PATHEON REPORTS THIRD QUARTER FISCAL 2010 RESULTS
TORONTO, Sept. 9 /PRNewswire-FirstCall/ - Patheon Inc. (TSX: PTI), a leading provider of contract development and manufacturing services to the global pharmaceutical industry, announced today its results for the third quarter and nine months ended July 31, 2010. Total revenues for the third quarter were $163.3 million or 0.7% lower than the same period last year. Excluding currency fluctuations, current year third quarter revenues would have increased by approximately 3.9% versus the same period last year. Operating income for the third quarter increased to $5.9 million, up from $3.7 million in the same period last year. Third quarter adjusted EBITDA was $23.7 million, up from $13.5 million in the comparable period last year. All amounts are in U.S. dollars unless otherwise indicated.
In commenting on results, Wes Wheeler, Patheon's Chief Executive Officer and President said, "We are beginning to see increased demand for our pharmaceutical development services (PDS) business. New business awards in the third quarter were the strongest we've seen in two years. We're also experiencing historically high quote activity in our commercial manufacturing business, but decision making timelines in the pharmaceutical industry continue to be very slow. We are encouraged by the potential for current quote activity, which appears to largely be driven by recent industry mergers and internal restructuring programs, to provide a source of solid growth over the next 12 to 18 months."
"The Company's operating performance improvement is due in part to reduced losses at our Puerto Rico operations, which had experienced significant operational issues in the third quarter last year. However, Puerto Rico continues to operate at a loss due to high Puerto Rico energy costs and the inefficiencies of operating two sites. We are working to minimize the near term impact, but consolidating the operations into our Manati site is the key to sustained profitability in Puerto Rico. We have signed a letter of intent for the sale of the Caguas site, and the consolidation plan is progressing well towards its scheduled completion at the end of calendar 2011," said Mr. Wheeler.
Third Quarter 2010 Operating Results from Continuing Operations
Gross profit for the period increased 15.4% to $34.4 million. Gross profit margin increased to 21.1% in the third quarter 2010 from 18.1% in the third quarter of 2009. The increase in gross profit was primarily due to stronger revenues in Puerto Rico and Swindon, favorable foreign exchange impact, favorable mix, and lower supplies and maintenance. These were partially offset by higher depreciation primarily due to the planned closure and associated accelerated depreciation of the Caguas facility.
Selling, general and administrative costs were $26.1 million, up $0.2 million or 0.8% from prior year. The increase is primarily due to higher employee costs and depreciation, partially offset by the non recurrence of Special Committee costs of $2.8 million recognized in the three months ended July 31, 2009, and favorable foreign exchange impact.
Repositioning expenses for the three months ended July 31, 2010 were $2.4 million for additional severance and project costs related to the Caguas closure and consolidation in Puerto Rico. During the third quarter last year, the company incurred $0.2 million in connection with the shut down and transition of business out of the York Mills facility.
Operating income for the period increased to $5.9 million or 3.6% of revenues from income of $3.7 million or 2.3% of revenues in the same period last year as a result of the factors discussed above.
The company reported a loss before discontinued operations for the three months ended July 31, 2010 of $3.0 million, compared to a loss of $5.2 million in the same period last year. Included in this loss are $6.1 million of costs associated with the Caguas consolidation project, including repositioning, impairment and accelerated depreciation expense.
Third Quarter 2010 Highlights of Business Segment Results
Commercial Manufacturing - Revenues from commercial manufacturing operations for the three months ended July 31, 2010 decreased by 2.0%, or $2.7 million, to $130.2 million from $132.9 million in the same period of 2009. Had local currencies remained constant to the rates of the prior year, commercial manufacturing revenues would have been approximately 3.1% higher than 2009.
North American commercial revenues increased $5.3 million, or 9.2%. Had the Canadian dollar remained constant to the prior year rates, North American revenues would have 8.5% higher than 2009. Increased revenues were primarily the result of improved production in Puerto Rico and favorable foreign exchange, partially offset by lower revenues in Whitby.
European commercial revenues decreased by $8.0 million or 10.6%. Had European currencies remained constant to the rates of the prior year, European revenues would have been approximately 1.1% lower than the same period of 2009. The decrease is primarily due to reduced volumes in Bourgoin due to the decision of a client to repatriate certain products to its own facilities for strategic purposes.
