Mds Inc - Report of Foreign Issuer (6-K)
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
6-K
Report
of Foreign Private Issuer
Pursuant
to Rule 13a-16 or 15d-16 of
the
Securities Exchange Act of 1934
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For
the month of,
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February
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2008
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Commission
File Number
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001-15016
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MDS
Inc.
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(Translation
of registrant’s name into English)
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Suite
300, West Tower, 2700
Matheson Blvd., East, Mississauga, Ontario Canada L4W
4V9
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(Address
of principal executive offices)
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Indicate
by check
mark whether the registrant files or will file annual reports under cover
of
Form 20-F or Form 40F:
Indicate
by check
mark if the registrant is submitting the Form 6-K in paper as permitted by
Regulation S-T Rule 101(b)(1):
Indicate
by check
mark if the registrant is submitting the Form 6-K in paper as permitted by
Regulation S-T Rule 101(b)(7):
Indicate
by check
mark whether by furnishing the information contained in this Form, the
registrant is also thereby furnishing the information to the Commission pursuant
to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
If
“Yes”
is
marked,
indicate below the file number assigned to the registrant in connection with
Rule 12g3-2(b): 82-_______________
DOCUMENTS
INCLUDED AS PART OF THIS
REPORT
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Documents
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1
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Restated
Consolidated Financials and Management's Discussion and Analysis
for the
quarter ended January 31, 2007.
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2
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Canadian
Supplement to the Restated Management's Discussion and Analysis
for the
quarter ended January 31, 2007.
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3
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Canadian
Form 52-109F1- Certification for the period ended January 31, 2007
by the
Chief Executive Officer.
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4
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Canadian
Form 52-109F1- Certification for the period ended January 31, 2007
by the
Chief Financial Officer.
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5
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Restated
Consolidated Financials and Management's Discussion and Analysis
for the
quarter ended April 30, 2007.
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6
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Canadian
Supplement to the Restated Management's Discussion and Analysis
for the
quarter ended April 30, 2007.
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7
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Canadian
Form 52-109F1- Certification for the period ended April 30, 2007
by the
Chief Executive Officer.
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8
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Canadian
Form 52-109F1- Certification for the period ended April 30, 2007
by the
Chief Financial Officer.
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9
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Restated
Consolidated Financials and Management's Discussion and Analysis
for the
quarter ended July 31, 2007.
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10
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Canadian
Supplement to the Restated Management's Discussion and Analysis
for the
quarter ended July 31, 2007.
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11
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Canadian
Form 52-109F1- Certification for the period ended July 31, 2007
by the
Chief Executive Officer.
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12
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Canadian
Form 52-109F1- Certification for the period ended July 31, 2007
by the
Chief Financial Officer.
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13
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Restated
Consolidated Financials and Management's Discussion and Analysis
for the
quarter ended October 31, 2007.
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14
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Canadian
Supplement to the Restated Management's Discussion and Analysis
for the
quarter ended October 31, 2007.
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Document
1
March
7,
2007
Restated
Management’s Discussion and
Analysis
The
following management’s discussion and analysis of the results of operations for
MDS Inc. (MDS or the Company) for the quarter ended January 31, 2007 and
its
financial position as at January 31, 2007 has been restated. This
restated management’s discussion and analysis (Restated MD&A) should be read
in conjunction with the restated consolidated financial statements and
notes
that follow. For the Company’s 2007 year ended October 31, 2007, MDS
has chosen to adopt United States generally accepted accounting principles
(US
GAAP) for financial reporting. As a result of this change, the
Company is required to restate to US GAAP its previously filed financial
statements for the four quarters of 2007. Previously, our filings
prepared in accordance with Canadian generally accepted accounting principles
(Canadian GAAP) disclosed a reconciliation of earnings to US GAAP due to
our
status as a foreign private issuer in the US. Going forward, with US
GAAP as our primary basis of accounting, we will reconcile our US GAAP
earnings
to Canadian GAAP. This reconciliation will be done as required by
applicable Canadian regulations on an annual and quarterly basis for a
minimum
of the next two fiscal years. The interim financial statements for
fiscal 2007 as initially reconciled to US GAAP, have also been restated
to
correct a US GAAP error identified during the preparation of our 2007 annual
financial statements related to the accounting for stock compensation
expense. This error related to the utilization of an incorrect
methodology under US GAAP in the calculation of stock compensation expense
with
respect to an equity-based incentive compensation plan. As a result of
this
error, we previously reported lower net income under US GAAP in each of
the
interim periods of 2007. Our accounting for stock-based compensation
was correct under Canadian GAAP and except for the US GAAP reconciliation
note,
there is no restatement to our previously filed Canadian GAAP financial
statements. This Restated MD&A has been revised to reflect the
restatement. The information contained in this Restated MD&A is
as at March 7, 2007 (as revised) unless otherwise
indicated. Accordingly, this Restated MD&A has not been updated
to reflect new facts, events or circumstances since March 7, 2007.
For
additional information and details, readers are referred to the 2007 annual
financial statements and management’s discussion and analysis for 2007 and the
Company’s 2007 Annual Information Form (AIF), all of which are published
separately and are available at
www.mdsinc.com
and
at
www.sedar.com
.
In addition, the Company’s 40-F filing is available
at
www.sec.gov
.
Our
Restated MD&A is intended to enable readers to gain an understanding of
MDS’s current results and financial position as at and for the period ended
January 31, 2007. To do so, we provide information and analysis comparing
the
results of operations and financial position for the current interim period
to
those of the same period in the preceding fiscal year. We also provide
analysis
and commentary that we believe is required to assess the Company’s future
prospects. Accordingly, certain sections of this report contain
forward-looking statements that are based on current plans and
expectations. These forward-looking statements are affected by risks
and uncertainties that are discussed in this document, as well as in the
AIF,
and that could have a material impact on future prospects. Readers
are cautioned that actual events and results will vary.
MDS
INTERIM REPORT JANUARY 31, 2007 (UNAUDITED) - Q1 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
Caution
regarding forward-looking
statements
From
time
to time, we make written or oral forward-looking statements within the
meaning
of certain securities laws, including the “safe harbour” provisions of the
Securities Act (Ontario) and the United States Private Securities Litigation
Reform Act of 1995. This document contains such statements, and we
may make such statements in other filings with Canadian regulators or the
United
States Securities and Exchange Commission (SEC), in reports to shareholders
or
in other communications, including public presentations. These
forward-looking statements include, among others, statements with respect
to our
objectives for 2008, our medium-term goals, and strategies to achieve those
objectives and goals, as well as statements with respect to our beliefs,
plans,
objectives, expectations, anticipations, estimates and
intentions. The words “may”, “could”, “should”, “would”, “suspect”,
“outlook”, “believe”, “plan”, “anticipate”, “estimate”, “expect”, “intend”,
“forecast”, “objective”, “optimistic”, and words and expressions of similar
import are intended to identify forward-looking statements.
By
their very nature, forward-looking statements involve inherent risks and
uncertainties, both general and specific, which give rise to the possibility
that predictions, forecasts, projections and other forward-looking statements
will not be achieved. We caution readers not to place undue reliance
on these statements as a number of important factors could cause our actual
results to differ materially from the beliefs, plans, objectives, expectations,
anticipations, estimates and intentions expressed in such forward-looking
statements. These factors include, but are not limited to: management
of operational risks; the strength of the Canadian and United States’ economies
and the economies of other countries in which we conduct business; our
ability
to secure a reliable supply of raw materials, particularly cobalt and critical
medical isotopes; the impact of the movement of the US dollar relative
to other
currencies, particularly the Canadian dollar and the euro; changes in interest
rate policies of the Bank of Canada and the Board of Governors of the Federal
Reserve System in the United States; the effects of competition in the
markets
in which we operate; the timing and technological advancement of new products
introduced by us or by our competitors; the impact of changes in laws,
trade
policies and regulations, and enforcement thereof; judicial judgments and
legal
proceedings; our ability to successfully realign our organization, resources
and
processes; our ability to complete strategic acquisitions and joint ventures
and
to integrate our acquisitions and joint ventures successfully; new accounting
policies and guidelines that impact the methods we use to report our financial
condition; uncertainties associated with critical accounting assumptions
and
estimates; the possible impact on our businesses from natural disasters,
public
health emergencies, international conflicts and other developments including
those relating to terrorism; and our success in anticipating and managing
the
foregoing risks.
We
caution that the foregoing list of important factors that may affect future
results is not exhaustive. When relying on our forward-looking
statements to make decisions with respect to the Company, investors and
others
should carefully consider the foregoing factors and other uncertainties
and
potential events. We do not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time
by us or
on our behalf.
Use
of non-GAAP
measures
In
addition to measures based on generally accepted accounting principles
(GAAP) in
this Restated MD&A, we use terms such as adjusted operating income; adjusted
earnings before interest, taxes, depreciation and amortization (EBITDA);
adjusted EBITDA margin; adjusted earnings per share (EPS); operating working
capital; net revenue; and backlog. These terms are not defined by
GAAP and our use of such terms or measurement of such items may vary from
that
of other companies. In addition, measurement of growth is not defined
by GAAP and our use of these terms or measurement of these items may vary
from
that of other companies. Where relevant, and particularly
MDS
INTERIM REPORT JANUARY 31, 2007 (UNAUDITED) - Q1 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
for
earnings-based measures, we provide tables in this document that reconcile
the
non-GAAP measures used to amounts reported on the face of the consolidated
financial statements. Our executive management team assesses the performance
of
our businesses based on a review of results comprising GAAP measures and
these
non-GAAP measures. We also report on our performance to the Company’s Board of
Directors based on these GAAP and non-GAAP measures. In addition,
adjusted EBITDA and operating working capital are the primary metrics for
our
annual incentive compensation plan for senior management. We provide
this non-GAAP detail so that readers have a better understanding of the
significant events and transactions that have had an impact on our results,
and
can view our results through the eyes of management.
Substantially
all of the products of the Sciex division of MDS Analytical Technologies
are
sold through two joint ventures. Under the terms of these joint ventures,
we are
entitled to a 50% share of the net earnings of the worldwide business that
we
conduct with our partners in these joint ventures. These earnings include
a
share of the profits generated by our partners that are paid to the joint
ventures as profit sharing. Under US GAAP, we report our direct
revenues from sales to the joint ventures and we report our share of the
profits
of the joint ventures as equity earnings. We do not report our share of
all
end-user revenues, despite the fact that these revenues contribute substantially
to our profitability. In order to provide readers with a better understanding
of
the drivers of profitability for the Sciex products of MDS Analytical
Technologies, we report growth in end-user revenues as reported by our
joint
venture partners. This figure provides management and readers with
additional information on the performance of our global business, including
trends in customer demand and our performance relative to the overall
market.
MDS
Pharma Services measures and tracks contract backlog. Contract backlog
is a
non-GAAP measure that we define to include the amount of contract value
associated with confirmed contracts that has not yet been recognized as
net
revenue. A confirmed contract is one for which the Company has received
customer
commitment in a manner that is customary for the type of contract involved.
For
large, long-term contracts, customer commitment is generally evidenced
by the
receipt of a signed contract or confirmation awarding the work to MDS.
For
smaller and short-term contracts, customer commitment may be documented
in other
ways, including email messages and oral confirmations. Only contracts for
which
such commitments have been received are included in backlog and the amount
of
backlog for these contracts is measured based on the net revenue that is
expected to be earned by MDS under the contract terms. A contract is removed
from backlog if the Company receives notice from the customer that the
contract
has been cancelled, indefinitely delayed, or reassigned to another service
provider.
Tabular
amounts are in millions of United States (US) dollars, except per share
amounts
and where otherwise noted.
Introduction
MDS
is a global life sciences company
that provides market-leading products and services that our customers use
for
the development of drugs and the diagnosis and treatment of
disease. Through our three business segments, we are a leading global
provider of pharmaceutical contract research services (MDS Pharma Services),
medical isotopes for molecular imaging and radiotherapeutics (MDS Nordion),
and
analytical instruments (MDS Analytical Technologies). Each of these business
segments sells a variety of products and services to customers in markets
around
the world
.
MDS
INTERIM REPORT JANUARY 31, 2007 (UNAUDITED) - Q1 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
Discontinued
operations
All
financial references in this document exclude those businesses that we
consider
to be discontinued. Our discontinued businesses include our
diagnostics businesses, certain early-stage pharmaceutical research services
operations, and our interest in Source Medical Corporation
(Source). All financial references for the prior year have been
restated to reflect this treatment. From the amounts reported in our
first quarter 2006 interim report, revenues for 2006 have been reduced
by $71
million and income from continuing operations has been reduced by $15 million
to
reflect what is now deemed to be discontinued.
Change
in Presentation Related to
Reimbursement of Out-of-Pocket Costs
In
addition to changes that relate to the adoption of US GAAP, the Company
changed
its presentation of certain revenues that arise from the reimbursement
of the
Company by our customers (reimbursement revenues) for certain reimbursable
out-of-pocket expenses that we incur on behalf of these customers during
the
conduct of clinical trials (reimbursed expenses). The Company has the right
to
bill customers for reimbursement of the amounts, but is generally not entitled
to a mark-up or other form of profit margin related to these activities.
In the
financial reports for prior years, the reimbursement revenues were offset
against the related out-of-pocket costs, and because these amounts offset,
neither a revenue nor an expense item associated with this activity was
reported.
In
the
current presentation, the Company is reporting reimbursement revenues and
reimbursed expenses on a gross basis as separate lines on the consolidated
statements of operations. As a result of this change, although both total
revenues and total expenses have increased, there is no impact on operating
income reported. This change in presentation reflects a reconsideration
of the
Company’s reporting of revenues under both Canadian GAAP and US GAAP. We now
believe that the presentation used in prior Canadian GAAP financial statements
is not permitted under Canadian GAAP. While this change does not reflect
a
Canadian GAAP to US GAAP difference, it does reflect a change in the
presentation compared to the previously filed Canadian GAAP financial statements
and therefore, comparative amounts reflected in these restated interim
consolidated financial statements have been revised to reflect this change
on
both a Canadian GAAP and a US GAAP basis.
Throughout
this report, when we refer to total revenues we mean revenues including
reimbursement revenues. We use the term
net revenues
to mean revenues
excluding such amounts. All revenue growth figures and adjusted
EBITDA margin figures are based on net revenues. We use net revenues to
measure
the growth and profitability of MDS and MDS Pharma Services because the
pass-through invoicing of reimbursable out-of-pocket expenses varies from
period-to-period, is not a reliable measure of the underlying performance
of the
business, and does not have an impact on net income or cash flows in any
significant way. Management assesses and rewards the performance of MDS
Pharma
Services and the segment’s senior management team using metrics that are based
on net revenues
Change
in reporting currency to US
dollars
MDS
has
historically measured and presented its consolidated financial statements
in
Canadian dollars. Effective November 1, 2006, we adopted the US dollar
as our
reporting currency as a significant portion of revenues, expenses, assets
and
liabilities are denominated in US dollars, the global character of the
Company’s
operations has increased dramatically following the divestiture of the
diagnostics business, and the majority of the companies with which we compete
report their financial results in US dollars; consequently, we believe
that
investors will gain a better understanding of our operating results when
they
are presented in US dollars.
MDS
INTERIM REPORT JANUARY 31, 2007 (UNAUDITED) - Q1 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
The
functional currency of MDS Inc., the parent company and reporting entity,
remains the Canadian dollar. When there is a change in reporting currency,
US
GAAP requires that financial statements for previous years be presented
using a
translation method that retains the company’s functional currency (in this case,
the Canadian dollar) as the currency of measurement. For comparative
purposes, we have prepared US-dollar historical financial statements by
translating the previously reported Canadian dollar amounts using the following
methods and exchange rates:
Revenues,
expenses, and cash flows – translated into US dollars using the weighted-average
exchange rate for the applicable periods.
Assets
and liabilities – translated into US dollars using the exchange rate in effect
at the end of the applicable period.
Share
capital – share capital transactions were translated into US dollars using the
exchange rate in effect when the transaction occurred.
Retained
earnings – net income transactions were translated into US dollars as described
above. Other transactions affecting retained earnings, principally as a
result
of dividend payments and share repurchases, were translated into US dollars
using the exchange rate in effect when the transaction occurred
.
Restatement
to US
GAAP
For
the
Company’s 2007 year end as at October 31, 2007, it has chosen to adopt US GAAP
for financial reporting.
MDS
INTERIM REPORT JANUARY 31, 2007 (UNAUDITED) - Q1 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
The
following table highlights the differences between Canadian and US GAAP,
and the
impact of the US GAAP error correction related to the valuation of a stock-based
compensation program on the results for the quarter. Our accounting
for stock-based compensation was correct under Canadian GAAP and there
has been
no change to the Canadian GAAP results shown in the following
table.
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2007
First
Quarter
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2006
First
Quarter
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Previously
Reported
(CAD
GAAP)
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GAAP
Adjustments
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Correction
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Restated
Correction (US
GAAP)
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Previously
Reported
(CAD
GAAP)
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GAAP
Adjustments
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Restated
Correction (US
GAAP)
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Total
revenues
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$273
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(9)
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-
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$264
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$273
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$(12)
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$261
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Reimbursement
revenues
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(23)
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-
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-
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(23)
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(31)
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-
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(31)
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Net
revenues
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$250
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(9)
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-
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$241
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$242
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$(12)
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$230
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Income
(loss) from continuing
operations
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(2)
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1
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1
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-
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14
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(1)
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13
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Income
taxes
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3
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(1)
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1
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3
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8
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(4)
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4
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Net
interest expense
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2
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-
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-
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2
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1
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-
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1
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Loss
(gain) on derivatives
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1
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(1)
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-
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-
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1
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(1)
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-
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Depreciation
and amortization
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17
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(3)
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-
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14
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13
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(2)
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11
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EBITDA
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21
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(4)
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2
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19
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37
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(8)
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29
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Restructuring
charges, net
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13
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-
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-
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13
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1
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-
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1
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Gain
on sale of a business/investment
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(2)
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-
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-
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(2)
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-
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-
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-
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Adjusted
EBITDA
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$32
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$(4)
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$2
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$30
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$38
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$(8)
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$30
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Adjusted
EBITDA
margin
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13%
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12%
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16%
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13%
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Note
15
to our consolidated financial statements for the first quarter of 2007
contains
a reconciliation of results reported in US GAAP to the net income we would
report in Canadian GAAP.
The
differences between US GAAP and Canadian GAAP that have the most significant
impact on the Company’s financial condition and results of operations for the
interim period ended January 31, 2007, include accounting for: joint ventures,
investment tax credits, research and development, and stock-based
compensation.
The
primary difference between Canadian GAAP and US GAAP affecting the consolidated
revenues and operating margin is that under Canadian GAAP proportionate
consolidation is used for the results of our joint ventures within MDS
Sciex,
whereas under US GAAP we apply the method of equity
accounting. For the first quarter of 2007, we reported $10
million less revenue and $16 million less operating income under US GAAP
than we
would have reported under Canadian GAAP ($11 million less and $12 million
less,
respectively for the first quarter of 2006). Under US GAAP, the
income from the joint ventures is included in equity earnings, which were
$14
million in 2007 ($14 million in first quarter of 2006). Under
Canadian GAAP this amount was included in operating income as part of the
proportionate consolidation. There is no significant impact
to the calculation of adjusted EBITDA from this accounting
difference.
MDS
INTERIM REPORT JANUARY 31, 2007 (UNAUDITED) - Q1 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
Other
differences in adjusted EBITDA are listed below.
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·
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Non-refundable
investment tax
credits (ITCs)
are treated as a reduction of expenditure under
Canadian GAAP and a reduction of income tax under US GAAP. In
the first quarter of 2007, there were $1 million ($3 million
in the first
quarter of 2006) of ITCs which when calculated based on US
GAAP reduced adjusted EBITDA, as compared to Canadian
GAAP.
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·
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Research
and Development
(R&D)
expenditures may be capitalized under Canadian GAAP if
certain criteria are met, however these expenditures are expensed
in the
period they are incurred under US GAAP. In the first quarter of 2007,
the $2 million ($2million in first quarter of 2006) of R&D
capitalized under Canadian GAAP resulted in a reduction of adjusted
EBITDA
when calculated based on US GAAP, compared to Canadian
GAAP.
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·
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Due
to a difference in
valuation methods
for
stock-based compensation
under US GAAP and Canadian GAAP, adjusted
EBITDA was higher by $2 million for first quarter of 2007 (nil
in
2006) when calculated based on US GAAP, compared to Canadian
GAAP.
|
There
are
no differences between US GAAP and Canadian GAAP in the adjustment used
in
calculating adjusted EBITDA for the first quarters of 2007 or 2006.
The
results discussed in this Restated MD&A are based on US GAAP. To
supplement the US GAAP Restated MD&A included in this document, please refer
to our Canadian Supplement to this Restated MD&A which is being filed at the
same time as our Restated MD&A and our previously filed Interim Report for
January 31, 2007 for our corresponding MD&A based on Canadian
GAAP.
Strategic
initiatives
On
September 1, 2005, we announced our strategic plan to pursue growth in
the
global life sciences market and divest of assets that do not contribute
to the
Company’s areas of focus. During fiscal 2006, we completed a number
of transactions in pursuit of this renewed focus, culminating in the
announcement on October 5, 2006 of the sale of our remaining Canadian
diagnostics businesses to Borealis Infrastructure Management Inc. for gross
proceeds of CDN$1.3 billion, which includes amounts ultimately paid to
holders
of minority interests in these businesses.
On
February 26, 2007, we announced the closing of this transaction. Under
the terms
of the final agreements, MDS received net cash proceeds (after expenses
and
taxes) of CDN$1.0 billion and a CDN$75 million promissory note due in 2009.
After paying costs of the transaction, taxes, and distributions to our
minority
partners in these businesses, we expect to report a gain of approximately
US$0.8
billion in our second quarter.
Also
on
February 26, 2007, and coinciding with the completion of the sale of the
diagnostics businesses, we announced the launch of a substantial issuer
bid.
Under the bid, we are proposing to repurchase up to CDN$500 million of
our
Common shares (US$425 million). We expect this bid to close in early
April.
In
our
September 2005 announcement, we reconfirmed our commitment to focus on
building
our life sciences businesses. On January 29, 2007, we announced our intention
to
acquire Molecular Devices Corporation (MDC), a leading provider of
high-performance measurement tools for high-content screening, cellular
analysis, and biochemical testing, in a $615 million cash transaction.
Under
this
MDS
INTERIM REPORT JANUARY 31, 2007 (UNAUDITED) - Q1 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
agreement,
MDS proposes to acquire all of the Common shares of MDC for $35.50 per
share.
The Boards of Directors of both companies unanimously approved the merger
agreement and we commenced a cash tender offer for all of the outstanding
shares
of MDC on February 13, 2007.
This
strategic acquisition marks a significant expansion for MDS. By acquiring
Sunnyvale, California-based MDC, with its strong brand recognition and
leading
edge products and capabilities, MDS will strengthen its leadership position
as
one of the top global providers of life sciences solutions. We will now
offer
systems that provide high-content screening, and cellular and biochemical
testing for leading drug discovery and life sciences laboratories in
pharmaceutical, biotechnology, academic, and government
institutions.
Upon
completion of this acquisition, we plan to establish a new business unit,
led by
the current President of MDS Sciex, Andy Boorn that will combine the MDC
and MDS
Sciex businesses. This combined organization will have more than 1,100
employees, including over 250 scientists and engineers.
We
expect
to close this transaction in the second quarter and we will begin integration
activities as soon as the transaction closes.
MDS
INTERIM REPORT JANUARY 31, 2007 (UNAUDITED) - Q1 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
MDS
Inc.
Consolidated
operating highlights and
reconciliation of consolidated adjusted EBITDA
|
|
First
Quarter
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
Total
revenues
|
$
|
264
|
$
|
261
|
|
Reimbursement
revenues
|
|
(23)
|
|
(31)
|
|
Net
revenues
|
$
|
241
|
$
|
230
|
|
|
|
|
|
|
|
Income
from continuing
operations
|
|
-
|
|
13
|
|
Income
taxes
|
|
3
|
|
4
|
|
Net
interest expense
|
|
2
|
|
1
|
|
Depreciation
and amortization
|
|
14
|
|
11
|
|
EBITDA
|
|
19
|
|
29
|
|
Restructuring
charges, net
|
|
13
|
|
1
|
|
Gain
on sale of a business/investment
|
|
(2)
|
|
-
|
|
Adjusted
EBITDA
|
$
|
30
|
$
|
30
|
|
Adjusted
EBITDA
margin
|
|
12%
|
|
13%
|
Net
revenue for the first quarter of 2007 was up 5% to $241 million compared
to $230
million last year. Strong growth in MDS Pharma Services, driven by growth
in its
late-stage businesses, offset a decline in revenues from MDS Nordion in
the
quarter compared to the first quarter of 2006. Excluding the
impact of unusual market conditions in the first quarter of 2006, MDS Nordion
revenues grew 6%.
Adjusted
EBITDA of $30 million was level with last year. Adjusted EBITDA was impacted
by
the non-recurring isotopes revenues earned last year and continued costs
in MDS
Pharma Services related to the self-review of bioequivalence studies conducted
at our St. Laurent facility from 2000 through 2004 (the Retrospective Review).
While we suspended this review at the end of the quarter in response to
actions
taken by the US Food and Drug Administration (FDA), costs incurred in the
first
quarter of 2007 totalled $4 million compared to $5 million in the same
quarter
last year.
Adjustments
reported for the quarter include restructuring costs totaling $13 million,
of
which $8 million relates to ongoing profit improvement initiatives in MDS
Pharma
Services. Other restructuring costs amounting to $5 million were incurred
in the
quarter as we neared completion of the transition of our information technology
infrastructure and support to a new provider. The other adjusting
item was a $2 million gain realized on the sale of our debt interest in
Hemosol
Corp.
Selling,
general, and administration (SG&A) expenses for the quarter totalled $54
million and 22% of revenues compared to $47 million and 20% last
year.
MDS
INTERIM REPORT JANUARY 31, 2007 (UNAUDITED) - Q1 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
We
spent
$12 million on R&D activities in the first quarter of both 2007 and
2006.
Consolidated
depreciation and amortization expense increased $3 million compared to
last
year. The increase is principally related to depreciation on our
expanded pre-clinical facility in Lyon, France, our new US central laboratory,
and our new manufacturing facility in Singapore. Capital expenditures
for the quarter were $9 million. In the first quarter of fiscal 2006, we
reported capital expenditures of $22 million, reflecting spending on new
facilities in MDS Pharma Services and expenditures related to the MAPLE
facility.
Results
from discontinued operations for this year include only the results of
our
remaining Canadian diagnostics businesses, as all other discontinued businesses
were sold or closed during 2006. The first quarter results from discontinued
operations for 2006 include these businesses, along with the results of
our
other discontinued business and include the after-tax gain resulting from
the
sale of our interest in Source.
Reported
earnings per share from continuing operations were nil for the quarter,
compared
to $0.09 in 2006. Adjusted earnings per share from continuing
operations for the quarter were $0.07 compared to $0.13 earned in the same
period last year. Earnings per share from discontinued operations
were $0.11 compared to $0.23. Adjusted earnings per share for the two
periods were as follows:
|
|
First
Quarter
|
|
|
|
2007
|
|
2006
|
|
Basic
and diluted EPS from continuing operations – as reported
|
$
|
-
|
$
|
0.09
|
|
Adjusted
for:
|
|
|
|
|
|
Restructuring
charges, net
|
|
0.08
|
|
0.01
|
|
Gain
on
sale of business and long-term investments
|
|
(0.01)
|
|
0.01
|
|
Tax
rate changes
|
|
-
|
|
0.02
|
|
Adjusted
EPS
|
$
|
0.07
|
$
|
0.13
|
MDS
INTERIM REPORT JANUARY 31, 2007 (UNAUDITED) - Q1 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
MDS
Pharma
Services
Financial
Highlights
|
|
First
Quarter
|
|
|
|
|
%
of net
|
|
|
%
of net
|
|
|
|
2007
|
revenues
|
|
2006
|
revenues
|
|
Early-stage
|
$
|
66
|
55%
|
$
|
67
|
60%
|
|
Late-stage
|
|
55
|
45%
|
|
44
|
40%
|
|
Net
revenues
|
|
121
|
100%
|
|
111
|
100%
|
|
Reimbursement
revenues
|
$
|
23
|
-
|
$
|
31
|
-
|
|
Total
revenues
|
|
144
|
-
|
|
142
|
-
|
|
Cost
of revenues
|
|
(89)
|
(74%)
|
|
(81)
|
(73%)
|
|
Reimbursed
expenses
|
|
(23)
|
-
|
|
(31)
|
-
|
|
Selling,
general, and administration
|
|
(33)
|
(26%)
|
|
(29)
|
(27%)
|
|
Depreciation
and amortization
|
|
(8)
|
(7%)
|
|
(7)
|
(6%)
|
|
Restructuring
charges - net
|
|
(8)
|
(7%)
|
|
1
|
1%
|
|
Other
income (expense)
|
|
2
|
2%
|
|
-
|
-
|
|
Operating
loss
|
|
(15)
|
(12%)
|
|
(5)
|
(5%)
|
|
Adjustments:
|
|
|
|
|
|
|
|
Restructuring
charges
|
|
8
|
7%
|
|
(1)
|
(1%)
|
|
|
|
(7)
|
(6%)
|
|
(6)
|
(5%)
|
|
Depreciation
and amortization
|
|
8
|
7%
|
|
7
|
6%
|
|
Adjusted
EBITDA
|
$
|
1
|
1%
|
$
|
1
|
1%
|
|
Margins:
|
|
|
|
|
|
|
|
Gross
margin
|
|
26%
|
-
|
|
27%
|
-
|
|
Adjusted
EBITDA
|
|
1%
|
-
|
|
1%
|
-
|
|
Capital
expenditures
|
$
|
2
|
|
$
|
7
|
|
Net
revenues for MDS Pharma Services grew 9% on a reported basis. Growth
was driven by continued strong results in preclinical discovery and our
late-stage businesses, which were up 6% and 25%, respectively. Both global
clinical development and global central labs services businesses contributed
to
the strong revenue growth for late-stage. Revenues from our
bioanalytical business were lower for the first quarter of 2007 than for
the
same period in 2006, which is attributable to continuing negative results
from
our Montreal-area facilities. Early-clinical revenues were also down
in the quarter and we noted a fall in demand immediately after the January
10,
2007 letter issued by the FDA.
Our
late-stage businesses continued to grow their backlog and account for most
of
the growth in our reported balance, although we have seen some renewed
growth in
backlog for our early-stage businesses this quarter. Our average
monthly pharmaceutical research backlog continues to expand and averaged
$450
million for the first quarter of 2007, an increase of approximately 22%
when
compared to the average for the first quarter of fiscal 2006. It is
also up 5% sequentially from the fourth quarter last year.
MDS
INTERIM REPORT JANUARY 31, 2007 (UNAUDITED) - Q1 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
|
Average
monthly
backlog
|
|
|
|
Fiscal
2005 – Quarter 1
|
$
|
315
|
|
Quarter
2
|
|
305
|
|
Quarter
3
|
|
315
|
|
Quarter
4
|
|
340
|
|
Fiscal
2006 – Quarter 1
|
|
370
|
|
Quarter
2
|
|
400
|
|
Quarter
3
|
|
400
|
|
Quarter
4
|
|
430
|
|
Fiscal
2007 – Quarter 1
|
|
450
|
Reported
operating income and adjusted EBITDA were impacted by decreased profits
in our
bioanalytical and early clinical research businesses.
Capital
expenditures in the pharmaceutical services segment were $2 million in
this
first quarter compared to $7 million last year. Expenditures in 2006
related to an ongoing expansion in Lyon, as well as an expansion of the
Skeletech site in Bothell that had been planned at the time of the
acquisition.
Profit
improvement
initiatives
We
remain
focused on taking action to position MDS Pharma Services for continued
growth
and improved and sustainable operating profitability as we move forward.
Over
the past several quarters, we implemented a number of steps designed to
focus on
MDS Pharma Services’ core competencies and strengthen the business:
|
§
|
Appointment
of David Spaight as President of MDS Pharma
Services
|
|
§
|
Strengthening
our senior management team with new global leaders in preclinical
discovery, early clinical research, bioanalytical, global clinical
development, and global central
labs
|
|
§
|
Expansion
of our early clinical research capacity in Lincoln (50 beds),
expansion of
capacity in our pre-clinical testing business in Lyon, and beginning
the
expansion of our Phoenix early clinical research capacity (300
beds)
|
|
§
|
Selling
or closing a number of our smaller, less profitable pre-clinical
business
lines and sites including, Munich, Geneva, Taipei, Tampa, Blainville,
Bothell and Lincoln
|
|
§
|
Stringent
management of hiring and discretionary
spending
|
|
§
|
Enhanced
management review and reporting
processes
|
|
§
|
More
selective business development activities, particularly in our
late-stage
businesses
|
|
§
|
Introduction
of LeanSigma as a primary tool to facilitate continuous
improvement.
|
During
the first quarter of 2007 we continued implementing our operating improvement
plan with the closure of our early clinical research facility in New Orleans,
the sale of the local portion of our Spanish clinical development business
located in Madrid, and completion of negotiations for the February sale
of our
phase 1 facility in Hamburg, Germany. These operations were not profitable
and
were not considered to be of strategic importance.
MDS
INTERIM REPORT JANUARY 31, 2007 (UNAUDITED) - Q1 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
A
s
a
result of these activities, we have streamlined our workforce with a personnel
reduction of 8% since the end of the second quarter of 2006, with the majority
of the reduction occurring in the last six months.
We
have
incurred charges totalling $8 million related to these activities in the
first
quarter, all of which are reported as restructuring charges.
Additional
operating improvement initiatives are currently under evaluation, and we
expect
to implement these initiatives in the coming months. We currently
expect to announce further workforce reductions and site rationalizations
as we
continue to align our global footprint and cost structure with our business
outlook, particularly in our bioanalytical business. We currently expect
to
record additional restructuring charges in the second quarter of 2007 totalling
$20 to $25 million related to these initiatives.
FDA
review of bioanalytical
operations
We
are
continuing to work to address FDA issues related to bioanalytical operations
in
our St. Laurent and Blainville, Canada facilities. Our other lines of
business and other sites where bioanalytical work is conducted are not
the
subjects of the FDA review described below. These other lines of business
and
sites are subject to routine FDA inspections and we have no indication
that the
FDA has any concerns with respect to these operations.
In
October 2006, we met with the FDA regarding the status of the Retrospective
Review and related matters. At this meeting, and in correspondence
with the FDA, MDS responded to concerns previously raised by the FDA and
highlighted upgrades and enhancements to the Retrospective Review.
In
January 2007, the FDA issued statements that outlined a path that will
enable
the Company and its clients to bring closure to issues associated with
bioanalytical studies conducted in our St. Laurent and Blainville
facilities. Sponsors of approved and pending generic drug submissions
that contain study data produced in these facilities during the period
between
January 2000 to December 2004 have been asked to take one of three actions
to
address FDA concerns about the accuracy and validity of these bioanalytical
studies: 1) repeat their bioanalytical studies; 2) re-analyze their
original study samples at a different bioanalytical facility or 3) independently
audit original study results. To date, nearly all of our generic customers
have
indicated their intention to pursue the third option and either have or
are
intending to commission third party study audits.
The
FDA
stated that it was taking this action as a precautionary measure to ensure
that
data submitted to the Agency and used in making approval decisions is of
the
highest quality. At the same time, the FDA made it clear that the
adverse event surveillance-monitoring program has not detected any signals
or
any evidence that any of the drugs involved pose a safety or lack of efficacy
risk. The FDA also made it clear that it does not have any evidence
that there are problems with the quality, purity, or potency of the affected
drug products.
During
the first quarter of fiscal 2007 we continued to expend effort and resources
in
conducting the Retrospective Review, incurring direct costs of $4 million,
of
which $3 million is included in MDS Pharma Services’ results and $1 million is
recorded in our Corporate segment. These amounts include direct labour,
consulting costs, and the cost of related customer accommodations. In the
first
quarter of 2006, we incurred review costs totaling $5 million, all of which
was
recorded by MDS Pharma Services. Based on the FDA’s new direction,
MDS
INTERIM REPORT JANUARY 31, 2007 (UNAUDITED) - Q1 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
MDS
terminated the Retrospective Review in January 2007 and re-directed efforts
to
support clients with independent audit activities. Work completed as
part of the Retrospective Review is being used, where applicable, to facilitate
independent audit reviews.
The
FDA
has identified 217 generic drug applications as being subject to the new
requirements. This total is made up of 140 approved and 77 pending applications.
As of February 28, 2007, independent study audits supporting approximately
20%
of these applications had been completed. We currently estimate that
the reviews of generic drug files will be completed within calendar
2007. We have been advised that, to date, three generic drug
applications have received FDA approval based on third party
audits.
In
addition to generic studies, the FDA has requested information regarding
submitted applications for innovative drugs that contain data from bioanalytical
studies conducted from January 2000 to December 2004 in our St. Laurent
and
Blainville facilities. It is not yet clear what work, if any, the FDA
will require with respect to this study category. The number of such
studies that may contain data from these facilities is not currently estimatable
but is expected to be substantially less than the corresponding number
of
generic bioequivalency studies.
Since
receipt of the first FDA letter, we have worked closely with our clients
to keep
them informed of our ongoing discussions with the FDA. We have worked especially
closely with clients who have had bioanalytical data produced in our St.
Laurent
and Blainville facilities questioned by the FDA by prioritizing study reviews
to
correspond with their priorities.
Bioequivalence
work for our generic customers has suffered a significant decline over
the
period in which we have been addressing the FDA issues. Our early clinical
research business has continued to experience a noticeable decline in business,
generally attributable to reluctance by certain of our generic customers
to
place work in the St. Laurent clinic while the review is underway.
Full
and
complete resolution of the FDA issues remains a key focus for MDS Pharma
Services and MDS. We remain committed to working cooperatively with
the FDA and our customers to address all of the FDA’s concerns and to assist
them while they complete the study audits mandated by the FDA in a satisfactory
manner.
The
Company is currently assessing the financial impact of addressing the FDA’s new
requirements, including the cost of customer accommodations. We are
working closely with study sponsors and currently expect to be in a position
to
record a provision for customer accommodations and related costs in our
second
quarter. We are not able to estimate the full extent or cost of the effort
required to satisfy the FDA and related client obligations, if
any. There can be no assurance at this time that the study audits
will be acceptable to the FDA or that the FDA will not require additional
work. We also are unable to judge what further impact this situation
will have on our business development activities, particularly for our
bioanalytical and early clinical operations.
MDS
INTERIM REPORT JANUARY 31, 2007 (UNAUDITED) - Q1 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
MDS
Nordion
Financial
Highlights
|
|
First
Quarter
|
|
|
|
|
%
of net
|
|
|
%
of net
|
|
|
|
2007
|
revenues
|
|
2006
|
revenues
|
|
Product
revenues
|
$
|
67
|
100%
|
$
|
69
|
99%
|
|
Service
revenues
|
|
-
|
-
|
|
1
|
1%
|
|
Net
revenues
|
|
67
|
100%
|
|
70
|
100%
|
|
Cost
of product revenues
|
|
(34)
|
(51%)
|
|
(33)
|
(47%)
|
|
Cost
of service revenues
|
|
(1)
|
(2%)
|
|
(1)
|
(1%)
|
|
Selling,
general, and administration
|
|
(11)
|
(16%)
|
|
(11)
|
(17%)
|
|
Research
and development
|
|
(1)
|
(2%)
|
|
(1)
|
(1%)
|
|
Depreciation
and amortization
|
|
(3)
|
(4%)
|
|
(3)
|
(4%)
|
|
Operating
income
|
|
17
|
25%
|
|
21
|
30%
|
|
Depreciation
and amortization
|
|
3
|
4%
|
|
3
|
4%
|
|
Adjusted
EBITDA
|
$
|
20
|
28%
|
$
|
24
|
34%
|
|
Margins:
|
|
|
|
|
|
|
|
Gross
margin
|
|
47%
|
-
|
|
52%
|
-
|
|
Adjusted
EBITDA
|
|
30%
|
-
|
|
34%
|
-
|
|
Capital
expenditures
|
$
|
1
|
|
$
|
10
|
-
|
Our
isotopes business fell 4% year-over-year on a reported basis, due to difficult
comparison to unusually strong results in the first quarter of 2006. The
2006
results were driven by very strong sales of medical isotopes during a period
when a major competitor announced a voluntary recall of its products used
primarily for cardiac imaging. Their facility was out of production
for most of the first two quarters of 2006 and we estimate that approximately
$7
million of high-margin revenues were realized in the
quarter. Excluding the impact of this on 2006, revenues were up
6%.
Revenues
from cobalt sterilization were strong this quarter and results from
radiotherapeutics were also up due in particular to strong sales of Therasphere®
and FDG (Glucotrace™), an imaging agent used in PET scans.
Adjusted
EBITDA margin for the quarter was 30%, down from last year on lower medical
isotope revenues. SG&A, R&D expenses and depreciation and amortization
were level with the prior year. There were no adjusting items for the
quarter.
Capital
expenditures in the isotopes segment were $1 million, compared to $10 million
last year. The expenditures last year reflected amounts spent on the
MAPLE project prior to the February 2006 settlement with AECL and which
were
assumed by AECL as part of the MAPLE settlement in the second quarter last
year.
During
the quarter, we announced that we have extended the clinical trial for
Therasphere to Europe and India.
MDS
INTERIM REPORT JANUARY 31, 2007 (UNAUDITED) - Q1 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
MDS
Sciex
Financial
Highlights
|
|
First
Quarter
|
|
|
|
|
%
of net
|
|
|
%
of net
|
|
|
|
2007
|
revenues
|
|
2006
|
revenues
|
|
Product
revenues
|
$
|
38
|
72%
|
$
|
36
|
73%
|
|
Service
revenues
|
|
15
|
28%
|
|
13
|
27%
|
|
Net
revenues
|
|
53
|
100%
|
|
49
|
100%
|
|
Cost
of product revenues
|
|
(37)
|
(70%)
|
|
(38)
|
(78%)
|
|
Cost
of service revenues
|
|
-
|
-
|
|
-
|
-
|
|
Selling,
general, and administration
|
|
(6)
|
(11%)
|
|
(2)
|
(4%)
|
|
Research
and development
|
|
(11)
|
(21%)
|
|
(11)
|
(22%)
|
|
Depreciation
and amortization
|
|
(3)
|
(5%)
|
|
(1)
|
(2%)
|
|
Other
income (expense) net
|
|
(1)
|
(2%)
|
|
1
|
2%
|
|
Operating
loss
|
|
(5)
|
(9%)
|
|
(2)
|
(4%)
|
|
|
|
|
|
|
|
|
|
Adjustments:
|
|
|
|
|
|
|
|
Equity
earnings
|
|
14
|
26%
|
|
13
|
27%
|
|
|
|
9
|
17%
|
|
11
|
23%
|
|
Depreciation
and amortization
|
|
3
|
6%
|
|
1
|
2%
|
|
Adjusted
EBITDA
|
$
|
12
|
23%
|
$
|
12
|
25%
|
|
Margins:
|
|
|
|
|
|
|
|
Gross
margin
|
|
30%
|
-
|
|
22%
|
-
|
|
Adjusted
EBITDA
|
|
23%
|
-
|
|
25%
|
-
|
|
Capital
expenditures
|
$
|
3
|
|
$
|
1
|
|
MDS
Sciex
carries out the majority of its business through joint
ventures. Currently, MDS generates the majority of its income
associated with these joint ventures from the net income of the joint ventures,
and not from its sales to the joint ventures. Under US GAAP, we
equity account for the joint ventures and therefore the majority of the
income
related to the Sciex division is reflected in equity earnings, which represent
our share of the net income of the joint ventures. We include equity earnings
in
our calculation of adjusted EBITDA, however, under US GAAP, these earnings
are
not included in operating income.
Our
instruments business grew 8% as reported and end-user revenues in the markets
served by our joint ventures grew 10% in the quarter. Growth remains
strong in Europe and in the small molecule and applied markets. Our QStar™,
4000Qtrap™, and API 4000™ have maintained the sales momentum from 2006. The
service business has developed and is showing solid growth so far this
year. MDS
Sciex shares in the profitability of the services business, although we
do not
report services revenues due to the terms of our partnership agreements.
Inorganic markets were also strong in the first quarter of 2007, led by
sales of
our Elan DRC products.
Adjusted
EBITDA for the segment was $12 million and was level compared to the same
period
last year. Capital expenditures in the instruments segment were $3 million
this
year compared to $1 million for 2006.
MDS
INTERIM REPORT JANUARY 31, 2007 (UNAUDITED) - Q1 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
Corporate
and
Other
Financial
Highlights
|
|
First
Quarter
|
|
|
|
2007
|
|
2006
|
|
Selling,
general, and administration
|
$
|
(4)
|
$
|
(5)
|
|
Restructuring
charges
|
|
(5)
|
|
(2)
|
|
Other
income (expense)
|
|
3
|
|
(3)
|
|
Operating
loss
|
|
(6)
|
|
(10)
|
|
Adjustments:
|
|
|
|
|
|
Equity
earnings
|
|
-
|
|
1
|
|
Gain
on sale of investments
|
|
(2)
|
|
-
|
|
Restructuring
|
|
5
|
|
2
|
|
Adjusted
EBITDA
|
$
|
(3)
|
$
|
(7)
|
Corporate
SG&A expenses were $1 million lower this year compared to 2006 due to lower
stock based compensation expense, the completion of our initial Sarbanes/Oxley
certification initiative and efforts to contain head office spending continued.
Restructuring charges in the quarter relate to the transition of IT support
and
infrastructure to a new provider. These efforts were substantially completed
in
February 2007.
On
November 3, 2006, we sold a secured debt interest in Hemosol Corp., along
with
an interest in related debtor-in-possession financing for combined proceeds
of
$14 million. We recorded a gain of $2 million as a result of this transaction,
and we have treated this as an adjusting item in the quarter.
Net
interest expense was $2 million compared to $1 million last year. In 2006,
we
capitalized $2 million of interest expense related to the MAPLE project.
Higher
cash and short-term investment balances resulted in higher interest income
in
the first quarter of 2007 compared to the same period in 2006.
Income
taxes
Our
effective tax rate for the quarter was 100%, as we incurred losses
this quarter in jurisdictions where we have full valuation allowances recorded
against our deferred tax assets. As a result no tax benefit could be
recorded for these losses in the current quarter. The favourable
impact of tax credits relating to eligible research and development carried
out
in Canada reduced the taxes we reported in the quarter by $1
million.
MDS
INTERIM REPORT JANUARY 31, 2007 (UNAUDITED) - Q1 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
Discontinued
operations
The
results of our discontinued businesses for the first quarter of 2007 and
2006
were as follows:
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
$
|
75
|
$
|
100
|
|
Cost
of revenues
|
|
(46)
|
|
(68)
|
|
Selling,
general and administration
|
|
(8)
|
|
(15)
|
|
Depreciation
and amortization
|
|
-
|
|
(3)
|
|
Restructuring
charges
|
|
-
|
|
(1)
|
|
Operating
income
|
|
21
|
|
13
|
|
Gain
on sale of discontinued operations
|
|
-
|
|
24
|
|
Income
taxes
|
|
(3)
|
|
(3)
|
|
Minority
interest
|
|
(3)
|
|
(2)
|
|
Equity
earnings
|
|
1
|
|
1
|
|
Income
from discontinued
operations
|
|
16
|
|
33
|
|
Basic
EPS from discontinued
operations
|
$
|
0.11
|
$
|
0.23
|
Income
from discontinued operations for fiscal 2007 reflects only the results
of our
remaining diagnostics businesses. Results for the first quarter of 2006
included
Source operations up to the sale of that business in late November 2005
and the
results from our Calgary laboratory business, which was sold in April of
2006.
Income from discontinued operations for 2006 also reflects the gain resulting
from the sale of Source.
Liquidity
and capital
resources
|
|
|
January
31
2007
|
|
October
31 2006
|
Change
|
|
Cash,
cash equivalents and short-term investments
|
$
|
364
|
$
|
382
|
(5%)
|
|
Operating
working capital
1
|
$
|
116
|
$
|
97
|
20%
|
|
Current
ratio (excludes net assets held for sale)
|
|
2.1
|
|
2.4
|
|
+1
Our
measure of
operating working capital equals accounts receivable plus unbilled revenue
and
inventory less accounts payable, accrued liabilities, and current deferred
revenue.
During
the first quarter, cash was utilized to pay normal year-end accruals and,
as a
result, cash balances are down and operating working capital has increased.
The
decrease in the current ratio is attributable to the classification of
a portion
of our long-term debt into current liabilities this period, reflecting
the
December 2007 repayment obligation.
Our
liquidity needs can be satisfied from cash generated from operations and
short-term borrowings against our available lines of credit. We have
available a CDN$500 million, five-year committed, revolving credit facility
to
fund our liquidity requirements. No funds were borrowed under the facility
as of
January 31, 2007. On February 6, 2007 we drew CDN$500 million from this
facility
to ensure that we had adequate funds on hand to complete our planned acquisition
of MDC. We have repaid this advance from the proceeds resulting from the
sale of
the diagnostics business.
To
complete the acquisition of MDC and the substantial issuer bid, we expect
to
utilize the full proceeds realized from the sale of the diagnostics business
and
a portion of our existing cash resources. Following these transactions,
we
expect to have sufficient liquidity resources, including our revolving
credit
facility, to meet our liquidity requirements.
Cash
used
in financing activities (excluding discontinued operations) during the
quarter
was $4 million versus $2 million last year. We made no purchases
under our NCIB during the quarter.
MDS
INTERIM REPORT JANUARY 31, 2007 (UNAUDITED) - Q1 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
We
believe that cash flow generated from operations, coupled with available
borrowings from existing financing sources, will be sufficient to meet
our
anticipated requirements for acquisitions, capital expenditures, research
and
development expenditures and operations in 2007. At this time, we do
not reasonably expect any presently known trend or uncertainty to affect
our
ability to access our current sources of cash. We remain in
compliance with all covenants for our senior unsecured notes and our bank
credit
facility.
Contractual
obligations
There
have been no material changes in contractual obligations since October
31, 2006,
and there has been no substantive change in any of our long-term debt or
other
long-term obligations since that date. We have not entered into any
new guarantees of the debt of other parties, nor do we have any off-balance
sheet arrangements.
Derivative
instruments
We
use
derivative financial instruments to manage our foreign currency and interest
rate exposure. These instruments consisted of forward foreign
exchange and option contracts and interest rate swap agreements entered
into in
accordance with established risk management policies and
procedures. All derivative instrument contracts are with banks listed
on Schedules I to III to the Bank Act (Canada) and the Company utilizes
financial information provided by certain of these banks to assist in the
determination the fair market values of the financial instruments.
The
net
mark-to-market value of all derivative instruments at January 31, 2007
was a
liability of $7 million.
Capitalization
|
|
|
January
31,
2007
|
|
October
31, 2006
|
|
Change
|
|
Long-term
debt
|
$
|
383
|
$
|
394
|
|
(3%)
|
|
Less:
cash and cash equivalents and short-term investments
|
|
364
|
|
382
|
|
(5%)
|
|
Net
debt
|
|
19
|
|
12
|
|
58%
|
|
Shareholders’
equity
|
|
1,355
|
|
1,354
|
|
0%
|
|
Capital
employed
1
|
$
|
1,374
|
$
|
1,366
|
|
1%
|
1
Capital
employed
is a measure of how much of our net assets are financed by debt and
equity.
Long-term
debt decreased $11 million due principally to revaluation of our Canadian
dollar
denominated long-term debt and reflecting the strength of the US dollar
in the
quarter. Changes in the value of the US-dollar denominated debt,
which is treated as a hedge in the US net investment, are reflected in
Other
Comprehensive Income in the Statement of Financial Position.
MDS
INTERIM REPORT JANUARY 31, 2007 (UNAUDITED) - Q1 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
Quarterly
highlights
Following
is a summary of selected financial information derived from the Company’s
unaudited interim period consolidated financial statements for each of
the eight
most recently completed quarters. This financial data has been
prepared in accordance with US GAAP and prior periods have been restated
to
reflect the discontinuance of the operations discussed above.
|
[millions
of US dollars, except earnings per share]
|
|
|
|
|
|
|
|
|
|
|
Trailing
Four
Quarters
|
Jan
2007
|
Oct
2006
|
Jul
2006
|
Apr
2006
|
|
Net
revenues
|
$
|
966
|
$
|
241
|
$
|
250
|
$
|
241
|
$
|
234
|
|
Operating
income (loss)
|
$
|
(69)
|
$
|
(9)
|
$
|
(3)
|
$
|
(21)
|
$
|
(36)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
$
|
9
|
$
|
-
|
$
|
12
|
$
|
(2)
|
$
|
(1)
|
|
Net
income (loss)
|
$
|
90
|
$
|
16
|
$
|
45
|
$
|
14
|
$
|
15
|
|
Earnings
(loss) per
share from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
$
|
0.06
|
$
|
0.00
|
$
|
0.08
|
$
|
(0.01)
|
$
|
(0.01)
|
|
Earnings
(loss) per
share
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
$
|
0.62
|
$
|
0.11
|
$
|
0.30
|
$
|
0.10
|
$
|
0.11
|
|
[millions
of US dollars, except earnings per share]
|
|
|
|
|
|
|
|
|
|
|
|
Trailing
Four
Quarters
|
Jan
2006
|
Oct
2005
|
Jul
2005
|
Apr
2005
|
|
|
Net
revenues
|
$
|
900
|
$
|
230
|
$
|
248
|
$
|
213
|
$
|
209
|
|
|
Operating
income (loss)
|
$
|
(70)
|
$
|
4
|
$
|
(47)
|
$
|
(15)
|
$
|
(12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
$
|
(24)
|
$
|
13
|
$
|
(35)
|
$
|
2
|
$
|
(4)
|
|
|
Net
income (loss)
|
$
|
22
|
$
|
46
|
$
|
(43)
|
$
|
10
|
$
|
9
|
|
|
Earnings
(loss) per
share from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
$
|
(0.14)
|
$
|
0.09
|
$
|
(0.25)
|
$
|
0.02
|
$
|
-
|
|
|
Earnings
(loss) per
share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
$
|
0.18
|
$
|
0.32
|
$
|
(0.30)
|
$
|
0.07
|
$
|
0.09
|
|
Items
that impact the comparability of operating income include:
|
·
|
Results
for the quarter ended January 31, 2007 reflect the impact of
restructuring
charges totalling $13 million.
|
|
·
|
Results
for the quarter ended April 30, 2006 reflect a loss of $36 million
resulting from the completion of the MAPLE
settlement.
|
|
·
|
Results
for the quarter ended October 31, 2005 reflect restructuring
charges of
$47 million and valuation provisions on certain long-term investments
totalling $11 million.
|
Outlook
As
we
enter the second quarter of fiscal 2007, we believe that we now have a
path
forward to resolution of our FDA issues. We have completed a number of
key
outstanding matters, including the sale of our Canadian diagnostics business
and
launching a large share repurchase offer. At the end of the first quarter,
we
announced our intention to materially expand our instruments business with
the
acquisition of MDC. We have also taken steps to clarify our financial reporting
and to make it more comparable to others in our sector by adopting the
US dollar
as our reporting currency and reporting our results under US GAAP.
Our
businesses are well positioned to gather momentum as the year progresses.
Customer demand and market growth in all segments
MDS
INTERIM REPORT JANUARY 31, 2007 (UNAUDITED) - Q1 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
remains
strong and both MDS Nordion and MDS Sciex have shown growth in the current
quarter, taking into account the unexpected strength in the medical isotopes
market in 2006. MDS Pharma Services delivered very strong growth in late-stage
services and in backlog, but the FDA issue continued to impact earnings.
We are
confident that we now have a path forward on this matter and we are taking
steps
to improve the operating performance of this business.
The
Molecular Devices transaction is proceeding as expected towards closure.
On
March 2, the waiting period for Hart Scott Rodino pre-merger clearance
in the US
expired. We are awaiting conclusion of regulatory approvals in other
jurisdictions. The closing of the transaction remains subject to other
customary
conditions, including other regulatory approvals, which we anticipate will
be
satisfied over the next several weeks.
MDS
Sciex
continues to transfer production to our new Singapore facility. We expect
to
move production of additional lines to Singapore over the course of the
year and
realize cost savings as a result. We see continued market strength in most
of
our markets for the second quarter.
MDS
Nordion has had a good start to the year and we are comfortable with the
momentum entering the second quarter. The Therasphere clinical trial will
drive
both revenues and R&D expense in future quarters, but successful
registration of this medical device is expected to enable us to expand
the
market for the product.
The
nature of our isotope products makes them subject to considerable regulation.
Ongoing interest in safety and security may impact the cost of regulatory
compliance for products such as cobalt and cesium and may affect patterns
of
customer demand. We continue to be involved in discussions on these
issues.
With
the
completion of the sale of our diagnostics business, we are now a focused
life
sciences company and we are well positioned to take advantage of the
opportunities available in this industry. We have a strong balance sheet
and the
financial resources to pursue selected growth opportunities, including
acquisitions. Our selection of appropriate opportunities to pursue will
be made
using a disciplined and methodical approach.
MDS
INTERIM REPORT JANUARY 31, 2007 (UNAUDITED) - Q1 US GAAP
RESTATED
CONSOLIDATED
STATEMENT OF FINANCIAL POSITION
[UNAUDITED]
|
Restated
See Note 2
|
|
As
at January 31 with comparatives at October 31
[millions
of US dollars]
|
|
2007
|
|
2006
|
|
Assets
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
Cash
and cash equivalents
|
$
|
335
|
$
|
247
|
|
Short-term
investments
|
|
29
|
|
135
|
|
Accounts
receivable, net
|
|
210
|
|
224
|
|
Unbilled
revenue
|
|
138
|
|
122
|
|
Inventories,
net
|
|
84
|
|
80
|
|
Income
taxes recoverable
|
|
29
|
|
42
|
|
Prepaid
expenses and other
|
|
33
|
|
21
|
|
Assets
held for sale
|
|
181
|
|
196
|
|
Total
Current
Assets
|
$
|
1,039
|
$
|
1,067
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
321
|
|
334
|
|
Deferred
tax assets
|
|
33
|
|
47
|
|
Long-term
investments and other
|
|
154
|
|
176
|
|
Goodwill
|
|
394
|
|
397
|
|
Intangible
assets, net
|
|
306
|
|
322
|
|
Total
Assets
|
$
|
2,247
|
$
|
2,343
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’
Equity
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
$
|
207
|
$
|
237
|
|
Deferred
revenue
|
|
109
|
|
92
|
|
Income
taxes payable
|
|
-
|
|
8
|
|
Current
portion of long-term debt
|
|
93
|
|
20
|
|
Liabilities
related to assets held for sale
|
|
98
|
|
114
|
|
Total
Current
Liabilities
|
$
|
507
|
$
|
471
|
|
|
|
|
|
|
|
Long-term
debt
|
|
290
|
|
374
|
|
Deferred
revenue
|
|
16
|
|
17
|
|
Other
long-term obligations
|
|
23
|
|
24
|
|
Deferred
tax liabilities
|
|
56
|
|
103
|
|
Total
Liabilities
|
$
|
892
|
$
|
989
|
|
|
|
|
|
|
|
Shareholders’
Equity
|
|
|
|
|
|
Common
shares, at par – Authorized shares: unlimited; Issued and
outstanding shares:
144,690,532
and 144,319,249 for January 31, 2007 and October 31, 2006
respectively
|
$
|
572
|
$
|
566
|
|
Additional
paid in capital
|
|
69
|
|
69
|
|
Retained
earnings
|
|
402
|
|
391
|
|
Accumulated
other comprehensive income
|
|
312
|
|
328
|
|
Total
Shareholders’
Equity
|
$
|
1,355
|
$
|
1,354
|
|
Total
Liabilities and
Shareholders’ Equity
|
$
|
2,247
|
$
|
2,343
|
|
Incorporated
under the Canada
Business Corporation Act
See
accompanying
notes
|
|
|
|
|
MDS
INTERIM REPORT JANUARY 31, 2007 (UNAUDITED) - Q1 US GAAP
RESTATED
CONSOLIDATED
STATEMENT OF OPERATIONS
[UNAUDITED]
|
|
|
Restated
See Note 2
|
|
|
|
Three
months ended January 31
|
|
[millions
of US dollars except per share amounts]
|
|
2007
|
2006
|
|
Revenues
|
|
|
|
|
|
Products
|
$
|
105
|
$
|
105
|
|
Services
|
|
136
|
|
125
|
|
Reimbursement
revenues
|
|
23
|
|
31
|
|
Total
revenues
|
$
|
264
|
$
|
261
|
|
|
|
|
|
|
|
Costs
and
expenses
|
|
|
|
|
|
Direct
cost of products
|
|
(71)
|
|
(71)
|
|
Direct
cost of services
|
|
(90)
|
|
(82)
|
|
Reimbursed
expenses
|
|
(23)
|
|
(31)
|
|
Selling,
general and administration
|
|
(54)
|
|
(47)
|
|
Research
and development
|
|
(12)
|
|
(12)
|
|
Depreciation
and amortization
|
|
(14)
|
|
(11)
|
|
Restructuring
charges - net
|
|
(13)
|
|
(1)
|
|
Other
income (expense) - net
|
|
4
|
|
(2)
|
|
Total
costs and expenses
|
$
|
(273)
|
$
|
(257)
|
|
|
|
|
|
|
|
Operating income
(loss) from continuing operations
|
$
|
(9)
|
$
|
4
|
|
|
|
|
|
|
|
Interest
expense
|
|
(6)
|
|
(3)
|
|
Interest
income
|
|
4
|
|
2
|
|
Equity
earnings
|
|
14
|
|
14
|
|
Income
from continuing
operations before income taxes
|
$
|
3
|
$
|
17
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
|
|
|
-
current
|
|
(2)
|
|
(2)
|
|
-
deferred
|
|
(1)
|
|
(2)
|
|
Income
from continuing
operations
|
$
|
-
|
$
|
13
|
|
|
|
|
|
|
|
Income
from discontinued
operations - net of income tax
|
|
16
|
|
33
|
|
Net
income
|
$
|
16
|
$
|
46
|
|
|
|
|
|
|
|
Basic
and diluted earnings per
share
-
from
continuing
operations
|
$
|
-
|
$
|
0.09
|
|
-
from discontinued operations
|
|
0.11
|
|
0.23
|
|
Basic
earnings per
share
|
$
|
0.11
|
$
|
0.32
|
|
See
accompanying
notes
|
|
|
|
|
MDS
INTERIM REPORT JANUARY 31, 2007 (UNAUDITED) - Q1 US GAAP
RESTATED
CONSOLIDATED
STATEMENT OF COMPREHENSIVE INCOME
[UNAUDITED]
Restated
See Note 2
|
|
Three
months ended January 31
|
|
[millions
of US dollars]
|
|
2007
|
|
2006
|
|
Net
income
|
$
|
16
|
$
|
46
|
|
Foreign
currency translation
|
|
(13)
|
|
42
|
|
Unrealized
loss on available-for-sale assets
|
|
(3)
|
|
(3)
|
|
Other
comprehensive income
|
$
|
(16)
|
$
|
39
|
|
Comprehensive
income
|
|
-
|
|
85
|
See
accompanying
notes
Consolidated
Statements of Cash
Flows
[unaudited]
|
|
Restated
See Note 2
|
|
|
Three
months ended January 31
|
|
[millions
of US dollars]
|
|
2007
|
|
2006
|
|
Operating
activities
|
|
|
|
|
|
Net
income
|
$
|
16
|
$
|
46
|
|
Less:
income from discontinued operations – net of tax
|
|
16
|
|
33
|
|
Income
from continuing operations
|
|
-
|
|
13
|
|
Adjustments
to reconcile net income to cash provided by operating activities
relating
to continuing operations
|
|
|
|
|
|
Items
not affecting current cash flow
|
|
28
|
|
9
|
|
Changes
in non-cash working capital balances relating to
operations
|
|
(33)
|
|
(40)
|
|
Cash
used in operating activities of continuing operations
|
|
(5)
|
|
(18)
|
|
Cash
provided by operating activities of discontinued
operations
|
|
16
|
|
13
|
|
|
|
11
|
|
(5)
|
|
Investing
activities
|
|
|
|
|
|
Purchase
of property, plant and equipment
|
|
(9)
|
|
(22)
|
|
Proceeds
on sale of short-term investments
|
|
126
|
|
-
|
|
Purchase
of short-term investments
|
|
(22)
|
|
-
|
|
Proceeds
on sale of long-term investments
|
|
11
|
|
-
|
|
Other
|
|
1
|
|
(17)
|
|
Cash
provided by (used in) investing activities of continuing
operations
|
|
107
|
|
(39)
|
|
Cash
provided by investing activities of discontinued
operations
|
|
-
|
|
68
|
|
Financing
activities
|
|
|
|
|
|
Repayment
of long-term debt
|
|
(6)
|
|
-
|
|
Increase
(decrease) in deferred revenue and other long-term
obligations
|
|
1
|
|
(9)
|
|
Payment
of cash dividends
|
|
(3)
|
|
(3)
|
|
Issuance
of shares
|
|
4
|
|
10
|
|
Cash
used in financing activities of continuing operations
|
|
(4)
|
|
(2)
|
|
Cash
used in
financing
activities of discontinued operations
|
|
(2)
|
|
(7)
|
|
Effect
of foreign exchange rate changes on cash and cash
equivalents
|
|
(24)
|
|
13
|
|
Increase
in cash and cash
equivalents during the period
|
|
88
|
|
28
|
|
Cash
and cash equivalents, beginning of period
|
|
247
|
|
215
|
|
Cash
and cash equivalents, end
of period
|
$
|
335
|
$
|
243
|
|
See
accompanying
notes
|
|
|
|
|
MDS
INTERIM REPORT JANUARY 31, 2007 (UNAUDITED) - Q1 US GAAP
RESTATED
NOTES
TO RESTATED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
As
a
Canadian-based company, MDS Inc. (MDS or the Company) historically has
prepared
its consolidated financial statements in Canadian dollars in conformity
with
accounting principles generally accepted in Canada (Canadian GAAP) and
has also
provided a reconciliation to United States (US) generally accepted accounting
principles (US GAAP).
To
enhance its communication with its shareholders, improve comparability
of
financial information with its competitors and peer group, and promote
a common
financial language within MDS, the Company adopted the US dollar as its
reporting currency as of the first quarter of 2007 and US GAAP as its primary
reporting standard for the presentation of its consolidated financial statements
as of fiscal year end 2007.
All
revenues, expenses and cash flows for each year were translated into the
reporting currency using average rates for the year, or the rates in effect
at
the date of the transaction for significant transactions. Assets and liabilities
were translated using the exchange rate at the end of each year. All
resulting exchange differences are reported as a separate component of
accumulated other comprehensive income. 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 consolidated and 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.
The
cumulative impact of the change in reporting currency was to increase the
cumulative translation adjustment by $371 million through October 31,
2006.
As
a
result of adopting US GAAP as its primary reporting standard for its 2007
consolidated year-end statements, the Company is required to restate to
US GAAP
its previously filed financial statements for the four quarters of
2007. Previously, our filings prepared in accordance with Canadian
GAAP disclosed a reconciliation of earnings to US GAAP due to our status
as a
foreign private issuer in the US. Going forward, with US GAAP as our
primary basis of accounting, we will reconcile our US GAAP earnings to
Canadian
GAAP. This reconciliation will be done as required by applicable
Canadian regulations on an annual and quarterly basis for a minimum of
the next
two fiscal years (see Note 15).
|
2.
|
Changes
Affecting Fiscal 2007
Consolidated Financial
Statements
|
During
the preparation of our 2007 annual financial statements, an error was identified
in the US GAAP reconciliation provided as part of the interim financial
statements prepared during the 2007 fiscal year with respect to certain
stock
based incentive compensation plans for which an incorrect valuation methodology
was utilized. The Company has corrected this error by restating
selling, general and administration expenses with a reduction of $2 million
in
the accompanying quarterly consolidated financial statements and reducing
the
value of accrued liabilities by a similar amount. The Canadian GAAP
financial statements previously reported were not impacted by the change,
except
for the reconciliation to US GAAP (see Note 15).
MDS
INTERIM REPORT JANUARY 31, 2007 (UNAUDITED) - Q1 US GAAP
RESTATED
NOTES
TO RESTATED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
As
a
result of adopting US GAAP as the primary reporting standard for the Company,
management has determined that investment tax credits (ITCs) having an
after-tax
value of $13 million realized in its fiscal year ended October 31, 2001
and
resulting from its acquisition of Phoenix International Life Sciences Inc.
in
the previous year had not been identified as a net income reconciliation
item in
the GAAP reconciliation note for fiscal 2001.
Under
Canadian GAAP, acquired ITCs that are determined to have nil value for
purposes
of purchase price allocation are, if subsequently realized, recorded as
income.
Under US GAAP, such acquired ITCs are recorded when realized as a reduction
in
goodwill arising from that prior period acquisition. This item should therefore
have been identified as a US GAAP net income reconciliation item in fiscal
2001.
In subsequent periods, the reported amount of goodwill and retained earnings
for
US GAAP purposes were likewise overstated by this amount. The Company has
corrected this error by restating opening retained earnings for fiscal
2005 in
the accompanying consolidated statement of shareholders’ equity and reducing the
carrying value of goodwill by $13 million. The impact of this
restatement has been similarly reflected for subsequent periods.
|
b.
|
Change
in Accounting
Policy
|
In
addition, in adopting US GAAP, the Company has changed its accounting policy
for
non-refundable investment tax credits (ITCs). In these consolidated financial
statements, the Company has recorded non-refundable ITCs as a reduction
in
income tax expense for the year in which the ITCs were recognized. Previously,
the Company recorded non-refundable ITCs as a reduction of the related
expenditure. Management believes this accounting policy change will make
the
Company’s reporting of ITCs consistent with the majority of other companies who
report under US GAAP.
