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 in the first
quarter of fiscal 2009. The Company is currently evaluating the
effect 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
for its 2009 fiscal year and is currently evaluating the effect
that the adoption of SFAS 159 will have on its consolidated results
of operations and financial condition and is not yet in a position
to determine such effects. 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 occurring after
October 31, 2009. d. In December 2007, the FASB issued SFAS # 160,
"Non-controlling Interests in Consolidated Financial Statements- an
Amendment of ARB # 51". 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 its consolidated results of
operations and financial condition. 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 approximately $600 million, paid in cash from existing
cash on hand. Included in the consideration is $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 approximately $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 preliminary
estimate of the fair values of the assets acquired and liabilities
assumed, pending completion of a comprehensive valuation with
mainly the valuation of brands to be finalized. The purchase price
and related allocations will be finalized in the second quarter of
fiscal 2008. 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,
assisted by a valuation consultant firm, 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. c. Pro forma information (unaudited) The following
unaudited pro forma information is provided for MDS assuming the
acquisition of MDC occurred on November 1, 2006. Three months
ending January 31
-------------------------------------------------------------------------
2008 2007
-------------------------------------------------------------------------
Net revenues $ 322 $ 315
-------------------------------------------------------------------------
Income from continuing operations, net of income taxes 17 (3)
Income from discontinued operations, net of income taxes - 16
-------------------------------------------------------------------------
Net income 17 13
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per share Basic $ 0.14 $ 0.09 Diluted $ 0.14 $ 0.09
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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. The unaudited pro forma information reflects
interest on the purchase price calculated at the Company's
short-term investments rates for the period prior to the
acquisition date for the respective periods. 5. Discontinued
Operations and Assets Held for Sale In November 2007, the Company
signed an agreement to sell its external beam therapy and
self-contained irradiator product lines. 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 cash. Best Medical International Inc. will acquire
these two product lines, which have combined annualized revenues of
approximately $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. Once the Company
made the decision, 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. The related assets have been reclassified as assets held
for sale as of the first quarter of 2008. 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 operations in the first
quarter were as follows (no activity in 2008): Three months ended
January 31
-------------------------------------------------------------------------
2007
-------------------------------------------------------------------------
Net revenues $ 75 Cost of revenues (46) Selling, general and
administration (8)
-------------------------------------------------------------------------
Operating income 21 Income taxes (3) Minority interest (3) Equity
earnings 1
-------------------------------------------------------------------------
Income from discontinued operations 16
-------------------------------------------------------------------------
Basic EPS from discontinued operations $ 0.11
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Assets held for sale and liabilities related to assets held for
sale comprised: As at As at January 31 October 31
-------------------------------------------------------------------------
2008 2007
-------------------------------------------------------------------------
Assets held for sale Accounts receivable, net $ 4 $ - Inventories,
net 19 - Property, plant and equipment, net 4 - Long-term
investments and other 1 1 Goodwill 1 -
-------------------------------------------------------------------------
Total assets held for sale $ 29 $ 1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities related to assets held for sale Accounts payable and
accrued liabilities $ 11 $ - Deferred revenue 3 -
-------------------------------------------------------------------------
Total liabilities related to assets held for sale $ 14 $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
6. Inventories As at As at January 31 October 31
-------------------------------------------------------------------------
2008 2007
-------------------------------------------------------------------------
Raw materials and supplies $ 68 $ 83 Work-in process 27 34 Finished
goods 27 26
-------------------------------------------------------------------------
122 143 Allowance for excess and obsolete inventory (14) (15)
-------------------------------------------------------------------------
Inventory, net $ 108 $ 128
-------------------------------------------------------------------------
-------------------------------------------------------------------------
7. Long-Term Investments and Other As at As at January 31 October
31
-------------------------------------------------------------------------
2008 2007
-------------------------------------------------------------------------
Financial instrument pledged as security on long-term debt $ 44 $
46 Long-term notes receivable 119 125 Equity investments 10 10
Equity investments in joint ventures 25 38 Available for sale
investments 18 24 Deferred pension assets 40 39 Other long-term
investments 9 4 Venture capital investments 2 4
-------------------------------------------------------------------------
Long-term investments and other $ 267 $ 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. Included
with available for sale investments is an investment in asset
backed commercial paper (ABCP) of $15 million net of a $2 million
provision. MDS provided $2 million against the investment in 2007
to reflect the conditions in the ABCP market. As there have been no
significant developments with regard to this investment, MDS
believes the current provision is adequate. b. 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 AECL related to the MAPLE reactor project, a long-term note
receivable for $38 million 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 note
receivable will be accreted up to its face amount of C$53 million
over a period of four years. Long-term notes receivable also
include amounts due related to the sale of MDS Diagnostic Services.
