TORONTO, Dec. 14 /PRNewswire-FirstCall/ - MDS Inc. , a company providing a range of enabling products and services to the global life sciences markets, today reported its fourth quarter and full year results.
MDS reported operating performance improvements across its business units and made significant progress in executing on its strategy to focus the Company on the high growth life sciences markets. The Company delivered on its commitment to divest its interest in Source Medical, entered into discussions to sell its interest in Calgary Laboratory Services, and has dramatically reduced the size of corporate headquarters and removed layers of management through a 700 person workforce reduction.
"We are making great progress in executing on our strategy to enhance performance through better market focus, execution and productivity improvements. We move into 2006 with positive revenue momentum and a more streamlined cost structure - one that positions us well to compete in the global life sciences markets," said Stephen P. DeFalco, President and CEO, MDS Inc.
Fourth Quarter Highlights - Life Sciences year-over-year currency-adjusted revenue growth of 8% (+ 3% as reported) - Health (Diagnostics) adjusted EBITDA margin expanded to 26%, up 660 basis points versus the fourth quarter last year - Consolidated adjusted EBITDA margin of 17%, up 280 basis points sequentially, on adjusted EBITDA of $68 million - Restructuring and other charges of $83 million - Adjusted earnings per share of $0.25 - Quarterly cash dividend of $0.0325
Adjusted EBITDA and adjusted earnings per share are non-GAAP measures as detailed in the Company's management discussion and analysis of operating results and financial position.
For the quarter, MDS's consolidated revenue was $390 million, up 8% currency-adjusted (+ 4% as reported) year-over-year. Adjusted EBITDA was $68 million compared to $54 million in the third quarter and $70 million in the same quarter last year, impacted principally by US currency and elevated SG&A expenses. Adjusted earnings per share were $0.25 compared to $0.16 in the third quarter and $0.30 in the same quarter last year. Restructuring and other charges in the quarter were $83 million. MDS paid a quarterly cash dividend of $0.0325 per share.
In the fourth quarter, the weakness of US currency impacted revenues in our Life Sciences segment by $16 million, adjusted EBITDA by $9 million and earnings per share by $0.04 per share. In the fourth quarter, the Company benefited from favorable exchange hedges that served to offset some of the impact of US currency on the operating performance. MDS's hedge portfolio in 2006 will not offer the same benefit as it did in 2004 and 2005.
For the full year, revenue was $1,489 million, up 1% over the prior year. The adjusted EBITDA margin was 16% on an adjusted EBITDA of $241 million compared to $306 million in the prior year - impacted principally by US currency. Adjusted earnings per share were $0.82 compared to $1.10 in fiscal 2004.
Consolidated and Health segment results reflect the reclassification of Source Medical and Calgary Laboratory Services into discontinued operations.
Life Sciences
In the quarter, revenue from the Life Sciences segment was $304 million, up 8% currency-adjusted (+ 3% as reported) over the same quarter last year. The adjusted EBITDA margin was 15%, on adjusted EBITDA of $46 million. For the full year Life Sciences revenue was $1,154 million, up 1% over the prior year. Highlights from the quarter include the following:
- Revenue from pharmaceutical research services revenue was $135 million, up 3% currency-adjusted (- 2% as reported). Backlog was up 13% year-over-year and 8% sequentially to US$340 million. - Isotopes revenue was $96 million, up 6% currency-adjusted (- 1% as reported) compared to the same quarter last year. Cobalt shipments increased by approximately 15% in the fourth quarter compared to prior year. TheraSphere(R), our innovative treatment for liver cancer, became eligible for sale in Europe and Bexxar became available in Canada. - Analytical instruments revenue was $73 million, up 23% currency- adjusted (+ 20% as reported) compared to the same quarter last year. The Company introduced two new products, the CellKey(TM) System and Tempo(TM) Liquid Chromatography systems. Our analytical instruments business received two awards; the AME Award for Manufacturing Excellence and the 2005 Frost & Sullivan Award for Drug Discovery Technologies Product Innovation. Health
Health segment revenue in the fourth quarter, which now only includes the Company's Canadian diagnostics business, was $86 million, up 9% year-over- year. Adjusted EBITDA grew 47% to $22 million compared to $15 million in the same period last year. For the full year, revenue was $335 million. Highlights from the quarter include the following:
- MDS Diagnostics continued their focus on improving operating efficiency through LeanSigma initiatives - implementing over 150 improvements. Adjusted EBITDA margins expanded 660 basis points over the same quarter last year. - On September 1, 2005, the Company indicated it was exploring strategic alternatives for the Canadian diagnostics business. The process is currently underway and the Company remains of the view that the likely scenarios for the business are either an outright sale or tax-efficient distribution to shareholders.