Adjusted EBITDA from the commercial manufacturing operations for the three months ended July 31, 2010 increased by 47.9%, or $5.8 million, to $17.9 million from $12.1 million in the same period of 2009. This represents an Adjusted EBITDA margin of 13.7% compared with 9.1% in the same period last year. Had local currencies remained constant to prior year rates and after eliminating the impact of all foreign exchange gains and losses, commercial manufacturing Adjusted EBITDA would have been approximately $0.9 million higher than the reported number in the current period.
North American operations reported an increase of $7.7 million, or 700% in Adjusted EBITDA. The increase in Adjusted EBITDA was primarily driven by increased revenues in Puerto Rico and Toronto, and favorable foreign exchange forward contracts in Canada. The Puerto Rico operations performed significantly better in the third quarter of 2010 than the same quarter last year, which was characterized by production problems. However, the Puerto Rico operations did generate an EBITDA loss of $3.2 million in the current period due to the inefficiencies of operating two sites in Puerto Rico. The planned consolidation of the two sites by the end of 2011 is expected to allow the Puerto Rico business to generate positive EBITDA.
European Adjusted EBITDA decreased by $1.9 million, or 14.4% for the three months ended July 31, 2010. The decrease is primarily due to unfavorable foreign exchange from the weakening of the Euro and U.K. Sterling against the U.S. dollar.
Pharmaceutical Development Services ("PDS") - PDS revenues for the three months ended July 31, 2010 increased by 5.1%, or $1.6 million, to $33.1 million from $31.5 million in the same period of 2009. Had the local currency rates remained constant to the prior year, PDS revenues would have been approximately 7.6% higher than the same period of 2009.
Adjusted EBITDA from the PDS operations for the three months ended July 31, 2010 increased by 39.5%, or $3.2 million to $11.3 million from $8.1 million in the same period of 2009. Had local currencies remained constant to the rates of the prior year and after eliminating the impact of all foreign exchange gains and losses, PDS Adjusted EBITDA would have been the same as the reported amount. This increase was due to higher revenues and cost controls.
Nine Month Year-to-Date 2010 Operating Results from Continuing Operations
Revenue for the period was $493.5 million, up 3.0% from the prior period. Excluding currency fluctuations, current year revenues would have been approximately 1.6% higher than the same period of 2009. Revenues from commercial manufacturing increased 3.8% to $400.5 million from $385.8 million in the prior period. PDS saw a reduction in revenue of 0.2% to $93.0 million from $93.2 million in the prior period.
Gross profit for the period decreased 0.7% to $102.2 million. Gross profit margin decreased to 20.7% in the first nine months of 2010 from 21.5% in the same period last year. This decrease was due to unfavorable foreign exchange impact on cost of goods sold, unfavorable mix, higher depreciation due in part to the planned Caguas shutdown, and higher lease expense. These factors were partially offset by a decrease in cost of goods sold due to the recognition of the Canadian research and development investment tax credits.
Selling, general and administrative costs were $82.1 million, up $1.6 million, or 2.0% from prior year. The increase is primarily due to unfavorable foreign exchange, higher depreciation, and employment expenses, partially offset by Special Committee costs of $3.0 million for the nine months ended July 31, 2010 compared to $6.2 million in the same period last year. The nine months ended July 31, 2009 also included $2.0 million of transitional expenses for the opening of the new U.S. headquarters.
Repositioning expenses for the nine months ended July 31, 2010 were $5.8 million in connection with the business consolidation in Puerto Rico. The total repositioning expense for the Caguas consolidation is expected to be approximately $9.0 million. During the nine months ended July 31, 2009, the company incurred $1.6 million in connection with the shut down and transition of business out of the York Mills facility.
Operating income for the period decreased to $14.3 million or 2.9% of revenues from income of $20.8 million or 4.3% of revenues in the same period last year as a result of the factors discussed above.
The company recorded a loss before discontinued operations for the nine months ended July 31, 2010 of $2.4 million, or 1.9 cents per share compared with a loss of $4.9 million, or 17.5 cents per share in the same period of 2009. Prior year results include dividends on the convertible preferred shares of $11.1 million. Dividends were recorded until July 28, 2009, the date when these preferred shares were converted to restricted voting shares by JLL.
