------------- The Company operates
globally, which gives rise to risks that its earnings and cash
flows may be adversely impacted by fluctuations in foreign exchange
rates. The Company enters into foreign currency forward contracts
and foreign currency option contracts to hedge foreign exchange
exposures on anticipated sales. The effective portion of changes in
the fair value of derivatives that are designated and qualify as
cash flow hedges is recognized in other comprehensive income. Any
gain or loss in fair value relating to the ineffective portion is
recognized immediately in the statement of income in other income
(expense). Amounts accumulated in other comprehensive income are
reclassified to the statement of income in the period in which the
hedged item affects income. When a hedging instrument expires or is
sold, or when a hedge no longer meets the criteria for hedge
accounting, any cumulative gain or loss existing in other
comprehensive income at that time remains in other comprehensive
income as long as the forecasted transaction is still probable of
occurring and would be recognized in the statement of income in the
period the hedged transaction impacts income. When a forecasted
transaction is no longer expected to occur, the cumulative gain or
loss that was reported in other comprehensive income is immediately
transferred to the statement of income. Upon adoption of the new
standards, the Company recorded a net increase in derivatives
assets included in accounts receivables of $1 million designated as
cash flow hedges and an increase of $1 million pre-tax in
accumulated other comprehensive income. Net investment hedges
--------------------- Hedges of net investments in foreign
operations are accounted for in a manner that is similar to cash
flow hedges. Any gain or loss on the hedging instrument relating to
the effective portion of the hedge is recognized in other
comprehensive income. The gain or loss relating to the ineffective
portion is recognized immediately in the statement of income. Gains
and losses accumulated in other comprehensive income are included
in the statement of income upon the repatriation, reduction or
disposal of the investment in the foreign operation. The adoption
of the new standards resulted in the reclassification of $347
million previously recorded in the foreign currency translation
adjustment account to opening accumulated comprehensive income. The
carrying value, which equals the fair value of financial assets and
liabilities as at July 31, 2007 is summarized as follows:
-------------------------------------------------------------------------
Classification
-------------------------------------------------------------------------
Held-for-trading $ 224 Held-to-maturity 42 Loans and receivables
383 Available-for-sale 90 Other liabilities $ 797
-------------------------------------------------------------------------
(d) Measurement Uncertainty To determine the assets held for sale
related to those operations classified as discontinued operations,
we are required to make estimates and assumptions that affect the
reported amounts of these assets and liabilities and, therefore,
these amounts are subject to measurement uncertainty. (e) Future
Changes in Accounting Policies Capital Disclosures The CICA issued
a new accounting standard, Section 1535 - Capital Disclosures,
which requires the disclosure of both qualitative and quantitative
information that enables users of financial statements to evaluate
the entity's objectives, policies and processes for managing
capital. This new standard is effective for the Company beginning
November 1, 2007. Financial Instruments The CICA issued two new
accounting standards, Section 3862 - Financial Instruments -
Disclosures, and Section 3863, Financial Instruments -
Presentation, which apply to interim and annual financial
statements relating to fiscal years beginning on or after October
1, 2007. The Company intends to adopt these new standards effective
November 1, 2007. Accounting for Transaction Costs of Financial
Instruments Classified Other than as Held for Trading On June 1,
2007, the EIC issued EIC-166, Accounting Policy Choice for
Transaction Costs, which allows an entity the accounting policy
choice of recognizing all transaction costs in net income or adding
to the initial carrying cost those transaction costs that are
directly attributable to the acquisition or issue of the financial
instrument for all similar financial instruments other than those
classified as held for trading. The guidance is effective beginning
November 1, 2007. The new guidance is not expected to have a
material effect on the financial position or earnings of the
Company. 4. Accumulated Other Comprehensive Income The accumulated
balances related to each component of other comprehensive income,
net of income taxes are as follows: As at July 31, 2007
-------------------------------------------------------------------------
Accumulated other comprehensive income, net of income taxes
-------------------------------------------------------------------------
Unrealized gains on derivatives designated as cash flow hedges $ 2
Unrealized gains on translation of debt designated as a hedge 129
Foreign currency translation (losses) on self-sustaining foreign
operations (176) Unrealized gain on translation resulting from the
application of US dollar reporting 394
-------------------------------------------------------------------------
Accumulated other comprehensive income balance as at July 31, 2007
$ 349
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income tax liabilities related to the above components of
accumulated other comprehensive income for unrealized gains on
derivatives designated as cash flow hedges and unrealized gains on
translation of debt designated as a hedge are $2 million and $24
million, respectively. 5. Share Capital and Stock Options The
following table summarizes information on share capital and stock
options and related matters as at July 31, 2007: (number of shares
in thousands) Number Amount
-------------------------------------------------------------------------
Common shares Balance as at October 31, 2006 144,319 $ 572 Issued
during the period 1,051 18 Repurchased during the period (22,831)
(91)
-------------------------------------------------------------------------
Balance as at July 31, 2007 122,539 $ 499
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the second quarter, the Company repurchased and cancelled
22,831 Common shares, under the terms of a substantial issuer bid.
