10-Q 1 pti-2012430x10q.htm FORM 10Q PTI-2012.4.30-10Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 _________________________________________
FORM 10-Q
 _________________________________________
S
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2012
OR
 
£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 000-54283
________________________________________ 
PATHEON INC.
(Exact name of registrant as specified in its charter)
 _________________________________________
Canada
 
Not Applicable
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
c/o Patheon Pharmaceuticals Services Inc.
4721 Emperor Boulevard, Suite 200
Durham, NC
 
27703
(Address of principal executive offices)
 
(Zip Code)
919-226-3200
(Registrant’s telephone number, including area code) 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  S    No  £
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  S    No  £
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
£
 
Accelerated filer
£
Non-accelerated filer
S
 (Do not check if a smaller reporting company)
Smaller reporting company
£
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  S
As of June 11, 2012, the registrant had 129,167,926 restricted voting shares outstanding.



Patheon Inc.
TABLE OF CONTENTS

 
PART I -
Financial Information
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II -
Item 1.
Item 1A.
Item 5.
Other Information
Item 6.
 
 




Item 1.        Financial Statements

Patheon Inc.
CONSOLIDATED BALANCE SHEETS
(unaudited)
 
 
As of April 30,
2012
 
As of October 31,
2011
(in millions of U.S. dollars)
$
 
$
Assets
 
 
 
Current
 
 
 
Cash and cash equivalents
19.6

 
33.4

Accounts receivable
147.3

 
158.0

Inventories
86.9

 
81.8

Income taxes receivable
3.7

 
3.1

Prepaid expenses and other
12.5

 
10.7

Future tax assets - short-term
7.8

 
8.1

Total current assets
277.8

 
295.1

Capital assets
405.8

 
474.2

Deferred financing costs
5.5

 
6.2

Future tax assets
35.8

 
39.1

Goodwill
3.5

 
3.5

Investments
5.4

 
5.3

Long-term assets held for sale

 
0.2

Other long-term assets
1.5

 
1.0

Total assets
735.3

 
824.6

Liabilities and shareholders’ equity
 
 
 
Current
 
 
 
Short-term borrowings
2.6

 
6.1

Accounts payable and accrued liabilities
167.2

 
181.5

Deferred revenues - short-term
9.2

 
8.8

Current portion of long-term debt

 
1.1

Total current liabilities
179.0

 
197.5

Long-term debt
312.2

 
280.1

Deferred revenues
31.0

 
27.7

Future tax liabilities
27.1

 
27.9

Other long-term liabilities
44.0

 
53.7

Total liabilities
593.3

 
586.9

Shareholders’ equity
 
 
 
Restricted voting shares
572.0

 
571.9

Contributed surplus
15.3

 
13.5

Deficit
(471.0
)
 
(371.9
)
Accumulated other comprehensive income
25.7

 
24.2

Total shareholders’ equity
142.0

 
237.7

Total liabilities and shareholders’ equity
735.3

 
824.6

see accompanying notes


1


Patheon Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 
  
Three months ended April 30,
 
Six months ended April 30,
  
2012
 
2011
 
2012
 
2011
(in millions of U.S. dollars, except loss per share)
$
 
$
 
$
 
$
Revenues
181.5

 
170.0

 
335.4

 
345.7

Cost of goods sold
147.5

 
139.6

 
287.0

 
273.1

Gross profit
34.0

 
30.4

 
48.4

 
72.6

Selling, general and administrative expenses
34.7

 
24.8

 
69.2

 
52.6

Repositioning expenses
6.0

 
0.7

 
6.8

 
1.5

Impairment charge
57.9

 

 
57.9

 

Loss on sale of fixed assets

 
0.2

 

 
0.2

Operating (loss) income
(64.6
)
 
4.7

 
(85.5
)
 
18.3

Interest expense, net
6.5

 
6.4

 
13.0

 
12.7

Foreign exchange loss, net
0.5

 
6.2

 
0.2

 
6.8

Other (income) expense, net

 
0.3

 
(0.1
)
 
0.5

Loss from continuing operations before income taxes
(71.6
)
 
(8.2
)
 
(98.6
)
 
(1.7
)
Provision for income taxes
8.0

 
2.1

 
0.3

 
4.8

Loss before discontinued operations
(79.6
)
 
(10.3
)
 
(98.9
)
 
(6.5
)
Loss from discontinued operations
(0.1
)
 
(0.1
)
 
(0.2
)
 
(0.3
)
Net loss attributable to restricted voting shareholders
(79.7
)
 
(10.4
)
 
(99.1
)
 