MDS will be holding a conference call today at 10:30 am EST. This call will be webcast live at www.mdsinc.com, and will also be available in archived format at www.mdsinc.com/news_present.asp after the call.
MDS Inc. has more than 8,800 highly skilled people in 27 countries. We provide a diverse range of superior products and services to increase our customers' speed, precision and productivity in the drug development and disease diagnosis processes. We are a global, values-driven health and life sciences company, recognized for our reliability and collaborative relationships as we help create better outcomes in the treatment of disease. Find out more at www.mdsinc.com or by calling 1-888-MDS-7222, 24 hours a day.
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. The Company's actual results could differ materially from those currently anticipated due to a number of factors, including, but not limited to, successful integration of structural changes, including restructuring plans, acquisitions, technical or manufacturing or distribution issues, the competitive environment for the Company's products, the degree of market penetration of the Company's products, and other factors set forth in reports and other documents filed by the Company with Canadian and US securities regulatory authorities from time to time.
MANAGEMENT'S DISCUSSION & ANALYSIS OF OPERATING RESULTS & FINANCIAL POSITION December 9, 2005
This section of the quarterly report contains management's analysis of the financial performance of the Company and its financial position and it should be read in conjunction with the consolidated financial statements. Readers are cautioned that management's discussion and analysis (MD&A) contains forward-looking statements and that actual events may vary from management's expectations. Readers are encouraged to consult the MDS Annual Report and Annual Information Form for fiscal 2004 for additional details regarding risks affecting the business.
In our MD&A and elsewhere we refer to measures such as backlog and other items that are not defined by generally accepted accounting principles (GAAP). Our use of these terms may not be consistent with the way these terms are used by others. Where possible, in particular for earnings-based measures, we provide tables or other information that enables readers to reconcile between such non-GAAP measures and standard GAAP measures. While these measures are not defined by or required by GAAP, we provide this information to readers to help them better understand the significant events, transactions, and trends that affect our businesses.
All financial references in this document exclude the discontinued generic radiopharmaceuticals operations, our US laboratory operations, certain early-stage pharmaceutical research services operations, and our interests in Source Medical and Calgary Laboratory Services. The discussion below is based only on our continuing operations, unless otherwise noted. The results for all prior periods have been restated to conform to this presentation.
Overview
Revenue for the fourth quarter of fiscal 2005 was $390 million, up from $375 million over the same period last year. The operating loss for the quarter was $34 million, versus operating income of $11 million in the prior year.
Adjusted operating income was $49 million, a decrease of $4 million versus last year. Adjustments include the costs of our announced restructuring initiatives, and provisions related to long-term investments. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) was $68 million at a margin of 17% compared to $70 million and 19% last year. Adjusted EBITDA is reconciled to operating income in a table on page 6.
For the fourth quarter, the average rate of exchange between the Canadian and US dollar was $1.18 compared to $1.26 last year and our effective translation rate on revenues was $1.26 versus $1.37, taking into account the impact of our hedging program. The declining US dollar, combined with the reduced protection of our hedge portfolio, reduced revenue by $16 million. On a currency-adjusted basis, revenues grew 8% in the quarter over the same period last year. On the same currency-adjusted basis, adjusted EBITDA grew 38%.
Adjusted earnings per share from continuing operations was $0.25 for the quarter, compared to $0.30 last year. The US dollar decline accounts for $0.04 of the drop compared to last year and the balance of the decline relates to decreases in operating income for reasons described in more detail below.
On September 1, 2005, we announced our strategic plan to pursue growth in the global life sciences market and dispose of assets that do not contribute to the Company's area of focus. Reflecting actions intended to implement this plan, our interests in Source Medical Corporation (Source) and Calgary Laboratory Services (CLS) were classified as discontinued operations in the quarter. Subsequent to the quarter-end, our interest in Source was sold to our partner for proceeds of $79 million. Late in the quarter, the Calgary Health Region, our partner in CLS, notified us of their intent to exercise their option to acquire our partnership interest. We are currently in discussions with the Region and expect to complete this transaction by the end of March 2006.
Our September 1st announcement also outlined our intent to find an alternate ownership structure for our Diagnostics business that realizes the maximum value for shareholders. The detailed plan to achieve this objective is being developed and, therefore, we have not reflected the balance of our Diagnostics business as discontinued at this time.