In the financial statement for the second quarter the share capital
reduction associated with the share repurchase was incorrectly
reported using the average exchange rate for April instead of the
weighted average historic rate applicable to share capital.
Correction of this reporting error resulted in an increase in US
dollar reported share capital of $32 million and a corresponding
reduction in other comprehensive income translation gains resulting
from the application of US dollar reporting. Average Exercise
(number of shares in thousands) Number Price
-------------------------------------------------------------------------
Stock options Balance as at October 31, 2006 5,850 C$ 18.76
Activity during the period: Granted 1,223 C$ 21.73 Exercised (942)
C$ 16.45 Cancelled or forfeited (517) C$ 20.34
-------------------------------------------------------------------------
Balance as at July 31, 2007 5,614 C$ 19.65
-------------------------------------------------------------------------
-------------------------------------------------------------------------
There were 3,266 stock options exercisable as at July 31, 2007. 6.
Acquisition of Molecular Devices Corporation On March 20, 2007, the
Company completed a tender offer which resulted in MDS acquiring
100% of the shares of Molecular Devices Corporation (MD), a
California-based company with global operations. MD designs,
develops, manufactures, sells and services 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 to strengthen
MDS'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 newly formed MDS Analytical
Technologies segment (which combines MD with the previous
Instruments segment) in the consolidated financial statements from
the acquisition date. The aggregate purchase consideration (net of
cash acquired of $21 million) was approximately $601 million paid
in cash from existing cash on hand. Included in the consideration
is the cash cost of $27 million to settle all outstanding
in-the-money options of MD at the closing date of the acquisition.
Direct and incremental third party acquisition costs associated
with the acquisition were approximately $8 million. The acquisition
has been accounted for as a purchase in accordance with CICA
Handbook Section 1581 "Business Combinations" and the Company has
accordingly allocated the purchase price of the acquisition based
upon the preliminary fair values of the assets acquired and
liabilities assumed. During the quarter, the Company revised the
allocation of the purchase price. The impact of the revision was to
decrease net tangible assets acquired by $35 million, increase
developed technology by $50 million, decrease in-process research
and development by $11 million, and decrease goodwill by $6
million. The purchase price and related allocations have not been
finalized and may be revised as a result of adjustments made to the
purchase price as additional information becomes available
regarding liabilities incurred and revisions are made to
preliminary estimates of fair values made at the acquisition date.