c. Equity investments As at As at January 31 October 31
-------------------------------------------------------------------------
2008 2007
-------------------------------------------------------------------------
Lumira Capital Corp 10 10 MDS Sciex joint ventures 25 38
-------------------------------------------------------------------------
Equity investments $ 35 $ 48
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 expense. 8.
Restructuring Charges An analysis of the activity in the provision
through January 31, 2008 is as follows: Cumulative drawdowns
Provision Cumulative --------------------- Balance at Restructuring
January 31, Charge Cash Non-cash 2008
-------------------------------------------------------------------------
2005: Workforce reductions $ 34 $ (33) $ (1) $ - Equipment and
other asset write-downs 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 $ (15) $ - $ 2 Equipment and other
asset write-downs 2 - - 2 Contract cancellation charges 5 (5) - -
Other 13 (9) (2) 2
-------------------------------------------------------------------------
$ 37 $ (29) $ (2) $ 6
-------------------------------------------------------------------------
$ 6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
In the first quarter of 2008 cash drawdowns were $7 million and
non-cash drawdowns were $1 million. The remaining balance primarily
relates to the MDS Pharma Services segment. 9. Earnings Per Share
a) Dilution Three months ended January 31
-------------------------------------------------------------------------
(number of shares in millions) 2008 2007
-------------------------------------------------------------------------
Weighted average number of Common shares outstanding - basic 123
145 Impact of shares repurchased during the period - -
-------------------------------------------------------------------------
Impact of stock options assumed exercised - -
-------------------------------------------------------------------------
Weighted average number of Common shares outstanding - diluted 123
145
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 ended
January 31
-------------------------------------------------------------------------
Restated See Note 2 2008 2007
-------------------------------------------------------------------------
Net income $ 17 $ 16 Compensation expense for options granted prior
to November 1, 2003 - -
-------------------------------------------------------------------------
Net income - pro forma $ 17 $ 16
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Pro forma basic earnings per share $ 0.14 $ 0.11 Pro forma diluted
earnings per share $ 0.14 $ 0.11
-------------------------------------------------------------------------
-------------------------------------------------------------------------
10. Share Capital At January 31, 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 January 31, 2008: (number of shares in thousands) Number
Amount
-------------------------------------------------------------------------
Common shares Balance as at October 31, 2007 122,578 $ 493 Issued
during the period 33 - Repurchased during the period (252) (1)
-------------------------------------------------------------------------
Balance as at January 31, 2008 122,359 $ 492
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the quarter, the Company repurchased and cancelled 252,400
Common shares under a normal course issuer bid for a cost of $4.5
million. Of the total cost, $1 million was charged to share
capital, $0.5 million was charged to other comprehensive income and
$3 million was charged to retained earnings. 11. Stock-based
Compensation Average C$ 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 9 19.58 Exercised (33) 15.77 Cancelled
or forfeited (56) 21.55
-------------------------------------------------------------------------
Balance as at January 31, 2008 5,475 $ 19.67
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 2 18.78 Exercised - - Cancelled or forfeited -
-
-------------------------------------------------------------------------
Balance as at January 31, 2008 2 $ 18.78
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the quarter, the Company granted 9,000 C$ options and 2,000
US$ options (2007 - 59,000 and nil) at an average exercise price of
C$19.58 and US$ 18.78 respectively (2007 - C$20.71 and US$ nil).