(6.8
)
Basic and diluted loss per share
 
 
 
 
 
 
 
From continuing operations

($0.616
)
 

($0.080
)
 

($0.766
)
 

($0.050
)
From discontinued operations

($0.001
)
 

($0.001
)
 

($0.002
)
 

($0.002
)
 

($0.617
)
 

($0.081
)
 

($0.768
)
 

($0.052
)
Average number of shares outstanding during period - basic and diluted (in thousands)
129,168

 
129,168

 
129,168

 
129,168

see accompanying notes

2


Patheon Inc.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(unaudited)
 
(in millions of U.S. dollars)
Restricted Voting Shares
 
Contributed Surplus
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income
 
Total Shareholders' Equity
Balance at October 31, 2011
$
571.9

 
$
13.5

 
$
(371.9
)
 
$
24.2

 
$
237.7

Stock-based compensation

 
1.8

 

 

 
1.8

Comprehensive income (loss):


 


 


 


 
 
Net loss attributable to restricted voting shareholders


 


 
(99.1
)
 


 
(99.1
)
Foreign currency translation adjustments
0.1

 


 


 


 
0.1

Change in foreign currency gains on investments in subsidiaries, net of hedging activities


 


 


 
(6.8
)
 
(6.8
)
Change in value of derivatives designated as foreign currency cash flow hedges
 
 
 
 
 
 
1.9

 
1.9

Losses on foreign currency hedges reclassified to consolidated statement of operations
 
 
 
 
 
 
0.1

 
0.1

Amortization of pension related costs, net of tax


 


 


 
0.3

 
0.3

Curtailment impact and plan asset remeasurement, net of tax
 
 
 
 
 
 
6.0

 
6.0

Subtotal
0.1

 
1.8

 
(99.1
)
 
1.5

 
(95.7
)
Balance at April 30, 2012
$
572.0

 
$
15.3

 
$
(471.0
)
 
$
25.7

 
$
142.0

see accompanying notes

3


Patheon Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
  
Six months ended April 30,
  
2012
 
2011
(in millions of U.S. dollars)
$
 
$
Operating activities
 
 
 
Loss before discontinued operations
(98.9
)
 
(6.5
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities
 
 
 
Depreciation and amortization
21.4

 
28.4

Impairment charge
57.9

 

Non-cash interest
0.6

 
0.5

Change in other long-term assets and liabilities
(0.5
)
 
(0.3
)
Future income taxes
1.1

 
9.2

Amortization of deferred revenues
(5.0
)
 
(41.1
)
Loss on sale of fixed assets

 
0.2

Stock-based compensation expense
1.8

 
1.3

Other

 
0.3

 
(21.6
)
 
(8.0
)
Net change in non-cash working capital balances related to continuing operations
(11.6
)
 
(10.9
)
Increase in deferred revenues
10.6

 
19.6

Cash (used in) provided by operating activities of continuing operations
(22.6
)
 
0.7

Cash used in operating activities of discontinued operations
(0.3
)
 
(0.4
)
Cash (used in) provided by operating activities
(22.9
)
 
0.3

Investing activities
 
 
 
Additions to capital assets
(17.6
)
 
(21.0
)
Proceeds on sale of capital assets

 
0.1

Cash used in investing activities of continuing operations
(17.6
)

(20.9
)
Cash provided by investing activities of discontinued operations
0.1



Cash used in investing activities
(17.5
)
 
(20.9
)
Financing activities
 
 
 
Decrease in short-term borrowings
(3.2
)

(2.1
)
Increase in long-term debt
32.0



Repayment of long-term debt
(1.1
)

(1.2
)
Cash provided by (used in) financing activities
27.7

 
(3.3
)
Effect of exchange rate changes on cash and cash equivalents
(1.1
)
 
9.7

Net decrease in cash and cash equivalents during the period
(13.8
)
 
(14.2
)
Cash and cash equivalents, beginning of period
33.4

 
53.5

Cash and cash equivalents, end of period
19.6

 
39.3

see accompanying notes


4

Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2012
(Dollar information in tabular form is expressed in millions of U.S. dollars, except per share information)