There
is
no impact on net income from continuing operations, earnings per share,
or
retained earnings of any period as a result of this change. This change
in
policy increased (decreased) other lines on the consolidated statements
of
operations as follows:
Three
months ended January 31
|
|
|
2007
|
|
2006
|
|
Direct
cost of services
|
$
|
-
|
$
|
1
|
|
Research
and development
|
|
1
|
|
2
|
|
Current
income taxes
|
|
(1)
|
|
(3)
|
MDS
has
adopted the provisions of Staff Accounting Bulletin (SAB) No. 108 –
Considering the Effects
of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements.
In accordance with the provisions of SAB No. 108, the Company
has recorded a cumulative adjustment to correct the treatment of certain
deferred charges and related income tax expenses. The adjustments resulted
in an
increase in fiscal 2005 opening retained earnings of $2 million and an
adjustment to the tax expense associated with prior year deferred charges
that
reduced fiscal 2005 opening retained earnings by $4 million. The cumulative
net
effect of these adjustments on retained earnings as at November 1, 2004
is a
reduction of $2 million. In addition, the Company has recorded a $6 million
reduction in November 1, 2004 retained earnings and a corresponding increase
in
additional paid-in capital to correct an amount that had previously been
misclassified in the continuity of retained earnings.
MDS
INTERIM REPORT JANUARY 31, 2007 (UNAUDITED) - Q1 US GAAP
RESTATED
NOTES
TO RESTATED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
On
January 29, 2007, MDS announced the signing of a definitive agreement to
offer
to purchase all of the outstanding shares of Common stock of Molecular
Devices
Corporation (MDC), a Delaware corporation at a price of $35.50 per share,
net to
the seller in cash, without interest thereon, upon the terms and subject
to the
conditions set forth in the Offer to Purchase filed on February 13,
2007.
MDC
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. As a result of this acquisition, a new
business segment will be created that will combine the MDC and MDS Sciex
businesses.
The
transaction, which is conditional upon certain regulatory approvals and
upon MDS
acquiring in excess of 50% of the fully diluted shares outstanding, is
expected
to close in the second quarter of 2007
.
The
Company estimates that the total amount of funds required to purchase all
16,493,470 shares that were outstanding as of January 25, 2007 plus any
stock
options that have subsequently been converted to shares pursuant to the
Offer
and to pay related fees and expenses will be approximately $615
million.
|
4.
|
Discontinued
Operations
|
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. This strategic sale is designed to shift the Company’s
business focus to the global life sciences market. In 2005, the
Company approved a plan to divest of its interests in Source Medical
Corporation, Calgary Laboratory Services LP and certain MDS Pharma Services
businesses. As a result of these actions, these businesses are
classified as discontinued operations.
The
results of discontinued operations in the first quarter were as
follows:
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
$
|
75
|
$
|
100
|
|
Cost
of revenues
|
|
(46)
|
|
(68)
|
|
Selling,
general and administration
|
|
(8)
|
|
(15)
|
|
Depreciation
and amortization
|
|
-
|
|
(3)
|
|
Restructuring
charges
|
|
-
|
|
(1)
|
|
Operating
income
|
|
21
|
|
13
|
|
Gain
on sale of discontinued operations
|
|
-
|
|
24
|
|
Income
taxes
|
|
(3)
|
|
(3)
|
|
Minority
interest
|
|
(3)
|
|
(2)
|
|
Equity
earnings
|
|
1
|
|
1
|
|
Income
from discontinued
operations
|
|
16
|
|
33
|
|
Basic
EPS from discontinued
operations
|
$
|
0.11
|
$
|
0.23
|
MDS
INTERIM REPORT JANUARY 31, 2007 (UNAUDITED) - Q1 US GAAP
RESTATED
NOTES
TO RESTATED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
Assets
held for sale and liabilities related to assets held for sale
comprised:
|
|
|
As
at January
31
|
|
As
at October31
|
|
|
|
2007
|
|
2006
|
|
Assets
held for
sale
|
|
|
|
|
|
Accounts
receivable, net
|
$
|
28
|
$
|
31
|
|
Inventories,
net
|
|
3
|
|
3
|
|
Prepaid
expenses and other
|
|
5
|
|
3
|
|
Property,
plant and equipment, net
|
|
24
|
|
28
|
|
Deferred
tax assets
|
|
55
|
|
63
|
|
Long-term
investments and other
|
|
13
|
|
13
|
|
Goodwill
|
|
52
|
|
54
|
|
Intangibles
assets, net
|
|
1
|
|
1
|
|
Total
assets held for sale
|
|
181
|
|
196
|
|
Less: Current
assets held for sale1
|
|
(181)
|
|
(196)
|
|
Long-term
assets held for sale
|
$
|
-
|
$
|
-
|
|
|
|
|
|
|
|
Liabilities
related to assets
held for sale
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
$
|
24
|
$
|
33
|
|
Income
tax payable
|
|
1
|
|
-
|
|
Long-term
debt
|
|
3
|
|
4
|
|
Other
long-term obligations
|
|
6
|
|
6
|
|
Deferred
tax liabilities
|
|
48
|
|
55
|
|
Minority
interest
|
|
16
|
|
16
|
|
Total
liabilities related to assets held for sale
|
|
98
|
|
114
|
|
Less: Current
liabilities related to assets held for sale1
|
|
(98)
|
|
(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
if
the Company has signed agreements where such assets are expected to be
disposed
of within one year.
|
5.
|
Accumulated
Other Comprehensive
Income [unaudited
]
|
Restated
see Note 2
|
|
Three
months ended January 31
|
|
[millions
of US dollars]
|
|
2007
|
|
2006
|
|
Accumulated
other comprehensive income, net of income taxes,
beginning
of period
|
$
|
328
|
$
|
268
|
|
Foreign
currency translation
|
|
(13)
|
|
42
|
|
Unrealized
loss on available-for-sale assets
|
|
(3)
|
|
(3)
|
|
Accumulated
other comprehensive income, net of income taxes,
end
of period
|
$
|
312
|
$
|
307
|
|
See
accompanying
notes
|
|
|
|
|
MDS
INTERIM REPORT JANUARY 31, 2007 (UNAUDITED) - Q1 US GAAP
RESTATED
NOTES
TO RESTATED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
An
analysis of the activity in the provision through January 31, 2007 is as
follows:
|
|
Restructuring
Charge
|
Cumulative
drawdowns
|
Provision
Balance
at
January
31,
2007
|
|
Cash
|
Non-cash
|
|
2005:
|
|
|
|
|
|
|
|
|
|
Workforce
reductions
|
$
|
34
|
$
|
(30)
|
$
|
(1)
|
$
|
3
|
|
Equipment and other asset write-downs – adjustment
|
|
7
|
|
-
|
|
(7)
|
|
-
|
|
Contract
cancellation charges
|
|
10
|
|
(2)
|
|
(8)
|
|
-
|
|
|
$
|
51
|
$
|
(32)
|
$
|
(16)
|
$
|
3
|
|
2006:
|
|
|
|
|
|
|
|
|
|
Workforce
reductions
|
$
|
1
|
$
|
(1)
|
$
|
-
|
$
|
-
|
|
Contract
cancellation charges
|
|
(8)
|
|
(1)
|
|
9
|
|
-
|
|
|
$
|
(7)
|
$
|
(2)
|
$
|
9
|
$
|
-
|
|
2007:
|
|
|
|
|
|
|
|
|
|
Workforce
reductions
|
$
|
3
|
$
|
(2)
|
$
|
-
|
$
|
1
|
|
Contract
cancellation charges
|
|
5
|
|
(5)
|
|
-
|
|
-
|
|
Other
|
|
5
|
|
(1)
|
|
-
|
|
4
|
|
|
$
|
13
|
$
|
(8)
|
$
|
-
|
$
|
5
|
|
|
|
|
|
|
|
|
$
|
8
|
The
Company has continued to utilize the reserves established in prior years
relating to change initiatives affecting support services, senior management
reductions, and system implementations.
|
|
Three
months ended January 31
|
|
[number
of shares in millions]
|
|
2007
|
|
2006
|
|
Weighted
average number of Common shares outstanding – basic
|
$
|
145
|
$
|
143
|
|
Impact
of stock options assumed exercised
|
$
|
-
|
$
|
1
|
|
Weighted
average number of Common shares outstanding – diluted
|
$
|
145
|
$
|
144
|
|
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.
MDS
INTERIM REPORT JANUARY 31, 2007 (UNAUDITED) - Q1 US GAAP
RESTATED
NOTES
TO RESTATED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
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
|
|
|
|
2007
|
|
2006
|
|
Net
income
|
$
|
16
|
$
|
46
|
|
Compensation
expense for options granted prior to November 1, 2003
|
|
-
|
|
(1)
|
|
Net
income – pro forma
|
$
|
16
|
$
|
45
|
|
|
|
|
|
|
|
Pro
forma basic earnings per share
|
$
|
0.11
|
$
|
0.32
|
|
Pro
forma diluted earnings per share
|
$
|
0.11
|
$
|
0.32
|
|
8.
|
Share
Capital and Stock
Options
|
The
following table summarizes information on share capital and stock options
and
related matters as at January 31, 2007:
|
[number
of shares in thousands]
|
Number
|
|
Amount
|
|
Common
shares
|
|
|
|
|
Balance
as at October 31, 2006
|
144,319
|
$
|
566
|
|
Issued
during the period
|
372
|
|
6
|
|
Balance
as at January 31, 2007
|
144,691
|
$
|
572
|
|
[number
of stock options in thousands]
|
Number
|
Average
Exercise
Price
(C$)
|
|
Stock
options
|
|
|
|
|
Balance
as at October 31, 2006
|
5,850
|
$
|
18.76
|
|
Activity
during the period:
|
|
|
|
|
Granted
|
59
|
|
20.71
|
|
Exercised
|
(309)
|
|
14.36
|
|
Cancelled
or
forfeited
|
(91)
|
|
20.10
|
|
Balance
as at January 31, 2007
|
5,509
|
$
|
19.00
|
There
were 3,938 stock options exercisable as at January 31, 2007.
During
the quarter, the Company granted 59,000 options (2006 – 934,450) at an average
exercise price of C$20.71 (2006 - C$19.98). These options have a fair
value determined using the Black-Scholes model of C$4.40 per share (2006
-
C$4.13) based on the following assumptions:
|
|
2007
|
2006
|
|
Risk-free
interest rate
|
4.0
|
%
|
3.9
|
%
|
|
Expected
dividend yield
|
0.0
|
%
|
0.7
|
%
|
|
Expected
volatility
|
0.22
|
|
0.23
|
|
|
Expected
time to exercise (years)
|
3.25
|
|
3.25
|
|
MDS
INTERIM REPORT JANUARY 31, 2007 (UNAUDITED) - Q1 US GAAP
RESTATED
NOTES
TO RESTATED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
|
9.
|
Other
Income (Expense) -
Net
|
|
|
Three
months ended January 31
|
|
|
|
2007
|
|
2006
|
|
Write-down
of other long-term assets
|
$
|
-
|
$
|
(1)
|
|
Gain
on sale of investment
|
|
2
|
|
-
|
|
Foreign
exchange gain
|
|
3
|
|
(1)
|
|
Other
|
|
(1)
|
|
-
|
|
Other
income (expense) - net
|
$
|
4
|
$
|
(2)
|
|
10.
|
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
$1 million (2006 - $1 million).
|
11.
|
Supplementary
Cash Flow
Information
|
Non-cash
items affecting net income comprise:
|
|
Three
months ended January 31
|
|
|
|
2007
|
|
2006
|
|
Depreciation
and amortization
|
$
|
14
|
$
|
11
|
|
Stock
option compensation
|
|
1
|
|
2
|
|
Deferred
revenue
|
|
(2)
|
|
(3)
|
|
Deferred
income taxes
|
|
16
|
|
(1)
|
|
Gain
on sale of business
|
|
(2)
|
|
-
|
|
Mark-to-market
on derivatives
|
|
-
|
|
1
|
|
Equity
earnings
|
|
-
|
|
3
|
|
Other
|
|
1
|
|
(4)
|
|
|
$
|
28
|
$
|
9
|
Changes
in non-cash working capital balances relating to operations
include:
|
|
Three
months ended January 31
|
|
[millions
of US dollars]
|
|
2007
|
|
2006
|
|
Accounts
receivable
|
$
|
13
|
$
|
32
|
|
Unbilled
revenue
|
|
(16)
|
|
12
|
|
Inventories
|
|
(4)
|
|
8
|
|
Prepaid
expenses
|
|
(24)
|
|
(14)
|
|
Accounts
payable and deferred revenue
|
|
(14)
|
|
(82)
|
|
Income
taxes
|
|
12
|
|
4
|
|
|
$
|
(33)
|
$
|
(40)
|
MDS
INTERIM REPORT JANUARY 31, 2007 (UNAUDITED) - Q1 US GAAP
RESTATED
NOTES
TO RESTATED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
|
|
|
|
|
|
|
Three
months to January 31, 2007
|
|
|
MDS
Pharma
Services
|
MDS
Nordion
|
MDS
Sciex
|
Corporate
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
|
Total
assets for 2007 exclude assets
held for sale relating to discontinued operations
|
|
|
|
|
|
|
Three
months to January 31, 2006
|
|
|
MDS
Pharma
Services
|
MDS
Nordion
|
MDS
Sciex
|
Corporate
and
Other
|
Total
|
|
Product
revenues
|
$
|
-
|
$
|
69
|
$
|
36
|
$
|
-
|
$
|
105
|
|
Service
revenues
|
|
111
|
|
1
|
|
13
|
|
-
|
|
125
|
|
Reimbursement
revenues
|
|
31
|
|
-
|
|
-
|
|
-
|
|
31
|
|
Total
revenues
|
|
142
|
|
70
|
|
49
|
|
-
|
|
261
|
|
Direct
product cost
|
|
-
|
|
(33)
|
|
(38)
|
|
-
|
|
(71)
|
|
Direct
service costs
|
|
(81)
|
|
(1)
|
|
-
|
|
-
|
|
(82)
|
|
Reimbursed
expenses
|
|
(31)
|
|
-
|
|
-
|
|
-
|
|
(31)
|
|
Selling,
general and administration
|
|
(29)
|
|
(11)
|
|
(2)
|
|
(5)
|
|
(47)
|
|
Research
and development
|
|
|
|
(1)
|
|
(11)
|
|
-
|
|
(12)
|
|
Depreciation
and amortization
|
|
(7)
|
|
(3)
|
|
(1)
|
|
-
|
|
(11)
|
|
Restructuring
charges – net
|
|
1
|
|
-
|
|
-
|
|
(2)
|
|
(1)
|
|
Other
income (expense) – net
|
|
-
|
|
-
|
|
1
|
|
(3)
|
|
(2)
|
|
Equity
earnings
|
|
-
|
|
-
|
|
13
|
|
1
|
|
14
|
|
Segment
earnings
(loss)
|
$
|
(5)
|
$
|
21
|
$
|
11
|
$
|
(9)
|
$
|
18
|
|
Total
Assets
|
$
|
715
|
$
|
692
|
$
|
145
|
$
|
458
|
$
|
2,010
|
|
Capital
expenditures
|
$
|
7
|
$
|
10
|
$
|
1
|
$
|
4
|
$
|
22
|
Total
assets for 2006 exclude assets
held for sale relating to discontinued operations
MDS
INTERIM REPORT JANUARY 31, 2007 (UNAUDITED) - Q1 US GAAP
RESTATED
NOTES
TO RESTATED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
|
13.
|
Financial
Instruments
|
The
carrying amounts and fair values for all derivative financial instruments
are as
follows:
|
|
As
at January
31
|
As
at January 31
|
|
|
2007
|
2006
|
|
|
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
|
Asset
(liability) position:
|
|
|
|
|
|
|
|
|
|
Currency
forward and option
|
-
assets
|
$
|
-
|
$
|
-
|
$
|
5
|
$
|
5
|
|
Currency
forward and option
|
-
liabilities
|
$
|
(4)
|
$
|
(4)
|
$
|
-
|
$
|
-
|
|
Interest
rate swap and option contracts
|
$
|
(3)
|
$
|
(3)
|
$
|
(2)
|
$
|
(2)
|
As
of
January 31, 2007, the Company had outstanding foreign exchange contracts
and
options in place to sell up to $178 million at a weighted average exchange
rate
of C$1.1468 maturing over the next 12 months. The Company also had
interest rate swap contracts that economically convert a notional amount
of $80
million of debt from a fixed to a floating interest rate.
A
reconciliation of expected income taxes to reported income tax expense
is
provided below. Income before taxes for continuing operations for the
quarter ended January 31, 2007 include losses incurred in foreign jurisdictions
for which no tax effect has been recorded. As a result, income tax
expense for the quarter of $3 million exceeded the amount expected based
on
statutory rates.
|
Three
months ended January 31
|
|
|
|
2007
|
|
2006
|
|
Expected
income tax expense at MDS’s 35% (2006 – 35%) statutory
rate
|
$
|
1
|
$
|
6
|
|
Increase
(decrease) to tax expense as a result of:
|
|
|
|
|
|
Tax credits
for research and development
|
|
(1)
|
|
(3)
|
|
Foreign
losses that have not been recognized, net
|
|
4
|
|
-
|
|
Impact
of tax rate changes on deferred tax balances
|
|
-
|
|
2
|
|
Other
|
|
(1)
|
|
(1)
|
|
Reported
income tax expense
|
$
|
3
|
$
|
4
|
|
15.
|
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.
|
i)
|
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
|
MDS
INTERIM REPORT JANUARY 31, 2007 (UNAUDITED) - Q1 US GAAP
RESTATED
NOTES
TO RESTATED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
|
|
difference,
there are numerous presentation differences affecting
the disclosures in these consolidated financial statements and
in certain
of the supporting notes.
|
|
ii)
|
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.
|
|
iii)
|
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.
|
|
iv)
|
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.
|
|
v)
|
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.
|
|
vi)
|
Comprehensive
income – US GAAP requires that a statement of other comprehensive income
and accumulated other comprehensive income be displayed with
the same
prominence as other financial statements. Under Canadian GAAP,
statements
of other comprehensive income and accumulated other comprehensive
income
were not required for years prior to the Company’s 2007 fiscal
year.
|
MDS
INTERIM REPORT JANUARY 31, 2007 (UNAUDITED) - Q1 US GAAP
RESTATED
NOTES
TO RESTATED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
|
vii)
|
Pensions
- Under US GAAP, the net funded status of pension plans sponsored
by a
Company are fully reflected in the consolidated assets or liabilities
of
the Company. The amount by which plan assets exceed benefit obligations
or
benefit obligations exceed plan assets, on a plan-by-plan basis,
is
reflected as an increase in assets or liabilities, with a corresponding
adjustment to accumulated other comprehensive income. Under Canadian
GAAP,
only the net actuarial asset or liability is reflected in the
consolidated
financial statements.
|
|
viii)
|
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 1, 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.
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 is required to adopt 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 February
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.
MDS
INTERIM REPORT JANUARY 31, 2007 (UNAUDITED) - Q1 US GAAP
RESTATED
NOTES
TO RESTATED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
|
CONSOLIDATED
STATEMENTS OF FINANCIAL POSITION
|
|
|
|
|
|
As
at January
31
[millions
of US
dollars]
|
|
2007
Canadian
GAAP
|
|
Reconciling
Adjustments
|
|
Restated
2007
US
GAAP
|
|
Assets
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$
|
340
|
$
|
(5)
|
$
|
335
|
|
Short-term
investments
|
|
29
|
|
-
|
|
29
|
|
Accounts
receivable, net
|
|
212
|
|
(2)
|
|
210
|
|
Unbilled
revenue
|
|
138
|
|
-
|
|
138
|
|
Inventories,
net
|
|
90
|
|
(6)
|
|
84
|
|
Income
taxes recoverable
|
|
29
|
|
-
|
|
29
|
|
Prepaid
expenses and other
|
|
33
|
|
-
|
|
33
|
|
Assets
held for sale
|
|
181
|
|
-
|
|
181
|
|
Total
Current
Assets
|
$
|
1,052
|
$
|
(13)
|
$
|
1,039
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
$
|
325
|
$
|
(4)
|
$
|
321
|
|
Deferred
tax asset
|
|
17
|
|
16
|
|
33
|
|
Long-term
investments and other
|
|
154
|
|
-
|
|
154
|
|
Goodwill
|
|
413
|
|
(19)
|
|
394
|
|
Intangible
assets, net
|
|
322
|
|
(16)
|
|
306
|
|
Total
Assets
|
$
|
2,283
|
$
|
(36)
|
$
|
2,247
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’
Equity
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
$
|
212
|
$
|
(5)
|
$
|
207
|
|
Deferred
revenue
|
|
109
|
|
-
|
|
109
|
|
Income
taxes payable
|
|
9
|
|
(9)
|
|
-
|
|
Current
portion of long-term debt
|
|
93
|
|
-
|
|
93
|
|
Liabilities
related to assets held for sale
|
|
98
|
|
-
|
|
98
|
|
Total
Current
Liabilities
|
$
|
521
|
$
|
(14)
|
$
|
507
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
$
|
290
|
$
|
-
|
$
|
290
|
|
Deferred
revenue
|
|
16
|
|
-
|
|
16
|
|
Other
long-term obligations
|
|
23
|
|
-
|
|
23
|
|
Deferred
tax liabilities
|
|
75
|
|
(19)
|
|
56
|
|
Total
Liabilities
|
$
|
925
|
$
|
(33)
|
$
|
892
|
|
|
|
|
|
|
|
|
|
Shareholders’
Equity
|
|
|
|
|
|
|
|
Share
capital
|
$
|
578
|
$
|
(6)
|
$
|
572
|
|
Additional
paid in capital
|
|
n/a
|
|
69
|
|
69
|
|
Retained
earnings
|
|
505
|
|
(103)
|
|
402
|
|
Accumulated
other comprehensive income
|
|
275
|
|
37
|
|
312
|
|
Total
Shareholders’
Equity
|
$
|
1,358
|
$
|
(3)
|
$
|
1,355
|
|
Total
Liabilities and
Shareholders’ Equity
|
$
|
2,283
|
$
|
(36)
|
$
|
2,247
|
|
|
|
|
|
|
|
|
MDS
INTERIM REPORT JANUARY 31, 2007 (UNAUDITED) - Q1 US GAAP
RESTATED
NOTES
TO RESTATED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
|
CONSOLIDATED
STATEMENTS OF FINANCIAL POSITION
|
|
|
|
|
|
As
at October 31
[millions
of US dollars]
|
|
2006
Canadian
GAAP
|
|
Reconciling
Adjustment
|
|
Restated
2006
US
GAAP
|
|
Assets
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$
|
253
|
$
|
(6)
|
$
|
247
|
|
Short-term
investments
|
|
135
|
|
-
|
|
135
|
|
Accounts
receivable, net
|
|
229
|
|
(5)
|
|
224
|
|
Unbilled
revenue
|
|
121
|
|
1
|
|
122
|
|
Inventories,
net
|
|
86
|
|
(6)
|
|
80
|
|
Income
taxes recoverable
|
|
42
|
|
-
|
|
42
|
|
Prepaid
expenses and other
|
|
21
|
|
-
|
|
21
|
|
Assets
held for sale
|
|
196
|
|
-
|
|
196
|
|
Total
Current
Assets
|
$
|
1,083
|
$
|
(16)
|
$
|
1,067
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
$
|
339
|
$
|
(5)
|
$
|
334
|
|
Deferred
tax asset
|
|
37
|
|
10
|
|
47
|
|
Long-term
investments and other
|
|
170
|
|
6
|
|
176
|
|
Goodwill
|
|
417
|
|
(20)
|
|
397
|
|
Intangible
assets, net
|
|
338
|
|
(16)
|
|
322
|
|
Total
Assets
|
$
|
2,384
|
$
|
(41)
|
$
|
2,343
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’
Equity
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
$
|
239
|
$
|
(2)
|
$
|
237
|
|
Deferred
revenue
|
|
93
|
|
(1)
|
|
92
|
|
Income
taxes payable
|
|
8
|
|
-
|
|
8
|
|
Current
portion of long-term debt
|
|
20
|
|
-
|
|
20
|
|
Liabilities
related to assets held for sale
|
|
114
|
|
-
|
|
114
|
|
Total
Current
Liabilities
|
$
|
474
|
$
|
(3)
|
$
|
471
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
$
|
374
|
$
|
-
|
$
|
374
|
|
Deferred
revenue
|
|
17
|
|
-
|
|
17
|
|
Other
long-term obligations
|
|
23
|
|
1
|
|
24
|
|
Deferred
tax liabilities
|
|
82
|
|
21
|
|
103
|
|
Total
Liabilities
|
$
|
970
|
$
|
19
|
$
|
989
|
|
|
|
|
|
|
|
|
|
Shareholders’
Equity
|
|
|
|
|
|
|
|
Share
capital
|
$
|
572
|
$
|
(6)
|
$
|
566
|
|
Additional
paid in capital
|
|
-
|
|
69
|
|
69
|
|
Retained
earnings
|
|
495
|
|
(104)
|
|
391
|
|
Accumulated
other comprehensive income
|
|
347
|
|
(19)
|
|
328
|
|
Total
Shareholders’
Equity
|
$
|
1,414
|
$
|
(60)
|
$
|
1,354
|
|
Total
Liabilities and
Shareholders’ Equity
|
$
|
2,384
|
$
|
(41)
|
$
|
2,343
|
MDS
INTERIM REPORT JANUARY 31, 2007 (UNAUDITED) - Q1 US GAAP
RESTATED
NOTES
TO RESTATED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
CONSOLIDATED
STATEMENTS OF
OPERATIONS
Three
months ended January 31,
2007
|
[millions
of US dollars except per share amounts]
|
|
Canadian
GAAP
|
|
Reconciling
Items
|
|
US
GAAP
|
|
Revenues
|
|
|
|
|
|
|
|
Products
|
$
|
-
|
$
|
-
|
$
|
105
|
|
Services
|
|
-
|
|
-
|
|
136
|
|
Reimbursement
revenues
|
|
-
|
|
-
|
|
23
|
|
Total
revenues
|
$
|
250
|
$
|
14
|
$
|
264
|
|
|
|
|
|
|
|
|
|
Costs
and
expenses
|
|
|
|
|
|
|
|
Direct
cost of products
|
$
|
-
|
$
|
(71)
|
$
|
(71)
|
|
Direct
cost of services
|
|
(160)
|
|
70
|
|
(90)
|
|
Reimbursed
expenses
|
|
-
|
|
(23)
|
|
(23)
|
|
Selling,
general and administration
|
|
(53)
|
|
(1)
|
|
(54)
|
|
Research
and development
|
|
(5)
|
|
(7)
|
|
(12)
|
|
Depreciation
and amortization
|
|
(17)
|
|
3
|
|
(14)
|
|
Restructuring
charges - net
|
|
(13)
|
|
-
|
|
(13)
|
|
Other
expense - net
|
|
1
|
|
3
|
|
4
|
|
Total
costs and expenses
|
$
|
(247)
|
$
|
(26)
|
$
|
(273)
|
|
|
|
|
|
|
|
|
|
Operating
income (loss) from
continuing operations
|
$
|
3
|
|
(12)
|
|
(9)
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
(6)
|
|
-
|
|
(6)
|
|
Interest
income
|
|
4
|
|
-
|
|
4
|
|
Equity
earnings
|
|
-
|
|
14
|
|
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
|
MDS
INTERIM REPORT JANUARY 31, 2007 (UNAUDITED) - Q1 US GAAP
RESTATED
NOTES
TO RESTATED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
CONSOLIDATED
STATEMENTS OF
OPERATIONS
Three
months ended January 31, 2006
|
[millions
of US dollars except per share amounts]
|
|
Canadian
GAAP
|
|
Reconciling
Items
|
|
Restated
US
GAAP
|
|
Revenues
|
|
|
|
|
|
|
|
Products
|
$
|
-
|
$
|
-
|
$
|
105
|
|
Services
|
|
-
|
|
-
|
|
125
|
|
Reimbursement
revenues
|
|
-
|
|
-
|
|
31
|
|
Total
revenues
|
$
|
242
|
$
|
19
|
$
|
261
|
|
|
|
|
|
|
|
|
|
Costs
and
expenses
|
|
|
|
|
|
|
|
Direct
cost of products
|
$
|
-
|
$
|
(71)
|
$
|
(71)
|
|
Direct
cost of services
|
|
(152)
|
|
70
|
|
(82)
|
|
Reimbursed
expenses
|
|
-
|
|
(31)
|
|
(31)
|
|
Selling,
general and administration
|
|
(48)
|
|
1
|
|
(47)
|
|
Research
and development
|
|
(5)
|
|
(7)
|
|
(12)
|
|
Depreciation
and amortization
|
|
(13)
|
|
2
|
|
(11)
|
|
Restructuring
charges - net
|
|
(1)
|
|
-
|
|
(1)
|
|
Other
expense - net
|
|
(1)
|
|
(1)
|
|
(2)
|
|
Total
costs and expenses
|
$
|
(220)
|
$
|
(37)
|
$
|
(257)
|
|
|
|
|
|
|
|
|
|
Operating
income (loss) from
continuing operations
|
$
|
22
|
$
|
(18)
|
$
|
4
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
(3)
|
|
-
|
|
(3)
|
|
Interest
income
|
|
2
|
|
-
|
|
2
|
|
Equity
earnings
|
|
1
|
|
13
|
|
14
|
|
Loss
from continuing operations
before income taxes
|
|
22
|
|
(5)
|
|
17
|
|
|
|
|
|
|
|
|
|
Income
tax (expense) recovery
|
|
|
|
|
|
|
|
-
current
|
|
(8)
|
|
6
|
|
(2)
|
|
-
deferred
|
|
-
|
|
(2)
|
|
(2)
|
|
Income
(loss) from continuing
operations
|
|
14
|
|
(1)
|
|
13
|
|
|
|
|
|
|
|
|
|
Income
from discontinued
operations - net of income tax
|
|
33
|
|
-
|
|
33
|
|
Net
income
(loss)
|
$
|
47
|
$
|
(1)
|
$
|
46
|
|
|
|
|
|
|
|
|
|
Basic
earnings per
share
-
from
continuing
operations
|
$
|
0.10
|
$
|
(0.01)
|
$
|
0.09
|
|
-
from discontinued operations
|
|
0.23
|
|
-
|
|
0.23
|
|
Basic
earnings per
share
|
$
|
0.33
|
$
|
(0.01)
|
$
|
0.32
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per
share
-
from continuing operations
|
$
|
0.10
|
$
|
(0.01)
|
$
|
0.09
|
|
-
from discontinued operations
|
|
0.23
|
|
-
|
|
0.23
|
|
Diluted
earnings per
share
|
$
|
0.33
|
$
|
(0.01)
|
$
|
0.32
|
MDS
INTERIM REPORT JANUARY 31, 2007 (UNAUDITED) - Q1 US GAAP
RESTATED
NOTES
TO RESTATED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
CONSOLIDATED
STATEMENTS OF CASH
FLOWS
Three
months ended January 31,
2007
|
[millions
of US dollars]
|
|
Canadian
GAAP
|
|
Reconciling
Items
|
|
Restated
US
GAAP
|
|
Operating
activities
|
|
|
|
|
|
|
|
Net
income
|
$
|
14
|
$
|
2
|
$
|
16
|
|
Income
from discontinued operations – net of tax
|
|
16
|
|
-
|
|
16
|
|
Income
(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
|
|
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
|
|
|
|
|
|
|
|
Increase
(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 (used) in 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
|
MDS
INTERIM REPORT JANUARY 31, 2007 (UNAUDITED) - Q1 US GAAP
RESTATED
NOTES
TO RESTATED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
CONSOLIDATED
STATEMENTS OF CASH
FLOWS
Three
months ended January 31, 2006
|
[millions
of US dollars]
|
|
Canadian
GAAP
|
|
Reconciling
Items
|
|
Restated
US
GAAP
|
|
Cash
flows from operating
activities
|
|
|
|
|
|
|
|
Net
income
|
$
|
47
|
$
|
(1)
|
$
|
46
|
|
Income
from discontinued operations – net of tax
|
|
33
|
|
-
|
|
33
|
|
Income
from continuing operations
|
|
14
|
|
(1)
|
|
13
|
|
Adjustments
to reconcile net income to cash provided by operating activities
relating
to continuing operations
|
|
|
|
|
|
|
|
Items not affecting current cash flow
|
|
12
|
|
(3)
|
|
9
|
|
Changes
in non-cash working capital balances relating to
operations
|
|
(43)
|
|
3
|
|
(40)
|
|
Cash
provided by (used in) operating activities of continuing
operations
|
|
(17)
|
|
(1)
|
|
(18)
|
|
Cash
provided by (used in) operating activities of discontinued
operations
|
|
13
|
|
-
|
|
13
|
|
|
|
(4)
|
|
(1)
|
|
(5)
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
Increase
in deferred development charges
|
|
(1)
|
|
1
|
|
-
|
|
Purchase
of property, plant and equipment
|
|
(22)
|
|
-
|
|
(22)
|
|
Proceeds
on sale of short-term investments
|
|
-
|
|
-
|
|
-
|
|
Purchase
of short-term investments
|
|
-
|
|
-
|
|
-
|
|
Other
|
|
(17)
|
|
-
|
|
(17)
|
|
Cash
provided by (used in) investing activities of continuing
operations
|
|
(40)
|
|
1
|
|
(39)
|
|
Cash
provided by (used in) investing activities of discontinued
operations
|
|
68
|
|
-
|
|
68
|
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
Repayment
of long-term debt
|
|
|
|
|
|
|
|
Increase
(decrease) in deferred revenue and other long-term
obligations
|
|
(9)
|
|
-
|
|
(9)
|
|
Payment
of cash dividends
|
|
(3)
|
|
-
|
|
(3)
|
|
Issuance
of shares
|
|
10
|
|
-
|
|
10
|
|
Cash
used in financing activities of continuing operations
|
|
(2)
|
|
-
|
|
(2)
|
|
Cash
used in financing activities of discontinued operations
|
|
(7)
|
|
-
|
|
(7)
|
|
Effect
of foreign exchange rate changes on cash and cash
equivalents
|
|
9
|
|
4
|
|
13
|
|
Increase
in cash and cash
equivalents during the period
|
|
24
|
|
4
|
|
28
|
|
Cash
and cash equivalents, beginning of period
|
|
224
|
|
(9)
|
|
215
|
|
Cash
and cash equivalents, end
of period
|
$
|
248
|
$
|
(5)
|
$
|
243
|
MDS
INTERIM REPORT JANUARY 31, 2007 (UNAUDITED) - Q1 US GAAP
RESTATED
NOTES
TO RESTATED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
|
|
Three
months ended January 31
|
|
|
|
2007
|
|
2006
|
|
Net
income (loss) from continuing operations in accordance with
Canadian
GAAP
|
$
|
(2)
|
$
|
14
|
|
US
GAAP adjustments:
|
|
|
|
|
|
Deferred
development costs - net
|
|
-
|
|
(1)
|
|
Mid
term incentive plan reversal
|
|
2
|
|
-
|
|
Reduction
in income tax expense arising from
GAAP adjustments
|
|
-
|
|
-
|
|
Net
income (loss) from continuing operations in accordance with
US
GAAP
|
|
-
|
|
13
|
|
Income
from discontinued operations in accordance with Canadian and
US GAAP – net
of tax
|
|
16
|
|
33
|
|
Net
income in accordance with US GAAP
|
$
|
16
|
$
|
46
|
|
|
|
|
|
|
|
Basic
and diluted earnings per share in accordance with US GAAP
|
|
|
|
|
|
-
from continuing operations
|
$
|
-
|
$
|
0.09
|
|
-
from discontinued operations
|
|
0.11
|
|
0.23
|
|
|
$
|
0.11
|
$
|
0.32
|
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. In addition, segmented information for 2006 has been
revised to reflect the discontinued operations reported.
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.
MDS
INTERIM REPORT JANUARY 31, 2007 (UNAUDITED) - Q1 US GAAP
RESTATED
Document
2
C
ANADIAN
S
UPPLEMENT
TO
R
ESTATED
M
ANAGEMENT’S
D
ISCUSSION
AND
A
NALYSIS
of
Financial Condition and Results of Operations,
for
the
three months ended January 31, 2007
This
document supplements the Restated Management’s Discussion and Analysis for
January 31, 2007 and has been prepared pursuant to Section 5.2 of National
Instrument 51-102 – Continuous Disclosure Obligations
CANADIAN
SUPPLEMENT TO JANUARY 31, 2007 INTERIM RESTATED MANAGEMENT'S DISCUSSION
AND
ANALYSIS
March
7,
2007
The
interim unaudited financial statements of MDS Inc. (MDS or the Company) for
the quarter ended January 31, 2007 are reported in United States (US)
dollars and have been restated in accordance with US generally accepted
accounting principles (US GAAP). As part of the Company’s Canadian
filing requirements, we are providing this supplement (Canadian Supplement)
to
our restated management’s discussion and analysis (Restated MD&A) prepared
in accordance with US GAAP that restates, based on financial information
of MDS
reconciled to Canadian generally accepted accounting principles (Canadian
GAAP),
those parts of our Restated MD&A that would contain material differences if
they were based on financial statements prepared in accordance with Canadian
GAAP. The Canadian Supplement should be read in conjunction with our
restated unaudited financial statements and Restated MD&A included in our
interim report for the three month period ended January 31, 2007 prepared
in
accordance with US GAAP (Restated Interim Report) and our 2007 annual financial
statements and related MD&A included in our annual report for the fiscal
year ended October 31, 2007 (Annual Report). Note 15 of our interim
restated financial statements explains and quantifies the material differences
between US GAAP and Canadian GAAP on the Company’s financial condition and
results of operations.
The
following contains forward-looking statements and should be read in conjunction
with the factors set forth in the “Caution regarding forward-looking statements”
section of the 2007 annual MD&A contained in the Financial Review portion of
our Annual Report.
This
supplement has been prepared as of the date set out above and has not been
updated to reflect new facts, events or circumstances since that
date.
In
addition to measures based on US GAAP and Canadian GAAP, we use terms such
as
adjusted earnings before interest, taxes, depreciation and amortization
(adjusted EBITDA) and adjusted earnings per share (adjusted
EPS). These terms are not defined by US GAAP or Canadian GAAP and
readers should refer to “Use of non-GAAP measures” in our 2007 annual
MD&A.
Amounts
are in millions of US dollars, except per share amounts and where otherwise
noted.
Summary
of difference between US GAAP
and Canadian GAAP
The
differences between US GAAP and Canadian GAAP that have the most significant
impact on the Company’s financial condition and results of operations for the
three month period ended January 31, 2007 include accounting for: joint
ventures, investment tax credits, research and development, and stock-based
compensation.
The
primary difference between Canadian GAAP and US GAAP affecting the consolidated
revenues and operating margin is that under Canadian GAAP proportionate
consolidation is used to report the results of our joint ventures within
MDS
Analytical Technologies, whereas under US GAAP we apply the method of equity
accounting. For the first quarter of 2007, we reported $10
million less revenue and $16 million less operating income under US GAAP
than we
would have reported under Canadian GAAP ($11 million less and $12 million
less,
respectively for the first quarter of 2006). Under US GAAP, the
income from the joint ventures is included in equity earnings, which were
$14
million in the first quarter of 2007 ($13 million in the first quarter of
2006). Under Canadian GAAP, this amount was included in operating
income as part of the proportionate consolidation. There is no
significant impact to adjusted EBITDA from this accounting
difference.
Other
differences in operating income and adjusted EBITDA are listed
below.
|
·
|
Non-refundable
investment tax
credits (ITCs)
are treated as a reduction of expenditure under
Canadian GAAP and a reduction of income tax under US GAAP. In
the first quarter of 2007, there were $1 million ($3 million in
the first
quarter of 2006) of ITCs which when calculated based on US
GAAP increased our operating loss and reduced adjusted EBITDA,
as compared to Canadian GAAP. This difference affects our three
segments MDS Pharma Services, MDS Nordion and MDS
Sciex.
|
CANADIAN
SUPPLEMENT TO JANUARY 31, 2007 INTERIM RESTATED MANAGEMENT'S DISCUSSION
AND
ANALYSIS
|
·
|
Research
and Development
(R&D)
expenditures may be capitalized under Canadian GAAP if
certain criteria are met, however these expenditures are expensed
in the
period they are incurred under US GAAP. In the first quarter of 2007,
the $2 million ($2 million in first quarter of 2006) of R&D
capitalized under Canadian GAAP resulted in a reduction of adjusted
EBITDA
when calculated based on US GAAP, compared to Canadian GAAP. In
the first quarter of 2007, there was no change to our operating
loss ($1 million increase in the first quarter of 2006) under US
GAAP due to $2 million ($1 million in 2006) of amortization under
Canadian
GAAP relating to previously capitalized R&D. This difference
affects our MDS Sciex segment in both 2006 and 2007, and MDS Pharma
Services in 2006.
|
|
·
|
Due
to a difference in
valuation methods
for
stock-based compensation
under US GAAP and Canadian GAAP, our
operating loss was reduced and adjusted EBITDA was higher by $2
million
for the first quarter of 2007 (nil in 2006) when calculated
based on US GAAP, compared to Canadian GAAP. This difference
only affects Corporate and Other.
|
There
are
no differences between US GAAP and Canadian GAAP in the adjustment used in
calculating adjusted EBITDA and adjusted EPS for the first quarters of 2007
or
2006.
Management’s
discussion and analysis
under Canadian GAAP
Please
refer to
the
Company's previously filed Interim Report for January 31, 2007 for our
corresponding management’s discussion and analysis (MD&A) under
Canadian GAAP. The differences between US GAAP and Canadian GAAP,
described above, impact the discussion and analysis in each of the “MDS
Inc.”, “MDS Pharma Services”, “MDS Nordion”, “MDS Sciex” and “Corporate and
Other” sections of our previously filed MD&A. The “Income
taxes” section of our previously filed MD&A is primarily affected by the
ITCs. The “US GAAP Reconciliation” section in our previously filed
MD&A is superseded by the “Restatement to US GAAP” section of our Restated
MD&A.
For
additional information and details, readers are referred to the 2007 annual
financial statements and management’s discussion and analysis for 2007 and the
Company’s 2007 Annual Information Form (AIF), all of which are published
separately and are available at
www.mdsinc.com
and
at
www.sedar.com
. In
addition, the Company’s 40-F filing is available at
www.sec.gov
.
Document
3
Form
52-109F2 - Certification of
Interim Filings
I
,
Stephen P. DeFalco
,
Executive Vice-President,
Finance and Chief Financial Officer of MDS
Inc., certify that:
|
1.
|
I
have reviewed the restated interim filings (as this term is defined
in
Multilateral Instrument 52-109
Certification
of Disclosure in
Issuers' Annual and Interim Filings
) of MDS Inc., (the issuer) for
the interim period ending January 31, 2007 (the "interim
filings");
|
|
2.
|
Based
on my knowledge, the interim filings do not contain any untrue
statement
of a material fact or omit to state a material fact required to
be stated
or that is necessary to make a statement not misleading in light
of the
circumstances under which it was made, with respect to the period
covered
by the interim filings;
|
|
3.
|
Based
on my knowledge, the restated interim financial statements together
with
the other financial information included in the interim filings
fairly
present in all material respects the financial condition, results
of
operations and cash flows of the issuer, as of the date and for
the
periods presented in the interim filings;
and
|
|
4.
|
The
issuer's other certifying officers and I are responsible for establishing
and maintaining disclosure controls and procedures for the issuer,
and we
have designed such disclosure controls and procedures, or caused
them to
be designed under our supervision, to provide reasonable assurance
that
material information relating to the issuer, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which the interim filings are
being
prepared.
|
|
|
/s/
Stephen P. DeFalco
|
|
Date:
January 29, 2008
|
Stephen
P. DeFalco
President
& Chief Executive Officer
|
Document
4
Form
52-109F2 - Certification of
Interim Filings
I
,
Douglas S. Prince
,
Executive Vice-President,
Finance and Chief Financial Officer of MDS
Inc., certify that:
|
1.
|
I
have reviewed the restated interim filings (as this term is defined
in
Multilateral Instrument 52-109
Certification
of Disclosure in
Issuers' Annual and Interim Filings
) of MDS Inc., (the issuer) for
the interim period ending January 31, 2007 (the "interim
filings");
|
|
2.
|
Based
on my knowledge, the interim filings do not contain any untrue
statement
of a material fact or omit to state a material fact required to
be stated
or that is necessary to make a statement not misleading in light
of the
circumstances under which it was made, with respect to the period
covered
by the interim filings;
|
|
3.
|
Based
on my knowledge, the restated interim financial statements together
with
the other financial information included in the interim filings
fairly
present in all material respects the financial condition, results
of
operations and cash flows of the issuer, as of the date and for
the
periods presented in the interim filings;
and
|
|
4.
|
The
issuer's other certifying officers and I are responsible for establishing
and maintaining disclosure controls and procedures for the issuer,
and we
have designed such disclosure controls and procedures, or caused
them to
be designed under our supervision, to provide reasonable assurance
that
material information relating to the issuer, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which the interim filings are
being
prepared.
|
|
|
/s/
Douglas S. Prince
|
|
|
Date:
January 31, 2008
|
Douglas
S. Prince
Executive
Vice-President, Finance and Chief Financial
Officer
|
Document
5
June
5,
2007
Restated
Management’s Discussion and
Analysis
The
following management’s discussion and analysis of the results of operations for
MDS Inc. (MDS or the Company) for the quarter ended April 30, 2007 and its
financial position as at April 30, 2007 has been restated. This
restated management’s discussion and analysis (Restated MD&A) should be read
in conjunction with the restated consolidated financial statements and notes
that follow. For the Company’s 2007 year end of October 31, 2007, MDS
has chosen to adopt United States generally accepted accounting principles
(US
GAAP) for financial reporting. As a result of this change, the
Company is required to restate to US GAAP its previously filed financial
statements for the four quarters of 2007. Previously, our filings
prepared in accordance with Canadian generally accepted accounting principles
(Canadian GAAP) disclosed a reconciliation of earnings to US GAAP due to
our
status as a foreign private issuer in the US. Going forward, with US
GAAP as our primary basis of accounting, we will reconcile our US GAAP earnings
to Canadian GAAP. This reconciliation will be done as required by
applicable Canadian regulations on an annual and quarterly basis for a minimum
of the next two fiscal years. The interim financial statements for
fiscal 2007 as initially reconciled to US GAAP, have also been restated to
correct a US GAAP error identified during the preparation of our 2007 annual
financial statements related to the accounting for stock compensation
expense. This error related to the utilization of an incorrect
methodology under US GAAP in the calculation of stock compensation expense
with
respect to an equity-based incentive compensation plan. As a result of this
error, we previously reported lower net income under US GAAP in each of the
interim periods of 2007. Our accounting for stock-based compensation
was correct under Canadian GAAP and except for the US GAAP reconciliation
note,
there is no restatement to our previously filed Canadian GAAP financial
statements. This Restated MD&A has been revised to reflect the
restatement. The information contained in this Restated MD&A is
as at June 5, 2007 (as revised) unless otherwise
indicated. Accordingly, this Restated MD&A has not been updated
to reflect new facts, events or circumstances since June 5, 2007.
For
additional information and details, readers are referred to the 2007 annual
financial statements and management’s discussion and analysis for 2007 and the
Company’s 2007 Annual Information Form (AIF), all of which are published
separately and are available at
www.mdsinc.com
and at
www.sedar.com
.
In addition, the Company’s 40-F filing is available at
www.sec.gov
.
Our
Restated MD&A is intended to enable readers to gain an understanding of
MDS’s current results and financial position as at and for the period ended
April 30, 3007. To do so, we provide information and analysis comparing the
results of operations and financial position for the current interim period
to
those of the same period in the preceding fiscal year. We also provide analysis
and commentary that we believe is required to assess the Company’s future
prospects. Accordingly, certain sections of this report contain
forward-looking
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US
GAAP RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
statements
that are based on current plans and expectations. These
forward-looking statements are affected by risks and uncertainties that are
discussed in this document, as well as in the AIF, and that could have a
material impact on future prospects. Readers are cautioned that
actual events and results will vary
Caution
Regarding Forward-Looking
Statements
From
time
to time, we make written or oral forward-looking statements within the meaning
of certain securities laws, including the “safe harbour” provisions of the
Securities Act (Ontario) and the United States Private Securities Litigation
Reform Act of 1995. This document contains such statements, and we
may make such statements in other filings with Canadian regulators or the
United
States Securities and Exchange Commission (SEC), in reports to shareholders
or
in other communications, including public presentations. These
forward-looking statements include, among others, statements with respect
to our
objectives for 2008, our medium-term goals, and strategies to achieve those
objectives and goals, as well as statements with respect to our beliefs,
plans,
objectives, expectations, anticipations, estimates and
intentions. The words “may”, “could”, “should”, “would”, “suspect”,
“outlook”, “believe”, “plan”, “anticipate”, “estimate”, “expect”, “intend”,
“forecast”, “objective”, “optimistic”, and words and expressions of similar
import are intended to identify forward-looking statements.
By
their
very nature, forward-looking statements involve inherent risks and
uncertainties, both general and specific, which give rise to the possibility
that predictions, forecasts, projections and other forward-looking statements
will not be achieved. We caution readers not to place undue reliance
on these statements as a number of important factors could cause our actual
results to differ materially from the beliefs, plans, objectives, expectations,
anticipations, estimates and intentions expressed in such forward-looking
statements. These factors include, but are not limited to: management
of operational risks; the strength of the Canadian and United States’ economies
and the economies of other countries in which we conduct business; our ability
to secure a reliable supply of raw materials, particularly cobalt and critical
medical isotopes; the impact of the movement of the US dollar relative to
other
currencies, particularly the Canadian dollar and the euro; changes in interest
rate policies of the Bank of Canada and the Board of Governors of the Federal
Reserve System in the United States; the effects of competition in the markets
in which we operate; the timing and technological advancement of new products
introduced by us or by our competitors; the impact of changes in laws, trade
policies and regulations, and enforcement thereof; judicial judgments and
legal
proceedings; our ability to successfully realign our organization, resources
and
processes; our ability to complete strategic acquisitions and joint ventures
and
to integrate our acquisitions and joint ventures successfully; new accounting
policies and guidelines that impact the methods we use to report our financial
condition; uncertainties associated with critical accounting assumptions
and
estimates; the possible impact on our businesses from natural disasters,
public
health emergencies, international conflicts and other developments including
those relating to terrorism; and our success in anticipating and managing
the
foregoing risks.
We
caution that the foregoing list of important factors that may affect future
results is not exhaustive. When relying on our forward-looking
statements to make decisions with respect to the Company, investors and others
should carefully consider the foregoing factors and other uncertainties and
potential events. We do not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by
us or
on our behalf.
Use
Of Non-GAAP
Measures
In
addition to measures based on generally accepted accounting principles (GAAP)
in
this Restated MD&A, we use terms such as adjusted operating income; adjusted
earnings before interest, taxes, depreciation and amortization (EBITDA);
adjusted EBITDA margin; adjusted earnings per share (EPS); operating working
capital; net revenue; and backlog. These terms are not defined by
GAAP and our use of such
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US
GAAP RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
terms
or
measurement of such items may vary from that of other companies. In
addition, measurement of growth is not defined by GAAP and our use of these
terms or measurement of these items may vary from that of other
companies. Where relevant, and particularly for earnings-based
measures, we provide tables in this document that reconcile the non-GAAP
measures used to amounts reported on the face of the consolidated financial
statements. Our executive management team assesses the performance of our
businesses based on a review of results comprising GAAP measures and these
non-GAAP measures. We also report on our performance to the Company’s Board of
Directors based on these GAAP and non-GAAP measures. In addition,
adjusted EBITDA and operating working capital are the primary metrics for
our
annual incentive compensation plan for senior management. We provide
this non-GAAP detail so that readers have a better understanding of the
significant events and transactions that have had an impact on our results,
and
can view our results through the eyes of management.
Substantially
all of the products of the Sciex division of MDS Analytical Technologies
are
sold through two joint ventures. Under the terms of these joint ventures,
we are
entitled to a 50% share of the net earnings of the worldwide business that
we
conduct with our partners in these joint ventures. These earnings include
a
share of the profits generated by our partners that are paid to the joint
ventures as profit sharing. Under US GAAP, we report our direct
revenues from sales to the joint ventures and we report our share of the
profits
of the joint ventures as equity earnings. We do not report our share of all
end-user revenues, despite the fact that these revenues contribute substantially
to our profitability. In order to provide readers with a better understanding
of
the drivers of profitability for the Sciex products of MDS Analytical
Technologies, we report growth in end-user revenues as reported by our joint
venture partners. This figure provides management and readers with
additional information on the performance of our global business, including
trends in customer demand and our performance relative to the overall
market.
MDS
Pharma Services measures and tracks contract backlog. Contract backlog is
a
non-GAAP measure that we define to include the amount of contract value
associated with confirmed contracts that has not yet been recognized as net
revenue. A confirmed contract is one for which the Company has received customer
commitment in a manner that is customary for the type of contract involved.
For
large, long-term contracts, customer commitment is generally evidenced by
the
receipt of a signed contract or confirmation awarding the work to MDS. For
smaller and short-term contracts, customer commitment may be documented in
other
ways, including email messages and oral confirmations. Only contracts for
which
such commitments have been received are included in backlog and the amount
of
backlog for these contracts is measured based on the net revenue that is
expected to be earned by MDS under the contract terms. A contract is removed
from backlog if the Company receives notice from the customer that the contract
has been cancelled, indefinitely delayed, or reassigned to another service
provider.
Tabular
amounts are in millions of United States dollars, except per share amounts
and
where otherwise noted.
Introduction
MDS
is a global life sciences company
that provides market-leading products and services that our customers use
for
the development of drugs and the diagnosis and treatment of
disease. Through our three business segments, we are a leading global
provider of pharmaceutical contract research services (MDS Pharma Services),
medical isotopes for molecular imaging and radiotherapeutics (MDS Nordion),
and
analytical instruments (MDS Analytical Technologies). Each of these business
segments sells a variety of products and services to customers in markets
around
the world
.
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US
GAAP RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
Discontinued
Operations
All
financial references in this document exclude those businesses that we consider
to be discontinued. Our discontinued businesses include our
diagnostics businesses, certain early-stage pharmaceutical research services
operations, and our interest in Source Medical Corporation
(Source). All financial references for the prior year have been
restated to reflect this treatment.
Change
in Presentation Related to
Reimbursement of Out-of-Pocket Costs
In
addition to changes that relate to the adoption of US GAAP, the Company changed
its presentation of certain revenues that arise from the reimbursement of
the
Company by our customers (reimbursement revenues) for certain reimbursable
out-of-pocket expenses that we incur on behalf of these customers during
the
conduct of clinical trials (reimbursed expenses). The Company has the right
to
bill customers for reimbursement of the amounts, but is generally not entitled
to a mark-up or other form of profit margin related to these activities.
In the
financial reports for prior years, the reimbursement revenues were offset
against the related out-of-pocket costs, and because these amounts offset,
neither a revenue nor an expense item associated with this activity was
reported.
In
the
current presentation, the Company is reporting reimbursement revenues and
reimbursed expenses on a gross basis as separate lines on the consolidated
statements of operations. As a result of this change, although both total
revenues and total expenses have increased, there is no impact on operating
income reported. This change in presentation reflects a reconsideration of
the
Company’s reporting of revenues under both Canadian GAAP and US GAAP. We now
believe that the presentation used in prior Canadian GAAP financial statements
is not permitted under Canadian GAAP. While this change does not reflect
a
Canadian GAAP to US GAAP difference, it does reflect a change in the
presentation compared to the previously filed Canadian GAAP financial statements
and therefore, comparative amounts reflected in these restated interim
consolidated financial statements have been revised to reflect this change
on
both a Canadian GAAP and a US GAAP basis.
Throughout
this report, when we refer to total revenues we mean revenues including
reimbursement revenues. We use the term
net revenues
to mean revenues
excluding such amounts. All revenue growth figures and adjusted
EBITDA margin figures are based on net revenues. We use net revenues to measure
the growth and profitability of MDS and MDS Pharma Services because the
pass-through invoicing of reimbursable out-of-pocket expenses varies from
period-to-period, is not a reliable measure of the underlying performance
of the
business, and does not have an impact on net income or cash flows in any
significant way. Management assesses and rewards the performance of MDS Pharma
Services and the segment’s senior management team using metrics that are based
on net revenues.
Restatement
to US
GAAP
For
the
Company’s 2007 year end of October 31, 2007, it has chosen to adopt US GAAP for
financial reporting.
The
following tables highlight the differences between Canadian and US GAAP,
and the
impact of the US GAAP error correction related to the valuation of a stock-based
compensation program on the quarter and the year-to-date results. Our
accounting for stock-
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US
GAAP RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
based
compensation was correct under Canadian GAAP and there has been no change
to the
Canadian GAAP results shown in the following table.
|
|
2007
Second
Quarter
|
2006
Second
Quarter
|
|
|
Previously
Reported
(CAD
GAAP)
|
GAAP
Adjustments
|
Correction
|
Restated
Correction (US
GAAP)
|
Previously
Reported
(CAD
GAAP)
|
GAAP
Adjustments
|
Restated
Correction (US
GAAP)
|
|
Total
revenues
|
$296
|
(10)
|
-
|
$286
|
$268
|
(8)
|
$260
|
|
Reimbursement
revenues
|
(23)
|
-
|
-
|
(23)
|
(26)
|
-
|
(26)
|
|
Net
revenues
|
$273
|
(10)
|
-
|
$263
|
$242
|
(8)
|
$234
|
|
Income
(loss) from continuing
operations
|
(57)
|
1
|
1
|
(55)
|
(2)
|
1
|
(1)
|
|
Income
taxes
|
(21)
|
(6)
|
-
|
(27)
|
1
|
(32)
|
(31)
|
|
Net
interest expense
|
(2)
|
-
|
-
|
(2)
|
3
|
-
|
3
|
|
Loss
(gain) on derivatives
|
(1)
|
-
|
-
|
(1)
|
2
|
-
|
2
|
|
Depreciation
and amortization
|
20
|
(2)
|
-
|
18
|
16
|
(3)
|
13
|
|
EBITDA
|
(61)
|
(7)
|
1
|
(67)
|
20
|
(34)
|
(14)
|
|
Restructuring
charges, net
|
28
|
(3)
|
-
|
25
|
1
|
-
|
1
|
|
Valuation
provisions
|
6
|
-
|
-
|
6
|
6
|
-
|
6
|
|
MAPLE
settlement
|
(3)
|
3
|
-
|
-
|
9
|
27
|
36
|
|
Loss
on sale of a business/investment
|
3
|
-
|
-
|
3
|
-
|
-
|
-
|
|
Provision
for FDA-related settlements
|
61
|
-
|
-
|
61
|
-
|
-
|
-
|
|
Acquisition
integration
|
3
|
-
|
-
|
3
|
-
|
-
|
-
|
|
Adjusted
EBITDA
|
$37
|
(7)
|
1
|
$31
|
$36
|
(7)
|
$29
|
|
Adjusted
EBITDA
margin
|
14%
|
|
|
12%
|
15%
|
|
12%
|
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US
GAAP RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
|
|
2007
Second Quarter
YTD
|
2006
Second Quarter
YTD
|
|
|
Previously
Reported
(CAD
GAAP)
|
GAAP
Adjustments
|
Correction
|
Restated
Correction (US
GAAP)
|
Previously
Reported
(CAD
GAAP)
|
GAAP
Adjustments
|
Restated
Correction (US
GAAP)
|
|
Total
revenues
|
$569
|
(19)
|
-
|
$550
|
$541
|
-
|
521
|
|
Reimbursement
revenues
|
(46)
|
-
|
-
|
(46)
|
(57)
|
-
|
(57)
|
|
Net
revenues
|
$523
|
(19)
|
-
|
$504
|
$484
|
(20)
|
$464
|
|
Income
(loss) from continuing
operations
|
(59)
|
2
|
2
|
(55)
|
12
|
-
|
12
|
|
Income
taxes
|
(18)
|
(7)
|
1
|
(24)
|
9
|
(36)
|
(27)
|
|
Net
interest expense
|
-
|
-
|
-
|
-
|
4
|
-
|
4
|
|
Loss
(gain) on derivatives
|
-
|
(1)
|
-
|
(1)
|
3
|
(1)
|
2
|
|
Depreciation
and amortization
|
37
|
(5)
|
-
|
32
|
29
|
(5)
|
24
|
|
EBITDA
|
(40)
|
(11)
|
3
|
(48)
|
57
|
(42)
|
15
|
|
Restructuring
charges, net
|
41
|
(3)
|
-
|
38
|
2
|
-
|
2
|
|
Valuation
provisions
|
6
|
-
|
-
|
6
|
6
|
-
|
6
|
|
MAPLE
settlement
|
(3)
|
3
|
-
|
-
|
9
|
27
|
36
|
|
Loss
on sale of a business/investment
|
1
|
-
|
-
|
1
|
-
|
-
|
-
|
|
Provision
for FDA-related settlements
|
61
|
-
|
-
|
61
|
-
|
-
|
-
|
|
Acquisition
integration
|
3
|
-
|
-
|
3
|
-
|
-
|
-
|
|
Adjusted
EBITDA
|
$69
|
(11)
|
3
|
$61
|
$74
|
(15)
|
$59
|
|
Adjusted
EBITDA
margin
|
13%
|
|
|
12%
|
15%
|
|
13%
|
Note
15
to our consolidated financial statements for the second quarter of 2007 contains
a reconciliation of results reported in US GAAP to the net income we would
report in Canadian GAAP.
The
differences between US GAAP and Canadian GAAP that have the most significant
impact on the Company’s financial condition and results of operations for the
interim period ended April 30, 2007, include accounting for: joint ventures,
investment tax credits, research and development, stock-based compensation
and
hedge contracts.
The
primary difference between Canadian GAAP and US GAAP affecting the consolidated
revenues and operating margin is that under Canadian GAAP proportionate
consolidation is used for the results of our joint ventures within MDS
Analytical Technologies, whereas under US GAAP, we apply the method of equity
accounting. For the second quarter of 2007, we reported $10
million less revenue and $12 million less operating income under US GAAP
than we
would have reported under Canadian GAAP ($11 million less and $15 million
less,
respectively for the second quarter of 2006). Under US GAAP, the
income from the joint ventures is included in equity earnings, which were
$11
million in 2007 ($9 million in second quarter of 2006). Under
Canadian GAAP this amount was included in operating income as part of the
proportionate consolidation. There is no significant impact to the
calculation of adjusted EBITDA from this accounting difference.
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US
GAAP RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
Other
differences in adjusted EBITDA are listed below.
|
·
|
Non-refundable
investment tax
credits (ITCs)
are treated as a reduction of expenditure under
Canadian GAAP and a reduction of income tax under US GAAP. In
the second quarter of 2007, there were $7 million ($34 million
in the
second quarter of 2006) of ITCs. Adjusted EBITDA was reduced by $4
million ($7 million in the second quarter of 2006) when calculated
based
on US GAAP, compared to Canadian GAAP, as $3 million of ITCs ($27
million
in the second quarter of 2006) related to MAPLE project and were
treated
as an adjusting item in our calculation of adjusted
EBITDA.
|
|
·
|
Research
and Development
(R&D)
expenditures may be capitalized under Canadian GAAP if
certain criteria are met, however these expenditures are expensed
in the
period they are incurred under US GAAP. In the second quarter of
2007, the
$2 million ($3 million in second quarter of 2006) of R&D capitalized
under Canadian GAAP resulted in a reduction of adjusted EBITDA
when
calculated based on US GAAP, compared to Canadian
GAAP.
|
|
·
|
Due
to a difference in
valuation methods
for
stock-based compensation
under US GAAP and Canadian GAAP, adjusted
EBITDA was higher by $1 million for second quarter of 2007 (nil
in 2006)
when calculated based on US GAAP, compared to Canadian
GAAP.
|
|
·
|
The
other difference, which is described in Note 15 to our restated
interim
financial statements is related to
hedges.
|
In
calculating adjusted EBITDA significant changes to the adjusting items include
the following two items:
|
·
|
In
2007, capitalized R&D was charged to restructuring under Canadian
GAAP. Under US GAAP, these expenditures may not be capitalized
and
therefore there is no adjustment.
|
|
·
|
In
2006, under Canadian GAAP, ITCs were netted against MAPLE settlement.
Under US GAAP these are treated as reduction to income
tax.
|
The
results discussed in this Restated MD&A are based on US GAAP. To
supplement the US GAAP Restated MD&A included in this document, please refer
to our Canadian Supplement to this Restated MD&A which is being filed at the
same time as our Restated MD&A and our previously filed Interim Report for
April 30, 2007 for our corresponding MD&A based on Canadian
GAAP.
Strategic
Initiatives
On
September 1, 2005, we announced our strategic plan to pursue growth in the
global life sciences market and divest of assets that do not contribute to
the
Company’s areas of focus. On February 26, 2007, we completed a
significant step in this strategic plan by selling our Canadian diagnostics
business to Borealis Infrastructure Management Inc. MDS received net
cash proceeds (after expenses and taxes) of $929 million and a $65 million
non-interest bearing promissory note due in 2009. After paying transaction
costs
and income taxes, we have reported a gain of US$792 million in our second
quarter, the details of which are (US$ millions):
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US
GAAP RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
|
Net
selling price
|
$
|
1,129
|
|
Less
share attributable to minority interests
|
|
(112)
|
|
MDS’s
share of selling price
|
|
1,017
|
|
Less:
|
|
|
|
Net
book value of assets sold
|
|
(82)
|
|
Transaction
costs
|
|
(30)
|
|
Income
taxes
|
|
(113)
|
|
Gain
included in income from discontinued operations
|
$
|
792
|
On
January 29, 2007, we announced another significant step in our strategic
plan
with our intent to acquire Molecular Devices Corporation (MD), a leading
provider of high-performance measurement tools for high-content screening,
cellular analysis, and biochemical testing, in a $624 million cash transaction.
This transaction closed and we recorded the acquisition of MD effective March
20, 2007. Under this agreement, MDS acquired all of the Common Shares
of MD for $35.50 per share. Following the acquisition, the MD
business was combined with that of MDS Sciex to create MDS Analytical
Technologies (MDS AT). The MDS Sciex and Molecular Devices brands will continue
to be used by this new business unit.
This
strategic acquisition marks a significant expansion for MDS. By acquiring
Sunnyvale, California-based MD, with its strong brand recognition and
leading-edge products and capabilities, MDS has strengthened its leadership
position as one of the top global providers of life sciences solutions. We
offer
systems that provide high-content screening, and cellular and biochemical
testing for leading drug discovery and life sciences laboratories in
pharmaceutical, biotechnology, academic, and government
institutions.
The
acquisition has been accounted for using the purchase method. The total cost
of
the acquisition was $624 million, including the cash cost of the tender offer,
the cash cost to acquire outstanding in-the-money options held by employees
of
MD and others, and cash transaction costs. The components of the purchase
cost
and the preliminary allocation of the costs are as follows:
|
Cash
paid for tendered shares
|
$
|
$589
|
|
Cash
paid to acquire vested options
|
|
27
|
|
Cash
transaction costs
|
|
8
|
|
Total
cost of acquisition
|
$
|
$624
|
|
Allocation
of cost of acquisition:
|
|
|
|
Net
tangible assets acquired
|
$
|
$
71
|
|
Intangible
assets acquired
|
|
182
|
|
Goodwill
|
|
371
|
|
Total
|
$
|
$624
|
Net
tangible assets includes $21 million of acquired cash.
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US
GAAP RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
MDS
Inc.
Consolidated
operating highlights and
reconciliation of consolidated adjusted EBITDA
|
Second
Quarter
|
|
|
Year-to-date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
2007
|
|
2006
|
|
|
286
|
|
260
|
|
Total
revenues
|
|
550
|
|
521
|
|
|
(23)
|
|
(26)
|
|
Reimbursement
revenues
|
|
(46)
|
|
(57)
|
|
$
|
263
|
$
|
234
|
|
Net
revenues
|
$
|
504
|
$
|
464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55)
|
|
(1)
|
|
Income
(loss) from continuing
operations
|
|
(55)
|
|
12
|
|
|
(27)
|
|
(31)
|
|
Income
taxes
|
|
(24)
|
|
(27)
|
|
|
(2)
|
|
3
|
|
Net
interest expense
|
|
-
|
|
4
|
|
|
(1)
|
|
2
|
|
Loss
(gain) on derivatives
|
|
(1)
|
|
2
|
|
|
18
|
|
13
|
|
Depreciation
and amortization
|
|
32
|
|
24
|
|
|
(67)
|
|
(14)
|
|
EBITDA
|
|
(48)
|
|
15
|
|
|
25
|
|
1
|
|
Restructuring
charges, net
|
|
38
|
|
2
|
|
|
6
|
|
6
|
|
Valuation
provisions
|
|
6
|
|
6
|
|
|
-
|
|
36
|
|
MAPLE
settlement
|
|
-
|
|
36
|
|
|
3
|
|
-
|
|
Loss
on sale of a business/investment
|
|
1
|
|
-
|
|
|
61
|
|
-
|
|
Provision
for FDA-related settlements
|
|
61
|
|
-
|
|
|
3
|
|
-
|
|
Acquisition
integration
|
|
3
|
|
-
|
|
$
|
31
|
$
|
29
|
|
Adjusted
EBITDA
|
$
|
61
|
$
|
59
|
|
|
12%
|
|
12%
|
|
Adjusted
EBITDA
margin
|
|
12%
|
|
13%
|
Consolidated
net revenues for the second quarter of 2007 were up 12% to $263 million compared
to $234 million last year. Revenue from the newly acquired MD business from
the
date of acquisition to April 30, 2007 amounted to $29 million. Our late-stage
MDS Pharma Services businesses continued their strong growth, offsetting
weakness in early-stage revenues, where we continue to feel the impact from
the
US Food and Drug Administration (FDA) review. MDS Nordion revenues were down
slightly on a reported basis compared with an unusually strong second quarter
in
fiscal 2006, when we experienced high shipments of key isotopes resulting
from
disruption at a key competitor. On a reported basis, and excluding the revenues
from the MD business, MDS Analytical Technologies was down 2%. The MD business,
however experienced solid growth as revenues for the quarter were up 22%
compared to a weak quarter in the same three-month period last
year.
