CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three months to
October 31 Year ended October 31
-------------------------------------------------------------------------
2007 2006 2007 2006 (millions of (Revised (Revised US dollars) Note
17) Note 17)
-------------------------------------------------------------------------
Operating activities Net income $ 15 $ 47 $ 772 $ 127 Income (loss)
from discontinued operations - net of tax (2) 33 806 98
-------------------------------------------------------------------------
Income (loss) from continuing operations 17 14 (34) 29 Adjustments
to reconcile net income to cash provided by operating activities
relating to continuing operations (note 13) Items not affecting
current cash flow 11 51 147 100 Changes in non-cash working capital
balances relating to operations 58 (19) 87 (96)
-------------------------------------------------------------------------
Cash provided by operating activities of continuing operations 86
46 200 33 Cash provided by (used in) operating activities of
discontinued operations (4) 53 (56) 104
-------------------------------------------------------------------------
82 99 144 137
-------------------------------------------------------------------------
Investing activities Acquisitions (note 6) 1 - (600) - Purchase of
intangibles - - (1) - Increase in deferred development charges (7)
(4) (14) (10) Proceeds from MAPLE transaction - - - 24 Purchase of
property, plant and equipment (note 14) (28) (14) (73) (53)
Proceeds from sale of capital assets 4 - 4 - Proceeds on sale of
short- term investments - - 165 - Purchases of short-term
investments - (1) (118) (135) Proceeds on divestitures - 3 - 5
Proceeds on sale of investment - - 13 - Other (18) 5 (20) (11)
-------------------------------------------------------------------------
Cash used in investing activities of continuing operations (48)
(11) (644) (180)
-------------------------------------------------------------------------
Cash provided by (used in) investing activities of discontinued
operations - (8) 929 73
-------------------------------------------------------------------------
Financing activities Repayment of long-term debt (10) (6) (18) (7)
Increase (decrease) in deferred revenue and other long-term
obligations (3) 2 (2) (7) Payment of cash dividends - (3) (3) (13)
Issuance of shares - 2 15 26 Repurchase of shares - - (441) -
-------------------------------------------------------------------------
Cash used in financing activities of continuing operations (13) (5)
(449) (1)
-------------------------------------------------------------------------
Cash used in financing activities of discontinued operations - (3)
(2) (12)
-------------------------------------------------------------------------
Effect of foreign exchange rate changes on cash and cash
equivalents 14 5 28 12
-------------------------------------------------------------------------
Increase in cash and cash equivalents during the period 35 77 6 29
Cash and cash equivalents, beginning of period 224 176 253 224
-------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 259 $ 253 $ 259 $ 253
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (All tabular amounts in millions of US Dollars, except
where noted) 1. Basis of Presentation These interim consolidated
financial statements of MDS Inc. (MDS or the Company) have been
prepared in accordance with Canadian generally accepted accounting
principles (GAAP) and follow the same accounting policies and
methods of application as the Company's consolidated financial
statements for the year ended October 31, 2006, except as described
in Note 3. Under GAAP, additional disclosures are required in the
annual financial statements and accordingly, these interim
consolidated financial statements should be read in conjunction
with the audited consolidated financial statements for the year
ended October 31, 2006 and the accompanying notes on pages 32 to 63
of the Company's annual report. Amounts for the prior year have
been revised to reflect the results of discontinued operations. 2.
Reporting Currency The Company has historically prepared its
consolidated financial statements in Canadian dollars and in
accordance with Canadian GAAP. Effective November 1, 2006, the
Company adopted the United States (US) dollar as the reporting
currency for presentation of its consolidated financial statements.
