MDS Reports Preliminary Fourth Quarter 2008 Results
For the fourth quarter, MDS Pharma Services net revenue decreased 9% over the prior year. Overall, early-stage revenue was flat with growth in Phase I and bioanalytical services. This was offset by a decline in late-stage, which was impacted by customer-driven delays. Adjusted EBITDA was $8 million, compared with $1 million last year, and included restructuring savings and a $9 million improvement related to the impact of foreign exchange. These benefits were partially offset by inflation and lower revenue.
New business wins of $131 million, compared with $134 million in the equivalent period last year, resulted in a backlog of $485 million for the quarter, up 14% from $426 million in the prior year. Sequentially, new business wins decreased 22% as clients continue to reprioritize their product pipelines. With more than 40% of the backlog denominated in currencies outside of the U.S., and a weakening euro during the quarter, backlog decreased 12% sequentially.
As previously announced, the Company carries out goodwill testing on an annual basis and has determined that a write-down of goodwill at MDS Pharma Services is appropriate. This write-down is due to the decline in the overall stock-market valuation of the contract-research sector, the uncertain economic outlook and the delay in profit recovery at MDS Pharma Services. Following completion of its detailed assessment to determine the fair value of the business, MDS expects to record a goodwill write-down in the range of $270 million to $370 million.
During the fourth quarter, MDS Pharma Services moved its Singapore central lab operations to a new and expanded facility. The new facility has doubled the previous capacity for sample storage, processing and safety testing to better serve current and emerging demand for laboratory research services in the Asia-Pacific region. In addition, MDS Pharma Services received two Good Clinical Practice Journal awards for excellence in clinical-trial management.
MDS Nordion's revenue for the fourth quarter was $84 million, compared with $76 million last year driven by strength in sterilization technologies and medical isotopes. In 2008, foreign exchange and the sale of non-strategic product lines both had a negative impact on revenue growth. Adjusted EBITDA was $21 million, up 5% from $20 million last year. Adjusted EBITDA benefited from strength in high-margin sterilization technologies volumes and from increased medical isotope demand due to a nuclear reactor shutdown in Europe. Additional volume realized as a result of the European reactor shutdown delivered approximately $6 million of incremental adjusted EBITDA this quarter.
MDS Nordion has a long-term contract to buy cobalt from a Russian supplier. This contract is denominated in U.S. dollars and, according to U.S. GAAP, creates an embedded derivative. The pronounced rise in the U.S. dollar during the fourth quarter of 2008 resulted in a $13 million loss on this embedded derivative. A $4 million embedded derivative gain was recorded in the fourth quarter of 2007 on that same contract. Excluding the impact of these unrealized embedded derivative charges, adjusted EBITDA more than doubled year over year.
During the fourth quarter, the Company assessed its MAPLE assets and determined, based on its dispute with Atomic Energy of Canada Limited (AECL) and the Government of Canada, that a net write-off of $246 million was appropriate under applicable accounting rules. This was driven by the difficulty of projecting a specific outcome for any dispute of this nature. MDS believes that it has a strong case against AECL and the Government of Canada with respect to the MAPLE agreement, which the Company continues to actively pursue.
In addition, MDS has determined that its original accounting in 2006 for the MAPLE transaction as an intangible asset was incorrect and has restated its historical results to report the MAPLE facilities as construction-in-progress. The MAPLE write-off includes the impact of this restatement.
MDS Analytical Technologies reported $99 million in revenue, down 8% from $108 million in the prior year. The year-over-year decline was largely driven by lower shipments of mass spectrometers as end-user revenue decreased 11%. MDS Analytical Technologies continues to see strength across Asia and in applied markets for food, water and environmental testing; however, demand for high-end instruments, particularly in North America and to a lesser extent Europe, remains soft. Foreign exchange had a negative impact on revenue of $3 million during the quarter. For the quarter, MDS Analytical Technologies reported $17 million for adjusted EBITDA, compared with $27 million last year. Declines were primarily driven by lower revenues.
To better serve our fastest growing markets and to further improve profitability, MDS Analytical Technologies is accelerating the transfer of its manufacturing base from North America to Asia. These actions and others are expected to generate approximately $7 million in annualized savings. MDS expects to record a restructuring charge in the first quarter of 2009 of roughly $5 million. This restructuring is expected to impact approximately 200 people.