These options have a fair value determined using the Black-Scholes
model of C$4.87 and US$4.67 per share respectively (2007 - C$4.40
and US$ nil) based on the following: C$ options 2008 2007
-------------------------------------------------------------------------
Risk-free interest rate 4.0 % 4.0 % Expected dividend yield 0.0 %
0.0 % Expected volatility 0.21 0.22 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 0.22 - Expected time to exercise (years) 4.40 -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The stock compensation expense for the three months ended January
31, 2008 was $1 million (2007 - $1 million). 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. 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.
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. 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 mid-term
incentive 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 January October Liability 31,
2008 31, 2007
-------------------------------------------------------------------------
2006 Plan $ 3 $ 11 2007 Plan 1 3 2008 Plan 1 -
-------------------------------------------------------------------------
Total $ 5 $ 14
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended January 31
-------------------------------------------------------------------------
(Income)Expense 2008 2007
-------------------------------------------------------------------------
2006 Plan $ (5) $ (1) 2007 Plan (2) - 2008 Plan 1 -
-------------------------------------------------------------------------
Total $ (6) $ (1)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
12. Accumulated Other Comprehensive Income As at As at January
October 31, 2008 31, 2007
-------------------------------------------------------------------------
Accumulated other comprehensive income, net of income taxes,
beginning of period $ 490 $ 366 Foreign currency translation (74)
112 Unrealized gain on available-for-sale assets, net of tax 1 -
Unrealized (loss) gain on derivatives designated as cash flow
hedges, net of tax (4) 1 Adoption of FAS 158 - 11 Repurchase and
cancellation of Common shares (1) -
-------------------------------------------------------------------------
Accumulated other comprehensive income, net of income taxes, end of
period $ 412 $ 490
-------------------------------------------------------------------------
-------------------------------------------------------------------------
13. Other Income (Expense) - Net Three months ended January 31
-------------------------------------------------------------------------
2008 2007
-------------------------------------------------------------------------
Loss on sale of business $ (4) $ - Gain on sale of investment 2 2
Foreign exchange gain 4 3 Loss on embedded derivatives (4) - Other
(2) (1)
-------------------------------------------------------------------------
Other income (expense) - net $ (4) $ 4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
14. Employee Benefit Plan 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
following table represents the net periodic benefit cost of defined
benefit pension plans. The cost of other post-employment benefit
plans was nil in the first quarter of 2008 and 2007. Three months
ended January 31
-------------------------------------------------------------------------
2008 2007
-------------------------------------------------------------------------
Service cost $ 1 $ 1 Interest cost 3 2 Expected return on plan
assets (4) (3)
-------------------------------------------------------------------------
Net periodic benefit cost (credit) $ - $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
15. Supplementary Cash Flow Information Non-cash items affecting
net income comprise: Three months ended January 31
-------------------------------------------------------------------------
2008 2007
-------------------------------------------------------------------------
Depreciation and amortization $ 27 $ 14 Stock option compensation 1
1 Deferred revenue (1) (2) Deferred income taxes (12) 16 Loss on
sale of business 4 - Gain on investment (2) (2) Mark-to-market on
derivatives 4 - Dividend from joint ventures, net of equity
earnings 12 - Other (3) 1
-------------------------------------------------------------------------
$ 30 $ 28
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Changes in non-cash working capital balances relating to operations
include: Three months ended January 31
-------------------------------------------------------------------------
2008 2007
-------------------------------------------------------------------------