We
reported a loss from continuing operations for the quarter of $55 million
compared to a $1 million loss reported for the same period in 2006. The $55
million loss for the current year includes a $61 million provision to cover
future costs to resolve the outstanding FDA issues associated with our
Montreal-area bioanalytical business and a restructuring charge of $25 million,
most of which relates to the MDS Pharma Services business.
Adjusted
EBITDA for the quarter was $31 million compared to $29 million last year
and $30
million in the first quarter of fiscal 2007. Adjusted EBITDA
increased 7% on a reported basis, compared to a strong adjusted EBITDA figure
for 2006 that reflects the impact of the unusual market conditions experienced
by MDS Nordion last year.
Adjustments
reported for the quarter include $61 million of costs that we expect to incur
to
reimburse clients of our Montreal-area bioanalytical facilities for audit
and
other costs that they will pay to comply with the FDA directive issued January
10, 2007. In addition, we
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US
GAAP RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
have
recorded $25 million of restructuring costs related mostly to ongoing profit
improvement initiatives in MDS Pharma Services. Other adjusting items included
a
$6 million valuation provision on our interest in MDS Capital Corp., a $3
million loss resulting from the sale of certain businesses, primarily our
Hamburg phase 1 facility, and $3 million of integration costs incurred by
MDS
AT.
Selling,
general, and administration (SG&A) expenses for the quarter totaled $61
million and 23% of net revenues compared to $53 million and 23% last year.
The
increase includes the impact from the addition of MD partway through the
quarter, and includes the cost of their sales and marketing
network.
We
spent
$16 million on R&D activities in the second quarter this year, compared to
spending of $13 million last year. The majority of the increase in R&D
spending comes from the additional spending in our new MD business.
Consolidated
depreciation and amortization expense increased $5 million compared to last
year. Of this increase, $2 million is primarily related to
depreciation on our expanded pre-clinical facility in Lyon, France, our new
US
central laboratory, and our new manufacturing facility in
Singapore. We also amortized $2 million of intangible assets acquired
as part of the MD transaction. Capital expenditures for the quarter
were $7 million. We reported a credit of $1 million for capital expenditures
in
the second quarter of 2006.
Other
Expense for the second quarter includes a foreign exchange loss of $4 million
resulting from the significant weakness in the US dollar over the last few
weeks
of the quarter. In the fiscal 2006 quarter we reported a foreign exchange
loss
of $2 million.
We
reported a loss from continuing operations for the quarter due primarily
to the
after-tax impact of the provisions for FDA study audit costs, long-term
investment valuation, and restructuring, which amounted to $69 million.
Excluding adjusting items, income from continuing operations was $15 million
or
$0.11 per share.
Results
from discontinued operations for this year include the operating results
of our
Canadian diagnostics businesses for the period prior to sale and the gain
resulting from the sale.
On
April
9, 2007, we completed a substantial issuer bid and repurchased approximately
22.8 million Common shares for C$500 million (US$ 441 million) at a price
of
C$21.90 per share. As a result of this issuer bid, we reduced the
number of Common shares outstanding from approximately 144 million to 122
million. The basic weighted average number of shares outstanding for
the quarter was 137 million.
Reported
earnings per share from continuing operations were a loss of $0.40 for the
quarter, compared to a loss of $0.01 in 2006. Adjusted earnings per
share from continuing operations for the quarter were $0.11 compared to $0.08
earned in the same period last year. Earnings per share from
discontinued operations were $5.77 compared to $0.12, and included $5.76
related
to the gain on sale of the
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US
GAAP RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
diagnostics
business. Adjusted earnings per share for the two periods were as
follows:
|
|
Second
Quarter
|
|
Year-to-date
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Basic
earnings per share from continuing operations – as
reported
|
$
|
(0.40)
|
$
|
(0.01)
|
$
|
(0.39)
|
$
|
0.08
|
|
Adjusted
for:
|
|
|
|
|
|
|
|
|
|
Restructuring
charges, net
|
|
0.15
|
|
-
|
|
0.23
|
|
0.01
|
|
FDA-related
customer settlements
|
|
0.29
|
|
-
|
|
0.29
|
|
-
|
|
Valuation
provisions
|
|
0.04
|
|
0.04
|
|
0.04
|
|
0.04
|
|
Mark-to-market
on interest rate swaps
|
|
-
|
|
0.01
|
|
-
|
|
0.01
|
|
MAPLE
settlement
|
|
(0.02)
|
|
0.04
|
|
(0.02)
|
|
0.04
|
|
Loss
sale of business and long-term investments
|
|
0.03
|
|
-
|
|
0.02
|
|
0.01
|
|
Acquisition
integration
|
|
0.02
|
|
-
|
|
0.02
|
|
-
|
|
Tax
rate changes
|
|
-
|
|
-
|
|
-
|
|
0.02
|
|
Adjusted
EPS
|
$
|
0.11
|
$
|
0.08
|
$
|
0.19
|
$
|
0.21
|
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US
GAAP RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
MDS
Pharma
Services
Financial
Highlights
|
Second
Quarter
|
|
|
Year-to-date
|
|
|
|
%
of net
|
|
|
%
of net
|
|
|
|
|
%
of net
|
|
|
%
of net
|
|
|
2007
|
revenues
|
|
2006
|
revenues
|
|
|
|
2007
|
revenues
|
|
2006
|
revenues
|
|
$
|
60
|
52%
|
$
|
68
|
60%
|
|
Early-stage
|
$
|
126
|
53%
|
$
|
135
|
60%
|
|
|
55
|
48%
|
|
45
|
40%
|
|
Late-stage
|
|
110
|
47%
|
|
89
|
40%
|
|
|
115
|
100%
|
|
113
|
100%
|
|
Net
revenues
|
|
236
|
100%
|
|
224
|
100%
|
|
$
|
23
|
-
|
$
|
26
|
-
|
|
Reimbursement
revenues
|
$
|
46
|
-
|
$
|
57
|
-
|
|
|
138
|
-
|
|
139
|
-
|
|
Total
revenues
|
|
282
|
-
|
|
281
|
-
|
|
|
(80)
|
(70%)
|
|
(84)
|
(74%)
|
|
Cost
of revenues
|
|
(169)
|
(72%)
|
|
(165)
|
(74%)
|
|
|
(23)
|
-
|
|
(26)
|
-
|
|
Reimbursed
expenses
|
|
(46)
|
-
|
|
(57)
|
-
|
|
|
(32)
|
(28%)
|
|
(28)
|
(25%)
|
|
Selling,
general, and administration
|
|
(65)
|
(28%)
|
|
(57)
|
(26%)
|
|
|
(10)
|
(9%)
|
|
(7)
|
(6%)
|
|
Depreciation
and amortization
|
|
(18)
|
(8%)
|
|
(14)
|
(6%)
|
|
|
(23)
|
(20%)
|
|
(1)
|
(1%)
|
|
Restructuring
charges
|
|
(31)
|
(13%)
|
|
|
|
|
|
(68)
|
(58%)
|
|
(1)
|
(1%)
|
|
Other
income (expense)
|
|
(66)
|
(27%)
|
|
(1)
|
(0%)
|
|
|
(98)
|
(85%)
|
|
(8)
|
(7%)
|
|
Operating
income
(loss)
|
|
(113)
|
(48%)
|
|
(13)
|
(6%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
61
|
53%
|
|
-
|
-
|
|
Provision
for FDA-related settlements
|
|
61
|
25%
|
|
-
|
-
|
|
|
23
|
20%
|
|
1
|
1%
|
|
Restructuring
charges
|
|
31
|
13%
|
|
-
|
-
|
|
|
4
|
3%
|
|
-
|
-
|
|
Loss
(gain) on sale of a business
|
|
4
|
2%
|
|
-
|
-
|
|
|
-
|
-
|
|
(1)
|
(1%)
|
|
Equity
Earnings
|
|
-
|
-
|
|
(1)
|
(0%)
|
|
|
(10)
|
(9%)
|
|
(8)
|
(7%)
|
|
|
|
(17)
|
(8%)
|
|
(14)
|
(6%)
|
|
|
10
|
9%
|
|
7
|
6%
|
|
Depreciation
and amortization
|
|
18
|
8%
|
|
14
|
6%
|
|
$
|
0
|
0%
|
$
|
(1)
|
(1%)
|
|
Adjusted
EBITDA
|
$
|
1
|
0%
|
$
|
0
|
0%
|
|
|
|
|
|
|
|
|
Margins:
|
|
|
|
|
|
|
|
|
30%
|
|
|
26%
|
|
|
Gross
margin
|
|
28%
|
|
|
26%
|
|
|
|
0%
|
|
|
(1%)
|
|
|
Adjusted
EBITDA
|
|
0%
|
|
|
0%
|
|
|
$
|
5
|
|
$
|
7
|
|
|
Capital
expenditures
|
$
|
7
|
|
$
|
14
|
|
MDS
Pharma Services net revenues grew 2% on a reported basis. Reported
revenue growth was strong in our late-stage businesses, reflecting continued
strong sales activity, improved discipline around managing revenues from
change
orders initiated by our clients, and efficiency gains in
operations. This strong growth in our late-stage businesses more than
offset weakness in early-stage businesses, where growth continues to be
constrained by our bioanalytical business in Montreal.
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US
GAAP RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
Average
monthly pharmaceutical research backlog was $450 million for the second quarter
of 2007, an increase of approximately 13% when compared to the average for
the
second quarter of fiscal 2006. A significant contract cancellation
occurred late in the quarter, reducing our backlog to $425 million at the
beginning of the third quarter.
|
Average
monthly
backlog
|
|
|
|
Fiscal
2005 – Quarter 1
|
$
|
315
|
|
Quarter
2
|
|
305
|
|
Quarter
3
|
|
315
|
|
Quarter
4
|
|
340
|
|
Fiscal
2006 – Quarter 1
|
|
370
|
|
Quarter
2
|
|
400
|
|
Quarter
3
|
|
400
|
|
Quarter
4
|
|
430
|
|
Fiscal
2007 – Quarter 1
|
|
450
|
|
Quarter
2
|
|
450
|
We
have
reported an operating loss of $98 million for MDS Pharma Services, reflecting
the impact of charges totaling $61 million related to reimbursing customers
for
costs they will incur to comply with the FDA requirements. This
provision includes $1 million of costs incurred during the
quarter. In the second quarter of 2006, we incurred $5 million, which
was included in SG&A for the period. Reported results for the
quarter also reflect restructuring charges of $23 million and a loss of $4
million from the sale of a facility. Both of these charges result from efforts
currently underway to streamline our global operations.
Other
income includes foreign exchange losses of $3 million resulting from the
weakness of the US dollar against both the Canadian dollar and the Euro (2006
–
nil).
Capital
expenditures in the pharmaceutical services segment were $5 million compared
to
$7 million last year. Fiscal 2007 expenditures include the expansion
of our Phoenix early clinical research facility. Expenditures in 2006
related to an ongoing expansion in Lyon, as well as an expansion of the
Skeletech site in Bothell that had been planned at the time of the
acquisition.
Profit
improvement
initiatives
We
believe we are now on a path that will result in final resolution of the
outstanding FDA issues at our Montreal area facilities. We have also
accelerated our profit improvement initiatives by eliminating less profitable
sites, reducing facility costs, and structuring our workforce to most
effectively serve our customers. We believe these actions will position MDS
Pharma Services for growth and improved profitability in the months
ahead.
During
the second quarter of 2007, we implemented certain portions of our operating
improvement plan, finalizing the sale of our phase 1 clinical facility in
Hamburg, Germany. Also during the quarter, senior management approved
a significant restructuring plan and we began actions to implement this plan
in
May. As a result of the approval of the plan in April, we have
recorded $23 million of restructuring charges, including severance of $17
million, equipment write-offs of $3 million, a $2 million provision to reduce
the carrying value of certain real estate to our estimate of its current
market
value, and $1 million for other costs of the restructuring. We expect
to record a further $6 million in future quarters, as we complete our withdrawal
from certain leased facilities and complete the headcount
reductions.
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US
GAAP RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
Reflected
in this plan is a decision not to re-open LCMS bioanalytical operations in
the
Montreal area and, as a direct result, we will reduce the size of our St.
Laurent operations and facility to improve its operational efficiency, as
it
focuses on early clinical operations.
In
the
first quarter, we reported losses totaling $8 million related to restructuring
activities, bringing our total expenses year-to-date to $31
million. Restructuring costs in the prior year period were $1
million.
FDA
review of bioanalytical
operations
The
January 2007 letters issued by the FDA to sponsors of ANDA (generic drugs)
and
NDA (innovative drugs) applications has provided direction and a path forward
that we expect will result in final resolution of the outstanding FDA issues
associated with bioequivalence testing conducted in our St. Laurent and
Blainville facilities during the period January 1, 2000 to December 31,
2004. Subsequent to issuing the letters setting out the path forward,
during the second quarter the FDA provided us with Establishment Inspection
Reports closing the 2004 inspections which gave rise to these
issues.
In
the
January letters, the FDA directed sponsors of 217 approved and pending generic
drug submissions that contain study data produced in these facilities during
that period to take one of three actions to address FDA concerns about the
accuracy and validity of these bioanalytical studies: 1) repeat their
bioanalytical studies; 2) re-analyze their original study samples at a different
bioanalytical facility; or 3) independently audit original study
results.
To
date,
we have been in contact with sponsors responsible for approximately 80% of
the
217 ANDA submissions under review. Of these, approximately 83% have third
party
audits underway or are expected to commence third party audits. A small number
of the sponsors we have been in touch with (representing 6% of the total
ANDAs
under review) have indicated that they will repeat the studies without auditing
the original study data first. The remaining sponsors have either not yet
indicated their preferred course of action, indicated they do not intend
any
action, or have yet to contact us.
In
addition to the ANDA reviews ordered by the FDA, we have recently been advised
by certain clients that some European regulators may follow a similar path
to
that taken by the FDA. We expect the number of studies subject to
these reviews to be limited.
In
addition to generic studies, the FDA has requested information regarding
submitted NDA applications for innovative drugs that contain data from
bioanalytical studies conducted from January 2000 to December 2004 in our
St.
Laurent and Blainville facilities. Although it is difficult to
estimate the full extent of the FDA’s intent relative to innovator studies, we
expect NDA sponsors to take action similar to the three actions set out for
generic studies and expect that this will impact a substantially lower number
of
studies than the work done for sponsors of ANDA submissions.
We
have
approved a reimbursement policy for clients who have incurred or will incur
third party audit costs to complete the work required by the FDA and other
regulators. In addition, we are supporting the sponsors who are conducting
audits by providing their third party auditors with space at our St. Laurent
facility, access to all of the relevant files and study materials, and support
from our technical staff. Based on the audit work conducted at our facility
to
date, we have estimated a total cost to complete this work of $61 million,
including the
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US
GAAP RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
expected
reimbursements to clients, audit support costs, and the expected amount of
refunds that will be issued to clients for studies on which an unqualified
third
party audit opinion cannot be obtained.
Full
and
complete resolution of the FDA issues remains a key focus for MDS Pharma
Services and MDS. We remain committed to working cooperatively with
the FDA and our customers to address all of the FDA’s concerns and to assist our
customers while they complete the study audits. Although we have
recorded a provision in our second quarter that reflects our current best
estimate of the costs we expect to incur with respect to this work and for
obligations we have to clients, there can be no assurance at this time that
we
will not incur costs that exceed the amounts we have currently estimated.
In
addition, there can be no certainty that the study audits conducted by our
clients will be acceptable to the FDA or that the FDA will not require
additional work. We also are unable to judge what further impact this
situation will have on our business development activities, particularly
for our
bioanalytical and early clinical operations.
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US
GAAP RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
MDS
Nordion
Financial
Highlights
|
Second
Quarter
|
|
|
Year-to-date
|
|
|
|
%
of net
|
|
|
%
of net
|
|
|
|
|
%
of net
|
|
|
%
of net
|
|
|
2007
|
revenues
|
|
2006
|
revenues
|
|
|
|
2007
|
revenues
|
|
2006
|
revenues
|
|
$
|
67
|
94%
|
$
|
71
|
99%
|
|
Product
revenues
|
$
|
134
|
97%
|
$
|
140
|
99%
|
|
|
4
|
6%
|
|
1
|
1%
|
|
Service
revenues
|
|
4
|
3%
|
|
2
|
1%
|
|
|
71
|
100%
|
|
72
|
100%
|
|
Net
revenues
|
|
138
|
100%
|
|
142
|
100%
|
|
|
(35)
|
(49%)
|
|
(37)
|
(51%)
|
|
Cost
of product revenues
|
|
(69)
|
(50%)
|
|
(70)
|
(49%)
|
|
|
(1)
|
(1%)
|
|
-
|
-
|
|
Cost
of service revenues
|
|
(2)
|
(1%)
|
|
(1)
|
(1%)
|
|
|
(12)
|
(18%)
|
|
(13)
|
(18%)
|
|
Selling,
general, and administration
|
|
(23)
|
(17%)
|
|
(24)
|
(17%)
|
|
|
(1)
|
(1%)
|
|
(1)
|
(1%)
|
|
Research
and development
|
|
(2)
|
(1%)
|
|
(2)
|
(1%)
|
|
|
(3)
|
(4%)
|
|
(4)
|
(6%)
|
|
Depreciation
and amortization
|
|
(6)
|
(4%)
|
|
(7)
|
(5%)
|
|
|
-
|
-
|
|
-
|
-
|
|
Restructuring
charges
|
|
-
|
-
|
|
-
|
-
|
|
|
1
|
1%
|
|
(36)
|
(50%)
|
|
Other
income (expense)
|
|
1
|
1%
|
|
(36)
|
(26%)
|
|
|
20
|
28%
|
|
(19)
|
(26%)
|
|
Operating
income
|
|
37
|
27%
|
|
2
|
1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
-
|
-
|
|
36
|
50%
|
|
MAPLE
settlement
|
|
-
|
-
|
|
36
|
26%
|
|
|
(1)
|
(1%)
|
|
-
|
-
|
|
Gain
on a sale of a business
|
|
(1)
|
(1%)
|
|
-
|
-
|
|
|
19
|
27%
|
|
17
|
23%
|
|
|
|
36
|
26%
|
|
38
|
27%
|
|
|
3
|
4%
|
|
4
|
6%
|
|
Depreciation
and amortization
|
|
6
|
4%
|
|
7
|
5%
|
|
$
|
22
|
31%
|
$
|
21
|
29%
|
|
Adjusted
EBITDA
|
$
|
42
|
30%
|
$
|
45
|
32%
|
|
|
|
|
|
|
|
|
Margins:
|
|
|
|
|
|
|
|
|
50%
|
|
|
49%
|
|
|
Gross
margin
|
|
49%
|
|
|
50%
|
|
|
|
31%
|
|
|
29%
|
|
|
Adjusted
EBITDA
|
|
30%
|
|
|
32%
|
|
|
$
|
1
|
|
$
|
-
|
|
|
Capital
expenditures
|
$
|
2
|
|
$
|
-
|
|
MDS
Nordion revenues were down 1% year-over-year on a reported basis, as they
are
being compared to unusually strong results in the second quarter of 2006.
The
2006 results were driven by strong sales of medical isotopes during a period
when a major competitor announced a voluntary recall of its products used
primarily for cardiac imaging. While this same competitor had similar
difficulties in the second quarter of 2007, their outage period did not extend
as long and therefore had less of an impact on our 2007 results. We estimate
that revenues in the second quarter of 2006 were approximately $2 million
higher
than the current year as a result of this situation.
Operating
income was $20 million compared to a loss of $19 million last year in the
same
period, due largely to special items. Adjusted EBITDA was $22 million this
year
compared to $21 million in 2006, and the adjusted EBITDA margin for the quarter
was 31%, up from 29% from last year.
SG&A
expenses and depreciation and amortization were down slightly compared to
the
prior year. Other income for the quarter this year includes the release of
a $1
million provision for indemnifications granted to the purchaser of our Therapy
Systems business when it was sold in 2003 and on which the indemnification
period has lapsed. This item has been treated as an adjusting item.
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US
GAAP RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
Capital
expenditures in the isotopes segment were $1 million, compared to none last
year. During the quarter, MDS Nordion announced plans to invest $6
million to expand our Belgian production facility to meet the growing demand
for
Glucotrace®, a medical imaging agent used extensively in positron emission
tomography (PET) scans.
During
the quarter, we continued to deliver TheraSphere to dose patients in India
and
Europe for the treatment of liver cancer. We also established centres
of excellence with medical centres in four European countries where oncologists
will be trained in the use of the product and related techniques. In
April, MDS Nordion announced a collaboration agreement with Avid
Radiopharmaceuticals, Inc. to support clinical studies of Avid’s novel
radiopharmaceuticals designed to diagnose and monitor Alzheimer’s disease. MDS
Nordion will provide the radiolabelling for Avid’s proprietary compounds under
the terms of the collaboration.
MDS
Analytical
Technologies
Financial
Highlights
|
Second
Quarter
|
|
|
Year-to-date
|
|
|
|
%
of net
|
|
|
%
of net
|
|
|
|
|
%
of net
|
|
|
%
of net
|
|
|
2007
|
revenues
|
|
2006
|
revenues
|
|
|
|
2007
|
revenues
|
|
2006
|
revenues
|
|
$
|
62
|
81%
|
$
|
36
|
73%
|
|
Product
revenues
|
$
|
100
|
77%
|
$
|
72
|
73%
|
|
|
15
|
19%
|
|
13
|
27%
|
|
Service
revenues
|
|
30
|
23%
|
|
26
|
27%
|
|
|
77
|
100%
|
|
49
|
100%
|
|
Net
revenues
|
|
130
|
100%
|
|
98
|
100%
|
|
|
(48)
|
(63%)
|
|
(31)
|
(63%)
|
|
Cost
of product revenues
|
|
(85)
|
(65%)
|
|
(69)
|
(70%)
|
|
|
(1)
|
(1%)
|
|
-
|
-
|
|
Cost
of service revenues
|
|
(1)
|
(1%)
|
|
-
|
-
|
|
|
(11)
|
(14%)
|
|
(5)
|
(10%)
|
|
Selling,
general, and administration
|
|
(17)
|
(13%)
|
|
(7)
|
(7%)
|
|
|
(15)
|
(20%)
|
|
(12)
|
(25%)
|
|
Research
and development
|
|
(26)
|
(20%)
|
|
(23)
|
(24%)
|
|
|
(4)
|
(5%)
|
|
(2)
|
(4%)
|
|
Depreciation
and amortization
|
|
(7)
|
(5%)
|
|
(3)
|
(3%)
|
|
|
-
|
-
|
|
-
|
-
|
|
Restructuring
charges
|
|
(2)
|
(2%)
|
|
-
|
-
|
|
|
(1)
|
(1%)
|
|
1
|
2%
|
|
Other
income (expense) net
|
|
-
|
-
|
|
2
|
2%
|
|
|
(3)
|
(4%)
|
|
-
|
0%
|
|
Operating
income
|
|
(8)
|
(6%)
|
|
(2)
|
(2%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
11
|
14%
|
|
14
|
29%
|
|
Equity
earnings
|
|
25
|
19%
|
|
27
|
28%
|
|
|
3
|
4%
|
|
-
|
-
|
|
Acquisition
integration
|
|
3
|
3%
|
|
-
|
-
|
|
|
11
|
14%
|
|
14
|
29%
|
|
|
|
20
|
16%
|
|
25
|
26%
|
|
|
4
|
5%
|
|
2
|
4%
|
|
Depreciation
and amortization
|
|
7
|
5%
|
|
3
|
3%
|
|
$
|
15
|
19%
|
$
|
16
|
33%
|
|
Adjusted
EBITDA
|
$
|
27
|
21%
|
$
|
28
|
29%
|
|
|
|
|
|
|
|
|
Margins:
|
|
|
|
|
|
|
|
|
36%
|
|
|
37%
|
|
|
Gross
margin
|
|
34%
|
|
|
30%
|
|
|
|
19%
|
|
|
33%
|
|
|
Adjusted
EBITDA
|
|
21%
|
|
|
29%
|
|
|
$
|
1
|
|
$
|
1
|
|
|
Capital
expenditures
|
$
|
4
|
|
$
|
2
|
|
The
Sciex
division of MDS Analytical Technologies carries out the majority of its business
through joint ventures. Currently, MDS generates the majority of its
income associated with these joint ventures from the net income of the joint
ventures, and not from its sales to the joint ventures. Under US
GAAP, we equity account for the joint ventures and therefore the majority
of the
income related to the Sciex division is reflected in equity earnings, which
represent our share of the net income of the joint ventures. We include equity
earnings in our calculation of adjusted EBITDA, however, under US GAAP, these
earnings are not included in operating income.
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US
GAAP RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
The
second quarter of 2007 includes the results of MDS Sciex, along with the
results
of the newly acquired Molecular Devices business for the 41-day period from
the
close of the acquisition on March 20, 2007 to the quarter-end.
MDS
Analytical Technologies grew 57% as reported, including the addition of MD,
and
was down 2% excluding the addition of MD. End-user revenues in the
markets served by our joint ventures grew 12% in the quarter. Growth
remains strong in most end-user markets and our 4000 series instruments have
maintained strong sales momentum. Services revenues continue to be a strong
driver of growth and profitability for the worldwide business and for our
share
of operating income from the MDS/Applied Biosystems partnership, although
accounting rules prevent us from reporting this revenue in our
financial results. Instrument sales to customers in inorganic markets
also continued their first quarter strength with strong orders received in
the
second quarter this year, led by sales of our Elan DRC products.
We
are
very pleased with the results from the Molecular Devices division. On a
comparable three-month period covering our fiscal quarter, MD reported revenues
were 22% higher this year than a weak period last year. MD was also a
solid contributor to adjusted EBITDA in the quarter.
MDS
acquired Molecular Devices effective March 20, 2007, and we are currently
conducting work to determine the fair value of the assets and liabilities
of the
acquired company and to finalize our integration planning and determine the
costs associated with the actions we intend to take. The purchase price
allocation reflected in the April 30, 2007 statement of financial position
and
the charges recorded in the period related to the amortization of intangible
assets and fair value increments are preliminary and subject to change. In
particular, the fair value increment for inventory and the value of backlog,
are
subject to significant judgment and amortize as expenses to income over a
short
period. We therefore expect to record further charges in the third quarter
related to these items as acquisition date inventories are sold and backlog
from
the pre-acquisition period is shipped. We expect to advance the
determination of the final purchase accounting substantially in the third
quarter and to finalize this by year-end.
There
was
an operating loss of $3 million for the second quarter of 2007 compared to
break
even performance in the second quarter of 2006. Equity earnings, which are
not
included in operating income and represent our share of earnings from the
Sciex
joint ventures was $11 million for the second quarter of 2007 a decrease
from
$14 million for the second quarter of 2006. Reported operating income for
2007
includes the results for MD from the date of acquisition, partially offset
by $2
million of inventory provisions and $3 million of integration costs and purchase
accounting adjustments. A $1 million foreign exchange gain on the
revaluation of US dollar debt was included in the second quarter of
2006.
Adjusted
EBITDA for the quarter was $15 million compared to $16 million last
year. Adjustments of $3 million for the quarter reflect costs of the
acquisition, including $1 million of costs we have incurred as we begin to
integrate the businesses and $2 million of non-cash fair market value
adjustments applied to inventory as part of the purchase accounting that
are
expensed as those inventories are sold. There were no adjustments in the
prior
year.
Increased
expenses in MDS Analytical Technologies for the second quarter of 2007 included
higher SG&A expenses reflecting the additional costs associated with the MD
business, including their global sales and marketing network. R&D expense
was higher for 2007,
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US
GAAP RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
due
to
the additional R&D costs incurred by the MD
division. Depreciation and amortization expense was also up,
reflecting amortization of intangible assets acquired as part of the MD
acquisition.
Capital
expenditures were $1 million this year and last.
MDS
Analytical Technologies announced a number of product innovations during
the
second quarter, including strong product launches from the Molecular Devices
product lines. MDS Sciex and its joint venture partners introduced enhancements
to the Protein Pilot™ software and the 4800 MALDI TOF/TOF ™ mass spectrometer to
support biomarker research; and the FlashQuant™, a new technology platform that
combines triple-quadrupole mass spectrometry with MALDI technology to streamline
the identification of viable drug candidates through better analysis of the
absorption, distribution, metabolism, and excretion properties of compounds
(ADME). Molecular Devices announced the first live cell kinetic neurotransmitter
transport uptake assembly kit, which aims to improve the quality of assay
results while reducing processing time and cost.
Corporate
and Other
Financial
Highlights
|
Second
Quarter
|
|
|
Year-to-Date
|
|
|
2007
|
|
2006
|
|
|
|
2007
|
|
2006
|
|
$
|
(6)
|
$
|
(7)
|
|
Selling,
general, and administration
|
$
|
(10)
|
$
|
(12)
|
|
|
(1)
|
|
-
|
|
Depreciation
and amortization
|
|
(1)
|
|
-
|
|
|
(2)
|
|
|
|
Restructuring
charges
|
|
(7)
|
|
(2)
|
|
|
(6)
|
|
(2)
|
|
Other
expense
|
|
(3)
|
|
(5)
|
|
|
(15)
|
|
(9)
|
|
Operating
income
|
|
(21)
|
|
(19)
|
|
|
|
|
|
|
Adjustments:
|
|
|
|
|
|
|
-
|
|
(4)
|
|
Equity
earnings
|
|
-
|
|
(3)
|
|
|
-
|
|
-
|
|
Gain
on sale of investments
|
|
(2)
|
|
-
|
|
|
6
|
|
6
|
|
Valuation
provisions
|
|
6
|
|
6
|
|
|
2
|
|
-
|
|
Restructuring
|
|
7
|
|
2
|
|
|
1
|
|
-
|
|
Depreciation
and amortization
|
|
1
|
|
-
|
|
$
|
(6)
|
$
|
(7)
|
|
Adjusted
EBITDA
|
$
|
(9)
|
$
|
(14)
|
Corporate
SG&A expenses were $6 million in the second quarter of 2007 compared to $7
million in the second quarter of 2006. Restructuring charges in the quarter
relate to costs incurred as we completed our exit from the diagnostics business
and included staff and facility reductions in our Corporate
offices.
Other
expense for the quarter includes a $6 million valuation provision related
to MDS
Capital Corp. As efforts to date to sell the remaining business have not
been
successful, ongoing operations are being restructured, and we no longer expect
to fully recover the carrying value of the investment. In 2006, other
expenses included a $3 million foreign exchange loss, compared to a $1 million
loss in the second quarter of 2007.
Interest
expense, which included $2 million of interest resulting from our one-month
utilization of our revolving credit facility, increased from $4 million to
$8
million as we no longer are able to capitalize interest incurred related
to the
MAPLE project. Interest income increased to $10 million from $1 million as
a
result of interest earned on higher cash balances in the current quarter
and on
the cash proceeds resulting from the sale of the diagnostics
business.
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US
GAAP RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
Income
taxes
Our
effective tax rate
on
the loss we reported this quarter was 33%. This is lower than our
expected tax rate of 36% as no tax benefits could be recognized on the loss
on
the sale of the Hamburg clinic, or the valuation provision we reported on
our
investment in MDS Capital Corp. The tax credits we reported this
quarter reduced our income taxes by $4 million, net of related income tax,
offsetting the unfavourable impact of foreign losses on our tax expense this
quarter.
Discontinued
Operations
The
results of our discontinued businesses for the second quarter of 2007 and
2006
were as follows:
|
|
Second
Quarter
|
Year-to-date
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
$
|
20
|
$
|
98
|
$
|
95
|
$
|
198
|
|
Cost
of revenues
|
|
(12)
|
|
(63)
|
|
(58)
|
|
(131)
|
|
Selling,
general and administration
|
|
(6)
|
|
(12)
|
|
(15)
|
|
(27)
|
|
Depreciation
and amortization
|
|
-
|
|
(2)
|
|
-
|
|
(5)
|
|
Goodwill
write-down
|
|
-
|
|
-
|
|
-
|
|
-
|
|
Restructuring
charges
|
|
-
|
|
-
|
|
-
|
|
(1)
|
|
Other
expenses
|
|
-
|
|
-
|
|
-
|
|
-
|
|
Operating
income
|
|
2
|
|
21
|
|
22
|
|
34
|
|
Gain
on sale of discontinued operations
|
|
905
|
|
-
|
|
905
|
|
24
|
|
Interest
expense
|
|
-
|
|
1
|
|
-
|
|
-
|
|
Interest
income
|
|
-
|
|
-
|
|
1
|
|
1
|
|
Income
taxes
|
|
(114)
|
|
(3)
|
|
(117)
|
|
(6)
|
|
Minority
interest
|
|
(1)
|
|
(3)
|
|
(4)
|
|
(5)
|
|
Equity
earnings
|
|
-
|
|
-
|
|
1
|
|
1
|
|
Income
from discontinued
operations
|
|
792
|
|
16
|
|
808
|
|
49
|
|
Basic
EPS from discontinued
operations
|
$
|
5.77
|
$
|
0.12
|
$
|
5.73
|
$
|
0.35
|
The
results from discontinued operations for 2007 reflect only the Canadian
diagnostic services business. The results from discontinued
operations for 2006 include results from the Canadian diagnostic services
business and certain small MDS Pharma Services businesses discontinued in
2005.
Liquidity
and capital
resources
|
|
|
April
30
2007
|
|
October
31 2006
|
Change
|
|
Cash,
cash equivalents and short-term investments
|
$
|
319
|
$
|
382
|
(16%)
|
|
Operating
working capital
1
|
$
|
74
|
$
|
97
|
(24%)
|
|
Current
ratio (excludes net assets held for sale)
|
$
|
1.6
|
$
|
2.4
|
|
1
Our
measure of
operating working capital equals accounts receivable plus unbilled revenue
and
inventory less accounts payable, accrued liabilities, and current deferred
revenue.
During
the past year, we utilized $63 million of cash, mostly to fund the acquisition
of Molecular Devices and our share repurchase. Net cash proceeds from
the sale of the diagnostics business amounted to $929 million, while net
cash
outflows to purchase Molecular Devices and fund the share repurchase totalled
$1,044 million. These investments were partially offset by cash generated
by
operations in the period of $42 million.
We
expect
our operating cash inflows to remain strong during the latter half of this
year
and throughout fiscal 2008. Cash outflows will include FDA
settlements with our customers and the payment of severance obligations
associated with our restructuring activities. In
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US
GAAP RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
addition,
we will make a principal repayment of $79 million on our long-term debt in
December 2007. These liquidity needs can be satisfied from cash
generated from operations and cash on hand. We also have available a CDN$500
million, five-year committed, revolving credit facility to fund our liquidity
requirements. On February 6, 2007 we drew CDN$500 million from this facility
to
ensure that we had adequate funds on hand to complete our planned acquisition
of
MD, in the event we were unable to close the sale of the diagnostics business
prior to taking up MD shares under our tender offer. We repaid this borrowing
in
March from the proceeds resulting from the sale of the diagnostics business
and
there were no borrowings under this facility as at April 30, 2007.
Cash
used
in financing activities (excluding discontinued operations) during the quarter
was $437 million versus $5 million received from financing activities last
year. Current year financing activities included $441 million used
for the share repurchase. Given the execution of our issuer bid, we
made no purchases under our normal course issuer bid during the
quarter.
We
believe that cash flow generated from operations, coupled with available
borrowings from existing financing sources, will be sufficient to meet our
anticipated requirements for acquisitions, capital expenditures, research
and
development expenditures, FDA settlements, restructuring costs and operations
in
2007 and 2008. At this time, we do not reasonably expect any
presently known trend or uncertainty to affect our ability to access our
current
sources of cash. We remain in compliance with all covenants for our
senior unsecured notes and our bank credit facility.
Contractual
Obligations
There
have been no material changes in contractual obligations since October 31,
2006
other than those arising from the acquisition of MD, and there has been no
substantive change in any of our long-term debt or other long-term obligations
since that date. We have not entered into any new guarantees of the
debt of third parties, nor do we have any off-balance sheet
arrangements. The acquisition of MD has added $6 million of annual
commitments related to operating leases and approximately $14 million of
inventory purchase commitments in 2007.
Derivative
Instruments
We
use
derivative financial instruments to manage our foreign currency and interest
rate exposure. These instruments consisted of forward foreign
exchange and option contracts and interest rate swap agreements entered into
in
accordance with established risk management policies and
procedures. All derivative instrument contracts are with banks listed
on Schedules I to III to the Bank Act (Canada) and the Company utilizes
financial information provided by certain of these banks to assist in the
determination of fair market values of the financial instruments.
The
net
mark-to-market value of all derivative instruments at April 30, 2007 was
an
asset of $2 million.
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US
GAAP RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
Capitalization
|
|
|
April
30
2007
|
|
October
31 2006
|
|
Change
|
|
Long-term
debt
|
$
|
384
|
$
|
394
|
|
(3%)
|
|
Less:
cash and cash equivalents and short-term investments
|
|
319
|
|
382
|
|
(16%)
|
|
Net
debt
|
|
65
|
|
12
|
|
442%
|
|
Shareholders’
equity
|
|
1,702
|
|
1,354
|
|
26%
|
|
Capital
employed
1
|
$
|
1,767
|
$
|
1,366
|
|
29%
|
1
Capital
employed
is a measure of how much of our net assets is financed by debt and
equity.
Long-term
debt decreased $10 million due to $6 million of principal payments in December
and currency re-valuation. Changes in the value of the US-dollar
denominated debt, which is treated as a hedge in the US net investment, are
reflected in Accumulated Other Comprehensive Income in the Statement of
Financial Position. The current portion of the long-term debt is $93
million compared to $20 million at October 31, 2006, reflecting the transfer
to
current portion of $79 million of long-term debt which will be repaid in
December 2007.
Quarterly
Highlights
Following
is a summary of selected financial information derived from the Company’s
unaudited interim period consolidated financial statements for each of the
eight
most recently completed quarters. This financial data has been
prepared in accordance with US GAAP and prior periods have been restated
to
reflect the discontinuance of the operations discussed above.
|
[millions
of US dollars, except earnings per share]
|
|
|
|
|
|
|
|
|
|
|
Trailing
Four
Quarters
|
Apr
2007
|
Jan
2007
|
Oct
2006
|
July
2006
|
|
Net
revenues
|
$
|
995
|
$
|
263
|
$
|
241
|
$
|
250
|
$
|
241
|
|
Operating
income (loss)
|
$
|
(129)
|
$
|
(96)
|
$
|
(9)
|
$
|
(3)
|
$
|
(21)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
$
|
(45)
|
$
|
(55)
|
$
|
-
|
$
|
12
|
$
|
(2)
|
|
Net
income (loss)
|
$
|
812
|
$
|
737
|
$
|
16
|
$
|
45
|
$
|
14
|
|
Earnings
(loss) per share from
continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
$
|
(0.33)
|
$
|
(0.40)
|
$
|
0.00
|
$
|
0.08
|
$
|
(0.01)
|
|
Earnings
(loss) per
share
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
5.88
|
$
|
5.37
|
$
|
0.11
|
$
|
0.30
|
$
|
0.10
|
|
Diluted
|
$
|
5.86
|
$
|
5.35
|
$
|
0.11
|
$
|
0.30
|
$
|
0.10
|
|
[millions
of US dollars, except earnings per share]
|
|
|
|
|
|
|
|
|
|
|
|
Trailing
Four
Quarters
|
Apr
2006
|
Jan
2006
|
Oct
2005
|
July
2005
|
|
|
Net
revenues
|
$
|
925
|
$
|
234
|
$
|
230
|
$
|
248
|
$
|
213
|
|
|
Operating
income (loss)
|
$
|
(94)
|
$
|
(36)
|
$
|
4
|
$
|
(47)
|
$
|
(15)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
$
|
(21)
|
$
|
(1)
|
$
|
13
|
$
|
(35)
|
$
|
2
|
|
|
Net
income (loss)
|
$
|
28
|
$
|
15
|
$
|
46
|
$
|
(43)
|
$
|
10
|
|
|
Earnings
(loss) per share from
continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
$
|
(0.15)
|
$
|
(0.01)
|
$
|
0.09
|
$
|
(0.25)
|
$
|
0.02
|
|
|
Earnings
(loss) per
share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
$
|
0.20
|
$
|
0.11
|
$
|
0.32
|
$
|
(0.30)
|
$
|
0.07
|
|
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US
GAAP RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
Items
that impact the comparability of operating income include:
|
·
|
Results
for the quarter ended April 30, 2007 reflect a $792 million net
gain from
the sale of our diagnostics businesses, the 41 days of operating
results
of Molecular Devices, $61 million of charges related to assisting
clients
in respect of the FDA review, and $25 million of restructuring
charges.
|
|
·
|
Results
for the quarter ended January 31, 2007 reflect the impact of restructuring
charges totaling $13 million.
|
|
·
|
Results
for the quarter ended April 30, 2006 reflect a loss of $36 million
resulting from the completion of the MAPLE
settlement.
|
|
·
|
Results
for the quarter ended October 31, 2005 reflect restructuring charges
of
$47 million and valuation provisions on certain long-term investments
totaling $11 million.
|
Outlook
Our
second quarter in 2007 included three significant transactions that complete
our
transition to a global life sciences company. In addition, we made meaningful
progress in resolving the outstanding FDA matter, assisting a majority of
our
generic pharmaceutical clients to conduct the study audits required by the
FDA.
We believe our businesses are well positioned for growth.
We
launched MDS Analytical Technologies during the quarter, combining the Molecular
Devices acquisition with our MDS Sciex division. Since then, the
business has announced several new products and attended a highly successful
Society for Biomolecular Sciences conference in April. Customer interest
in our
newly expanded product line is strong and we have seen continued strength
in
orders.
Our
goal
is to maintain an ongoing supply of high-quality products and services as
we
introduce exciting new technologies to increase our customers’
productivity. Our focus for the balance of the year is to continue to
serve our customers well as we drive a smooth integration of the MDS Sciex
and
Molecular Devices businesses. We believe that there are significant synergies
available to these businesses as they become one. We will achieve
these as rapidly as possible, while maintaining the hard-earned reputation
of
both businesses for providing superior solutions to meet our customers’ complex
needs.
In
recent
quarters, management of MDS Pharma Services has focused significant attention
on
resolving the FDA issue at our Montreal site. With this matter on a path
to
final resolution, management has renewed its attention on customers and building
for the future. A substantial realignment of the business has begun and we
recorded a charge in the second quarter for this. Looking forward, attention
is
focused on sustaining the strong performance of our late-stage businesses
and
restoring the growth and profitability of our early-stage business by building
on the solid platforms we have in early clinical research and drug safety.
We
are working hard to reassure our clients that they can rely on MDS Pharma
Services for work that is of the highest quality.
MDS
Nordion has posted solid performance so far this year and has continued to
grow
its business outside of its traditional medical isotopes platforms. New
commercial relationships with companies like Avid Radiopharmaceuticals and
others provide opportunities to expand in the molecular imaging market. We
see
continued strong demand for TheraSphere in Europe and, more recently, in
India
and we believe the potential for this innovative therapy is high. We are
also
investing to serve the rapidly growing market for PET scans by expanding
our
capacity to manufacturer Glucotrace, an imaging agent, in Europe. We believe
these initiatives, combined with others that are in earlier stages of
development, position this business well for the future.
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US
GAAP RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
We
continue to monitor currency markets and there has been significant volatility
in the value of the US dollar since year-end. Although we have hedged a
significant portion of our net US-dollar cash flows from our Canadian-based
businesses, currency markets will continue to have an impact on our reported
results and we will continue to report organic measures of revenue and adjusted
EBITDA growth to help readers understand the impact of these market
dynamics.
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US
GAAP RESTATED
CONSOLIDATED
STATEMENT OF FINANCIAL POSITION
[UNAUDITED]
|
|
|
Restated
See Note 2
|
|
As
at April 30 with comparatives at October 31
[millions
of US dollars]
|
|
2007x
|
|
2006
|
|
Assets
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
Cash
and cash equivalents
|
$
|
298
|
$
|
247
|
|
Short-term
investments
|
|
21
|
|
135
|
|
Accounts
receivable, net
|
|
246
|
|
224
|
|
Unbilled
revenue
|
|
111
|
|
122
|
|
Inventories,
net
|
|
147
|
|
80
|
|
Income
taxes recoverable
|
|
63
|
|
42
|
|
Prepaid
expenses and other
|
|
24
|
|
21
|
|
Assets
held for sale
|
|
1
|
|
196
|
|
Total
Current
Assets
|
$
|
911
|
$
|
1,067
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
$
|
332
|
$
|
334
|
|
Deferred
tax assets
|
|
1
|
|
47
|
|
Long-term
investments and other
|
|
215
|
|
176
|
|
Goodwill
|
|
762
|
|
397
|
|
Intangible
assets, net
|
|
504
|
|
322
|
|
Total
Assets
|
$
|
2,725
|
$
|
2,343
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’
Equity
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
$
|
338
|
$
|
237
|
|
Deferred
revenue
|
|
92
|
|
92
|
|
Income
taxes payable
|
|
56
|
|
8
|
|
Deferred
tax liabilities
|
|
8
|
|
-
|
|
Current
portion of long-term debt
|
|
93
|
|
20
|
|
Liabilities
related to assets held for sale
|
|
-
|
|
114
|
|
Total
Current
Liabilities
|
$
|
587
|
$
|
471
|
|
|
|
|
|
|
|
Long-term
debt
|
$
|
291
|
$
|
374
|
|
Deferred
revenue
|
|
16
|
|
17
|
|
Other
long-term obligations
|
|
27
|
|
24
|
|
Deferred
tax liabilities
|
|
102
|
|
103
|
|
Total
Liabilities
|
$
|
1,023
|
$
|
989
|
|
|
|
|
|
|
|
Shareholders’
Equity
|
|
|
|
|
|
Common
shares, at par – Authorized shares: unlimited; Issued and
outstanding shares:
122,288,316
and 144,319,249 for April 2007 and October 2006
respectively.
|
$
|
486
|
$
|
566
|
|
Additional
paid in capital
|
|
71
|
|
69
|
|
Retained
earnings
|
|
822
|
|
391
|
|
Accumulated
other comprehensive income
|
|
323
|
|
328
|
|
Total
Shareholders’
Equity
|
$
|
1,702
|
|
1,354
|
|
Total
Liabilities and
Shareholders’ Equity
|
$
|
2,725
|
$
|
2,343
|
|
Incorporated
Under The Canada
Business Corporations Act
|
|
|
|
|
See
accompanying
notes.
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US
GAAP RESTATED
CONSOLIDATED
STATEMENT OF OPERATIONS
[UNAUDITED]
|
|
Restated
See Note 2
|
Restated
See Note 2
|
|
|
Three
months to April 30
|
Six
months to April 30
|
|
[millions
of US dollars, except per share amounts]
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Products
|
$
|
129
|
$
|
107
|
$
|
234
|
$
|
212
|
|
Services
|
|
134
|
|
127
|
|
270
|
|
252
|
|
Reimbursement
revenues
|
|
23
|
|
26
|
|
46
|
|
57
|
|
Total
revenues
|
$
|
286
|
$
|
260
|
$
|
550
|
$
|
521
|
|
Costs
and
expenses
|
|
|
|
|
|
|
|
|
|
Direct
cost of products
|
$
|
(83)
|
$
|
(68)
|
$
|
(154)
|
$
|
(139)
|
|
Direct
cost of services
|
|
(82)
|
|
(84)
|
|
(172)
|
|
(166)
|
|
Reimbursed
expenses
|
|
(23)
|
|
(26)
|
|
(46)
|
|
(57)
|
|
Selling,
general and administration
|
|
(61)
|
|
(53)
|
|
(115)
|
|
(100)
|
|
Research
and development
|
|
(16)
|
|
(13)
|
|
(28)
|
|
(25)
|
|
Depreciation
and amortization
|
|
(18)
|
|
(13)
|
|
(32)
|
|
(24)
|
|
Restructuring
charges – net
|
|
(25)
|
|
(1)
|
|
(38)
|
|
(2)
|
|
Other
expenses - net
|
|
(74)
|
|
(38)
|
|
(70)
|
|
(40)
|
|
Total
costs and
expenses
|
$
|
(382)
|
$
|
(296)
|
$
|
(655)
|
$
|
(553)
|
|
Operating
loss from continuing
operations
|
|
(96)
|
|
(36)
|
|
(105)
|
|
(32)
|
|
Interest
expense
|
|
(8)
|
|
(4)
|
|
(14)
|
|
(7)
|
|
Interest
income
|
|
10
|
|
1
|
|
14
|
|
|
|
Mark-to-market
on interest note swaps
|
|
1
|
|
(2)
|
|
1
|
|
(2)
|
|
Equity
earnings
|
|
11
|
|
9
|
|
25
|
|
23
|
|
Loss
from continuing operations
before income taxes
|
$
|
(82)
|
$
|
(32)
|
$
|
(79)
|
$
|
(15)
|
|
Income
tax (expense) recovery
|
|
|
|
|
|
|
|
|
|
- current
|
|
31
|
|
19
|
|
29
|
|
17
|
|
- deferred
|
|
(4)
|
|
12
|
|
(5)
|
|
10
|
|
Income
(loss) from continuing
operations
|
$
|
(55)
|
$
|
(1)
|
$
|
(55)
|
$
|
12
|
|
|
|
|
|
|
|
|
|
|
|
Income
from discontinued
operations – net of income tax
|
|
792
|
|
16
|
|
808
|
|
49
|
|
Net
income
(loss)
|
$
|
737
|
$
|
15
|
$
|
753
|
$
|
61
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per
share
|
|
|
|
|
|
|
|
|
|
-
from continuing operations
|
$
|
(0.40)
|
$
|
(0.01)
|
$
|
(0.39)
|
$
|
0.08
|
|
-
from discontinued operations
|
|
5.77
|
|
0.12
|
|
5.73
|
|
0.35
|
|
Basic
earnings (loss) per
share
|
$
|
5.37
|
$
|
0.11
|
$
|
5.34
|
$
|
0.43
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per
share
|
|
|
|
|
|
|
|
|
|
-
from continuing operations
|
$
|
(0.40)
|
$
|
(0.01)
|
$
|
(0.39)
|
$
|
0.08
|
|
-
from discontinued operations
|
|
5.75
|
|
0.12
|
|
5.72
|
|
0.35
|
|
Diluted
earnings (loss) per
share
|
$
|
5.35
|
$
|
0.11
|
$
|
5.33
|
$
|
0.43
|
See
accompanying
notes
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US
GAAP RESTATED
CONSOLIDATED
STATEMENT OF COMPREHENSIVE INCOME
[UNAUDITED]
Restated
see Note 2
|
|
Three
months to April 30
|
Six
months to April 30
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net
income
|
$
|
737
|
$
|
15
|
$
|
753
|
$
|
61
|
|
Foreign
currency translation
|
|
41
|
|
33
|
|
28
|
|
75
|
|
Unrealized
loss on available-for-sale assets
|
|
-
|
|
(1)
|
|
(3)
|
|
(4)
|
|
Unrealized
loss on derivatives designated as cash flow hedges, net of
tax
|
|
5
|
|
-
|
|
5
|
|
-
|
|
Reclassification
of realized loses
|
|
(2)
|
|
1
|
|
(2)
|
|
1
|
|
Repurchase
and cancellation of common shares
|
|
(33)
|
|
-
|
|
(33)
|
|
-
|
|
Other
comprehensive income
|
$
|
11
|
$
|
33
|
$
|
(5)
|
$
|
72
|
|
Comprehensive
income
|
$
|
748
|
$
|
48
|
$
|
748
|
$
|
133
|
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US
GAAP RESTATED
CONSOLIDATED
STATEMENT OF CASH FLOWS
[UNAUDITED]
|
|
Restated
See Note 2
|
Restated
See Note 2
|
|
|
Three
months to April 30
|
Six
months to April 30
|
|
[millions
of US dollars]
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Operating
activities
|
|
|
|
|
|
|
|
|
|
Net
income
|
$
|
737
|
$
|
15
|
$
|
753
|
$
|
61
|
|
Income
from discontinued operations – net of tax
|
|
792
|
|
16
|
|
808
|
|
49
|
|
Income
(loss) from continuing operations
|
|
(55)
|
|
(1)
|
|
(55)
|
|
12
|
|
Adjustments
to reconcile net income to cash provided by operating
activities relating
to continuing operations
|
|
|
|
|
|
|
|
|
|
Items
not affecting current cash flow
|
|
71
|
|
20
|
|
99
|
|
29
|
|
Changes
in non-cash working capital balances relating to
operations
|
|
95
|
|
(12)
|
|
62
|
|
(52)
|
|
Cash
provided by (used in) operating activities of continuing
operations
|
|
111
|
|
7
|
|
106
|
|
(11)
|
|
Cash
provided by (used in) operating activities of discontinued
operations
|
|
(69)
|
|
21
|
|
(53)
|
|
34
|
|
|
|
42
|
|
28
|
|
53
|
|
23
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
|
Acquisitions
|
|
(603)
|
|
-
|
|
(603)
|
|
-
|
|
Proceeds
from MAPLE transaction
|
|
-
|
|
24
|
|
-
|
|
24
|
|
Purchase
of property, plant and equipment
|
|
(7)
|
|
1
|
|
(16)
|
|
(21)
|
|
Proceeds
on sale of short-term investments
|
|
25
|
|
-
|
|
151
|
|
-
|
|
Purchases
of short-term investments
|
|
(15)
|
|
-
|
|
(37)
|
|
-
|
|
Proceeds
on sale of long-term investment
|
|
2
|
|
-
|
|
13
|
|
-
|
|
Other
|
|
(1)
|
|
1
|
|
-
|
|
(16)
|
|
Cash
provided by (used in) investing activities of continuing
operations
|
|
(599)
|
|
26
|
|
(492)
|
|
(13)
|
|
Cash
provided by investing activities of discontinued
operations
|
|
929
|
|
9
|
|
929
|
|
77
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
|
Repayment
of long-term debt
|
|
(1)
|
|
(1)
|
|
(7)
|
|
(1)
|
|
Decrease
in deferred revenue and other long-term
obligations
|
|
(1)
|
|
-
|
|
-
|
|
(9)
|
|
Payment
of cash dividends
|
|
-
|
|
(3)
|
|
(3)
|
|
(6)
|
|
Issuance
of shares
|
|
6
|
|
9
|
|
10
|
|
19
|
|
Repurchase
of shares
|
|
(441)
|
|
-
|
|
(441)
|
|
-
|
|
Cash
provided by (used in) financing activities of continuing
operations
|
|
(437)
|
|
5
|
|
(441)
|
|
3
|
|
Cash
used in financing activities of discontinued operations
|
|
-
|
|
(1)
|
|
(2)
|
|
(8)
|
|
Effect
of foreign exchange rate changes on cash and cash
equivalents
|
|
28
|
|
4
|
|
4
|
|
17
|
|
Increase
(decrease) in cash and
cash
equivalents
during the period
|
|
(37)
|
|
71
|
|
51
|
|
99
|
|
Cash
and cash equivalents, beginning of
period
|
|
335
|
|
243
|
|
247
|
|
215
|
|
Cash
and cash equivalents, end
of period
|
$
|
298
|
$
|
314
|
$
|
298
|
$
|
314
|
|
See
accompanying
notes
|
|
|
|
|
|
|
|
|
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US
GAAP RESTATED
NOTES
TO RESTATED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
As
a
Canadian-based company, MDS Inc. (MDS or the Company) historically has prepared
its consolidated financial statements in Canadian dollars in conformity with
accounting principles generally accepted in Canada (Canadian GAAP) and has
also
provided a reconciliation to United States generally accepted accounting
principles (US GAAP).
To
enhance its communication with its shareholders, improve comparability of
financial information with its competitors and peer group, and promote a
common
financial language within MDS, the Company adopted the US dollar as
its reporting currency as at the first quarter of 2007 and US GAAP as its
primary reporting standard for the presentation of its consolidated financial
statements as of fiscal year end 2007.
All
revenues, expenses and cash flows for each year were translated into the
reporting currency using average rates for the year, or the rates in effect
at
the date of the transaction for significant transactions. Assets and liabilities
were translated using the exchange rate at the end of each year. All
resulting exchange differences are reported as a separate component of
accumulated other comprehensive income. 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 consolidated and 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.
The
cumulative impact of the change in reporting currency was to increase the
cumulative translation adjustment by $371 million through October 31,
2006.
As
a
result of adopting US GAAP as its primary reporting standard for its 2007
consolidated year-end statements, the Company is required to restate to US
GAAP
its previously filed financial statements for the four quarters of
2007. Previously, our filings prepared in accordance with Canadian
GAAP disclosed a reconciliation of earnings to US GAAP due to our status
as a
foreign private issuer in the US. Going forward, with US GAAP as our
primary basis of accounting, we will reconcile our US GAAP earnings to Canadian
GAAP. This reconciliation will be done as required by applicable
Canadian regulations on an annual and quarterly basis for a minimum of the
next
two fiscal years (see Note 15).
|
2.
|
Changes
Affecting Fiscal 2007
Consolidated Financial Statements
|
During
the preparation of our 2007 annual financial statements, an error was identified
in the US GAAP reconciliation provided as part of the interim
financial statements prepared during the 2007 fiscal year with
respect to certain stock based incentive compensation plans for which an
incorrect valuation methodology was utilized. The Company has
corrected this error by restating selling, general and administration expenses
by $1 million in the accompanying quarter consolidated financial statements
and
reducing the value of accrued liabilities by a similar amount. The
Canadian GAAP statements previously reported were not impacted by the change,
except for the reconciliation to US GAAP (see Note 15).
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US
GAAP RESTATED
NOTES
TO RESTATED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
As
a
result of adopting US GAAP as the primary reporting standard for the Company,
management has determined that investment tax credits (ITCs) having an after-tax
value of $13 million realized in its fiscal year ended October 31, 2001 and
resulting from its acquisition of Phoenix International Life Sciences Inc.
in
the previous year had not been identified as a net income reconciliation
item in
the GAAP reconciliation note for fiscal 2001.
Under
Canadian GAAP, acquired ITCs that are determined to have nil value for purposes
of purchase price allocation are, if subsequently realized, recorded as income.
Under US GAAP, such acquired ITCs are recorded when realized as a reduction
in
goodwill arising from that prior period acquisition. This item should therefore
have been identified as a US GAAP net income reconciliation item in fiscal
2001.
In subsequent periods, the reported amount of goodwill and retained earnings
for
US GAAP purposes were likewise overstated by this amount. The Company has
corrected this error by restating opening retained earnings for fiscal 2005
in
the accompanying consolidated statement of shareholders’ equity and reducing the
carrying value of goodwill by $13 million. The impact of this
restatement has been similarly reflected for subsequent periods.
|
b.
|
Change
in Accounting
Policy
|
In
addition, in adopting US GAAP, the Company has changed its accounting policy
for
non-refundable investment tax credits (ITCs). In these consolidated financial
statements, the Company has recorded non-refundable ITCs as a reduction in
income tax expense for the year in which the ITC’s were recognized. Previously,
the Company recorded non-refundable ITCs as a reduction of the related
expenditure. Management believes this accounting policy change will make
the
Company’s reporting of ITCs consistent with the majority of other companies who
report under US GAAP.
There
is
no impact on net income from continuing operations, earnings per share, or
retained earnings of any period as a result of this change. This change in
policy increased (decreased) other lines on the statements of operations
as
follows:
Three
months ended January 31
|
|
|
2007
|
|
2006
|
|
Direct
cost of services
|
$
|
3
|
$
|
4
|
|
Research
and development
|
|
1
|
|
3
|
|
Other
expense – net
|
|
3
|
|
27
|
|
Current
income taxes
|
|
(7)
|
|
(34)
|
MDS
has
adopted the provisions of Staff Accounting Bulletin No. 108 –
Considering the Effects
of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements.
In accordance with the provisions of SAB No. 108, the Company
has recorded a cumulative adjustment to correct the treatment of certain
deferred charges and related income tax expenses. The adjustments resulted
in an
increase in fiscal 2005 opening retained earnings of $2 million and an
adjustment to the tax expense associated with prior year deferred charges
that
reduced fiscal 2005 opening retained earnings by $4 million. The cumulative
net
effect of these adjustments on retained earnings as at November 1, 2004 is
a
reduction of $2 million. In addition, the Company has recorded a $6 million
reduction in November 1, 2004
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US
GAAP RESTATED
NOTES
TO RESTATED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
retained
earnings and a corresponding increase in additional paid-in capital to correct
an amount that had previously been misclassified in the continuity of retained
earnings.
|
3.
|
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 $603 million paid in cash from existing cash on
hand. Included in the consideration is the cash cost of $27 million
to settle all outstanding in-the-money options of MD at the closing date
of the
acquisition. Direct and incremental third party acquisition costs
associated with the acquisition were approximately $8 million.
The
acquisition has been accounted for as a purchase in accordance with SFAS
No. 141
“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 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,
assisted by valuation consultants, 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
|
$
|
595
|
|
Transaction
costs
|
|
8
|
|
|
|
|
|
Net
consideration and acquisition costs
|
$
|
603
|
|
|
|
|
|
Allocation
of purchase price
|
|
|
|
Net
tangible assets acquired
|
$
|
50
|
|
Intangible
assets acquired:
|
|
|
|
Developed
technology
|
|
111
|
|
In
process research and development
|
|
11
|
|
Brands
|
|
60
|
|
Goodwill
(non-tax deductible)
|
|
371
|
|
Total
purchase price
|
$
|
603
|
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US
GAAP RESTATED
NOTES
TO RESTATED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
The
following table summarizes the components of the tangible assets acquired
at
fair value:
|
Inventories
|
$
|
60
|
|
Property,
plant and equipment
|
|
12
|
|
Other
assets and liabilities, net
|
|
(22)
|
|
Net
tangible assets acquired
|
$
|
50
|
Other
assets and liabilities include $23 million quarter net deferred tax liabilities.
Net tangible assets acquired include a charge of $4 million to eliminate
redundant positions at MD over the course of the next year. The
acquired technology will be amortized over its estimated life, which ranges
between five and seven years while the brands have an indefinite life and
are
not amortized.
|
4.
|
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$792 million on the transaction in the quarter.
As
a
result of the sale, MDS sold $82 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
|
|
(27)
|
|
Long-term
debt and other long-term obligations
|
|
(24)
|
|
Net
assets
|
$
|
82
|
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US
GAAP RESTATED
NOTES
TO RESTATED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
The
results of discontinued operations in the quarter and the six-months ended
April
30 were as follows:
|
|
Second
Quarter
|
Year-to-date
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net
revenues
|
$
|
20
|
$
|
98
|
$
|
95
|
$
|
198
|
|
Cost
of revenues
|
|
(12)
|
|
(63)
|
|
(58)
|
|
(131)
|
|
Selling,
general and administration
|
|
(6)
|
|
(12)
|
|
(15)
|
|
(27)
|
|
Depreciation
and amortization
|
|
-
|
|
(2)
|
|
-
|
|
(5)
|
|
Goodwill
write-down
|
|
-
|
|
-
|
|
-
|
|
-
|
|
Restructuring
charges
|
|
-
|
|
-
|
|
-
|
|
(1)
|
|
Other
expenses
|
|
-
|
|
-
|
|
-
|
|
-
|
|
Operating
income
|
|
2
|
|
21
|
|
22
|
|
34
|
|
Gain
on sale of discontinued operations
|
|
905
|
|
-
|
|
905
|
|
24
|
|
Interest
expense
|
|
-
|
|
1
|
|
-
|
|
-
|
|
Interest
income
|
|
-
|
|
-
|
|
1
|
|
1
|
|
Income
taxes
|
|
(114)
|
|
(3)
|
|
(117)
|
|
(6)
|
|
Minority
interest
|
|
(1)
|
|
(3)
|
|
(4)
|
|
(5)
|
|
Equity
earnings
|
|
-
|
|
-
|
|
1
|
|
1
|
|
Income
from discontinued
operations
|
|
792
|
|
16
|
|
808
|
|
49
|
|
Basic
EPS from discontinued
operations
|
$
|
5.77
|
$
|
0.12
|
$
|
5.73
|
$
|
0.35
|
The
results from discontinued operations for 2007 reflect only the Canadian
diagnostic services business. The results from discontinued
operations for 2006 include results from the Canadian diagnostic services
business and certain small MDS Pharma Services businesses discontinued in
2005. In accordance with SFAS No. 144, “Accounting for the Impairment
or Disposal of Long-Lived Assets” long-lived assets classified as held for sale
are measured at the lower of carrying value and fair value less costs to
sell.
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US
GAAP RESTATED
NOTES
TO RESTATED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
Assets
held for sale and liabilities related to assets held for sale
comprise:
|
|
|
As
at April
30
|
|
As
at October 31
|
|
|
|
2007
|
|
2006
|
|
Assets
held for
sale
|
|
|
|
|
|
Accounts
receivable
|
$
|
-
|
$
|
31
|
|
Inventories
|
|
-
|
|
3
|
|
Prepaid
expenses and other
|
|
-
|
|
3
|
|
Property,
plant and equipment
|
|
-
|
|
28
|
|
Deferred
tax asset
|
|
-
|
|
63
|
|
Long-term
investments and other
|
|
1
|
|
13
|
|
Goodwill
|
|
-
|
|
54
|
|
Intangible
assets
|
|
-
|
|
1
|
|
Total
assets held for sale
|
|
1
|
|
196
|
|
Less: Current
assets held for sale1
|
|
(1)
|
|
(196)
|
|
Long-term
assets held for sale
|
$
|
-
|
$
|
-
|
|
|
|
|
|
|
|
Liabilities
related to assets
held for sale
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
$
|
-
|
$
|
33
|
|
Long-term
debt
|
|
-
|
|
4
|
|
Other
long-term obligations
|
|
-
|
|
6
|
|
Deferred
tax liabilities
|
|
-
|
|
55
|
|
Minority
interest
|
|
-
|
|
16
|
|
Total
liabilities related to assets held for sale
|
|
-
|
|
114
|
|
Less: Current
liabilities related to assets held for sale1
|
|
-
|
|
(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 if the Company has signed agreements where such assets are expected
to
be disposed of within one year.
|
5.
|
Accumulated
Other Comprehensive
Income
|
Restated
see Note 2
|
|
Three
months ended April 30
|
|
[millions
of US dollars]
|
|
2007
|
|
2006
|
|
Accumulated
other comprehensive
income, net of income taxes,
beginning
of
period
|
$
|
312
|
$
|
307
|
|
Foreign
currency translation
|
|
41
|
|
33
|
|
Unrealized
loss on available-for-sale assets
|
|
-
|
|
(1)
|
|
Unrealized
loss on derivatives designated as cash flow hedges, net of
tax
|
|
5
|
|
-
|
|
Reclassification
of realized losses
|
|
(2)
|
|
1
|
|
Repurchase
and cancellation of common shares
|
|
(33)
|
|
-
|
|
Accumulated
other comprehensive
income, net of income taxes,
end
of
period
|
$
|
323
|
$
|
340
|
|
See
accompanying
notes
|
|
|
|
|
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US
GAAP RESTATED
NOTES
TO RESTATED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
An
analysis of the activity in the provision through April 30, 2007 is as
follows:
|
|
Restructuring
Charge
|
Cumulative
drawdowns
|
Provision
Balance
at
April
30,
2007
|
|
Cash
|
Non-cash
|
|
2005:
|
|
|
|
|
|
|
|
|
|
Workforce
reductions
|
$
|
34
|
$
|
(32)
|
$
|
(1)
|
$
|
1
|
|
Equipment
and other asset write-downs – adjustment
|
|
7
|
|
-
|
|
(7)
|
|
-
|
|
Contract
cancellation charges
|
|
10
|
|
(2)
|
|
(8)
|
|
-
|
|
|
$
|
51
|
$
|
(34)
|
$
|
(16)
|
$
|
1
|
|
2006:
|
|
|
|
|
|
|
|
|
|
Workforce
reductions
|
$
|
1
|
$
|
(1)
|
$
|
-
|
$
|
-
|
|
Contract
cancellation charges
|
|
(8)
|
|
(1)
|
|
9
|
|
-
|
|
|
$
|
(7)
|
$
|
(2)
|
$
|
9
|
$
|
-
|
|
2007:
|
|
|
|
|
|
|
|
|
|
Workforce
reductions
|
$
|
19
|
$
|
(3)
|
$
|
-
|
$
|
16
|
|
Equipment
and other asset write-downs
|
|
2
|
|
-
|
|
-
|
|
2
|
|
Contract
cancellation charges
|
|
5
|
|
(5)
|
|
-
|
|
-
|
|
Other
|
|
12
|
|
(5)
|
|
(2)
|
|
5
|
|
|
$
|
38
|
$
|
(13)
|
$
|
(2)
|
$
|
23
|
|
|
|
|
|
|
|
|
$
|
24
|
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
$25 million in the quarter including $17 million for severance, $2 million
to
reduce the carrying value of certain assets and $6 million for other
costs.
|
|
Three
months to April 30
|
Six
months to April 30
|
|
(number
of shares in millions)
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Weighted
average number of Common shares outstanding – basic
|
|
137
|
143
|
141
|
143
|
|
Impact
of stock options assumed exercised
|
|
1
|
|
1
|
|
-
|
|
1
|
|
Weighted
average number of Common shares outstanding – diluted
|
138
|
144
|
141
|
144
|
|
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
.
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US GAAP
RESTATED
NOTES
TO RESTATED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
For
purposes of these pro-forma disclosures, the Company's net income and basic
and
diluted earnings per share would have been:
|
|
Three
months to April 30
|
Six
months to April 30
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net
income
|
$
|
737
|
$
|
15
|
$
|
753
|
$
|
61
|
|
Compensation
expense for options granted prior to November 1, 2003
|
|
-
|
|
-
|
|
(1)
|
|
(1)
|
|
Net
income – pro-forma
|
$
|
737
|
$
|
15
|
$
|
752
|
$
|
60
|
|
|
|
|
|
|
|
|
|
|
|
Pro-forma
basic earnings per share
|
$
|
5.37
|
$
|
0.11
|
$
|
5.34
|
$
|
0.42
|
|
Pro-forma
diluted earnings per share
|
$
|
5.35
|
$
|
0.11
|
$
|
5.33
|
$
|
0.42
|
|
8.
|
Share
Capital and Stock
Options
|
The
following table summarizes information on share capital and stock options
and
related matters as at April 30, 2007:
|
(number
of shares in thousands)
|
Number
|
|
Amount
|
|
Common
shares
|
|
|
|
|
Balance
as at October 31, 2006
|
144,319
|
|
566
|
|
Issued
during the period
|
800
|
|
11
|
|
Repurchased
during the period
|
(22,831)
|
|
(91)
|
|
Balance
as at April 30, 2007
|
122,288
|
|
486
|
|
(number
of stock options in thousands)
|
Number
|
Average
Exercise
Price
(C$)
|
|
Stock
options
|
|
|
|
|
Balance
as at October 31, 2006
|
5,850
|
$
|
18.76
|
|
Activity
during the period:
|
|
|
|
|
Granted
|
340
|
|
21.64
|
|
Exercised
|
(710)
|
|
15.66
|
|
Cancelled
or
forfeited
|
(163)
|
|
20.10
|
|
Balance
as at April 30, 2007
|
5,317
|
$
|
19.31
|
There
were 3,661 stock options exercisable as at April 30, 2007.