1.    Accounting policies
Basis of presentation
The accompanying unaudited consolidated financial statements have been prepared by Patheon Inc. (the “Company” or “Patheon”) in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"). Operating results for the three and six months ended April 30, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending October 31, 2012 (“fiscal 2012”). These consolidated financial statements do not include all the information and footnotes required by U.S. GAAP for annual financial statements and therefore should be read in conjunction with the audited consolidated financial statements and notes for the fiscal year ended October 31, 2011 (“fiscal 2011”).
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect: the reported amounts of assets and liabilities; the disclosure of contingent assets and liabilities at the date of the consolidated financial statements; and the reported amounts of revenue and expenses in the reporting period. Management believes that the estimates and assumptions used in preparing its consolidated financial statements are reasonable and prudent, however, actual results could differ from those estimates.
Changes in accounting policy
The Company historically prepared its consolidated financial statements in conformity with accounting principles generally accepted in Canada and provided a supplemental reconciliation to U.S. GAAP. Effective November 1, 2011, the Company adopted U.S. GAAP as the reporting standard for its consolidated financial statements. These unaudited consolidated interim financial statements, including related notes, have therefore been prepared in accordance with U.S. GAAP. All comparative financial information contained herein has been recast to reflect the Company's results as if the Company had historically reported in accordance with U.S. GAAP. These unaudited interim financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the interim periods presented.
Effective February 1, 2012, the Company adopted ASU 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This ASU modifies the existing standards to include disclosure of all transfers between Level 1 and Level 2 asset and liability fair value categories. In addition, the ASU provides guidance on measuring the fair value of financial instruments managed within a portfolio and the application of premiums and discounts on fair value measurements. The ASU requires additional disclosure for Level 3 measurements regarding the sensitivity of fair value to changes in unobservable inputs and any interrelationships between those inputs. The adoption of this guidance had no material impact to the Company's financial statements.
Recently issued accounting pronouncements

In April 2012, the Jumpstart Our Business Startups Act (the “JOBS Act”) was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” can utilize the extended transition period that is typically available only for private companies for implementing new or revised accounting standards. In other words, as an “emerging growth company,” the Company can delay the adoption of certain new or revised accounting standards until such time as those standards apply to private companies.  The Company has elected not to avail itself of this exemption and, therefore, will be implementing new or revised accounting standards at the same time as other public companies that are not “emerging growth companies.”

In June 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income in U.S. GAAP” (“ASU 2011-05”). ASU 2011-05 requires that comprehensive income and the related components of net income and of other comprehensive income be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 also requires reclassification adjustments from other comprehensive income to net income be presented on the face of the financial statements. The amendments are effective for annual reporting periods beginning on or after December 15, 2011, and interim periods within those annual periods. However, in December 2011, the FASB issued ASU 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05” to defer the requirement to present reclassification adjustments from other comprehensive income on the face of the financial statements and allow entities to continue to report reclassifications out of accumulated other comprehensive income consistent with the requirements in effect before ASU 2011-05. Other than a change in presentation, the Company does not expect the adoption of this guidance will have a material impact on the Company's consolidated financial statements.


5

Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2012
(Dollar information in tabular form is expressed in millions of U.S. dollars, except per share information)

In December 2011, the FASB issued ASU 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities,” which requires enhanced disclosures about financial instruments and derivative instruments that are either (1) offset in accordance with either Section 210-20-45 or 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with either Section 210-20-45 or Section 815-10-45. The amendments are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The amendments should be applied retrospectively for all prior periods presented. The Company does not expect this ASU would have a material impact on its consolidated financial statements.

In September 2011, the FASB issued ASU 2011-08, “Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment,” which amends U.S. GAAP ASC 350, “Intangible Assets-Goodwill and Other.” Under this new ASU, an entity may elect the option to assess qualitative factors to determine whether it is necessary to perform the first step in the two-step impairment testing process. This guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company does not expect this ASU would have a material impact on its consolidated financial statements.
 
2.    Discontinued operations, plant consolidations and asset impairments
Puerto Rico
The Company announced on December 10, 2009 its plan to consolidate its Puerto Rico operations into its manufacturing site located in Manati and ultimately close or sell its plant in Caguas. As a result of additional time required to transition manufacturing operations from Caguas to Manati due to longer than expected customer regulatory time lines and increased product demand, an offer received in the fiscal year ended October 31, 2010 (“fiscal 2010”) to purchase the facility was rescinded. The transition will continue beyond the end of calendar year 2012, and the Company now estimates the total project repositioning expenses to be $13.2 million, of which an additional $0.6 million and $1.4 million was recorded in the three and six months ended April 30, 2012, respectively. The consolidation also results in additional accelerated depreciation of Caguas assets of approximately $12.0 million over the life of the project. Because the business in the Caguas facility is being transferred within the existing site network, its results of operations are included in continuing operations.
The results of discontinued operations for the Company's Carolina facility (which the Company closed effective January 31, 2009) for the three and six months ended April 30, 2012 and 2011 are as follows:
 