During the fourth quarter, MDS Analytical Technologies introduced a next-generation mass spectrometry platform with the launch of two of the most advanced mass spectrometry systems, the AB SCIEX Triple Quad(TM) 5500 and the AB SCIEX QTRAP(R) 5500. These two new systems provide researchers with complete workflow solutions that deliver superior functionality, speed and performance. The systems were both announced and shipped to customers in the fourth-quarter.
Corporate SG&A expenses were $9 million in the fourth quarter of 2008 down $2 million from the fourth quarter of 2007, primarily due to foreign exchange gains and lower incentive and stock-based compensation costs.
During the quarter, MDS also recorded $8 million in write-downs for certain long-term investments and treated these write-downs as adjusting items.
New Disclosure and Delivery Method for Reporting Financial Results
MDS has adopted a new approach to releasing quarterly financial results. The Company will no longer use the newswires to issue quarterly Management Discussion and Analysis (MD&A) and financial statements and notes. For the Company's first, second and third quarters, MD&A and financial statements and notes will be posted to the Company's Website at mdsinc.com and filed with the relevant Canadian and U.S. securities regulators. Commencing this quarter, for fourth quarter results, a press release will be issued with expanded disclosure. However, fourth quarter results will no longer be accompanied by an MD&A and financial statements and notes. A comprehensive MD&A with financial statements and notes will be provided on a year-end basis with the Company's Annual Report, Annual Information Form and Proxy Circular Filings. These documents are expected to be filed in January 2009 with the relevant securities regulators, and will also be posted to mdsinc.com.
MDS will hold a conference call today at 9:30 a.m. EST to discuss fourth 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 Inc. (TSX: MDS; NYSE: MDZ) 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 5,000 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 and services , the degree of market penetration of its products and services, the ability to secure a reliable supply of raw materials, the impact of our clients' exercising rights to delay or cancel certain contracts, the strength of the global economy, the stability of global equity markets, the availability and cost of financing, the impact of the movement of the U.S. 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 U.S. securities regulatory authorities from time to time, including MDS's quarterly and annual MD&A, annual information form, and annual report on Form 40-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 U.S. GAAP basis. MDS converted to U.S. GAAP reporting with the filing of the Company's 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 revenue, 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 actual results to GAAP financial results in its MD&A and Annual Report.
Consolidated net revenues, which exclude reimbursement revenue, were down 4% on a reported basis in the fourth quarter of 2008 with declines at MDS Pharma Services and MDS Analytical Technologies offsetting an increase at MDS Nordion. On a year over year basis, foreign exchange impacts decreased net revenue in the fourth-quarter by approximately $13 million and the sale of certain product lines within MDS Nordion reduced revenue by roughly $10 million. Excluding the impact of foreign exchange plus acquisitions and divestitures, net revenue increased 4%.
The net loss from continuing operations, excluding the expected 2008 MDS Pharma Services goodwill write-down estimated at $270 million to $370 million, for the fourth quarter of 2008 was $255 million, compared with income of $17 million last year. Primary drivers for this decline include the MAPLE write-off of $246 million, $8 million of long-term investment write-downs and a $2 million in-process R&D expense related to a technology acquisition. The fourth quarter of 2007 included $5 million of acquisition and integration costs associated with the Molecular Devices Corporation acquisition; a $4 million reduction in restructuring relating to employees who left voluntarily prior to their planned termination; a $5 million gain resulting from the bankruptcy proceeds of Protana Inc.; and a $2 million provision related to our investment in asset-backed commercial paper. Note the above does not include the pending fourth quarter write-down of MDS Pharma Services goodwill. The items listed above were treated as adjusting items in calculating adjusted EBITDA.
Adjusted EBITDA of $37 million in the fourth quarter of 2008 was up $2 million from the fourth quarter of 2007. On a year-over-year basis, foreign exchange gains from the revaluation of certain assets and liabilities resulted in a $20 million increase in adjusted EBITDA, which was largely offset by a $17 million reduction due to losses on embedded derivatives. Excluding foreign exchange and embedded derivative impacts, higher cobalt shipment and medical isotope demand increased adjusted EBITDA at MDS Nordion, which was offset by declines at both MDS Analytical Technologies and MDS Pharma Services primarily as a result of lower revenue.