Accounts receivable $ 7 $ 13 Unbilled revenue (6) (16) Inventories
1 (4) Prepaid expenses and other (12) (24) Accounts payable and
deferred revenue (67) (14) Income taxes (27) 12
-------------------------------------------------------------------------
$ (104) $ (33)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 to January 31, 2008
-------------------------------------------------------------------------
MDS MDS Analytical Pharma MDS Technol- Corporate Services Nordion
ogies and Other Total
-------------------------------------------------------------------------
Product revenues $ - $ 59 $ 92 $ - $ 151 Service revenues 120 1 24
- 145 Reimbursement revenues 26 - - - 26
-------------------------------------------------------------------------
Total revenues 146 60 116 - 322 Direct product cost - (34) (61) -
(95) Direct service costs (88) - (4) - (92) Reimbursed expenses
(26) - - - (26) Selling, general and administration (29) (11) (19)
(5) (64) Research and development - - (20) - (20) Depreciation and
amortization (9) (3) (15) - (27) Other income (expense) - net 5 (8)
(2) 1 (4) Equity earnings - - 14 - 14
-------------------------------------------------------------------------
Segment earnings (loss) $ (1) $ 4 $ 9 $ (4) $ 8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total assets $ 805 $ 723 $ 854 $ 347 $ 2,729
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital expenditures $ 6 $ 3 $ 2 $ 2 $ 13
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total assets for 2008 and 2007 exclude assets held for sale. Three
months to January 31, 2007
-------------------------------------------------------------------------
MDS MDS Analytical Pharma MDS Techno- Corporate Services Nordion
logies and Other Total
-------------------------------------------------------------------------
Product revenues $ - $ 67 $ 38 $ - $ 105 Service revenues 121 0 15
- 136 Reimbursement revenues 23 - - - 23
-------------------------------------------------------------------------
Total revenues 144 67 53 - 264 Direct product cost - (34) (37) -
(71) Direct service costs (89) (1) - - (90) Reimbursed expenses
(23) - - - (23) Selling, general and administration (33) (11) (6)
(4) (54) Research and development - (1) (11) - (12) Depreciation
and amortization (8) (3) (3) - (14) Restructuring charges - net (8)
- - (5) (13) Other income (expense) - net 2 - (1) 3 4 Equity
earnings - - 14 - 14
-------------------------------------------------------------------------
Segment earnings (loss) $ (15) $ 17 $ 9 $ (6) $ 5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total assets $ 846 $ 604 $ 125 $ 491 $ 2,066
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital expenditures $ 2 $ 1 $ 3 $ 3 $ 9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
In segment reporting, equity earnings are included in the
determination of segment earnings (loss). Excluding equity earnings
of $14 million results in an operating loss of $6 million in the
first quarter of 2008 and a $9 million loss in 2007. Segment
earnings (loss) is the same as operating income (loss) except for
the MDS Analytical Technologies segment. 17. Financial Instruments
The carrying amounts and fair values for all derivative financial
instruments are as follows: As at January 31 As at October 31
-------------------------------------------------------------------------
2008 2007
-------------------------------------------------------------------------
Carrying Fair Carrying Fair Amount Value Amount Value
-------------------------------------------------------------------------
Asset (liability) position: Currency forward and option - assets $
1 $ 1 $ 7 $ 7 Currency forward and option - liabilities $ (1) $ (1)
$ (12) $ (12) Interest rate swap and option contracts $ - $ - $ (1)
$ (1)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As of January 31, 2008, the Company had outstanding foreign
exchange contracts in place to sell $36 million at a weighted
average exchange rate of C$1.0225 maturing over the next 12 months.
In the first quarter of 2008, the Company recorded a $2 million
gain on the settlement of interest rate swaps. In addition to the
above derivatives, isotope supply agreements totaling $120 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 January 31, 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
loss of $4 million on the contract in 2008. There was no
significant mark-to-market adjustment required for the first
quarter of 2007. 18. Income Taxes A reconciliation of expected
income taxes to reported income tax expense is provided below.