Three months ended April 30,
 
Six months ended April 30,
 
2012
 
2011
 
2012
 
2011
 
$
 
$
 
$
 
$
Revenues

 

 

 

Cost of goods sold

 

 

 

Gross loss

 

 

 

Selling, general and administrative expenses
0.2

 
0.1

 
0.3

 
0.3

Gain on sale of fixed assets
(0.1
)
 

 
(0.1
)
 

Operating loss
(0.1
)
 
(0.1
)
 
(0.2
)
 
(0.3
)
Loss before income taxes
(0.1
)
 
(0.1
)
 
(0.2
)
 
(0.3
)
Net loss for the period
(0.1
)
 
(0.1
)
 
(0.2
)
 
(0.3
)
 
On February 17, 2012, the Company finalized the sale of our Carolina, Puerto Rico facility for a nominal amount.
United Kingdom
The Company determined to make certain adjustments over the next 24 to 36 months to the scale and scope of business conducted at its Swindon, U.K., facility. These adjustments include winding down or transferring non-cephalosporin commercial production to other facilities and, to the extent possible and commercially appropriate, directing PDS projects that require commercialization activities to other facilities. The Company will work with each of its affected commercial customers to develop plans to maintain supply chain continuity to the extent possible and commercially appropriate.

As a result of the above, the Company conducted an impairment analysis on long-term assets at the Company's Swindon, U.K. facility, during the second quarter 2012, and concluded that a non-cash  impairment charge of $57.9 million was required to bring the assets down to the fair value of $9.5 million. The impairment charges reduce assets in the CMO segment by $55.1 million and PDS assets by $2.8 million.

6

Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2012
(Dollar information in tabular form is expressed in millions of U.S. dollars, except per share information)

The impairment analysis included fair value (Level 3) measurements resulting from future cash flows from operations, as well as market value approach of land and buildings, internal transfer of assets, and expected salvage value on equipment.  Cash inflows were based on current customer expectations and future contract expiry dates.  Cash outflows were based on expenses needed to run the facility in each period including on-going maintenance and capital expenditures.  It was also determined that the best use of the asset is to continue using it in the Pharmaceutical business and the restrictive covenants prevents the land from being used for anything other than a business industrial site.  The corporate weighted average cost of capital was used for discounting future cash flows.  

3.    Supplemental balance sheet information

Inventories

Inventories consisted of the following as of April 30, 2012 and October 31, 2011:
 
April 30, 2012
 
October 31, 2011
 
$
 
$
Raw materials, packaging components and spare parts
53.5

 
53.0

Work-in-process
33.4

 
28.8

 
86.9

 
81.8

Accounts payable and accrued liabilities
The following is the breakdown of accounts payable and accrued liabilities:
 
 
April 30, 2012
 
October 31, 2011
 
$
 
$
Trade payables
92.2

 
102.2

Interest payable
1.0

 
1.0

Accrued salaries and related expenses
40.3

 
44.0

Customer deposits
17.5

 
17.9

Other accruals
16.2

 
16.4

 
167.2

 
181.5


4.    Preferred shares and restricted voting shares
The following table summarizes information regarding the Company’s outstanding preferred shares, restricted voting shares and restricted voting share stock options as of April 30, 2012:
 
 
Outstanding
 
Exercisable
Class I preferred shares series D
150,000

 
N/A

Restricted voting shares
129,167,926

 
N/A

Restricted voting share stock options
11,005,335

 
3,464,683



5.    Segmented information
The Company is organized and managed in two business segments: CMO and PDS. These segments are organized around the service activities provided to the Company’s customers.
 

7

Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2012
(Dollar information in tabular form is expressed in millions of U.S. dollars, except per share information)

 
Three months ended April 30, 2012
 
Commercial
 
PDS
 
Corp. & Other
 
Total
 
$
 
$
 
$
 
$
Revenues
147.0

 
34.5

 

 
181.5

Adjusted EBITDA
14.1

 
5.0

 
(9.4
)
 
9.7

Depreciation and amortization
9.3

 
1.3

 
0.2

 
10.8

Impairment charge
55.1

 
2.8

 

 
57.9

Capital expenditures
9.5

 
0.9

 
0.7

 
11.1


 
Three months ended April 30, 2011
 
Commercial
 
PDS
 
Corp. & Other
 
Total
 
$
 
$
 
$
 
$
Revenues
138.5

 
31.5

 

 
170.0

Adjusted EBITDA
17.0

 
5.9

 
(10.0
)
 