During
the quarter, the Company granted 280,500 options (2006 – 49,700) at an average
exercise price of C$21.84 (2006 - C$19.72). These options have a fair value
determined using the Black-Scholes model of C$4.62 per share (2006 - C$4.39)
based on the following assumptions:
|
|
2007
|
2006
|
|
Risk-free
interest
rate
|
3.9
|
%
|
3.9
|
%
|
|
Expected
dividend yield
|
0.0
|
%
|
0.7
|
%
|
|
Expected
volatility
|
0.22
|
|
0.23
|
|
|
Expected
time to exercise (years)
|
3.25
|
|
3.25
|
|
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US GAAP
RESTATED
NOTES
TO RESTATED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
|
9.
|
Other
Income (Expense) -
Net
|
|
|
Three
months to April 30
|
Six
months to April 30
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Write-down
of other long-term assets
|
$
|
-
|
$
|
-
|
$
|
|
$
|
(1)
|
|
Write-down
of investments
|
|
(6)
|
|
-
|
|
(6)
|
|
-
|
|
Gain
on sale of investment
|
|
-
|
|
-
|
|
2
|
|
-
|
|
Loss
on sale of Hamburg clinic
|
|
(4)
|
|
-
|
|
(4)
|
|
-
|
|
Gain
on sale of business
|
|
1
|
|
-
|
|
1
|
|
-
|
|
Acquisition
integration costs
|
|
(1)
|
|
-
|
|
(1)
|
|
-
|
|
FDA
Provision
|
|
(61)
|
|
-
|
|
(61)
|
|
-
|
|
Maple
Settlement
|
|
-
|
|
(36)
|
|
-
|
|
(36)
|
|
Foreign
exchange loss
|
|
(4)
|
|
(2)
|
|
(1)
|
|
(2)
|
|
Other
|
|
1
|
|
-
|
|
-
|
|
(1)
|
|
Other
expense - net
|
$
|
(74)
|
$
|
(38)
|
$
|
(70)
|
$
|
(40)
|
|
10.
|
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 $1 million (2006 -
$1
million).
|
11.
|
Supplementary
Cash Flow
Information
|
Non-cash
items affecting net income comprise:
|
|
Three
months to April 30
|
Six
months to April 30
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Depreciation
and amortization
|
$
|
18
|
$
|
13
|
$
|
32
|
$
|
24
|
|
Stock
option compensation
|
|
-
|
|
1
|
|
1
|
|
3
|
|
Deferred
revenue
|
|
-
|
|
(2)
|
|
(2)
|
|
(5)
|
|
Deferred
income taxes
|
|
31
|
|
(7)
|
|
47
|
|
(8)
|
|
Equity
earnings – net of distribution
|
|
9
|
|
5
|
|
9
|
|
8
|
|
Write-down
of MAPLE assets
|
|
-
|
|
9
|
|
-
|
|
9
|
|
Write-down
of investments
|
|
6
|
|
-
|
|
6
|
|
-
|
|
Loss
on sale of Hamburg clinic
|
|
4
|
|
-
|
|
4
|
|
-
|
|
Loss
on disposal of equipment and other assets
|
|
4
|
|
-
|
|
4
|
|
-
|
|
Gain
on dilution of investment
|
|
-
|
|
-
|
|
(2)
|
|
-
|
|
Mark-to-market
of derivatives
|
|
(1)
|
|
-
|
|
(1)
|
|
1
|
|
Amortization
of purchase price adjustments
|
|
2
|
|
-
|
|
2
|
|
-
|
|
Other
|
|
(2)
|
|
1
|
|
(1)
|
|
(3)
|
|
|
$
|
71
|
$
|
20
|
$
|
99
|
$
|
29
|
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US GAAP
RESTATED
NOTES
TO RESTATED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
Changes
in non-cash working capital balances relating to operations include
|
|
Three
months to April 30
|
Six
months to April 30
|
|
[millions
of US dollars]
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Accounts
receivable
|
$
|
(5)
|
$
|
(42)
|
$
|
8
|
$
|
(10)
|
|
Unbilled
revenue
|
|
27
|
|
(41)
|
|
11
|
|
(29)
|
|
Inventories
|
|
(3)
|
|
29
|
|
(7)
|
|
37
|
|
Prepaid
expenses
|
|
35
|
|
6
|
|
11
|
|
(8)
|
|
Accounts
payable and deferred revenue
|
|
62
|
|
39
|
|
48
|
|
(43)
|
|
Income
taxes
|
|
(21)
|
|
(3)
|
|
(9)
|
|
1
|
|
|
$
|
95
|
$
|
(12)
|
$
|
62
|
$
|
(52)
|
|
|
|
|
|
|
|
|
Three
months to April 30,
2007
|
|
|
MDS
Pharma
Services
|
MDS
Nordion
|
MDS
Analytical
Technologies
|
Corporate
and
Other
|
Total
|
|
Product
revenues
|
$
|
-
|
$
|
67
|
$
|
62
|
$
|
-
|
$
|
129
|
|
Service
revenues
|
|
115
|
|
4
|
|
15
|
|
-
|
|
134
|
|
Reimbursement
revenues
|
|
23
|
|
-
|
|
-
|
|
-
|
|
23
|
|
Total
revenues
|
|
138
|
|
71
|
|
77
|
|
-
|
|
286
|
|
Direct
product cost
|
|
-
|
|
(35)
|
|
(48)
|
|
-
|
|
(83)
|
|
Direct
service cost
|
|
(80)
|
|
(1)
|
|
(1)
|
|
-
|
|
(82)
|
|
Reimbursed
expenses
|
|
(23)
|
|
-
|
|
-
|
|
-
|
|
(23)
|
|
Selling,
general and administration
|
|
(32)
|
|
(12)
|
|
(11)
|
|
(6)
|
|
(61)
|
|
Research
and development
|
|
-
|
|
(1)
|
|
(15)
|
|
-
|
|
(16)
|
|
Depreciation
and amortization
|
|
(10)
|
|
(3)
|
|
(4)
|
|
(1)
|
|
(18)
|
|
Restructuring
charges - net
|
|
(23)
|
|
-
|
|
-
|
|
(2)
|
|
(25)
|
|
Other
income (expense) - net
|
|
(68)
|
|
1
|
|
(1)
|
|
(6)
|
|
(74)
|
|
Equity
Earnings
|
|
-
|
|
-
|
|
11
|
|
-
|
|
11
|
|
Segment
earnings
(loss)
|
$
|
(98)
|
$
|
20
|
$
|
8
|
$
|
(15)
|
$
|
(85)
|
|
Total
Assets
|
$
|
810
|
$
|
660
|
$
|
819
|
$
|
435
|
$
|
2,724
|
|
Capital
expenditures
|
$
|
5
|
$
|
1
|
$
|
1
|
$
|
-
|
$
|
7
|
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US GAAP
RESTATED
NOTES
TO RESTATED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
|
|
|
|
|
|
|
|
Three
months to April 30, 2006
|
|
|
MDS
Pharma
Services
|
MDS
Nordion
|
MDS
Analytical
Technologies
|
Corporate
and
Other
|
Total
|
|
Product
revenues
|
$
|
|
$
|
71
|
$
|
36
|
$
|
-
|
$
|
107
|
|
Service
revenues
|
|
113
|
|
1
|
|
13
|
|
-
|
|
127
|
|
Reimbursement
revenues
|
|
26
|
|
-
|
|
-
|
|
-
|
|
26
|
|
Total
revenues
|
|
139
|
|
72
|
|
49
|
|
-
|
|
260
|
|
Direct
product cost
|
|
-
|
|
(37)
|
|
(31)
|
|
-
|
|
(68)
|
|
Direct
service cost
|
|
(84)
|
|
-
|
|
-
|
|
-
|
|
(84)
|
|
Reimbursed
expenses
|
|
(26)
|
|
-
|
|
-
|
|
-
|
|
(26)
|
|
Selling,
general and administration
|
|
(28)
|
|
(13)
|
|
(5)
|
|
(7)
|
|
(53)
|
|
Research
and development
|
|
-
|
|
(1)
|
|
(12)
|
|
-
|
|
(13)
|
|
Depreciation
and amortization
|
|
(7)
|
|
(4)
|
|
(2)
|
|
-
|
|
(13)
|
|
Restructuring
charges - net
|
|
(1)
|
|
-
|
|
-
|
|
-
|
|
(1)
|
|
Other
income (expense) - net
|
|
(1)
|
|
(36)
|
|
1
|
|
(2)
|
|
(38)
|
|
Equity
Earnings
|
|
(1)
|
|
-
|
|
14
|
|
(4)
|
|
9
|
|
Segment
earnings
(loss)
|
$
|
(9)
|
$
|
(19)
|
$
|
14
|
$
|
(13)
|
$
|
(27)
|
|
Total
Assets
|
$
|
771
|
$
|
663
|
$
|
151
|
$
|
8
|
$
|
1,593
|
|
Capital
expenditures
|
$
|
7
|
$
|
(10)
|
$
|
1
|
$
|
1
|
$
|
(1)
|
|
|
|
|
|
|
|
|
Six
months to April 30,
2007
|
|
|
MDS
Pharma
Services
|
MDS
Nordion
|
MDS
Analytical
Technologies
|
Corporate
and
Other
|
Total
|
|
Product
revenues
|
$
|
-
|
$
|
134
|
$
|
100
|
$
|
-
|
$
|
234
|
|
Service
revenues
|
|
236
|
|
4
|
|
30
|
|
-
|
|
270
|
|
Reimbursement
revenues
|
|
46
|
|
-
|
|
-
|
|
-
|
|
46
|
|
Total
revenues
|
|
282
|
|
138
|
|
130
|
|
-
|
|
550
|
|
Direct
product cost
|
|
-
|
|
(69)
|
|
(85)
|
|
-
|
|
(154)
|
|
Direct
service cost
|
|
(169)
|
|
(2)
|
|
(1)
|
|
-
|
|
(172)
|
|
Reimbursed
expenses
|
|
(46)
|
|
-
|
|
-
|
|
-
|
|
(46)
|
|
Selling,
general and administration
|
|
(65)
|
|
(23)
|
|
(17)
|
|
(10)
|
|
(115)
|
|
Research
and development
|
|
|
|
(2)
|
|
(26)
|
|
-
|
|
(28)
|
|
Depreciation
and amortization
|
|
(18)
|
|
(6)
|
|
(7)
|
|
(1)
|
|
(32)
|
|
Restructuring
charges - net
|
|
(31)
|
|
-
|
|
-
|
|
(7)
|
|
(38)
|
|
Other
income (expense) - net
|
|
(66)
|
|
1
|
|
(2)
|
|
(3)
|
|
(70)
|
|
Equity
Earnings
|
|
-
|
|
-
|
|
25
|
|
-
|
|
25
|
|
Segment
earnings
(loss)
|
$
|
(113)
|
$
|
37
|
$
|
17
|
$
|
(21)
|
$
|
(80)
|
|
Total
Assets
|
$
|
810
|
$
|
660
|
$
|
819
|
$
|
435
|
$
|
2,724
|
|
Capital
expenditures
|
$
|
7
|
$
|
2
|
$
|
4
|
$
|
3
|
$
|
16
|
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US GAAP
RESTATED
NOTES
TO RESTATED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
|
|
|
|
|
|
|
|
Six
months to April 30, 2006
|
|
|
MDS
Pharma
Services
|
MDS
Nordion
|
MDS
Analytical
Technologies
|
Corporate
and
Other
|
Total
|
|
Product
revenues
|
$
|
-
|
$
|
140
|
$
|
72
|
$
|
-
|
$
|
212
|
|
Service
revenues
|
|
224
|
|
2
|
|
26
|
|
-
|
|
252
|
|
Reimbursement
revenues
|
|
57
|
|
-
|
|
-
|
|
-
|
|
57
|
|
Total
revenues
|
|
281
|
|
142
|
|
98
|
|
-
|
|
521
|
|
Direct
product cost
|
|
-
|
|
(70)
|
|
(69)
|
|
|
|
(139)
|
|
Direct
service cost
|
|
(165)
|
|
(1)
|
|
-
|
|
-
|
|
(166)
|
|
Reimbursed
expenses
|
|
(57)
|
|
-
|
|
-
|
|
|
|
(57)
|
|
Selling,
general and administration
|
|
(57)
|
|
(24)
|
|
(7)
|
|
(12)
|
|
(100)
|
|
Research
and development
|
|
-
|
|
(2)
|
|
(23)
|
|
-
|
|
(25)
|
|
Depreciation
and amortization
|
|
(14)
|
|
(7)
|
|
(3)
|
|
-
|
|
(24)
|
|
Restructuring
charges - net
|
|
-
|
|
-
|
|
-
|
|
(2)
|
|
(2)
|
|
Other
income (expense) - net
|
|
(1)
|
|
(36)
|
|
2
|
|
(5)
|
|
(40)
|
|
Equity
Earnings
|
|
(1)
|
|
-
|
|
27
|
|
(3)
|
|
23
|
|
Segment
earnings
(loss)
|
$
|
(14)
|
$
|
2
|
$
|
25
|
$
|
(22)
|
$
|
(9)
|
|
Total
Assets
|
$
|
771
|
$
|
663
|
$
|
151
|
$
|
8
|
$
|
1,593
|
|
Capital
expenditures
|
$
|
14
|
$
|
-
|
$
|
2
|
$
|
5
|
$
|
21
|
|
13.
|
Financial
Instruments
|
The
carrying amounts and fair values for all derivative financial instruments
are as
follows:
|
|
As
at April
30
|
As
at April 30
|
|
|
2007
|
2006
|
|
|
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
|
Asset
(liability) position:
|
|
|
|
|
|
|
|
|
|
Currency
forward and option
|
-
assets
|
$
|
4
|
$
|
4
|
$
|
8
|
$
|
8
|
|
Currency
forward and option
|
-
liabilities
|
$
|
-
|
$
|
-
|
$
|
(1)
|
$
|
(1)
|
|
Interest
rate swap and option contracts
|
$
|
(2)
|
$
|
(2)
|
$
|
(4)
|
$
|
(4)
|
As
of
April 30, 2007, the Company had outstanding foreign exchange contracts in
place
to sell $90 million at a weighted average exchange rate of C$1.1541 maturing
over the next ten months. The Company also had interest rate swap
contracts that convert a notional amount of $80 million of debt from a fixed
to
a floating interest rate.
A
reconciliation of expected income taxes to the reported income tax recovery
is
provided below. The Company’s tax recovery for the quarter was
lower than expected as portions of the restructuring charge related to foreign
jurisdictions where full valuation allowances have been recorded against
existing tax assets. In addition, the Company was unable to recognize any
tax
benefit on the Hamburg clinic loss or valuation provision recorded this
quarter.
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US GAAP
RESTATED
NOTES
TO RESTATED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
|
Three
months to April 30
|
|
|
|
2007
|
|
2006
|
|
Expected
income tax expense (recovery) at MDS’s 35% (2006 – 35%) statutory
rate
|
$
|
(28)
|
$
|
(12)
|
|
Increase
(decrease) to tax expense as a result of:
|
|
|
|
|
|
Tax
credits for research and development
|
|
(5)
|
|
(20)
|
|
Foreign
tax losses not recognized
|
|
4
|
|
-
|
|
Valuation
provision on MDS Capital Corp.
|
|
2
|
|
-
|
|
Loss
on sale of Hamburg clinic
|
|
1
|
|
-
|
|
Other
|
|
(1)
|
|
1
|
|
Reported
income tax expense (recovery)
|
$
|
(27)
|
$
|
(31)
|
|
15.
|
Differences
Between Canadian
and US Generally Accepted Accounting
Principles
|
US
GAAP
accounting principles used in the preparation of these consolidated financial
statements conform in all material respects to Canadian GAAP, except as set
out
below.
|
i)
|
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 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.
|
|
ii)
|
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.
|
|
iii)
|
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.
|
|
iv)
|
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;
|
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US GAAP
RESTATED
NOTES
TO RESTATED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
|
|
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.
|
|
v)
|
Currency
forward and option contracts – The Company currently designates the
majority of the forward foreign exchange contracts it enters into
as
hedges of future anticipated cash inflows. In prior years, these
contracts
did not qualify for treatment as hedges and, accordingly, such
contracts
were carried at fair value and changes in fair value were reflected
in
earnings. Under Canadian GAAP, all such contracts were eligible
for hedge
accounting, and as a result, gains and losses on these contracts
were
deferred and recognized in the period in which the cash flows to
which
they relate were incurred.
|
|
vi)
|
Comprehensive
income – US GAAP requires that a statement of other comprehensive income
and accumulated other comprehensive income be displayed with the
same
prominence as other financial statements. Under Canadian GAAP,
statements
of other comprehensive income and accumulated other comprehensive
income
were not required for years prior to the Company’s 2007 fiscal
year.
|
|
vii)
|
Pensions
- Under US GAAP, the net funded status of pension plans sponsored
by a
Company are fully reflected in the consolidated assets or liabilities
of
the Company. The amount by which plan assets exceed benefit obligations
or
benefit obligations exceed plan assets, on a plan-by-plan basis,
is
reflected as an increase in assets or liabilities, with a corresponding
adjustment to accumulated other comprehensive income. Under Canadian
GAAP,
only the net actuarial asset or liability is reflected in the consolidated
financial statements.
|
|
viii)
|
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 1, 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 $1 million in these
consolidated financial statements. Also, in the Canadian GAAP second quarter
statement, the share capital reduction associated with the share repurchased
of
22,831 common shares was incorrectly reported using the average exchange
rate
for April instead of the weighted average historic rate applicable to share
capital. Correction of this reporting error in the third quarter resulted
in an
increase in US dollar reported share capital of $32 million and a corresponding
reduction in other comprehensive income translation gains resulting from
the
application of US dollar reporting. The Company has reflected this correction
in
the restated second quarter US GAAP financial statements. The previous Canadian
GAAP to US GAAP reconciliation is therefore amended by the below restated
reconciliation.
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US GAAP
RESTATED
NOTES
TO RESTATED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
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 is required to adopt 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 February 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.
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US GAAP
RESTATED
NOTES
TO RESTATED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
|
Consolidated
Statements of
Financial Position
|
|
|
|
|
|
As
at April 30, 2007
[millions
of US dollars]
|
|
Canadian
GAAP
|
|
Reconciling
Adjustments
|
|
Restated
US
GAAP
|
|
Assets
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$
|
301
|
$
|
(3)
|
$
|
298
|
|
Short-term
investments, net
|
|
21
|
|
-
|
|
21
|
|
Accounts
receivable, net
|
|
244
|
|
2
|
|
246
|
|
Unbilled
revenue
|
|
111
|
|
-
|
|
111
|
|
Inventories,
net
|
|
152
|
|
(5)
|
|
147
|
|
Income
taxes recoverable
|
|
63
|
|
-
|
|
63
|
|
Prepaid
expenses and other
|
|
24
|
|
-
|
|
24
|
|
Assets
of discontinued operations
|
|
1
|
|
-
|
|
1
|
|
Total
Current
Assets
|
$
|
917
|
$
|
(6)
|
$
|
911
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
337
|
|
(5)
|
|
332
|
|
Deferred
tax asset
|
|
-
|
|
1
|
|
1
|
|
Long-term
investments and other
|
|
218
|
|
(3)
|
|
215
|
|
Goodwill
|
|
782
|
|
(20)
|
|
762
|
|
Intangible
assets, net
|
|
519
|
|
(15)
|
|
504
|
|
Total
Assets
|
$
|
2,773
|
$
|
(48)
|
$
|
2,725
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’
Equity
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
$
|
340
|
$
|
(2)
|
$
|
338
|
|
Deferred
revenue
|
|
92
|
|
-
|
|
92
|
|
Income
taxes payable
|
|
56
|
|
-
|
|
56
|
|
Deferred
tax liabilities
|
|
8
|
|
-
|
|
8
|
|
Current
portion of long-term debt
|
|
93
|
|
-
|
|
93
|
|
Total
Current
Liabilities
|
$
|
589
|
$
|
(2)
|
$
|
587
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
291
|
|
-
|
|
291
|
|
Deferred
revenue
|
|
16
|
|
-
|
|
16
|
|
Other
long-term obligations
|
|
26
|
|
1
|
|
27
|
|
Deferred
tax liabilities
|
|
129
|
|
(27)
|
|
102
|
|
Total
Liabilities
|
$
|
1,051
|
$
|
(28)
|
$
|
1,023
|
|
|
|
|
|
|
|
|
|
Shareholders’
Equity
|
|
|
|
|
|
|
|
Share
capital
|
|
462
|
|
24
|
|
486
|
|
Additional
paid in capital
|
|
n/a
|
|
71
|
|
71
|
|
Retained
earnings
|
|
923
|
|
(101)
|
|
822
|
|
Accumulated
other comprehensive income
|
|
337
|
|
(14)
|
|
323
|
|
Total
Shareholders’
Equity
|
$
|
1,722
|
$
|
(20)
|
$
|
1,702
|
|
Total
Liabilities and
Shareholders’ Equity
|
$
|
2,773
|
$
|
(48)
|
$
|
2,725
|
|
|
|
|
|
|
|
|
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US GAAP
RESTATED
NOTES
TO RESTATED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
|
Consolidated
Statements of
Financial Position
|
|
|
|
|
|
As
at October 31, 2006
[millions
of US dollars]
|
|
2006
Canadian
GAAP
|
|
Reconciling
Adjustments
|
|
Restated
2006
US
GAAP
|
|
Assets
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$
|
253
|
$
|
(6)
|
$
|
247
|
|
Short-term
investments
|
|
135
|
|
-
|
|
135
|
|
Accounts
receivable, net
|
|
229
|
|
(5)
|
|
224
|
|
Unbilled
revenue
|
|
121
|
|
1
|
|
122
|
|
Inventories,
net
|
|
86
|
|
(6)
|
|
80
|
|
Income
taxes recoverable
|
|
42
|
|
-
|
|
42
|
|
Prepaid
expenses and other
|
|
21
|
|
-
|
|
21
|
|
Assets
held for sale
|
|
196
|
|
-
|
|
196
|
|
Total
Current
Assets
|
|
1,083
|
|
(16)
|
|
1,067
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
339
|
|
(5)
|
|
334
|
|
Deferred
tax asset
|
|
37
|
|
10
|
|
47
|
|
Long-term
investments and other
|
|
170
|
|
6
|
|
176
|
|
Goodwill
|
|
417
|
|
(20)
|
|
397
|
|
Intangible
assets, net
|
|
338
|
|
(16)
|
|
322
|
|
Total
Assets
|
$
|
2,384
|
|
(41)
|
$
|
2,343
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’
Equity
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
$
|
239
|
|
(2)
|
$
|
237
|
|
Deferred
revenue
|
|
93
|
|
(1)
|
|
92
|
|
Income
taxes payable
|
|
8
|
|
-
|
|
8
|
|
Current
portion of long-term debt
|
|
20
|
|
-
|
|
20
|
|
Deferred
tax liabilities
|
|
-
|
|
-
|
|
-
|
|
Liabilities
related to assets held for sale
|
|
114
|
|
-
|
|
114
|
|
Total
Current
Liabilities
|
|
474
|
|
(3)
|
|
471
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
374
|
|
-
|
|
374
|
|
Deferred
revenue
|
|
17
|
|
-
|
|
17
|
|
Other
long-term obligations
|
|
23
|
|
1
|
|
24
|
|
Deferred
tax liabilities
|
|
82
|
|
21
|
|
103
|
|
Total
Liabilities
|
|
970
|
|
19
|
|
989
|
|
|
|
|
|
|
|
|
|
Shareholders’
Equity
|
|
|
|
|
|
|
|
Share
capital
|
|
572
|
|
(6)
|
|
566
|
|
Additional
paid in capital
|
|
-
|
|
69
|
|
69
|
|
Retained
earnings
|
|
495
|
|
(104)
|
|
391
|
|
Accumulated
other comprehensive income
|
|
347
|
|
(19)
|
|
328
|
|
Total
Shareholders’
Equity
|
|
1,414
|
|
(60)
|
|
1,354
|
|
Total
Liabilities and
Shareholders’ Equity
|
$
|
2,384
|
|
(41)
|
$
|
2,343
|
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US GAAP
RESTATED
NOTES
TO RESTATED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
Consolidated
Statements of
Operations
|
|
|
Three
months ended April 30, 2007
|
|
Six
months ended April 30, 2007
|
|
[millions
of US dollars except per share amounts]
|
|
CDN
GAAP
|
|
Recon.
Items
1
|
|
Restated
US
GAAP
|
|
CDN
GAAP
|
|
Recon.
Items
1
|
|
Restated
US
GAAP
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
$
|
-
|
$
|
-
|
$
|
129
|
$
|
-
|
$
|
-
|
$
|
234
|
|
Services
|
|
-
|
|
-
|
|
134
|
|
-
|
|
-
|
|
270
|
|
Reimbursement
revenues
|
|
-
|
|
-
|
|
23
|
|
-
|
|
-
|
|
46
|
|
Total
revenues
|
|
273
|
|
13
|
|
286
|
|
523
|
|
27
|
|
550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
cost of products
|
|
-
|
|
(83)
|
|
(83)
|
|
-
|
|
(154)
|
|
(154)
|
|
Direct
cost of services
|
|
(164)
|
|
82
|
|
(82)
|
|
(324)
|
|
152
|
|
(172)
|
|
Reimbursed
expenses
|
|
-
|
|
(23)
|
|
(23)
|
|
-
|
|
(46)
|
|
(46)
|
|
Selling,
general and administration
|
|
(67)
|
|
6
|
|
(61)
|
|
(120)
|
|
5
|
|
(115)
|
|
Research
and development
|
|
(7)
|
|
(9)
|
|
(16)
|
|
(12)
|
|
(16)
|
|
(28)
|
|
Depreciation
and amortization
|
|
(20)
|
|
2
|
|
(18)
|
|
(37)
|
|
5
|
|
(32)
|
|
Restructuring
charges - net
|
|
(28)
|
|
3
|
|
(25)
|
|
(41)
|
|
3
|
|
(38)
|
|
Other
expense - net
|
|
(67)
|
|
(7)
|
|
(74)
|
|
(66)
|
|
(4)
|
|
(70)
|
|
Total
costs and expenses
|
|
(353)
|
|
(29)
|
|
(382)
|
|
(600)
|
|
(55)
|
|
(655)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss from continuing
operations
|
|
(80)
|
|
(16)
|
|
(96)
|
|
(77)
|
|
(28)
|
|
(105)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
(8)
|
|
-
|
|
(8)
|
|
(14)
|
|
-
|
|
(14)
|
|
Interest
income
|
|
10
|
|
-
|
|
10
|
|
14
|
|
-
|
|
14
|
|
Mark-to-market
on interest note swaps
|
|
-
|
|
1
|
|
1
|
|
-
|
|
1
|
|
1
|
|
Equity
earnings
|
|
-
|
|
11
|
|
11
|
|
-
|
|
25
|
|
25
|
|
Loss
from continuing operations
before income taxes
|
|
(78)
|
|
(4)
|
|
(82)
|
|
(77)
|
|
(2)
|
|
(79)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax (expense) recovery
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
current
|
|
21
|
|
10
|
|
31
|
|
18
|
|
11
|
|
29
|
|
-
deferred
|
|
|
|
(4)
|
|
(4)
|
|
|
|
(5)
|
|
(5)
|
|
Income
(loss) from continuing
operations
|
|
(57)
|
|
2
|
|
(55)
|
|
(59)
|
|
4
|
|
(55)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from discontinued
operations - net of income tax
|
|
793
|
|
(1)
|
|
792
|
|
809
|
|
(1)
|
|
808
|
|
Net
income
|
$
|
736
|
$
|
1
|
$
|
737
|
$
|
750
|
$
|
3
|
$
|
753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per
share
-
from
continuing
operations
|
$
|
(0.42)
|
|
0.02
|
$
|
(0.40)
|
$
|
(0.42)
|
$
|
0.03
|
$
|
(0.39)
|
|
-
from discontinued operations
|
|
5.77
|
|
-
|
|
5.77
|
|
5.74
|
|
(0.01)
|
|
5.73
|
|
Basic
earnings (loss) per
share
|
$
|
5.35
|
|
0.02
|
$
|
5.37
|
$
|
5.32
|
$
|
0.02
|
$
|
5.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per
share
-
from
continuing
operations
|
$
|
(0.41)
|
$
|
0.01
|
|
(0.40)
|
|
(0.42)
|
|
0.03
|
|
(0.39)
|
|
-
from discontinued operations
|
|
5.75
|
|
-
|
|
5.75
|
|
5.72
|
|
-
|
|
5.72
|
|
Diluted
earnings (loss) per
share
|
$
|
5.34
|
$
|
0.01
|
$
|
5.35
|
$
|
5.30
|
$
|
0.03
|
$
|
5.33
|
1
Reconciling
items between Canadian
GAAP and US GAAP
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US GAAP
RESTATED
NOTES
TO RESTATED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
Consolidated
Statements Of
Operations
|
|
|
Three
months ended April 30, 2006
|
|
Six
months ended April 30, 2006
|
|
[millions
of US dollars except per share amounts]
|
|
CDN
GAAP
|
|
Recon.
Items
1
|
|
Restated
US
GAAP
|
|
CDN
GAAP
|
|
Recon.
Items
1
|
|
Restated
US
GAAP
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
$
|
-
|
$
|
-
|
$
|
107
|
$
|
-
|
$
|
-
|
$
|
212
|
|
Services
|
|
-
|
|
-
|
|
127
|
|
-
|
|
-
|
|
252
|
|
Reimbursement
revenues
|
|
-
|
|
-
|
|
26
|
|
-
|
|
-
|
|
57
|
|
Total
revenues
|
|
242
|
|
18
|
|
260
|
|
484
|
|
37
|
|
521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
cost of products
|
|
(150)
|
|
82
|
|
(68)
|
|
(301)
|
|
162
|
|
(139)
|
|
Direct
cost of services
|
|
-
|
|
(84)
|
|
(84)
|
|
-
|
|
(166)
|
|
(166)
|
|
Reimbursed
expenses
|
|
-
|
|
(26)
|
|
(26)
|
|
-
|
|
(57)
|
|
(57)
|
|
Selling,
general and administration
|
|
(56)
|
|
3
|
|
(53)
|
|
(105)
|
|
5
|
|
(100)
|
|
Research
and development
|
|
(1)
|
|
(12)
|
|
(13)
|
|
(6)
|
|
(19)
|
|
(25)
|
|
Depreciation
and amortization
|
|
(16)
|
|
3
|
|
(13)
|
|
(29)
|
|
5
|
|
(24)
|
|
Restructuring
charges - net
|
|
(1)
|
|
-
|
|
(1)
|
|
(2)
|
|
-
|
|
(2)
|
|
Other
expense - net
|
|
(11)
|
|
(27)
|
|
(38)
|
|
(12)
|
|
(28)
|
|
(40)
|
|
Total
costs and expenses
|
|
(235)
|
|
(61)
|
|
(296)
|
|
(455)
|
|
(98)
|
|
(553)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss) from
continuing operations
|
|
7
|
|
(43)
|
|
(36)
|
|
29
|
|
(61)
|
|
(32)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
(4)
|
|
-
|
|
(4)
|
|
(7)
|
|
-
|
|
(7)
|
|
Interest
income
|
|
1
|
|
-
|
|
1
|
|
3
|
|
-
|
|
3
|
|
Mark-to-market
on interest note swaps
|
|
-
|
|
(2)
|
|
(2)
|
|
|
|
(2)
|
|
(2)
|
|
Equity
earnings
|
|
(5)
|
|
14
|
|
9
|
|
(4)
|
|
27
|
|
23
|
|
Income
(loss) from continuing
operations before income taxes
|
|
(1)
|
|
(31)
|
|
(32)
|
|
21
|
|
(36)
|
|
(15)
|
|
Income
tax (expense) recovery
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
current
|
|
(1)
|
|
20
|
|
19
|
|
(9)
|
|
26
|
|
17
|
|
-
deferred
|
|
|
|
12
|
|
12
|
|
|
|
10
|
|
10
|
|
Income
(loss) from continuing
operations
|
|
(2)
|
|
1
|
|
(1)
|
|
12
|
|
-
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from discontinued
operations - net of income tax
|
|
16
|
|
-
|
|
16
|
|
49
|
|
-
|
|
49
|
|
Net
income
(loss)
|
$
|
14
|
$
|
1
|
$
|
15
|
$
|
61
|
$
|
-
|
$
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per
share
-
from
continuing
operations
|
$
|
(0.01)
|
$
|
-
|
$
|
(0.01)
|
$
|
0.09
|
$
|
(0.01)
|
$
|
0.08
|
|
-
from discontinued operations
|
|
0.11
|
|
0.01
|
|
0.12
|
|
0.34
|
|
0.01
|
|
0.35
|
|
Basic
earnings (loss) per
share
|
$
|
0.10
|
$
|
0.01
|
$
|
0.11
|
$
|
0.43
|
$
|
-
|
$
|
0.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per
share
-
from
continuing operations
|
$
|
(0.01)
|
$
|
-
|
$
|
(0.01)
|
$
|
0.09
|
$
|
(0.01)
|
$
|
0.08
|
|
-
from
discontinued operations
|
|
0.11
|
|
0.01
|
|
0.12
|
|
0.34
|
|
0.01
|
|
0.35
|
|
Diluted
earnings
(loss) per share
|
$
|
0.10
|
$
|
0.01
|
$
|
0.11
|
$
|
0.43
|
$
|
-
|
$
|
0.43
|
|
1
Reconciling
items between Canadian GAAP and US
GAAP
|
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US GAAP
RESTATED
NOTES
TO RESTATED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
Consolidated
Statement Of Cash
Flows
|
|
|
Three
months ended April 30, 2007
|
Six
months ended April 30, 2007
|
|
[millions
of US dollars]
|
|
CDN
GAAP
|
|
Recon.
Items
1
|
|
US
GAAP
|
|
CDN
GAAP
|
|
Recon.
Items
1
|
|
US
GAAP
|
|
Operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
$
|
736
|
$
|
1
|
$
|
737
|
$
|
750
|
$
|
3
|
$
|
753
|
|
Income
from discontinued operations – net of tax
|
|
793
|
|
(1)
|
|
792
|
|
809
|
|
(1)
|
|
808
|
|
Income
(loss) from continuing operations
|
|
(57)
|
|
2
|
|
(55)
|
|
(59)
|
|
4
|
|
(55)
|
|
Adjustments
to reconcile net income to cash provided by operating activities
relating
to continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Items
not affecting current cash flow
|
|
82
|
|
(11)
|
|
71
|
|
95
|
|
4
|
|
99
|
|
Changes
in non-cash working capital balances relating to
operations
|
|
98
|
|
(3)
|
|
95
|
|
70
|
|
(8)
|
|
62
|
|
Cash
used in operating activities of continuing operations
|
|
123
|
|
(12)
|
|
111
|
|
106
|
|
-
|
|
106
|
|
Cash
provided by operating activities of discontinued
operations
|
|
(69)
|
|
-
|
|
(69)
|
|
(53)
|
|
-
|
|
(53)
|
|
|
|
54
|
|
(12)
|
|
42
|
|
53
|
|
-
|
|
53
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
|
|
(603)
|
|
-
|
|
(603)
|
|
(603)
|
|
-
|
|
(603)
|
|
Increase
in deferred development charges
|
|
-
|
|
-
|
|
-
|
|
(2)
|
|
2
|
|
-
|
|
Purchase
of property, plant and equipment
|
|
(9)
|
|
2
|
|
(7)
|
|
(17)
|
|
1
|
|
(16)
|
|
Proceeds
from sale of property, plant and equipment
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
Proceeds
on sale of short-term investments
|
|
25
|
|
-
|
|
25
|
|
151
|
|
-
|
|
151
|
|
Purchase
of short-term investments
|
|
(15)
|
|
-
|
|
(15)
|
|
(37)
|
|
-
|
|
(37)
|
|
Proceeds
on sale of long-term investment
|
|
-
|
|
2
|
|
2
|
|
13
|
|
-
|
|
13
|
|
Other
|
|
1
|
|
(2)
|
|
(1)
|
|
-
|
|
-
|
|
-
|
|
Cash
provided by (used) in investing activities of continuing
operations
|
|
(601)
|
|
2
|
|
(599)
|
|
(495)
|
|
3
|
|
(492)
|
|
Cash
provided by investing activities of discontinued
operations
|
|
929
|
|
-
|
|
929
|
|
929
|
|
-
|
|
929
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment
of long-term debt
|
|
(1)
|
|
-
|
|
(1)
|
|
(7)
|
|
-
|
|
(7)
|
|
Increase
(decrease) in deferred revenue and other long-term
obligations
|
|
(1)
|
|
-
|
|
(1)
|
|
-
|
|
-
|
|
-
|
|
Payment
of cash dividends
|
|
-
|
|
-
|
|
-
|
|
(3)
|
|
-
|
|
(3)
|
|
Issuance
of shares
|
|
6
|
|
-
|
|
6
|
|
10
|
|
-
|
|
10
|
|
Repurchase
of Shares
|
|
(441)
|
|
-
|
|
(441)
|
|
(441)
|
|
-
|
|
(441)
|
|
Cash
used in financing activities of continuing operations
|
|
(437)
|
|
-
|
|
(437)
|
|
(441)
|
|
-
|
|
(441)
|
|
Cash
used in financing activities of discontinued operations
|
|
-
|
|
-
|
|
-
|
|
(2)
|
|
-
|
|
(2)
|
|
Effect
of foreign exchange rate changes on cash and cash
equivalents
|
|
16
|
|
12
|
|
28
|
|
4
|
|
-
|
|
4
|
|
Increase
in cash and cash
equivalents during the period
|
|
(39)
|
|
2
|
|
(37)
|
|
48
|
|
3
|
|
51
|
|
Cash
and cash equivalents, beginning of period
|
|
340
|
|
(5)
|
|
335
|
|
253
|
|
(6)
|
|
247
|
|
Cash
and cash equivalents, end
of period
|
$
|
301
|
$
|
(3)
|
$
|
298
|
$
|
301
|
$
|
(3)
|
$
|
298
|
|
1
Reconciling
items between
Canadian GAAP and US
GAAP
|
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US GAAP
RESTATED
NOTES
TO RESTATED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
Three
months ended April 30, 2006
|
Six
months ended April 30, 2006
|
|
[millions
of US dollars]
|
|
CDN
GAAP
|
|
Recon.
Items
1
|
|
Restated
US
GAAP
|
|
CDN
GAAP
|
|
Recon.
Items
1
|
|
Restated
US
GAAP
|
|
Cash
flows from operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
$
|
14
|
$
|
1
|
$
|
15
|
$
|
61
|
$
|
-
|
$
|
61
|
|
Income
from discontinued operations – net of tax
|
|
16
|
|
-
|
|
16
|
|
49
|
|
-
|
|
49
|
|
Income
(loss) from continuing operations
|
|
(2)
|
|
1
|
|
(1)
|
|
12
|
|
-
|
|
12
|
|
Adjustments
to reconcile net income to cash provided by operating activities
relating
to continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Items
not affecting current cash flow
|
|
20
|
|
-
|
|
20
|
|
32
|
|
(3)
|
|
29
|
|
Changes
in non-cash working capital balances relating to
operations
|
|
(10)
|
|
(2)
|
|
(12)
|
|
(53)
|
|
1
|
|
(52)
|
|
Cash
provided by (used in) operating activities of continuing
operations
|
|
8
|
|
(1)
|
|
7
|
|
(9)
|
|
(2)
|
|
(11)
|
|
Cash
provided by (used in) operating activities of discontinued
operations
|
|
21
|
|
-
|
|
21
|
|
34
|
|
-
|
|
34
|
|
|
|
29
|
|
(1)
|
|
28
|
|
25
|
|
(2)
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in deferred development charges
|
|
(2)
|
|
2
|
|
-
|
|
(3)
|
|
3
|
|
-
|
|
Proceeds
from Maple transaction
|
|
24
|
|
-
|
|
24
|
|
24
|
|
-
|
|
24
|
|
Purchase
of property, plant and equipment
|
|
-
|
|
1
|
|
1
|
|
(22)
|
|
1
|
|
(21)
|
|
Other
|
|
1
|
|
-
|
|
1
|
|
(16)
|
|
-
|
|
(16)
|
|
Cash
provided by (used in) investing activities of continuing
operations
|
|
23
|
|
3
|
|
26
|
|
(17)
|
|
4
|
|
(13)
|
|
Cash
provided by (used in) investing activities of discontinued
operations
|
|
9
|
|
-
|
|
9
|
|
77
|
|
-
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment
of long-term debt
|
|
(1)
|
|
-
|
|
(1)
|
|
(1)
|
|
-
|
|
(1)
|
|
Increase
(decrease) in deferred revenue and other long-term
obligations
|
|
-
|
|
-
|
|
-
|
|
(9)
|
|
-
|
|
(9)
|
|
Payment
of cash dividends
|
|
(3)
|
|
-
|
|
(3)
|
|
(6)
|
|
-
|
|
(6)
|
|
Issuance
of shares
|
|
9
|
|
-
|
|
9
|
|
19
|
|
-
|
|
19
|
|
Cash
provided by financing activities of continuing operations
|
|
5
|
|
-
|
|
5
|
|
3
|
|
-
|
|
3
|
|
Cash
used in financing activities of discontinued operations
|
|
(1)
|
|
-
|
|
(1)
|
|
(8)
|
|
-
|
|
(8)
|
|
Effect
of foreign exchange rate changes on cash and cash
equivalents
|
|
8
|
|
(4)
|
|
4
|
|
17
|
|
-
|
|
17
|
|
Increase
in cash and cash
equivalents during the period
|
|
73
|
|
(2)
|
|
71
|
|
97
|
|
2
|
|
99
|
|
Cash
and cash equivalents, beginning of period
|
|
248
|
|
(5)
|
|
243
|
|
224
|
|
(9)
|
|
215
|
|
Cash
and cash equivalents, end
of period
|
$
|
321
|
$
|
(7)
|
$
|
314
|
$
|
321
|
$
|
(7)
|
$
|
314
|
|
1
Reconciling
items between
Canadian GAAP and US
GAAP
|
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US GAAP
RESTATED
NOTES
TO RESTATED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
|
|
Three
months to
April
30
|
Six
months
to
April 30
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net
income (loss) from continuing operations in accordance with Canadian
GAAP
|
$
|
(57)
|
$
|
(2)
|
$
|
(59)
|
$
|
12
|
|
US
GAAP adjustments:
|
|
|
|
|
|
|
|
|
|
Deferred
development costs - net
|
|
(1)
|
|
(1)
|
|
(1)
|
|
(2)
|
|
Deferred
development costs written off
|
|
3
|
|
-
|
|
3
|
|
-
|
|
Mid
term incentive plan reversal
|
|
1
|
|
-
|
|
3
|
|
-
|
|
Unrealized
gains on foreign exchange contracts and interest rate
swaps
|
|
-
|
|
2
|
|
-
|
|
2
|
|
Reduction
in income tax expense arising
from
GAAP adjustments
|
|
(1)
|
|
-
|
|
(1)
|
|
-
|
|
Net
income (loss) from continuing operations in accordance with US
GAAP
|
|
(55)
|
|
(1)
|
|
(55)
|
|
12
|
|
Income
from discontinued operations in accordance with Canadian and
US GAAP – net
of tax
|
|
792
|
|
16
|
|
808
|
|
49
|
|
Net
income in accordance with US GAAP
|
$
|
737
|
$
|
15
|
$
|
753
|
$
|
61
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share in accordance with US GAAP
|
|
|
|
|
|
|
|
|
|
-
from continuing operations
|
$
|
(0.40)
|
$
|
(0.01)
|
$
|
(0.39)
|
$
|
0.08
|
|
-
from discontinued operations
|
|
5.77
|
|
0.12
|
|
5.73
|
|
0.35
|
|
Basic
earnings per share
|
$
|
5.37
|
$
|
0.11
|
$
|
5.34
|
$
|
0.43
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share in accordance with US GAAP
|
|
|
|
|
|
|
|
|
|
-
from continuing operations
|
$
|
(0.40)
|
$
|
(0.01)
|
$
|
(0.39)
|
$
|
0.08
|
|
-
from discontinued operations
|
|
5.75
|
|
0.12
|
|
5.72
|
|
0.35
|
|
Diluted
earnings per share
|
$
|
5.35
|
$
|
0.11
|
$
|
5.33
|
$
|
0.43
|
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. In addition, segmented information for 2006 has been
revised to reflect the discontinued operations reported.
MDS
INTERIM REPORT APRIL 30, 2007 (UNAUDITED) - Q2 US
GAAP RESTATED
Document
6
C
ANADIAN
S
UPPLEMENT
TO
R
ESTATED
M
ANAGEMENT’S
D
ISCUSSION AND
A
NALYSIS
of
Financial Condition and Results of Operations,
for
the
three months ended April 30, 2007
This
document supplements the Restated Management’s Discussion and Analysis for April
30, 2007 and has been prepared pursuant to Section 5.2 of National Instrument
51-102 – Continuous Disclosure Obligations
CANADIAN
SUPPLEMENT TO APRIL 30, 2007 INTERIM RESTATED MANAGEMENT'S DISCUSSION
AND
ANALYSIS
June
5,
2007
The
interim unaudited financial statements of MDS Inc. (MDS or the Company) for
the quarter ended April 30, 2007 are reported in United States (US) dollars
and have been restated in accordance with US generally accepted accounting
principles (US GAAP). As part of the Company’s Canadian filing
requirements, we are providing this supplement (Canadian Supplement) to our
restated management’s discussion and analysis (Restated MD&A) prepared in
accordance with US GAAP that restates, based on financial information of
MDS
reconciled to Canadian generally accepted accounting principles (Canadian
GAAP),
those parts of our Restated MD&A that would contain material differences if
they were based on financial statements prepared in accordance with Canadian
GAAP. The Canadian Supplement should be read in conjunction with our
restated unaudited financial statements and Restated MD&A included in our
interim report for the three month period ended April 30, 2007 prepared in
accordance with US GAAP (Restated Interim Report) and our 2007 annual financial
statements and related MD&A included in our annual report for the fiscal
year ended October 31, 2007 (Annual Report). Note 15 of our interim
restated financial statements explains and quantifies the material differences
between US GAAP and Canadian GAAP on the Company’s financial condition and
results of operations.
The
following contains forward-looking statements and should be read in conjunction
with the factors set forth in the “Caution regarding forward-looking statements”
section of the 2007 annual MD&A contained in the Financial Review portion of
our Annual Report.
This
supplement has been prepared as of the date set out above and has not been
updated to reflect new facts, events or circumstances since that
date.
In
addition to measures based on US GAAP and Canadian GAAP, we use terms such
as
adjusted earnings before interest, taxes, depreciation and amortization
(adjusted EBITDA) and adjusted earnings per share (adjusted
EPS). These terms are not defined by US GAAP or Canadian GAAP and
readers should refer to “Use of non-GAAP measures” in our 2007 annual
MD&A.
Amounts
are in millions of US dollars, except per share amounts and where otherwise
noted.
Summary
of difference between US GAAP
and Canadian GAAP
The
differences between US GAAP and Canadian GAAP that have the most significant
impact on the Company’s financial condition and results of operations for the
three month period ended April 30, 2007 include accounting for: joint ventures,
investment tax credits, research and development, stock-based compensation
and
hedge contracts.
The
primary difference between Canadian GAAP and US GAAP affecting the consolidated
revenues and operating margin is that under Canadian GAAP proportionate
consolidation is used to report the results of our joint ventures within
MDS
Analytical Technologies, whereas under US GAAP, we apply the method of equity
accounting. For the second quarter of 2007, we reported $10
million less revenue and $12 million less operating income under US GAAP
than we
would have reported under Canadian GAAP ($11 million less and $15 million
less,
respectively for the second quarter of 2006). Under US GAAP, the
income from the joint ventures is included in equity earnings, which were
$11
million in the second quarter of 2007 ($14 million in the second quarter
of
2006). Under Canadian GAAP, this amount was included in operating
income as part of the proportionate consolidation. There is no
significant impact to adjusted EBITDA from this accounting
difference.
Other
differences in operating income and adjusted EBITDA are listed
below.
|
·
|
Non-refundable
investment tax
credits (ITCs)
are treated as a reduction of expenditure under
Canadian GAAP and a reduction of income tax under US GAAP. In
the second quarter of 2007, there were $7 million ($34 million
in the
second quarter of 2006) of ITCs which under US GAAP, increased our
operating loss, as compared to Canadian GAAP. This difference affected
all
of our business units. Adjusted EBITDA was reduced by $4 million
($7
million in the second quarter of 2006)
when
|
CANADIAN
SUPPLEMENT TO APRIL 30, 2007 INTERIM RESTATED MANAGEMENT'S DISCUSSION
AND
ANALYSIS
|
|
calculated
based on US GAAP, compared to Canadian GAAP, as $3 million of ITCs
($27
million in the second quarter of 2006) related to MAPLE project
and were
treated as an adjusting item in our calculation of adjusted
EBITDA. These differences affect our three segments MDS Pharma
Services, MDS Nordion and MDS Analytical
Technologies.
|
|
·
|
Research
and Development
(R&D)
expenditures may be capitalized under Canadian GAAP if
certain criteria are met, however these expenditures are expensed
in the
period they are incurred under US GAAP. In the second quarter of
2007, the
$2 million ($3 million in second quarter of 2006) of R&D capitalized
under Canadian GAAP resulted in a reduction of adjusted EBITDA
when
calculated based on US GAAP, compared to Canadian GAAP. In the
second quarter of 2007, there was no difference in our operating
loss ($1
million increase in operating loss in the second quarter of 2006)
under US
GAAP due to $2 million ($2 million in 2006) of amortization under
Canadian
GAAP relating to previously capitalized R&D. This
difference affects our MDS Analytical Technologies segment in both
2006
and 2007, and MDS Pharma Services in
2006.
|
|
·
|
Due
to a difference in
valuation methods
for
stock-based compensation
under US GAAP and Canadian GAAP, our
operating loss was reduced and adjusted EBITDA was higher by $1
million
for the second quarter of 2007 (nil in 2006) when calculated based
on US
GAAP, compared to Canadian GAAP. This difference only affects
Corporate and Other.
|
|
·
|
The
other difference, which is described in Note 15 to our restated
interim
financial statements, is related to
hedges.
|
In
calculating adjusted EBITDA and adjusted EPS, the significant changes to
the
adjusting items include the following two items:
|
·
|
In
2007, capitalized R&D was charged to restructuring in MDS Pharma
Services under Canadian GAAP. Under US GAAP, these expenditures
may not be
capitalized and therefore there is no
adjustment.
|
|
·
|
In
2006, under Canadian GAAP, ITCs were netted against MAPLE settlement
in
MDS Nordion. Under US GAAP these are treated as reduction to income
tax.
The adjustment related to MAPLE ITCs only impacts adjusted
EBITDA
|
Management’s
discussion and analysis
under Canadian GAAP
Please
refer to
the
Company's previously filed Interim Report for April 30, 2007 for our
corresponding management’s discussion and analysis under Canadian GAAP. The
differences between US GAAP and Canadian GAAP, described above, impact the
discussion and analysis in each of the “MDS Inc.”, “MDS Pharma Services”,
“MDS Nordion”, “MDS Analytical Technologies” and “Corporate and Other” sections
of our previously filed MD&A. The “Income taxes” section of
our previously filed MD&A is primarily affected by the ITCs. The
“US GAAP Reconciliation” section in our previously filed MD&A is superseded
by the “Restatement to US GAAP” section of our Restated MD&A.
For
additional information and details, readers are referred to the 2007 annual
financial statements and management’s discussion and analysis for 2007 and the
Company’s 2007 Annual Information Form (AIF), all of which are published
separately and are available at
www.mdsinc.com
and
at
www.sedar.com
. In
addition, the Company’s 40-F filing is available at
www.sec.gov
.
Document
7
Form
52-109F2 - Certification of
Interim Filings
I
,
Stephen P. DeFalco, President and Chief Executive Officer of MDS Inc., certify
that:
|
1.
|
I
have reviewed the restated
interim filings (as this term is defined in Multilateral Instrument
52-109
Certification
of Disclosure in
Issuers' Annual and Interim Filings
)
of MDS Inc., (the issuer) for
the interim period ending April 30, 2007 (the "interim
filings")
;
|
|
2.
|
Based
on my knowledge, the interim filings do not contain any untrue
statement
of a material fact or omit to state a material fact required to
be stated
or that is necessary to make a statement not misleading in light
of the
circumstances under which it was made, with respect to the period
covered
by the interim filings;
|
|
3.
|
Based
on my knowledge, the restated interim financial statements together
with
the other financial information included in the interim filings
fairly
present in all material respects the financial condition, results
of
operations and cash flows of the issuer, as of the date and for
the
periods presented in the interim
filings;
|
|
4.
|
The
issuer's other certifying officers and I are responsible for establishing
and maintaining disclosure controls and procedures and internal
control
over financial reporting for the issuer, and we
have:
|
|
|
(a)
|
designed
such disclosure controls and procedures, or caused them to be designed
under our supervision, to provide reasonable assurance that material
information relating to the issuer, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which the interim filings are
being
prepared; and
|
|
|
(b)
|
designed
such internal control over financial reporting, or caused it to
be
designed under our supervision, to provide reasonable assurance
regarding
the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with the issuer’s GAAP;
and
|
|
5.
|
I
have caused the issuer to disclose in the interim MD&A any change in
the issuer’s internal control over financial reporting that occurred
during the issuer’s most recent interim period that has materially
affected, or is reasonably likely to materially affect, the issuer’s
internal control over financial
reporting.
|
|
|
/s/
Stephen P. DeFalco
|
|
Date: January
29, 2008
|
Stephen
P. DeFalco
President
& Chief Executive Officer
|
Document
8
Form
52-109F2 - Certification of
Interim Filings
I,
Douglas S. Prince
,
Executive Vice-President,
Finance and Chief Financial Officer of MDS
Inc., certify that:
|
1.
|
I
have reviewed the restated interim filings (as this term is defined
in
Multilateral Instrument 52-109
Certification
of Disclosure in
Issuers' Annual and Interim Filings
) of MDS Inc., (the issuer) for
the interim period ending April 30, 2007 (the "interim
filings");
|
|
2.
|
Based
on my knowledge, the interim filings do not contain any untrue
statement
of a material fact or omit to state a material fact required to
be stated
or that is necessary to make a statement not misleading in light
of the
circumstances under which it was made, with respect to the period
covered
by the interim filings;
|
|
3.
|
Based
on my knowledge, the restated interim financial statements together
with
the other financial information included in the interim filings
fairly
present in all material respects the financial condition, results
of
operations and cash flows of the issuer, as of the date and for
the
periods presented in the interim filings;
and
|
|
4.
|
The
issuer's other certifying officers and I are responsible for establishing
and maintaining disclosure controls and procedures and internal
control
over financial reporting for the issuer, and we
have:
|
|
|
(a)
|
designed
such disclosure controls and procedures, or caused them to be designed
under our supervision, to provide reasonable assurance that material
information relating to the issuer, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which the interim filings are
being
prepared; and
|
|
|
(b)
|
designed
such internal control over financial reporting, or caused it to
be
designed under our supervision, to provide reasonable assurance
regarding
the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with the issuer’s GAAP;
and
|
|
5.
|
I
have caused the issuer to disclose in the interim MD&A any change in
the issuer’s internal control over financial reporting that occurred
during the issuer’s most recent interim period that has materially
affected, or is reasonably likely to materially affect, the issuer’s
internal control over financial
reporting.
|
|
|
/s/
Douglas S. Prince
|
|
|
Date:
January 31, 2008
|
Douglas
S. Prince
Executive
Vice-President, Finance and Chief Financial
Officer
|
Document
9
September
4, 2007
Restated
Management’s Discussion and
Analysis
The
following management’s discussion and analysis of the results of operations for
MDS Inc. (MDS or the Company) for the quarter ended July 31, 2007 and its
financial position as at July 31, 2007 has been restated. This
restated management’s discussion and analysis (Restated MD&A) should be read
in conjunction with the restated consolidated financial statements and notes
that follow. For the Company’s 2007 year end of October 31, 2007, MDS
has chosen to adopt United States generally accepted accounting principles
(US
GAAP) for financial reporting. As a result of this change, the
Company is required to restate to US GAAP its previously filed financial
statements for the four quarters of 2007. Previously, our filings
prepared in accordance with Canadian generally accepted accounting principles
(Canadian GAAP) disclosed a reconciliation of earnings to US GAAP due to our
status as a foreign private issuer in the US. Going forward, with US
GAAP as our primary basis of accounting, we will reconcile our US GAAP earnings
to Canadian GAAP. This reconciliation will be done as required by
applicable Canadian regulations on an annual and quarterly basis for a minimum
of the next two fiscal years. The interim financial statements for
fiscal 2007 as initially reconciled to US GAAP, have also been restated to
correct a US GAAP error identified during the preparation of our 2007 annual
financial statements under US GAAP related to the accounting for stock
compensation expense. This error related to the utilization of an
incorrect methodology under US GAAP in the calculation of stock compensation
expense with respect to an equity-based incentive compensation plan. As a result
of this error, we previously reported lower net income under US GAAP in each
of
the interim periods of 2007. Our accounting for stock-based
compensation was correct under Canadian GAAP and except for the US GAAP
reconciliation note, there is no restatement to our previously filed Canadian
GAAP financial statements. This Restated MD&A has been revised to reflect
the restatement. The information contained in this Restated MD&A
is as at September 4, 2007 (as revised) unless otherwise
indicated. Accordingly, this Restated MD&A has not been updated
to reflect new facts, events or circumstances since September 4,
2007.
For
additional information and details, readers are referred to the 2007 annual
financial statements and management’s discussion and analysis for 2007 and the
Company’s 2007 Annual Information Form (AIF), all of which are published
separately and are available at
www.mdsinc.com
and at
www.sedar.com
.
In addition, the Company’s 40-F filing is available at
www.sec.gov
.
Our
Restated MD&A is intended to enable readers to gain an understanding of
MDS’s current results and financial position as at and for the period ended July
31, 2007. We provide information and analysis in our Restated MD&A comparing
the results of operations for the current interim period to those of the same
period in the preceding fiscal year and comparing our financial position to
that
at the end of the preceding fiscal year. We also provide analysis and commentary
that we believe is required to assess the Company’s future
prospects. Accordingly, certain sections of this report contain
forward-looking statements that are based on current plans and
expectations. These forward-looking statements are affected by risks
and uncertainties that are discussed in this document, as well as in the AIF,
and that could have a material impact on future prospects. Readers
are cautioned that actual events and results will vary.
MDS
INTERIM REPORT JULY 31, 2007 (UNAUDITED) - Q3 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
Caution
Regarding Forward-Looking
Statements
From
time
to time, we make written or oral forward-looking statements within the meaning
of certain securities laws, including the “safe harbour” provisions of the
Securities Act (Ontario) and the United States Private Securities Litigation
Reform Act of 1995. This document contains such statements, and we
may make such statements in other filings with Canadian regulators or the United
States Securities and Exchange Commission (SEC), in reports to shareholders
or
in other communications, including public presentations. These
forward-looking statements include, among others, statements with respect to
our
objectives for 2008, our medium-term goals, and strategies to achieve those
objectives and goals, as well as statements with respect to our beliefs, plans,
objectives, expectations, anticipations, estimates and
intentions. The words “may”, “could”, “should”, “would”, “suspect”,
“outlook”, “believe”, “plan”, “anticipate”, “estimate”, “expect”, “intend”,
“forecast”, “objective”, “optimistic”, and words and expressions of similar
import are intended to identify forward-looking statements.
By
their
very nature, forward-looking statements involve inherent risks and
uncertainties, both general and specific, which give rise to the possibility
that predictions, forecasts, projections and other forward-looking statements
will not be achieved. We caution readers not to place undue reliance
on these statements as a number of important factors could cause our actual
results to differ materially from the beliefs, plans, objectives, expectations,
anticipations, estimates and intentions expressed in such forward-looking
statements. These factors include, but are not limited to: management
of operational risks; the strength of the Canadian and United States’ economies
and the economies of other countries in which we conduct business; our ability
to secure a reliable supply of raw materials, particularly cobalt and critical
medical isotopes; the impact of the movement of the US dollar relative to other
currencies, particularly the Canadian dollar and the euro; changes in interest
rate policies of the Bank of Canada and the Board of Governors of the Federal
Reserve System in the United States; the effects of competition in the markets
in which we operate; the timing and technological advancement of new products
introduced by us or by our competitors; the impact of changes in laws, trade
policies and regulations, and enforcement thereof; judicial judgments and legal
proceedings; our ability to successfully realign our organization, resources
and
processes; our ability to complete strategic acquisitions and joint ventures
and
to integrate our acquisitions and joint ventures successfully; new accounting
policies and guidelines that impact the methods we use to report our financial
condition; uncertainties associated with critical accounting assumptions and
estimates; the possible impact on our businesses from natural disasters, public
health emergencies, international conflicts and other developments including
those relating to terrorism; and our success in anticipating and managing the
foregoing risks.
We
caution that the foregoing list of important factors that may affect future
results is not exhaustive. When relying on our forward-looking
statements to make decisions with respect to the Company, investors and others
should carefully consider the foregoing factors and other uncertainties and
potential events. We do not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by us
or
on our behalf.
Use
of Non-GAAP
Measures
In
addition to measures based on generally accepted accounting principles (GAAP)
in
this Restated MD&A, we use terms such as adjusted operating income; adjusted
earnings before interest, taxes, depreciation and amortization (EBITDA);
adjusted EBITDA margin; adjusted earnings per share (EPS); operating working
capital; net revenue; and backlog. These terms are not defined by
GAAP and our use of such terms or measurement of such items may vary from that
of other companies. In addition, measurement of growth is not defined
by GAAP and our use of these terms or measurement of these items may vary from
that of other companies. Where relevant, and particularly for
earnings-based measures, we provide tables in this document that reconcile
the
non-GAAP measures used to amounts reported on the
MDS
INTERIM REPORT JULY 31, 2007 (UNAUDITED) - Q3 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
face
of
the consolidated financial statements. Our executive management team assesses
the performance of our businesses based on a review of results comprising GAAP
measures and these non-GAAP measures. We also report on our performance to
the
Company’s Board of Directors based on these GAAP and non-GAAP
measures. In addition, adjusted EBITDA and operating working capital
are the primary metrics for our annual incentive compensation plan for senior
management. We provide this non-GAAP detail so that readers have a
better understanding of the significant events and transactions that have had
an
impact on our results, and can view our results through the eyes of
management.
Substantially
all of the products of the Sciex division of MDS Analytical Technologies are
sold through two joint ventures. Under the terms of these joint ventures, we
are
entitled to a 50% share of the net earnings of the worldwide business that
we
conduct with our partners in these joint ventures. These earnings include a
share of the profits generated by our partners that are paid to the joint
ventures as profit sharing. Under US GAAP, we report our direct
revenues from sales to the joint ventures and we report our share of the profits
of the joint ventures as equity earnings. We do not report our share of all
end-user revenues, despite the fact that these revenues contribute substantially
to our profitability. In order to provide readers with a better understanding
of
the drivers of profitability for the Sciex products of MDS Analytical
Technologies, we report growth in end-user revenues as reported by our joint
venture partners. This figure provides management and readers with
additional information on the performance of our global business, including
trends in customer demand and our performance relative to the overall
market.
MDS
Pharma Services measures and tracks contract backlog. Contract backlog is a
non-GAAP measure that we define to include the amount of contract value
associated with confirmed contracts that has not yet been recognized as net
revenue. A confirmed contract is one for which the Company has received customer
commitment in a manner that is customary for the type of contract involved.
For
large, long-term contracts, customer commitment is generally evidenced by the
receipt of a signed contract or confirmation awarding the work to MDS. For
smaller and short-term contracts, customer commitment may be documented in
other
ways, including email messages and oral confirmations. Only contracts for which
such commitments have been received are included in backlog and the amount
of
backlog for these contracts is measured based on the net revenue that is
expected to be earned by MDS under the contract terms. A contract is removed
from backlog if the Company receives notice from the customer that the contract
has been cancelled, indefinitely delayed, or reassigned to another service
provider.
Tabular
amounts are in millions of United States dollars, except per share amounts
and
where otherwise noted.
Introduction
MDS
is a
global life sciences company that provides market-leading products and services
that our customers use for the development of drugs and the diagnosis and
treatment of disease. Through our three business segments, we are a
leading global provider of pharmaceutical contract research services (MDS Pharma
Services), medical isotopes for molecular imaging and radiotherapeutics (MDS
Nordion), and analytical instruments (MDS Analytical Technologies). Each of
these business segments sells a variety of products and services to customers
in
markets around the world.
Discontinued
Operations
All
financial references in this document exclude those businesses that we consider
to be discontinued. Our discontinued businesses include our
diagnostics businesses, certain early-stage pharmaceutical research services
operations, and our interest in Source Medical Corporation
(Source). All financial references for the prior year have been
restated to reflect this treatment.
MDS
INTERIM REPORT JULY 31, 2007 (UNAUDITED) - Q3 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
Change
in Presentation Related to
Reimbursement of Out-of-Pocket Costs
In
addition to changes that relate to the adoption of US GAAP, the Company changed
its presentation of certain revenues that arise from the reimbursement of the
Company by our customers (reimbursement revenues) for certain reimbursable
out-of-pocket expenses that we incur on behalf of these customers during the
conduct of clinical trials (reimbursed expenses). The Company has the right
to
bill customers for reimbursement of the amounts, but is generally not entitled
to a mark-up or other form of profit margin related to these activities. In
the
financial reports for prior years, the reimbursement revenues were offset
against the related out-of-pocket costs, and because these amounts offset,
neither a revenue nor an expense item associated with this activity was
reported.
In
the
current presentation, the Company is reporting reimbursement revenues and
reimbursed expenses on a gross basis as separate lines on the consolidated
statements of operations. As a result of this change, although both total
revenues and total expenses have increased, there is no impact on operating
income reported. This change in presentation reflects a reconsideration of
the
Company’s reporting of revenues under both Canadian GAAP and US GAAP. We now
believe that the presentation used in prior Canadian GAAP financial statements
is not permitted under Canadian GAAP. While this change does not reflect a
Canadian GAAP to US GAAP difference, it does reflect a change in the
presentation compared to the previously filed Canadian GAAP financial statements
and therefore, comparative amounts reflected in these restated interim
consolidated financial statements have been revised to reflect this change
on
both a Canadian GAAP and a US GAAP basis.
Throughout
this report, when we refer to total revenues we mean revenues including
reimbursement revenues. We use the term
net revenues
to mean revenues
excluding such amounts. All revenue growth figures and adjusted
EBITDA margin figures are based on net revenues. We use net revenues to measure
the growth and profitability of MDS and MDS Pharma Services because the
pass-through invoicing of reimbursable out-of-pocket expenses varies from
period-to-period, is not a reliable measure of the underlying performance of
the
business, and does not have an impact on net income or cash flows in any
significant way. Management assesses and rewards the performance of MDS Pharma
Services and the segment’s senior management team using metrics that are based
on net revenues.
Restatement
to US
GAAP
For
the
Company’s 2007 year end of October 31, 2007, it has chosen to adopt US GAAP for
financial reporting.
The
following tables highlight the differences between Canadian and US GAAP, and
the
impact of the US GAAP error correction related to the valuation of a stock-based
compensation program on the quarter and the year-to-date results. Our
accounting for stock-based compensation was correct under Canadian GAAP and
there has been no change to the Canadian GAAP results shown in the following
table.