A significant portion of revenues, expenses and assets and
liabilities are denominated in US dollars and the international
focus of the Company's sales and operations is continuing to
increase; consequently, the Company believes that investors will
gain a better understanding of the operating results when presented
in US dollars. The Company will continue to report its financial
results for fiscal 2007 in accordance with Canadian GAAP. In
accordance with Canadian generally accepted accounting principles,
the Company is required to restate all amounts presented in US
dollars using the current rate method. Under this method, all
revenues, expenses and cash flows for each year (or period) are
translated into the reporting currency using the rates in effect at
the date of the transactions. Assets and liabilities are translated
using the exchange rate at the end of that year or period. All
resulting exchange differences are reported as a separate component
of shareholders' equity. The functional currency of each of the
Company's operations is unchanged. Assets and liabilities of the
Company's operations having a functional currency other than US
dollars are translated into US dollars using the exchange rate in
effect at the end of the period, and revenues and expenses are
translated at the average rate during the period. As a result of
the change in the reporting currency, the Company reported a
cumulative translation adjustment balance of $347 million as at
October 31, 2006. All comparative financial information has been
restated to reflect the Company's results as if they had been
historically reported in US dollars. 3. 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 gains and
losses on assets held for sale, 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 statements 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 statements
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. The carrying value, which equals the fair value of
financial assets and liabilities as at October 31, 2007 is
summarized as follows:
-------------------------------------------------------------------------
Classification
-------------------------------------------------------------------------
Held-for-trading $ 259 Held-to-maturity 46 Loans and receivables
413 Available-for-sale 116 Other liabilities $ 855
-------------------------------------------------------------------------
(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
statements 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 occurrence of the forecasted transaction is
still probable and it 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. (d) Measurement Uncertainty The preparation of consolidated
financial statements that confirm with GAAP requires management to
make estimates and assumptions that affect the reported amount of
assets and liabilities and disclosures of contingent liabilities at
the date of the consolidated financial statements and the reported
amounts of revenue and expenses during the reporting period.
Estimates are derived from financial models that are based on
historical experience, current trends and other assumptions that
are believed to be reasonable under the circumstances. Actual
results could differ from those estimates. In early August 2007, we
invested in $17 million of asset-backed commercial paper that has
since been affected by the recent liquidity disruption in that
market. We recorded a valuation provision of $2 million as an
adjusting item to reflect our estimate of the current value of that
asset. The provision reflects management's best estimate of the
likely impairment based on a risk-adjusted estimate of expected
future cash flows. Continuing uncertainties regarding the value of
the assets, the nature and timing of future cash flows, and the
outcome of the restructuring of this financial market may impact
the amount that MDS will ultimately realize on this investment (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 October 31, 2007
-------------------------------------------------------------------------
Unrealized gains on derivatives designated as cash flow hedges $ 4
Unrealized foreign currency gains on debt designated as a hedge 135
Unrealized foreign currency gain (loss) on translation 337
-------------------------------------------------------------------------
Accumulated other comprehensive income balance as at October 31,
2007 $ 476
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 October 31, 2007: (number of
shares in thousands) Number Amount
-------------------------------------------------------------------------
Common shares Balance as at October 31, 2006 144,319 $ 572 Issued
during the period 1,090 21 Repurchased during the period (22,831)
(91)
-------------------------------------------------------------------------
Balance as at October 31, 2007 122,578 $ 502
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the second quarter, the Company repurchased and cancelled
22,831 Common shares, under the terms of a substantial issuer bid.
Average Exercise (number of options in thousands) Number Price
-------------------------------------------------------------------------
Stock options Balance as at October 31, 2006 5,850 C$ 18.76
Activity during the period: Granted 1,241 C$ 21.72 Exercised (982)
C$ 16.47 Cancelled or forfeited (554) C$ 20.35
-------------------------------------------------------------------------
Balance as at October 31, 2007 5,555 C$ 19.66
-------------------------------------------------------------------------
-------------------------------------------------------------------------
There were 3,223 stock options exercisable as at October 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 $600 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 $7 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. 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 7
-------------------------------------------------------------------------
Net consideration and acquisition costs $ 600
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Allocation of purchase price: Net tangible assets acquired $ 15
Intangible assets acquired: Developed technologies 161 Brands 60
Goodwill (non-tax deductible) 364
-------------------------------------------------------------------------
Total purchase price $ 600
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 $25 million of net future tax
liabilities. Net tangible assets acquired include a charge of $8
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 estimated to range 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
twelve- months ended October 31 were as follows: Three months to
October 31 Year ended October 31
-------------------------------------------------------------------------