In connection with determining the fair value of the assets
acquired and liabilities assumed, management performed assessments
of intangible assets using customary valuation procedures and
techniques. The components of the preliminary purchase price
allocation for the acquisition cost of MD are as follows:
-------------------------------------------------------------------------
Consideration and acquisition costs: Cash and payments, net of cash
acquired $ 593 Transaction costs 8
-------------------------------------------------------------------------
Net consideration and acquisition costs $ 601
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Allocation of purchase price Net tangible assets acquired $ 15
Intangible assets acquired: Developed technologies 161 Brands 60
Goodwill (non-tax deductible) 365
-------------------------------------------------------------------------
Total purchase price $ 601
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The following table summarizes the components of the net tangible
assets acquired at fair value:
-------------------------------------------------------------------------
Inventories $ 40 Property, plant and equipment 12 Other assets and
liabilities, net (37)
-------------------------------------------------------------------------
Net tangible assets acquired $ 15
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other assets and liabilities include $26 million of net future tax
liabilities. Net tangible assets acquired include a charge of $7
million to eliminate redundant positions and consolidate redundant
facilities at MD over the course of the next year. The developed
technologies will be amortized over their estimated lives, which
are between five and seven years, while the brands have an
indefinite life and are not amortized. The acquisition of MD has
added $6 million of annual commitments related to operating leases
and $14 million of inventory purchase commitments in 2007. 7. Sale
of Canadian Diagnostics Business and Discontinued Operations In
2005, The Board of Directors of the Company approved a strategic
plan to focus the Company on its life sciences businesses and to
close or divest of businesses that were not strategic to this plan.
As a result, the Company had reclassified its Canadian diagnostics
business as discontinued operations. On February 26, 2007, the
Company completed the sale of its Canadian diagnostic services
business to Borealis Infrastructure Management Inc. for gross
proceeds of C$1.325 billion. The sale was structured as an asset
purchase transaction and after provision for taxes, expenses and
amounts attributable to minority interests, resulted in net
proceeds of US$988 million comprising $929 million in cash and $65
million in an unconditional non-interest bearing note payable in
March 2009. This note was recorded at an effective interest rate of
4.4% and had a book value of $59 million. Included in income from
discontinued operations, the Company recorded a net gain of US$791
million on the transaction. As a result of the sale, MDS sold $84
million in net assets consisting of:
-------------------------------------------------------------------------
Accounts receivable $ 31 Property, plant and equipment 27 Long-term
investments and other 18 Goodwill 57 Accounts payable and accrued
liabilities (25) Long-term debt and other long-term obligations
(24)
-------------------------------------------------------------------------
Net assets $ 84
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The results of discontinued operations in the quarter and the
nine-months ended July 31 were as follows: Three months Nine months
to July 31 to July 31
-------------------------------------------------------------------------
2007 2006 2007 2006
-------------------------------------------------------------------------
Net revenues $ - $ 82 $ 95 $ 280 Cost of revenues - (49) (57) (180)
Selling, general and administration - (11) (15) (38) Depreciation
and amortization - (2) - (7) Restructuring charges - - - (1) Equity
earnings - 1 1 2
-------------------------------------------------------------------------
Operating income - 21 24 56 Gain on sale of discontinued operations
(1) - 904 24 Dividend and interest income - - 1 1 Income taxes -
(3) (117) (9) Minority interest - net of tax - (2) (4) (7)
-------------------------------------------------------------------------
Income (loss) from discontinued operations - net of tax $ (1) $ 16
$ 808 $ 65
-------------------------------------------------------------------------
Basic earnings per share $ (0.01) $ 0.11 $ 5.99 $ 0.45
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Diluted earnings per share $ (0.01) $ 0.11 $ 5.98 $ 0.45