MDS
INTERIM REPORT JULY 31, 2007 (UNAUDITED) - Q3 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
|
|
2007
Third
Quarter
|
2006
Third
Quarter
|
|
|
Previously
Reported
(CAD
GAAP)
|
GAAP
Adj.
|
Correction
|
Restated
Correction (US
GAAP)
|
Previously
Reported
(CAD
GAAP)
|
GAAP
Adj.
|
Restated
Correction (US
GAAP)
|
|
Total
revenues
|
$346
|
(13)
|
-
|
$333
|
$281
|
(17)
|
$264
|
|
Reimbursement
revenues
|
(25)
|
-
|
-
|
(25)
|
(23)
|
-
|
(23)
|
|
Net
revenues
|
$321
|
(13)
|
-
|
$308
|
$258
|
(17)
|
$241
|
|
Income
(loss) from continuing
operations
|
8
|
(2)
|
1
|
7
|
3
|
(5)
|
(2)
|
|
Income
taxes
|
3
|
(3)
|
1
|
1
|
2
|
(6)
|
(4)
|
|
Net
interest expense
|
2
|
-
|
-
|
2
|
-
|
-
|
-
|
|
Loss
on derivatives
|
1
|
-
|
-
|
1
|
-
|
-
|
-
|
|
Depreciation
and amortization
|
28
|
(4)
|
-
|
24
|
16
|
(3)
|
13
|
|
EBITDA
|
42
|
(9)
|
2
|
35
|
21
|
(14)
|
7
|
|
Restructuring
charges, net
|
3
|
-
|
-
|
3
|
2
|
-
|
2
|
|
Gain
on sale of a business/investment
|
-
|
-
|
-
|
-
|
(2)
|
-
|
(2)
|
|
Acquisition
integration
|
11
|
-
|
-
|
11
|
-
|
-
|
-
|
|
Adjusted
EBITDA
|
$56
|
(9)
|
2
|
$49
|
$21
|
(14)
|
$7
|
|
Adjusted
EBITDA
margin
|
17%
|
-
|
-
|
16%
|
8%
|
-
|
3%
|
|
|
2007
Third Quarter
YTD
|
2006
Third Quarter
YTD
|
|
|
|
Previously
Reported
(CAD
GAAP)
|
GAAP
Adj.
|
Correction
|
Restated
Correction (US
GAAP)
|
Previously
Reported
(CAD
GAAP)
|
GAAP
Adj.
|
Restated
Correction (US
GAAP)
|
|
Total
revenues
|
$915
|
(32)
|
-
|
$883
|
$822
|
(37)
|
$785
|
|
Reimbursement
revenues
|
(71)
|
-
|
-
|
(71)
|
(80)
|
-
|
(80)
|
|
Net
revenues
|
$844
|
(32)
|
-
|
$812
|
$742
|
(37)
|
$705
|
|
Income
(loss) from continuing
operations
|
51)
|
-
|
3
|
(48)
|
15
|
(5)
|
10
|
|
Income
taxes
|
(15)
|
(10)
|
2
|
(23)
|
11
|
(42)
|
(31)
|
|
Net
interest expense
|
2
|
-
|
-
|
2
|
4
|
-
|
4
|
|
Loss
(gain) on derivatives
|
1
|
(1)
|
-
|
-
|
2
|
-
|
2
|
|
Depreciation
and amortization
|
65
|
(9)
|
-
|
56
|
45
|
(8)
|
37
|
|
EBITDA
|
2
|
(20)
|
5
|
(13)
|
77
|
(55)
|
22
|
|
Restructuring
charges, net
|
44
|
(3)
|
-
|
41
|
4
|
-
|
4
|
|
Valuation
provisions
|
6
|
-
|
-
|
6
|
7
|
(1)
|
6
|
|
MAPLE
settlement
|
(3)
|
3
|
-
|
-
|
9
|
27
|
36
|
|
Loss
(gain) on sale of a business/investment
|
1
|
-
|
-
|
1
|
(2)
|
-
|
(2)
|
|
Provision
for FDA-related settlements
|
61
|
-
|
-
|
61
|
-
|
-
|
-
|
|
Acquisition
integration
|
14
|
-
|
-
|
14
|
-
|
-
|
-
|
|
Adjusted
EBITDA
|
$125
|
(20)
|
5
|
$110
|
$95
|
(29)
|
$66
|
|
Adjusted
EBITDA
margin
|
15%
|
-
|
-
|
14%
|
13%
|
-
|
9%
|
Note
15
to our consolidated financial statements for the third quarter of 2007 contains
a reconciliation of results reported in US GAAP to the net income we would
report in Canadian GAAP.
The
differences between US GAAP and Canadian GAAP that have the most significant
impact on the Company’s financial condition and results of operations for the
interim period ended July 31, 2007, include accounting for: joint ventures,
investment tax credits, research and development, stock-based compensation
and
hedge contracts.
MDS
INTERIM REPORT JULY 31, 2007 (UNAUDITED) - Q3 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
The
primary difference between Canadian GAAP and US GAAP affecting the consolidated
revenues and operating margin is that under Canadian GAAP proportionate
consolidation is used for the results of our joint ventures within MDS
Analytical Technologies, whereas under US GAAP we apply the method of equity
accounting. For the third quarter of 2007, we reported
$13 million less revenue and $17 million less operating income under US GAAP
than we would have reported under Canadian GAAP ($13 million less and $13
million less, respectively for the third quarter of 2006). Under US
GAAP, the income from the joint ventures is included in equity earnings, which
were $15 million in 2007 ($15 million in third quarter of
2006). Under Canadian GAAP this amount was included in operating
income as part of the proportionate consolidation. There is no
significant impact to the calculation of adjusted EBITDA from this accounting
difference.
Other
differences in adjusted EBITDA are listed below.
|
·
|
Non-refundable
investment tax
credits (ITCs)
are treated as a reduction of expenditure under
Canadian GAAP and a reduction of income tax under US GAAP. In
the third quarter of 2007, there were $1 million ($3 million in the
third
quarter of 2006) of ITCs which when calculated based on US GAAP,
increased
our operating loss and reduced adjusted EBITDA, as compared to Canadian
GAAP.
|
|
·
|
Research
and Development
(R&D)
expenditures may be capitalized under Canadian GAAP if
certain criteria are met, however these expenditures are expensed
in the
period they are incurred under US GAAP. In the third quarter of 2007,
the
$5 million ($3 million in third quarter of 2006) of R&D capitalized
under Canadian GAAP resulted in a reduction of adjusted EBITDA when
calculated based on US GAAP, compared to Canadian
GAAP.
|
|
·
|
Due
to a difference in
valuation methods
for
stock-based compensation
under US GAAP and Canadian GAAP, adjusted
EBITDA was higher by $2 million for third quarter of 2007 (nil in
2006)
when calculated based on US GAAP, compared to Canadian
GAAP.
|
|
·
|
The
other difference, which is described in Note 15 to our restated interim
financial statements is related to
hedges.
|
There
are
no differences between US GAAP and Canadian GAAP in the adjustment used in
calculating adjusted EBITDA and adjusted EPS for the third quarters of 2007
or
2006. In calculating adjusted EBITDA for the year-to-date,
the significant changes to the adjusting items include the following two
items:
|
·
|
In
2007, capitalized R&D was charged to restructuring under Canadian
GAAP. Under US GAAP, these expenditures may not be capitalized and
therefore there is no adjustment.
|
|
·
|
In
2006, under Canadian GAAP, ITCs were netted against MAPLE settlement.
Under US GAAP these are treated as reduction to income
tax.
|
The
results discussed in this Restated MD&A are based on US GAAP. To
supplement the US GAAP Restated MD&A included in this document, please refer
to our Canadian Supplement to this Restated MD&A which is being filed at the
same time as our Restated MD&A and our previously filed Interim Report for
July 31, 2007 for our corresponding MD&A based on Canadian
GAAP.
MDS
INTERIM REPORT JULY 31, 2007 (UNAUDITED) - Q3 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
Acquisition
of Molecular Devices
Corporation
On
March
20, 2007, we completed the acquisition of Molecular Devices Corporation (MD),
a
leading provider of high-performance measurement tools for high-content
screening, cellular analysis, and biochemical testing, in a $622 million cash
transaction.
The
acquisition was accounted for in our second quarter using the purchase method
based on certain preliminary estimates relating to the value of the assets
and
liabilities of the acquired company. During the third quarter, we continued
the
work required to assign final values to the assets and liabilities acquired,
and, we have adjusted the purchase price allocation reported in the second
quarter to reflect the current estimates of value. The total cost of
the acquisition was $622 million, including the cash cost of the tender offer,
the cash cost to acquire outstanding in-the-money options held by MD employees,
and cash transaction costs. The components of the purchase cost and the
preliminary allocation of the costs are as follows:
|
Cash
paid for tendered shares
|
$
|
587
|
|
Cash
paid to acquire vested options
|
|
27
|
|
Cash
transaction costs
|
|
8
|
|
Total
cost of acquisition
|
$
|
622
|
|
Allocation
of cost of acquisition:
|
|
|
|
Net
tangible assets acquired
|
$
|
36
|
|
Intangible
assets acquired
|
|
221
|
|
Goodwill
|
|
365
|
|
Total
|
$
|
622
|
Net
tangible assets acquired includes $21 million of acquired
cash. Additional details are provided in note 3 to the unaudited
consolidated financial statements.
MDS
Inc.
Consolidated
operating highlights and
reconciliation of consolidated adjusted EBITDA
|
Third
Quarter
|
|
|
Year-to-date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
2007
|
|
2006
|
|
|
333
|
|
264
|
|
Total
revenues
|
|
883
|
|
785
|
|
|
(25)
|
|
(23)
|
|
Reimbursement
revenues
|
|
(71)
|
|
(80)
|
|
$
|
308
|
$
|
241
|
|
Net
revenues
|
$
|
812
|
$
|
705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
(2)
|
|
Income
(loss) from
continuing operations
|
|
(48)
|
|
10
|
|
|
1
|
|
(4)
|
|
Income
taxes
|
|
(23)
|
|
(31)
|
|
|
2
|
|
-
|
|
Net
interest
expense
|
|
2
|
|
4
|
|
|
1
|
|
-
|
|
Loss
(gain) on
derivatives
|
|
-
|
|
2
|
|
|
24
|
|
13
|
|
Depreciation
and
amortization
|
|
56
|
|
37
|
|
|
35
|
|
7
|
|
EBITDA
|
|
(13)
|
|
22
|
|
|
3
|
|
2
|
|
Restructuring
charges,
net
|
|
41
|
|
4
|
|
|
-
|
|
-
|
|
Valuation
provisions
|
|
6
|
|
6
|
|
|
-
|
|
-
|
|
MAPLE
settlement
|
|
-
|
|
36
|
|
|
-
|
|
(2)
|
|
Loss
(g
ain
)
on
sale of a
business/investment
|
|
1
|
|
(2)
|
|
|
-
|
|
-
|
|
Provision
for FDA-related
settlements
|
|
61
|
|
-
|
|
|
11
|
|
-
|
|
Acquisition
integration
|
|
14
|
|
-
|
|
$
|
49
|
$
|
7
|
|
Adjusted
EBITDA
|
$
|
11
0
|
$
|
66
|
|
|
16%
|
|
3%
|
|
Adjusted
EBITDA
margin
|
|
14%
|
|
9%
|
MDS
INTERIM REPORT JULY 31, 2007 (UNAUDITED) - Q3 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
Net
revenues for the third quarter of 2007 were up 28% on a reported basis to $308
million compared to $241 million last year. Strong 16% revenue growth at Sciex,
combined with $55 million of revenue from MD in the third quarter, pushed MDS
Analytical Technologies revenues up 124%. MDS Pharma Services net revenues
increased 5% compared to the same period in 2006, as our late-stage MDS Pharma
Services businesses continued their strong growth. MDS Nordion revenues were
down 3% on a reported basis compared to the same period in 2006, as the prior
year figures included the realization of deferred revenue associated with our
Zevalin® contract, which expired in February 2007 and therefore had no impact in
the third quarter of fiscal 2007.
Income
from continuing operations for the third quarter of 2007 was $7 million compared
to a $2 million loss reported for the same period in 2006. Both MDS
Pharma Services and MDS AT experienced solid growth in operating income compared
to the prior year. Excluding the $2 million of the Zevalin® deferred revenue in
the prior-year period, MDS Nordion operating income increased by $1
million.
Adjusted
EBITDA for the quarter was $49 million, compared to $7 million last year and
$31
million reported for the second quarter of fiscal 2007. MDS Pharma
Services demonstrated improvement in adjusted EBITDA, reporting $4M in the
third
quarter of 2007. MDS Analytical Technologies also had a strong
quarter on an adjusted EBITDA basis, both before and after the impact of the
MD
acquisition. Excluding the impact of MD, MDS Analytical Technologies
adjusted EBITDA increased by 50%.
Adjustments
reported for the quarter include $11 million of costs related to the integration
of MDS Analytical Technologies, $10 million of which relates to amortization
of
fair value increments recorded for inventory and order backlog as part of the
purchase accounting for MD. As at July 31, 2007, the fair value increments
related to inventory and order backlog have been fully expensed.
Selling,
general, and administration (SG&A) expenses for the quarter totaled $66
million and 21% of net revenues compared to $62 million and 26% last year.
The
increase reflects the addition of MD, and SG&A in the other businesses was
level or lower than last year.
We
spent
$20 million on R&D activities in the third quarter this year, compared to
spending of $12 million last year. The majority of the increase in R&D
spending comes from the additional spending in our new MD business.
Consolidated
depreciation and amortization expense increased $11 million compared to the
third quarter of last year. In the third quarter of 2007, we
amortized $8 million of intangible assets acquired as part of the MD
transaction. Capital expenditures for the quarter were $27 million
and included $13 million for a property acquisition related to the expansion
of
our early-stage business in Phoenix, Arizona.
Income
from discontinued operations was nil in the third quarter of 2007 compared
to
$16 million for 2006 reflects the operating results of our Canadian diagnostics
businesses for that period.
Earnings
per share from continuing operations were $0.06 for the quarter, compared to
($0.01) in 2006. Adjusted earnings per share from continuing
operations for the quarter were $0.13 compared to ($0.04) earned in the same
period last year. Earnings per share from discontinued operations
were a loss of $0.01 compared to income of $0.11 last year. Adjusted earnings
per share for the two periods were as follows:
MDS
INTERIM REPORT JULY 31, 2007 (UNAUDITED) - Q3 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
|
|
Third
Quarter
|
|
Year-to-date
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Basic
earnings (loss) per share from continuing operations – as
reported
|
$
|
0.06
|
$
|
(0.01)
|
$
|
(0.36)
|
$
|
0.07
|
|
Adjusted
for:
|
|
|
|
|
|
|
|
|
|
Restructuring
charges, net
|
|
0.01
|
|
-
|
|
0.24
|
|
0.01
|
|
FDA-related
customer settlements
|
|
-
|
|
-
|
|
0.30
|
|
-
|
|
Valuation
provisions
|
|
-
|
|
-
|
|
0.04
|
|
0.04
|
|
Mark-to-market
on interest rate swaps
|
|
0.01
|
|
-
|
|
0.01
|
|
0.01
|
|
MAPLE
settlement
|
|
-
|
|
-
|
|
(0.02)
|
|
0.04
|
|
Loss
(gain) on sale of business and long-term investments
|
|
-
|
|
(0.01)
|
|
0.02
|
|
-
|
|
Acquisition
integration
|
|
0.05
|
|
-
|
|
0.07
|
|
-
|
|
Tax
rate changes
|
|
-
|
|
(0.02)
|
|
-
|
|
-
|
|
Adjusted
EPS
|
$
|
0.13
|
$
|
(0.04)
|
$
|
0.29
|
$
|
0.17
|
MDS
Pharma
Services
Financial
Highlights
|
Third
Quarter
|
|
|
Year-to-date
|
|
|
|
%
of net
|
|
|
%
of net
|
|
|
|
|
%
of net
|
|
|
%
of net
|
|
|
2007
|
revenues
|
|
2006
|
revenues
|
|
|
|
2007
|
revenues
|
|
2006
|
revenues
|
|
$
|
62
|
53%
|
$
|
62
|
-
|
|
Early-stage
|
$
|
188
|
53%
|
$
|
197
|
-
|
|
|
56
|
47%
|
|
50
|
-
|
|
Late-stage
|
|
166
|
47%
|
|
139
|
-
|
|
|
118
|
100%
|
|
112
|
100%
|
|
Net
revenues
|
|
354
|
100%
|
|
336
|
100%
|
|
$
|
25
|
-
|
$
|
23
|
-
|
|
Reimbursement
revenues
|
$
|
71
|
-
|
$
|
80
|
-
|
|
|
143
|
-
|
|
135
|
-
|
|
Total
revenues
|
|
425
|
-
|
|
416
|
-
|
|
|
(82)
|
(69%)
|
|
(97)
|
(87%)
|
|
Cost
of
revenues
|
|
(251)
|
(71%)
|
|
(262)
|
(78%)
|
|
|
(25)
|
-
|
|
(23)
|
-
|
|
Reimbursed
expenses
|
|
(71)
|
-
|
|
(80)
|
-
|
|
|
(30)
|
(25%)
|
|
(34)
|
(30%)
|
|
Selling,
general, and
administration
|
|
(95)
|
(27%)
|
|
(91)
|
(27%)
|
|
|
-
|
-
|
|
-
|
-
|
|
Research
and
development
|
|
-
|
-
|
|
-
|
-
|
|
|
(8)
|
(7%)
|
|
(7)
|
(6%)
|
|
Depreciation
and
amortization
|
|
(26)
|
(7%)
|
|
(21)
|
(6%)
|
|
|
(1)
|
(1%)
|
|
(1)
|
(1%)
|
|
Restructuring
charges
|
|
(32)
|
(9%)
|
|
(1)
|
(0%)
|
|
|
(2)
|
(2%)
|
|
6
|
5%
|
|
Other
income
(expense)
|
|
(68)
|
(19%)
|
|
5
|
1%
|
|
|
(5)
|
(4%)
|
|
(21)
|
(19%)
|
|
Operating
income
(loss)
|
|
(118)
|
(33%)
|
|
(34)
|
(10%)
|
|
|
|
|
|
|
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
-
|
-
|
|
-
|
-
|
|
Provision
for FDA-related
settlements
|
|
61
|
17%
|
|
-
|
-
|
|
|
1
|
1%
|
|
1
|
1%
|
|
Restructuring
charges
|
|
32
|
9%
|
|
1
|
0%
|
|
|
-
|
-
|
|
(2)
|
(2%)
|
|
Loss
(gain) on sale of a
business
|
|
4
|
1%
|
|
-
|
-
|
|
|
-
|
-
|
|
-
|
-
|
|
Valuation
provision
|
|
-
|
-
|
|
(2)
|
(1%)
|
|
|
-
|
-
|
|
-
|
-
|
|
Equity
earnings
|
|
-
|
-
|
|
(1)
|
(0%)
|
|
|
(4)
|
(3%)
|
|
(22)
|
(20%)
|
|
|
|
(21)
|
(6%)
|
|
(36)
|
(11%)
|
|
|
8
|
7%
|
|
7
|
6%
|
|
Depreciation
and
amortization
|
|
26
|
7%
|
|
21
|
6%
|
|
$
|
4
|
3%
|
$
|
(15)
|
(13%)
|
|
Adjusted
EBITDA
|
$
|
5
|
1%
|
$
|
(15)
|
(4%)
|
|
|
|
|
|
|
|
|
Margins:
|
|
|
|
|
|
|
|
|
31
%
|
-
|
|
1
3
%
|
-
|
|
Gross
margin
|
|
29%
|
-
|
|
22%
|
-
|
|
|
3%
|
-
|
|
(13%)
|
-
|
|
Adjusted
EBITDA
|
|
1%
|
-
|
|
(4%)
|
-
|
|
$
|
21
|
-
|
$
|
12
|
-
|
|
Capital
expenditures
|
$
|
28
|
-
|
$
|
2
6
|
-
|
MDS
Pharma Services net revenues grew 5%, based on solid 12% revenue growth in
our
late-stage businesses. Early-stage revenues were level compared to the same
quarter last year, as weakness in both early clinical and bioanalytical revenues
offset otherwise strong growth in drug safety and discovery/preclinical
revenues. We have been invited to propose on an increasing number of generic
drug studies and as a
MDS
INTERIM REPORT JULY 31, 2007 (UNAUDITED) - Q3 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
result,
we have seen some strength in new orders in the early-stage businesses this
quarter. In addition, bioanalytical revenues were modestly higher on
a quarter-over-quarter basis following three quarters of decline. We believe
that these are positive signs of stability returning to our early-stage
businesses and an indicator that some of the prior customer uncertainty created
by the FDA issues are being resolved.
Average
monthly pharmaceutical research backlog was $420 million for the third quarter
of 2007, an increase of 5% when compared to the average for the third quarter
of
fiscal 2006.
Although
we saw some improvement in bid proposals in the quarter, we also experienced
some delays signing contracts and cancellations. As noted last
quarter, a significant contract cancellation occurred late in April, reducing
our backlog to $425 million at the beginning of May and we have experienced
a
further decline in reported backlog for the third quarter.
|
Average
monthly backlog during
the quarter
|
|
|
|
Fiscal
2005 – Quarter 1
|
$
|
315
|
|
Quarter
2
|
|
305
|
|
Quarter
3
|
|
315
|
|
Quarter
4
|
|
340
|
|
Fiscal
2006 – Quarter 1
|
|
370
|
|
Quarter
2
|
|
400
|
|
Quarter
3
|
|
400
|
|
Quarter
4
|
|
430
|
|
Fiscal
2007 – Quarter 1
|
|
450
|
|
Quarter
2
|
|
450
|
|
Quarter
3
|
|
420
|
We
reported an operating loss of $5 million for MDS Pharma Services, a 76%
reduction compared to the operating loss of $21 million reported for the prior
year quarter. We are beginning to realize cost savings from our previously
announced restructuring actions and we expect to see these savings increase
as
we complete more of these restructuring initiatives during the fourth quarter.
The operating loss for 2006 included $6 million of costs related to the FDA
review of our Montreal-area bioanalytical facilities, partially offset by a
$2
million gain from the sale of an agricultural testing business and $3 million
related to a Hurricane Katrina insurance settlement.
Adjusted
EBITDA for the third quarter was $4 million, up substantially from the $15
million adjusted EBITDA loss reported for the third quarter of 2006. Adjustments
for the 2007 quarter related to restructuring activities that we were not able
to provide for previously. Adjustments in the third quarter last year comprised
restructuring charges and the gain from the sale of the agricultural testing
business.
During
the third quarter of 2007, we continued to implement portions of our
restructuring plan, initiating the resizing of our St. Laurent facility, and
announcing the closure of our Sittingbourne, UK facility. To date,
these restructuring activities have resulted in a headcount reduction of
approximately 200 employees and we utilized $5 million of the restructuring
reserve established in the second quarter of 2007 on these
activities.
Capital
expenditures in the pharmaceutical services segment were $21 million compared
to
$12 million last year. The increase in expenditures in fiscal 2007
related to the expansion of our Phoenix, Arizona early clinical research
facility, and included the purchase of the property for the
facility. Expenditures in 2006 related to an ongoing expansion in
Lyon, France as well as an expansion of the Skeletech site in Bothell,
Washington.
MDS
INTERIM REPORT JULY 31, 2007 (UNAUDITED) - Q3 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
Regulatory
Review of Montreal
Bioanalytical Operations
We
made
significant progress during the quarter helping our generic customers to
complete the study audits required of them by the FDA. To date, we have been
in
contact with sponsors responsible for approximately 85% of the 217 ANDA
submissions under review. Based on our communication with customers and on
the
work done at our facility since January, 150 ANDA submissions have been
subjected to third party audits. The FDA imposed a six-month time limit on
completing this work in their January 10, 2007 letter to ANDA sponsors and
we
therefore believe that substantially all of the site audit work for these ANDA
studies has now been done. Most of our efforts at this time are
focused on follow-up questions and supporting the finalization of our customers’
remaining audit reports.
In
addition to generic studies, the FDA has requested information regarding
submitted NDA applications for innovative drugs that contain data from
bioanalytical studies conducted from January 2000 to December 2004 in our St.
Laurent and Blainville, Quebec facilities. As of today it is
difficult to estimate the full extent of the FDA’s intent relative to innovator
studies. To August 29, 2007, we had assisted on 38 study audits for a
smaller number of NDA submissions for which the FDA has requested additional
review.
Also
during the quarter, we continued to respond to questions from customers and
from
European regulators about the nature of the work being done for the FDA. At
this
time, we are not able to assess the impact of possible European regulatory
actions. We are working closely with these regulators to address
their questions utilizing work prepared in the FDA review.
During
the second quarter, we approved and recorded a $61 million provision for a
reimbursement policy for clients who have incurred or will incur third party
audit costs to complete the work required by the FDA and other regulators.
During the third quarter, we utilized $5 million of this reserve for such costs.
Based on information currently available, we believe that the existing provision
will be sufficient to cover any agreements reached with clients for study
audits, study re-runs, and other related costs. As our experience to date has
been that sponsors bill us for costs once their audits are finalized, we expect
the utilization of this reserve to increase significantly in the fourth quarter
and continue into 2008.
Full
and
complete resolution of the bioanalytical regulatory issues remains a key focus
for MDS Pharma Services and MDS. We remain committed to working
cooperatively with the FDA, other regulators, and our customers to address
any
regulatory concerns and to support our customers while they complete the study
audits. Although we recorded a provision in our second quarter that
reflects our current best estimate of the costs we expect to incur with respect
to this work and for obligations we have to clients, there can be no assurance
at this time that we will not incur costs that exceed the amounts we have
currently estimated. In addition, although the FDA has approved certain
submissions, there can be no certainty that, in all cases, the study audits
conducted by our clients will be acceptable to the FDA or other regulators,
or
that such regulators will not require additional work. We also are
unable to judge what further impact this situation will have on our business
development activities, particularly for our bioanalytical and Phase I
operations.
MDS
INTERIM REPORT JULY 31, 2007 (UNAUDITED) - Q3 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
MDS
Nordion
Financial
Highlights
|
Third
Quarter
|
|
|
Year-to-date
|
|
|
|
%
of net
|
|
|
%
of net
|
|
|
|
|
%
of net
|
|
|
%
of net
|
|
|
2007
|
revenues
|
|
2006
|
revenues
|
|
|
|
2007
|
revenues
|
|
2006
|
revenues
|
|
$
|
76
|
100%
|
$
|
77
|
99%
|
|
Product revenues
|
$
|
210
|
98%
|
$
|
217
|
99%
|
|
|
-
|
-
|
|
1
|
1%
|
|
Service revenues
|
|
4
|
2%
|
|
3
|
1%
|
|
|
76
|
100%
|
|
78
|
100%
|
|
Net
revenues
|
|
214
|
100%
|
|
220
|
100%
|
|
|
(39)
|
(51%)
|
|
(39)
|
(50%)
|
|
Cost of product revenues
|
|
(108)
|
(50%)
|
|
(109)
|
(50%)
|
|
|
-
|
-
|
|
(1)
|
(1%)
|
|
Cost of service revenues
|
|
(2)
|
(1%)
|
|
(2)
|
(1%)
|
|
|
(13)
|
(17%)
|
|
(13)
|
(17%)
|
|
Selling, general, and administration
|
|
(36)
|
(17%)
|
|
(37)
|
(17%)
|
|
|
(1)
|
(1%)
|
|
(2)
|
(3%)
|
|
Research and development
|
|
(3)
|
(1%)
|
|
(4)
|
(2%)
|
|
|
(4)
|
(5%)
|
|
(4)
|
(5%)
|
|
Depreciation and amortization
|
|
(10)
|
(5%)
|
|
(11)
|
(5%)
|
|
|
-
|
-
|
|
-
|
-
|
|
Restructuring charges
|
|
-
|
-
|
|
-
|
-
|
|
|
(1)
|
(1%)
|
|
-
|
-
|
|
Other income (expense)
|
|
-
|
-
|
|
(36)
|
(16%)
|
|
|
18
|
24%
|
|
19
|
24%
|
|
Operating
income
|
|
55
|
26%
|
|
21
|
10%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
-
|
-
|
|
-
|
-
|
|
MAPLE settlement
|
|
-
|
-
|
|
36
|
16%
|
|
|
-
|
-
|
|
-
|
-
|
|
Gain on a sale of a business
|
|
(1)
|
(0%)
|
|
-
|
-
|
|
|
-
|
-
|
|
-
|
-
|
|
Restructuring charges, net
|
|
-
|
-
|
|
-
|
-
|
|
|
18
|
24%
|
|
19
|
24%
|
|
|
|
54
|
25%
|
|
57
|
26%
|
|
|
4
|
5%
|
|
4
|
5%
|
|
Depreciation and amortization
|
|
10
|
5%
|
|
11
|
5%
|
|
$
|
22
|
29%
|
$
|
23
|
29%
|
|
Adjusted
EBITDA
|
$
|
64
|
30%
|
$
|
68
|
31%
|
|
|
|
|
|
|
|
|
Margins:
|
|
|
|
|
|
|
|
|
49%
|
-
|
|
49%
|
-
|
|
Gross margin
|
|
49%
|
-
|
|
49%
|
-
|
|
|
29%
|
-
|
|
29%
|
-
|
|
Adjusted EBITDA
|
|
30%
|
-
|
|
31%
|
-
|
|
$
|
3
|
-
|
$
|
-
|
-
|
|
Capital
expenditures
|
$
|
5
|
-
|
$
|
-
|
-
|
MDS
Nordion revenues were down 3% year-over-year on a reported basis. Revenues
for
2006 included $2 million related to an amount received associated with the
2004
cancellation of the supply agreement between MDS Nordion and Biogen
Idec. This amount was included in deferred revenue and recognized in
income over 40 months, with the final recognition of this occurring in February
2007. Excluding the impact of this item, revenues were level on a
year-over-year basis, as stronger medical isotopes revenues offset weakness
in
cobalt therapy unit sales.
Operating
income was $18 million compared to $19 million last year in the same period
and
adjusted EBITDA was $22 million compared to $23 million for the third quarter
of
2006. Both were $1 million lower due to the contract cancellation
referred to above. There were no adjusting items in the third quarter of either
year, and depreciation and amortization was level, year-over-year.
Capital
expenditures in the isotopes segment for the quarter were $3 million, compared
to none last year. Spending in the quarter related primarily to
the previously announced plans to invest $6 million to expand our Belgian
production facility to meet the growing demand for Glucotrace®, a medical
imaging agent used extensively in positron emission tomography (PET)
scans.
We
experienced continued growth in revenues from TheraSphere in the quarter
compared to last year and demand for this product in Europe remains
encouraging. TheraSphere has been added to treatment formularies in
certain European countries, allowing doctors to charge for the utilization
of
the product. We are optimistic that this development will drive
increased revenue from this radiotherapeutic product.
MDS
INTERIM REPORT JULY 31, 2007 (UNAUDITED) - Q3 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
We
announced a collaboration with the University of Ottawa Heart Institute in
June
to launch a molecular imaging centre of excellence to advance research in
cardiology. We believe this collaboration represents a unique opportunity for
future expansion of MDS Nordion’s molecular imaging business. Also in the
quarter, MDS Nordion was granted the C-TPAT Tier 3 designation for cross-border
transportation of dangerous goods. This designation, which reflects the highest
level of security clearance for transportation of dangerous goods, is a direct
result of MDS Nordion’s commitment to quality and safety and to the strength of
our reputation with regulators in this area.
MDS
Analytical
Technologies
Financial
Highlights
|
Third
Quarter
|
|
|
Year-to-date
|
|
|
|
%
of net
|
|
|
%
of net
|
|
|
|
|
%
of net
|
|
|
%
of net
|
|
|
2007
|
revenues
|
|
2006
|
revenues
|
|
|
|
2007
|
revenues
|
|
2006
|
revenues
|
|
$
|
94
|
82%
|
$
|
37
|
73%
|
|
Product revenues
|
$
|
194
|
80%
|
$
|
109
|
73%
|
|
|
20
|
18%
|
|
14
|
27%
|
|
Service revenues
|
|
50
|
20%
|
|
40
|
27%
|
|
|
114
|
100%
|
|
51
|
100%
|
|
Net
revenues
|
|
244
|
100%
|
|
149
|
100%
|
|
|
(70)
|
(61%)
|
|
(42)
|
(82%)
|
|
Cost of product revenues
|
|
(155)
|
(64%)
|
|
(111)
|
(74%)
|
|
|
(1)
|
(1%)
|
|
-
|
-
|
|
Cost of service revenues
|
|
(2)
|
(1%)
|
|
-
|
-
|
|
|
(20)
|
(18%)
|
|
(7)
|
(14%)
|
|
Selling, general, and administration
|
|
(37)
|
(15%)
|
|
(14)
|
(9%)
|
|
|
(19)
|
(17%)
|
|
(10)
|
(20%)
|
|
Research and development
|
|
(45)
|
(18%)
|
|
(33)
|
(22%)
|
|
|
(12)
|
(11%)
|
|
(2)
|
(4%)
|
|
Depreciation and amortization
|
|
(19)
|
(8%)
|
|
(5)
|
(3%)
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
|
|
|
|
|
|
(3)
|
(3%)
|
|
1
|
2%
|
|
Other income (expense) net
|
|
(5)
|
(2%)
|
|
3
|
2%
|
|
|
(11)
|
(10%)
|
|
(9)
|
(18%)
|
|
Operating
income
|
|
(19)
|
(8%)
|
|
(11)
|
(7%)
|
|
|
|
|
|
|
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
15
|
13%
|
|
15
|
29%
|
|
Equity earnings
|
|
40
|
16%
|
|
42
|
28%
|
|
|
11
|
10%
|
|
-
|
-
|
|
Acquisition integration
|
|
14
|
6%
|
|
-
|
-
|
|
|
-
|
-
|
|
-
|
-
|
|
Restructuring charges
|
|
-
|
-
|
|
-
|
-
|
|
|
15
|
13%
|
|
6
|
12%
|
|
|
|
35
|
14%
|
|
31
|
21%
|
|
|
12
|
11%
|
|
2
|
4%
|
|
Depreciation and amortization
|
|
19
|
8%
|
|
5
|
3%
|
|
$
|
27
|
24%
|
$
|
8
|
16%
|
|
Adjusted
EBITDA
|
$
|
54
|
22%
|
$
|
36
|
24%
|
|
|
|
|
|
|
|
|
Margins:
|
|
|
|
|
|
|
|
|
38%
|
|
|
18%
|
|
|
Gross margin
|
|
35%
|
|
|
26%
|
|
|
|
24%
|
|
|
16%
|
|
|
Adjusted EBITDA
|
|
22%
|
|
|
24%
|
|
|
$
|
2
|
|
$
|
-
|
|
|
Capital
expenditures
|
$
|
6
|
|
$
|
2
|
|
The
Sciex
division of MDS Analytical Technologies carries out the majority of its business
through joint ventures. Currently, MDS generates the majority of its
income associated with these joint ventures from the net income of the joint
ventures, and not from its sales to the joint ventures. Under US
GAAP, we equity account for the joint ventures and therefore the majority of
the
income related to the Sciex division is reflected in equity earnings, which
represent our share of the net income of the joint ventures. We include equity
earnings in our calculation of adjusted EBITDA, however, under US GAAP, these
earnings are not included in operating income.
MDS
Analytical Technologies reported revenues of $114 million for the third quarter
of 2007, compared to $51 million for the same period last year. Fiscal 2007
revenues included $55 million from the newly acquired Molecular Devices
business. The Sciex division of MDS Analytical Technologies reported 16% revenue
growth compared to the prior-year period.
MDS
INTERIM REPORT JULY 31, 2007 (UNAUDITED) - Q3 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
Growth
was strong in the Sciex business for the quarter, especially in the small
molecule markets. Our high-end triple-quad and ion-trap instruments have
maintained strong sales momentum, across all the geographic
markets. Good strength from our core LC/MS products was augmented by
strength from our ICP/MS product line. Service revenues continue to
be a strong driver of growth and profitability for the worldwide business,
building on the large installed base of equipment, and for our share of
operating income from the Applied Biosystems/Sciex and MDS/PerkinElmer
partnerships. End-user revenues for Sciex products grew 10% in the
third quarter compared to the same period last year.
MD
has
been a strong contributor to segment revenues and adjusted EBITDA since we
acquired it. Given the strong start, we believe the division is on
track to meet or exceed the expected $190 million in revenues and $45 - $50
million in adjusted EBITDA in the first full year of ownership. MD revenues
were
up 16% compared to the same three-month period in their fiscal
2006.
MDS
acquired Molecular Devices effective March 20, 2007. During the third
quarter we continued our work to finalize the determination of the fair value
of
the assets and liabilities acquired and to finalize the estimates of the costs
associated with the integration actions we plan to take. The purchase price
allocation reflected in the July 31, 2007 statement of financial position and
the charges recorded in the period related to the amortization of intangible
assets and fair value increments have been updated compared to those reported
in
April 2007 for changes in the preliminary valuation estimates. These
valuations remain preliminary under purchase accounting guidelines and are
subject to change.
In
our
report for the second quarter we indicated that the fair value increment for
inventory and the value of pre-acquisition backlog were subject to significant
judgment and that they would be amortized as expenses to income over a short
period. In the third quarter, we expensed $10 million related to these items
as
acquisition date inventories were sold and essentially all order backlog from
the pre-acquisition period has been shipped. We also expensed $8
million of amortization related to intangible assets, primarily related to
MD
technologies. We expect to finalize the determination of the purchase accounting
by year-end.
One
particular area of focus for MDS Analytical Technologies is the integration
of
our manufacturing operations in Asia. We now have our plants in Singapore and
China fully operational and an increasing amount of our product is being
manufactured in Asia. Our integration plan includes consideration of the
appropriate mix of products for these plants to maximize the economic benefits
while protecting our intellectual property and our access to markets in which
trade protectionism is a factor.
We
reported an operating loss of $11 million for the third quarter of 2007 compared
to a loss of $9 million for the third quarter of 2006. Equity
earnings, which are not included in operating income and represent our share
of
earnings from the Sciex joint ventures were $15 million for the third quarter
of
2007 which was level with the third quarter of 2006. Operating income for the
third quarter this year includes a $4 million operating loss from MD, reflecting
the purchase-related items discussed above.
Adjusted
EBITDA for the quarter was $27 million compared to $8 million last
year.
Adjustments of $11
million for the quarter reflect costs of the MD acquisition, including $1
million of costs that we have incurred as we begin to integrate the businesses
and $10 million of non-cash fair market value adjustments applied to inventory
and order backlog as described above. Adjustments of $15 million of
equity earnings as described above were included in the third quarter of both
2007 and 2006.
MDS
INTERIM REPORT JULY 31, 2007 (UNAUDITED) - Q3 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
Increased
SG&A and R&D expenses in MDS Analytical Technologies for the third
quarter of 2007 reflect the additional costs associated with the MD business.
Depreciation and amortization expense was also up, reflecting $8 million for
amortization of intangible assets acquired as part of the MD acquisition, along
with depreciation on MD property, plant, and equipment. Capital
expenditures made in the third quarter this year were $3 million this year
and
nil in the third quarter last year.
The
MD
division of MDS Analytical Technologies announced the release of the AquaMax
2000 and AquaMax 4000 series of microplate washers to add speed and flexibility
to microplate washing for bioanalytical assays. In addition, Sciex and its
partner Applied Biosystems announced the release of a new food testing method
for LC/MS to help address recent concerns about melamine and cyanuric acid
in
food. This announcement marks the launch of the first commercially available
method to test for these contaminants simultaneously.
Corporate
and
Other
Financial
Highlights
|
Third
Quarter
|
|
|
Year-to-Date
|
|
|
2007
|
|
2006
|
|
|
|
2007
|
|
2006
|
|
$
|
(3)
|
$
|
(8)
|
|
Selling,
general, and administration
|
$
|
(13)
|
$
|
(20)
|
|
|
-
|
|
-
|
|
Research
and development
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
Depreciation
and amortization
|
|
(1)
|
|
-
|
|
|
(2)
|
|
(1)
|
|
Restructuring
charges
|
|
(9)
|
|
(3)
|
|
|
(1)
|
|
(1)
|
|
Other
expense
|
|
(4)
|
|
(6)
|
|
|
(6)
|
|
(10)
|
|
Operating
loss
|
|
(27)
|
|
(29)
|
|
|
|
|
|
|
Adjustments:
|
|
|
|
|
|
|
-
|
|
-
|
|
Equity
earnings
|
|
-
|
|
(3)
|
|
|
-
|
|
-
|
|
Gain
on sale of investments
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
Valuation
provisions
|
|
6
|
|
6
|
|
|
2
|
|
1
|
|
Restructuring
|
|
9
|
|
3
|
|
|
-
|
|
-
|
|
Depreciation
and amortization
|
|
1
|
|
-
|
|
$
|
(4)
|
$
|
(9)
|
|
Adjusted
EBITDA
|
$
|
(11)
|
$
|
(23)
|
Corporate
SG&A expenses were $3 million for the third quarter this year, compared to
$8 million in the third quarter of 2006. Expenses for the prior year included
$4
million related to the FDA matter and our initial SOx certification
initiative.
Other
expenses for the third quarter includes $2 million of restructuring, which
was
treated as an adjustment to arrive at adjusted EBITDA.
Third
quarter interest expense increased from $4 million in 2006 to $6 million in
2007
and interest income in the quarter was $4 million in both years.
Income
Taxes
Our
effective tax rate for the quarter was 13%, due primarily to the improved
performance of certain of our foreign operations, including the stronger
performance this quarter of the late-stage business in MDS Pharma
Services. This resulted in the use of tax loss carry forwards in
these foreign jurisdictions. The tax benefit of these losses had not
been previously recognized in our accounts.
MDS
INTERIM REPORT JULY 31, 2007 (UNAUDITED) - Q3 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
Discontinued
Operations
The
results of our discontinued businesses for the third quarter of 2007 and 2006
were as follows:
|
|
Third
Quarter
|
Year-to-date
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
$
|
|
$
|
82
|
$
|
95
|
$
|
280
|
|
Cost
of revenues
|
|
-
|
|
(49)
|
|
(57)
|
|
(180)
|
|
Selling,
general and administration
|
|
-
|
|
(11)
|
|
(15)
|
|
(38)
|
|
Depreciation
and amortization
|
|
-
|
|
(2)
|
|
-
|
|
(7)
|
|
Goodwill
write-down
|
|
-
|
|
-
|
|
-
|
|
-
|
|
Restructuring
charges
|
|
-
|
|
-
|
|
-
|
|
(1)
|
|
Other
expenses
|
|
-
|
|
-
|
|
-
|
|
-
|
|
Operating
income
|
|
|
|
20
|
|
23
|
|
54
|
|
Gain
on sale of discontinued operations
|
|
-
|
|
-
|
|
904
|
|
24
|
|
Interest
expense
|
|
-
|
|
-
|
|
-
|
|
-
|
|
Interest
income
|
|
-
|
|
-
|
|
1
|
|
1
|
|
Income
taxes
|
|
-
|
|
(3)
|
|
(117)
|
|
(9)
|
|
Minority
interest
|
|
-
|
|
(2)
|
|
(4)
|
|
(7)
|
|
Equity
earnings
|
|
-
|
|
1
|
|
1
|
|
2
|
|
Income
from discontinued
operations
|
|
-
|
|
16
|
|
808
|
|
65
|
|
Basic
EPS from discontinued
operations
|
$
|
-
|
$
|
0.11
|
$
|
5.99
|
$
|
0.45
|
The
results from discontinued operations for 2006 include results from the Canadian
diagnostic services business and certain small MDS Pharma Services businesses
discontinued in 2005.
Liquidity
and Capital
Resources
|
|
|
July
31
2007
|
|
October
31 2006
|
Change
|
|
Cash,
cash equivalents and short-term investments
|
$
|
311
|
$
|
382
|
(19%)
|
|
Operating
working capital
1
|
$
|
82
|
$
|
97
|
(15%)
|
|
Current
ratio (excludes net assets held for sale)
|
$
|
1.6
|
$
|
2.4
|
|
1
Our
measure of operating working
capital equals accounts receivable plus unbilled revenue and inventory less
accounts payable, accrued liabilities, and current deferred
revenue.
Cash
and
short-term investments totaled $311 million compared to $319 million at the
end
of April 2007 and $382 million at the end of October 2006. The
increase in capital expenditures to $27 million this quarter compared to $15
million in the same period last year accounts for the decrease in cash
balance.
As
at the
date of this report, we have C$17 million in short-term investments in
asset-backed commercial paper (ABCP) that was purchased subsequent to July
31,
2007. This ABCP is due to mature on September 7, 2007 and the issuer
has been affected by the recent liquidity issues in these investment
markets. While we have not received notice of the intentions of the
issuer on these investments, this issuer has not honoured maturities of its
other ABCP since August 14
th
,
and we currently
expect that this issuer will extend the maturity on these investments. At the
present time, we do not have sufficient information to determine whether a
write-down in the value of these investments is required, nor do we know when
we
will be able to convert these investments into cash.
Operating
working capital of $82 million at the end of the third quarter was up from
$74
million at the end of April, but continues to be down substantially from the
October 2006 balance. The decline since year-end is due primarily to
accounts payable and accrued liabilities as at July 31, 2007 which reflects
the
impact of the FDA and restructuring provisions recorded in the second
quarter. These provisions are offsetting the addition of
operating working capital associated with MD. We expect that our
operating working capital will rise to normal levels in future quarters as
these
reserves are utilized.
MDS
INTERIM REPORT JULY 31, 2007 (UNAUDITED) - Q3 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
We
expect
our operating cash inflows to remain strong during the balance of this year
and
throughout fiscal 2008. Cash outflows will include FDA settlements
with our customers and the payment of severance obligations associated with
our
restructuring activities. In addition, we will make a principal repayment of
$79
million on our long-term debt in December 2007. These liquidity needs
can be satisfied from cash generated from operations and cash on hand. We also
have available a C$500 million, five-year, committed, revolving credit facility
to fund our liquidity requirements. There were no borrowings under this facility
as at July 31, 2007. We do not believe that the liquidity issues
affecting ABCP markets at this time will have any significant impact on our
liquidity.
Cash
used
in investing activities for continuing operations totaled $94 million for the
third quarter this year, compared to $147 million for the third
quarter of 2006, primarily due to purchases of short-term investments
and capital expenditures. The $27 million of capital expenditures
this year includes higher levels of capital expenditures in MDS Pharma Services
for reasons noted above.
Financing
activities (excluding discontinued operations) generated $5 million of cash
in
the quarter from the issuance of shares compared to $1 million in the prior
year. Financing activities this year were limited to small regularly
scheduled payments on certain long-term debt, offset by the proceeds for shares
issued under the MDS employee share ownership and stock option plans. Cash
from
financing activities for the prior year was net of a $4 million dividend
payment.
We
believe that cash flow generated from operations, coupled with available
borrowings from existing financing sources, will be sufficient to meet our
anticipated requirements for acquisitions, capital expenditures, research and
development expenditures, FDA settlements, restructuring costs and operations
in
2007 and 2008. At this time, we do not reasonably expect any
presently known trend or uncertainty to affect our ability to access our current
sources of cash. We remain in compliance with all covenants for our
senior unsecured notes and our bank credit facility.
Contractual
Obligations
There
have been no material changes in contractual obligations since October 31,
2006
other than those arising from the acquisition of MD, and there has been no
substantive change in any of our long-term debt or other long-term obligations
since that date. We have not entered into any new guarantees of the
debt of third parties, nor do we have any off-balance sheet
arrangements. The acquisition of MD has added $6 million of annual
commitments related to operating leases and approximately $14 million of
inventory purchase commitments in 2007.
Derivative
Instruments
We
use
derivative financial instruments to manage our foreign currency and interest
rate exposure. These instruments consisted of forward foreign
exchange and option contracts and interest rate swap agreements entered into
in
accordance with our established risk management policies and
procedures. All derivative instrument contracts are with banks listed
on Schedules I to III to the Bank Act (Canada) and the Company utilizes
financial information provided by certain of these banks to assist in the
determination of fair market values of the financial instruments.
The
net
mark-to-market value of all derivative instruments at July 31, 2007 was
nil. We recorded a $1 million mark-to-market loss on interest rate
swaps during the third quarter of 2007.
MDS
INTERIM REPORT JULY 31, 2007 (UNAUDITED) - Q3 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
Capitalization
|
|
|
July
31
2007
|
|
October
31 2006
|
|
Change
|
|
Long-term
debt
|
$
|
387
|
$
|
394
|
|
(2%)
|
|
Less:
cash and cash equivalents and short-term investments
|
|
311
|
|
382
|
|
(19%)
|
|
Net
debt
|
|
76
|
|
12
|
|
533%
|
|
Shareholders’
equity
|
|
1,756
|
|
1,354
|
|
30%
|
|
Capital
employed
1
|
$
|
1,832
|
$
|
1,366
|
|
34%
|
1
Capital
employed
is a measure of how much of our net assets is financed by debt and
equity.
Long-term
debt decreased $7 million due mostly to principal payments. Changes
in the value of the US-dollar denominated debt, the majority of which is treated
as a hedge in the US net investment, are reflected in Accumulated Other
Comprehensive Income in the Statements of Financial Position. The
current portion of the long-term debt is $93 million compared to $20 million
at
October 31, 2006, reflecting the transfer to current portion of $79 million
of
long-term debt which will be repaid in December 2007. During the third quarter,
we de-designated $70 million of the US-dollar debt as a hedge of our US net
investment in accordance with the provisions of FAS 133 and entered into foreign
exchange contracts to fix the exchange rate that we will pay to buy the US
dollars required to make the December debt payments. Gains and losses on the
foreign exchange contracts and on this portion of the US-dollar denominated
debt
are offsetting.
Quarterly
Highlights
Following
is a summary of selected financial information derived from the Company’s
unaudited interim period consolidated financial statements for each of the
eight
most recently completed quarters. This financial data has been
prepared in accordance with US GAAP and prior periods have been restated to
reflect the discontinuance of the operations discussed above.
|
[millions
of US dollars, except earnings per share]
|
|
|
|
|
|
|
|
|
|
|
Trailing
Four Quarters
|
July
2007
|
Apr
2007
|
Jan
2007
|
Oct
2006
|
|
Net
revenues
|
$
|
1,062
|
$
|
308
|
$
|
263
|
$
|
241
|
$
|
250
|
|
Operating
income (loss)
|
$
|
(112)
|
$
|
(4)
|
$
|
(96)
|
$
|
(9)
|
$
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
$
|
(36)
|
$
|
7
|
$
|
(55)
|
$
|
-
|
$
|
12
|
|
Net
income (loss)
|
$
|
805
|
$
|
7
|
$
|
737
|
$
|
16
|
$
|
45
|
|
Earnings
(loss) per share from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
$
|
(0.26)
|
$
|
0.06
|
$
|
(0.40)
|
$
|
0.00
|
$
|
0.08
|
|
Earnings
(loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
6.36
|
$
|
0.05
|
$
|
5.37
|
$
|
0.11
|
$
|
0.83
|
|
Diluted
|
$
|
6.34
|
$
|
0.05
|
$
|
5.35
|
$
|
0.11
|
$
|
0.83
|
|
[millions
of US dollars, except earnings per share]
|
|
|
|
|
|
|
|
|
|
|
|
Trailing
Four Quarters
|
July
2006
|
Apr
2006
|
Jan
2006
|
Oct
2005
|
|
Net
revenues
|
$
|
953
|
$
|
241
|
$
|
234
|
$
|
230
|
$
|
248
|
|
Operating
income (loss)
|
$
|
(100)
|
$
|
(21)
|
$
|
(36)
|
$
|
4
|
$
|
(47)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
$
|
(25)
|
$
|
(2)
|
$
|
(1)
|
$
|
13
|
$
|
(35)
|
|
Net
income (loss)
|
$
|
32
|
$
|
14
|
$
|
15
|
$
|
46
|
$
|
(43)
|
|
Earnings
(loss) per share from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
$
|
(0.18)
|
$
|
(0.01)
|
$
|
(0.01)
|
$
|
0.09
|
$
|
(0.25)
|
|
Earnings
(loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
$
|
0.23
|
$
|
0.10
|
$
|
0.11
|
$
|
0.32
|
$
|
(0.30)
|
MDS
INTERIM REPORT JULY 31, 2007 (UNAUDITED) - Q3 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
Items
that impact the comparability of operating income include:
|
·
|
Results
for the quarter ended April 30, 2007 reflect a $792 million net gain
from
the sale of our diagnostics businesses, the 41 days of operating
results
of Molecular Devices, $61 million of charges related to assisting
clients
in respect of the FDA review, and $25 million of restructuring
charges.
|
|
·
|
Results
for the quarter ended January 31, 2007 reflect the impact of restructuring
charges totalling $13 million.
|
|
·
|
Results
for the quarter ended April 30, 2006 reflect a loss of $36 million
resulting from the completion of the MAPLE
settlement.
|
|
·
|
Results
for the quarter ended October 31, 2005 reflect restructuring charges
of
$47 million and valuation provisions on certain long-term investments
totalling $11 million.
|
Outlook
Our
third
quarter marks the first full quarter following our transition to a global life
sciences company – the first full quarter with MD and without our diagnostics
business. We are very pleased with the results we achieved this
quarter.
Both
MDS
Analytical Technologies businesses delivered strong results in the third
quarter. Efforts to integrate these businesses are tracking well to plan and
we
continue to believe that the MD business will meet or exceed our target revenues
of $190 million and adjusted EBITDA of between $45 million and $50 million
in
its first 12 months of MDS ownership. Continued growth from these businesses
is
expected to be generated, in part, from the new products announced by both
businesses this year and from synergies we expect to realize as we integrate
the
businesses and expand our production capabilities in Asia.
As
we
stated in our report for our second quarter, our goal is to maintain an ongoing
supply of high-quality products and services as we introduce exciting new
technologies to increase our customers’ productivity. Our focus for
the balance of the year is to continue to serve our customers well as we drive
a
smooth integration of the Sciex and Molecular Devices businesses to realize
the
significant synergies we believe are available to these businesses.
We
are
pleased with the results from our MDS Pharma Services business. In
the three months ended July 31, 2007, they delivered their fourth consecutive
quarter of sequential improvement in adjusted EBITDA. They have
completed several key steps in restructuring the business, including the
downsizing of our St. Laurent operation and the transfer of operations from
Sittingbourne to Zurich. Additional actions are underway for
completion by year-end, including the transfer of certain discovery/preclinical
operations from St. Laurent to Bothell, and central laboratory services from
Hamburg to Baillet. These actions and other restructuring moves will
provide significant savings in the fourth quarter and throughout
2008.
As
stated
earlier, revenue growth throughout this year has been strong in our late-stage
and preclinical businesses. In our remaining early-stage businesses,
we believe that significant progress has been made completing FDA related study
audits for the ANDA studies. Although uncertainty remains related to
NDA studies and potential EMEA actions, we currently believe that we have
adequate reserves to cover the expected costs. Our early-stage
businesses are also focused on serving our customers more effectively and we
are
seeing positive signs that we are regaining their trust. We have seen
an increased number of invitations to bid on new projects, including some from
customers who left us in 2006. This renewed growth in early-stage,
combined with productivity from restructuring and other efficiency improvements,
is expected to deliver improved profitability in 2008 and beyond.
MDS
INTERIM REPORT JULY 31, 2007 (UNAUDITED) - Q3 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
MDS
Nordion has continued solid performance so far this year and has been able
to
grow both revenues and adjusted EBITDA after taking into account foreign
exchange and the unusual market conditions that existed in the first half of
2006. New product developments and new commercial relationships provide
opportunities to expand in the molecular imaging market. We see continued strong
demand for TheraSphere in Europe, and we believe the potential for this
innovative therapy is high.
We
continue to monitor currency markets and there has been significant volatility
in the value of the US dollar all year. Although we have hedged a significant
portion of our net US-dollar cash flows from our Canadian-based businesses
this
year, currency markets will continue to have an impact on our reported results.
We continue to report organic measures of revenue and adjusted EBITDA growth
to
help readers understand the impact of these market dynamics.
We
also
continue to monitor the markets in our industry for appropriate acquisition
opportunities. We remain focused on our three businesses and will
pursue only those acquisition opportunities that are reasonably priced and
synergistic with our existing businesses.
MDS
INTERIM REPORT JULY 31, 2007 (UNAUDITED) - Q3 US GAAP
RESTATED
|
Consolidated
Statements of
Financial Position
[unaudited]
|
|
|
Restated
See Note
2
|
|
As
at July 31 with comparatives at October 31
[millions
of US dollars]
|
|
2007
|
|
2006
|
|
Assets
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
Cash
and cash equivalents
|
$
|
221
|
$
|
247
|
|
Short-term
investments
|
|
90
|
|
135
|
|
Accounts
receivable, net
|
|
267
|
|
224
|
|
Unbilled
revenue
|
|
110
|
|
122
|
|
Inventories,
net
|
|
118
|
|
80
|
|
Income
taxes recoverable
|
|
54
|
|
42
|
|
Prepaid
expenses and other
|
|
24
|
|
21
|
|
Assets
held for sale
|
|
1
|
|
196
|
|
Total
Current
Assets
|
$
|
885
|
$
|
1,067
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
352
|
|
334
|
|
Deferred
tax asset
|
|
5
|
|
47
|
|
Long-term
investments and other
|
|
227
|
|
176
|
|
Goodwill
|
|
763
|
|
397
|
|
Intangible
assets, net
|
|
547
|
|
322
|
|
Total
Assets
|
$
|
2,779
|
$
|
2,343
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’
Equity
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
$
|
325
|
$
|
237
|
|
Deferred
revenue
|
|
88
|
|
92
|
|
Income
taxes payable
|
|
54
|
|
8
|
|
Current
portion of long-term debt
|
|
93
|
|
20
|
|
Deferred
tax liabilities
|
|
9
|
|
-
|
|
Liabilities
related to assets held for sale
|
|
-
|
|
114
|
|
Total
Current
Liabilities
|
$
|
569
|
$
|
471
|
|
|
|
|
|
|
|
Long-term
debt
|
|
294
|
|
374
|
|
Deferred
revenue
|
|
16
|
|
17
|
|
Other
long-term obligations
|
|
27
|
|
24
|
|
Deferred
tax liabilities
|
|
117
|
|
103
|
|
Total
Liabilities
|
$
|
1,023
|
$
|
989
|
|
|
|
|
|
|
|
Shareholders’
Equity
|
|
|
|
|
|
Common
shares, at par – Authorized shares: unlimited; Issued and
outstanding shares: 122,538,714 and 144,319,249 for July, 2007 and
October, 2006 respectively
|
|
491
|
|
566
|
|
Additional
paid in capital
|
|
71
|
|
69
|
|
Retained
earnings
|
|
829
|
|
391
|
|
Accumulated
other comprehensive income
|
|
365
|
|
328
|
|
Total
Shareholders’
Equity
|
$
|
1,756
|
$
|
1,354
|
|
Total
Liabilities and
Shareholders’ Equity
|
$
|
2,779
|
$
|
2,343
|
|
Incorporated
under the Canada
Business Corporation Act.
|
|
|
|
|
See
accompanying
notes.
MDS
INTERIM REPORT JULY 31, 2007 (UNAUDITED) - Q3 US GAAP
RESTATED
CONSOLIDATED
STATEMENT OF FINANCIAL POSITION
[UNAUDITED]
|
|
Restated
See Note
2
|
Restated
See Note
2
|
|
|
Three
months to July
31
|
Nine
months to July
31
|
|
[millions
of US dollars, except
per share amounts]
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Products
|
$
|
170
|
$
|
114
|
$
|
404
|
$
|
326
|
|
Services
|
|
138
|
|
127
|
|
408
|
|
379
|
|
Reimbursement
revenues
|
|
25
|
|
23
|
|
71
|
|
80
|
|
Total
revenues
|
|
333
|
|
264
|
|
883
|
|
785
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and
expenses
|
|
|
|
|
|
|
|
|
|
Direct
cost of products
|
|
(109)
|
|
(81)
|
|
(263)
|
|
(220)
|
|
Direct
cost of services
|
|
(83)
|
|
(98)
|
|
(255)
|
|
(264)
|
|
Reimbursed
expenses
|
|
(25)
|
|
(23)
|
|
(71)
|
|
(80)
|
|
Selling,
general and administration
|
|
(66)
|
|
(62)
|
|
(181)
|
|
(162)
|
|
Research
and development
|
|
(20)
|
|
(12)
|
|
(48)
|
|
(37)
|
|
Depreciation
and amortization
|
|
(24)
|
|
(13)
|
|
(56)
|
|
(37)
|
|
Restructuring
charges - net
|
|
(3)
|
|
(2)
|
|
(41)
|
|
(4)
|
|
Other
income (expense) - net
|
|
(7)
|
|
6
|
|
(77)
|
|
(34)
|
|
Total
costs and expenses
|
$
|
(337)
|
$
|
(285)
|
$
|
(992)
|
$
|
(838)
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss from continuing
operations
|
|
(4)
|
|
(21)
|
|
(109)
|
|
(53)
|
|
Interest
expense
|
|
(6)
|
|
(4)
|
|
(20)
|
|
(11)
|
|
Interest
income
|
|
4
|
|
4
|
|
18
|
|
7
|
|
Mark-to-market
on interest note swaps
|
|
(1)
|
|
-
|
|
-
|
|
(2)
|
|
Equity
earnings
|
|
15
|
|
15
|
|
40
|
|
38
|
|
Income
loss from continuing
operations before income taxes
|
|
8
|
|
(6)
|
|
(71)
|
|
(21)
|
|
Income
tax (expense) recovery
|
|
|
|
|
|
|
|
|
|
-
current
|
|
5
|
|
-
|
|
34
|
|
18
|
|
-
deferred
|
|
(6)
|
|
4
|
|
(11)
|
|
13
|
|
Income
(loss) from continuing
operations
|
|
7
|
|
(2)
|
|
(48)
|
|
10
|
|
Income
from discontinued
operations - net of income tax
|
|
-
|
|
16
|
|
808
|
|
65
|
|
Net
income
|
$
|
7
|
$
|
14
|
$
|
760
|
$
|
75
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per
share
-
from
continuing
operations
|
$
|
0.06
|
$
|
(0.01)
|
$
|
(0.36)
|
$
|
0.07
|
|
-
from discontinued operations
|
|
(0.01)
|
|
0.11
|
|
5.99
|
|
0.45
|
|
Basic
earnings per
share
|
$
|
0.05
|
$
|
0.10
|
$
|
5.63
|
$
|
0.52
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per
share
-
from
continuing
operations
|
$
|
0.06
|
$
|
(0.01)
|
$
|
(0.36)
|
$
|
0.07
|
|
-
from
discontinued
operations
|
|
(0.01)
|
|
0.11
|
|
5.99
|
|
0.45
|
|
Diluted
earnings per
share
|
$
|
0.05
|
$
|
0.10
|
$
|
5.63
|
$
|
0.52
|
|
See
accompanying
notes.
|
|
|
|
|
|
|
|
|
MDS
INTERIM REPORT JULY 31, 2007 (UNAUDITED) - Q3 US GAAP
RESTATED
CONSOLIDATED
STATEMENT OF COMPREHENSIVE INCOME
[UNAUDITED]
Restated
See Note 2
|
|
Three
months to
July
31
|
Nine
months to
July
31
|
|
[millions
of US dollars]
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net
income
|
$
|
7
|
$
|
14
|
$
|
760
|
$
|
75
|
|
Foreign
currency translation
|
|
42
|
|
(24)
|
|
71
|
|
51
|
|
Unrealized
loss on available-for-sale assets
|
|
-
|
|
(3)
|
|
(3)
|
|
(7)
|
|
Unrealized
loss on derivatives designated as cash flow hedges, net of
tax
|
|
-
|
|
-
|
|
5
|
|
-
|
|
Reclassification
of realized losses
|
|
-
|
|
4
|
|
(2)
|
|
5
|
|
Repurchase
and cancellation of common shares
|
|
-
|
|
-
|
|
(33)
|
|
-
|
|
Other
comprehensive income
|
|
42
|
|
(23)
|
|
38
|
|
49
|
|
Comprehensive
income
|
$
|
49
|
$
|
(9)
|
$
|
798
|
$
|
124
|
MDS
INTERIM REPORT JULY 31, 2007 (UNAUDITED) - Q3 US GAAP
RESTATED
CONSOLIDATED
STATEMENT OF CASH FLOWS
[UNAUDITED]
|
|
Restated
See Note 2
|
Restated
See Note2
|
|
|
Three
months to July 31
|
Nine
months to July 31
|
|
[millions
of US dollars]
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Operating
activities
|
|
|
|
|
|
|
|
|
|
Net
income
|
$
|
7
|
$
|
14
|
$
|
760
|
$
|
75
|
|
Income
from discontinued operations – net of tax
|
|
-
|
|
16
|
|
808
|
|
65
|
|
Income
(loss) from continuing operations
|
|
7
|
|
(2)
|
|
(48)
|
|
10
|
|
Adjustments
to reconcile net income to cash
provided
by operating activities relating to continuing
operations
|
|
|
|
|
|
|
|
|
|
Items
not affecting current cash flow
|
|
35
|
|
4
|
|
134
|
|
33
|
|
Changes
in non-cash working capital
balances
relating to operations
|
|
(42)
|
|
(11)
|
|
20
|
|
(63)
|
|
Cash
provided by (used in) operating activities of continuing
operations
|
|
-
|
|
(9)
|
|
106
|
|
(20)
|
|
Cash
provided by (used in) operating activities of discontinued
operations
|
|
1
|
|
17
|
|
(52)
|
|
51
|
|
|
|
1
|
|
8
|
|
54
|
|
31
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
|
Acquisitions
|
|
2
|
|
-
|
|
(601)
|
|
-
|
|
Proceeds
from MAPLE transaction
|
|
-
|
|
-
|
|
-
|
|
24
|
|
Purchase
of property, plant and equipment
|
|
(27)
|
|
(15)
|
|
(43)
|
|
(36)
|
|
Proceeds
on sale of short-term investments
|
|
14
|
|
-
|
|
165
|
|
-
|
|
Purchases
of short-term investments
|
|
(81)
|
|
(134)
|
|
(118)
|
|
(134)
|
|
Proceeds
from sale of business and investments
|
|
-
|
|
2
|
|
13
|
|
2
|
|
Other
|
|
(2)
|
|
-
|
|
(2)
|
|
(16)
|
|
Cash
used in investing activities of continuing operations
|
|
(94)
|
|
(147)
|
|
(586)
|
|
(160)
|
|
Cash
provided by investing activities of discontinued
operations
|
|
-
|
|
4
|
|
929
|
|
81
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
|
Repayment
of long-term debt
|
|
(1)
|
|
-
|
|
(8)
|
|
(1)
|
|
Decrease
in deferred revenue and
other
long-term obligations
|
|
1
|
|
-
|
|
1
|
|
(9)
|
|
Payment
of cash dividends
|
|
-
|
|
(4)
|
|
(3)
|
|
(10)
|
|
Issuance
of shares
|
|
5
|
|
5
|
|
15
|
|
24
|
|
Repurchase
of shares
|
|
-
|
|
-
|
|
(441)
|
|
-
|
|
Cash
provided by (used in) financing activities of continuing
operations
|
|
5
|
|
1
|
|
(436)
|
|
4
|
|
Cash
used in financing activities of discontinued operations
|
|
-
|
|
(1)
|
|
(2)
|
|
(9)
|
|
Effect
of foreign exchange rate changes on cash and cash
equivalents
|
|
11
|
|
(3)
|
|
15
|
|
14
|
|
Decrease
in cash and cash equivalents during the period
|
|
(77)
|
|
(138)
|
|
(26)
|
|
(39)
|
|
Cash
and cash equivalents, beginning of
period
|
|
298
|
|
314
|
|
247
|
|
215
|
|
Cash
and cash equivalents, end of period
|
$
|
221
|
$
|
176
|
$
|
221
|
$
|
176
|
|
See
accompanying notes.
|
|
|
|
|
|
|
|
|
MDS
INTERIM REPORT JULY 31, 2007 (UNAUDITED) - Q3 US GAAP
RESTATED
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
As
a
Canadian-based company, MDS historically has prepared its consolidated financial
statements in Canadian dollars in conformity with accounting principles
generally accepted in Canada (Canadian GAAP) and has also provided a
reconciliation to United States (US) generally accepted accounting principles
(US GAAP).
To
enhance its communication with its shareholders, improve comparability of
financial information with its competitors and peer group, and promote a common
financial language within MDS, the Company adopted the US dollar as its
reporting currency as at the first quarter of 2007 and US GAAP as its primary
reporting standard for the presentation of its consolidated financial statements
as of fiscal year end 2007.
All
revenues, expenses and cash flows for each year were translated into the
reporting currency using average rates for the year, or the rates in effect
at
the date of the transaction for significant transactions. Assets and liabilities
were translated using the exchange rate at the end of each year. All
resulting exchange differences are reported as a separate component of
accumulated other comprehensive income. 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 consolidated and 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.
The
cumulative impact of the change in reporting currency was to increase the
cumulative translation adjustment by $371 million through October 31,
2006.
As
a
result of adopting US GAAP as its primary reporting standard for its 2007
consolidated year-end statements, the Company is required to restate to US
GAAP
its previously filed financial statements for the four quarters of
2007. Previously, our filings prepared in accordance with Canadian
generally accepted accounting principles (Canadian GAAP) disclosed a
reconciliation of earnings to US GAAP due to our status as a foreign private
issuer in the US. Going forward, with US GAAP as our primary basis of
accounting, we will reconcile our US GAAP earnings to Canadian
GAAP. This reconciliation will be done as required by applicable
Canadian regulations on an annual and quarterly basis for a minimum of the
next
two fiscal years.
|
2.
|
Changes
Affecting Fiscal 2007
Consolidated Financial Statements
|
During
the preparation of our 2007 annual financial statements, an error was
identified in the US GAAP reconciliation provided as part of the interim
financial statements prepared during the 2007 fiscal year with respect to
certain stock based incentive compensation plans for which an incorrect
valuation methodology was utilized. The Company has corrected this
error by restating selling, general and administration expenses by $2 million
in
the accompanying quarter consolidated financial statements and reducing the
value of accrued liabilities by a similar amount. The Canadian GAAP
statements previously reported were not impacted by the change, except for
the
reconciliation to US GAAP (see Note 15).
MDS
INTERIM REPORT JULY 31, 2007 (UNAUDITED) - Q3 US GAAP
RESTATED
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
As
a
result of adopting US GAAP as the primary reporting standard for the Company,
management has determined that investment tax credits (ITCs) having an after-tax
value of $13 million realized in its fiscal year ended October 31, 2001 and
resulting from its acquisition of Phoenix International Life Sciences Inc.
in
the previous year had not been identified as a net income reconciliation item
in
the GAAP reconciliation note for fiscal 2001.
Under
Canadian GAAP, acquired ITCs that are determined to have nil value for purposes
of purchase price allocation are, if subsequently realized, recorded as income.
Under US GAAP, such acquired ITCs are recorded when realized as a reduction
in
goodwill arising from that prior period acquisition. This item should therefore
have been identified as a US GAAP net income reconciliation item in fiscal
2001.
In subsequent periods, the reported amount of goodwill and retained earnings
for
US GAAP purposes were likewise overstated by this amount. The Company has
corrected this error by restating opening retained earnings for fiscal 2005
in
the accompanying consolidated statement of shareholders’ equity and reducing the
carrying value of goodwill by $13 million. The impact of this
restatement has been similarly reflected for subsequent periods.
|
b.
|
Change
in Accounting
Policy
|
In
addition, in adopting US GAAP, the Company has changed its accounting policy
for
non-refundable investment tax credits (ITCs). In these consolidated financial
statements, the Company has recorded non-refundable ITCs as a reduction in
income tax expense for the year in which the ITCs were recognized. Previously,
the Company recorded non-refundable ITCs as a reduction of the related
expenditure. Management believes this accounting policy change will make the
Company’s reporting of ITCs consistent with the majority of other companies who
report under US GAAP
.