2010 Outlook
Patheon continues to anticipate that full fiscal year 2010 Revenues and Adjusted EBITDA (ignoring Special Committee costs in both periods) will exceed comparable results from the prior year. The extent to which 2010 results are achieved and will exceed 2009 is dependent on, among other things: foreign exchange rates, the timing in pharmaceutical development outsourced decision making, the timing of regulatory drug approvals, and the timing of integration activity related to recent major pharmaceutical mergers.
Conference Call
Patheon will host a webcast conference call with financial analysts on Thursday, September 9, 2010 at 10:00 a.m. (Eastern Standard Time). The call will begin with a brief discussion, followed by a question-and-answer period with investment analysts. Interested parties are invited to access the live call, via telephone, in listen-only mode, toll free at 1-888-231-8191 (U.S., including Puerto Rico) and 1-647-427-7450 (Canada and International). Listeners are encouraged to dial in five to fifteen minutes in advance to avoid delays. The live audio webcast will be available via the web at www.patheon.com. An archived version of the third quarter audio webcast will be available at www.patheon.com.
About Patheon
Patheon Inc. (TSX: PTI) is a leading global provider of contract development and manufacturing services to the global pharmaceutical industry. Patheon provides the highest quality products and services to approximately 300 of the world's leading pharmaceutical and biotechnology companies. Patheon's services range from preclinical development through commercial manufacturing of a full array of dosage forms including parenteral, solid, semi-solid and liquid forms. Patheon uses many innovative technologies including single-use disposables, liquid-filled hard capsules and a variety of modified release technologies. Patheon's comprehensive range of fully integrated Pharmaceutical Development Services includes pre-formulation, formulation, analytical development, clinical manufacturing, scale-up and commercialization. Patheon can take customers direct to clinic with global clinical packaging and distribution services and Patheon's Quick to Clinic(TM) programs can accelerate early phase development projects to clinical trials while minimizing the consumption of valuable API. Patheon's integrated development and manufacturing network of 11 facilities, and eight development centers across North America and Europe, ensures that customer products can be launched with confidence anywhere in the world.
Use of Non-GAAP Financial Measures
References in this press release to "Adjusted EBITDA" are to income (loss) from continuing operations before repositioning expenses, interest expense, foreign exchange losses reclassified from other comprehensive income, refinancing expenses, gains and losses on sale of fixed assets, gain on extinguishment of debt, income taxes, asset impairment charge, depreciation and amortization and other non-cash expenses. "Adjusted EBITDA margin" is Adjusted EBITDA as a percentage of revenues.
Since Adjusted EBITDA is a non-GAAP measure that does not have a standardized meaning, it may not be comparable to similar measures presented by other issuers. Readers are cautioned that these non-GAAP measures should not be construed as alternatives to income (loss) determined in accordance with GAAP as indicators of performance. Adjusted EBITDA is used by management as an internal measure of profitability. The company's major credit facilities also have certain covenant calculations that are based on Adjusted EBITDA. The company has included these measures because it believes that this information is used by certain investors to assess financial performance of the company, before non-cash charges and large non-recurring costs. Please see Note 6 of the consolidated interim financial statements for an Adjusted EBITDA bridge.