2007 2006 2007 2006
-------------------------------------------------------------------------
Net revenues $ - $ 82 $ 95 $ 362 Cost of revenues - (45) (57) (225)
Selling, general and administration (1) (15) (16) (53) Depreciation
and amortization - (3) - (10) Restructuring charges - - - (1) Other
expenses - (3) - (3) Equity earnings - 1 1 3
-------------------------------------------------------------------------
Operating income (loss) (1) 17 23 73 Gain on sale of discontinued
operations - - 904 24 Dividend and interest income - 1 1 2 Income
tax recovery (expense) - 16 (117) 7 Minority interest - net of tax
(1) (1) (5) (8)
-------------------------------------------------------------------------
Income (loss) from discontinued operations - net of tax $ (2) $ 33
$ 806 $ 98
-------------------------------------------------------------------------
Basic earnings per share $ (0.01) $ 0.23 $ 6.12 $ 0.68
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Diluted earnings per share $ (0.01) $ 0.23 $ 6.10 $ 0.68
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The results from discontinued operations for 2007 reflect only the
Canadian diagnostic services business. The results from
discontinued operations for 2006 include results from the Canadian
diagnostic services business, the results of Source Medical
Corporation, 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 October 31 October 31 2007
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 to October 31
Year ended October 31
-------------------------------------------------------------------------
2007 2006 2007 2006
-------------------------------------------------------------------------
Gross expenditures $ 22 $ 14 $ 72 $ 52 Investment tax credits (2)
(3) (5) (9) Recoveries from partners (7) (4) (24) (21) Development
costs deferred (5) - (14) (4)
-------------------------------------------------------------------------
Research and development expense $ 8 $ 7 $ 29 $ 18
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three months ended October 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 - $2 million). For
the twelve months ended October 31, 2007 depreciation and
amortization includes $6 million (2006 - $7 million) related to
equipment used for research and development and $6 million (2006 -
$6 million) from amortization of deferred development costs. 9.
Restructuring An analysis of the activity in the reserve, which
covers restructuring plans announced and recorded in 2005, 2006 and
2007, is as follows: Cumulative drawdowns ------------------------
Restructuring Reserve Charge Cash Non-cash Balance
-------------------------------------------------------------------------
2005 Restructuring Plan: Workforce reductions $ 34 $ (32) $ (1) $ 1
Equipment and other asset write-downs - adjustment 7 - (7) -
Contract cancellation charges 10 (2) (8) -
-------------------------------------------------------------------------
Total for 2005 Plan $ 51 $ (34) $ (16) $ 1
-------------------------------------------------------------------------
2006 Restructuring Plan: Workforce reductions $ 1 $ (1) $ - $ -
Contract cancellation charges (8) (1) 9 -
-------------------------------------------------------------------------
Total for 2006 Plan $ (7) $ (2) $ 9 $ -
-------------------------------------------------------------------------
2007 Restructuring Plan: Workforce reductions $ 18 $ (9) $ - $ 9
Equipment and other asset write-downs 4 - (2) 2 Contract
cancellation charges 5 (5) - - Other 13 (9) (2) 2
-------------------------------------------------------------------------
Total for 2007 Plan $ 40 $ (23) $ (4) $ 13
-------------------------------------------------------------------------
Remaining Reserve Balance, Total $ 14
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 October 31, 2007, the Company
utilized $5 million of this provision. 10. Earnings Per Share (a)
Dilution Three months to October 31 Year ended October 31
-------------------------------------------------------------------------
(number of shares in millions) 2007 2006 2007 2006
-------------------------------------------------------------------------
Weighted average number of Common shares outstanding - basic 123
143 132 143 Impact of stock options assumed exercised - 1 - 1
-------------------------------------------------------------------------
Weighted average number of Common shares outstanding - diluted 123
144 132 144
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 Year
ended to October 31 to October 31
-------------------------------------------------------------------------
2007 2006 2007 2006
-------------------------------------------------------------------------
Net income $ 15 $ 47 $ 772 $ 127 Compensation expense for options
granted prior to November 1, 2003 - - - (2)
-------------------------------------------------------------------------
Net income - pro-forma $ 15 $ 47 $ 772 $ 125
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Pro-forma basic earnings per share $ 0.13 $ 0.33 $ 5.86 $ 0.89
Pro-forma diluted earnings per share $ 0.13 $ 0.33 $ 5.85 $ 0.89
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(c) Stock Options During the quarter, the Company granted 17,900
options (2006 - 9,000) at an average exercise price of C$20.87
(2006 - C$19.77). These options have a fair value determined using
the Black-Scholes model of C$5.32 per share (2006 - C$4.18) based
on the following assumptions: 2007 2006
-------------------------------------------------------------------------
Risk-free interest rate 4.2% 4.0% Expected dividend yield 0.0% 0.0%
Expected volatility 0.20 0.21 Expected time to exercise (years)
4.40 3.25
-------------------------------------------------------------------------
-------------------------------------------------------------------------
11. Other Income (Expense) - Net Three months to October 31 Year
ended October 31
-------------------------------------------------------------------------
2007 2006 2007 2006
-------------------------------------------------------------------------
Write-down of other long-term assets $ - $ - $ - $ (1) Write-down
of investments - - (6) - Gain on sale of long-term assets 1 - 3 2
Loss on sale of Hamburg clinic - - (4) - Gain on sale of business -
- 1 - Acquisition integration costs (2) - (4) - FDA provision - -
(61) - Valuation provision (2) - (2) - Protana settlement 5 - 5 -
Unrealized gain on interest rate swaps 2 2 1 - MAPLE settlement 3 -
6 (9) Insurance settlement - (1) - 2
-------------------------------------------------------------------------
Other income (expense) - net $ 7 $ 1 $ (61) $ (6)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 $2 million (2006 - $1 million) for the year. 13.