Adjusted net income and adjusted earnings per share reflect the adjustments described above on an after-tax basis.
In the fourth quarter of 2008, the Company identified certain adjustments related to the calculation of MDS Pharma Services order backlog which resulted in an increase to the third quarter 2008 ending backlog of approximately $65 million. The increase in ending backlog was a result of improper calculation of foreign exchange impacts and the exclusion of certain orders or portions of orders.
New orders of $131 million in the fourth quarter of 2008 were down 2% from the fourth quarter of 2007, primarily due to lower orders in preclinical early-stage services. Compared with the fourth quarter of 2007, period-end backlog was up 14% driven by higher new order wins, particularly in the first three quarters of 2008, which were partially offset by a foreign exchange revaluation due to a decline in the euro at the end of 2008, compared with the end 2007. Period-ending backlog declined $66 million from the third quarter of 2008, primarily driven by the impact of foreign exchange due to a weaker euro in the fourth quarter and a moderate level of cancellations.
MDS Pharma Services Goodwill
During the annual fourth-quarter evaluation of goodwill, MDS determined that the carrying value of its MDS Pharma Services reporting unit exceeded its estimated fair value, indicating that its goodwill was impaired. The Company believes that the decline in overall contract research sector's market valuations, ongoing economic uncertainty and the delay in profit recovery at its MDS Pharma Services business are principal factors that drive the decline in its estimated fair market value as compared with its book value.
The Company is currently performing the second step of the goodwill impairment test for its MDS Pharma Services business. This involves allocating the estimated fair value of the reporting unit to all of its assets, including intangible assets regardless of whether they are recorded, and liabilities other than goodwill and comparing the residual amount to the carrying value of goodwill. The Company is in the process of finalizing its calculations and, at this time, believes that the goodwill impairment will be in the range of $270 million to $370 million. The final goodwill impairment charge will be incorporated into MDS's 2008 year-end reports which are expected to be filed in January 2009.
MDS has reviewed its accounting for the 2006 MAPLE transaction which resulted from a mediated dispute with AECL, and has determined that the original accounting treatment was not correct. Instead, the transaction should have been accounted for as a construction-in-progress, and when completed, as a capitalized lease over the estimated 40-year useful life of the MAPLE facilities. Under lease accounting, the $356 million incurred to build the MAPLE reactors prior to their transfer to AECL have been reclassified as a construction-in-progress and no gain or loss was recorded. As a result, the $36 million pre-tax loss and associated income taxes previously reported in 2006 have been reversed and the 2007 balance sheet has been restated. From 2006 to 2008, $147 million of additional costs incurred by AECL in their efforts to complete the project were recorded in construction-in-progress and a corresponding amount was recorded as a long-term non-cash financing liability. In addition, $25 million of implicit interest expense associated with MDS construction costs during the period should have been capitalized, resulting in an increase in net income in each period subsequent to the 2006 transaction with AECL. Prior to the write-off of the MAPLE facilities in the fourth quarter 2008, the restatement increases net assets approximately $38 million and 2008 net income by about $4 million.
Write-off of MAPLE facilities
In the fourth quarter, MDS assessed the MAPLE facilities net assets in light of its dispute with AECL and the Government of Canada, and determined that a net write-off of $246 million was appropriate under applicable accounting rules, given the difficulty of projecting a specific outcome for any dispute of this nature. After restating the MAPLE facilities transaction, the write-off includes $501 million of construction-in-progress and $160 million of long-term financing liabilities. This write-off also resulted in the recognition of $95 million of deferred tax assets.
Debt Covenants Impact on Normal Course Issuer Bid
MDS long-term senior unsecured notes, which mature in several tranches up to 2014, contain a covenant that restricts the Company's use of cash for certain purposes if cumulative net income from the date of issuance of the notes falls below a predefined amount. The restrictions on the use of cash include the repurchase of shares, payment of dividends and investments in businesses that the Company does not control. While MDS had no plans to pay dividends or invest in non-controlled businesses, the Company has repurchased shares in the past two years. In 2008, MDS purchased 2.9 million shares for $44 million under its Normal Course Issuer Bid. In 2007, MDS used $441 million to purchase 22.8 million shares under its substantial issuer bid. With the write-off of certain MAPLE net assets and the expected write-down of MDS Pharma Services goodwill, its cumulative net income is expected to be below the amount defined in the covenant. At this time, the Company cannot determine when it will overcome this restriction.
