TORONTO, March 6 /PRNewswire-FirstCall/ - MDS Inc. , a leading provider of products and services to the global life sciences markets, today reported its first quarter 2008 results. For the quarter, MDS reported net revenues of $296 million, net income of $17 million and earnings per share from continuing operations of $0.14. Adjusted EBITDA rose to $40 million, up from $30 million in the prior year. Adjusted earnings per share were $0.05, down from $0.07 in the prior year. This solid start to 2008 is primarily driven by improvements at MDS Pharma Services and MDS Analytical Technologies, partially offset by challenges at MDS Nordion.
“We are off to a solid start in the first quarter with double-digit growth in both net revenues and adjusted EBITDA,” said Stephen P. DeFalco, President and Chief Executive Officer of MDS Inc. “I am very pleased with the performance of the Molecular Devices acquisition which continues to perform strongly, setting new records in revenue. I am also encouraged by the accelerating pace of new business wins at MDS Pharma Services which we expect to result in revenue growth in the second half of 2008.”
For the first quarter, MDS Pharma Services net revenues declined 1% over the prior year. Adjusted EBITDA was $6 million compared to $1 million last year, an improvement of $5 million year-over-year, driven primarily by savings from 2007 restructuring activities.
MDS Pharma Services initiated the reporting of certain non-GAAP measures for new business wins and period ending backlog, to track confirmed contracts to which customers have committed within the period. New orders increased to $177 million representing three quarters of sequential improvements and are up 32% from last quarter. Contract cancellations were $37 million in the quarter leaving a quarter-ending backlog of $395 million, down 16% year-over-year and up 5% sequentially.
As of the end of the first quarter, MDS Pharma Services has implemented 90% of its restructuring initiatives announced in the second quarter of last year and is well positioned to accelerate profitable growth with higher second half revenues coupled with a lower cost base.
In January, MDS Pharma Services opened its 300-bed expansion of a Phase I facility in Phoenix, Arizona and is now conducting trials. As well, MDS Pharma Services launched Apollo, a new study management system for central lab customers which is designed to improve efficiency and enable MDS to deliver its brand promise of on-time, high-quality service.
MDS Nordion’s revenues for the first quarter were $60 million, down 10% from the prior year driven by a disruption in medical isotope supply and light cobalt shipments. Adjusted EBITDA was $11 million compared to $20 million in the first quarter of 2007. This decrease includes $5 million in unfavourable impact from the medical isotope disruption and a $4 million non-cash charge to account for foreign exchange impact on supply agreements.
During the quarter, MDS Nordion announced the sale of two non-strategic product lines. This sale is expected to close in the second quarter of 2008.
MDS Analytical Technologies delivered $116 million in revenues, a 119% increase over prior year and $27 million in adjusted EBITDA, a 125% year-over-year increase.
Sciex contributed $60 million in revenues and $16 million in adjusted EBITDA in the first quarter, up 13% and 33% from the prior year respectively. Mass spectrometry end user revenue grew 5% compared to the same period last year.
Molecular Devices (MD) contributed $56 million in revenues and $11 million in adjusted EBITDA. This is the highest quarterly revenue for MD in its history. We remain on track to exceed our first year commitments for the MD acquisition.
Conference Call
MDS will be holding a conference call today at 9:30 am EST to discuss first quarter 2008 results. This call will be webcast live at www.mdsinc.com and will also be available in archived format at www.mdsinc.com/news_events/webcasts_presentations.asp after the call.
MDS Annual Shareholders Meeting
MDS will be holding its annual shareholders meeting today for shareholders of record at 4:00 pm EST in Toronto. The AGM will be webcast live at www.mdsinc.com and will also be available in archived format at www.mdsinc.com/news_events/webcasts_presentations.asp.
About MDS
MDS Inc. is a global life sciences company that provides market-leading products and services that our customers need for the development of drugs and diagnosis and treatment of disease. We are a leading global provider of pharmaceutical contract research, medical isotopes for molecular imaging, radiotherapeutics, and analytical instruments. MDS has more than 5,500 highly skilled people in 29 countries. Find out more at www.mdsinc.com or by calling 1-888-MDS-7222, 24 hours a day.