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The results from discontinued operations for 2007 reflect only the
Canadian diagnostic services business. The results from
discontinued operations for 2006 include results from the Canadian
diagnostic services business and certain small MDS Pharma Services
businesses discontinued in 2005. In accordance with Section 3475 of
the CICA Handbook, long-lived assets classified as held for sale
are measured at the lower of carrying value and fair value less
costs to sell. Assets held for sale and liabilities related to
assets held for sale comprised: As at As at July October 31 2007 31
2006
-------------------------------------------------------------------------
Assets held for sale Accounts receivable $ - $ 31 Inventories - 3
Prepaid expenses and other - 3 Property, plant and equipment - 28
Future tax asset - 63 Long-term investments and other 1 13 Goodwill
- 54 Intangibles - 1
-------------------------------------------------------------------------
Total assets held for sale 1 196 Less: Current assets held for
sale(1) (1) (196)
-------------------------------------------------------------------------
Long-term assets held for sale $ - $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities related to assets held for sale Accounts payable and
accrued liabilities $ - $ 33 Income taxes payable - - Long-term
debt - 4 Other long-term obligations - 6 Future tax liabilities -
55 Minority interest - 16
-------------------------------------------------------------------------
Total liabilities related to assets held for sale - 114 Less:
Current liabilities related to assets held for sale(1) - (114)
-------------------------------------------------------------------------
Long-term liabilities related to assets held for sale $ - $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Assets held for sale and liabilities related to assets held for
sale have been classified as current as the Company had signed
agreements where such assets were expected to be disposed of within
one year. 8. Research and Development Three months Nine months to
July 31 to July 31
-------------------------------------------------------------------------
2007 2006 2007 2006
-------------------------------------------------------------------------
Gross expenditures $ 21 $ 13 $ 50 $ 38 Investment tax credits (1)
(1) (3) (6) Recoveries from partners (6) (5) (17) (17) Development
costs deferred (5) (2) (9) (4)
-------------------------------------------------------------------------
Research and development expense $ 9 $ 5 $ 21 $ 11
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three months ended July 31, 2007 depreciation and
amortization includes $2 million (2006 - $2 million) related to
equipment used for research and development, and $2 million from
amortization of deferred development costs (2006 - $1 million). For
the nine months ended July 31, 2007 depreciation and amortization
includes $4 million (2006 - $5 million) related to equipment used
for research and development and $5 million (2006 - $4 million)
from amortization of deferred development costs. 9. Restructuring
An analysis of the activity in the provision through July 31, 2007
is as follows: Cumulative drawdowns Provision
------------------------ Balance at Restructuring July 31, Charge
Cash Non-cash 2007
-------------------------------------------------------------------------
2005: Workforce reductions $ 34 $ (32) $ (1) $ 1 Equipment and
other asset write-downs - adjustment 7 - (7) - Contract
cancellation charges 10 (2) (8) -
-------------------------------------------------------------------------
$ 51 $ (34) $ (16) $ 1
-------------------------------------------------------------------------
2006: Workforce reductions $ 1 $ (1) $ - $ - Contract cancellation
charges (8) (1) 9
-------------------------------------------------------------------------
$ (7) $ (2) $ 9 $ -
-------------------------------------------------------------------------
2007: Workforce reductions $ 21 $ (8) $ (1) $ 12 Equipment and
other asset write-downs 5 - (3) 2 Contract cancellation charges 5
(5) - - Other 13 (6) (3) 4
-------------------------------------------------------------------------
$ 44 $ (19) $ (7) $ 18
-------------------------------------------------------------------------
$ 19
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the quarter ended April 30, 2007, management of the Company
approved a restructuring plan designed principally to improve the
profitability of MDS Pharma Services. The Company recorded a
restructuring provision of $28 million in the second quarter
including $17 million for severance, $5 million to reduce the
carrying value of certain assets and $6 million for other costs.