12.9

Depreciation and amortization
11.9

 
1.3

 
0.3

 
13.5

Capital expenditures
10.0

 
0.8

 
0.3

 
11.1



 
As of and for the six months ended April 30, 2012
 
Commercial
 
PDS
 
Corp. & Other
 
Total
 
$
 
$
 
$
 
$
Revenues
269.8

 
65.6

 

 
335.4

Adjusted EBITDA
12.6

 
8.9

 
(21.0
)
 
0.5

Total assets
580.2

 
75.3

 
79.8

 
735.3

Depreciation and amortization
18.3

 
2.6

 
0.5

 
21.4

Goodwill
3.5

 

 

 
3.5

Impairment charge
55.1

 
2.8

 

 
57.9

Capital expenditures
14.7

 
2.0

 
0.9

 
17.6


 
As of and for the six months ended April 30, 2011
 
Commercial
 
PDS
 
Corp. & Other
 
Total
 
$
 
$
 
$
 
$
Revenues
287.2

 
58.5

 

 
345.7

Adjusted EBITDA
52.5

 
8.6

 
(19.5
)
 
41.6

Total assets
668.5

 
79.6

 
77.3

 
825.4

Depreciation and amortization
25.2

 
2.7

 
0.5

 
28.4

Goodwill
3.7

 

 

 
3.7

Capital expenditures
17.0

 
3.6

 
0.3

 
20.9


Cash and cash equivalents as well as future tax assets are considered to be part of “Corp. & Other” in the breakout of total assets shown above. The Company evaluates the performance of its segments based on segment Adjusted EBITDA, which is defined as income (loss) before discontinued operations before repositioning expenses, interest expense, foreign exchange losses reclassified from other comprehensive loss, refinancing expenses, gains and losses on sale of fixed assets, gain on extinguishment of debt, income taxes, asset impairment charges, depreciation and amortization and other income and expenses. The Company has included Adjusted EBITDA because it believes that this measure is used by certain investors to assess the Company's financial performance before non-cash charges and certain costs that it does not believe are reflective of its underlying business. The Company’s presentation of Adjusted EBITDA may not be comparable to similarly-titled measures used by other companies.
 
Below is a reconciliation of Adjusted EBITDA to its closest U.S. GAAP measure.
 

8

Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2012
(Dollar information in tabular form is expressed in millions of U.S. dollars, except per share information)

 
Three months ended April 30,
 
2012
 
2011
 
$
 
$
Total Adjusted EBITDA
9.7

 
12.9

Depreciation and amortization
(10.8
)
 
(13.5
)
Repositioning expenses
(6.0
)
 
(0.7
)
Interest expense, net
(6.5
)
 
(6.4
)
Impairment charge
(57.9
)
 

Loss on sale of fixed assets

 
(0.2
)
Provision for income taxes
(8.0
)
 
(2.1
)
Other
(0.1
)
 
(0.3
)
Loss before discontinued operations
(79.6
)
 
(10.3
)

 
Six months ended April 30,
 
2012
 
2011
 
$
 
$
Total Adjusted EBITDA
0.5

 
41.6

Depreciation and amortization
(21.4
)
 
(28.4
)
Repositioning expenses
(6.8
)
 
(1.5
)
Interest expense, net
(13.0
)
 
(12.7
)
Impairment charge
(57.9
)
 

Loss on sale of fixed assets

 
(0.2
)
Provision for income taxes
(0.3
)
 
(4.8
)
Other

 
(0.5
)
Loss before discontinued operations
(98.9
)
 
(6.5
)

As illustrated in the table below, revenues are attributed to countries based on the location of the customer’s billing address, capital assets are attributed to the country in which they are located and goodwill is attributed to the country in which the entity to which the goodwill pertains is organized:
 
 
 
Three months ended April 30, 2012
 
 
Canada
$
 
US*
$
 
Europe
$
 
Other
$
 
Total
$
Revenues
 
2.5

 
111.8

 
57.5

 
9.7

 
181.5

*  Includes Puerto Rico

 
 
Three months ended April 30, 2011
 
 
Canada
 
US*
 
Europe
 
Other
 
Total
 
 
$
 
$
 
$
 
$
 
$
Revenues
 
2.6

 
80.8

 
77.9

 
8.7

 
170.0

*  Includes Puerto Rico
 
 
 
As of and for the six months ended April 30, 2012
 
 
Canada
$
 
US*
$
 
Europe**
$
 
Other
$
 
Total
$
Revenues
 
4.8

 
201.3

 
111.8

 
17.5

 
335.4

Capital assets
 
114.9

 
137.5

 
151.9

 
1.5

 
405.8

Goodwill
 
3.5

 

 

 

 
3.5

*  Includes Puerto Rico
** European assets in current year reflect the reduction of Swindon assets.