Caution Concerning Forward-Looking Statements
This document contains forward-looking statements. Some forward-looking statements may be identified by words like “expects”, “anticipates”, “plans”, “intends”, “indicates” or similar expressions. The statements are not a guarantee of future performance and are inherently subject to risks and uncertainties. MDS’s actual results could differ materially from those expressed in the forward-looking statements due to these risks and a number of other factors, including, but not limited to, successful implementation of structural changes, including restructuring plans and acquisitions, technical or manufacturing or distribution issues, the competitive environment for MDS’s products, the degree of market penetration of its products, the ability to secure a reliable supply of raw materials, the impact of our clients’ exercising rights to cancel certain contracts, the strength of the Canadian and US economies, the impact of the movement of the US dollar relative to other currencies, particularly the Canadian dollar and the euro, uncertainties associated with critical accounting assumptions and estimates, and other factors set forth in reports and other documents filed by MDS with Canadian and US securities regulatory authorities from time to time, including MDS’s quarterly and annual MD&A, annual information form, and annual report on Form40-F for the fiscal year ended October 31, 2007 filed with the Securities & Exchange Commission.
Also note that all financial data is now shown on a US GAAP basis. MDS converted to US GAAP reporting with the filing of its 2007 annual report and financial statements on January 29, 2008.
Use of Non-GAAP Financial Measures
The use of non-GAAP measures including terms such as net revenues, adjusted EBITDA, adjusted EPS, new orders and backlog are used to explain the operating performance of the Company. These terms are not defined by GAAP and MDS’s use may vary from that of other companies. MDS uses certain non-GAAP measures so that investors and analysts have a better understanding of the significant events and transactions that have had an impact on results or may have an impact on MDS’s financial outlook. MDS provides a description of these non-GAAP measures and a reconciliation of these non-GAAP measures for 2007 actual results to GAAP financial results in the MD&A of its 2007 annual report.
Following is management’s discussion and analysis (MD&A) of the results of operations for MDS Inc. (MDS or the Company) for the quarter ended January 31, 2008 and its financial position as at January 31, 2008. This MD&A should be read in conjunction with the unaudited consolidated financial statements and notes that follow. In 2007, MDS chose to adopt United States generally accepted accounting principles (US GAAP) for financial reporting. As a result of this change, the Company restated to US GAAP its previously filed financial statements for the four quarters of 2007. With US GAAP as our primary basis of accounting, we will reconcile our US GAAP earnings to Canadian generally accepted accounting principles (Canadian GAAP). This reconciliation will be done as required by applicable Canadian regulations on an annual and quarterly basis for fiscal 2008 and 2009. The results discussed in this MD&A are based on US GAAP. To supplement the US GAAP MD&A included in this document, please refer to our separately filed Canadian Supplement to this MD&A that restates, based on financial information of MDS reconciled to Canadian GAAP, those parts of our MD&A that would contain material differences if they were based on financial statements prepared in accordance with Canadian GAAP.
For additional information and details, readers are referred to the 2007 annual financial statements and MD&A 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 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, 2008. 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.
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 our clients’ exercising rights to cancel certain contracts; 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.
Use of Non-GAAP Measures
In addition to measures based on generally accepted accounting principles (GAAP) in this MD&A, we use terms such as adjusted operating income; adjusted earnings before interest, taxes, depreciation and amortization (EBITDA); adjusted EBITDA margin; adjusted net income, adjusted earnings per share (EPS); operating working capital; net revenue; new orders 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 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.
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.
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 have 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 communicated 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. As at January 31, 2008, we have started to report new orders, which are the confirmed contracts that we have received a customer commitment for within the interim period. We have also started to report period ending backlog which measures our backlog at the period ending date and we continue to reported average backlog which is the average of the three month end backlog balances for the interim period.
Substantially all of the Sciex brand products 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 as revenues 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.
Tabular amounts are in millions of United States (US) dollars, except per share amounts and where otherwise noted.
Adoption of US GAAP
Effective with the reporting of our fiscal 2007 annual results, we adopted US GAAP as our primary reporting standard for our consolidated financial statements. We have adopted US GAAP to improve the comparability of our financial information with that of our competitors, the majority of whom are US-based multinational companies. All figures for prior periods contained in these documents have been revised to reflect the adoption of US GAAP as our reporting standard.
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, sterilization, 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. The results of discontinued operations relate to the diagnostics business we sold in 2007. All financial references for the prior year have been restated to reflect this treatment.