Significant reconciling items include an $11 million net reduction
in deferred tax liabilities due to the enactment during the quarter
of reductions in Canadian federal income tax rates. Three months
ended January 31
-------------------------------------------------------------------------
Restated See note 2 2008 2007
-------------------------------------------------------------------------
Expected income tax expense at MDS's 33% (2007 - 35%) statutory
rate $ 3 $ 1 Increase (decrease) to tax expense as a result of: Tax
credits for research and development (1) (2) Impact of tax rate
changes on deferred tax balances (11) - Foreign losses that have
not been recognized, net 1 4 Other 1 -
-------------------------------------------------------------------------
Reported income tax expense (recovery) $ (7) $ 3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
19. Differences Between US and Canadian Generally Accepted
Accounting Principles The 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 according to US GAAP 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 (AOCI) 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. FAS 158 required
the Company to fully recognize the funded status of its benefit
plans. Each overfunded plan is recognized as an asset and each
underfunded plan is recognized as a liability. Previously
unrecognized net losses and unrecognized plan changes are
recognized as a component of AOCI. 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.
As mentioned in Note 2, in the fourth quarter 2007 during the
preparation of our 2007 annual financial statements under US GAAP
an error was identified in the prior interim financial statements
with respect to certain stock based incentive compensation plans.
The Company has corrected this error of $2 million in these
consolidated financial statements. The previous Canadian GAAP to US
GAAP reconciliation is therefore amended by the below restated
reconciliation. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
-------------------------------------------------------------------------
Recon- 2008 ciling As at January 31 Canadian Adjust- 2008 US
(millions of US dollars) GAAP ments Reference GAAP
-------------------------------------------------------------------------
Assets Current assets Cash and cash equivalents $ 150 $ (6) a $ 144
Accounts receivable, net 273 2 a,d 275 Unbilled revenue 105 - 105
Inventories, net 114 (6) a 108 Income taxes recoverable 54 - 54
Current portion of deferred tax assets 54 - 54 Prepaid expenses and
other 30 2 32 Assets held for sale 29 - 29
-------------------------------------------------------------------------
Total current assets 809 (8) 801 Property, plant and equipment, net
367 (3) a 364 Deferred tax asset 3 - 3 Long-term investments and
other 275 (8) a,b,g 267 Goodwill 797 (23) 774 Intangible assets,
net 566 (17) a 549
-------------------------------------------------------------------------
Total assets $ 2,817 $ (59) $ 2,758
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts
payable and accrued liabilities $ 313 $ (13) a,d,h $ 300 Deferred
revenue 75 - 75 Income taxes payable 30 - 30 Current portion of
long-term debt 20 - 20 Current portion of deferred tax liabilities
20 - 20 Liabilities related to assets held for sale 14 - 14
-------------------------------------------------------------------------
Total current liabilities 472 (13) 459 Long-term debt 281 - 281
Deferred revenue 16 (1) 15 Other long-term obligations 30 - 30
Deferred tax liabilities 152 (13) f,h 139
-------------------------------------------------------------------------
Total liabilities 951 (27) 924
-------------------------------------------------------------------------
Shareholders' equity Share capital 502 (10) h 492 Additional paid
in capital - 74 h 74 Retained earnings 963 (107) b,d,g,h 856
Accumulated other comprehensive income 401 11 a,f,g 412
-------------------------------------------------------------------------
Total shareholders' equity 1,866 (32) 1,834
-------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 2,817 $ (59) $ 2,758
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
-------------------------------------------------------------------------
Recon- 2007 ciling As at October 31 Canadian Adjust- 2007 US
(millions of US dollars) GAAP ments Reference GAAP
-------------------------------------------------------------------------
ASSETS Current assets Cash and cash equivalents $ 259 $ (24) a $
235 Short-term investments 91 11 102 Accounts receivable 284 3 a,d
287 Unbilled revenue 99 - 99 Inventories, net 134 (6) a 128 Income
taxes recoverable 54 - 54 Current portion of deferred tax assets 45
- 45 Prepaid expenses and other 21 1 22 Assets held for sale 1 - 1