There
is
no impact on net income from continuing operations, earnings per share, or
retained earnings of any period as a result of this change. This change in
policy increased (decreased) other lines on the statements of operations as
follows:
|
|
|
2007
|
|
2006
|
|
Direct
cost of services
|
$
|
0
|
$
|
2
|
|
Research
and development
|
|
1
|
|
1
|
|
Current
income taxes
|
|
(1)
|
|
(3)
|
MDS
has
adopted the provisions of Staff Accounting Bulletin No. 108 –
Considering the Effects
of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements.
In accordance with the provisions of SAB No. 108, the Company
has recorded a cumulative adjustment to correct the treatment of certain
deferred charges and related income tax expenses. The adjustments resulted
in an
increase in fiscal 2005 opening retained earnings of $2 million and an
adjustment to the tax expense associated with prior year deferred charges that
reduced fiscal 2005 opening retained earnings by $4 million. The cumulative
net
effect of these adjustments on retained earnings as at November 1, 2004 is
a
reduction of $2 million. In addition, the Company has recorded a $6 million
reduction in November 1, 2004 retained earnings and a corresponding increase
in
additional paid-in capital to correct an amount that had previously been
misclassified in the continuity of retained earnings.
MDS
INTERIM REPORT JULY 31, 2007 (UNAUDITED) - Q3 US GAAP
RESTATED
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
|
3.
|
Acquisition
of Molecular
Devices Corporation
|
On
March
20, 2007, the Company completed a tender offer which resulted in MDS acquiring
100% of the shares of Molecular Devices Corporation (MD), a California-based
company with global operations. MD designs, develops, manufactures,
sells and services bioanalytical measurement systems that accelerate and improve
drug discovery and other life sciences research. The Company acquired
MD primarily to add their leading-edge products to those of MDS Sciex to
strengthen MDS’s position as one of the top global providers of analytical
instrumentation and related products marketed to life sciences
customers.
The
operations for this acquisition are reported within the results of the Company’s
newly formed MDS Analytical Technologies segment (which combines MD with the
previous Instruments segment) in the consolidated financial statements from
the
acquisition date.
The
aggregate purchase consideration (net of cash acquired of $21 million) was
approximately $601 million paid in cash from existing cash on
hand. Included in the consideration is the cash cost of $27 million
to settle all outstanding in-the-money options of MD at the closing date of
the
acquisition. Direct and incremental third party acquisition costs
associated with the acquisition were approximately $8 million.
The
acquisition has been accounted for as a purchase in accordance with SFAS No.
141
and the Company has accordingly allocated the purchase price of the acquisition
based upon the preliminary fair values of the assets acquired and liabilities
assumed. During the quarter, the Company revised the allocation of the purchase
price. The impact of the revision was to decrease net tangible assets
acquired by $35 million, increase developed technology by $50 million, decrease
in-process research and development by $11 million, and decrease goodwill by
$6
million. The purchase price and related allocations have not been
finalized and may be revised as a result of adjustments made to the purchase
price as additional information becomes available regarding liabilities incurred
and revisions are made to preliminary estimates of fair values made at the
acquisition date. In connection with determining the fair value of
the assets acquired and liabilities assumed, management performed assessments
of
intangible assets using customary valuation procedures and
techniques.
The
components of the preliminary purchase price allocation for the acquisition
cost
of MD are as follows:
|
Consideration
and acquisition costs:
|
|
|
|
Cash
and payments, net of cash acquired
|
$
|
593
|
|
Transaction
costs
|
|
8
|
|
|
|
|
|
Net
consideration and acquisition costs
|
$
|
601
|
|
|
|
|
|
Allocation
of purchase price
|
|
|
|
Net
tangible assets acquired
|
$
|
15
|
|
Intangible
assets acquired:
|
|
|
|
Developed
technologies
|
|
161
|
|
Brands
|
|
60
|
|
Goodwill
(non-tax deductible)
|
|
365
|
|
Total
purchase price
|
$
|
601
|
The
following table summarizes the components of the net tangible assets acquired
at
fair value:
|
Inventories
|
$
|
40
|
|
Property,
plant and equipment
|
|
12
|
|
Other
assets and liabilities, net
|
|
(37)
|
|
Net
tangible assets acquired
|
$
|
15
|
MDS
INTERIM REPORT JULY 31, 2007 (UNAUDITED) - Q3 US GAAP
RESTATED
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
Other
assets and liabilities include $26 million of net future tax liabilities. Net
tangible assets acquired include a charge of $7 million to eliminate redundant
positions and consolidate redundant facilities at MD over the course of the
next
year. The acquired technology will be amortized over its estimated
lives, which 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.
|
4.
|
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
|
MDS
INTERIM REPORT JULY 31, 2007 (UNAUDITED) - Q3 US GAAP
RESTATED
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
The
results of discontinued operations in the quarter and the nine-months ended
July
31 were as follows:
|
|
Third
Quarter
|
Year-to-date
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
$
|
|
$
|
82
|
$
|
95
|
$
|
280
|
|
Cost
of revenues
|
|
-
|
|
(49)
|
|
(57)
|
|
(180)
|
|
Selling,
general and administration
|
|
-
|
|
(11)
|
|
(15)
|
|
(38)
|
|
Depreciation
and amortization
|
|
-
|
|
(2)
|
|
-
|
|
(7)
|
|
Goodwill
write-down
|
|
-
|
|
-
|
|
-
|
|
-
|
|
Restructuring
charges
|
|
-
|
|
-
|
|
-
|
|
(1)
|
|
Other
expenses
|
|
-
|
|
-
|
|
-
|
|
-
|
|
Operating
income
|
|
-
|
|
20
|
|
23
|
|
54
|
|
Gain
on sale of discontinued operations
|
|
-
|
|
-
|
|
904
|
|
24
|
|
Interest
expense
|
|
-
|
|
-
|
|
-
|
|
-
|
|
Interest
income
|
|
-
|
|
-
|
|
1
|
|
1
|
|
Income
taxes
|
|
-
|
|
(3)
|
|
(117)
|
|
(9)
|
|
Minority
interest
|
|
-
|
|
(2)
|
|
(4)
|
|
(7)
|
|
Equity
earnings
|
|
-
|
|
1
|
|
1
|
|
2
|
|
Income
from discontinued
operations
|
|
-
|
|
16
|
|
808
|
|
65
|
|
Basic
EPS from discontinued
operations
|
$
|
-
|
$
|
0.11
|
$
|
5.99
|
$
|
0.45
|
The
results from discontinued operations for 2007 reflect only the Canadian
diagnostic services business. The results from discontinued
operations for 2006 include results from the Canadian diagnostic services
business and certain small MDS Pharma Services businesses discontinued in
2005. In accordance with SFAS No. 144, “Accounting for the Impairment
or Disposal of Long-Lived Assets”, 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:
MDS
INTERIM REPORT JULY 31, 2007 (UNAUDITED) - Q3 US GAAP
RESTATED
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
|
|
|
As
at July 31
|
As
at October 31
|
|
|
|
2007
|
|
2006
|
|
Assets
held for sale
|
|
|
|
|
|
Accounts
receivable
|
$
|
-
|
$
|
31
|
|
Inventories
|
|
-
|
|
3
|
|
Prepaid
expenses and other
|
|
-
|
|
3
|
|
Property,
plant and equipment
|
|
-
|
|
28
|
|
Deferred
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
|
|
Deferred
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.
|
5.
|
Accumulated
Other Comprehensive
Income
|
|
|
Three
months ended July 31
|
|
[millions
of US dollars]
|
|
2007
|
|
2006
|
|
Accumulated
other comprehensive
income, net of income taxes,
beginning
of
period
|
$
|
323
|
$
|
340
|
|
Foreign
currency translation
|
|
42
|
|
(24)
|
|
Unrealized
loss on available-for-sale assets
|
|
-
|
|
(3)
|
|
Reclassification
of realized losses
|
|
-
|
|
4
|
|
Accumulated
other comprehensive
income, net of income taxes,
end
of
period
|
$
|
365
|
$
|
317
|
|
See
accompanying
note.
|
|
|
|
|
MDS
INTERIM REPORT JULY 31, 2007 (UNAUDITED) - Q3 US GAAP
RESTATED
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
An
analysis of the activity in the provision through July 31, 2007 is as
follows:
|
|
Restructuring
Charge
|
Cumulative
drawdowns
|
Provision
Balance at
July
31, 2007
|
|
Cash
|
Non-cash
|
|
2005:
|
|
|
|
|
|
|
|
|
|
Workforce
reductions
|
$
|
34
|
$
|
(32)
|
$
|
(1)
|
$
|
1
|
|
Equipment
and other asset write-downs – adjustment
|
|
7
|
|
-
|
|
(7)
|
|
-
|
|
Contract
cancellation charges
|
|
10
|
|
(2)
|
|
(8)
|
|
-
|
|
|
$
|
51
|
$
|
(34)
|
$
|
(16)
|
$
|
1
|
|
2006:
|
|
|
|
|
|
|
|
|
|
Workforce
reductions
|
$
|
1
|
$
|
(1)
|
$
|
-
|
$
|
-
|
|
Contract
cancellation charges
|
|
(8)
|
|
(1)
|
|
9
|
|
|
|
|
$
|
(7)
|
$
|
(2)
|
$
|
9
|
$
|
-
|
|
2007:
|
|
|
|
|
|
|
|
|
|
Workforce
reductions
|
$
|
21
|
$
|
(8)
|
$
|
(1)
|
$
|
12
|
|
Equipment
and other asset write-downs
|
|
2
|
|
-
|
|
-
|
|
2
|
|
Contract
cancellation charges
|
|
5
|
|
(5)
|
|
-
|
|
-
|
|
Other
|
|
13
|
|
(6)
|
|
(3)
|
|
4
|
|
|
$
|
41
|
$
|
(19)
|
$
|
(4)
|
$
|
18
|
|
|
|
|
|
|
|
|
$
|
19
|
During
the quarter ended April 30, 2007, management of the Company approved a
restructuring plan designed principally to improve the profitability of MDS
Pharma Services. The Company recorded a restructuring provision of
$28 million in the second quarter including $17 million for severance, $2
million to reduce the carrying value of certain assets and $6 million for other
costs. During the three months ended July 31, 2007, the Company
utilized $5 million of this provision.
|
|
Three
months to July 31
|
Nine
months to July 31
|
|
[number
of shares in millions]
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Weighted
average number of Common shares outstanding – basic
|
123
|
143
|
135
|
143
|
|
Impact
of stock options assumed exercised
|
-
|
1
|
-
|
1
|
|
Weighted
average number of Common shares outstanding – diluted
|
123
|
144
|
135
|
144
|
|
(b)
|
Pro-Forma
Impact of Stock-Based
Compensation
|
Compensation
expense related to the fair value of stock options granted prior to November
1,
2003 is excluded from the determination of net income and is, instead,
calculated and disclosed on a pro-forma basis in the notes to the consolidated
financial statements. The Company used the Black-Scholes option
valuation model to estimate the fair value of options granted.
MDS
INTERIM REPORT JULY 31, 2007 (UNAUDITED) - Q3 US GAAP
RESTATED
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
For
purposes of these pro-forma disclosures, the Company's net income and basic
and
diluted earnings per share would have been:
|
|
Three
months to July 31
|
Nine
months to July 31
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net
income
|
$
|
7
|
$
|
14
|
$
|
760
|
$
|
75
|
|
Compensation
expense for options granted prior to November 1, 2003
|
|
-
|
|
-
|
|
(1)
|
|
(2)
|
|
Net
income – pro-forma
|
$
|
7
|
$
|
14
|
$
|
759
|
$
|
73
|
|
|
|
|
|
|
|
|
|
|
|
Pro-forma
basic earnings per share
|
$
|
0.06
|
$
|
0.10
|
$
|
5.63
|
$
|
0.52
|
|
Pro-forma
diluted earnings per share
|
$
|
0.06
|
$
|
0.10
|
$
|
5.62
|
$
|
0.51
|
|
8.
|
Share
Capital and Stock
Options
|
The
following table summarizes information on share capital and stock options and
related matters as at July 31, 2007:
|
[nu
mber
of shares in thousands]
|
Number
|
|
Amount
|
|
Common
shares
|
|
|
|
|
Balance
as at October 31, 2006
|
144,319
|
$
|
566
|
|
Issued
during the period
|
1,051
|
|
16
|
|
Repurchased
during the period
|
(22,831)
|
|
(91)
|
|
Balance
as at July 31, 2007
|
122,539
|
$
|
491
|
|
[number
of shares in thousands]
|
Number
|
Average
Exercise
Price
|
|
Stock
options
|
|
|
|
|
Balance
as at October 31, 2006
|
5,850
|
$
|
18.76
|
|
Activity
during the period:
|
|
|
|
|
Granted
|
1,223
|
|
21.73
|
|
Exercised
|
(942)
|
|
16.45
|
|
Cancelled
or forfeited
|
(517)
|
|
20.34
|
|
Balance
as at July 31, 2007
|
5,614
|
$
|
19.65
|
There
were 3,266 stock options exercisable as at July 31, 2007.
During
the quarter, the Company granted 883,600 options (2006 – 25,600) at an average
exercise price of C$21.77 (2006 - C$20.96). These options have a fair value
determined using the Black-Scholes model of C$4.44 per share (2006 - C$4.10)
based on the following assumptions:
|
|
2007
|
2006
|
|
Risk-free
interest rate
|
3.9
|
%
|
3.9
|
%
|
|
Expected
dividend yield
|
0.0
|
|
0.7
|
|
|
Expected
volatility
|
0.21
|
|
0.23
|
|
|
Expected
time to exercise (years)
|
3.17
|
|
3.25
|
|
Of
the
stock options issued during the third quarter, 100,000 are performance
contingent options that vest if the ten-day simple average share price on the
Toronto Stock Exchange reaches $25 within two years of the grant
date.
MDS
INTERIM REPORT JULY 31, 2007 (UNAUDITED) - Q3 US GAAP
RESTATED
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
|
9.
|
Other
Income (Expense) -
Net
|
|
|
Three
months to July 31
|
Nine
months to July 31
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Write-down
of other long-term assets
|
$
|
-
|
$
|
-
|
$
|
|
$
|
(1)
|
|
Write-down
of investments
|
|
-
|
|
-
|
|
(6)
|
|
-
|
|
Gain
on sale of investment
|
|
-
|
|
2
|
|
2
|
|
2
|
|
Loss
on sale of Hamburg clinic
|
|
-
|
|
-
|
|
(4)
|
|
-
|
|
Maple
Settlement
|
|
-
|
|
-
|
|
-
|
|
(36)
|
|
Gain
on sale of business
|
|
-
|
|
-
|
|
1
|
|
-
|
|
Acquisition
integration costs
|
|
(1)
|
|
-
|
|
(2)
|
|
-
|
|
FDA
Provision
|
|
-
|
|
-
|
|
(61)
|
|
-
|
|
Foreign
exchange
|
|
(4)
|
|
-
|
|
(5)
|
|
(2)
|
|
Insurance
settlement
|
|
-
|
|
3
|
|
-
|
|
3
|
|
Other
|
|
(2)
|
|
1
|
|
(2)
|
|
-
|
|
Other
income (expense) - net
|
$
|
(7)
|
$
|
6
|
$
|
(77)
|
$
|
(34)
|
|
10.
|
Post-Employment
Obligations
|
The
Company sponsors various post-employment benefit plans including defined benefit
and contribution pension plans, retirement compensation arrangements, and plans
that provide extended health care coverage to retired employees. All
defined benefit pension plans sponsored by the Company are funded
plans. Other post-employment benefits are unfunded. During
2005, the Company amended the terms of certain post-employment plans such that
effective January 1, 2008, and subject to certain transitional conditions,
newly
retired employees will no longer be entitled to extended health care
benefits.
The
post-employment obligation expense for the quarter was nil (2006 - nil) and
$1
million (2006 - $1 million) for the nine months.
|
11.
|
Supplementary
Cash Flow
Information
|
Non-cash
items affecting net income comprise:
|
|
Three
months to July 31
|
Nine
months to July 31
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Depreciation
and amortization
|
$
|
24
|
$
|
13
|
$
|
56
|
$
|
37
|
|
Stock
option compensation
|
|
1
|
|
-
|
|
2
|
|
3
|
|
Deferred
revenue
|
|
(1)
|
|
(1)
|
|
(3)
|
|
(6)
|
|
Deferred
income taxes
|
|
(1)
|
|
(6)
|
|
46
|
|
(14)
|
|
Equity
earnings – net of distribution
|
|
(1)
|
|
(2)
|
|
8
|
|
6
|
|
Write-down
of investments
|
|
-
|
|
-
|
|
6
|
|
-
|
|
Loss
on sale of Hamburg clinic
|
|
-
|
|
-
|
|
4
|
|
-
|
|
Loss
on disposal of equipment and other assets
|
|
1
|
|
-
|
|
5
|
|
-
|
|
Writedown
of MAPLE assets
|
|
-
|
|
-
|
|
-
|
|
9
|
|
Gain
on sale of investment
|
|
-
|
|
(2)
|
|
(2)
|
|
(2)
|
|
Mark-to-market
of derivatives
|
|
1
|
|
1
|
|
-
|
|
2
|
|
Amortization
of purchase price adjustments
|
|
10
|
|
-
|
|
12
|
|
-
|
|
Other
|
|
1
|
|
1
|
|
-
|
|
(2)
|
|
|
$
|
35
|
$
|
4
|
$
|
134
|
$
|
33
|
MDS
INTERIM REPORT JULY 31, 2007 (UNAUDITED) - Q3 US GAAP
RESTATED
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
Changes
in non-cash working capital balances relating to operations
include:
|
|
Three
months to July 31
|
Nine
months to July 31
|
|
[millions
of US dollars]
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Accounts
receivable
|
$
|
(23)
|
$
|
20
|
$
|
(15)
|
$
|
10
|
|
Unbilled
revenue
|
|
1
|
|
(40)
|
|
12
|
|
(69)
|
|
Inventories
|
|
(3)
|
|
8
|
|
(10)
|
|
45
|
|
Prepaid
expenses
|
|
(2)
|
|
(3)
|
|
9
|
|
(11)
|
|
Accounts
payable and deferred revenue
|
|
(20)
|
|
4
|
|
28
|
|
(39)
|
|
Income
taxes
|
|
5
|
|
-
|
|
(4)
|
|
1
|
|
|
$
|
(42)
|
$
|
(11)
|
$
|
20
|
$
|
(63)
|
|
|
Three
months to July 31, 2007
|
|
|
|
MDS
Pharma Services
|
|
MDS
Nordion
|
|
MDS
Analytical Technologies
|
|
Corporate
and Other
|
|
Total
|
|
Product
revenues
|
$
|
-
|
$
|
76
|
$
|
94
|
$
|
-
|
$
|
170
|
|
Service
revenues
|
|
118
|
|
-
|
|
20
|
|
-
|
|
138
|
|
Reimbursement
revenues
|
|
25
|
|
-
|
|
-
|
|
-
|
|
25
|
|
Total
revenues
|
|
143
|
|
76
|
|
114
|
|
-
|
|
333
|
|
Direct
product cost
|
|
-
|
|
(39)
|
|
(70)
|
|
-
|
|
(109)
|
|
Direct
service cost
|
|
(82)
|
|
-
|
|
(1)
|
|
-
|
|
(83)
|
|
Reimbursed
expenses
|
|
(25)
|
|
-
|
|
-
|
|
-
|
|
(25)
|
|
Selling,
general and administration
|
|
(30)
|
|
(13)
|
|
(20)
|
|
(3)
|
|
(66)
|
|
Research
and
development
|
|
-
|
|
(1)
|
|
(19)
|
|
-
|
|
(20)
|
|
Depreciation
and
amortization
|
|
(8)
|
|
(4)
|
|
(12)
|
|
-
|
|
(24)
|
|
Restructuring
charges -
net
|
|
(1)
|
|
-
|
|
-
|
|
(2)
|
|
(3)
|
|
Other
expense -
net
|
|
(2)
|
|
(1)
|
|
(3)
|
|
(1)
|
|
(7)
|
|
Equity
Earnings
|
|
-
|
|
-
|
|
15
|
|
-
|
|
15
|
|
Segment
earnings
(loss)
|
$
|
(5)
|
$
|
18
|
$
|
4
|
$
|
(6)
|
$
|
11
|
|
Total
Assets
|
$
|
820
|
$
|
699
|
$
|
840
|
$
|
419
|
$
|
2,778
|
|
Capital
expenditures
|
$
|
21
|
$
|
3
|
$
|
2
|
$
|
1
|
$
|
27
|
MDS
INTERIM REPORT JULY 31, 2007 (UNAUDITED) - Q3 US GAAP
RESTATED
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
|
|
Three
months to July 31, 2006
|
|
|
|
MDS
Pharma Services
|
|
MDS
Nordion
|
|
MDS
Analytical Technologies
|
|
Corporate
and Other
|
|
Total
|
|
Product
revenues
|
$
|
-
|
$
|
77
|
$
|
37
|
$
|
-
|
$
|
114
|
|
Service
revenues
|
|
112
|
|
1
|
|
14
|
|
-
|
|
127
|
|
Reimbursement
revenues
|
|
23
|
|
-
|
|
-
|
|
-
|
|
23
|
|
Total
revenues
|
|
135
|
|
78
|
|
51
|
|
-
|
|
264
|
|
Direct
product cost
|
|
-
|
|
(39)
|
|
(42)
|
|
-
|
|
(81)
|
|
Direct
service cost
|
|
(97)
|
|
(1)
|
|
-
|
|
-
|
|
(98)
|
|
Reimbursed
expenses
|
|
(23)
|
|
-
|
|
-
|
|
-
|
|
(23)
|
|
Selling,
general and administration
|
|
(34)
|
|
(13)
|
|
(7)
|
|
(8)
|
|
(62)
|
|
Research
and
development
|
|
-
|
|
(2)
|
|
(10)
|
|
-
|
|
(12)
|
|
Depreciation
and
amortization
|
|
(7)
|
|
(4)
|
|
(2)
|
|
-
|
|
(13)
|
|
Restructuring
charges -
net
|
|
(1)
|
|
-
|
|
-
|
|
(1)
|
|
(2)
|
|
Other
income (expense) -
net
|
|
6
|
|
-
|
|
1
|
|
(1)
|
|
6
|
|
Equity
Earnings
|
|
-
|
|
-
|
|
15
|
|
-
|
|
15
|
|
Segment
earnings
(loss)
|
$
|
(21)
|
$
|
19
|
$
|
6
|
$
|
(10)
|
$
|
(6)
|
|
Total
Assets
|
$
|
789
|
$
|
641
|
$
|
151
|
$
|
507
|
$
|
2,088
|
|
Capital
expenditures
|
$
|
12
|
$
|
-
|
$
|
-
|
$
|
3
|
$
|
15
|
|
|
Nine
months to July 31, 2007
|
|
|
|
MDS
Pharma Services
|
|
MDS
Nordion
|
|
MDS
Analytical Technologies
|
|
Corporate
and
Other
|
|
Total
|
|
Product
revenues
|
$
|
-
|
$
|
210
|
$
|
194
|
$
|
-
|
$
|
404
|
|
Service
revenues
|
|
354
|
|
4
|
|
50
|
|
-
|
|
408
|
|
Reimbursement
revenues
|
|
71
|
|
-
|
|
-
|
|
-
|
|
71
|
|
Total
revenues
|
|
425
|
|
214
|
|
244
|
|
-
|
|
883
|
|
Direct
product cost
|
|
-
|
|
(108)
|
|
(155)
|
|
-
|
|
(263)
|
|
Direct
service cost
|
|
(251)
|
|
(2)
|
|
(2)
|
|
-
|
|
(255)
|
|
Reimbursed
expenses
|
|
(71)
|
|
-
|
|
-
|
|
-
|
|
(71)
|
|
Selling,
general and administration
|
|
(95)
|
|
(36)
|
|
(37)
|
|
(13)
|
|
(181)
|
|
Research
and
development
|
|
-
|
|
(3)
|
|
(45)
|
|
-
|
|
(48)
|
|
Depreciation
and
amortization
|
|
(26)
|
|
(10)
|
|
(19)
|
|
(1)
|
|
(56)
|
|
Restructuring
charges -
net
|
|
(32)
|
|
-
|
|
-
|
|
(9)
|
|
(41)
|
|
Other
expense -
net
|
|
(68)
|
|
-
|
|
(5)
|
|
(4)
|
|
(77)
|
|
Equity
Earnings
|
|
-
|
|
-
|
|
40
|
|
-
|
|
40
|
|
Segment
earnings
(loss)
|
$
|
(118)
|
$
|
55
|
$
|
21
|
$
|
(27)
|
$
|
(69)
|
|
Total
Assets
|
$
|
820
|
$
|
699
|
$
|
840
|
$
|
419
|
$
|
2,778
|
|
Capital
expenditures
|
$
|
28
|
$
|
5
|
$
|
6
|
$
|
4
|
$
|
43
|
MDS
INTERIM REPORT JULY 31, 2007 (UNAUDITED) - Q3 US GAAP
RESTATED
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
|
|
|
Nine
months to July 31, 2006
|
|
|
|
MDS
Pharma Services
|
|
MDS
Nordion
|
|
MDS
Analytical Technologies
|
|
Corporate
and Other
|
|
Total
|
|
Product
revenues
|
$
|
-
|
$
|
217
|
$
|
109
|
$
|
-
|
$
|
326
|
|
Service
revenues
|
|
336
|
|
3
|
|
40
|
|
-
|
|
379
|
|
Reimbursement
revenues
|
|
80
|
|
-
|
|
-
|
|
-
|
|
80
|
|
Total
revenues
|
|
416
|
|
220
|
|
149
|
|
-
|
|
785
|
|
Direct
product cost
|
|
-
|
|
(109)
|
|
(111)
|
|
-
|
|
(220)
|
|
Direct
service cost
|
|
(262)
|
|
(2)
|
|
-
|
|
-
|
|
(264)
|
|
Reimbursed
expenses
|
|
(80)
|
|
-
|
|
-
|
|
-
|
|
(80)
|
|
Selling,
general and administration
|
|
(91)
|
|
(37)
|
|
(14)
|
|
(20)
|
|
(162)
|
|
Research
and
development
|
|
-
|
|
(4)
|
|
(33)
|
|
-
|
|
(37)
|
|
Depreciation
and
amortization
|
|
(21)
|
|
(11)
|
|
(5)
|
|
-
|
|
(37)
|
|
Restructuring
charges -
net
|
|
(1)
|
|
-
|
|
-
|
|
(3)
|
|
(4)
|
|
Other
income (expense) -
net
|
|
5
|
|
(36)
|
|
3
|
|
(6)
|
|
(34)
|
|
Equity
Earnings
|
|
(1)
|
|
-
|
|
42
|
|
(3)
|
|
38
|
|
Segment
earnings
(loss)
|
$
|
(35)
|
$
|
21
|
$
|
31
|
$
|
(32)
|
$
|
(15)
|
|
Total
Assets
|
$
|
789
|
$
|
641
|
$
|
151
|
$
|
507
|
$
|
2,088
|
|
Capital
expenditures
|
$
|
26
|
$
|
-
|
$
|
2
|
$
|
8
|
$
|
36
|
|
13.
|
Financial
Instruments
|
The
carrying amounts and fair values for all derivative financial instruments are
as
follows:
|
|
As
at July 31
|
As
at July 31
|
|
|
2007
|
2006
|
|
|
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
|
Asset
(liability) position:
|
|
|
|
|
|
|
|
|
|
Currency forward and option - asset
|
$
|
4
|
$
|
4
|
$
|
4
|
$
|
4
|
|
Currency forward and option - liabilities
|
$
|
(2)
|
$
|
(2)
|
$
|
(1)
|
$
|
(1)
|
|
Interest
rate swap and option contracts
|
$
|
(3)
|
$
|
(3)
|
$
|
(4)
|
$
|
(4)
|
As
of
July 31, 2007 the Company had outstanding foreign exchange contracts in place
to
sell $69 million at a weighted average exchange rate of C$1.1339 maturing over
the next six months. The Company also had interest rate swap
contracts that convert a notional amount of $80 million of debt from a fixed
to
a floating interest rate.
Foreign
exchange options and interest rate swaps not eligible for hedge accounting
are
included in accounts payable and are marked to market each period.
During
the quarter, the Company de-designated $70 million of the US dollar debt from
being a hedge of its US net investment, and entered into foreign exchange
contracts to lock in the exchange rate the Company would pay to buy the US
dollars required to make the scheduled December debt payments. Gains
and losses on the foreign exchange contracts and on this portion of the US
dollar denominated debt are offsetting in the income statement.
MDS
INTERIM REPORT JULY 31, 2007 (UNAUDITED) - Q3 US GAAP
RESTATED
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
A
reconciliation of expected income taxes to the reported income tax recovery
is
provided below. The Company’s tax recovery for the quarter was lower
than expected as portions of the restructuring charge related to foreign
jurisdictions where full valuation allowances have been recorded against
existing tax assets. In addition, the Company was unable to recognize any tax
benefit on the Hamburg clinic loss or valuation provision.
|
Three
months to July 31
|
|
|
|
2007
|
|
2006
|
|
Expected
income tax expense (recovery) at MDS’s 35% (2006 – 35%) statutory
rate
|
$
|
3
|
$
|
(2)
|
|
Increase
(decrease) to tax expense as a result of:
|
|
|
|
|
|
Tax
credits for research and development
|
|
(1)
|
|
(3)
|
|
Foreign
tax losses not previously recognized
|
|
1
|
|
-
|
|
Impact
of tax rate changes on deferred tax balances
|
|
-
|
|
2
|
|
Other
|
|
(2)
|
|
(1)
|
|
Reported
income tax expense (recovery)
|
$
|
1
|
$
|
(4)
|
|
15.
|
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.
|
i)
|
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 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 financial
statements and in certain of the supporting
notes.
|
|
ii)
|
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.
|
|
iii)
|
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.
|
|
iv)
|
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
|
MDS
INTERIM REPORT JULY 31, 2007 (UNAUDITED) - Q3 US GAAP
RESTATED
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
|
|
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.
|
|
v)
|
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.
|
|
vi)
|
Comprehensive
income – US GAAP requires that a statement of other comprehensive income
and accumulated other comprehensive income be displayed with the
same
prominence as other financial statements. Under Canadian GAAP, statements
of other comprehensive income and accumulated other comprehensive
income
were not required for years prior to the Company’s 2007 fiscal
year.
|
|
vii)
|
Pensions
- Under US GAAP, the net funded status of pension plans sponsored
by a
Company are fully reflected in the consolidated assets or liabilities
of
the Company. The amount by which plan assets exceed benefit obligations
or
benefit obligations exceed plan assets, on a plan-by-plan basis,
is
reflected as an increase in assets or liabilities, with a corresponding
adjustment to accumulated other comprehensive income. Under Canadian
GAAP,
only the net actuarial asset or liability is reflected in the consolidated
financial statements.
|
|
viii)
|
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 1, 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.
MDS
INTERIM REPORT JULY 31, 2007 (UNAUDITED) - Q3 US GAAP
RESTATED
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
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 is required to adopt 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 February 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.
MDS
INTERIM REPORT JULY 31, 2007 (UNAUDITED) - Q3 US GAAP
RESTATED
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
|
CONSOLIDATED
STATEMENTS OF FINANCIAL POSITION
|
|
|
|
|
|
[millions
of US dollars]
|
|
2007
Canadian
GAAP
|
|
Reconciling
Adjustments
|
|
2007
US
GAAP
|
|
Assets
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$
|
224
|
$
|
(3)
|
$
|
221
|
|
Short-term
investments
|
|
90
|
|
-
|
|
90
|
|
Accounts
receivable, net
|
|
265
|
|
2
|
|
267
|
|
Unbilled
revenue
|
|
110
|
|
-
|
|
110
|
|
Inventories,
net
|
|
124
|
|
(6)
|
|
118
|
|
Income
taxes recoverable
|
|
54
|
|
-
|
|
54
|
|
Prepaid
expenses and other
|
|
25
|
|
(1)
|
|
24
|
|
Assets
held for sale
|
|
1
|
|
-
|
|
1
|
|
Total
Current
Assets
|
$
|
893
|
$
|
(8)
|
$
|
885
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
356
|
|
(4)
|
|
352
|
|
Deferred
tax asset
|
|
5
|
|
-
|
|
5
|
|
Long-term
investments and other
|
|
233
|
|
(6)
|
|
227
|
|
Goodwill
|
|
784
|
|
(21)
|
|
763
|
|
Intangible
assets, net
|
|
563
|
|
(16)
|
|
547
|
|
Total
Assets
|
$
|
2,834
|
$
|
(55)
|
$
|
2,779
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’
Equity
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
$
|
330
|
$
|
(5)
|
$
|
325
|
|
Deferred
revenue
|
|
88
|
|
-
|
|
88
|
|
Income
taxes payable
|
|
54
|
|
-
|
|
54
|
|
Current
portion of long-term debt
|
|
93
|
|
-
|
|
93
|
|
Deferred
tax liabilities
|
|
9
|
|
-
|
|
9
|
|
Total
Current
Liabilities
|
$
|
574
|
$
|
(5)
|
$
|
569
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
294
|
|
-
|
|
294
|
|
Deferred
revenue
|
|
16
|
|
-
|
|
16
|
|
Other
long-term obligations
|
|
26
|
|
1
|
|
27
|
|
Deferred
tax liabilities
|
|
145
|
|
(28)
|
|
117
|
|
Minority
Interest
|
|
1
|
|
(1)
|
|
-
|
|
Total
Liabilities
|
$
|
1,056
|
$
|
(33)
|
$
|
1,023
|
|
|
|
|
|
|
|
|
|
Shareholders’
Equity
|
|
|
|
|
|
|
|
Share
capital
|
|
499
|
|
(8)
|
|
491
|
|
Additional
paid in capital
|
|
n/a
|
|
71
|
|
71
|
|
Retained
earnings
|
|
930
|
|
(101)
|
|
829
|
|
Accumulated
other comprehensive income
|
|
349
|
|
16
|
|
365
|
|
Total
Shareholders’
Equity
|
$
|
1,778
|
$
|
(22)
|
$
|
1,756
|
|
Total
Liabilities and
Shareholders’ Equity
|
$
|
2,834
|
$
|
(55)
|
$
|
2,779
|
MDS
INTERIM REPORT JULY 31, 2007 (UNAUDITED) - Q3 US GAAP
RESTATED
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
|
CONSOLIDATED
STATEMENTS OF FINANCIAL POSITION
|
|
|
|
|
|
As
at October 31, 2006
[millions
of US dollars]
|
|
2006
Canadian
GAAP
|
|
Reconciling
Adjustments
|
|
2006
US
GAAP
|
|
Assets
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$
|
253
|
$
|
(6)
|
$
|
247
|
|
Short-term
investments
|
|
135
|
|
-
|
|
135
|
|
Accounts
receivable, net
|
|
229
|
|
(5)
|
|
224
|
|
Unbilled
revenue
|
|
121
|
|
1
|
|
122
|
|
Inventories,
net
|
|
86
|
|
(6)
|
|
80
|
|
Income
taxes recoverable
|
|
42
|
|
-
|
|
42
|
|
Prepaid
expenses and other
|
|
21
|
|
-
|
|
21
|
|
Assets
held for sale
|
|
196
|
|
-
|
|
196
|
|
Total
Current
Assets
|
|
1,083
|
|
(16)
|
|
1,067
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
339
|
|
(5)
|
|
334
|
|
Deferred
tax asset
|
|
37
|
|
10
|
|
47
|
|
Long-term
investments and other
|
|
170
|
|
6
|
|
176
|
|
Goodwill
|
|
417
|
|
(20)
|
|
397
|
|
Intangible
assets, net
|
|
338
|
|
(16)
|
|
322
|
|
Total
Assets
|
$
|
2,384
|
$
|
(41)
|
$
|
2,343
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’
Equity
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
$
|
239
|
$
|
(2)
|
$
|
237
|
|
Deferred
revenue
|
|
93
|
|
(1)
|
|
92
|
|
Income
taxes payable
|
|
8
|
|
-
|
|
8
|
|
Current
portion of long-term debt
|
|
20
|
|
-
|
|
20
|
|
Deferred
tax liabilities
|
|
-
|
|
-
|
|
-
|
|
Liabilities
related to assets held for sale
|
|
114
|
|
-
|
|
114
|
|
Total
Current
Liabilities
|
|
474
|
|
(3)
|
|
471
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
374
|
|
-
|
|
374
|
|
Deferred
revenue
|
|
17
|
|
-
|
|
17
|
|
Other
long-term obligations
|
|
23
|
|
1
|
|
24
|
|
Deferred
tax liabilities
|
|
82
|
|
21
|
|
103
|
|
Total
Liabilities
|
|
970
|
|
19
|
|
989
|
|
|
|
|
|
|
|
|
|
Shareholders’
Equity
|
|
|
|
|
|
|
|
Share
capital
|
|
572
|
|
(6)
|
|
566
|
|
Additional
paid in capital
|
|
-
|
|
69
|
|
69
|
|
Retained
earnings
|
|
495
|
|
(104)
|
|
391
|
|
Accumulated
other comprehensive income
|
|
347
|
|
(19)
|
|
328
|
|
Total
Shareholders’
Equity
|
|
1,414
|
|
(60)
|
|
1,354
|
|
Total
Liabilities and
Shareholders’ Equity
|
$
|
2,384
|
$
|
(41)
|
$
|
2,343
|
MDS
INTERIM REPORT JULY 31, 2007 (UNAUDITED) - Q3 US GAAP
RESTATED
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
Three
months ended July 31, 2007
|
Nine
months ended July 31, 2007
|
|
[millions
of US dollars except per share amounts]
|
|
CDN
GAAP
|
|
Recon.
Items
1
|
|
US
GAAP
|
|
CDN
GAAP
|
|
Recon.
Items
1
|
|
US
GAAP
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
$
|
-
|
$
|
-
|
$
|
170
|
$
|
-
|
$
|
-
|
$
|
404
|
|
Services
|
|
-
|
|
-
|
|
138
|
|
-
|
|
-
|
|
408
|
|
Reimbursement
revenues
|
|
-
|
|
-
|
|
25
|
|
-
|
|
-
|
|
71
|
|
Total
revenues
|
|
321
|
|
12
|
|
333
|
|
844
|
|
39
|
|
883
|
|
Costs
and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
cost of products
|
|
-
|
|
(109)
|
|
(109)
|
|
-
|
|
(263)
|
|
(263)
|
|
Direct
cost of services
|
|
(192)
|
|
109
|
|
(83)
|
|
(516)
|
|
261
|
|
(255)
|
|
Reimbursed
expenses
|
|
-
|
|
(25)
|
|
(25)
|
|
-
|
|
(71)
|
|
(71)
|
|
Selling,
general and administration
|
|
(74)
|
|
8
|
|
(66)
|
|
(194)
|
|
13
|
|
(181)
|
|
Research
and development
|
|
(9)
|
|
(11)
|
|
(20)
|
|
(21)
|
|
(27)
|
|
(48)
|
|
Depreciation
and amortization
|
|
(28)
|
|
4
|
|
(24)
|
|
(65)
|
|
9
|
|
(56)
|
|
Restructuring
charges - net
|
|
(3)
|
|
-
|
|
(3)
|
|
(44)
|
|
3
|
|
(41)
|
|
Other
expense - net
|
|
(2)
|
|
(5)
|
|
(7)
|
|
(68)
|
|
(9)
|
|
(77)
|
|
Total
costs and expenses
|
|
(308)
|
|
(29)
|
|
(337)
|
|
(908)
|
|
(84)
|
|
(992)
|
|
Operating
income (loss) from continuing operations
|
|
13
|
|
(17)
|
|
(4)
|
|
(64)
|
|
(45)
|
|
(109)
|
|
Interest
expense
|
|
(6)
|
|
-
|
|
(6)
|
|
(20)
|
|
-
|
|
(20)
|
|
Interest
income
|
|
4
|
|
-
|
|
4
|
|
18
|
|
-
|
|
18
|
|
Mark-to-market
on interest note swaps
|
|
-
|
|
(1)
|
|
(1)
|
|
-
|
|
-
|
|
-
|
|
Equity
earnings
|
|
-
|
|
15
|
|
15
|
|
-
|
|
40
|
|
40
|
|
Income
(loss) from continuing operations before income taxes
|
|
11
|
|
(3)
|
|
8
|
|
(66)
|
|
(5)
|
|
(71)
|
|
Income
taxes (expense) recovery:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
current
|
|
(3)
|
|
8
|
|
5
|
|
15
|
|
19
|
|
34
|
|
-
deferred
|
|
-
|
|
(6)
|
|
(6)
|
|
-
|
|
(11)
|
|
(11)
|
|
Income
(loss) from continuing operations
|
|
8
|
|
(1)
|
|
7
|
|
(51)
|
|
3
|
|
(48)
|
|
Income
from discontinued operations - net of income tax
|
|
(1)
|
|
1
|
|
-
|
|
808
|
|
-
|
|
808
|
|
Net
income
|
$
|
7
|
$
|
-
|
$
|
7
|
$
|
757
|
$
|
3
|
$
|
760
|
|
Basic
earnings (loss) per share:
-
from
continuing
operations
|
$
|
0.07
|
$
|
(0.01)
|
$
|
0.06
|
$
|
(0.37)
|
$
|
0.01
|
$
|
(0.36)
|
|
-
from discontinued operations
|
|
(0.01)
|
|
-
|
|
(0.01)
|
|
5.99
|
|
-
|
|
5.99
|
|
Basic
earnings per share
|
$
|
0.06
|
$
|
(0.01)
|
$
|
0.05
|
$
|
5.62
|
$
|
0.01
|
$
|
5.63
|
|
Diluted
earnings (loss) per share:
-
from
continuing
operations
|
$
|
0.07
|
$
|
(0.01)
|
|
0.06
|
$
|
(0.38)
|
$
|
0.02
|
$
|
(0.36)
|
|
-
from discontinued operations
|
|
(0.01)
|
|
-
|
|
(0.01)
|
|
5.98
|
|
0.01
|
|
5.99
|
|
Diluted
earnings per share
|
$
|
0.06
|
$
|
(0.01)
|
$
|
0.05
|
$
|
5.60
|
$
|
0.03
|
$
|
5.63
|
|
1
Reconciling items between Canadian GAAP and US
GAAP
|
MDS
INTERIM REPORT JULY 31, 2007 (UNAUDITED) - Q3 US GAAP
RESTATED
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
Three
months ended July 31, 2006
|
|
Nine
months ended July 31, 2006
|
|
[millions
of US dollars except per share amounts]
|
|
CDN
GAAP
|
|
Recon
Items
1
|
|
US
GAAP
|
|
CDN
GAAP
|
|
Recon
Items
1
|
|
US
GAAP
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
$
|
-
|
$
|
-
|
$
|
114
|
$
|
-
|
$
|
-
|
$
|
326
|
|
Services
|
|
-
|
|
-
|
|
127
|
|
-
|
|
-
|
|
379
|
|
Reimbursement
revenues
|
|
-
|
|
-
|
|
23
|
|
-
|
|
-
|
|
80
|
|
Total
revenues
|
|
258
|
|
6
|
|
264
|
|
742
|
|
43
|
|
785
|
|
Costs
and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
cost of products
|
|
-
|
|
(81)
|
|
(81)
|
|
-
|
|
(220)
|
|
(220)
|
|
Direct
cost of services
|
|
(174)
|
|
76
|
|
(98)
|
|
(475)
|
|
211
|
|
(264)
|
|
Reimbursed
expenses
|
|
-
|
|
(23)
|
|
(23)
|
|
-
|
|
(80)
|
|
(80)
|
|
Selling,
general and administration
|
|
(61)
|
|
(1)
|
|
(62)
|
|
(166)
|
|
4
|
|
(162)
|
|
Research
and development
|
|
(5)
|
|
(7)
|
|
(12)
|
|
(11)
|
|
(26)
|
|
(37)
|
|
Depreciation
and amortization
|
|
(16)
|
|
3
|
|
(13)
|
|
(45)
|
|
8
|
|
(37)
|
|
Restructuring
charges - net
|
|
(2)
|
|
-
|
|
(2)
|
|
(4)
|
|
-
|
|
(4)
|
|
Other
expense - net
|
|
5
|
|
1
|
|
6
|
|
(7)
|
|
(27)
|
|
(34)
|
|
Total
costs and expenses
|
|
(253)
|
|
(32)
|
|
(285)
|
|
(708)
|
|
(130)
|
|
(838)
|
|
Operating
income (loss) from continuing operations
|
|
5
|
|
(26)
|
|
(21)
|
|
34
|
|
(87)
|
|
(53)
|
|
Interest
expense
|
|
(4)
|
|
-
|
|
(4)
|
|
(11)
|
|
-
|
|
(11)
|
|
Interest
income
|
|
4
|
|
-
|
|
4
|
|
7
|
|
-
|
|
7
|
|
Mark-to-market
on interest note swaps
|
|
-
|
|
-
|
|
-
|
|
-
|
|
(2)
|
|
(2)
|
|
Equity
earnings (loss)
|
|
-
|
|
15
|
|
15
|
|
(4)
|
|
42
|
|
38
|
|
Income
(loss) from continuing operations before income taxes
|
|
5
|
|
(11)
|
|
(6)
|
|
26
|
|
(47)
|
|
(21)
|
|
Income
tax (expense) recovery
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
current
|
|
(2)
|
|
2
|
|
-
|
|
(11)
|
|
29
|
|
18
|
|
-
deferred
|
|
-
|
|
4
|
|
4
|
|
-
|
|
13
|
|
13
|
|
Income
(loss) from continuing operations
|
|
3
|
|
(5)
|
|
(2)
|
|
15
|
|
(5)
|
|
10
|
|
Income
from discontinued operations - net of income tax
|
|
16
|
|
-
|
|
16
|
|
65
|
|
-
|
|
65
|
|
Net
income (loss)
|
$
|
19
|
$
|
(5)
|
$
|
14
|
$
|
80
|
$
|
(5)
|
$
|
75
|
|
Basic
earnings (loss) per share
-
from
continuing
operations
|
$
|
0.02
|
$
|
(0.03)
|
$
|
(0.01)
|
$
|
0.11
|
$
|
(0.04)
|
$
|
0.07
|
|
-
from discontinued operations
|
|
0.11
|
|
-
|
|
0.11
|
|
0.45
|
|
-
|
|
0.45
|
|
Basic
earnings per share
|
$
|
0.13
|
$
|
(0.03)
|
$
|
0.10
|
$
|
0.56
|
$
|
(0.04)
|
$
|
0.52
|
|
Diluted
earnings (loss) per share
-
from continuing operations
|
$
|
0.02
|
$
|
(0.03)
|
$
|
(0.01)
|
$
|
0.11
|
$
|
(0.04)
|
$
|
0.07
|
|
-
from discontinued operations
|
|
0.11
|
|
-
|
|
0.11
|
|
0.45
|
|
-
|
|
0.45
|
|
Diluted
earnings per share
|
$
|
0.13
|
$
|
(0.03)
|
$
|
0.10
|
$
|
0.56
|
$
|
(0.04)
|
$
|
0.52
|
|
1
Reconciling items between Canadian GAAP and US GAAP
|
|
MDS
INTERIM REPORT JULY 31, 2007 (UNAUDITED) - Q3 US GAAP
RESTATED
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
CONSOLIDATED
STATEMENT OF CASH FLOWS
|
|
|
Three
months ended July 31, 2007
|
|
|
Nine
months ended July 31, 2007
|
|
[millions
of US dollars]
|
|
CDN
GAAP
|
|
Recon.
Items
1
|
|
US
GAAP
|
|
|
|
CDN
GAAP
|
|
Recon.
Items
1
|
|
US
GAAP
|
|
Operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
$
|
7
|
$
|
-
|
$
|
7
|
|
|
$
|
757
|
$
|
3
|
$
|
760
|
|
Income
from discontinued operations – net of tax
|
|
(1)
|
|
1
|
|
-
|
|
|
|
808
|
|
-
|
|
808
|
|
Income
(loss) from continuing operations
|
|
8
|
|
(1)
|
|
7
|
|
|
|
(51)
|
|
3
|
|
(48)
|
|
Adjustments
to reconcile net income to cash provided by operating activities
relating
to continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Items
not affecting current cash flow
|
|
41
|
|
(6)
|
|
35
|
|
|
|
136
|
|
(2)
|
|
134
|
|
Changes
in non-cash working capital balances relating to
operations
|
|
(41)
|
|
(1)
|
|
(42)
|
|
|
|
29
|
|
(9)
|
|
20
|
|
Cash
provided by operating activities of continuing operations
|
|
8
|
|
(8)
|
|
-
|
|
|
|
114
|
|
(8)
|
|
106
|
|
Cash
provided by (used in) operating activities of discontinued
operations
|
|
1
|
|
-
|
|
1
|
|
|
|
(52)
|
|
-
|
|
(52)
|
|
|
|
9
|
|
(8)
|
|
1
|
|
|
|
62
|
|
(8)
|
|
54
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
|
|
2
|
|
-
|
|
2
|
|
|
|
(601)
|
|
-
|
|
(601)
|
|
Purchase
of Intangibles
|
|
(1)
|
|
1
|
|
-
|
|
|
|
(1)
|
|
1
|
|
-
|
|
Increase
in deferred development charges
|
|
(5)
|
|
5
|
|
-
|
|
|
|
(7)
|
|
7
|
|
-
|
|
Purchase
of property, plant and equipment
|
|
(28)
|
|
1
|
|
(27)
|
|
|
|
(45)
|
|
2
|
|
(43)
|
|
Proceeds
on sale of short-term investments
|
|
14
|
|
-
|
|
14
|
|
|
|
165
|
|
-
|
|
165
|
|
Purchase
of short-term investments
|
|
(81)
|
|
-
|
|
(81)
|
|
|
|
(118)
|
|
-
|
|
(118)
|
|
Proceeds
on sale of long-term investment
|
|
-
|
|
-
|
|
-
|
|
|
|
13
|
|
-
|
|
13
|
|
Other
|
|
(2)
|
|
-
|
|
(2)
|
|
|
|
(2)
|
|
-
|
|
(2)
|
|
Cash
provided by (used) in investing activities of continuing
operations
|
|
(101)
|
|
7
|
|
(94)
|
|
|
|
(596)
|
|
10
|
|
(586)
|
|
Cash
provided by investing activities of discontinued
operations
|
|
-
|
|
-
|
|
-
|
|
|
|
929
|
|
-
|
|
929
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment
of long-term debt
|
|
(1)
|
|
-
|
|
(1)
|
|
|
|
(8)
|
|
-
|
|
(8)
|
|
Increase
in deferred revenue and other long-term obligations
|
|
1
|
|
-
|
|
1
|
|
|
|
1
|
|
-
|
|
1
|
|
Payment
of cash dividends
|
|
-
|
|
-
|
|
-
|
|
|
|
(3)
|
|
-
|
|
(3)
|
|
Issuance
of shares
|
|
5
|
|
-
|
|
5
|
|
|
|
15
|
|
-
|
|
15
|
|
Repurchase
of Shares
|
|
-
|
|
-
|
|
-
|
|
|
|
(441)
|
|
-
|
|
(441)
|
|
Cash
provided by (used in) financing activities of continuing
operations
|
|
5
|
|
-
|
|
5
|
|
|
|
(436)
|
|
-
|
|
(436)
|
|
Cash
used in financing activities of discontinued operations
|
|
-
|
|
-
|
|
-
|
|
|
|
(2)
|
|
-
|
|
(2)
|
|
Effect
of foreign exchange rate changes on cash and cash
equivalents
|
|
10
|
|
1
|
|
11
|
|
|
|
14
|
|
1
|
|
15
|
|
Increase
(decrease) in cash and cash equivalents during the period
|
|
(77)
|
|
-
|
|
(77)
|
|
|
|
(29)
|
|
3
|
|
(26)
|
|
Cash
and cash equivalents, beginning of period
|
|
301
|
|
(3)
|
|
298
|
|
|
|
253
|
|
(6)
|
|
247
|
|
Cash
and cash equivalents, end of period
|
$
|
224
|
$
|
(3)
|
$
|
221
|
|
|
$
|
224
|
$
|
(3)
|
$
|
221
|
|
1
Reconciling items between Canadian GAAP and US
GAAP
|
MDS
INTERIM REPORT JULY 31, 2007 (UNAUDITED) - Q3 US GAAP
RESTATED
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
Three
months ended July 31, 2006
|
Nine
months ended July 31, 2006
|
|
[millions
of US dollars]
|
|
CDN
GAAP
|
|
Recon.
Items
|
|
US
GAAP
|
|
CDN
GAAP
|
|
Recon.
Items
|
|
US
GAAP
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
$
|
19
|
$
|
(5)
|
$
|
14
|
$
|
80
|
$
|
(5)
|
$
|
75
|
|
Income
from discontinued operations – net of tax
|
|
16
|
|
-
|
|
16
|
|
65
|
|
-
|
|
65
|
|
Income
(loss) from continuing operations
|
|
3
|
|
(5)
|
|
(2)
|
|
15
|
|
(5)
|
|
10
|
|
Adjustments
to reconcile net income to cash provided by operating activities
relating
to continuing operations
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
Items
not affecting current cash flow
|
|
17
|
|
(13)
|
|
4
|
|
49
|
|
(16)
|
|
33
|
|
Changes
in non-cash working capital balances relating to
operations
|
|
(24)
|
|
13
|
|
11
|
|
(77)
|
|
14
|
|
(63)
|
|
Cash
used in operating activities of continuing operations
|
|
(4)
|
|
(5)
|
|
(9)
|
|
(13)
|
|
(7)
|
|
(20)
|
|
Cash
provided by operating activities of discontinued
operations
|
|
17
|
|
-
|
|
17
|
|
51
|
|
-
|
|
51
|
|
|
|
13
|
|
(5)
|
|
8
|
|
38
|
|
(7)
|
|
31
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in deferred development charges
|
|
(3)
|
|
3
|
|
-
|
|
(6)
|
|
6
|
|
-
|
|
Proceeds
from sale MAPLE transaction
|
|
-
|
|
-
|
|
-
|
|
24
|
|
-
|
|
24
|
|
Purchase
of property, plant and equipment
|
|
(17)
|
|
2
|
|
(15)
|
|
(39)
|
|
3
|
|
(36)
|
|
Proceeds
on divestiture
|
|
2
|
|
-
|
|
2
|
|
-
|
|
2
|
|
2
|
|
Proceeds
on sale of short-term investments
|
|
-
|
|
-
|
|
-
|
|
2
|
|
(2)
|
|
-
|
|
Purchase
of short-term investments
|
|
(134)
|
|
-
|
|
(134)
|
|
(134)
|
|
-
|
|
(134)
|
|
Other
|
|
-
|
|
-
|
|
-
|
|
(16)
|
|
-
|
|
(16)
|
|
Cash
provided by investing activities of continuing operations
|
|
(152)
|
|
5
|
|
(147)
|
|
(169)
|
|
9
|
|
(160)
|
|
Cash
provided by (used in) investing activities of discontinued
operations
|
|
4
|
|
-
|
|
4
|
|
81
|
|
-
|
|
81
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment
of long-term debt
|
|
-
|
|
-
|
|
-
|
|
(1)
|
|
-
|
|
(1)
|
|
Decrease
in deferred revenue and other long-term obligations
|
|
-
|
|
-
|
|
-
|
|
(9)
|
|
-
|
|
(9)
|
|
Payment
of cash dividends
|
|
(4)
|
|
-
|
|
(4)
|
|
(10)
|
|
-
|
|
(10)
|
|
Issuance
of shares
|
|
5
|
|
-
|
|
5
|
|
24
|
|
-
|
|
24
|
|
Cash
provided by financing activities of continuing operations
|
|
1
|
|
-
|
|
1
|
|
4
|
|
-
|
|
4
|
|
Cash
used in financing activities of discontinued operations
|
|
(1)
|
|
-
|
|
(1)
|
|
(9)
|
|
-
|
|
(9)
|
|
Effect
of foreign exchange rate changes on cash and cash
equivalents
|
|
(10)
|
|
7
|
|
(3)
|
|
7
|
|
7
|
|
14
|
|
Decrease
in cash and cash equivalents during the period
|
|
(145)
|
|
7
|
|
(138)
|
|
(48)
|
|
9
|
|
(39)
|
|
Cash
and cash equivalents, beginning of period
|
|
321
|
|
(7)
|
|
314
|
|
224
|
|
(9)
|
|
215
|
|
Cash
and cash equivalents, end of period
|
$
|
176
|
$
|
-
|
$
|
176
|
$
|
176
|
$
|
-
|
$
|
176
|
|
1
Reconciling items between Canadian GAAP and US
GAAP
|
MDS
INTERIM REPORT JULY 31, 2007 (UNAUDITED) - Q3 US GAAP
RESTATED
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
|
|
Three
months to July 31
|
Nine
months to July 31
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net
income (loss) from continuing operations in accordance with Canadian
GAAP
|
$
|
8
|
$
|
3
|
$
|
(51)
|
$
|
15
|
|
US
GAAP adjustments:
|
|
|
|
|
|
|
|
|
|
Deferred
development costs - net
|
|
(3)
|
|
(2)
|
|
(4)
|
|
(4)
|
|
Deferred
development costs written off
|
|
-
|
|
-
|
|
3
|
|
-
|
|
Mid
term incentive plan reversal
|
|
2
|
|
-
|
|
5
|
|
-
|
|
Unrealized
gains on foreign exchange contracts and interest rate
swaps
|
|
-
|
|
(4)
|
|
-
|
|
(2)
|
|
Reduction
in income tax expense arising from GAAP
adjustments
|
|
-
|
|
1
|
|
(1)
|
|
1
|
|
Net
income (loss) from continuing operations in accordance with US
GAAP
|
|
7
|
|
(2)
|
|
(48)
|
|
10
|
|
Income
from discontinued operations in accordance with Canadian and US
GAAP – net
of tax
|
|
-
|
|
16
|
|
808
|
|
65
|
|
Net
income in accordance with US GAAP
|
$
|
7
|
$
|
14
|
$
|
760
|
$
|
75
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share in accordance with US GAAP
|
|
|
|
|
|
|
|
|
|
-
from continuing operations
|
$
|
0.06
|
$
|
(0.01)
|
$
|
(0.36)
|
$
|
0.07
|
|
-
from discontinued operations
|
|
(0.01)
|
|
0.11
|
|
6.00
|
|
0.45
|
|
Basic
earnings per share
|
$
|
0.05
|
$
|
0.10
|
$
|
5.64
|
$
|
0.52
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share in accordance with US GAAP
|
|
|
|
|
|
|
|
|
|
-
from continuing operations
|
$
|
0.06
|
$
|
(0.01)
|
$
|
(0.36)
|
$
|
0.07
|
|
-
from discontinued operations
|
|
(0.01)
|
|
0.11
|
|
5.98
|
|
0.45
|
|
Diluted
earnings per share
|
$
|
0.05
|
$
|
0.10
|
$
|
5.62
|
$
|
0.52
|
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 period have
been reclassified to conform to the current period’s financial statement
presentation. In addition, segmented information for 2006 has been
revised to reflect the discontinued operations reported.
MDS
INTERIM REPORT JULY 31, 2007 (UNAUDITED) - Q3 US
GAAP RESTATED
Document
10
C
ANADIAN
S
UPPLEMENT
TO
R
ESTATED
M
ANAGEMENT’S
D
ISCUSSION
AND
A
NALYSIS
of
Financial Condition and Results of Operations,
for
the
three months ended July 31, 2007
This
document supplements the Restated Management’s Discussion and Analysis for July
31, 2007 and has been prepared pursuant to Section 5.2 of National Instrument
51-102 – Continuous Disclosure Obligations
CANADIAN
SUPPLEMENT TO JULY 31, 2007 INTERIM RESTATED MANAGEMENT'S DISCUSSION
AND
ANALYSIS
September
4, 2007
The
interim unaudited financial statements of MDS Inc. (MDS or the Company) for
the quarter ended July 31, 2007 are reported in United States (US) dollars
and have been restated in accordance with US generally accepted accounting
principles (US GAAP). As part of the Company’s Canadian filing
requirements, we are providing this supplement (Canadian Supplement) to our
restated management’s discussion and analysis (Restated MD&A) prepared in
accordance with US GAAP that restates, based on financial information of
MDS
reconciled to Canadian generally accepted accounting principles (Canadian
GAAP),
those parts of our Restated MD&A that would contain material differences if
they were based on financial statements prepared in accordance with Canadian
GAAP. The Canadian Supplement should be read in conjunction with our
restated unaudited financial statements and Restated MD&A included in our
interim report for the three month period ended July 31, 2007 prepared in
accordance with US GAAP (Restated Interim Report) and our 2007 annual financial
statements and related MD&A included in our annual report for the fiscal
year ended October 31, 2007 (Annual Report). Note 15 of our interim
restated financial statements explains and quantifies the material differences
between US GAAP and Canadian GAAP on the Company’s financial condition and
results of operations.
The
following contains forward-looking statements and should be read in conjunction
with the factors set forth in the “Caution regarding forward-looking statements”
section of the 2007 annual MD&A contained in the Financial Review portion of
our Annual Report.
This
supplement has been prepared as of the date set out above and has not been
updated to reflect new facts, events or circumstances since that
date.
In
addition to measures based on US GAAP and Canadian GAAP, we use terms such
as
adjusted earnings before interest, taxes, depreciation and amortization
(adjusted EBITDA) and adjusted earnings per share (adjusted
EPS). These terms are not defined by US GAAP or Canadian GAAP and
readers should refer to “Use of non-GAAP measures” in our 2007 annual
MD&A.
Amounts
are in millions of US dollars, except per share amounts and where otherwise
noted.
Summary
of difference between US GAAP
and Canadian GAAP
The
differences between US GAAP and Canadian GAAP that have the most significant
impact on the Company’s financial condition and results of operations for the
three month period ended July 31, 2007 include accounting for: joint ventures,
investment tax credits, research and development, stock-based compensation
and
hedge contracts.
The
primary difference between Canadian GAAP and US GAAP affecting the consolidated
revenues and operating margin is that under Canadian GAAP proportionate
consolidation is used to report the results of our joint ventures within
MDS
Analytical Technologies, whereas under US GAAP we apply the method of equity
accounting. For the third quarter of 2007, we reported $13
million less revenue and $17 million less operating income under US GAAP
than we
would have reported under Canadian GAAP ($13 million less and $17 million
less,
respectively for the third quarter of 2006). Under US GAAP, the
income from the joint ventures is included in equity earnings, which were
$15
million in the third quarter of 2007 ($15 million in the third quarter of
2006). Under Canadian GAAP, this amount was included in operating
income as part of the proportionate consolidation. There is no
significant impact to adjusted EBITDA from this accounting
difference.
Other
differences in operating income and adjusted EBITDA are listed
below.
|
·
|
Non-refundable
investment tax
credits (ITCs)
are treated as a reduction of expenditure under
Canadian GAAP and a reduction of income tax under US GAAP. In
the third quarter of 2007, there were $1 million ($3 million in
the third
quarter of 2006) of ITCs which when calculated based on US GAAP,
increased our operating loss and reduced adjusted EBITDA, as compared
to Canadian GAAP. This difference affects our three segments
MDS Pharma Services, MDS Nordion and MDS Analytical
|
CANADIAN
SUPPLEMENT TO JULY 31, 2007 INTERIM RESTATED MANAGEMENT'S DISCUSSION
AND
ANALYSIS
|
·
|
Research
and Development
(R&D)
expenditures may be capitalized under Canadian GAAP if
certain criteria are met, however these expenditures are expensed
in the
period they are incurred under US GAAP. In the third quarter of 2007,
the $5 million ($3 million in third quarter of 2006) of R&D
capitalized under Canadian GAAP resulted in a reduction of adjusted
EBITDA
when calculated based on US GAAP, compared to Canadian GAAP. In
the second quarter of 2007, our operating loss was increased by $3
million ($2 million in third quarter of 2006) under US GAAP due
to $2
million ($1 million of 2006) of amortization under Canadian GAAP
relating
to previously capitalized R&D. This difference affects our MDS
Analytical Technologies segment in both 2006 and 2007, and MDS
Pharma
Services in 2006.
|
|
·
|
Due
to a difference in
valuation methods
for
stock-based compensation
under US GAAP and Canadian GAAP, our
operating loss was reduced and adjusted EBITDA was higher by $2
million
for the third quarter of 2007 (nil in 2006) when calculated based
on US
GAAP, compared to Canadian GAAP. This difference only affects
Corporate and Other.
|
|
·
|
The
other difference, which is described in Note 15 to our restated
interim
financial statements, is related to
hedges.
|
There
are
no differences between US GAAP and Canadian GAAP in the adjustment used in
calculating adjusted EBITDA and adjusted EPS for the third quarters of 2007
or 2006. In calculating adjusted EBITDA and adjusted
EPS for the year-to-date, the significant changes to the adjusting items
include the following two items:
|
·
|
In
2007, capitalized R&D was charged to restructuring in MDS Pharma
Services under Canadian GAAP. Under US GAAP, these expenditures
may not be
capitalized and therefore there is no
adjustment.
|
|
·
|
In
2006, under Canadian GAAP, ITCs were netted against MAPLE settlement
in
MDS Nordion. Under US GAAP these are treated as reduction to income
tax.
The adjustment related to MAPLE ITCs only impacts adjusted
EBITDA
|
Management’s
discussion and analysis
under Canadian GAAP
Please
refer to
the
Company's previously filed Interim Report for July 31, 2007 for our
corresponding management’s discussion and analysis under Canadian
GAAP. The differences between US GAAP and Canadian GAAP, described
above, impact the discussion and analysis in each of the “MDS Inc.”, “MDS
Pharma Services”, “MDS Nordion”, “MDS Analytical Technologies” and “Corporate
and Other” sections of our previously filed MD&A. The
“Income taxes” section of our previously filed MD&A is primarily affected by
the ITCs. The “US GAAP Reconciliation” section in our previously
filed MD&A is superseded by the “Restatement to US GAAP” section of our
Restated MD&A.
For
additional information and details, readers are referred to the 2007 annual
financial statements and management’s discussion and analysis for 2007 and the
Company’s 2007 Annual Information Form (AIF), all of which are published
separately and are available at
www.mdsinc.com
and
at
www.sedar.com
. In
addition, the Company’s 40-F filing is available at
www.sec.gov
.
Document
11
Form
52-109F2 - Certification of
Interim Filings
I
,
Stephen P. DeFalco, President and Chief Executive Officer of MDS Inc., certify
that:
|
1.
|
I
have reviewed the restated
interim filings (as this term is defined in Multilateral Instrument
52-109
Certification
of Disclosure in
Issuers' Annual and Interim Filings
)
of MDS Inc., (the issuer) for
the interim period ending July 31, 2007 (the "interim
filings")
;
|
|
2.
|
Based
on my knowledge, the interim filings do not contain any untrue
statement
of a material fact or omit to state a material fact required to
be stated
or that is necessary to make a statement not misleading in light
of the
circumstances under which it was made, with respect to the period
covered
by the interim filings;
|
|
3.
|
Based
on my knowledge, the restated interim financial statements together
with
the other financial information included in the interim filings
fairly
present in all material respects the financial condition, results
of
operations and cash flows of the issuer, as of the date and for
the
periods presented in the interim
filings;
|
|
4.
|
The
issuer's other certifying officers and I are responsible for establishing
and maintaining disclosure controls and procedures and internal
control
over financial reporting for the issuer, and we
have:
|
|
(a)
|
designed
such disclosure controls and procedures, or caused them to be designed
under our supervision, to provide reasonable assurance that material
information relating to the issuer, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which the interim filings are
being
prepared; and
|
|
(b)
|
designed
such internal control over financial reporting, or caused it to
be
designed under our supervision, to provide reasonable assurance
regarding
the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with the issuer’s GAAP;
and
|
|
5.
|
I
have caused the issuer to disclose in the interim MD&A any change in
the issuer’s internal control over financial reporting that occurred
during the issuer’s most recent interim period that has materially
affected, or is reasonably likely to materially affect, the issuer’s
internal control over financial
reporting.
|
|
|
/s/
Stephen P. DeFalco
|
|
Date:
January 29, 2008
|
Stephen
P. DeFalco
President
& Chief Executive Officer
|
Document
12
Form
52-109F2 - Certification of
Interim Filings
I,
Douglas S. Prince
,
Executive Vice-President,
Finance and Chief Financial Officer of MDS
Inc., certify that:
|
1.
|
I
have reviewed the restated interim filings (as this term is defined
in
Multilateral Instrument 52-109
Certification
of Disclosure in
Issuers' Annual and Interim Filings
) of MDS Inc., (the issuer) for
the interim period ending July 31, 2007 (the "interim
filings");
|
|
2.
|
Based
on my knowledge, the interim filings do not contain any untrue
statement
of a material fact or omit to state a material fact required to
be stated
or that is necessary to make a statement not misleading in light
of the
circumstances under which it was made, with respect to the period
covered
by the interim filings;
|
|
3.
|
Based
on my knowledge, the restated interim financial statements together
with
the other financial information included in the interim filings
fairly
present in all material respects the financial condition, results
of
operations and cash flows of the issuer, as of the date and for
the
periods presented in the interim
filings;
|
|
4.
|
The
issuer's other certifying officers and I are responsible for establishing
and maintaining disclosure controls and procedures and internal
control
over financial reporting for the issuer, and we
have:
|
|
|
(a)
|
designed
such disclosure controls and procedures, or caused them to be designed
under our supervision, to provide reasonable assurance that material
information relating to the issuer, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which the interim filings are
being
prepared; and
|
|
|
(b)
|
designed
such internal control over financial reporting, or caused it to
be
designed under our supervision, to provide reasonable assurance
regarding
the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with the issuer’s GAAP;
and
|
|
5.
|
I
have caused the issuer to disclose in the interim MD&A any change in
the issuer’s internal control over financial reporting that occurred
during the issuer’s most recent interim period that has materially
affected, or is reasonably likely to materially affect, the issuer’s
internal control over financial
reporting.
|
|
|
/s/
Douglas S. Prince
|
|
|
Date:
January 31, 2008
|
Douglas
S. Prince
Executive
Vice-President, Finance and Chief Financial
Officer
|
Document
13
RESTATED
MANAGEMENT’S DISCUSSION AND
ANALYSIS
December
12, 2007
The
following management’s discussion and analysis of the results of operations for
MDS Inc. (MDS or the Company) for the quarter ended October 31, 2007 and its
financial position as at October 31, 2007 has been restated. This
restated management’s discussion and analysis (Restated MD&A) should be read
in conjunction with the restated consolidated financial statements and notes
that follow. For the Company’s 2007 year end of October 31, 2007, MDS
has chosen to adopt United States generally accepted accounting principles
(US
GAAP) for financial reporting. As a result of this change, the
Company is required to restate to US GAAP its previously filed financial
statements for the four quarters of 2007. Previously, our filings
prepared in accordance with Canadian generally accepted accounting principles
(Canadian GAAP) disclosed a reconciliation of earnings to US GAAP due to our
status as a foreign private issuer in the US. Going forward, with US
GAAP as our primary basis of accounting, we will reconcile our US GAAP earnings
to Canadian GAAP. This reconciliation will be done as required by
applicable Canadian regulations on an annual and quarterly basis for a minimum
of the next two fiscal years. The interim financial statements for
fiscal 2007 as initially reconciled to US GAAP, have also been restated to
correct a US GAAP error identified during the preparation of our 2007 annual
financial statements under US GAAP related to the accounting for stock
compensation expense. This error related to the utilization of an
incorrect methodology under US GAAP in the calculation of stock compensation
expense with respect to an equity-based incentive compensation plan. As a result
of this error, we previously reported lower net income under US GAAP in each
of
the interim periods of 2007. Our accounting for stock-based
compensation was correct under Canadian GAAP and except for the US GAAP
reconciliation note, there is no restatement to our previously filed Canadian
GAAP financial statements. This Restated MD&A has been revised to reflect
the restatement. The information contained in this Restated MD&A
is as at December, 12, 2007 (as revised) unless otherwise
indicated. Accordingly, this Restated MD&A has not been updated
to reflect new facts, events or circumstances since December, 12,
2007.