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 $296 million for the first quarter of 2008 compared to $241 million last year. The Molecular Devices (MD) business of MDS Analytical Technologies, which was acquired in the second quarter of 2007, added $56 million of net revenue in the quarter, its highest quarter to date, and that led net revenue for MDS Analytical Technologies to more than double compared to that of the first quarter of 2007. MDS Pharma Services net revenues decreased 1% compared to the same period in 2007, with slight growth in late-stage net revenues being offset by a decline in early-stage net revenues. MDS Nordion net revenues were down 10% compared to the same period in 2007, due primarily to a medical isotope supply disruption and lower cobalt shipments. Foreign exchange impacts increased net revenue in the first quarter of 2008 compared to the first quarter of 2007 by approximately $25 million.
Income from continuing operations for the first quarter of 2008 was $17 million compared to nil reported for the same period in 2007. The first quarter of 2008 included $12 million in expenses for integration and amortization related to MD and a $11 million gain on deferred taxes related to a reduction in future income tax rates by the Canadian government.
Adjusted EBITDA for the quarter was $40 million, up 33% compared to $30 million reported for last year. MD contributed $11 million of adjusted EBITDA in the first quarter of 2008. MDS Pharma Services delivered $5 million of 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; and, MDS Nordion was adversely impacted by approximately $5 million from the medical isotope supply disruption, lower cobalt shipments and an embedded derivative loss of $4 million in the first quarter of 2008 (nil in 2007). In the first quarter of 2008, a $7 million gain was recorded relating to certain stock-based compensation programs, primarily as a result of a reduction in MDS’s stock price, compared to a $1 million gain in 2007. Primarily due to the strengthening of the US dollar relative to the Canadian dollar from our fiscal year end to January 31, 2008, we recorded a $4 million gain from the impact of foreign exchange on certain monetary assets and liabilities up $1 million from the first quarter of 2007. However, in the first quarter of 2008 we also experienced a negative impact of approximately $3 million on adjusted EBITDA from the net impact of foreign exchange, on our operations, due to the decline of the US dollar, from the first quarter of 2007 to the first quarter of 2008.
Adjustments reported for the quarter in 2008 include a $4 million loss associated with the expected sale of MDS Nordion’s beam therapy and self-contained irradiator product lines, a $2 million gain resulting from the settlement of a mortgage that in 2000 had been determined to be uncollectible at that time, $2 million of costs related to the acquisition and integration of MDS Analytical Technologies, $1 million of in-process research and development (in-process R&D) related to an acquisition within the quarter, and a $2 million gain resulting from the settlement of interest rate swaps. In 2007, adjustments reported for the quarter included restructuring costs totalling $13 million, of which $8 million related to ongoing profit improvement initiatives in MDS Pharma Services, and $5 million related to transition of our information technology infrastructure and support to a new provider. The other adjusting item in the first quarter of 2007 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 $64 million, and represents 22% of net revenues compared to $54 million and 22% respectively, in the same period last year. The increase in SG&A spending is a result of the addition of MD and foreign exchange which was partially offset by lower stock-based compensation expense, and spending on the FDA issue in the first quarter of 2007.
We spent $20 million on R&D activities in the first quarter of 2008 compared to $12 million in the first quarter of 2007. The increase in spending is a result of the additional MD spending and higher investment related to the Sciex brand products of MDS Analytical Technologies.
Consolidated depreciation and amortization expense increased $13 million in the first quarter of 2008 compared to the same period last year. The increase is principally related to the amortization of intangible assets associated with the MD acquisition. Capital expenditures for the quarter were $13 million compared to $9 million in the first quarter of 2007.
Reported earnings per share from continuing operations were $0.14 for the quarter, compared to nil in the first quarter of 2007. Adjusted earnings per share from continuing operations for the quarter were $0.05 compared to $0.07 earned in the same period last year. In addition to the adjusting items affecting adjusted EBITDA that were described earlier, adjusting items include a $0.09 reduction in our deferred tax liabilities due to the enactment of income tax rate reductions in Canada. Earnings per share from discontinued operations were nil compared to $0.11 for 2007. Results from discontinued operations include only the results of the diagnostics business that we sold in 2007. Adjusted net income and adjusted earnings per share for the two periods were as follows:
MDS Pharma Services net revenues declined 1% as reported. The impact on revenue of the change in foreign exchange rates from the first quarter of 2007 to the first quarter of 2008 was an increase of approximately $9 million or 7%. Both our early-stage and late-stage businesses had lower revenue excluding the impact of foreign exchange. The late-stage decline was primarily a result of contract cancellations related to failures of compounds that occurred in the current and prior quarters. While we have seen an increase in early-stage orders, the timing of service delivery relative to our capacity did not allow us to convert these orders into revenue in the quarter and this business continued to show declines versus the prior year.