9

Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2012
(Dollar information in tabular form is expressed in millions of U.S. dollars, except per share information)


 
 
As of and for the six months ended April 30, 2011
 
 
Canada
 
US*
 
Europe
 
Other
 
Total
 
 
$
 
$
 
$
 
$
 
$
Revenues
 
5.3

 
157.3

 
167.6

 
15.5

 
345.7

Capital assets
 
121.1

 
130.8

 
239.0

 
1.8

 
492.7

Goodwill
 
3.7

 

 

 

 
3.7

*  Includes Puerto Rico


6.    Stock-based compensation
The Company has an incentive stock option plan in which directors, officers and key employees of the Company and its subsidiaries, as well as other persons engaged to provide ongoing management or consulting services to Patheon, are eligible to participate. On March 10, 2011, the Company’s shareholders approved an amendment to the stock option plan, which, among other things, provides that the maximum number of shares that may be issued under the plan is 15,500,151, which currently represents 12% of the issued and outstanding restricted voting shares. As of April 30, 2012 and 2011, the total number of restricted voting shares issuable under the plan was 15,500,151 shares, respectively, of which there were stock options outstanding to purchase 11,005,335 shares and 12,435,824 shares, respectively, under the plan. Before the March 2011 amendments, the plan provided that the exercise prices of options were determined at the time of grant and could not be less than the weighted-average market price of the restricted voting shares of Patheon on the Toronto Stock Exchange ( the “TSX”) during the two trading days immediately preceding the grant date. Following the March 2011 amendments, the exercise prices of the options may not be less than the closing price of the restricted voting shares on the TSX (or on such other stock exchange in Canada or the United States on which restricted voting shares may be then listed and posted) on the date of the grant. Options generally expire in no more than 10 years after the grant date and are subject to early expiry in the event of death, resignation, dismissal or retirement of an optionee. Options have vesting periods of either three years or five years, with either one-third or one-fifth vesting on each anniversary of the grant date, respectively.
For the purposes of calculating the stock-based compensation expense in connection with the Company’s incentive stock option plan, the fair value of stock options is estimated at the date of the grant using the Black-Scholes option pricing model and the cost is amortized over the vesting period.
Stock-based compensation expense recorded in the three and six months ended April 30, 2012 was $0.8 million and $1.8 million, respectively. Stock-based compensation expense recorded in the three and six months ended April 30, 2011 was $1.1 million and $1.3 million, respectively.
A summary of the plan activity during the six months ended April 30, 2012 is as follows:
 
 
April 30, 2012
(Dollar amounts in Canadian dollars)
Shares
Number
 
Weighted-
Average
Exercise Price
 
Weighted Average Contractual Term
 
Aggregate Intrinsic Value
 
 
 
$
 
 
 
$
Outstanding as of October 31, 2011
12,628,458

 
2.88

 
 
 
 
Granted
591,252

 
1.85

 
 
 
 
Exercised

 

 
 
 
 
Forfeited
(2,168,575
)
 
3.63

 
 
 
 
Expired
(45,800
)
 
12.28

 
 
 
 
Outstanding as of April 30, 2012
11,005,335

 
2.63

 
7.9

 
491,276

Exercisable as of April 30, 2012
3,464,683

 
3.00

 
6.3

 

The total fair value of shares that vested during the three months ended April 30, 2012 and 2011 was $1.8 million and $0.8 million, respectively. As of April 30, 2012, the total unrecognized compensation cost related to the nonvested stock options was $5.5 million, which is expected to be recognized through fiscal 2017, with a weighted average remaining vesting period of 2.49 years.



10

Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2012
(Dollar information in tabular form is expressed in millions of U.S. dollars, except per share information)

7.    Pension and post-retirement benefits

Employee future benefits
The components of net periodic benefit cost for the defined benefit plans and other benefit plans for the six months ended April 30, 2012 and 2011 were as follows: 
 
Six months ended April 30,
 
2012
 
2011
 
Defined Benefit
Pension Plans
 
Other Benefit
Plans
 
Defined Benefit
Pension Plans
 
Other Benefit
Plans
 
$
 
$
 
$
 
$
Service cost
1.4

 

 
1.8

 

Interest cost
2.6

 
0.2

 
2.6

 
0.2

Expected return on plan assets
(2.7
)
 

 
(2.4
)
 

Amortization of actuarial loss
0.6

 

 
0.4

 

Net periodic benefit costs
1.9

 
0.2

 
2.4

 
0.2


Based on current information available from actuarial estimates, the Company anticipates that contributions required under its defined benefit pension plans and other benefit plans for fiscal 2012 will be approximately $6.4 million compared to contributions of $11.8 million that were made in fiscal 2011. Included in the fiscal 2011 contributions is a voluntary catch-up contribution of $4.9 million for the benefit plans in the United Kingdom, which was made during the third quarter of fiscal 2011. Required contributions to defined benefit pension plans in future years will be dependent upon a number of variables, including the long-term rate of return on plan assets. The amounts that the Company will be required to contribute to such plans in the future may vary.