For
additional information and details, readers are referred to the 2007 annual
financial statements and management’s discussion and analysis for 2007 and the
Company’s 2007 Annual Information Form (AIF), all of which are published
separately and are available at
www.mdsinc.com
and at
www.sedar.com
.
In addition, the Company’s 40-F filing is available at
www.sec.gov
.
Our
Restated MD&A is intended to enable readers to gain an understanding of
MDS’s current results and financial position as at and for the period ended
October 31, 2007. We provide information and analysis in our Restated MD&A
comparing the results of operations for the current interim period to those
of
the same period in the preceding fiscal year and comparing our financial
position to that at the end of the preceding fiscal year. We also provide
analysis and commentary that we believe is required to assess the Company’s
future prospects. Accordingly, certain sections of this report
contain forward-looking statements that are based on current plans and
expectations. These forward-looking statements are affected by risks
and uncertainties that are discussed in this document, as well as in the AIF,
and that could have a material impact on future prospects. Readers
are cautioned that actual events and results will vary.
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
Caution
Regarding Forward-Looking
Statements
From
time
to time, we make written or oral forward-looking statements within the meaning
of certain securities laws, including the “safe harbour” provisions of the
Securities Act (Ontario) and the United States Private Securities Litigation
Reform Act of 1995. This document contains such statements, and we
may make such statements in other filings with Canadian regulators or the United
States Securities and Exchange Commission (SEC), in reports to shareholders
or
in other communications, including public presentations. These
forward-looking statements include, among others, statements with respect to
our
objectives for 2008, our medium-term goals, and strategies to achieve those
objectives and goals, as well as statements with respect to our beliefs, plans,
objectives, expectations, anticipations, estimates and
intentions. The words “may”, “could”, “should”, “would”, “suspect”,
“outlook”, “believe”, “plan”, “anticipate”, “estimate”, “expect”, “intend”,
“forecast”, “objective”, “optimistic”, and words and expressions of similar
import are intended to identify forward-looking statements.
By
their
very nature, forward-looking statements involve inherent risks and
uncertainties, both general and specific, which give rise to the possibility
that predictions, forecasts, projections and other forward-looking statements
will not be achieved. We caution readers not to place undue reliance
on these statements as a number of important factors could cause our actual
results to differ materially from the beliefs, plans, objectives, expectations,
anticipations, estimates and intentions expressed in such forward-looking
statements. These factors include, but are not limited to: management
of operational risks; the strength of the Canadian and United States’ economies
and the economies of other countries in which we conduct business; our ability
to secure a reliable supply of raw materials, particularly cobalt and critical
medical isotopes; the impact of the movement of the US dollar relative to other
currencies, particularly the Canadian dollar and the euro; changes in interest
rate policies of the Bank of Canada and the Board of Governors of the Federal
Reserve System in the United States; the effects of competition in the markets
in which we operate; the timing and technological advancement of new products
introduced by us or by our competitors; the impact of changes in laws, trade
policies and regulations, and enforcement thereof; judicial judgments and legal
proceedings; our ability to successfully realign our organization, resources
and
processes; our ability to complete strategic acquisitions and joint ventures
and
to integrate our acquisitions and joint ventures successfully; new accounting
policies and guidelines that impact the methods we use to report our financial
condition; uncertainties associated with critical accounting assumptions and
estimates; the possible impact on our businesses from natural disasters, public
health emergencies, international conflicts and other developments including
those relating to terrorism; and our success in anticipating and managing the
foregoing risks.
We
caution that the foregoing list of important factors that may affect future
results is not exhaustive. When relying on our forward-looking
statements to make decisions with respect to the Company, investors and others
should carefully consider the foregoing factors and other uncertainties and
potential events. We do not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by us
or
on our behalf.
Use
of Non-GAAP
Measures
In
addition to measures based on generally accepted accounting principles (GAAP)
in
this Restated MD&A, we use terms such as adjusted operating income; adjusted
earnings before interest, taxes, depreciation and amortization (EBITDA);
adjusted EBITDA margin; adjusted earnings per share (EPS); operating working
capital; net revenue; and backlog. These terms are not defined by
GAAP and our use of such terms or measurement of such items may vary from that
of other companies. In addition, measurement of growth is not defined
by GAAP and our use of these terms or measurement of these items may vary from
that of other companies. Where relevant, and particularly for
earnings-based measures, we provide tables in this document that reconcile
the
non-GAAP measures used to amounts reported on the
MDS
INTERIM REPORT OCTOBER 31, 2007 (UNAUDITED) - Q4 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
face
of
the consolidated financial statements. Our executive management team assesses
the performance of our businesses based on a review of results comprising GAAP
measures and these non-GAAP measures. We also report on our performance to
the
Company’s Board of Directors based on these GAAP and non-GAAP
measures. In addition, adjusted EBITDA and operating working capital
are the primary metrics for our annual incentive compensation plan for senior
management. We provide this non-GAAP detail so that readers have a
better understanding of the significant events and transactions that have had
an
impact on our results, and can view our results through the eyes of
management.
Substantially
all of the products of the Sciex division of MDS Analytical Technologies are
sold through two joint ventures. Under the terms of these joint ventures, we
are
entitled to a 50% share of the net earnings of the worldwide business that
we
conduct with our partners in these joint ventures. These earnings include a
share of the profits generated by our partners that are paid to the joint
ventures as profit sharing. Under US GAAP, we report our direct
revenues from sales to the joint ventures and we report our share of the profits
of the joint ventures as equity earnings. We do not report our share of all
end-user revenues, despite the fact that these revenues contribute substantially
to our profitability. In order to provide readers with a better understanding
of
the drivers of profitability for the Sciex products of MDS Analytical
Technologies, we report growth in end-user revenues as reported by our joint
venture partners. This figure provides management and readers with
additional information on the performance of our global business, including
trends in customer demand and our performance relative to the overall
market.
MDS
Pharma Services measures and tracks contract backlog. Contract backlog is a
non-GAAP measure that we define to include the amount of contract value
associated with confirmed contracts that has not yet been recognized as net
revenue. A confirmed contract is one for which the Company has received customer
commitment in a manner that is customary for the type of contract involved.
For
large, long-term contracts, customer commitment is generally evidenced by the
receipt of a signed contract or confirmation awarding the work to MDS. For
smaller and short-term contracts, customer commitment may be documented in
other
ways, including email messages and oral confirmations. Only contracts for which
such commitments have been received are included in backlog and the amount
of
backlog for these contracts is measured based on the net revenue that is
expected to be earned by MDS under the contract terms. A contract is removed
from backlog if the Company receives notice from the customer that the contract
has been cancelled, indefinitely delayed, or reassigned to another service
provider.
Amounts
are in millions of United States dollars, except per share amounts and where
otherwise noted.
Introduction
MDS
is a
global life sciences company that provides market-leading products and services
that our customers use for the development of drugs and the diagnosis and
treatment of disease. Through our three business segments, we are a
leading global provider of pharmaceutical contract research services (MDS Pharma
Services), medical isotopes for molecular imaging and radiotherapeutics (MDS
Nordion), and analytical instruments (MDS Analytical Technologies). Each of
these business segments sells a variety of products and services to customers
in
markets around the world.
MDS
INTERIM REPORT OCTOBER 31, 2007 (UNAUDITED) - Q4 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
Discontinued
Operations
All
financial references in this document exclude those businesses that we consider
to be discontinued. Our discontinued businesses include our
diagnostics businesses, certain early-stage pharmaceutical research services
operations, and our interest in Source Medical Corporation
(Source). All financial references for the prior year have been
restated to reflect this treatment.
Change
in Presentation Related to
Reimbursement of Out-of-Pocket Costs
In
addition to changes that relate to the adoption of US GAAP, the Company changed
its presentation of certain revenues that arise from the reimbursement of the
Company by our customers (reimbursement revenues) for certain reimbursable
out-of-pocket expenses that we incur on behalf of these customers during the
conduct of clinical trials (reimbursed expenses). The Company has the right
to
bill customers for reimbursement of the amounts, but is generally not entitled
to a mark-up or other form of profit margin related to these activities. In
the
financial reports for prior years, the reimbursement revenues were offset
against the related out-of-pocket costs, and because these amounts offset,
neither a revenue nor an expense item associated with this activity was
reported.
In
the
current presentation, the Company is reporting reimbursement revenues and
reimbursed expenses on a gross basis as separate lines on the consolidated
statements of operations. As a result of this change, although both total
revenues and total expenses have increased, there is no impact on operating
income reported. This change in presentation reflects a reconsideration of
the
Company’s reporting of revenues under both Canadian GAAP and US GAAP. We now
believe that the presentation used in prior Canadian GAAP financial statements
is not permitted under Canadian GAAP. While this change does not reflect a
Canadian GAAP to US GAAP difference, it does reflect a change in the
presentation compared to the previously filed Canadian GAAP financial statements
and therefore, comparative amounts reflected in these restated interim
consolidated financial statements have been revised to reflect this change
on
both a Canadian GAAP and a US GAAP basis.
Throughout
this report, when we refer to total revenues we mean revenues including
reimbursement revenues. We use the term net revenues to mean revenues excluding
such amounts. All revenue growth figures and adjusted EBITDA margin
figures are based on net revenues. We use net revenues to measure the growth
and
profitability of MDS and MDS Pharma Services because the pass-through invoicing
of reimbursable out-of-pocket expenses varies from period-to-period, is not
a
reliable measure of the underlying performance of the business, and does not
have an impact on net income or cash flows in any significant way. Management
assesses and rewards the performance of MDS Pharma Services and the segment’s
senior management team using metrics that are based on net
revenues.
Restatement
to US
GAAP
For
the
Company’s 2007 year end of October 31, 2007, it has chosen to adopt US GAAP for
financial reporting.
The
following tables highlight the differences between Canadian and US GAAP, and
the
impact of the US GAAP error correction related to the valuation of a stock-based
compensation program on the quarter and the year-to-date results. Our
accounting for stock-based compensation was correct under Canadian GAAP and
there has been no change to the Canadian GAAP results shown in the following
table.
MDS
INTERIM REPORT OCTOBER 31, 2007 (UNAUDITED) - Q4 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
|
|
2007
Fourth
Quarter
|
2006
Fourth
Quarter
|
|
|
Previously
Reported
(CAD
GAAP)
|
GAAP
Adjustments
|
Correction
|
Restated
Correction (US
GAAP)
|
Previously
Reported
(CAD
GAAP)
|
GAAP
Adjustments
|
Restated
Correction (US
GAAP)
|
|
Total
revenues
|
$338
|
(11)
|
-
|
$327
|
$285
|
(10)
|
$275
|
|
Reimbursement
revenues
|
(20)
|
-
|
-
|
(20)
|
(25)
|
-
|
(25)
|
|
Net
revenues
|
$318
|
(11)
|
-
|
$307
|
$260
|
(10)
|
$250
|
|
Income
(loss) from continuing
operations
|
17
|
(3)
|
1
|
15
|
14
|
(2)
|
12
|
|
Income
taxes
|
8
|
(8)
|
-
|
-
|
2
|
(6)
|
(4)
|
|
Net
interest
expense
|
-
|
-
|
-
|
-
|
2
|
-
|
2
|
|
Loss
(gain) on
derivatives
|
(2)
|
1
|
-
|
(1)
|
(2)
|
-
|
(2)
|
|
Depreciation
and
amortization
|
26
|
(3)
|
-
|
23
|
18
|
(4)
|
14
|
|
EBITDA
|
49
|
(1
3
)
|
1
|
3
7
|
34
|
(12)
|
22
|
|
Restructuring
charges,
net
|
(4)
|
-
|
-
|
(4)
|
(11)
|
-
|
(11)
|
|
Valuation
provisions
|
2
|
-
|
-
|
2
|
-
|
-
|
-
|
|
MAPLE
settlement
|
(3)
|
3
|
-
|
-
|
-
|
-
|
-
|
|
Gain
on sale of a
business/investment
|
(5)
|
-
|
-
|
(5)
|
-
|
-
|
-
|
|
Acquisition
integration
|
5
|
-
|
-
|
5
|
-
|
-
|
-
|
|
Adjusted
EBITDA
|
$44
|
(
10
)
|
1
|
$3
5
|
$23
|
(12)
|
$11
|
|
Adjusted
EBITDA
margin
|
14%
|
|
|
1
1
%
|
9%
|
|
4%
|
|
|
2007
Fourth Quarter
YTD
|
2006
Fourth Quarter
YTD
|
|
|
Previously
Reported
(CAD
GAAP)
|
GAAP
Adjustments
|
Correction
|
Restated
Correction (US
GAAP)
|
Previously
Reported
(CAD
GAAP)
|
GAAP
Adjustments
|
Restated
Correction (US
GAAP)
|
|
Total
revenues
|
$1,253
|
(43)
|
-
|
$1,210
|
$1,107
|
(47)
|
$1,060
|
|
Reimbursement
revenues
|
(91)
|
-
|
-
|
(91)
|
(105)
|
-
|
(105)
|
|
Net
revenues
|
$1,162
|
(43)
|
-
|
$1,119
|
$1,002
|
(47)
|
$955
|
|
Income
(loss) from continuing
operations
|
(34)
|
(3)
|
4
|
(33)
|
29
|
(7)
|
22
|
|
Income
taxes
|
(7)
|
(18)
|
2
|
(23)
|
13
|
(48)
|
(35)
|
|
Net
interest
expense
|
2
|
-
|
-
|
2
|
6
|
-
|
6
|
|
Loss
(gain) on
derivatives
|
(1)
|
-
|
-
|
(1)
|
1
|
(1)
|
-
|
|
Depreciation
and
amortization
|
91
|
(12)
|
-
|
79
|
63
|
(12)
|
51
|
|
EBITDA
|
51
|
(33)
|
6
|
24
|
112
|
(68)
|
44
|
|
Restructuring
charges,
net
|
40
|
(3)
|
-
|
37
|
(7)
|
-
|
(7)
|
|
Valuation
provisions
|
8
|
-
|
-
|
8
|
6
|
-
|
6
|
|
MAPLE
settlement
|
(6)
|
6
|
-
|
-
|
9
|
27
|
36
|
|
Gain
on sale of a
business/investment
|
(4)
|
-
|
-
|
(4)
|
(2)
|
-
|
(2)
|
|
Provision
for FDA-related
settlements
|
61
|
-
|
-
|
61
|
-
|
-
|
-
|
|
Acquisition
integration
|
19
|
-
|
-
|
19
|
-
|
-
|
-
|
|
Adjusted
EBITDA
|
$169
|
(30)
|
6
|
$145
|
$118
|
(41)
|
$77
|
|
Adjusted
EBITDA
margin
|
15%
|
|
|
13%
|
12%
|
|
8%
|
Note
15
to our consolidated financial statements for the fourth quarter of 2007 contains
a reconciliation of results reported in US GAAP to the net income we would
report in Canadian GAAP.
MDS
INTERIM REPORT OCTOBER 31, 2007 (UNAUDITED) - Q4 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
The
differences between US GAAP and Canadian GAAP that have the most significant
impact on the Company’s financial condition and results of operations for the
interim period ended October 31, 2007, include accounting for: joint ventures,
investment tax credits, research and development, stock-based compensation,
embedded derivatives, pensions and hedge contracts.
The
primary difference between Canadian GAAP and US GAAP affecting the consolidated
revenues and operating margin is that under Canadian GAAP proportionate
consolidation is used for the results of our joint ventures within MDS
Analytical Technologies, whereas under US GAAP we apply the method of equity
accounting. For the fourth quarter of 2007, we reported
$12 million less revenue and $15 million less operating income under US GAAP
than we would have reported under Canadian GAAP ($7 million less and $14 million
less, respectively for the fourth quarter of 2006). Under US GAAP,
the income from the joint ventures is included in equity earnings, which were
$13 million in fourth quarter of 2007 ($12 million in fourth quarter of
2006). Under Canadian GAAP this amount was included in operating
income as part of the proportionate consolidation. There is no
significant impact to the calculation of adjusted EBITDA from this accounting
difference.
Other
differences in adjusted EBITDA are listed below.
|
·
|
Non-refundable
investment tax
credits (ITCs)
are treated as a reduction of expenditure under
Canadian GAAP and a reduction of income tax under US GAAP. In
the fourth quarter of 2007, there were $8 million ($6 million in
the
fourth quarter of 2006) of ITCs. Adjusted EBITDA was reduced by $5
million
($6 million in the fourth quarter of 2006) when calculated based
on US
GAAP, compared to Canadian GAAP, as $3 million of ITCs (nil in the
fourth
quarter of 2006) related to MAPLE project and were treated as an
adjusting
item in our calculation of adjusted
EBITDA.
|
|
·
|
Research
and Development
(R&D)
expenditures may be capitalized under Canadian GAAP if
certain criteria are met, however these expenditures are expensed
in the
period they are incurred under US GAAP. In the fourth quarter of
2007, the
$5 million ($2 million in fourth quarter of 2006) of R&D capitalized
under Canadian GAAP resulted in a reduction of adjusted EBITDA when
calculated based on US GAAP, compared to Canadian
GAAP.
|
|
·
|
Due
to a difference in
valuation methods
for
stock-based compensation
under US GAAP and Canadian GAAP, adjusted
EBITDA was higher by $1 million for fourth quarter of 2007 (nil in
2006)
when calculated based on US GAAP, compared to Canadian
GAAP.
|
|
·
|
The
other differences, which are described in Note 15 to our restated
interim
financial statements, include accounting for embedded derivatives,
pensions and hedges. In the fourth quarter of 2007, embedded
derivatives increase adjusted EBITDA by $4 million (nil in 2006)
and
pensions decreased adjusted EBITDA by $4 million (nil in 2006) when
calculated based on US GAAP, compared to Canadian
GAAP.
|
In
calculating adjusted EBITDA, the significant changes to the adjusting items
include the following two items:
|
·
|
In
2007, capitalized R&D was charged to restructuring under Canadian
GAAP. Under US GAAP, these expenditures may not be capitalized and
therefore there is no adjustment. This difference only impacts
the year-to-date adjusting items.
|
|
·
|
In
2006, under Canadian GAAP, ITCs were netted against MAPLE settlement.
Under US GAAP these are treated as reduction to income
tax.
|
MDS
INTERIM REPORT OCTOBER 31, 2007 (UNAUDITED) - Q4 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
The
results discussed in this Restated MD&A are based on US GAAP. To
supplement the US GAAP Restated MD&A included in this document, please refer
to our Canadian Supplement to this Restated MD&A which is being filed at the
same time as our Restated MD&A and our previously filed Interim Report for
October 31, 2007, for our corresponding MD&A based on Canadian
GAAP.
MDS
Inc.
Consolidated
operating highlights and reconciliation of consolidated adjusted
EBITDA
|
Fourth
Quarter
|
|
|
Year-to-date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
2007
|
|
2006
|
|
|
327
|
|
275
|
|
Total revenues
|
|
1,210
|
|
1,060
|
|
|
(20)
|
|
(25)
|
|
Reimbursement revenues
|
|
(91)
|
|
(105)
|
|
$
|
307
|
$
|
250
|
|
Net revenues
|
$
|
1,119
|
$
|
955
|
|
|
15
|
|
12
|
|
Income
(loss) from
continuing operations
|
|
(33)
|
|
22
|
|
|
-
|
|
(4)
|
|
Income taxes
|
|
(23)
|
|
(35)
|
|
|
-
|
|
2
|
|
Net interest expense
|
|
2
|
|
6
|
|
|
(1)
|
|
(2)
|
|
Loss (gain) on derivatives
|
|
(1)
|
|
-
|
|
|
23
|
|
14
|
|
Depreciation and amortization
|
|
79
|
|
51
|
|
|
37
|
|
22
|
|
EBITDA
|
|
24
|
|
44
|
|
|
(4)
|
|
(11)
|
|
Restructuring charges, net
|
|
37
|
|
(7)
|
|
|
2
|
|
-
|
|
Valuation provisions
|
|
8
|
|
6
|
|
|
-
|
|
-
|
|
MAPLE settlement
|
|
-
|
|
36
|
|
|
(5)
|
|
-
|
|
Gain on sale of a business/investment
|
|
(4)
|
|
(2)
|
|
|
-
|
|
-
|
|
Provision for FDA-related settlements
|
|
61
|
|
-
|
|
|
5
|
|
-
|
|
Acquisition integration
|
|
19
|
|
-
|
|
$
|
35
|
$
|
11
|
|
Adjusted
EBITDA
|
$
|
145
|
$
|
77
|
|
|
11%
|
|
4%
|
|
Adjusted
EBITDA
margin
|
|
13%
|
|
8%
|
Consolidated
net revenues, which exclude reimbursement revenues associated with reimbursed
expenses in the MDS Pharma Services segment, were up 23% on a reported basis
to
$307 million for the fourth quarter of 2007 compared to $250 million last year.
The Molecular Devices (MD) division of MDS Analytical Technologies, which was
acquired earlier this year, added $54 million of net revenue in the quarter,
pushing net revenue growth for MDS Analytical Technologies to slightly more
than
double compared to that of the fourth quarter of 2006. MDS Pharma Services
net
revenues increased 1% compared to the same period in 2006, as 10% growth in
our
late-stage businesses continued to be offset by declines in the early-stage
businesses. MDS Nordion net revenues were up 1% compared to the same period
in
2006 on a reported basis, and up 4% excluding the impact of deferred revenue
realized last year associated with our Zevalin® contract, which expired in
February 2007.
Income
from continuing operations for the fourth quarter of 2007 was $15 million
compared to $12 million reported for the same period in
2006. The fourth quarter of 2007 included $11 million in
expenses for integration and amortization related to Molecular
Devices.
Adjusted
EBITDA for the quarter was $35 million, up more than three times compared to
$11
million reported for last year. On a year-over-year basis, the significant
decline in the value of the US dollar negatively impacted adjusted EBITDA due
to
both the foreign exchange impact on our operating activities and a $10 million
increase in the loss for the impact of foreign exchange on certain monetary
assets and liabilities. MDS Pharma Services delivered improvement in
adjusted EBITDA. MDS Analytical Technologies also had a strong
quarter on an adjusted EBITDA basis, with and without the impact of the MD
acquisition.
MDS
INTERIM REPORT OCTOBER 31, 2007 (UNAUDITED) - Q4 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
Adjustments
reported for the quarter include $5 million of costs related to the integration
of MDS Analytical Technologies, including $2 million related to amortization
of
fair value increments recorded for deferred revenue from service contracts.
Although we report this deferred revenue adjustment as an operating income
adjustment in this non-GAAP measure, our GAAP-based income statement reports
this amount as a reduction in revenues.
Other
adjustments for the quarter include a release of $4 million of restructuring
reserves related primarily to severance costs for employees who left voluntarily
prior to their planned termination.
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.
In
October, we were advised that we were entitled to receive $5 million of
bankruptcy proceeds resulting from the final liquidation of Protana Inc.
(formerly MDS Proteomics Inc.). This recovery is included in other income and
it
has been treated as an adjusting item.
Selling,
general, and administration (SG&A) expenses for the quarter totaled $84
million or 27% of net revenues compared to $58 million and 23% last year. The
increase in SG&A of $26 million includes $17 million resulting from the
addition of MD during the year.
We
spent
$20 million on research and development (R&D) activities in the fourth
quarter this year, compared to spending of $16 million last year. The majority
of the increase in R&D spending comes from the spending in our new MD
business.
Consolidated
depreciation and amortization expense increased $9 million compared to the
fourth quarter of last year. In the fourth quarter of 2007, we
amortized $6 million of intangible assets acquired as part of the MD
transaction. In total, we recorded $161 million of intangible assets
related to acquired technology, reagents, and intellectual property that we
currently estimate will be amortized over a weighted average useful life of
6
years. Capital expenditures for the quarter were $28 million, compared to $15
million in the fourth quarter of 2006.
Other
expenses included the impact of the significant $0.12 drop in the value of
the
US dollar compared to the Canadian dollar following our July quarter-end, which
resulted in consolidated foreign exchange losses from the translation of certain
monetary assets and liabilities of $11 million, compared to a $1 million loss
in
the prior-year quarter.
The
loss
from discontinued operations of $2 million for the fourth quarter this year
reflects costs associated with the sale of our Canadian diagnostics businesses.
Income from discontinued operations of $33 million for 2006 reflects the
operating results of our Canadian diagnostics businesses for that
period.
Earnings
per share from continuing operations were $0.12 for the quarter, compared to
$0.08 in 2006. Adjusted earnings per share from continuing operations
for the quarter were $0.07 compared to $0.00 earned in the same period last
year. Earnings per share from
MDS
INTERIM REPORT OCTOBER 31, 2007 (UNAUDITED) - Q4 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
discontinued
operations were a loss of $0.01 compared to income of $0.23 last year. Adjusted
earnings per share for the two periods were as follows:
|
|
Fourth
Quarter
|
|
Year-to-date
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Basic
earnings (loss) per share from continuing operations – as
reported
|
$
|
0.12
|
$
|
0.08
|
$
|
(0.25)
|
$
|
0.15
|
|
Adjusted
for:
|
|
|
|
|
|
|
|
|
|
Restructuring
charges, net
|
|
(0.02)
|
|
(0.05)
|
|
0.19
|
|
(0.04)
|
|
FDA-related
customer settlements
|
|
-
|
|
-
|
|
0.31
|
|
-
|
|
Valuation
provisions
|
|
0.01
|
|
-
|
|
0.06
|
|
0.05
|
|
Mark-to-market
on interest rate swaps
|
|
(0.01)
|
|
-
|
|
(0.01)
|
|
-
|
|
MAPLE
settlement
|
|
(0.01)
|
|
-
|
|
(0.03)
|
|
0.04
|
|
Gain
on sale of business and long-term investments
|
|
(0.04)
|
|
-
|
|
(0.02)
|
|
-
|
|
Acquisition
integration
|
|
0.02
|
|
-
|
|
0.09
|
|
-
|
|
Tax
rate changes
|
|
-
|
|
(0.03)
|
|
-
|
|
(0.03)
|
|
Adjusted
EPS
|
$
|
0.07
|
$
|
0.00
|
$
|
0.34
|
$
|
0.17
|
MDS
INTERIM REPORT OCTOBER 31, 2007 (UNAUDITED) - Q4 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
MDS
Pharma
Services
Financial
Highlights
|
Fourth
Quarter
|
|
|
Year-to-date
|
|
|
|
%
of net
|
|
|
%
of net
|
|
|
|
|
%
of net
|
|
|
%
of net
|
|
|
2007
|
revenues
|
|
2006
|
revenues
|
|
|
|
2007
|
revenues
|
|
2006
|
revenues
|
|
$
|
66
|
54%
|
$
|
70
|
57%
|
|
Early-stage
|
$
|
254
|
53%
|
$
|
267
|
58%
|
|
|
57
|
46%
|
|
52
|
43%
|
|
Late-stage
|
|
223
|
47%
|
|
191
|
42%
|
|
|
123
|
100%
|
|
122
|
100%
|
|
Net revenues
|
|
477
|
100%
|
|
458
|
100%
|
|
$
|
20
|
-
|
$
|
25
|
-
|
|
Reimbursement revenues
|
$
|
91
|
-
|
$
|
105
|
-
|
|
|
143
|
|
|
147
|
|
|
Total
revenues
|
|
568
|
|
|
563
|
|
|
|
(81)
|
(66%)
|
|
(97)
|
(80%)
|
|
Cost of revenues
|
|
(332)
|
(70%)
|
|
(359)
|
(78%)
|
|
|
(20)
|
|
|
(25)
|
|
|
Reimbursed expenses
|
|
(91)
|
|
|
(105)
|
|
|
|
(35)
|
(28%)
|
|
(34)
|
(28%)
|
|
Selling, general, and administration
|
|
(130)
|
(27%)
|
|
(125)
|
(27%)
|
|
|
-
|
-
|
|
-
|
-
|
|
Research and development
|
|
-
|
-
|
|
-
|
-
|
|
|
(9)
|
(7%)
|
|
(9)
|
(7%)
|
|
Depreciation and amortization
|
|
(35)
|
(7%)
|
|
(30)
|
(6%)
|
|
|
4
|
3%
|
|
1
|
1%
|
|
Restructuring charges
|
|
(28)
|
(6%)
|
|
-
|
-
|
|
|
(6)
|
(5%)
|
|
(3)
|
(2%)
|
|
Other income (expense)
|
|
(74)
|
(16%)
|
|
2
|
0%
|
|
|
(4)
|
(3%)
|
|
(20)
|
(16%)
|
|
Operating
income
(loss)
|
|
(122)
|
(26%)
|
|
(54)
|
(12%)
|
|
|
|
|
|
|
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
-
|
-
|
|
-
|
-
|
|
Provision for FDA-related settlements
|
|
61
|
13%
|
|
-
|
-
|
|
|
(4)
|
(3%)
|
|
(1)
|
(1%)
|
|
Restructuring charges
|
|
28
|
6%
|
|
-
|
-
|
|
|
-
|
-
|
|
-
|
-
|
|
Loss (gain) on sale of a business
|
|
4
|
1%
|
|
(2)
|
(0%)
|
|
|
-
|
-
|
|
-
|
-
|
|
Valuation provision
|
|
-
|
-
|
|
-
|
-
|
|
|
(8)
|
(6%)
|
|
(21)
|
(17%)
|
|
|
|
(29)
|
(6%)
|
|
(56)
|
(12%)
|
|
|
9
|
7%
|
|
9
|
7%
|
|
Depreciation and amortization
|
|
35
|
7%
|
|
30
|
6%
|
|
$
|
1
|
1%
|
$
|
(12)
|
(10%)
|
|
Adjusted
EBITDA
|
$
|
6
|
1%
|
$
|
(26)
|
(6%)
|
|
|
|
|
|
|
|
|
Margins:
|
|
|
|
|
|
|
|
|
34%
|
|
|
20%
|
|
|
Gross margin
|
|
30%
|
|
|
22%
|
|
|
|
1%
|
|
|
(10%)
|
|
|
Adjusted EBITDA
|
|
1%
|
|
|
(6%)
|
|
|
$
|
20
|
|
$
|
11
|
|
|
Capital
expenditures
|
$
|
48
|
|
$
|
37
|
|
MDS
Pharma Services net revenues grew 1% as a result of continued revenue growth
from our late-stage businesses. Late-stage revenues grew 10% compared to the
fourth quarter of 2006; however, this growth was largely offset by weaker
early-stage revenues, which were down 6% compared to the same quarter last
year.
Weakness in revenues from bioanalytical and discovery/preclinical services
more
than offset otherwise strong growth in drug safety testing. Phase I revenues
were level with the fourth quarter last year and are gaining momentum
sequentially.
Early-stage
contract awards were strong this quarter compared to last year; however, we
experienced some order weakness and a higher than normal level of contract
cancellations relating to compound failures and customer mergers affecting
our
late-stage businesses. Combined with the improved conversion of contract
backlog, this weakness contributed to an overall decrease in average monthly
pharmaceutical research backlog to $385 million, down 10% compared to the fourth
quarter of 2006. We are encouraged by the strength of new bioanalytical orders,
which doubled compared to the fourth quarter of 2006, as well as the improved
quality of our period-end backlog resulting from our focus on bidding on
contracts that enable us to achieve reliable profitability.
MDS
INTERIM REPORT OCTOBER 31, 2007 (UNAUDITED) - Q4 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
|
Average
monthly
backlog
|
|
|
|
Fiscal
2005 – Quarter 1
|
$
|
315
|
|
Quarter
2
|
|
305
|
|
Quarter
3
|
|
315
|
|
Quarter
4
|
|
340
|
|
Fiscal
2006 – Quarter 1
|
|
370
|
|
Quarter
2
|
|
400
|
|
Quarter
3
|
|
400
|
|
Quarter
4
|
|
430
|
|
Fiscal
2007 – Quarter 1
|
|
450
|
|
Quarter
2
|
|
450
|
|
Quarter
3
|
|
420
|
|
Quarter
4
|
|
385
|
MDS
Pharma Services had an operating loss of $4 million for the quarter, compared
to
a loss of $20 million for the same period last year. MDS Pharma
Services also experienced approximately $6 million of unfavourable foreign
currency impact in the quarter compared to the prior year. Fourth
quarter 2006 operating income reflects $8 million of spending on the US Food
and
Drug Administration (FDA) review of our Montreal bioanalytical operations.
Spending on this matter during the fourth quarter of 2007 amounted to $6
million, and this was charged to the reserve established for this
purpose.
Adjusted
EBITDA for the fourth quarter was $1 million, up substantially from the $12
million adjusted EBITDA loss reported for the fourth quarter of 2006. Fiscal
2007 adjustments reflect the release of restructuring provisions related to
severance for employees who resigned prior to being terminated and to whom
no
severance was therefore paid. Fiscal 2006 operating income was
adjusted downwards by $1 million to eliminate a net recovery of certain
restructuring costs as the related restructuring initiatives were completed
below budget.
During
the fourth quarter of 2007, we continued to implement our restructuring plan,
largely completing the staff reductions at our Montreal facility, including
a
substantial reduction of staff supporting the FDA audits and other audits being
conducted by our clients. We made substantial progress on the consolidation
of
central laboratory operations in Europe and completed the closure of our
Sittingbourne, UK facility. During the quarter, we also completed the transfer
of certain operations from Montreal to our Bothell, Washington and Lincoln,
Nebraska facilities. To date, these restructuring activities have resulted
in a
headcount reduction of approximately 400 employees and we have utilized $15
million of the restructuring reserve established in the second quarter of 2007
on these activities. The remaining reserve is $11 million and we anticipate
further headcount reductions affecting 100 positions in the first half of next
year.
Capital
expenditures in the pharmaceutical services segment were $20 million compared
to
$11 million last year. Late in the quarter, our Beijing, China
central laboratory facility moved to larger and more modern facilities,
resulting in a significant increase in testing capacity. The new facility also
provides for more kit production space and can accommodate a wider range of
specialized clinical testing services.
Regulatory
Review of Montreal
Bioanalytical Operations
The
six-month time limit imposed by the FDA for generic audits has passed, and
we
believe we have substantially completed all site audits for generic customers
that were required of them by the FDA. We continue to receive a
limited number of study audit requests from innovator customers and expect
we
may continue to receive these requests in low numbers in the coming
months.
MDS
INTERIM REPORT OCTOBER 31, 2007 (UNAUDITED) - Q4 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
We
have
responded to questions from European regulators about the nature of the work
that was done for the FDA. Although we are not able to assess the
potential impact of possible foreign regulatory actions, if any, at this time
we
are satisfied with the progression of these discussions.
During
the second quarter, we approved and recorded a $61 million provision for a
reimbursement policy for clients who have incurred or will incur third party
audit costs or study re-run costs to complete the work required by the FDA
and
other regulators. We have utilized $11 million of this reserve for such costs,
an amount that was partially offset by a foreign currency translation gain
on
the US-dollar denominated components of the cost estimate. We await
reimbursement requests for the majority of the generic and innovator study
audits that were completed in our facility. Based on information
currently available, we believe that the remaining reserve of $55 million will
be sufficient to cover any agreements reached with clients for study audits,
study re-runs, and other related costs.
Full
and
complete resolution of the bioanalytical regulatory issues has been a key area
of focus for MDS Pharma Services and MDS. We remain committed to
working cooperatively with the FDA, other regulators, and our customers to
address any regulatory concerns and to support our customers with further follow
up, if any. The remaining reserve reflects our current best estimate
of the costs we expect to incur with respect to this work and for obligations
we
have to clients. There can be no assurance at this time that the full balance
of
this reserve will be required, or that costs will not exceed the amounts we
have
currently estimated.
MDS
Nordion
Financial
Highlights
|
Fourth
Quarter
|
|
|
Year-to-date
|
|
|
|
%
of net
|
|
|
%
of net
|
|
|
|
|
%
of net
|
|
|
%
of net
|
|
|
2007
|
revenues
|
|
2006
|
revenues
|
|
|
|
2007
|
revenues
|
|
2006
|
revenues
|
|
$
|
74
|
97%
|
$
|
73
|
97%
|
|
Product revenues
|
$
|
284
|
98%
|
$
|
290
|
98%
|
|
|
2
|
3%
|
|
2
|
3%
|
|
Service revenues
|
|
6
|
2%
|
|
5
|
2%
|
|
|
76
|
100%
|
|
75
|
100%
|
|
Net
revenues
|
|
290
|
100%
|
|
295
|
100%
|
|
|
(39)
|
(51%)
|
|
(38)
|
(51%)
|
|
Cost of product revenues
|
|
(147)
|
(51%)
|
|
(147)
|
(50%)
|
|
|
(1)
|
(1%)
|
|
(1)
|
(1%)
|
|
Cost of service revenues
|
|
(3)
|
(1%)
|
|
(3)
|
(1%)
|
|
|
(18)
|
(25%)
|
|
(14)
|
(19%)
|
|
Selling, general, and administration
|
|
(54)
|
(19%)
|
|
(51)
|
(17%)
|
|
|
(1)
|
(1%)
|
|
(1)
|
(1%)
|
|
Research and development
|
|
(4)
|
(1%)
|
|
(5)
|
(2%)
|
|
|
(3)
|
(4%)
|
|
(4)
|
(5%)
|
|
Depreciation and amortization
|
|
(13)
|
(4%)
|
|
(15)
|
(5%)
|
|
|
-
|
-
|
|
2
|
2%
|
|
Restructuring charges
|
|
-
|
-
|
|
2
|
1%
|
|
|
3
|
4%
|
|
-
|
-
|
|
Other income (expense)
|
|
3
|
1%
|
|
(36)
|
(12%)
|
|
|
17
|
22%
|
|
19
|
25%
|
|
Operating
income
|
|
72
|
25%
|
|
40
|
14%
|
|
|
|
|
|
|
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
-
|
-
|
|
-
|
-
|
|
MAPLE settlement
|
|
-
|
-
|
|
36
|
12%
|
|
|
-
|
-
|
|
-
|
-
|
|
Gain on a sale of a business
|
|
(1)
|
(0%)
|
|
-
|
-
|
|
|
-
|
-
|
|
(2)
|
(2%)
|
|
Restructuring charges, net
|
|
-
|
-
|
|
(2)
|
(1%)
|
|
|
17
|
22%
|
|
17
|
23%
|
|
|
|
71
|
25%
|
|
74
|
25%
|
|
|
3
|
4%
|
|
4
|
5%
|
|
Depreciation and amortization
|
|
13
|
4%
|
|
15
|
5%
|
|
$
|
20
|
26%
|
$
|
21
|
28%
|
|
Adjusted
EBITDA
|
$
|
84
|
29%
|
$
|
89
|
30%
|
|
|
|
|
|
|
|
|
Margins:
|
|
|
|
|
|
|
|
|
48%
|
|
|
48%
|
|
|
Gross margin
|
|
48%
|
|
|
49%
|
|
|
|
26%
|
|
|
28%
|
|
|
Adjusted EBITDA
|
|
29%
|
|
|
30%
|
|
|
$
|
3
|
|
$
|
-
|
|
|
Capital
expenditures
|
$
|
8
|
|
$
|
-
|
|
MDS
INTERIM REPORT OCTOBER 31, 2007 (UNAUDITED) - Q4 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
MDS
Nordion revenues were up 1% year-over-year on a reported basis. Revenues for
2006 included $2 million related to deferred revenue associated with the 2004
cancellation of the supply agreement between MDS Nordion and Biogen
Idec. Excluding the impact of this item, revenues were up 4% compared
to the fourth quarter of 2006, largely due to the strength of the Canadian
dollar this year and increased revenue associated with our expanding
TheraSphere® markets. These increases were offset by declines in cobalt
shipments and the prior-year sale of a production irradiator that was not
repeated in the current-year quarter.
Operating
income was $17 million compared to $19 million last year in the same period
and
adjusted EBITDA was $20 million in the fourth quarter of 2007, down $1 million
year-over-year. There was one adjustment for 2006 for unused
restructuring reserves associated with our European generic radiopharmaceutical
manufacturing business, the closure of which was completed at the end of last
year. SG&A expense of $18 million was up $4 million primarily due
to increased pension expense in the fourth quarter of 2007. Other
income of $3 million in the fourth quarter of 2007 primarily related to a gain
on an embedded derivative associated with our cobalt supply agreements described
below. Capital expenditures in the isotopes segment for the quarter were $3
million, compared to none last year.
Late
in
the quarter, MDS Nordion announced the signing of a 17-year, $83 million
agreement for the supply of cobalt-60 with Rosenergoatom, the operating utility
of Russia’s nuclear power plants. This contract, together with an existing
agreement signed in 2005, provides for a 30% increased supply of cobalt-60
to
MDS Nordion by 2016. Cobalt-60 is primarily used for the sterilization of
hospital medical supplies to help prevent patient infection and disease by
reducing harmful bacteria.
Subsequent
to the year-end, we announced the signing of an agreement to sell our external
beam therapy and self-contained irradiator product lines. The sale is a key
part
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. Best Medical International Inc. will acquire these two product
lines with combined annualized revenues of approximately US$32 million at an
adjusted EBITDA margin of 5% and approximately 150 employees. The transaction,
which is subject to the usual closing conditions, is expected to close in the
second quarter of 2008. We anticipate that we will report a loss on disposal
of
this business, including all costs associated with the disposal, in the range
of
$4 million to $6 million.
MDS
INTERIM REPORT OCTOBER 31, 2007 (UNAUDITED) - Q4 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
MDS
Analytical
Technologies
Financial
Highlights
|
Fourth
Quarter
|
|
|
Year-to-date
|
|
|
|
%
of net
|
|
|
%
of net
|
|
|
|
|
%
of net
|
|
|
%
of net
|
|
|
2007
|
revenues
|
|
2006
|
revenues
|
|
|
|
2007
|
revenues
|
|
2006
|
revenues
|
|
$
|
86
|
80%
|
$
|
39
|
74%
|
|
Product revenues
|
$
|
280
|
80%
|
$
|
148
|
73%
|
|
|
22
|
20%
|
|
14
|
26%
|
|
Service revenues
|
|
72
|
20%
|
|
54
|
27%
|
|
|
108
|
100%
|
|
53
|
100%
|
|
Net
revenues
|
|
352
|
100%
|
|
202
|
100%
|
|
|
(58)
|
(54%)
|
|
(38)
|
(72%)
|
|
Cost of product revenues
|
|
(213)
|
(61%)
|
|
(149)
|
(74%)
|
|
|
(1)
|
(1%)
|
|
-
|
-
|
|
Cost of service revenues
|
|
(3)
|
(1%)
|
|
-
|
-
|
|
|
(20)
|
(18%)
|
|
(6)
|
(11%)
|
|
Selling, general, and administration
|
|
(57)
|
(16%)
|
|
(20)
|
(9%)
|
|
|
(19)
|
(18%)
|
|
(15)
|
(28%)
|
|
Research and development
|
|
(64)
|
(18%)
|
|
(48)
|
(24%)
|
|
|
(10)
|
(9%)
|
|
(1)
|
(2%)
|
|
Depreciation and amortization
|
|
(29)
|
(8%)
|
|
(6)
|
(3%)
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
|
|
|
|
|
|
(1)
|
(1%)
|
|
2
|
4%
|
|
Other income (expense) net
|
|
(6)
|
(2%)
|
|
5
|
2%
|
|
|
(1)
|
(1%)
|
|
(5)
|
(9%)
|
|
Operating
income
|
|
(20)
|
(6%)
|
|
(16)
|
(8%)
|
|
|
|
|
|
|
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
13
|
12%
|
|
12
|
22%
|
|
Equity earnings
|
|
53
|
16%
|
|
54
|
27%
|
|
|
5
|
5%
|
|
-
|
-
|
|
Acquisition integration
|
|
19
|
5%
|
|
-
|
-
|
|
|
-
|
-
|
|
-
|
-
|
|
Restructuring charges
|
|
-
|
-
|
|
-
|
-
|
|
|
17
|
16%
|
|
7
|
13%
|
|
|
|
52
|
15%
|
|
38
|
19%
|
|
|
10
|
9%
|
|
1
|
2%
|
|
Depreciation and amortization
|
|
29
|
8%
|
|
6
|
3%
|
|
$
|
27
|
25%
|
$
|
8
|
15%
|
|
Adjusted
EBITDA
|
$
|
81
|
23%
|
$
|
44
|
22%
|
|
|
|
|
|
|
|
|
Margins:
|
|
|
|
|
|
|
|
|
45%
|
|
|
28%
|
|
|
Gross margin
|
|
38%
|
|
|
26%
|
|
|
|
25%
|
|
|
15%
|
|
|
Adjusted EBITDA
|
|
23%
|
|
|
22%
|
|
|
$
|
2
|
|
$
|
2
|
|
|
Capital
expenditures
|
$
|
8
|
|
$
|
4
|
|
The
Sciex
division of MDS Analytical Technologies carries out the majority of its business
through joint ventures. Currently, MDS generates the majority of its
income associated with these joint ventures from the net income of the joint
ventures, and not from its sales to the joint ventures. Under US
GAAP, we equity account for the joint ventures and therefore the majority of
the
income related to the Sciex division is reflected in equity earnings, which
represent our share of the net income of the joint ventures. We include equity
earnings in our calculation of adjusted EBITDA, however, under US GAAP, these
earnings are not included in operating income.
MDS
Analytical Technologies reported revenues of $108 million for the fourth quarter
of 2007, compared to $53 million for the same period last year. Fourth quarter
revenues for the current year include $54 million of revenues from the newly
acquired Molecular Devices business (MD). This amount is net of a $2 million
purchase price adjustment related to assigning fair value to deferred service
contracts that were on the acquisition date balance sheet of MD. Excluding
this
adjustment, MD revenues were up 15% compared to the same three-month period
in
2006, and have totaled $140 million since the acquisition date.
MD
has
been a strong contributor to segment revenues and adjusted EBITDA since it
was
combined with Sciex. Given the strong start, we believe the division
is on track to exceed the expected $190 million in revenues and $45 - $50
million in adjusted EBITDA in the first full year of MDS ownership.
MDS
INTERIM REPORT OCTOBER 31, 2007 (UNAUDITED) - Q4 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
Sciex
revenues were up 2% and the small molecule markets continued to be an area
of
strength for the business. Our high-end triple-quad and ion-trap instruments
have maintained strong sales momentum, across most markets. Good
strength from our core LC/MS products was augmented by continued strength from
our ICP/MS product line, although the proteomics markets continued to perform
below expectations. End-user revenues for Sciex products grew 4% in
the fourth quarter compared to the same period last year.
The
operating loss was $1 million for the fourth quarter of 2007 compared to a
loss
of $5 million for the fourth quarter of 2006. On an operating income basis,
MD
lost $2 million in the fourth quarter because of the acquisition-related items
which partially offset the $6 million improvement in Sciex
performance. Equity earnings, which are not included in operating
income and represent our share of earnings from the Sciex joint ventures was
$13
million for the third quarter of 2007 and up $1 million
year-over-year.
Adjusted
EBITDA for the quarter was $27 million compared to $8 million last
year. Excluding growth attributable to the acquisition of MD adjusted
EBITDA grew by 88% as a result of improved gross margins and a $2 million gain
on the sale of land. The adjustment for integration costs of $5
million for the quarter includes $2 million of deferred service contract revenue
adjustments. There were no adjustments in the prior
year.
Increased
SG&A and R&D expenses in MDS Analytical Technologies for the fourth
quarter of 2007 reflect the additional costs associated with the MD business.
Depreciation and amortization expense was also up, reflecting $6 million for
amortization of intangible assets acquired as part of the MD acquisition, plus
the inclusion of depreciation on MD property, plant, and
equipment. Capital expenditures were $2 million this year and last
year.
During
the fourth quarter, MDS Analytical Technologies announced the launch of a
significant advance in high-speed imaging technologies with the release of
the
MetaMorph
I
ICS (Integrated
Confocal System), in partnership with VisiTech International, a manufacturer
of
confocal hardware. This turnkey, confocal microscope is the first of its kind
in
the imaging industry. It has the capability to obtain high resolution images
in
multiple dimensions to support researchers in their exploration of live cell
and
functional imaging without the limitations inherent in other high-speed imaging
technologies.
The
division also introduced a new automated toxicology testing application for
drugs of abuse. The new Cliquid™ Drug Screen and Quant Software for Routine
Forensic Toxicology applications equips toxicology laboratories for the first
time with a built-in library of 1,200 compounds and a search reporting function
designed to screen hundreds of drugs in less than 20 minutes. This software
application is an improvement over existing toxicology testing methods. It
enables faster delivery of results, more thorough screening and, ultimately,
more accurate analysis to be used as evidence in criminal court
cases.
MDS
INTERIM REPORT OCTOBER 31, 2007 (UNAUDITED) - Q4 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
Corporate
and Other
Financial
Highlights
|
Fourth
Quarter
|
|
|
Year-to-Date
|
|
|
2007
|
|
2006
|
|
|
|
2007
|
|
2006
|
|
$
|
(11)
|
$
|
(4)
|
|
Selling, general, and administration
|
$
|
(24)
|
$
|
(24)
|
|
|
-
|
|
-
|
|
Research and development
|
|
-
|
|
-
|
|
|
(1)
|
|
-
|
|
Depreciation and amortization
|
|
(2)
|
|
|
|
|
-
|
|
8
|
|
Restructuring charges
|
|
(9)
|
|
5
|
|
|
1
|
|
(1)
|
|
Other expense
|
|
(3)
|
|
(7)
|
|
|
(11)
|
|
3
|
|
Operating
income
(loss)
|
|
(38)
|
|
(26)
|
|
|
|
|
|
|
Adjustments:
|
|
|
|
|
|
|
-
|
|
(1)
|
|
Equity earnings
|
|
-
|
|
(4)
|
|
|
(5)
|
|
-
|
|
Gain on sale of investments
|
|
(7)
|
|
-
|
|
|
2
|
|
-
|
|
Valuation provisions
|
|
8
|
|
6
|
|
|
-
|
|
(8)
|
|
Restructuring
|
|
9
|
|
(5)
|
|
|
1
|
|
-
|
|
Depreciation and amortization
|
|
2
|
|
-
|
|
$
|
(13)
|
$
|
(6)
|
|
Adjusted
EBITDA
|
$
|
(26)
|
$
|
(29)
|
The
increase in corporate SG&A expenses from $11 million in the fourth quarter
of 2007 compared to $4 million in 2006 was primarily due to increased costs
associated with incentive compensation plans and spending associated with
certain corporate projects, including conversion to US GAAP.
Other
income for the quarter includes a $4 million of foreign exchange loss on balance
sheet translation and a $2 million valuation provision for asset-backed
commercial paper we own and which is not currently liquid. Also included in
other income is $5 million of bankruptcy proceeds resulting from the wind-up
of
Protana Inc., a successor company to MDS Proteomics. We were advised
by the liquidator of these proceeds late in the fourth quarter and we expect
to
receive the funds in the first half of 2008. Other income for the
fourth quarter in 2006 included a $2 million mark-to-market gain and an $8
million release of restructuring reserves originally set aside in 2005 for
expected contract cancellation costs. We were able to negotiate termination
of
this contract without penalty during 2006 and as a consequence, this reserve
was
no longer required. With the exception of the $4 million foreign exchange loss,
all of these items were treated as adjustments to arrive at adjusted EBITDA
for
the quarter.
Fourth
quarter interest expense increased from $6 million in 2006 to $7 million in
2007
and interest income in the quarter was $7 million this year compared to $4
million last year.
Income
Taxes
We
reported no tax expense this quarter as the benefit of tax credits relating
to
eligible research and development offset the taxes we otherwise
reported. And the bankruptcy proceeds that we recorded in the quarter
relating to the wind-up of Protana are not subject to income tax.
MDS
INTERIM REPORT OCTOBER 31, 2007 (UNAUDITED) - Q4 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
Discontinued
Operations
The
results of our discontinued businesses for the fourth quarter of 2007 and 2006
were as follows:
|
|
Fourth
Quarter
|
Year-to-date
|
|
|
|
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)
|
|
Goodwill
write-down
|
|
-
|
|
-
|
|
-
|
|
-
|
|
Restructuring
charges
|
|
-
|
|
-
|
|
-
|
|
(1)
|
|
Other
expenses
|
|
-
|
|
(3)
|
|
-
|
|
(3)
|
|
Operating
income
|
|
(1)
|
|
16
|
|
22
|
|
70
|
|
Gain
on sale of discontinued operations
|
|
-
|
|
-
|
|
904
|
|
24
|
|
Interest
expense
|
|
-
|
|
-
|
|
-
|
|
-
|
|
Interest
income
|
|
-
|
|
1
|
|
1
|
|
2
|
|
Income
taxes
|
|
-
|
|
16
|
|
(117)
|
|
7
|
|
Minority
interest
|
|
(1)
|
|
(1)
|
|
(5)
|
|
(8)
|
|
Equity
earnings
|
|
-
|
|
1
|
|
1
|
|
3
|
|
Income
(loss) from discontinued
operations
|
|
(2)
|
|
33
|
|
806
|
|
98
|
|
Basic
EPS from discontinued
operations
|
$
|
(0.01)
|
$
|
0.23
|
$
|
6.12
|
$
|
0.68
|
The
results from discontinued operations in the fourth quarter of 2007 reflect
expenses associated with the sale of our diagnostics business. The
results from discontinued operations for 2006 include results from the Canadian
diagnostic services business and certain small MDS Pharma Services businesses
discontinued in 2005.
Liquidity
and Capital
Resources
|
|
|
October
31
2007
|
|
October
31 2006
|
Change
|
|
Cash,
cash equivalents and short-term investments
|
$
|
337
|
$
|
382
|
(12%)
|
|
Operating
working capital
1
|
$
|
59
|
$
|
97
|
(39%)
|
|
Current
ratio (excludes net assets held for sale)
|
$
|
1.6
|
$
|
2.4
|
|
1
Our
measure of operating working capital
equals accounts receivable plus unbilled revenue and inventory less accounts
payable, accrued liabilities, and current deferred
revenue.
Cash
and
short-term investments totaled $337 million compared to $311 million at the
end
of July 2007 and $382 million at the end of October 2006. The increase in cash
primarily results from an increase in accounts payable at year-end.
As
at the
date of this report, we had $17 million in short-term investments in
asset-backed commercial paper (ABCP) that was purchased in August
2007. This ABCP was due to mature on September 7, 2007 and the issuer
has been affected by the recent liquidity issues in these investment
markets. We received notice on the roll-over date that the sponsor of
these obligations would be unable to meet its obligations. At the present time,
we have only limited access to information that would help us to determine
the
amount and timing for the repayment of these obligations. As a result, we have
estimated that a write-down in the value of these investments is required,
and
accordingly, we recorded a $2 million provision in the fourth quarter. In
addition, while these investment vehicles would ordinarily qualify as cash
equivalents, we believe that the current market conditions are such that it
is
no longer appropriate to record these investments as current assets. We have
therefore classified these commercial paper assets as long-term investments
that
are available for sale.
Operating
working capital of $59 million at the end of the fourth quarter was down from
$82 million at the end of July, and down substantially compared to the October
2006 balance of $97 million. The decline since the 2006 year-end
reflects higher than usual accounts
MDS
INTERIM REPORT OCTOBER 31, 2007 (UNAUDITED) - Q4 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
payable
and accrued liabilities as at October 31, 2007. This reflects, in part, the
balance that remains unpaid from the FDA and restructuring provisions recorded
in the second quarter, along with an increase in trade payables at year-end,
partially driven by increased capital expenditures in the fourth
quarter. The FDA and restructuring provisions are offsetting
the addition of operating working capital associated with MD. We
expect that our operating working capital will rise to normal levels in future
quarters as these reserves are utilized and accounts payable drop to normal
levels.
We
expect
our operating cash inflows to remain strong throughout fiscal
2008. Cash outflows are expected to include FDA–related
reimbursements to our customers and the payment of severance obligations
associated with our restructuring activities. In addition, we will make a
principal repayment of $79 million on our long-term debt in December
2007. We believe that these liquidity needs can be satisfied from
cash generated by operations and cash on hand. We also have available a C$500
million, five-year, committed, revolving credit facility to fund our liquidity
requirements. There were no borrowings under this facility as at October 31,
2007. We do not believe that the current liquidity issues affecting
the ABCP markets will have any significant impact on our liquidity.
Cash
used
in investing activities for continuing operations totaled $36 million for the
fourth quarter this year, compared to $8 million for 2006, primarily due to
capital expenditures. The $28 million of capital expenditures this
quarter includes higher levels of capital expenditures in MDS Pharma Services
related to investments in information systems to support growth in MDS Pharma
Services, the 300-bed expansion of our Phoenix, Arizona Phase I clinic and
the
build-out of our central laboratory in Beijing, China.
Financing
activities (excluding discontinued operations) used $13 million of cash in
the
quarter, primarily for scheduled debt repayments, compared to $5 million in
the
prior year. Cash used in financing activities for the prior year
included a $3 million dividend payment.
We
believe that cash flow generated from operations, coupled with available
borrowings from existing financing sources, will be sufficient to meet our
anticipated requirements for acquisitions, capital expenditures, research and
development expenditures, FDA settlements, restructuring costs and operations
in
2008. At this time, we do not reasonably expect any presently known
trend or uncertainty to affect our ability to access our current sources of
cash. We remain in compliance with all covenants for our senior
unsecured notes and our bank credit facility.
Contractual
Obligations
In
October 2007, we signed a 17-year, $83 million cobalt supply agreement in the
normal course of business. Aside from this, there have been no material changes
in contractual obligations since October 31, 2006 other than those arising
from
the acquisition of MD, and there has been no substantive change in any of our
long-term debt or other long-term obligations since that date. We
have not entered into any new guarantees of the debt of third parties, nor
do we
have any off-balance sheet arrangements. The acquisition of MD has
added $6 million of annual commitments related to operating leases and
approximately $14 million of inventory purchase commitments in
2007.
Derivative
Instruments
We
use
derivative financial instruments to manage our foreign currency and interest
rate exposure. These instruments consist of forward foreign exchange
and option contracts and interest rate swap agreements entered into in
accordance with our established risk management policies and
procedures. All derivative instrument contracts are with banks listed
on Schedules I to III to the Bank Act (Canada) and the
MDS
INTERIM REPORT OCTOBER 31, 2007 (UNAUDITED) - Q4 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
Company
utilizes financial information provided by certain of these banks to assist
in
the determination of fair market values of the financial
instruments.
The
net
mark-to-market value of all derivative instruments at October 31, 2007 was
a net
liability of $6 million. We recorded a $2 million mark-to-market gain
on interest rate swaps during the fourth quarter of 2007.
Capitalization
|
|
|
October
31
2007
|
|
October
31 2006
|
|
Change
|
|
Long-term
debt
|
$
|
384
|
$
|
394
|
|
(3%)
|
|
Less:
cash and cash equivalents and short-term investments
|
|
337
|
|
382
|
|
(12%)
|
|
Net
debt
|
|
47
|
|
12
|
|
292%
|
|
Shareholders’
equity
|
|
1,897
|
|
1,354
|
|
40%
|
|
Capital
employed
1
|
$
|
1,944
|
$
|
1,366
|
|
42%
|
1
Capital
employed is a measure of how
much of our net assets are financed by debt and
equity
.
Long-term
debt decreased $10 million due to principal payments, and the current portion
of
the long-term debt is $94 million compared to $20 million at October 31, 2006.
The increase in the current portion reflects the inclusion of $79 million of
long-term debt that will be repaid in December 2007. During the third quarter,
we re-designated $70 million of the US-dollar debt as a hedge of our US net
investment in accordance with FAS 133 and entered into foreign exchange
contracts to fix the exchange rate that we will pay to buy the US dollars
required to make the December debt payments. Gains and losses on the foreign
exchange contracts and on this portion of the US-dollar denominated debt are
offsetting.
MDS
INTERIM REPORT OCTOBER 31, 2007 (UNAUDITED) - Q4 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
Quarterly
Highlights
Following
is a summary of selected financial information derived from the Company’s
unaudited interim period consolidated financial statements for each of the
eight
most recently completed quarters. This financial data has been
prepared in accordance with US GAAP and prior periods have been restated to
reflect the discontinuance of the operations and the inclusion of reimbursement
revenues in the MDS Pharma Services segment, both of which are discussed
above.
|
(millions
of US dollars, except
earnings per share)
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2007
|
Oct
2007
|
July
2007
|
Apr
2007
|
Jan
2007
|
|
|
Net
revenues
|
$
|
1,119
|
$
|
307
|
$
|
308
|
$
|
263
|
$
|
241
|
|
|
Operating
income (loss)
|
$
|
(108)
|
$
|
1
|
$
|
(4)
|
$
|
(96)
|
$
|
(9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
$
|
(33)
|
$
|
15
|
$
|
7
|
$
|
(55)
|
$
|
-
|
|
|
Net
income (loss)
|
$
|
773
|
$
|
13
|
$
|
7
|
$
|
737
|
$
|
16
|
|
|
Earnings
(loss) per share from
continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
$
|
(0.25)
|
$
|
0.12
|
$
|
0.06
|
$
|
(0.40)
|
$
|
-
|
|
|
Earnings
(loss) per
share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
5.87
|
$
|
0.11
|
$
|
0.05
|
$
|
5.37
|
$
|
0.11
|
|
|
Diluted
|
$
|
5.86
|
$
|
0.11
|
$
|
0.05
|
$
|
5.35
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions
of US dollars, except
earnings per share)
|
|
|
|
|
|
|
|
Fiscal
2006
|
Oct
2006
|
July
2006
|
Apr
2006
|
Jan
2006
|
|
Net
revenues
|
$
|
955
|
$
|
250
|
$
|
241
|
$
|
234
|
$
|
230
|
|
Operating
income (loss)
|
$
|
(56)
|
$
|
(3)
|
$
|
(21)
|
$
|
(36)
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
$
|
22
|
$
|
12
|
$
|
(2)
|
$
|
(1)
|
$
|
13
|
|
Net
income (loss)
|
$
|
120
|
$
|
45
|
$
|
14
|
$
|
15
|
$
|
46
|
|
Earnings
(loss) per share from
continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
$
|
0.15
|
$
|
0.08
|
$
|
(0.01)
|
$
|
(0.01)
|
$
|
0.09
|
|
Earnings
(loss) per
share
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
$
|
0.83
|
$
|
0.30
|
$
|
0.10
|
$
|
0.11
|
$
|
0.32
|
Items
that impact the comparability of operating income include:
|
·
|
Results
for the quarter ended April 30, 2007 reflect a $792 million net gain
from
the sale of our diagnostics businesses, the 41 days of operating
results
of Molecular Devices, $61 million of charges related to assisting
clients
in respect of the FDA review, and $25 million of restructuring
charges.
|
|
·
|
Results
for the quarter ended January 31, 2007 reflect the impact of restructuring
charges totaling $13 million.
|
|
·
|
Results
for the quarter ended April 30, 2006 reflect a loss of $36 million
resulting from the completion of the MAPLE
settlement.
|
Outlook
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 while they completed a scheduled shutdown and an
upgrade to the electrical system of the National Research Universal reactor.
Our
supplier advised us that they are working closely with industry regulators
MDS
INTERIM REPORT OCTOBER 31, 2007 (UNAUDITED) - Q4 US GAAP
RESTATED
RESTATED
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 adjusted EBITDA at $8 to $9 million
in
total for the first quarter of 2008.
We
closed
our 2007 fiscal year strongly, with all businesses showing growth over the
prior
year. Despite the supply issues at MDS Nordion, we believe that the Company
is
well positioned as we enter fiscal 2008.
Our
integration of MDS Analytical Technologies is tracking well to plan and we
continue to believe that the MD business will exceed our first year targets
of
$190 million in revenue and adjusted EBITDA of between $45 million and $50
million. We are pleased by the continued pace of new product launches and we
will continue to drive innovation in this business next year. Our MetaMorph® ICS
microscope launch this quarter was well received and is an example of our
commitment to provide leading-edge technology to our customers in the drug
development industry. Strong sales of FLIPR Tetra and Image Express during
the
year have contributed to positive momentum as we enter fiscal 2008. Continued
growth from our many new platforms is expected. We also anticipate continuing
strong adjusted EBITDA margins from MDS Analytical Technologies as we complete
our integration and drive further migration of our production capabilities
to
Asia.
We
are
pleased with the continuing improvement in profitability at MDS Pharma Services.
The business has now delivered five straight quarters of sequential improvement
in adjusted EBITDA. By year-end, the business had implemented 80% of
the restructuring initiatives announced earlier in the year, although the timing
of completing these steps meant that the savings from these activities were
only
partially realized this year. We expect adjusted EBITDA in this business to
improve further in fiscal 2008 because of the actions we took this
year.
We
have
been very pleased with the performance of our late-stage operations this year,
which produced strong revenue growth and solid adjusted EBITDA. Although a
number of contract cancellations have resulted in reduced reported backlog
at
year-end, our focus on bidding only on contracts from which we can achieve
solid
profitability has improved the quality of the remaining backlog. In addition,
the increase in bioanalytical orders in the fourth quarter increases our level
of confidence that our customers in this line of business are
returning.
MDS
Nordion has continued solid performance this year and has been able to grow
both
revenues and adjusted EBITDA after taking into account foreign exchange; the
Biogen Idec deferred revenue, and the unusual market conditions that existed
in
the first half of 2006. Our expanded contract for cobalt supply with
Rosenergoatom positions MDS Nordion well to serve continued growth in cobalt
sterilization. It is also evidence of our strength in establishing new business
relationships on a global basis.
MDS
INTERIM REPORT OCTOBER 31, 2007 (UNAUDITED) - Q4 US GAAP
RESTATED
CONSOLIDATED
STATEMENTS OF FINANCIAL POSITION
[UNAUDITED]
|
Restated
See Note 2
|
|
As
at October 31
[millions
of US dollars]
|
|
2007
|
|
2006
|
|
Assets
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
Cash
and cash equivalents
|
$
|
235
|
$
|
247
|
|
Short-term
investments
|
|
102
|
|
135
|
|
Accounts
receivable, net
|
|
287
|
|
224
|
|
Unbilled
revenue
|
|
99
|
|
122
|
|
Inventories,
net
|
|
128
|
|
80
|
|
Income
taxes recoverable
|
|
54
|
|
42
|
|
Current
portion of deferred tax assets
|
|
45
|
|
-
|
|
Prepaid
expenses and other
|
|
22
|
|
21
|
|
Assets
held for sale
|
|
1
|
|
196
|
|
Total
Current
Assets
|
$
|
973
|
$
|
1,067
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
386
|
|
334
|
|
Deferred
tax assets
|
|
4
|
|
47
|
|
Long-term
investments and other
|
|
290
|
|
176
|
|
Goodwill
|
|
782
|
|
397
|
|
Intangible
assets, net
|
|
583
|
|
322
|
|
Total
Assets
|
$
|
3,018
|
$
|
2,343
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’
Equity
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
$
|
384
|
$
|
237
|
|
Deferred
revenue
|
|
71
|
|
92
|
|
Income
taxes payable
|
|
57
|
|
8
|
|
Current
portion of long-term debt
|
|
94
|
|
20
|
|
Deferred
tax liabilities
|
|
10
|
|
-
|
|
Liabilities
related to assets held for sale
|
|
-
|
|
114
|
|
Total
Current
Liabilities
|
$
|
616
|
$
|
471
|
|
|
|
|
|
|
|
Long-term
debt
|
|
290
|
|
374
|
|
Deferred
revenue
|
|
17
|
|
17
|
|
Other
long-term obligations
|
|
30
|
|
24
|
|
Deferred
tax liabilities
|
|
168
|
|
103
|
|
Total
Liabilities
|
$
|
1,121
|
$
|
989
|
|
|
|
|
|
|
|
Shareholders’
Equity
|
|
|
|
|
|
Common
shares, at par – Authorized shares: unlimited; Issued and
outstanding shares: 122,578,331 and 144,319,249 for October 31, 2007
and
October 31, 2006, respectively
|
|
493
|
|
566
|
|
Additional
paid in capital
|
|
72
|
|
69
|
|
Retained
earnings
|
|
842
|
|
391
|
|
Accumulated
other comprehensive income
|
|
490
|
|
328
|
|
Total
Shareholders’
Equity
|
$
|
1,897
|
$
|
1,354
|
|
Total
Liabilities and
Shareholders’ Equity
|
$
|
3,018
|
$
|
2,343
|
|
Incorporated
under the
Canadian Business Companies Act.