Supplementary Cash Flow Information Non-cash items affecting net
income comprise: Three months to October 31 Year ended October 31
-------------------------------------------------------------------------
2007 2006 2007 2006
-------------------------------------------------------------------------
Depreciation and amortization $ 26 $ 18 $ 91 $ 63 Stock option
compensation 2 1 4 4 Deferred revenue (2) (1) (5) (7) Future income
taxes (10) 32 36 19 Equity earnings - net of distribution - 7 - 15
Write-down of MAPLE assets - - - 9 Write-down of investments 2 - 8
- Write-down of intangibles 1 - 1 - Loss on sale of Hamburg clinic
- - 4 - (Gain) loss on disposal of equipment and other assets (5) -
1 - Gain on sale of investment/business - - (2) (2) Amortization of
purchase price adjustments 2 1 14 1 Other (5) (7) (5) (2)
-------------------------------------------------------------------------
$ 11 $ 51 $ 147 $ 100
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Changes in non-cash working capital balances relating to operations
include: Three months to October 31 Year ended October 31
-------------------------------------------------------------------------
2007 2006 2007 2006
-------------------------------------------------------------------------
Accounts receivable $ (21) $ (17) $ (30) $ (19) Unbilled revenue 11
44 23 (25) Inventories (10) 4 (20) 49 Prepaid expenses and other 25
6 33 (5) Accounts payable and deferred revenue 49 - 81 (41) Income
taxes 4 (56) - (55)
-------------------------------------------------------------------------
$ 58 $ (19) $ 87 $ (96)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
14. Segmented Information Three months to October 31, 2007
-------------------------------------------------------------------------
MDS MDS Pharma MDS Analytical Corporate Services Nordion
Technologies and Other Total
-------------------------------------------------------------------------
Net revenues $ 123 $ 76 $ 119 $ - $ 318 Cost of revenues (78) (40)
(60) - (178) Selling, general and administration (40) (15) (23)
(14) (92) Research and development - - (8) - (8) Depreciation and
amortization (9) (3) (14) - (26) Restructuring charges - net 4 - -
- 4 Other income (expense) - net - 3 (1) 5 7
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Operating income (loss) $ - $ 21 $ 13 $ (9) $ 25
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Total assets $ 853 $ 772 $ 938 $ 501 $ 3,064
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Capital expenditures $ 20 $ 3 $ 2 $ 3 $ 28
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Three-months to October 31, 2006
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MDS MDS Pharma MDS Analytical Corporate Services Nordion
Technologies and Other Total
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Net revenues $ 122 $ 76 $ 62 $ - $ 260 Cost of revenues (91) (39)
(39) - (169) Selling, general and administration (37) (14) (3) (5)
(59) Research and development - (2) (5) - (7) Depreciation and
amortization (9) (4) (5) - (18) Restructuring charges - net 1 2 - 8
11 Other income (expense) - net (1) - - 2 1 Equity loss - - - (1)
(1)
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Operating income (loss) $ (15) $ 19 $ 10 $ 4 $ 18
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Total Assets $ 877 $ 621 $ 166 $ 720 $ 2,384
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Capital expenditures $ 9 $ - $ 2 $ 3 $ 14
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Year ended October 31, 2007
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MDS MDS Pharma MDS Analytical Corporate Services Nordion
Technologies and Other Total
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Net revenues $ 477 $ 289 $ 396 $ - $ 1,162 Cost of revenues (326)
(150) (218) - (694) Selling, general and administration (138) (51)
(64) (33) (286) Research and development - (2) (27) - (29)
Depreciation and amortization (35) (13) (41) (2) (91) Restructuring
charges - net (31) - - (9) (40) Other income (expense) - net (65) 7
(3) - (61)
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Operating income (loss) $ (118) $ 80 $ 43 $ (44) $ (39)
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Total assets $ 853 $ 772 $ 938 $ 501 $ 3,064
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Capital expenditures $ 48 $ 8 $ 10 $ 7 $ 73
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Year ended October 31, 2006