New orders in the first quarter of 2008 of $177 million were up 32% sequentially and were higher than any quarter in 2007; however, we also experienced a high level of contract cancellations relating to compound failures affecting our late-stage businesses. As order cancellations occurred early in the quarter and order receipts were higher at the end of the quarter, we saw an overall decrease in our average monthly backlog to $360 million, down $25 million from the fourth quarter of 2007 and down 20% compared to the first quarter of 2007. Despite these cancellations and given the strength of new orders, our quarter end backlog increased sequentially by $20 million to $395 million.
MDS Pharma Services had an operating loss of $1 million for the quarter, compared to a loss of $15 million for the same period last year. This reduction in operating loss was driven by lower costs in the first quarter of 2008 resulting from the restructuring actions taken in 2007; a $2 million reduction in stock-based compensation costs in the first quarter of 2008; a $2 million gain related to the settlement of a mortgage that in 2000 had been determined uncollectible and a $3 million foreign currency gain on the revaluation of certain assets and liabilities in the quarter, compared to a $2 million gain the first quarter of 2007. As well, in the first quarter of 2007, our operating loss reflects $8 million of restructuring charges and $4 million of spending on the US Food and Drug Administration (FDA) review of our Montreal bioanalytical operations. In the first quarter of 2008 there was no impact to operating income from these items, although we did spend $2 million on the FDA matter and it was charged to the reserve we established for this purpose in the second quarter of 2007. Partially offsetting these reductions in our operating loss was the lower amount of gross profit associated with the net revenue declines, excluding the impact of foreign exchange, described in our discussion of net revenues, and the negative impact of foreign exchange on our operations resulting from the decline in the US dollar from the first quarter of 2007 to the first quarter of 2008 of approximately $3 million.
Adjusted EBITDA for MDS Pharma Services for the first quarter of 2008 was $6 million, up substantially from $1 million for the first quarter of 2007 driven by restructuring savings and the other items described above, except that the $2 million gain on the mortgage settlement in the first quarter of 2008 and the $8 million restructuring charges in the first quarter of 2007 were adjusting items.
SG&A of $29 million in the first quarter of 2008 was $4 million lower than the first quarter of 2007 due to $2 million of lower stock-based compensation and productivity, partially offset by the negative impact of foreign exchange on spending from the strengthening of the Canadian dollar, British pound and the euro over the same period.
During the first quarter of 2008, we continued to implement our restructuring plan announced in 2007. These plans are now 90% complete with the balance of actions expected to be substantially completed in the second quarter of 2008.
During the first quarter of 2008, we opened a new 300 bed facility in Phoenix, Arizona to expand our capacity to deliver early-stage services to both pharmaceutical and biotech clients. Our late-stage business also launched a new proprietary software application to allow our clients real-time access to their study data. This new application will benefit our customers both in terms of efficiency and standardization in study management.
Capital expenditures in the pharmaceutical services segment were $6 million compared to $2 million in the first quarter of 2007.
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 required site audits for generic customers. 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.
We have responded to questions from European regulators about the nature of the work that was done for the FDA. Although we are not yet able to fully assess the potential impact of possible, if any, foreign regulatory actions, we are satisfied with the progress of our discussions with these regulators.
During the second quarter of 2007, we approved and recorded a $61 million provision to reimburse clients who have incurred or will incur third party audit costs or study re-run costs to complete the work required by the FDA and other regulators. We have utilized $13 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. Although we believe we have substantially completed the majority of all required site audits, we still await final reimbursement requests for many of these audits. Based on information currently available, we believe that the remaining reserve of $52 million will be sufficient to cover any agreements reached with clients for study audits, study re-runs, and other related costs.
MDS Nordion revenues were down $7 million or 10% from the first quarter of 2007 on a reported basis. The decline of the US dollar in the first quarter of 2008, compared to the first quarter of 2007, increased reported revenue by approximately $9 million. The $16 million decline, net of foreign exchange impacts was due to a disruption in supply of medical isotopes at our supplier’s reactor; lower shipments of Cobalt, largely as a result of shipping delays in Asia, which we expect to recover in the middle of the fiscal year; and the revenues for 2007 included $2 million related to deferred revenue associated with the 2004 cancellation of a supp