-------------------------------------------------------------------------
Total current assets 988 (15) 973 Property, plant and equipment,
net 390 (4) a 386 Deferred tax assets 4 - 4 Long-term investments
and other 284 6 a,b,g 290 Goodwill 797 (15) 782 Intangible assets,
net 601 (18) a 583
-------------------------------------------------------------------------
Total assets $ 3,064 $ (46) $ 3,018
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts
payable and accrued liabilities $ 391 $ (7) a,h $ 384 Deferred
revenue 71 - 71 Income taxes payable 57 - 57 Current portion of
long-term debt 94 - 94 Current portion of deferred tax liabilities
10 - 10
-------------------------------------------------------------------------
Total current liabilities 623 (7) 616 Long-term debt 290 - 290
Deferred revenue 16 1 17 Other long-term obligations 29 1 30
Deferred tax liabilities 182 (14) f,h 168 Minority interest 1 (1) -
-------------------------------------------------------------------------
Total liabilities 1,141 (20) 1,121
-------------------------------------------------------------------------
Shareholders' equity Share capital 502 (9) h 493 Additional paid in
capital n/a 72 h 72 Retained earnings 945 (103) b,d,g,h 842
Accumulated other comprehensive income 476 14 a,f,g 490
-------------------------------------------------------------------------
Total shareholders' equity 1,923 (26) 1,897
-------------------------------------------------------------------------
Total liabilities and shareholders' Equity $ 3,064 $ (46) $ 3,018
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS Three months ended January
31, 2008
-------------------------------------------------------------------------
Recon- (millions of US dollars Canadian ciling except per share
amounts) GAAP Items Reference US GAAP
-------------------------------------------------------------------------
Revenues Products and services $ 304 $ (8) a $ 296 Reimbursement
revenues 26 - 26
-------------------------------------------------------------------------
Total revenues 330 (8) 322
-------------------------------------------------------------------------
Costs and expenses Cost of revenues (187) - a,c (187) Reimbursed
expenses (26) - (26) Selling, general and administration (58) (6)
a,e,h (64) Research and development (9) (11) a,b,c (20)
Depreciation and amortization (30) 3 a (27) Restructuring charges -
net - - - Other expense - net (3) (1) b,d (4)
-------------------------------------------------------------------------
Total costs and expenses (313) (15) (328)
-------------------------------------------------------------------------
Operating income (loss) from continuing operations 17 (23) (6)
Interest expense (6) - (6) Interest income 6 - 6 Gain on interest
rate swaps - 2 2 Equity earnings - 14 a 14
-------------------------------------------------------------------------
Income from continuing operations before income taxes 17 (7) 10
Income tax (expense) recovery - current (24) 2 (22) - deferred 28 1
29
-------------------------------------------------------------------------
Income (loss) from continuing operations 21 (4) 17 Income from
discontinued operations - net of income tax - - -
-------------------------------------------------------------------------
Net income $ 21 $ (4) $ 17
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic earnings (loss) per share - from continuing operations $ 0.17
$ 0.03 $ 0.14 - from discontinued operations - - -
-------------------------------------------------------------------------
Basic earnings (loss) per share $ 0.17 $ 0.03 $ 0.14
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Diluted earnings (loss) per share - from continuing operations $
0.17 $ 0.03 $ 0.14 - from discontinued operations - - -
-------------------------------------------------------------------------
Diluted earnings(loss) per share $ 0.17 $ 0.03 $ 0.14
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS Three months ended January
31, 2007
-------------------------------------------------------------------------
Recon- (millions of US dollars Canadian ciling Restated except per
share amounts) GAAP Items Reference US GAAP
-------------------------------------------------------------------------
Revenues Products and services $ 250 $ (9) a $ 241 Reimbursement
revenues 23 - 23
-------------------------------------------------------------------------
Total revenues 273 (9) 264
-------------------------------------------------------------------------
Costs and expenses Cost of revenues (160) (1) a,c (161) Reimbursed
expenses (23) - (23) Selling, general and administration (53) (1)
a,e,h (54) Research and development (5) (7) a,b,c (12) Depreciation