Not included in the defined benefit and other benefit plans estimates above are the unfunded termination indemnities related to the employees of the Company's Italian subsidiary. In accordance with Italian severance pay statutes, an employee benefit is accrued for service to date and is payable when the employee’s employment with the Company ceases. The termination indemnity liability is calculated in accordance with local civil and labor laws based on each employee's length of service, employment category and remuneration. The termination liability is adjusted annually by a cost-of-living index provided by the Italian government. Although there is no vesting period, the Italian government has established private accounts for these benefits and has required the Company to contribute $3.2 million and $3.4 million in fiscal 2012 and 2011, respectively, to these accounts, with additional contributions in the future. The liability recorded in the consolidated balance sheets is the amount to which the employees would be entitled if their employment with the Company ceased. The related expenses for the six months ended April 30, 2012 and 2011 was $1.6 million and $1.3 million, respectively.

The employee future benefit expense in connection with defined benefit pension plans, other post retirement benefit plans and the unfunded termination indemnities for the six months ended April 30, 2012 and 2011 was $3.7 million and $3.9 million, respectively.

The Company amended its U.K. Pension Plan to freeze the accrual of additional benefits related to future service and allow the employees to enter into a defined contribution plan effective February 1, 2012.  All current and future U.K. employees will be eligible to participate in the defined contribution plan. Any pension benefits accrued in the U.K. Pension Plan will be retained in that plan until retirement unless the plan participant chooses to transfer the benefits to another arrangement. The curtailment impact reduced the projected benefit obligation by $7.9 million. This resulting gain was applied against the accumulated unrecognized net actuarial losses in other comprehensive (loss) income.

8.    Repositioning expense
On May 9, 2012, the Company announced a plan of termination (the “Plan of Termination”) that is expected to result in a workforce reduction of approximately 91 employees across the Company's global PDS and commercial operating segments. In the U.K., the Company has begun the consultative process with the works councils representing the employees at the Swindon and Milton Park facilities. Subject to these consultations, the Company expects to complete the Plan of Termination across all affected sites by the end of fiscal 2012. In connection with the Plan of Termination, the Company recorded approximately $5.4 million of estimated expenses associated with employee termination benefits during the second quarter of fiscal 2012. The

11

Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2012
(Dollar information in tabular form is expressed in millions of U.S. dollars, except per share information)

Company anticipates that it may further adjust the size of the workforce at the Swindon facility as it continues its transformation process, with a total of approximately 400 jobs at risk of redundancy.
During the three and six months ended April 30, 2012, the Company incurred $6.0 million and $6.8 million, respectively, in repositioning expenses, which related to the Plan of Termination and the shutdown of the Caguas facility. During the three and six months ended April 30, 2011, the Company incurred $0.7 million and $1.5 million, respectively, in repositioning expenses, all of which related to the shutdown of the Caguas facility.
 
The following is a summary of these expenses and other charges associated with operational improvements (collectively “repositioning expenses”) as of and for the three and six months ended April 30, 2012 and 2011:
 
 
As of and for the three months ended April 30, 2012
 
Commercial
$
 
PDS
$
 
Corporate
$
 
Total
$
Total repositioning liabilities at January 31, 2012
 
 
 
 
 
 
5.4

Employee-related expenses
4.2

 
1.2

 

 
5.4

Consulting, professional and project management costs
0.6

 

 

 
0.6

Total expenses
4.8

 
1.2

 

 
6.0

Repositioning expenses paid
 
 
 
 
 
 
(2.5
)
Foreign exchange
 
 
 
 
 
 
0.3

Total repositioning liabilities at April 30, 2012
 
 
 
 
 
 
9.2


 
As of and for the three months ended April 30, 2011
 
Commercial
 
PDS
 
Corporate
 
Total
 
$
 
$
 
$
 
$
Total repositioning liabilities at January 31, 2011
 
 
 
 
 