See
accompanying
notes.
|
|
|
|
|
MDS
INTERIM REPORT OCTOBER 31, 2007 (UNAUDITED) - Q4 US GAAP
RESTATED
CONSOLIDATED
STATEMENTS OF OPERATIONS
[UNAUDITED]
|
|
Restated
See Note 2
|
Restated
See Note 2
|
|
|
Three
months to October 31
|
Year
ended October 31
|
|
[millions
of US dollars, except
per share amounts]
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Products
|
$
|
160
|
$
|
112
|
$
|
564
|
$
|
438
|
|
Services
|
|
147
|
|
138
|
|
555
|
|
517
|
|
Reimbursement
revenues
|
|
20
|
|
25
|
|
91
|
|
105
|
|
Total
revenues
|
$
|
327
|
$
|
275
|
|
1,210
|
$
|
1,060
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and
expenses
|
|
|
|
|
|
|
|
|
|
Direct
cost of products
|
$
|
(97)
|
$
|
(76)
|
$
|
(360)
|
$
|
(296)
|
|
Direct
cost of services
|
|
(83)
|
|
(98)
|
|
(338)
|
|
(362)
|
|
Reimbursed
expenses
|
|
(20)
|
|
(25)
|
|
(91)
|
|
(105)
|
|
Selling,
general and administration
|
|
(84)
|
|
(58)
|
|
(265)
|
|
(220)
|
|
Research
and development
|
|
(20)
|
|
(16)
|
|
(68)
|
|
(53)
|
|
Depreciation
and amortization
|
|
(23)
|
|
(14)
|
|
(79)
|
|
(51)
|
|
Restructuring
charges - net
|
|
4
|
|
11
|
|
(37)
|
|
7
|
|
Other
expense - net
|
|
(3)
|
|
(2)
|
|
(80)
|
|
(36)
|
|
Total
costs and expenses
|
$
|
(326)
|
$
|
(278)
|
$
|
(1,318)
|
$
|
(1,116)
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss) from
continuing operations
|
|
1
|
|
(3)
|
|
(108)
|
|
(56)
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
(7)
|
|
(6)
|
|
(27)
|
|
(21)
|
|
Interest
income
|
|
7
|
|
4
|
|
25
|
|
15
|
|
Mark-to-market
on interest note swaps
|
|
1
|
|
2
|
|
1
|
|
-
|
|
Equity
earnings
|
|
13
|
|
11
|
|
53
|
|
49
|
|
Income
(loss) from continuing
operations before income taxes
|
|
15
|
|
8
|
|
(56)
|
|
(13)
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax (expense) recovery
|
|
|
|
|
|
|
|
|
|
-
current
|
|
(9)
|
|
48
|
|
25
|
|
65
|
|
-
deferred
|
|
9
|
|
(44)
|
|
(2)
|
|
(30)
|
|
Income
(loss) from continuing
operations
|
|
15
|
|
12
|
|
(33)
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from discontinued
operations - net of income tax
|
|
(2)
|
|
33
|
|
806
|
|
98
|
|
Net
income
|
$
|
13
|
$
|
45
|
$
|
773
|
$
|
120
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per
share
-
from
continuing
operations
|
$
|
0.12
|
$
|
0.08
|
$
|
(0.25)
|
$
|
0.15
|
|
-
from discontinued operations
|
|
(0.01)
|
|
0.23
|
|
6.12
|
|
0.68
|
|
Basic
earnings per
share
|
$
|
0.11
|
$
|
0.31
|
$
|
5.87
|
$
|
0.83
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per
share
-
from
continuing
operations
|
$
|
0.12
|
$
|
0.08
|
$
|
(0.25)
|
$
|
0.15
|
|
-
from
discontinued
operations
|
|
(0.01)
|
|
0.23
|
|
6.11
|
|
0.68
|
|
Diluted
earnings per
share
|
$
|
0.11
|
$
|
0.31
|
$
|
5.86
|
$
|
0.83
|
See
accompanying
notes.
MDS
INTERIM REPORT OCTOBER 31, 2007 (UNAUDITED) - Q4 US GAAP
RESTATED
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
[UNAUDITED]
Restated
See Note 2
|
|
Three
months to
October
31
|
Year
ended
October
31
|
|
[millions
of US dollars]
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net
income
|
$
|
13
|
$
|
45
|
$
|
773
|
$
|
120
|
|
Foreign
currency translation
|
|
112
|
|
9
|
|
183
|
|
60
|
|
Unrealized
loss on available-for-sale assets
|
|
-
|
|
(3)
|
|
(3)
|
|
(10)
|
|
Unrealized
loss on derivatives designated as cash flow hedges, net of
tax
|
|
1
|
|
1
|
|
6
|
|
1
|
|
Reclassification
of realized losses
|
|
-
|
|
4
|
|
(2)
|
|
9
|
|
Adoption
of FAS 158
|
|
11
|
|
-
|
|
11
|
|
-
|
|
Repurchase
and cancellation of common shares
|
|
-
|
|
-
|
|
(33)
|
|
-
|
|
Other
comprehensive income
|
|
124
|
|
11
|
|
162
|
|
60
|
|
Comprehensive
income
|
$
|
137
|
$
|
56
|
$
|
935
|
$
|
180
|
MDS
INTERIM REPORT OCTOBER 31, 2007 (UNAUDITED) - Q4 US GAAP
RESTATED
CONSOLIDATED
STATEMENTS OF CASH FLOWS
[UNAUDITED]
|
|
Restated
See Note 2
|
Restated
See Note 2
|
|
|
Three
months to October 31
|
Year
ended October 31
|
|
[millions
of US dollars]
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Operating
activities
|
|
|
|
|
|
|
|
|
|
Net
income
|
$
|
13
|
$
|
45
|
$
|
773
|
$
|
120
|
|
Income
(loss) from discontinued operations – net of tax
|
|
(2)
|
|
33
|
|
806
|
|
98
|
|
Income
(loss) from continuing operations
|
|
15
|
|
12
|
|
(33)
|
|
22
|
|
Adjustments
to reconcile net income to cash provided by operating activities
relating
to continuing operations
|
|
|
|
|
|
|
|
|
|
Items
not affecting current cash flow
|
|
(6)
|
|
61
|
|
128
|
|
94
|
|
Changes
in non-cash working capital balances relating to
operations
|
|
63
|
|
(28)
|
|
83
|
|
(91)
|
|
Cash
provided by operating activities of continuing operations
|
|
72
|
|
45
|
|
178
|
|
25
|
|
Cash
provided by (used in) operating activities of discontinued
operations
|
|
(4)
|
|
53
|
|
(56)
|
|
104
|
|
|
|
68
|
|
98
|
|
122
|
|
129
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
|
Acquisitions
|
|
1
|
|
-
|
|
(600)
|
|
-
|
|
Proceeds
from MAPLE transaction
|
|
-
|
|
-
|
|
-
|
|
24
|
|
Purchase
of property, plant and equipment
|
|
(28)
|
|
(15)
|
|
(71)
|
|
(51)
|
|
Proceeds
from sale of property, plant and equipment
|
|
4
|
|
-
|
|
4
|
|
-
|
|
Proceeds
from sale of business and investments
|
|
-
|
|
3
|
|
13
|
|
5
|
|
Proceeds
on sale of short-term investments
|
|
-
|
|
-
|
|
165
|
|
-
|
|
Purchases
of short-term investments
|
|
-
|
|
(1)
|
|
(118)
|
|
(135)
|
|
Other
|
|
(13)
|
|
5
|
|
(15)
|
|
(11)
|
|
Cash
used in investing activities of continuing operations
|
|
(36)
|
|
(8)
|
|
(622)
|
|
(168)
|
|
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
|
|
(5)
|
|
(3)
|
|
10
|
|
11
|
|
Increase
(decrease) in cash and cash equivalents during the period
|
|
14
|
|
71
|
|
(12)
|
|
32
|
|
Cash
and cash equivalents, beginning of period
|
|
221
|
|
176
|
|
247
|
|
215
|
|
Cash
and cash equivalents, end of period
|
$
|
235
|
$
|
247
|
$
|
235
|
$
|
247
|
|
See
accompanying notes.
|
|
|
|
|
|
|
|
|
MDS
INTERIM REPORT OCTOBER 31, 2007 (UNAUDITED) - Q4 US GAAP
RESTATED
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
As
a
Canadian-based company, MDS Inc. (MDS or the Company) historically has prepared
its consolidated financial statements in Canadian dollars in conformity with
accounting principles generally accepted in Canada and has also provided a
reconciliation to United States (US) generally accepted accounting principles
(GAAP).
To
enhance its communication with its shareholders, improve comparability of
financial information with its competitors and peer group, and promote a common
financial language within MDS, the Company adopted the US dollar as its
reporting currency as of the first quarter 2007. US GAAP as its primary
reporting standard for the presentation of its consolidated financial statements
as of fiscal year end 2007.
All
revenues, expenses and cash flows for each year were translated into the
reporting currency using average rates for the year, or the rates in effect
at
the date of the transaction for significant transactions. Assets and liabilities
were translated using the exchange rate at the end of each year. All
resulting exchange differences are reported as a separate component of
accumulated other comprehensive income. 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 consolidated and 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.
The
cumulative impact of the change in reporting currency was to increase the
cumulative translation adjustment by $371 million through October 31,
2006.
As
a
result of adopting US GAAP as its primary reporting standard for its 2007
consolidated year-end statements, the Company is required to restate to US
GAAP
its previously filed financial statements for the four quarters of
2007. Previously, our filings prepared in accordance with Canadian
generally accepted accounting principles (Canadian GAAP) disclosed a
reconciliation of earnings to US GAAP due to our status as a foreign private
issuer in the US. Going forward, with US GAAP as our primary basis of
accounting, we will reconcile our US GAAP earnings to Canadian
GAAP. This reconciliation will be done as required by applicable
Canadian regulations on an annual and quarterly basis for a minimum of the
next
two fiscal years (see Note 15).
2.
Changes
Affecting Fiscal 2007
Consolidated Financial Statements
a.
Restatement
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 for which an incorrect valuation
methodology was utilized. The Company has corrected this error by
restating selling, general and administration expenses with a reduction of
$1
million in the accompanying quarterly consolidated financial statements and
reducing the value of accrued liabilities by a similar amount. The
Canadian GAAP statements previously reported were not impacted by the change,
except for the reconciliation to US GAAP (see Note 15).
MDS
INTERIM REPORT OCTOBER 31, 2007 (UNAUDITED) - Q4 US GAAP
RESTATED
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
As
a
result of adopting US GAAP as the primary reporting standard for the Company,
management has determined that investment tax credits (ITCs) having an after-tax
value of $13 million realized in its fiscal year ended October 31, 2001 and
resulting from its acquisition of Phoenix International Life Sciences Inc.
in
the previous year had not been identified as a net income reconciliation item
in
the GAAP reconciliation note for fiscal 2001.
Under
Canadian GAAP, acquired ITCs that are determined to have nil value for purposes
of purchase price allocation are, if subsequently realized, recorded as income.
Under US GAAP, such acquired ITCs are recorded when realized as a reduction
in
goodwill arising from that prior period acquisition. This item should therefore
have been identified as a US GAAP net income reconciliation item in fiscal
2001.
In subsequent periods, the reported amount of goodwill and retained earnings
for
US GAAP purposes were likewise overstated by this amount. The Company has
corrected this error by restating opening retained earnings for fiscal 2005
in
the accompanying consolidated statement of shareholders’ equity and reducing the
carrying value of goodwill by $13 million. The impact of this
restatement has been similarly reflected for subsequent periods.
|
b.
|
Change
in Accounting
Policy
|
In
addition, in adopting US GAAP, the Company has changed its accounting policy
for
non-refundable investment tax credits (ITCs). In these consolidated financial
statements, the Company has recorded non-refundable ITCs as a reduction in
income tax expense for the year in which the ITCs were recognized. Previously,
the Company recorded non-refundable ITCs as a reduction of the related
expenditure. Management believes this accounting policy change will make the
Company’s reporting of ITCs consistent with the majority of other companies who
report under US GAAP.
There
is
no impact on net income from continuing operations, earnings per share, or
retained earnings of any period as a result of this change. This change in
policy increased (decreased) other lines on the consolidated statements of
operations as follows:
|
|
|
2007
|
|
2006
|
|
Direct
cost of services
|
$
|
3
|
$
|
5
|
|
Research
and development
|
|
2
|
|
1
|
|
Other
expense – net
|
|
3
|
|
-
|
|
Current
income taxes
|
|
(8)
|
|
(6)
|
MDS
has
adopted the provisions of Staff Accounting Bulletin No. 108 –
Considering the Effects
of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements.
In accordance with the provisions of SAB No. 108, the Company
has recorded a cumulative adjustment to correct the treatment of certain
deferred charges and related income tax expenses. The adjustments resulted
in an
increase in fiscal 2005 opening retained earnings of $2 million and an
adjustment to the tax expense associated with prior year deferred charges that
reduced fiscal 2005 opening retained earnings by $4 million. The cumulative
net
effect of these adjustments on retained earnings as at November 1, 2004 is
a
reduction of $2 million. In addition, the Company has recorded a $6 million
reduction in November 1, 2004 retained earnings and a corresponding increase
in
additional paid-in capital to correct an amount that had previously been
misclassified in the continuity of retained earnings.
MDS
INTERIM REPORT OCTOBER 31, 2007 (UNAUDITED) - Q4 US GAAP
RESTATED
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
|
d.
|
Recently
Adopted Accounting
Pronouncement
|
On
October 31, 2007, the Company adopted the recognition and disclosure
requirements of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension
and Other Post-Retirement Plans—an amendment of FASB Statements No. 87, 88, 106,
and 132(R)”. This statement requires employers that sponsor defined benefit
plans to recognize the funded status of a benefit plan on its balance sheet;
recognize gains, losses, and prior service costs or credits that arise during
the period that are not recognized as components of net periodic benefit cost
as
a component of accumulated other comprehensive income, net of tax; measure
defined benefit plan assets and obligations as of the date of the employer’s
fiscal year-end balance sheet; and, disclose in the notes to financial
statements additional information about certain effects on net periodic benefit
cost for the next fiscal year that arise from delayed recognition of the gains
or losses, prior service costs or credits, and transition assets or
obligations.
|
3.
|
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 SFAS No.
141, “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.
MDS
INTERIM REPORT OCTOBER 31, 2007 (UNAUDITED) - Q4 US GAAP
RESTATED
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
MDS
INTERIM REPORT OCTOBER 31, 2007 (UNAUDITED) - Q4 US GAAP
RESTATED
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
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.
|
4.
|
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.
MDS
INTERIM REPORT OCTOBER 31, 2007 (UNAUDITED) - Q4 US GAAP
RESTATED
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
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:
|
|
Fourth
Quarter
|
Year-to-date
|
|
|
|
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)
|
|
Goodwill
write-down
|
|
-
|
|
-
|
|
-
|
|
-
|
|
Restructuring
charges
|
|
-
|
|
-
|
|
-
|
|
(1)
|
|
Other
expenses
|
|
-
|
|
(3)
|
|
-
|
|
(3)
|
|
Operating
income
|
|
(1)
|
|
16
|
|
22
|
|
70
|
|
Gain
on sale of discontinued operations
|
|
-
|
|
-
|
|
904
|
|
24
|
|
Interest
expense
|
|
-
|
|
-
|
|
-
|
|
-
|
|
Interest
income
|
|
-
|
|
1
|
|
1
|
|
2
|
|
Income
taxes
|
|
-
|
|
16
|
|
(117)
|
|
7
|
|
Minority
interest
|
|
(1)
|
|
(1)
|
|
(5)
|
|
(8)
|
|
Equity
earnings
|
|
-
|
|
1
|
|
1
|
|
3
|
|
Income
(loss) from discontinued
operations
|
|
(2)
|
|
33
|
|
806
|
|
98
|
|
Basic
EPS from discontinued
operations
|
$
|
(0.01)
|
$
|
0.23
|
$
|
6.12
|
$
|
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
SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”,
long-lived assets classified as held for sale are measured at the lower of
carrying value and fair value less costs to sell.
MDS
INTERIM REPORT OCTOBER 31, 2007 (UNAUDITED) - Q4 US GAAP
RESTATED
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
Assets
held for sale and liabilities related to assets held for sale
comprised:
|
|
As
at October 31,
|
As
at 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 assets
|
|
-
|
|
63
|
|
Long-term
investments and other
|
|
1
|
|
13
|
|
Goodwill
|
|
-
|
|
54
|
|
Intangible
assets, net
|
|
-
|
|
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.
MDS
INTERIM REPORT OCTOBER 31, 2007 (UNAUDITED) - Q4 US GAAP
RESTATED
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
|
5.
|
Accumulated
Other Comprehensive
Income
|
|
|
Three
months ended October 31
|
|
[millions
of US dollars]
|
|
2007
|
|
2006
|
|
Accumulated
other comprehensive
income, net of income taxes,
beginning
of
period
|
$
|
366
|
$
|
317
|
|
Foreign
currency translation
|
|
112
|
|
9
|
|
Unrealized
loss on available-for-sale assets
|
|
-
|
|
1
|
|
Unrealized
loss on derivatives designated as cash flow hedges, net of
tax
|
|
1
|
|
4
|
|
Reclassification
of realized loss
|
|
-
|
|
(3)
|
|
Adoption
of FAS 158
|
|
11
|
|
-
|
|
Accumulated
other comprehensive
income, net of income taxes,
end
of
period
|
$
|
490
|
$
|
328
|
|
|
|
|
|
|
An
analysis of the activity in the reserve, which covers restructuring plans
announced and recorded in 2005, 2006 and 2007, is as follows:
|
|
Restructuring
Charge
|
Cumulative
drawdowns
|
Reserve
Balance
|
|
Cash
|
Non-cash
|
|
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
|
|
1
|
|
-
|
|
1
|
|
2
|
|
Contract
cancellation charges
|
|
5
|
|
(5)
|
|
-
|
|
-
|
|
Other
|
|
13
|
|
(9)
|
|
(2)
|
|
2
|
|
Total
for 2007 Plan
|
$
|
37
|
$
|
(23)
|
$
|
(1)
|
$
|
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
$25 million in the second quarter including $17 million for severance, $2
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.
MDS
INTERIM REPORT OCTOBER 31, 2007 (UNAUDITED) - Q4 US GAAP
RESTATED
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
|
|
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
|
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. 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 to October 31
|
Year
ended to October 31
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net
income
|
$
|
13
|
$
|
45
|
$
|
773
|
$
|
120
|
|
Compensation
expense for options granted prior to November 1, 2003
|
|
-
|
|
-
|
|
(1)
|
|
(2)
|
|
Net
income – pro-forma
|
$
|
13
|
$
|
45
|
$
|
772
|
$
|
118
|
|
|
|
|
|
|
|
|
|
|
|
Pro-forma
basic earnings per share
|
$
|
0.11
|
$
|
0.31
|
$
|
5.87
|
$
|
0.82
|
|
Pro-forma
diluted earnings per share
|
$
|
0.11
|
$
|
0.31
|
$
|
5.85
|
$
|
0.82
|
|
8.
|
Share
Capital and Stock
Options
|
The
following table summarizes information on share capital and stock options and
related matters s at October 31, 2007.
|
[number
of shares in thousands]
|
Number
|
|
Amount
|
|
Common
shares
|
|
|
|
|
Balance
as at October 31, 2006
|
144,319
|
$
|
566
|
|
Issued
during the period
|
1,090
|
|
17
|
|
Repurchased
during the period
|
(22,831)
|
|
(90)
|
|
Balance
as at January 31, 2007
|
122,578
|
$
|
493
|
|
[number
of options in thousands]
|
Number
|
Average
Exercise
Price
|
|
Stock
options
|
|
|
|
|
Balance
as at October 31, 2006
|
5,850
|
C$
|
18.76
|
|
Activity
during the period:
|
|
|
|
|
Granted
|
1,241
|
|
21.72
|
|
Exercised
|
(982)
|
|
16.47
|
|
Cancelled
or forfeited
|
(554)
|
|
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.
MDS
INTERIM REPORT OCTOBER 31, 2007 (UNAUDITED) - Q4 US GAAP
RESTATED
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
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
|
|
|
9.
|
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
|
|
-
|
|
MAPLE
settlement
|
|
-
|
|
-
|
|
-
|
|
(36)
|
|
Insurance
settlement
|
|
-
|
|
(1)
|
|
-
|
|
2
|
|
Foreign
exchange loss
|
|
(11)
|
|
(1)
|
|
(16)
|
|
(3)
|
|
Gain
on embedded derivatives
|
|
4
|
|
-
|
|
4
|
|
-
|
|
Other
|
|
2
|
|
-
|
|
-
|
|
-
|
|
Other
income (expense) - net
|
$
|
(3)
|
$
|
(2)
|
$
|
(80)
|
$
|
(36)
|
|
10.
|
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.
MDS
INTERIM REPORT OCTOBER 31, 2007 (UNAUDITED) - Q4 US GAAP
RESTATED
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
|
11.
|
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
|
$
|
23
|
$
|
17
|
$
|
79
|
$
|
54
|
|
Stock
option compensation
|
|
2
|
|
1
|
|
4
|
|
4
|
|
Deferred
revenue
|
|
(2)
|
|
(1)
|
|
(5)
|
|
(7)
|
|
Deferred
income taxes
|
|
(15)
|
|
31
|
|
31
|
|
17
|
|
Equity
earnings – net of distribution
|
|
(9)
|
|
10
|
|
(1)
|
|
16
|
|
Write-down
of MAPLE assets
|
|
-
|
|
-
|
|
-
|
|
9
|
|
Write-down
of investments
|
|
2
|
|
-
|
|
8
|
|
-
|
|
Write-down
of intangible assets
|
|
1
|
|
-
|
|
1
|
|
-
|
|
Loss
on sale of Hamburg clinic
|
|
-
|
|
-
|
|
4
|
|
(2)
|
|
(Gain)
loss on disposal of equipment and other assets
|
|
(5)
|
|
1
|
|
-
|
|
1
|
|
Gain
on sale of investment/business
|
|
-
|
|
-
|
|
(2)
|
|
-
|
|
Mark-to-market
of derivatives
|
|
(5)
|
|
3
|
|
(5)
|
|
5
|
|
Amortization
of purchase price adjustments
|
|
2
|
|
-
|
|
14
|
|
-
|
|
Other
|
|
-
|
|
(1)
|
|
-
|
|
(3)
|
|
|
$
|
(6)
|
$
|
61
|
$
|
128
|
$
|
94
|
Changes
in non-cash working capital balances relating to operations
include:
|
|
Three
months to October 31
|
Year
ended October 31
|
|
[millions
of US dollars]
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Accounts
receivable
|
$
|
(17)
|
$
|
(27)
|
$
|
(32)
|
$
|
(18)
|
|
Unbilled
revenue
|
|
11
|
|
44
|
|
23
|
|
(25)
|
|
Inventories
|
|
(9)
|
|
4
|
|
(19)
|
|
49
|
|
Prepaid
expenses
|
|
32
|
|
7
|
|
33
|
|
(3)
|
|
Accounts
payable and deferred revenue
|
|
42
|
|
-
|
|
78
|
|
(39)
|
|
Income
taxes
|
|
4
|
|
(56)
|
|
-
|
|
(55)
|
|
|
$
|
63
|
$
|
(28)
|
$
|
83
|
$
|
(91)
|
MDS
INTERIM REPORT OCTOBER 31, 2007 (UNAUDITED) - Q4 US GAAP
RESTATED
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
|
12.
|
Segmented
Information
|
|
|
|
|
|
|
|
Three
months to October 31, 2007
|
|
|
MDS
Pharma Services
|
MDS
Nordion
|
MDS
Analytical Technologies
|
Corporate
and
Other
|
Total
|
|
Product
revenues
|
$
|
-
|
$
|
74
|
$
|
86
|
$
|
-
|
$
|
160
|
|
Service
revenues
|
|
123
|
|
2
|
|
22
|
|
-
|
|
147
|
|
Reimbursement
revenues
|
|
20
|
|
-
|
|
-
|
|
-
|
|
20
|
|
Total
revenues
|
|
143
|
|
76
|
|
108
|
|
-
|
|
327
|
|
Direct
product cost
|
|
-
|
|
(39)
|
|
(58)
|
|
-
|
|
(97)
|
|
Direct
service cost
|
|
(81)
|
|
(1)
|
|
(1)
|
|
-
|
|
(83)
|
|
Reimbursed
expenses
|
|
(20)
|
|
-
|
|
-
|
|
-
|
|
(20)
|
|
Selling,
general and administration
|
|
(35)
|
|
(18)
|
|
(20)
|
|
(11)
|
|
(84)
|
|
Research
and
development
|
|
-
|
|
(1)
|
|
(19)
|
|
-
|
|
(20)
|
|
Depreciation
and
amortization
|
|
(9)
|
|
(3)
|
|
(10)
|
|
(1)
|
|
(23)
|
|
Restructuring
charges -
net
|
|
4
|
|
-
|
|
-
|
|
-
|
|
4
|
|
Other
income (expense) -
net
|
|
(6)
|
|
3
|
|
(1)
|
|
1
|
|
(3)
|
|
Equity
Earnings
|
|
-
|
|
-
|
|
13
|
|
-
|
|
13
|
|
Segment
earnings
(loss)
|
$
|
(4)
|
$
|
17
|
$
|
12
|
$
|
(11)
|
$
|
14
|
|
Total
Assets
|
$
|
835
|
$
|
789
|
$
|
857
|
$
|
537
|
$
|
3,018
|
|
Capital
expenditures
|
$
|
20
|
$
|
3
|
$
|
2
|
$
|
3
|
$
|
28
|
|
|
|
|
|
|
|
Three
months to October 31, 2006
|
|
|
MDS
Pharma Services
|
MDS
Nordion
|
MDS
Analytical Technologies
|
Corporate
and
Other
|
Total
|
|
Product
revenues
|
$
|
-
|
$
|
73
|
$
|
39
|
$
|
-
|
$
|
112
|
|
Service
revenues
|
|
122
|
|
2
|
|
14
|
|
-
|
|
138
|
|
Reimbursement
revenues
|
|
25
|
|
-
|
|
-
|
|
-
|
|
25
|
|
Total
revenues
|
|
147
|
|
75
|
|
53
|
|
-
|
|
275
|
|
Direct
product cost
|
|
-
|
|
(38)
|
|
(38)
|
|
-
|
|
(76)
|
|
Direct
service cost
|
|
(97)
|
|
(1)
|
|
-
|
|
-
|
|
(98)
|
|
Reimbursed
expenses
|
|
(25)
|
|
-
|
|
-
|
|
-
|
|
(25)
|
|
Selling,
general and administration
|
|
(34)
|
|
(14)
|
|
(6)
|
|
(4)
|
|
(58)
|
|
Research
and
development
|
|
-
|
|
(1)
|
|
(15)
|
|
-
|
|
(16)
|
|
Depreciation
and
amortization
|
|
(9)
|
|
(4)
|
|
(1)
|
|
-
|
|
(14)
|
|
Restructuring
charges -
net
|
|
1
|
|
2
|
|
-
|
|
8
|
|
11
|
|
Other
income (expense) -
net
|
|
(3)
|
|
-
|
|
2
|
|
(1)
|
|
(2)
|
|
Equity
Earnings
|
|
-
|
|
-
|
|
12
|
|
(1)
|
|
11
|
|
Segment
earnings
(loss)
|
$
|
(20)
|
$
|
19
|
$
|
7
|
$
|
2
|
$
|
8
|
|
Total
Assets
|
$
|
858
|
$
|
621
|
$
|
132
|
$
|
536
|
$
|
2,147
|
|
Capital
expenditures
|
$
|
11
|
$
|
-
|
$
|
2
|
$
|
2
|
$
|
15
|
MDS
INTERIM REPORT OCTOBER 31, 2007 (UNAUDITED) - Q4 US GAAP
RESTATED
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
|
|
|
|
|
|
|
|
Year
ended October 31, 2007
|
|
|
MDS
Pharma Services
|
MDS
Nordion
|
MDS
Analytical Technologies
|
Corporate
and
Other
|
Total
|
|
Product
revenues
|
$
|
-
|
$
|
284
|
$
|
280
|
$
|
-
|
$
|
564
|
|
Service
revenues
|
|
477
|
|
6
|
|
72
|
|
-
|
|
555
|
|
Reimbursement
revenues
|
|
91
|
|
-
|
|
-
|
|
-
|
|
91
|
|
Total
revenues
|
|
568
|
|
290
|
|
352
|
|
-
|
|
1,210
|
|
Direct
product cost
|
|
-
|
|
(147)
|
|
(213)
|
|
-
|
|
(360)
|
|
Direct
service cost
|
|
(332)
|
|
(3)
|
|
(3)
|
|
-
|
|
(338)
|
|
Reimbursed
expenses
|
|
(91)
|
|
-
|
|
-
|
|
-
|
|
(91)
|
|
Selling,
general and administration
|
|
(130)
|
|
(54)
|
|
(57)
|
|
(24)
|
|
(265)
|
|
Research
and
development
|
|
-
|
|
(4)
|
|
(64)
|
|
-
|
|
(68)
|
|
Depreciation
and
amortization
|
|
(35)
|
|
(13)
|
|
(29)
|
|
(2)
|
|
(79)
|
|
Restructuring
charges -
net
|
|
(28)
|
|
-
|
|
-
|
|
(9)
|
|
(37)
|
|
Other
income (expense) -
net
|
|
(74)
|
|
3
|
|
(6)
|
|
(3)
|
|
(80)
|
|
Equity
Earnings
|
|
-
|
|
-
|
|
53
|
|
-
|
|
53
|
|
Segment
earnings
(loss)
|
$
|
(122)
|
$
|
72
|
$
|
33
|
$
|
(38)
|
$
|
(55)
|
|
Total
Assets
|
$
|
835
|
$
|
789
|
$
|
857
|
$
|
537
|
$
|
3,018
|
|
Capital
expenditures
|
$
|
48
|
$
|
8
|
$
|
8
|
$
|
7
|
$
|
71
|
|
|
|
|
|
|
|
|
Year
ended October 31, 2006
|
|
|
MDS
Pharma Services
|
MDS
Nordion
|
MDS
Analytical Technologies
|
Corporate
and
Other
|
Total
|
|
Product
revenues
|
$
|
-
|
$
|
290
|
$
|
148
|
$
|
-
|
$
|
438
|
|
Service
revenues
|
|
458
|
|
5
|
|
54
|
|
-
|
|
517
|
|
Reimbursement
revenues
|
|
105
|
|
-
|
|
-
|
|
-
|
|
105
|
|
Total
revenues
|
|
563
|
|
295
|
|
202
|
|
-
|
|
1,060
|
|
Direct
product cost
|
|
-
|
|
(147)
|
|
(149)
|
|
-
|
|
(296)
|
|
Direct
service cost
|
|
(359)
|
|
(3)
|
|
-
|
|
-
|
|
(362)
|
|
Reimbursed
expenses
|
|
(105)
|
|
-
|
|
-
|
|
-
|
|
(105)
|
|
Selling,
general and administration
|
|
(125)
|
|
(51)
|
|
(20)
|
|
(24)
|
|
(220)
|
|
Research
and
development
|
|
-
|
|
(5)
|
|
(48)
|
|
-
|
|
(53)
|
|
Depreciation
and
amortization
|
|
(30)
|
|
(15)
|
|
(6)
|
|
-
|
|
(51)
|
|
Restructuring
charges -
net
|
|
-
|
|
2
|
|
-
|
|
5
|
|
7
|
|
Other
income (expense) -
net
|
|
2
|
|
(36)
|
|
5
|
|
(7)
|
|
(36)
|
|
Equity
Earnings
|
|
(1)
|
|
-
|
|
54
|
|
(4)
|
|
49
|
|
Segment
earnings
(loss)
|
$
|
(55)
|
$
|
40
|
$
|
38
|
$
|
(30)
|
$
|
(7)
|
|
Total
Assets
|
$
|
858
|
$
|
621
|
$
|
132
|
$
|
536
|
$
|
2,147
|
|
Capital
expenditures
|
$
|
37
|
$
|
-
|
$
|
4
|
$
|
10
|
$
|
51
|
MDS
INTERIM REPORT OCTOBER 31, 2007 (UNAUDITED) - Q4 US GAAP
RESTATED
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
|
13.
|
Financial
Instruments
|
The
carrying amounts and fair values for all derivative financial instruments are
as
follows:
|
|
As
at October 31
|
As
at October 31
|
|
|
2007
|
2006
|
|
|
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
|
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)
|
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 re-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 Consolidated Statement of
Operations.
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
|
|
|
|
2007
|
|
2006
|
|
Expected
income tax expense (recovery) at MDS’s 35% (2006 – 35%) statutory
rate
|
$
|
5
|
$
|
3
|
|
Decrease
to taxes expense as a result of:
|
|
|
|
|
|
Tax
credits for research and development
|
|
(5)
|
|
(3)
|
|
Protana
bankruptcy proceeds not subject to tax
|
|
(1)
|
|
-
|
|
Impact
of tax rate changes on future tax balances
|
|
-
|
|
(4)
|
|
Other
|
|
1
|
|
-
|
|
Reported
income tax recovery
|
$
|
-
|
$
|
(4)
|
|
15.
|
Differences
Between United
States 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.
MDS
INTERIM REPORT OCTOBER 31, 2007 (UNAUDITED) - Q4 US GAAP
RESTATED
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
|
i)
|
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.
|
|
ii)
|
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.
|
|
iii)
|
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.
|
|
iv)
|
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.
|
|
v)
|
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
|
MDS
INTERIM REPORT OCTOBER 31, 2007 (UNAUDITED) - Q4 US GAAP
RESTATED
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
|
|
period
in which the
cash flows to which they relate were
incurred.
|
|
vi)
|
Comprehensive
income – US GAAP
requires
that a statement of other
comprehensive income and accumulated other comprehensive income be
displayed with the same prominence as other financial statements.
Under
Canadian GAAP, statements of other comprehensive income and accumulated
other comprehensive income were not required for years prior to the
Company’s 2007 fiscal year.
|
|
vii)
|
Pensions
- Under US GAAP, the net funded status of pension plans sponsored
by a
Company are fully reflected in the consolidated assets or liabilities
of
the Company. The amount by which plan assets exceed benefit obligations
or
benefit obligations exceed plan assets, on a plan-by-plan basis,
is
reflected as an increase in assets or liabilities, with a corresponding
adjustment to accumulated other comprehensive income. Under Canadian
GAAP,
only the net actuarial asset or liability is reflected in the consolidated
financial statements.
|
|
viii)
|
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 1, 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 $1 million in the
accompanying quarter consolidated financial statements. The previous
Canadian GAAP to US GAAP reconciliation is therefore amended by the below
restated reconciliation.
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 is required to adopt 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 February 1, 2008.
MDS
INTERIM REPORT OCTOBER 31, 2007 (UNAUDITED) - Q4 US GAAP
RESTATED
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
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.
|
CONSOLIDATED
STATEMENTS OF FINANCIAL POSITION
|
|
|
|
As
at October 31
[millions
of US dollars]
|
|
2007
Canadian
GAAP
|
|
Reconciling
Adjustments
|
|
2007
US
GAAP
|
|
Assets
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$
|
259
|
$
|
(24)
|
$
|
235
|
|
Short-term
investments
|
|
91
|
|
11
|
|
102
|
|
Accounts
receivable
|
|
284
|
|
3
|
|
287
|
|
Unbilled
revenue
|
|
99
|
|
-
|
|
99
|
|
Inventories,
net
|
|
134
|
|
(6)
|
|
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)
|
$
|
386
|
|
Deferred
tax assets
|
|
4
|
|
-
|
|
4
|
|
Long-term
investments and other
|
|
284
|
|
6
|
|
290
|
|
Goodwill
|
|
797
|
|
(15)
|
|
782
|
|
Intangible
assets, net
|
|
601
|
|
(18)
|
|
583
|
|
Total
Assets
|
$
|
3,064
|
$
|
(46)
|
$
|
3,018
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’
Equity
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
$
|
391
|
$
|
(7)
|
$
|
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)
|
|
168
|
|
Minority
interest
|
|
1
|
|
(1)
|
|
-
|
|
Total
Liabilities
|
$
|
1,141
|
$
|
(20)
|
$
|
1,121
|
|
|
|
|
|
|
|
|
|
Shareholders’
Equity
|
|
|
|
|
|
|
|
Share
capital
|
$
|
502
|
$
|
(9)
|
$
|
493
|
|
Additional
paid in capital
|
|
n/a
|
|
72
|
|
72
|
|
Retained
earnings
|
|
945
|
|
(103)
|
|
842
|
|
Accumulated
other comprehensive income
|
|
476
|
|
14
|
|
490
|
|
Total
Shareholders’
Equity
|
$
|
1,923
|
$
|
(26)
|
$
|
1,897
|
|
Total
Liabilities and
Shareholders’ Equity
|
$
|
3,064
|
$
|
(46)
|
$
|
3,018
|
|
|
|
|
|
|
|
|
MDS
INTERIM REPORT OCTOBER 31, 2007 (UNAUDITED) - Q4 US GAAP
RESTATED
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
|
CONSOLIDATED
STATEMENTS OF FINANCIAL POSITION
|
|
|
|
As
at October 31
[millions
of US dollars]
|
|
2006
Canadian
GAAP
x
|
|
Reconciling
Adjustments
|
|
2006
US
GAAP
|
|
Assets
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$
|
253
|
$
|
(6)
|
$
|
247
|
|
Short-term
investments
|
|
135
|
|
-
|
|
135
|
|
Accounts
receivable, net
|
|
229
|
|
(5)
|
|
224
|
|
Unbilled
revenue
|
|
121
|
|
1
|
|
122
|
|
Inventories,
net
|
|
86
|
|
(6)
|
|
80
|
|
Income
taxes recoverable
|
|
42
|
|
-
|
|
42
|
|
Prepaid
expenses and other
|
|
21
|
|
-
|
|
21
|
|
Assets
held for sale
|
|
196
|
|
-
|
|
196
|
|
Total
Current
Assets
|
$
|
1,083
|
$
|
(16)
|
$
|
1,067
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
$
|
339
|
$
|
(5)
|
$
|
334
|
|
Deferred
tax assets
|
|
37
|
|
10
|
|
47
|
|
Long-term
investments and other
|
|
170
|
|
6
|
|
176
|
|
Goodwill
|
|
417
|
|
(20)
|
|
397
|
|
Intangible
assets, net
|
|
338
|
|
(16)
|
|
322
|
|
Total
Assets
|
$
|
2,384
|
$
|
(41)
|
$
|
2,343
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’
Equity
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
$
|
239
|
$
|
(2)
|
$
|
237
|
|
Deferred
revenue
|
|
93
|
|
(1)
|
|
92
|
|
Income
taxes payable
|
|
8
|
|
1
|
|
9
|
|
Current
portion of long-term debt
|
|
20
|
|
-
|
|
20
|
|
Current
portion of deferred tax liabilities
|
|
-
|
|
(1)
|
|
(1)
|
|
Liabilities
related to assets held for sale
|
|
114
|
|
-
|
|
114
|
|
Total
Current
Liabilities
|
$
|
474
|
$
|
(3)
|
$
|
471
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
$
|
374
|
$
|
-
|
$
|
374
|
|
Deferred
revenue
|
|
17
|
|
-
|
|
17
|
|
Other
long-term obligations
|
|
23
|
|
1
|
|
24
|
|
Deferred
tax liabilities
|
|
82
|
|
21
|
|
103
|
|
Total
Liabilities
|
$
|
970
|
$
|
19
|
$
|
989
|
|
|
|
|
|
|
|
|
|
Shareholders’
Equity
|
|
|
|
|
|
|
|
Share
capital
|
$
|
572
|
$
|
(6)
|
$
|
566
|
|
Additional
paid in capital
|
|
-
|
|
69
|
|
69
|
|
Retained
earnings
|
|
495
|
|
(104)
|
|
391
|
|
Accumulated
other comprehensive income
|
|
347
|
|
(19)
|
|
328
|
|
Total
Shareholders’
Equity
|
|
1,414
|
|
(60)
|
|
1,354
|
|
Total
Liabilities and
Shareholders’ Equity
|
$
|
2,384
|
$
|
(41)
|
$
|
2,343
|
|
|
|
|
|
|
|
|
MDS
INTERIM REPORT OCTOBER 31, 2007 (UNAUDITED) - Q4 US GAAP
RESTATED
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
Three
months ended
October
31, 2007
|
|
Year
ended
October
31, 2007
|
|
[millions
of US dollars except per share amounts]
|
|
CDN
GAAP
|
|
Recon.
Items
1
|
|
US
GAAP
|
|
CDN
GAAP
|
|
Recon.
Items
1
|
|
US
GAAP
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
$
|
-
|
$
|
-
|
$
|
160
|
$
|
-
|
$
|
-
|
$
|
564
|
|
Services
|
|
-
|
|
-
|
|
147
|
|
-
|
|
-
|
|
555
|
|
Reimbursement
revenues
|
|
-
|
|
-
|
|
20
|
|
-
|
|
-
|
|
91
|
|
Total
revenues
|
$
|
318
|
$
|
9
|
$
|
327
|
$
|
1,162
|
$
|
48
|
$
|
1,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
cost of products
|
$
|
-
|
$
|
(97)
|
$
|
(97)
|
$
|
-
|
$
|
(360)
|
$
|
(360)
|
|
Direct
cost of services
|
|
(178)
|
|
95
|
|
(83)
|
|
(694)
|
|
356
|
|
(338)
|
|
Reimbursed
expenses
|
|
-
|
|
(20)
|
|
(20)
|
|
-
|
|
(91)
|
|
(91)
|
|
Selling,
general and administration
|
|
(92)
|
|
8
|
|
(84)
|
|
(286)
|
|
21
|
|
(265)
|
|
Research
and development
|
|
(8)
|
|
(12)
|
|
(20)
|
|
(29)
|
|
(39)
|
|
(68)
|
|
Depreciation
and amortization
|
|
(26)
|
|
3
|
|
(23)
|
|
(91)
|
|
12
|
|
(79)
|
|
Restructuring
charges - net
|
|
4
|
|
-
|
|
4
|
|
(40)
|
|
3
|
|
(37)
|
|
Other
expense - net
|
|
7
|
|
(10)
|
|
(3)
|
|
(61)
|
|
(19)
|
|
(80)
|
|
Total
costs and expenses
|
$
|
(293)
|
$
|
(33)
|
$
|
(326)
|
$
|
(1,201)
|
$
|
(117)
|
$
|
(1,318)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss) from continuing operations
|
$
|
25
|
$
|
(24)
|
$
|
1
|
$
|
(39)
|
$
|
(69)
|
$
|
(108)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
(7)
|
|
-
|
|
(7)
|
|
(27)
|
|
-
|
|
(27)
|
|
Interest
income
|
|
7
|
|
-
|
|
7
|
|
25
|
|
-
|
|
25
|
|
Mark-to-market
on interest rate swaps
|
|
-
|
|
1
|
|
1
|
|
-
|
|
1
|
|
1
|
|
Equity
earnings
|
|
-
|
|
13
|
|
13
|
|
-
|
|
53
|
|
53
|
|
Income
(loss) from continuing operations before income taxes
|
|
25
|
|
(10)
|
|
15
|
|
(41)
|
|
(15)
|
|
(56)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax (expense) recovery :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
current
|
|
(8)
|
|
(1)
|
|
(9)
|
|
7
|
|
18
|
|
25
|
|
-
deferred
|
|
-
|
|
9
|
|
9
|
|
-
|
|
(2)
|
|
(2)
|
|
Income
(loss) from continuing operations
|
|
17
|
|
(2)
|
|
15
|
|
(34)
|
|
1
|
|
(33)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from discontinued operations - net of income tax
|
|
(2)
|
|
-
|
|
(2)
|
|
806
|
|
-
|
|
806
|
|
Net
income
|
$
|
15
|
$
|
(2)
|
$
|
13
|
$
|
772
|
$
|
1
|
$
|
773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share
-
from
continuing
operations
|
$
|
0.14
|
|
(0.02)
|
$
|
0.12
|
$
|
(0.26)
|
$
|
0.01
|
$
|
(0.25)
|
|
-
from discontinued operations
|
|
(0.01)
|
|
-
|
|
(0.01)
|
|
6.12
|
|
-
|
|
6.12
|
|
Basic
earnings per share
|
$
|
0.13
|
|
(0.02)
|
$
|
0.11
|
$
|
5.86
|
$
|
0.01
|
$
|
5.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share
-
from
continuing
operations
|
$
|
0.14
|
|
(0.02)
|
|
0.12
|
$
|
(0.25)
|
|
-
|
$
|
(0.25)
|
|
-
from discontinued operations
|
|
(0.01)
|
|
-
|
|
(0.01)
|
|
6.10
|
|
0.01
|
|
6.11
|
|
Diluted
earnings (loss) per share
|
$
|
0.13
|
|
(0.02)
|
$
|
0.11
|
$
|
5.85
|
|
0.01
|
$
|
5.86
|
1
Reconciling
items between Canadian GAAP
and US GAAP
MDS
INTERIM REPORT OCTOBER 31, 2007 (UNAUDITED) - Q4 US GAAP
RESTATED
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
Three
months ended
October
31, 2006
|
|
Year
ended
October
31, 2006
|
|
[millions
of US dollars except per share amounts]
|
|
CDN
GAAP
|
|
Recon.
Items
1
|
|
US
GAAP
|
|
CDN
GAAP
|
|
Recon.
Items
1
|
|
US
GAAP
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
$
|
-
|
$
|
-
|
$
|
112
|
$
|
-
|
$
|
-
|
$
|
438
|
|
Services
|
|
-
|
|
-
|
|
138
|
|
-
|
|
-
|
|
517
|
|
Reimbursement
revenues
|
|
-
|
|
-
|
|
25
|
|
-
|
|
-
|
|
105
|
|
Total
revenues
|
$
|
260
|
$
|
15
|
$
|
275
|
$
|
1,002
|
$
|
58
|
$
|
1,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
cost of products
|
$
|
(169)
|
$
|
93
|
$
|
(76)
|
$
|
(644)
|
$
|
348
|
$
|
(296)
|
|
Direct
cost of services
|
|
-
|
|
(98)
|
|
(98)
|
|
-
|
|
(362)
|
|
(362)
|
|
Reimbursed
expenses
|
|
-
|
|
(25)
|
|
(25)
|
|
-
|
|
(105)
|
|
(105)
|
|
Selling,
general and administration
|
|
(59)
|
|
1
|
|
(58)
|
|
(225)
|
|
5
|
|
(220)
|
|
Research
and development
|
|
(7)
|
|
(9)
|
|
(16)
|
|
(18)
|
|
(35)
|
|
(53)
|
|
Depreciation
and amortization
|
|
(18)
|
|
4
|
|
(14)
|
|
(63)
|
|
12
|
|
(51)
|
|
Restructuring
charges - net
|
|
11
|
|
-
|
|
11
|
|
7
|
|
-
|
|
7
|
|
Other
expense - net
|
|
1
|
|
(3)
|
|
(2)
|
|
(6)
|
|
(30)
|
|
(36)
|
|
Total
costs and expenses
|
$
|
(241)
|
$
|
(37)
|
$
|
(278)
|
$
|
(949)
|
$
|
(167)
|
$
|
(1,116)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss) from continuing operations
|
$
|
19
|
$
|
(22)
|
$
|
(3)
|
$
|
53
|
$
|
(109)
|
$
|
(56)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
(6)
|
|
-
|
|
(6)
|
|
(21)
|
|
-
|
|
(21)
|
|
Interest
income
|
|
4
|
|
-
|
|
4
|
|
15
|
|
-
|
|
15
|
|
Mark-to-market
on interest note swaps
|
|
-
|
|
2
|
|
2
|
|
-
|
|
-
|
|
-
|
|
Equity
earnings
|
|
(1)
|
|
12
|
|
11
|
|
(5)
|
|
54
|
|
49
|
|
Income
(loss) from continuing operations before income taxes
|
|
16
|
|
(8)
|
|
8
|
|
42
|
|
(55)
|
|
(13)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax (expense) recovery:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
current
|
|
(2)
|
|
50
|
|
48
|
|
(13)
|
|
78
|
|
65
|
|
-
deferred
|
|
-
|
|
(44)
|
|
(44)
|
|
-
|
|
(30)
|
|
(30)
|
|
Income
(loss) from continuing operations
|
|
14
|
|
(2)
|
|
12
|
|
29
|
|
(7)
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations - net of income tax
|
|
33
|
|
-
|
|
33
|
|
98
|
|
-
|
|
98
|
|
Net
income (loss)
|
$
|
47
|
$
|
(2)
|
$
|
45
|
$
|
127
|
$
|
(7)
|
$
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
-
from
continuing
operations
|
$
|
0.10
|
$
|
(0.02)
|
$
|
0.08
|
$
|
0.21
|
$
|
(0.06)
|
$
|
0.15
|
|
-
from discontinued operations
|
|
0.23
|
|
-
|
|
0.23
|
|
0.68
|
|
-
|
|
0.68
|
|
Basic
earnings per share
|
$
|
0.33
|
$
|
(0.02)
|
$
|
0.31
|
$
|
0.89
|
$
|
(0.06)
|
$
|
0.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
-
from
continuing
operations
|
$
|
0.10
|
$
|
(0.02)
|
$
|
0.08
|
$
|
0.21
|
$
|
(0.06)
|
$
|
0.15
|
|
-
from
discontinued
operations
|
|
0.23
|
|
-
|
|
0.23
|
|
0.68
|
|
-
|
|
0.68
|
|
Diluted
earnings per share
|
$
|
0.33
|
$
|
(0.02)
|
$
|
0.31
|
$
|
0.89
|
$
|
(0.06)
|
$
|
0.83
|
MDS
INTERIM REPORT OCTOBER 31, 2007 (UNAUDITED) - Q4 US GAAP
RESTATED
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
|
|
|
Three
months ended
October
31, 2007
|
|
Year
ended
October
31, 2007
|
|
[millions
of US dollars]
|
|
Cdn
GAAP
|
|
Recon.
Items
1
|
|
US
GAAP
|
|
Cdn
GAAP
|
|
Recon.
Items
1
|
|
US
GAAP
|
|
Operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
$
|
15
|
$
|
(2)
|
$
|
13
|
$
|
772
|
$
|
1
|
$
|
773
|
|
Income
from discontinued operations – net of tax
|
|
(2)
|
|
-
|
|
(2)
|
|
806
|
|
-
|
|
806
|
|
Income
(loss) from continuing operations
|
|
17
|
|
(2)
|
|
15
|
|
(34)
|
|
1
|
|
(33)
|
|
Adjustments
to reconcile net income to cash provided by operating activities
relating
to continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Items
not affecting current cash flow
|
|
11
|
|
(17)
|
|
(6)
|
|
147
|
|
(19)
|
|
128
|
|
Changes
in non-cash working capital balances relating to
operations
|
|
58
|
|
5
|
|
63
|
|
87
|
|
(4)
|
|
83
|
|
Cash
provided by operating activities of continuing operations
|
|
86
|
|
(14)
|
|
72
|
|
200
|
|
(22)
|
|
178
|
|
Cash
used in operating activities of discontinued operations
|
|
(4)
|
|
-
|
|
(4)
|
|
(56)
|
|
-
|
|
(56)
|
|
|
|
82
|
|
(14)
|
|
68
|
|
144
|
|
(22)
|
|
122
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
|
|
1
|
|
-
|
|
1
|
|
(600)
|
|
-
|
|
(600)
|
|
Purchase
of intangible assets
|
|
-
|
|
-
|
|
-
|
|
(1)
|
|
1
|
|
-
|
|
Increase
in deferred development charges
|
|
(7)
|
|
7
|
|
-
|
|
(14)
|
|
14
|
|
-
|
|
Purchase
of property, plant and equipment
|
|
(28)
|
|
-
|
|
(28)
|
|
(73)
|
|
2
|
|
(71)
|
|
Proceeds
from sale of property, plant and equipment
|
|
4
|
|
-
|
|
4
|
|
4
|
|
-
|
|
4
|
|
Proceeds
on sale of short-term investments
|
|
-
|
|
-
|
|
-
|
|
165
|
|
-
|
|
165
|
|
Purchase
of short-term investments
|
|
-
|
|
-
|
|
-
|
|
(118)
|
|
-
|
|
(118)
|
|
Proceeds
on sale of long-term investment
|
|
-
|
|
-
|
|
-
|
|
13
|
|
-
|
|
13
|
|
Other
|
|
(18)
|
|
5
|
|
(13)
|
|
(20)
|
|
5
|
|
(15)
|
|
Cash
provided by (used) in investing activities of continuing
operations
|
|
(48)
|
|
12
|
|
(36)
|
|
(644)
|
|
22
|
|
(622)
|
|
Cash
provided by investing activities of discontinued
operations
|
|
-
|
|
-
|
|
-
|
|
929
|
|
-
|
|
929
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment
of long-term debt
|
|
(10)
|
|
-
|
|
(10)
|
|
(18)
|
|
-
|
|
(18)
|
|
Increase
(decrease) in deferred revenue and other long-term
obligations
|
|
(3)
|
|
-
|
|
(3)
|
|
(2)
|
|
-
|
|
(2)
|
|
Payment
of cash dividends
|
|
-
|
|
-
|
|
-
|
|
(3)
|
|
-
|
|
(3)
|
|
Issuance
of shares
|
|
-
|
|
-
|
|
-
|
|
15
|
|
-
|
|
15
|
|
Repurchase
of shares
|
|
-
|
|
-
|
|
-
|
|
(441)
|
|
-
|
|
(441)
|
|
Cash
used in financing activities of continuing operations
|
|
(13)
|
|
-
|
|
(13)
|
|
(449)
|
|
-
|
|
(449)
|
|
Cash
used in financing activities of discontinued operations
|
|
-
|
|
-
|
|
-
|
|
(2)
|
|
-
|
|
(2)
|
|
Effect
of foreign exchange rate changes on cash and cash
equivalents
|
|
14
|
|
(19)
|
|
(5)
|
|
28
|
|
(18)
|
|
10
|
|
Increase
(decrease) in cash and cash equivalents during the period
|
|
35
|
|
(21)
|
|
14
|
|
6
|
|
(18)
|
|
(12)
|
|
Cash
and cash equivalents, beginning of period
|
|
224
|
|
(3)
|
|
221
|
|
253
|
|
(6)
|
|
247
|
|
Cash
and cash equivalents, end of period
|
$
|
259
|
$
|
(24)
|
$
|
235
|
|
259
|
$
|
(24)
|
$
|
235
|
|
1
Reconciling
items
between Canadian GAAP and US GAAP
|
|
|
|
|
|
|
|
|
|
|
1
Reconciling
items between Canadian GAAP
and US GAAP
MDS
INTERIM REPORT OCTOBER 31, 2007 (UNAUDITED) - Q4 US GAAP
RESTATED
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
Three
months ended October 31, 2006
|
|
Year
ended October 31, 2006
|
|
[millions
of US dollars]
|
|
CDN
GAAP
|
|
Recon.
Items
1
|
|
US
GAAP
|
|
CDN
GAAP
|
|
Recon.
Items
1
|
|
US
GAAP
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
$
|
47
|
$
|
(2)
|
$
|
45
|
$
|
127
|
$
|
(7)
|
$
|
120
|
|
Income
from discontinued operations – net of tax
|
|
33
|
|
-
|
|
33
|
|
98
|
|
-
|
|
98
|
|
Income
(loss) from continuing operations
|
|
14
|
|
(2)
|
|
12
|
|
29
|
|
(7)
|
|
22
|
|
Adjustments
to reconcile net income to cash provided by operating activities
relating
to continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Items
not affecting current cash flow
|
|
51
|
|
10
|
|
61
|
|
100
|
|
(6)
|
|
94
|
|
Changes
in non-cash working capital balances relating to
operations
|
|
(19)
|
|
(9)
|
|
(28)
|
|
(96)
|
|
5
|
|
(91)
|
|
Cash
provided by operating activities of continuing operations
|
|
46
|
|
(1)
|
|
45
|
|
33
|
|
(8)
|
|
25
|
|
Cash
provided by operating activities of discontinued
operations
|
|
53
|
|
-
|
|
53
|
|
104
|
|
-
|
|
104
|
|
|
|
99
|
|
(1)
|
|
98
|
|
137
|
|
(8)
|
|
129
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in deferred development charges
|
|
(4)
|
|
4
|
|
-
|
|
(10)
|
|
10
|
|
-
|
|
Purchase
of property, plant and equipment
|
|
(14)
|
|
(1)
|
|
(15)
|
|
(53)
|
|
2
|
|
(51)
|
|
Proceeds
from MAPLE transaction
|
|
|
|
|
|
|
|
24
|
|
-
|
|
24
|
|
Proceeds
on divestiture
|
|
3
|
|
-
|
|
3
|
|
5
|
|
-
|
|
5
|
|
Proceeds
on sale of short-term investments
|
|
(1)
|
|
1
|
|
-
|
|
-
|
|
-
|
|
-
|
|
Purchase
of short-term investments
|
|
-
|
|
(1)
|
|
(1)
|
|
(135)
|
|
-
|
|
(135)
|
|
Other
|
|
5
|
|
-
|
|
5
|
|
(11)
|
|
-
|
|
(11)
|
|
Cash
provided by (used in) investing activities of continuing
operations
|
|
(11)
|
|
3
|
|
(8)
|
|
(180)
|
|
12
|
|
(168)
|
|
Cash
provided by (used in) investing activities of discontinued
operations
|
|
(8)
|
|
-
|
|
(8)
|
|
73
|
|
-
|
|
73
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment
of long-term debt
|
|
(6)
|
|
-
|
|
(6)
|
|
(7)
|
|
-
|
|
(7)
|
|
Increase
(decrease) in deferred revenue and other long-term
obligations
|
|
2
|
|
-
|
|
2
|
|
(7)
|
|
-
|
|
(7)
|
|
Payment
of cash dividends
|
|
(3)
|
|
-
|
|
(3)
|
|
(13)
|
|
-
|
|
(13)
|
|
Issuance
of shares
|
|
2
|
|
-
|
|
2
|
|
26
|
|
-
|
|
26
|
|
Cash
used in financing activities of continuing operations
|
|
(5)
|
|
-
|
|
(5)
|
|
(1)
|
|
-
|
|
(1)
|
|
Cash
used in financing activities of discontinued operations
|
|
(3)
|
|
-
|
|
(3)
|
|
(12)
|
|
-
|
|
(12)
|
|
Effect
of foreign exchange rate changes on cash and cash
equivalents
|
|
5
|
|
(8)
|
|
(3)
|
|
12
|
|
(1)
|
|
11
|
|
Increase
in cash and cash equivalents during the period
|
|
77
|
|
(6)
|
|
71
|
|
29
|
|
3
|
|
32
|
|
Cash
and cash equivalents, beginning of period
|
|
176
|
|
-
|
|
176
|
|
224
|
|
(9)
|
|
215
|
|
Cash
and cash equivalents, end of period
|
$
|
253
|
$
|
(6)
|
$
|
247
|
$
|
253
|
$
|
(6)
|
$
|
247
|
|
1
Reconciling
items
between Canadian GAAP and US GAAP
|
|
|
|
|
|
|
|
|
|
MDS
INTERIM REPORT OCTOBER 31, 2007 (UNAUDITED) - Q4 US GAAP
RESTATED
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
Three
months to October 31
|
Year
Ended October 31
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net
income (loss) from continuing operations in accordance with Canadian
GAAP
|
$
|
17
|
$
|
14
|
$
|
(34)
|
$
|
29
|
|
US
GAAP adjustments:
|
|
|
|
|
|
|
|
|
|
Deferred
development costs - net
|
|
(4)
|
|
-
|
|
(8)
|
|
(4)
|
|
Deferred
development costs written off
|
|
-
|
|
-
|
|
3
|
|
|
|
Mid
term incentive plan reversal
|
|
1
|
|
-
|
|
6
|
|
-
|
|
Unrealized
gains on foreign exchange contracts and interest rate
swaps
|
|
-
|
|
(3)
|
|
-
|
|
(5)
|
|
Pensions
|
|
(4)
|
|
-
|
|
(4)
|
|
-
|
|
Embedded
derivative
|
|
4
|
|
-
|
|
4
|
|
-
|
|
Reduction
in income tax expense arising
from
GAAP adjustments
|
|
1
|
|
1
|
|
-
|
|
2
|
|
Net
income (loss) from continuing operations in accordance with US
GAAP
|
|
15
|
|
12
|
|
(33)
|
|
22
|
|
Income
from discontinued operations in accordance with Canadian and US
GAAP – net
of tax
|
|
(2)
|
|
33
|
|
806
|
|
98
|
|
Net
income in accordance with US GAAP
|
$
|
13
|
$
|
45
|
$
|
773
|
$
|
120
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share in accordance with US GAAP
|
|
|
|
|
|
|
|
|
|
-
from continuing operations
|
$
|
0.12
|
$
|
0.08
|
$
|
(0.25)
|
$
|
0.15
|
|
-
from discontinued operations
|
|
(0.01)
|
|
0.23
|
|
6.12
|
|
0.68
|
|
Basic
earnings per share
|
$
|
0.11
|
$
|
0.31
|
$
|
5.87
|
$
|
0.83
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share in accordance with US GAAP
|
|
|
|
|
|
|
|
|
|
-
from continuing operations
|
$
|
0.12
|
$
|
0.08
|
$
|
(0.25)
|
$
|
0.15
|
|
-
from discontinued operations
|
|
(0.01)
|
|
0.23
|
|
6.11
|
|
0.68
|
|
Diluted
earnings per share
|
$
|
0.11
|
$
|
0.31
|
$
|
5.86
|
$
|
0.83
|
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 period have
been reclassified to conform to the current period’s financial statement
presentation.
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
MDS
INTERIM REPORT OCTOBER 31, 2007 (UNAUDITED) - Q4 US GAAP
RESTATED
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
[All
tabular amounts in millions of US Dollars, except where
noted]
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.
MDS
INTERIM REPORT OCTOBER 31, 2007 (UNAUDITED) - Q4
US GAAP RESTATED
Document
14
C
ANADIAN
S
UPPLEMENT
TO
R
ESTATED
M
ANAGEMENT’S
D
ISCUSSION
AND
A
NALYSIS
of
Financial Condition and Results of Operations,
for
the
three months ended October 31, 2007
This
document supplements the Restated Management’s Discussion and Analysis for
October 31, 2007 and has been prepared pursuant to Section 5.2 of National
Instrument 51-102 – Continuous Disclosure Obligations
CANADIAN
SUPPLEMENT TO OCTOBER 31, 2007 INTERIM RESTATED MANAGEMENT'S DISCUSSION
AND
ANALYSIS
December
12, 2007
The
interim unaudited financial statements of MDS Inc. (MDS or the Company) for
the quarter ended October 31, 2007 are reported in United States (US)
dollars and have been restated in accordance with US generally accepted
accounting principles (US GAAP). As part of the Company’s Canadian
filing requirements, we are providing this supplement (Canadian Supplement)
to
our restated management’s discussion and analysis (Restated MD&A) prepared
in accordance with US GAAP that restates, based on financial information
of MDS
reconciled to Canadian generally accepted accounting principles (Canadian
GAAP),
those parts of our Restated MD&A that would contain material differences if
they were based on financial statements prepared in accordance with Canadian
GAAP. The Canadian Supplement should be read in conjunction with our
restated unaudited financial statements and Restated MD&A included in
our interim report for the three month period ended October 31, 2007 prepared
in
accordance with US GAAP (Restated Interim Report) and our 2007 annual financial
statements and related MD&A included in our annual report for the fiscal
year ended October 31, 2007 (Annual Report). Note 15 of our interim
restated financial statements explains and quantifies the material differences
between US GAAP and Canadian GAAP on the Company’s financial condition and
results of operations.
The
following contains forward-looking statements and should be read in conjunction
with the factors set forth in the “Caution regarding forward-looking statements”
section of the 2007 annual MD&A contained in the Financial Review portion of
our Annual Report.
This
supplement has been prepared as of the date set out above and has not been
updated to reflect new facts, events or circumstances since that
date.
In
addition to measures based on US GAAP and Canadian GAAP, we use terms such
as
adjusted earnings before interest, taxes, depreciation and amortization
(adjusted EBITDA) and adjusted earnings per share (adjusted
EPS). These terms are not defined by US GAAP or Canadian GAAP and
readers should refer to “Use of non-GAAP measures” in our 2007 annual
MD&A.
Amounts
are in millions of US dollars, except per share amounts and where otherwise
noted.
Summary
of difference between US GAAP
and Canadian GAAP
The
differences between US GAAP and Canadian GAAP that have the most significant
impact on the Company’s financial condition and results of operations for the
three month period ended October 31, 2007 include accounting for: joint
ventures, investment tax credits, research and development, stock-based
compensation, embedded derivatives, pensions and hedge contracts.
The
primary difference between Canadian GAAP and US GAAP affecting the consolidated
revenues and operating margin is that under Canadian GAAP proportionate
consolidation is used to report the results of our joint ventures within
MDS
Analytical Technologies, whereas under US GAAP we apply the method of equity
accounting. For the fourth quarter of 2007, we reported
$12 million less revenue and $15 million less operating income under US GAAP
than we would have reported under Canadian GAAP ($7 million less and $14
million
less, respectively for the fourth quarter of 2006). Under US GAAP,
the income from the joint ventures is included in equity earnings, which
were
$13 million in the fourth quarter of 2007 ($12 million in the fourth quarter
of 2006). Under Canadian GAAP, this amount was included in
operating income as part of the proportionate consolidation. There is
no significant impact to adjusted EBITDA from this accounting
difference.
Other
differences in operating income and adjusted EBITDA are listed
below.
|
·
|
Non-refundable
investment tax
credits (ITCs)
are treated as a reduction of expenditure under
Canadian GAAP and a reduction of income tax under US GAAP. In
the fourth quarter of 2007, there were $8 million ($6 million in the
fourth quarter of 2006) of ITCs which under US GAAP increased our
operating loss, as compared to Canadian GAAP. This difference primarily
affected our MDS
|
CANADIAN
SUPPLEMENT TO OCTOBER 31, 2007 INTERIM RESTATED MANAGEMENT'S DISCUSSION
AND
ANALYSIS
|
|
Pharma
Services and MDS Analytical Technologies segments. Adjusted EBITDA
was
reduced by $5 million ($6 million in the fourth quarter of 2006)
when
calculated based on US GAAP, compared to Canadian GAAP, as $3 million
of
ITCs (nil in the fourth quarter of 2006) related to MAPLE project
and were
treated as an adjusting item in our calculation of adjusted
EBITDA. These differences affect our three segments MDS Pharma
Services, MDS Nordion and MDS Analytical
Technologies.
|
|
·
|
Research
and Development
(R&D)
expenditures may be capitalized under Canadian GAAP if
certain criteria are met, however these expenditures are expensed
in the
period they are incurred under US GAAP. In the fourth quarter of
2007, the $5 million ($2 million in fourth quarter of 2006) of
R&D
capitalized under Canadian GAAP resulted in a reduction of adjusted
EBITDA
when calculated based on US GAAP, compared to Canadian
GAAP. Our operating income was decreased by $4 million (nil in
fourth quarter of 2006) under US GAAP due to $1 million ($2 million
of
2006) of amortization under Canadian GAAP relating to previously
capitalized R&D. This difference affects our MDS Analytical
Technologies segment in both 2006 and 2007, and MDS Pharma Services
in
2006.
|
|
·
|
Due
to a difference in
valuation methods
for
stock-based compensation
under US GAAP and Canadian GAAP, our
operating income and adjusted EBITDA was higher by $1 million for
the
fourth quarter of 2007 (nil in 2006) when calculated based on US
GAAP,
compared to Canadian GAAP. This difference only affects
Corporate and Other.
|
|
·
|
The
other differences, which are described in Note 15 to our restated
interim
financial statements, include accounting for embedded derivatives,
pensions and hedges. In the fourth quarter of 2007, embedded
derivatives increase operating income and adjusted EBITDA by $4
million
(nil in 2006) and pensions decreased operating income and adjusted
EBITDA
by $4 million (nil in 2006) when calculated based on US GAAP, compared
to
Canadian GAAP. The difference in accounting for embedded
derivatives and pensions primarily affects our MDS Nordion
segment.
|
In
calculating adjusted EBITDA and adjusted EPS, the significant changes to
the
adjusting items include the following two items:
|
·
|
In
2007, capitalized R&D was charged to restructuring in MDS Pharma
Services under Canadian GAAP. Under US GAAP, these expenditures
may not be
capitalized and therefore there is no adjustment. This
difference only impacts the year-to-date adjusting
items.
|
|
·
|
In
2006, under Canadian GAAP, ITCs were netted against MAPLE settlement
in
MDS Nordion. Under US GAAP these are treated as reduction to income
tax.
This adjustment related to MAPLE ITCs only impacts adjusted
EBITDA
|
Management’s
discussion and analysis
under Canadian GAAP
Please
refer to
the
Company's previously filed Interim Report for October 31, 2007 for our
corresponding management’s discussion and analysis under Canadian
GAAP. The differences between US GAAP and Canadian GAAP, described
above, impact the discussion and analysis in each of the “MDS Inc.”, “MDS
Pharma Services”, “MDS Nordion”, “MDS Analytical Technologies” and “Corporate
and Other” sections of our previously filed MD&A. The
“Income taxes” section of our previously filed MD&A is primarily affected by
the ITCs. The “US GAAP Reconciliation” section in our previously
filed MD&A is superseded by the “Restatement to US GAAP” section of our
Restated MD&A.
For
additional information and details, readers are referred to the 2007 annual
financial statements and management’s discussion and analysis for 2007 and the
Company’s 2007 Annual Information Form (AIF), all of which are published
separately and are available at
www.mdsinc.com
and
at
www.sedar.com
. In
addition, the Company’s 40-F filing is available at
www.sec.gov
.
SIGNATURES
Pursuant
to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report
to
be signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
MDS
Inc.
|
|
|
(Registrant)
|
|
Date:
|
|
February
5, 2008
|
|
By:
|
/s/
PETER BRENT
|
|
|
Name:
Peter Brent
Title: Senior
Vice President, Legal and Corporate
Secretary
|