and amortization (17) 3 a,b (14) Restructuring charges - net (13) -
(13) Other expense - net 1 3 b,d 4
-------------------------------------------------------------------------
Total costs and expenses (270) (3) (273)
-------------------------------------------------------------------------
Operating income (loss) from continuing operations 3 (12) (9)
Interest expense (6) - (6) Interest income 4 - 4 Equity earnings -
14 a 14
-------------------------------------------------------------------------
Income from continuing operations before income taxes 1 2 3 Income
tax expense - current (3) 1 (2) - deferred - (1) (1)
-------------------------------------------------------------------------
Income (loss) from continuing operations (2) 2 - Income from
discontinued operations - net of income tax 16 - 16
-------------------------------------------------------------------------
Net income $ 14 $ 2 $ 16
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic earnings (loss) per share - from continuing operations $
(0.02) $ 0.02 $ - - from discontinued operations 0.12 (0.01) 0.11
-------------------------------------------------------------------------
Basic earnings (loss) per share $ 0.10 $ 0.01 $ 0.11
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Diluted earnings (loss) per share - from continuing operations $
(0.02) $ 0.02 $ - - from discontinued operations 0.12 (0.01) 0.11
-------------------------------------------------------------------------
Diluted earnings(loss) per share $ 0.10 $ 0.01 $ 0.11
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS Three months ended January
31, 2008
-------------------------------------------------------------------------
Recon- Canadian ciling (millions of US dollars) GAAP Items US GAAP
-------------------------------------------------------------------------
Operating activities Net income $ 21 $ (4) $ 17 Less: Income from
discontinued operations - net of tax - - -
-------------------------------------------------------------------------
Income from continuing operations 21 (4) 17 Adjustments to
reconcile net income to cash provided by operating activities
relating to continuing operations Items not affecting current cash
flow (22) 52 30 Net changes in non-cash working capital balances
relating to operations (97) (7) (104)
-------------------------------------------------------------------------
Cash used in operating activities of continuing operations (98) 41
(57) Cash provided by operating activities of discontinued
operations - - -
-------------------------------------------------------------------------
(98) 41 (57)
-------------------------------------------------------------------------
Investing activities Decrease in deferred development charges (5) 5
- Purchase of property, plant and equipment (13) - (13) Proceeds on
sale of property, plant and equipment 1 - 1 Proceeds on sale of
short-term investments 101 - 101 Proceeds on sale of long-term
investments 3 - 3 Other (1) 1 -
-------------------------------------------------------------------------
Cash provided by in investing activities of continuing operations
86 6 92
-------------------------------------------------------------------------
Financing activities Repayment of long-term debt (80) - (80)
Increase in deferred revenue and other long-term obligations 1 - 1
Repurchase of shares (5) - (5) Issuance of shares 1 - 1
-------------------------------------------------------------------------
Cash used in financing activities of continuing operations (83) -
(83)
-------------------------------------------------------------------------
Effect of foreign exchange rate changes on cash and cash
equivalents (3) (40) (43)
-------------------------------------------------------------------------
Decrease in cash and cash equivalents during the period (98) 7 (91)
Cash and cash equivalents, beginning of period 248 (13) 235
-------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 150 $ (6) $ 144
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS Three months ended January
31, 2007
-------------------------------------------------------------------------
Recon- Canadian ciling Restated (millions of US dollars) GAAP Items
US GAAP
-------------------------------------------------------------------------
Operating activities Net income $ 14 $ 2 $ 16 Less: Income from
discontinued operations - net of tax 16 - 16
-------------------------------------------------------------------------
Loss from continuing operations (2) 2 - Adjustments to reconcile
net income to cash provided by operating activities relating to
continuing operations Items not affecting current cash flow 13 15
28 Net changes in non-cash working capital balances relating to