Caution Concerning Forward-Looking Statements
This press release contains forward-looking statements which reflect management's expectations regarding the company's future growth, results of operations, performance (both operational and financial) and business prospects and opportunities. All statements, other than statements of historical fact, are forward-looking statements. Wherever possible, words such as "plans", "expects" or "does not expect", "forecasts", "anticipates" or "does not anticipate", "believes", "intends" and similar expressions or statements that certain actions, events or results "may", "could", "would", "might" or "will" be taken, occur or be achieved have been used to identify these forward-looking statements. Although the forward-looking statements contained in this press release reflect management's current assumptions based upon information currently available to management and based upon what management believes to be reasonable assumptions, the company cannot be certain that actual results will be consistent with these forward-looking statements. Current material assumptions relate to customer volumes, regulatory compliance and foreign exchange rates. Forward-looking statements necessarily involve significant known and unknown risks, assumptions and uncertainties that may cause the company's actual results, performance, prospects and opportunities in future periods to differ materially from those expressed or implied by such forward-looking statements. These risks and uncertainties include, among other things: regulatory approval of and market demand for client products; general economic risks; credit and client concentration; the ability to identify and secure new contracts; regulatory matters, including compliance with pharmaceutical regulations; international operations risks; exposure to foreign currency risks; competition; product liability claims; intellectual property; environmental, health and safety risks; substantial financial leverage; interest rates; initiatives to reduce operating expenses; improved results from the consolidation of operations in Puerto Rico; use of non-GAAP financial measures; significant shareholders; risks associated with information systems; and supply arrangements. For additional information regarding risks and uncertainties that could affect our business, please see the "Description of the Business - Risk Factors" section in our Annual Information Form, and the "Risk Factors" section in our MD&A for the year ended October 31, 2009, both of which are available on SEDAR at www.sedar.com. Although the company has attempted to identify important risks and factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements, there may be other factors and risks that cause actions, events or results not to be as anticipated, estimated or intended. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements. These forward-looking statements are made as of the date of this press release and, except as required by law, the company assumes no obligation to update or revise them to reflect new events or circumstances.
CONSOLIDATED STATEMENTS OF LOSS
(unaudited)
Three months ended Nine months ended
July 31, July 31,
2010 2009 2010 2009
-------------------------------------------------------------------------
(in millions of U.S. dollars,
except loss per share) $ $ $ $
-------------------------------------------------------------------------
Revenues 163.3 164.4 493.5 479.0
Cost of goods sold 128.9 134.6 391.3 376.1
----------------------------------------
Gross profit 34.4 29.8 102.2 102.9
Selling, general and
administrative expenses 26.1 25.9 82.1 80.5
Repositioning expenses 2.4 0.2 5.8 1.6
----------------------------------------
Operating income 5.9 3.7 14.3 20.8
Interest expense, net 6.3 3.8 13.2 11.7
Impairment charge 2.1 - 3.4 -
Foreign exchange (gain) loss (2.2) 1.1 (3.5) 6.6
Loss on sale of fixed assets - - 0.1 -
Refinancing Expenses 0.3 - 12.0 -
Other 0.4 0.5 (0.1) 0.7
----------------------------------------
(Loss) income from continuing
operations before income taxes (1.0) (1.7) (10.8) 1.8
Provision for (benefit from)
income taxes 2.0 3.5 (8.4) 6.7
----------------------------------------
Loss before discontinued
operations (3.0) (5.2) (2.4) (4.9)
Loss from discontinued operations - (0.8) (0.8) (6.6)
----------------------------------------
Net loss for the period (3.0) (6.0) (3.2) (11.5)
Dividends on convertible
preferred shares - 3.8 - 11.1
----------------------------------------
Net loss attributable to
restricted voting shareholders (3.0) (9.8) (3.2) (22.6)
----------------------------------------
----------------------------------------
Basic and diluted loss per share
From continuing operations ($0.023) ($0.097) ($0.019) ($0.175)
From discontinued operations $0.000 ($0.009) ($0.006) ($0.072)
----------------------------------------
($0.023) ($0.106) ($0.025) ($0.247)
----------------------------------------
Average number of shares
outstanding during period -
basic and diluted (in thousands) 129,168 92,389 129,168 91,566