On December 2, an investee company, Hemosol Corp., entered receivership. In 2003, we wrote down the carrying value of our equity interest in this company to nil, although we continued to provide a guarantee of the company's bank debt. As a result of the receivership, the company's bank requested payment by MDS under the guarantee and on December 8, we remitted $20 million to the bank. In doing so, we assumed the loan and the senior security position held by the bank.
In conjunction with another secured lender who ranks second to us in preference, we have agreed to provide up to $1 million of debtor-in-possession (DIP) financing. This new funding will rank in preference to our existing secured position. Acting with our approval, the bankruptcy trustee has initiated a liquidation process.
The valuation of the company and its assets is highly uncertain at this time. Although we will have the first claim on any proceeds of the bankruptcy after the DIP financing is paid, we are unable at this time to determine whether or not there will be sufficient proceeds to fully repay our $20 million loan.
Under Canadian GAAP, equity accounting is required when losses sustained by an investee create an economic exposure for the shareholder. Our share of the operating losses sustained by Hemosol since it was restructured in May 2004 totals $7 million and this amount has been recorded in our fourth quarter financial statements. This amount is included in valuation provisions and investment write-downs in our reconciliations of adjusted EBITDA and adjusted EPS.
(Tabular amounts are in millions of Canadian dollars, except where noted.) Summary Consolidated Fourth Full Results Quarter Year ------------------------------------------------------------------------- 2005 2004 Change 2005 2004 Change ------------------------------------------------------------------------- Revenues $ 390 $ 375 4% $ 1,489 $ 1,479 1% Operating (loss) income $ (34) $ 11 n/m $ 76 $ 137 (45%) Basic earnings (loss) per share $ (0.34) $ 0.06 n/m $ 0.22 $ 0.36 (39%) ------------------------------------------------------------------------- ------------------------------------------------------------------------- n/m (equal sign) not meaningful
The following table reconciles operating income as reported to adjusted earnings before interest, taxes, depreciation and amortization (adjusted EBITDA):
Fourth Quarter Full Year ------------------------------------------------------------------------- 2005 2004 2005 2004 ------------------------------------------------------------------------- Operating (loss) income - as reported $ (34) $ 11 $ 76 $ 137 Adjusted for: Restructuring charges 67 7 72 13 Valuation provisions and investment write-downs 13 35 21 35 Other (gains) and charges 3 - 3 (18) MDS Proteomics - - - 81 ------------------------------------------------------------------------- Adjusted operating income 49 53 172 248 Depreciation and amortization 19 17 69 58 ------------------------------------------------------------------------- Adjusted EBITDA $ 68 $ 70 $ 241 $ 306 ------------------------------------------------------------------------- -------------------------------------------------------------------------
Details of items affecting the period-to-period comparability of operating income and earnings per share are provided in the following table.
Fourth Quarter Full Year ------------------------------------------------------------------------- 2005 2004 2005 2004 ------------------------------------------------------------------------- Basic Earnings (Loss) Per Share (EPS) from continuing operations - as reported (note 3 - Consolidated Financial Statements) $ (0.21) $ 0.04 $ 0.30 $ 0.44 Adjusted for: Restructuring 0.35 0.04 0.38 0.06 Valuation provisions and investment write-downs 0.10 0.22 0.13 0.22 Other (gains) and charges 0.01 - 0.01 (0.09) MDS Proteomics - - - 0.47 ------------------------------------------------------------------------- Adjusted EPS from continuing operations $ 0.25 $ 0.30 $ 0.82 $ 1.10 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Segment results Fourth Quarter 2005 2004 ------------------------------------------------------------------------- Operating Income Operating Operating Operating Revenues (Loss) Margin Revenues Income Margin ------------------------------------------------------------------------- Life Sciences $ 304 $ (37) (12%) $ 296 $ 9 3% Health 86 3 3% 79 2 3% ------------------------------------------------------------------------- $ 390 $ (34) (9%) $ 375 $ 11 3% ------------------------------------------------------------------------- ------------------------------------------------------------------------- n/m (equal sign) not meaningful Full Year 2005 2004 ------------------------------------------------------------------------- Operating Operating Operating Income Operating Revenues Income Margin Revenues (Loss) Margin ------------------------------------------------------------------------- Life Sciences $ 1,154 $ 31 3% $ 1,141 $ 160 14% Health 335 45 13% 338 58 17% ------------------------------------------------------------------------- 1,489 76 5% 1,479 218 15% Proteomics - - - - (81) n/m ------------------------------------------------------------------------- $ 1,489 $ 76 5% $ 1,479 $ 137 9% ------------------------------------------------------------------------- ------------------------------------------------------------------------- n/m (equal sign) not meaningful Life Sciences
Review of operations - Revenues from Life Sciences businesses for the quarter were:
Fourth Quarter 2005 2004 Change ------------------------------------------------------------------------- Early-stage research $ 84 $ 86 (2%) Late-stage research 51 52 (2%) ------------------------------------------------------------------------- Pharmaceutical research services 135 138 (2%) ------------------------------------------------------------------------- Gamma sterilization 31 30 3% Nuclear medicine 56 56 - Teletherapy systems 9 11 (18%) ------------------------------------------------------------------------- Isotopes 96 97 (1%) ------------------------------------------------------------------------- Analytical instruments 73 61 20% ------------------------------------------------------------------------- $ 304 $ 296 3% ------------------------------------------------------------------------- -------------------------------------------------------------------------
Revenue from pharmaceutical research services was $135 million, a decline of 2% when compared to the prior year. Overall, our pharmaceutical research revenue continues to be unfavorably affected by the weakening of the US dollar. On a currency-adjusted basis, revenues were up 3% compared to a strong fourth quarter in the prior year.