During the three months ended July 31, 2007, the Company utilized
$5 million of this provision. 10. Earnings Per Share (a) Dilution
Three months Nine months to July 31 to July 31
-------------------------------------------------------------------------
(number of shares in millions) 2007 2006 2007 2006
-------------------------------------------------------------------------
Weighted average number of Common shares outstanding - basic 123
143 135 143 Impact of stock options assumed exercised - 1 - 1
-------------------------------------------------------------------------
Weighted average number of Common shares outstanding - diluted 123
144 135 144
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(b) Pro-Forma Impact of Stock-Based Compensation Compensation
expense related to the fair value of stock options granted prior to
November 1, 2003 is excluded from the determination of net income
and is, instead, calculated and disclosed on a pro-forma basis in
the notes to the consolidated financial statements. Compensation
expense for purposes of these pro-forma disclosures is determined
in accordance with a methodology prescribed in CICA Handbook
Section 3870 "Stock-Based Compensation and Other Stock-Based
Payments". The Company used the Black- Scholes option valuation
model to estimate the fair value of options granted. For purposes
of these pro-forma disclosures, the Company's net income and basic
and diluted earnings per share would have been: Three months Nine
months to July 31 to July 31
-------------------------------------------------------------------------
2007 2006 2007 2006
-------------------------------------------------------------------------
Net income $ 7 $ 19 $ 757 $ 80 Compensation expense for options
granted prior to November 1, 2003 - - (1) (2)
-------------------------------------------------------------------------
Net income - pro-forma $ 7 $ 19 $ 756 $ 78
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Pro-forma basic earnings per share $ 0.06 $ 0.13 $ 5.61 $ 0.55
Pro-forma diluted earnings per share $ 0.06 $ 0.13 $ 5.59 $ 0.54
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(c) Stock Options During the quarter, the Company granted 883,600
options (2006 - 25,600) at an average exercise price of C$21.77
(2006 - C$20.96). These options have a fair value determined using
the Black-Scholes model of C$4.44 per share (2006 - C$4.10) based
on the following assumptions: 2007 2006
-------------------------------------------------------------------------
Risk-free interest rate 3.9% 3.9% Expected dividend yield 0.0% 0.7%
Expected volatility 0.21 0.23 Expected time to exercise (years)
3.17 3.25
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Of the stock options issued during the third quarter, 100,000 are
performance contingent options that vest if the ten-day simple
average share price on the Toronto Stock Exchange reaches $25
within two years of the grant date. 11. Other Income (Expense) -
Net Three months Nine months to July 31 to July 31
-------------------------------------------------------------------------
2007 2006 2007 2006
-------------------------------------------------------------------------
Write-down of other long-term assets $ - $ - $ - $ (1) Write-down
of investments - - (6) - Gain on sale of investment - 2 2 2 Loss on
sale of Hamburg clinic - - (4) - Gain on sale of business - - 1 -
Acquisition integration costs (1) - (2) - FDA Provision - - (61) -
Unrealized gain (loss) on interest rate swaps (1) - (1) (2) MAPLE
settlement - - 3 (9) Insurance settlement - 3 - 3
-------------------------------------------------------------------------
Other income (expense) - net $ (2) $ 5 $ (68) $ (7)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
12. Post-Employment Obligations The Company sponsors various
post-employment benefit plans including defined benefit and
contribution pension plans, retirement compensation arrangements,
and plans that provide extended health care coverage to retired
employees. All defined benefit pension plans sponsored by the
Company are funded plans. Other post-employment benefits are
unfunded. During 2005, the Company amended the terms of certain
post-employment plans such that effective January 1, 2008, and
subject to certain transitional conditions, newly retired employees
will no longer be entitled to extended health care benefits. The
post-employment obligation expense for the quarter was nil (2006 -
nil) and $1 million (2006 - $1 million) for the nine months. 13.
Supplementary Cash Flow Information Non-cash items affecting net
income comprise: Three months Nine months to July 31 to July 31
-------------------------------------------------------------------------
2007 2006 2007 2006
-------------------------------------------------------------------------
Depreciation and amortization $ 28 $ 16 $ 65 $ 45 Stock option
compensation 1 2 3 Deferred revenue (1) (1) (3) (6) Future income
taxes - (4) 46 (13) Equity earnings - net of distribution - 1 - 8
Write-down of MAPLE assets - - - 9 Write-down of investments - - 6
- Loss on sale of Hamburg clinic - (2) 4 (2) Equipment and other
asset write-downs 1 - 6 - Gain on sale of investment - - (2) -
Amortization of purchase price adjustments 10 - 12 - Other 2 7 - 5
-------------------------------------------------------------------------
$ 41 $ 17 $ 136 $ 49
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Changes in non-cash working capital balances relating to operations
include: Three months Nine months to July 31 to July 31
-------------------------------------------------------------------------
2007 2006 2007 2006
-------------------------------------------------------------------------
Accounts receivable $ (24) $ 2 $ (9) $ (2) Unbilled revenue 1 (40)
12 (69) Inventories (4) 7 (10) 45 Prepaid expenses and other (2)