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MDS MDS Pharma MDS Analytical Corporate Services Nordion
Technologies and Other Total
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Net revenues $ 459 $ 297 $ 246 $ - $ 1,002 Cost of revenues (343)
(150) (151) - (644) Selling, general and administration (128) (51)
(16) (30) (225) Research and development - (4) (14) - (18)
Depreciation and amortization (30) (15) (18) - (63) Restructuring
charges - net - 2 - 5 7 Other income (expense) - net 4 (9) - (1)
(6) Equity loss (1) - - (4) (5)
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Operating income (loss) $ (39) $ 70 $ 47 $ (30) $ 48
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Total Assets $ 877 $ 621 $ 166 $ 720 $ 2,384
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Capital expenditures $ 35 $ - $ 7 $ 11 $ 53
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15. Financial Instruments The carrying amounts and fair values for
all derivative financial instruments are as follows: As at October
31 As at October 31
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2007 2006
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Carrying Fair Carrying Fair Amount Value Amount Value
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Asset (liability) position: Currency forward and option - asset $ 7
$ 7 $ 1 $ 1 Currency forward and option - liabilities $ (12) $ (12)
$ - $ - Interest rate swap and option contracts $ (1) $ (1) $ (2) $
(2)
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As of October 31, 2007, the Company had outstanding foreign
exchange contracts in place to sell US$34 million at a weighted
average exchange rate of C$1.1280 maturing over the next five
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
third 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 expense is provided below. Our effective tax rate for
the quarter was lower than expected due to the bankruptcy proceeds
that we recorded this quarter relating to Protana Inc., that are
not subject to income tax. Three months to October 31
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2007 2006
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Expected income tax expense (recovery) at MDS's 35% (2006 - 35%)
statutory rate $ 9 $ 6 Decrease to taxes expense as a result of:
Protana bankruptcy proceeds not subject to tax (1) Impact of tax
rate changes on future tax balances (4)
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Reported income tax expense $ 8 $ 2
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17. 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. 18. Subsequent Events
Subsequent to the year-end, the Company signed an agreement to sell
its external beam therapy and self-contained irradiator product
lines. The sale is a result of MDS Nordion's strategy to focus its
resources on being a leading innovator in molecular medicine. Under
the terms of this agreement, Best Medical International Inc., a
provider of radiotherapy and oncology products, will purchase MDS
Nordion's external beam therapy and self-contained irradiator
product lines for $15 million. Best Medical International Inc. will
acquire these two product lines with combined annualized revenues
of approximately US$32 million and approximately 150 employees. The
transaction, which is subject to the usual closing conditions, is
expected to close in the second quarter of 2008. The Company will
report a loss on disposal of this product line, including all costs
associated with the disposal, in the range of $4 million to $6
million. On November 30 and December 5, 2007, we announced that MDS
Nordion was experiencing an interruption in supply of medical
isotopes from our primary supplier, Atomic Energy of Canada Limited
(AECL) while they completed a scheduled shutdown and an upgrade to
the electrical system of the National Research Universal reactor.
AECL advised us that they are working closely with industry
regulators on this matter. They also advised us that production was
scheduled to recommence in early to mid- January. While we are
working closely with our global supply network to lessen the impact
of this shutdown, we will not be able to fully mitigate the impact
of this supply disruption on our results. We currently estimate the
impact of this disruption on operating income at $8 to $9 million
in total for the first quarter of 2008. DATASOURCE: MDS Inc.
CONTACT: PRNewswire - - 12/13/2007
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