operations (28) (5) (33)
-------------------------------------------------------------------------
Cash used in operating activities of continuing operations (17) 12
(5) Cash provided by operating activities of discontinued
operations 16 - 16
-------------------------------------------------------------------------
(1) 12 11
-------------------------------------------------------------------------
Investing activities Decrease in deferred development charges (2) 2
- Purchase of property, plant and equipment (8) (1) (9) Proceeds on
sale of short-term investments 126 - 126 Purchase of short-term
investments (22) - (22) Proceeds on sale of long-term investments
11 - 11 Other 1 - 1
-------------------------------------------------------------------------
Cash provided by investing activities of continuing operations 106
1 107
-------------------------------------------------------------------------
Financing activities Repayment of long-term debt (6) - (6) Decrease
in deferred revenue and other long-term obligations 1 - 1 Payment
of cash dividends (3) - (3) Issuance of shares 4 - 4
-------------------------------------------------------------------------
Cash used in financing activities of continuing operations (4) -
(4)
-------------------------------------------------------------------------
Cash used in financing activities of discontinued operations (2) -
(2)
-------------------------------------------------------------------------
Effect of foreign exchange rate changes on cash and cash
equivalents (12) (12) (24)
-------------------------------------------------------------------------
Increase in cash and cash equivalents during the period 87 1 88
Cash and cash equivalents, beginning of period 253 (6) 247 Cash and
cash equivalents, end of period $ 340 $ (5) $ 335
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended January 31 2008 2007
-------------------------------------------------------------------------
Net income (loss) from continuing operations in accordance with US
GAAP $ 17 $ - US GAAP adjustments: Deferred development costs - net
4 - Mid term incentive plan (4) (2) Mark to market on embedded
derivatives 4 - Defined benefit pension plans 1 - Reduction in
income tax expense arising from GAAP adjustments (1) -
-------------------------------------------------------------------------
Net income (loss) from continuing operations in accordance with
Canadian GAAP 21 (2)
-------------------------------------------------------------------------
Income from discontinued operations in accordance with Canadian and
US GAAP - net of tax - 16
-------------------------------------------------------------------------
Net income in accordance with Canadian GAAP $ 21 $ 14
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted earnings per share in accordance with Canadian
GAAP - from continuing operations $ 0.17 $ (0.02) - from
discontinued operations - 0.12
-------------------------------------------------------------------------
$ 0.17 $ 0.10
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Recent Canadian Accounting Pronouncements a) Capital disclosures -
The CICA issued Section 1535, "Capital Disclosures", which requires
the disclosure of both the qualitative and quantitative information
that enables users of financial statements to evaluate the entity's
objectives, policies, and processes for managing capital. b)
Inventories - The CICA issued Section 3031, "Inventories", which
replaces existing Section 3030 and harmonizes the Canadian
standards related to inventories with International Financial
Reporting Standards. The new Section includes changes to the
measurement of inventories, including guidance on costing,
impairment testing, and disclosure requirements. c) Financial
instruments - The CICA issued section 3862, "Financial Instruments
- Disclosure" and Section 3863, "Financial Instruments -
Presentation" to replace Section 3861, "Financial Instruments -
Disclosure and Presentation". The Company has adopted Sections
1535, 3862, and 3863 effective for its fiscal year end beginning
November 1, 2007 and these sections affect disclosures only. The
Company is required to adopt Section 3031 effective November 1,
2008. The Company is currently evaluating the effects that the
adoption of Section 3031 will have on its consolidated results of
operations and financial condition and is not yet in a position to
determine such effects. 20. 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 and
in accordance with US GAAP. Certain figures for the previous year
have been reclassified to conform to the current year's financial
statement presentation. DATASOURCE: MDS Inc. CONTACT: PRNewswire -
- 03/06/2008
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