(6) 8 (11) Accounts payable and deferred revenue (17) 13 32 (41)
Income taxes 5 - (4) 1
-------------------------------------------------------------------------
$ (41) $ (24) $ 29 $ (77)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
14. Segmented Information Three months to July 31, 2007
-------------------------------------------------------------------------
MDS MDS Pharma MDS Analytical Corporate Services Nordion
Technologies and Other Total
-------------------------------------------------------------------------
Net revenues $ 118 $ 76 $ 127 $ - $ 321 Cost of revenues (82) (39)
(71) - (192) Selling, general and administration (32) (13) (22) (7)
(74) Research and development - (1) (8) - (9) Depreciation and
amortization (8) (4) (15) (1) (28) Restructuring charges - net (1)
- - (2) (3) Other income (expense) - net - - (1) (1) (2) Equity
earnings (loss) - - - - -
-------------------------------------------------------------------------
Operating income (loss) $ (5) $ 19 $ 10 $ (11) $ 13
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total assets $ 838 $ 699 $ 877 $ 420 $ 2,834
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital expenditures $ 21 $ 3 $ 3 $ 1 $ 28
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months to July 31, 2006
-------------------------------------------------------------------------
MDS MDS Pharma MDS Analytical Corporate Services Nordion
Technologies and Other Total
-------------------------------------------------------------------------
Net revenues $ 113 $ 79 $ 66 $ - $ 258 Cost of revenues (93) (40)
(41) - (174) Selling, general and administration (33) (13) (6) (9)
(61) Research and development - (1) (4) - (5) Depreciation and
amortization (7) (4) (5) - (16) Restructuring charges - net (1) - -
(1) (2) Other income (expense) - net 5 - - - 5 Equity earnings
(loss) - - - - -
-------------------------------------------------------------------------
Operating income (loss) $ (16) $ 21 $ 10 $ (10) $ 5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total assets $ 805 $ 640 $ 181 $ 694 $ 2,320
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital expenditures $ 12 $ - $ 2 $ 3 $ 17
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Nine months to July 31, 2007
-------------------------------------------------------------------------
MDS MDS Pharma MDS Analytical Corporate Services Nordion
Technologies and Other Total
-------------------------------------------------------------------------
Net revenues $ 354 $ 213 $ 277 $ - $ 844 Cost of revenues (248)
(110) (158) - (516) Selling, general and administration (98) (36)
(41) (19) (194) Research and development - (2) (19) - (21)
Depreciation and amortization (26) (10) (27) (2) (65) Restructuring
charges - net (35) - - (9) (44) Other income (expense) - net (65) 4
(2) (5) (68) Equity earnings (loss) - - - - -
-------------------------------------------------------------------------
Operating income (loss) $ (118) $ 59 $ 30 $ (35) $ (64)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital expenditures $ 28 $ 5 $ 8 $ 4 $ 45
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Nine months to July 31, 2006
-------------------------------------------------------------------------
MDS MDS Pharma MDS Analytical Corporate Services Nordion
Technologies and Other Total
-------------------------------------------------------------------------
Net revenues $ 337 $ 221 $ 184 $ - $ 742 Cost of revenues (252)
(111) (112) - (475) Selling, general and administration (91) (37)
(13) (25) (166) Research and development - (2) (9) - (11)
Depreciation and amortization (21) (11) (13) - (45) Restructuring
charges - net (1) - - (3) (4) Other income (expense) - net 5 (9) -
(3) (7) Equity earnings (loss) (1) - - (3) (4)
-------------------------------------------------------------------------
Operating income (loss) $ (24) $ 51 $ 37 $ (34) $ 30
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital expenditures $ 26 $ - $ 5 $ 8 $ 39
-------------------------------------------------------------------------
-------------------------------------------------------------------------
15. Financial Instruments The carrying amounts and fair values for
all derivative financial instruments are as follows: As at July 31
As at July 31
-------------------------------------------------------------------------
2007 2006
-------------------------------------------------------------------------
Carrying Fair Carrying Fair Amount Value Amount Value
-------------------------------------------------------------------------
Asset (liability) position: Currency forward and option - asset $ 4
$ 4 $ 1 $ 4 Currency forward and option - liabilities $ (2) $ (2) $
(1) $ (1) Interest rate swap and option contracts $ (3) $ (3) $ (4)
$ (4)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As of July 31, 2007 the Company had outstanding foreign exchange
contracts in place to sell US$69 million at a weighted average
exchange rate of C$1.1339 maturing over the next six months. The
Company also had interest rate swap contracts that convert a
notional amount of US$80 million of debt from a fixed to a floating
interest rate. Foreign exchange options and interest rate swaps not
eligible for hedge accounting are included in accounts payable and
are marked to market each period. During the quarter, the Company
de-designated $70 million of the US dollar debt from being a hedge
of its US net investment, and entered into foreign exchange
contracts to lock in the exchange rate the Company would pay to buy
the US dollars required to make the scheduled December debt
payments. Gains and losses on the foreign exchange contracts and on
this portion of the US dollar denominated debt are offsetting in
the income statement. 16. Income Taxes A reconciliation of expected
income taxes to the reported income tax recovery is provided below.