In early-stage business for the quarter, our pharmacology unit continued to drive performance and was complemented by the integration of SkeleTech Inc.'s expertise in bone and central-nervous-system efficacy models. Our Canadian bioanalysis business is improving; however, with significantly lower sales levels when compared to the prior year, mainly driven by the ongoing US Food & Drug Administration (FDA) mandated review of bioequivalance studies. In the late-stage business, global central labs reported 10% incremental growth compared to the prior year, as work has ramped up on contracts previously in backlog.
The Company has a dedicated team focused on completing the FDA mandated review at our Montreal facility. Progress on the review is expected to accelerate as we approach completion and integrate the learnings experienced to date, and as the complexity of the remaining reviewable studies decreases. To ensure that we complete these reviews on schedule, we have reduced the volume of customer work at this facility by servicing contracts at our other lab locations. To regain our revenue base in this business, we are meeting with our customers to keep them advised of our findings and to present our comprehensive scientific capabilities to bring effective bioanalysis support to their research.
Our facility in New Orleans, which was affected by Hurricane Katrina, supports approximately 5% of the Company's total early clinical research beds. We assessed the damage sustained and have concluded that this site can be reopened by mid-fiscal 2006. We expect our insurance coverage to reimburse us for most of the losses experienced.
Our average pharmaceutical research backlog continues to expand, led by the performance of our global central labs business. Compared to the prior quarter and the prior year, backlog increased by 8% and 13% respectively.
Quarterly Average Backlog (millions of US dollars) ------------------------------------------------------- Fiscal 2004 - Quarter 1 $ 240 Quarter 2 265 Quarter 3 285 Quarter 4 300 Fiscal 2005 - Quarter 1 315 Quarter 2 305 Quarter 3 315 Quarter 4 340
Backlog measures are not defined by GAAP and our measurement of backlog may vary from that used by others. While we believe that long-term backlog trends serve as a useful metric for assessing the growth prospects for our business, backlog is not a guarantee of future revenues and provides no information about the timing on which future revenue may be recorded. We report our backlog in US dollars to reflect the underlying currency of the majority of such contracts and, therefore, reduce the volatility that would result from converting the measure to Canadian dollars.
Revenue in our Isotope business was up 6% on a currency-adjusted basis compared to the prior year, although reported revenues decreased slightly, as foreign currency impacts were only partially balanced by an approximate 15% increase in cobalt-60 sales in the quarter. Our order book for self-contained irradiators remained stable in the quarter, led by our Gammacell units. Self-contained irradiators shipped in the year increased 19% compared to the prior year. Our teletherapy unit sales experienced softness in the quarter compared to prior year; however, we look forward to initial shipments of the new Equinox platform, which are scheduled for the first quarter of 2006.
We also had good results from radiotherapeutic products in the quarter. TheraSphere(R), an innovative treatment option for liver cancer, continued to experience growth, with an approximate 80% increase in shipped doses compared to last year. In September, we were chosen by Berlex Canada to supply Yttrium-90 Chloride Sterile Solution (Y-90) for use with Berlex's ZEVALIN(R) radioimmunotherapy treatment for non-Hodgkin's lymphoma. This Canadian contract complements our supply contract with Biogen Idec Inc. in the US.