Given the impact of the MAPLE write-off and the expected write-down of MDS Pharma Services goodwill, MDS expects the loss from continuing operations and the loss per share to be significantly below its annual guidance range. These write-offs are also expected to have a significant impact on the Company's 2008 effective tax rate.
The table above compares preliminary unaudited 2008 results, excluding the write-down of MDS Pharma Services goodwill with the annual guidance MDS provided in September, 2008. An updated comparison of audited 2008 results to annual guidance will be included in the Company's MD&A which is expected to be filed in January 2009.
The Company's preliminary full-year performance on total revenue and net revenue is expected to be below the low end of its September 2008 guidance by $15 million as a result of impact of foreign exchange from the strengthening of the U.S. dollar in the latter part of the fourth quarter of 2008, lower than expected demand for high-end instruments at MDS Analytical Technologies and lower revenue at MDS Pharma Services as a result of higher-than-expected, customer-driven project delays and cancellations.
Preliminary adjusted EBITDA and adjusted EPS are expected to be $152 million and $0.21, below the low end of the Company's guidance range by $8 million and $0.06, respectively. Excluding the impact of the significant strengthening of the U.S. dollar in the latter part of the fourth quarter of 2008, which resulted in a $13 million loss on embedded derivatives and a $9 million gain from the revaluation of certain assets and liabilities, MDS's results are expected to be $4 million below guidance primarily as a result of the shortfalls in revenue at MDS Analytical Technologies and MDS Pharma Services as described above.
Preliminary 2008 capital expenditures are expected to be $56 million and within the guidance range MDS provided in September 2008.
In 2008, MDS provided annual guidance to facilitate the transition to U.S. GAAP. Moving forward, the Company does not intend to issue guidance.
Quarterly Highlights - MDS reported net revenue of $295 million, down 4% from $307 million in the prior year. Excluding the impact of foreign exchange plus acquisitions and divestitures, net revenue increased 4%. - MDS delivered adjusted EBITDA of $37 million, up 6% from $35 million in the prior year. - MDS Pharma Services reported $112 million in net revenue, down from $123 million last year, and $8 million in adjusted EBITDA, up from $1 million in the prior year. - MDS Nordion delivered solid results with revenue of $84 million, up from $76 million last year. Adjusted EBITDA was $21 million versus $20 million last year, including an unrealized embedded derivative charge of $13 million in 2008 and an unrealized gain of $4 million in 2007. - MDS Analytical Technologies continued to be impacted by soft demand for high-end instruments and reported revenue of $99 million and adjusted EBITDA of $17 million, compared with $108 million and $27 million last year, respectively. - MDS will record a non-cash after-tax charge of $246 million to write off the net book value of certain assets related to the MAPLE facilities project. In addition, the Company expects to record a charge in the range of $270 million to $370 million to write down MDS Pharma Services goodwill. - MDS repurchased 1.0 million shares for $12 million under its Normal Course Issuer Bid during the fourth quarter. As a result of the reported net loss, driven by the write-down charges, a debt covenant restricts MDS from further share repurchases for the foreseeable future. "While 2008 included successes and disappointments, we have made progresson our improvement initiatives," said Stephen P. DeFalco, President and ChiefExecutive Officer, MDS Inc. "We are taking action to make MDS more competitiveas we head into 2009 and a backdrop of challenging economic conditions." Operating Segment Results MDS Pharma Services % Change (millions of U.S. dollars) Q4 2008 Q4 2007 Reported ------------------------------------------------------------------------- Net Revenues: Early-stage 65 66 (2%) Late-stage 47 57 (18%) ------------------------------------------------------------------------- ------------------------------------------------------------------------- $ 112 $ 123 (9%) Reimbursement revenues 27 20 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Total revenues $ 139 $ 143 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Adjusted EBITDA: $ 8 $ 1 700% 7% 1% - ------------------------------------------------------------------------- -------------------------------------------------------------------------
SOURCE MDS Inc.
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