----------------------------------------
CONSOLIDATED BALANCE SHEETS
(unaudited)
As of As of
July 31, October 31,
2010 2009
-------------------------------------------------------------------------
(in millions of U.S. dollars) $ $
-------------------------------------------------------------------------
Assets
Current
Cash and cash equivalents 57.0 22.3
Accounts receivable 121.4 151.5
Inventories 78.9 78.3
Income taxes receivable 1.5 2.6
Prepaid expenses and other 12.9 11.8
Future tax assets - short term 11.0 10.5
--------------------------
Total current assets 282.7 277.0
--------------------------
Capital assets 463.8 490.8
Intangible assets 1.9 3.2
Future tax assets 12.4 11.8
Goodwill 3.4 3.2
Investments 4.8 4.1
Long-term assets held for sale 0.7 0.7
Other long-term assets 18.1 -
--------------------------
Total assets 787.8 790.8
--------------------------
--------------------------
Liabilities and shareholders' equity
Current
Short term borrowings 3.5 14.0
Accounts payable and accrued liabilities 138.0 170.8
Income taxes payable 0.2 1.8
Deferred revenues - short term 25.8 4.6
Future tax liability - short term - 1.7
Current portion of long-term debt 3.3 15.4
--------------------------
Total current liabilities 170.8 208.3
--------------------------
Long-term debt 274.8 221.1
Deferred revenues 31.9 37.1
Future tax liabilities 28.0 31.5
Other long-term liabilities 24.7 21.5
--------------------------
Total liabilities 530.2 519.5
--------------------------
Shareholders' equity
Restricted voting shares 553.8 553.8
Contributed surplus 9.1 7.7
Deficit (328.9) (325.7)
Accumulated other comprehensive income 23.6 35.5
--------------------------
Total shareholders' equity 257.6 271.3
--------------------------
Total liabilities and shareholders' equity 787.8 790.8
--------------------------
--------------------------
Patheon Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three months ended Nine months ended
July 31, July 31,
2010 2009 2010 2009
-------------------------------------------------------------------------
(in millions of U.S. dollars) $ $ $ $
-------------------------------------------------------------------------
Operating activities
Loss before discontinued
operations (3.0) (5.2) (2.4) (4.9)
Add (deduct) charges to
operations not requiring
a current cash payment
Depreciation and amortization 13.2 10.7 39.5 30.7
Impairment charge 2.1 - 3.4 -
Other non-cash interest 0.2 0.1 2.3 0.4
Change in other long-term
assets and liabilities 0.4 0.7 (8.9) 0.3
Future income taxes 1.4 2.3 (11.7) (0.5)
Amortization of deferred
revenues (13.0) (0.1) (24.5) (0.4)
Loss on sale of fixed assets - - 0.1 -
Stock-based compensation
expense 0.8 - 1.4 0.9
Other 0.4 1.5 - 1.2
------------------ -------------------
2.5 10.0 (0.8) 27.7
Net change in non-cash working
capital balances related to
continuing operations (12.3) 11.3 (3.4) (0.2)
Increase in deferred revenues 3.8 0.9 44.1 5.0
------------------ -------------------
Cash (used in) provided by
operating activities of
continuing operations (6.0) 22.2 39.9 32.5
Cash provided by (used in)
operating activities of
discontinued operations 0.3 (1.6) (0.8) (8.2)
------------------ -------------------
Cash (used in) provided by
operating activities (5.7) 20.6 39.1 24.3
------------------ -------------------
Investing activities
Additions to capital assets (13.5) (12.2) (32.9) (33.4)
Net increase in investments - - (0.9) (0.3)
Investment in intangibles - - (0.2) -
------------------ -------------------
Cash used in investing activities
of continuing operations (13.5) (12.2) (34.0) (33.7)
Cash provided by investing
activities of discontinued
operations - 0.2 - 0.2
------------------ -------------------
Cash used in investing activities (13.5) (12.0) (34.0) (33.5)
------------------ -------------------
Financing activities
Increase (decrease) in
short-term borrowings 3.5 3.4 (9.1) 7.3
Increase in long-term debt 2.0 7.7 288.9 48.4
Repayment of long-term debt (2.1) (11.5) (246.4) (36.7)
------------------ -------------------
Cash provided by (used in)
financing activities of
continuing operations 3.4 (0.4) 33.4 19.0
------------------ -------------------
Cash provided by (used in)
financing activities 3.4 (0.4) 33.4 19.0
------------------ -------------------
Effect of exchange rate changes
on cash and cash equivalents (3.0) (2.1) (3.8) (1.6)
------------------ -------------------
Net (decrease) increase in cash
and cash equivalents during
the period (18.8) 6.1 34.7 8.2
Cash and cash equivalents,
beginning of period 75.8 22.3 22.3 20.2
------------------ -------------------
Cash and cash equivalents,
end of period 57.0 28.4 57.0 28.4
------------------ -------------------
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Supplemental cash flow information
Interest paid 3.8 3.7 11.1 12.2
------------------ -------------------
Income taxes paid, net of refunds 5.7 1.2 4.8 10.3
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SOURCE Patheon Inc.
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