Analytical instruments revenues increased by 23% on a currency-adjusted basis and reported revenues increased 20% compared to the prior year. Overall shipments of analytical instruments were up approximately 22% in the quarter, with one-third of this increase related to our new MALDI products. Shipments of triple quad instruments to pharmaceutical customers in the small molecule market are strengthening, led by our API 4000 model and momentum from products launched earlier in the year, including the API 5000 and API 3200. The recently introduced 4800 MALDI TOF/TOF has shown strong market acceptance in the proteomics market and we have a backlog of orders at quarter-end. In addition, our ICP/MS mass spectrometer-based products have shown encouraging indications of a rebound to counterbalance the slower first half of the year. Performance in this market was led by the strong showing of our market-leading DRC II product when compared to the prior year.
Our new cell-based technology, CellKey(TM) System was introduced at the annual Society for Biomolecular Screening Conference held recently in Geneva, Switzerland. The CellKey(TM) platform will offer our drug discovery customers tools to simplify their assay design activities, address many of the bottlenecks currently experienced within secondary screening and lead optimization, and ultimately enable them to develop important new medicines more rapidly.
The operating loss for the Life Sciences segment was $37 million (after the allocation of common costs) at a margin of (12%), down from of $9 million and 3% respectively in the prior year. Adjusted EBITDA for the segment was $46 million for the fourth quarter of 2005 at a margin of 15%, compared with $55 million and 19% for the same period last year.
The following table reconciles operating income for the Life Sciences segment as reported in the interim consolidated financial statements to adjusted EBITDA:
Fourth Quarter Full Year ------------------------------------------------------------------------- 2005 2004 2005 2004 ------------------------------------------------------------------------- Operating (loss) income - as reported $ (37) $ 9 $ 31 $ 160 Adjusted for: Restructuring charges 50 6 55 8 Valuation provisions and investment write-downs 13 25 21 25 Other (gains) and charges 3 - 3 (18) ------------------------------------------------------------------------- Adjusted operating income 29 40 110 175 Depreciation and amortization 17 15 61 52 ------------------------------------------------------------------------- Adjusted EBITDA $ 46 $ 55 $ 171 $ 227 ------------------------------------------------------------------------- -------------------------------------------------------------------------
Foreign currency exposure in excess of our US dollar hedges impacted segment operating income by $9 million in the quarter compared to 2004. On a currency-adjusted basis, adjusted EBITDA for the segment increased 33%.
During the quarter, we determined that a US$5 million long-term investment is impaired based on our assessment of the carrying value of the receivable compared to the present value of expected future cash flows. The write-off of this asset has been reflected as an adjustment in arriving at adjusted EBITDA for the quarter.
The work MDS Pharma Services conducts in Montreal for foreign clients is eligible for certain tax credits. During the quarter, we increased the valuation provision relating to these credits by approximately $3 million, to reflect our current view of the likelihood that such claims can be collected given current assessing practices.
In our pharmaceutical research services business, strong performance by our pharmacology business unit, combined with a cost reduction program relating to selling and administrative costs, made a positive contribution to operating income. Our bioanalysis business, inclusive of the incremental FDA review costs and adjustments to tax credits, along with timing delays for certain global clinical development projects in our North American business, contributed lower operating income compared to the prior year.
Our isotopes business experienced a decrease in operating income versus the prior year, driven primarily by currency impacts, partially balanced by the increased shipments of cobalt-60, and the continuing growth of our TheraSphere(R) product.
The incremental change in operating income related to analytical instruments was favorable when compared to the prior year, resulting largely from the recovery within our ICP/MS products, strength from our triple quad products, and solid performance from our MALDI 4800 and other new products.
Capital expenditures - Net purchases of capital assets in Life Sciences amounted to $37 million for the quarter compared to $32 million last year. Included in capital expenditures for the quarter is $26 million relating to the MAPLE facility, of which $2 million reflects capitalized interest costs.
Earlier this year, we commenced a mediation process with Atomic Energy of Canada Limited (AECL) relating to the MAPLE facilities in an attempt to settle our dispute with regards to commissioning delays, as well as construction and pre-commissioning and post-commissioning operating costs. Formal mediation proceedings were held during the fourth quarter and the mediation process is ongoing.
AECL has obtained a renewal of the Class I Non-Power Reactor Operating License to operate the MAPLE 1 and 2 reactors at the Chalk River Laboratories from the Canadian Nuclear Safety Commission (CNSC), replacing the license that was scheduled to expire on November 30, 2005. The renewed license, which was obtained subsequent to quarter-end, is valid until November 30, 2007 and will permit work to continue on the commissioning of the reactors. Commissioning remains de