The Company's tax recovery for the quarter was lower than expected
as portions of the restructuring charge related to foreign
jurisdictions where full valuation allowances have been recorded
against existing tax assets. In addition, the Company was unable to
recognize any tax benefit on the Hamburg clinic loss or valuation
provision. Three months to July 31
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2007 2006
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Expected income tax expense (recovery) at MDS's 35% (2006 - 35%)
statutory rate $ 4 $ 2 Increase (decrease) to taxes expense as a
result of: Foreign tax losses not previously recognized (1) -
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Reported income tax expense (recovery) $ 3 $ 2
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17. Differences Between Canadian and United States Generally
Accepted Accounting Principles The consolidated financial
statements have been prepared in accordance with Canadian GAAP. The
principles adopted in these financial statements conform in all
material respects to those of US GAAP except as summarized below.
Significant differences between Canadian and US GAAP would have the
following effect on net income of the Company: Three months Nine
months to July 31 to July 31
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2007 2006 2007 2006
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Net income (loss) from continuing operations in accordance with
Canadian GAAP $ 8 $ 3 $ (51) $ 15 US GAAP adjustments: Deferred
development costs (7) (3) (9) (3) Deferred development cost
amortization 5 - 8 - Reduction in income tax expense arising from
GAAP adjustments 3 - 3 -
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Net income (loss) from continuing operations in accordance with US
GAAP 9 - (49) 12 Income from discontinued operations in accordance
with Canadian and US GAAP - net of tax (1) 16 808 65
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Net income in accordance with US GAAP $ 8 $ 16 $ 759 $ 77
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Basic earnings (loss) per share in accordance with US GAAP - from
continuing operations $ 0.07 $ 0.0 $ (0.36) $ 0.08 - from
discontinued operations (0.01) 0.11 5.99 0.46
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Basic earnings per share $ 0.06 $ 0.11 $ 5.63 $ 0.54
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Diluted earnings (loss) per share in accordance with US GAAP - from
continuing operations $ 0.07 $ 0.0 $ (0.36) $ 0.08 - from
discontinued operations (0.01) 0.11 5.98 0.45
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Diluted earnings per share $ 0.06 $ 0.11 $ 5.62 $ 0.53
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During the quarter, as a result of updating management's
preliminary valuation of acquired intangibles, the Company
determined that amounts previously identified as in-process
research and development costs for US GAAP purposes had nil value.
Accordingly, net income under US GAAP for 2007 has been increased
by $6 million. 18. Comparative Figures All comparative financial
information has been restated to reflect the Company's results as
if they had been historically reported in US dollars. Certain
figures for the previous period have been reclassified to conform
to the current period's financial statement presentation. In
addition, segmented information for 2006 has been revised to
reflect the discontinued operations reported. DATASOURCE: MDS Inc.
CONTACT: PRNewswire - - 09/06/2007
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