 
3.0

Employee-related expenses
0.1

 

 

 
0.1

Consulting, professional and project management costs
0.6

 

 

 
0.6

Total expenses
0.7

 

 

 
0.7

Repositioning expenses paid
 
 
 
 
 
 
(0.8
)
Total repositioning liabilities at April 30, 2011
 
 
 
 
 
 
2.9


 
As of and for the six months ended April 30, 2012
 
Commercial
$
 
PDS
$
 
Corporate
$
 
Total
$
Total repositioning liabilities at October 31, 2011
 
 
 
 
 
 
6.7

Employee-related expenses
4.3

 
1.2

 

 
5.5

Consulting, professional and project management costs
1.3

 

 

 
1.3

Total expenses
5.6

 
1.2

 

 
6.8

Repositioning expenses paid
 
 
 
 
 
 
(4.6
)
Foreign exchange
 
 
 
 
 
 
0.3

Total repositioning liabilities at April 30, 2012
 
 
 
 
 
 
9.2



12

Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2012
(Dollar information in tabular form is expressed in millions of U.S. dollars, except per share information)

 
As of and for the six months ended April 30, 2011
 
Commercial
 
PDS
 
Corporate
 
Total
 
$
 
$
 
$
 
$
Total repositioning liabilities at October 31, 2010
 
 
 
 
 
 
3.2

Employee-related expenses
0.1

 

 

 
0.1

Consulting, professional and project management costs
1.4

 

 

 
1.4

Total expenses
1.5

 

 

 
1.5

Repositioning expenses paid
 
 
 
 
 
 
(1.8
)
Total repositioning liabilities at April 30, 2011
 
 
 
 
 
 
2.9

 
 
 
 
 
 
 
 

9.    Other information

Foreign exchange
During the three and six months ended April 30, 2012, the Company recorded foreign exchange losses of $0.5 million and $0.2 million, respectively. The losses during the three months ended April 30, 2012 were primarily from operating exposures. The losses during the six months ended April 30, 2012 were primarily from hedge gains, partially offset by operating exposures. During the three and six months ended April 30, 2011, the Company recorded foreign exchange losses of $6.2 million and $6.8 million, respectively, primarily from operating exposures, partially offset by hedge gains.
 
Net loss per share
The computation of diluted net loss per share did not include 11,005,335 and 12,435,824 outstanding options in both of the three and six months ended April 30, 2012 and 2011, respectively, because such options were anti-dilutive in nature.

Contingencies
      In the fourth quarter of fiscal 2011, a customer gave notice of its intent to seek indemnification against the Company pursuant to a manufacturing service agreement (“MSA”) for all costs associated with a recall of an allegedly defective product. The Company accrued $1.7 million, net of expected insurance proceeds, to cover recall costs and costs to replace returned products.  During the first quarter of fiscal 2012, the customer gave further notice of its intent to seek indemnification pursuant to the MSA for all actual and potential third-party claims that have been or may be filed against it in connection with the recall and the alleged product defects, as well as all costs and expenses of the defense and settlement of such claims. During the second quarter of fiscal 2012, the Company accrued an additional $2.4 million, for additional returned products from the customer.  To date, three putative class actions and two single plaintiff actions have been commenced in the United States against the customer in connection with the allegedly defective products, and the Company has also been named in one of the putative class actions.  As these cases are at an early stage, the Company is unable to estimate the number of potential claimants or the amount of potential damages for which the Company may be directly or indirectly liable in the above actions.   

10.    Financial instruments and risk management

The Company has determined the estimated fair values of its financial instruments using a replacement cost model, with inputs based on observed market rates; however, considerable judgment is required to develop these estimates. The fair values of the Company’s financial instruments are not materially different from their carrying values.
As of April 30, 2012 and October 31, 2011, the carrying amount of the financial assets that the Company has pledged as collateral for its long-term debt facilities was $105.0 million and $106.7 million, respectively.
Fair value measurements
The fair value under ASC 820, “Fair Value Measurement,” is principally applied to financial assets and liabilities such as derivative instruments consisting of embedded call options and foreign exchange contracts. The following table provides a summary of the financial assets and liabilities that are measured at fair values as of April 30, 2012 and October 31, 2011:


13

Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2012
(Dollar information in tabular form is expressed in millions of U.S. dollars, except per share information)

Assets measured at fair value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair Value measurement at
April 30, 2012 using:
 
Fair Value measurement at
October 31, 2011 using:
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
$
 
$
 
$
 
$
 
$
 
$
 
$
 
$
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts

 
2.2

 

 
2.2

 

 
1.2

 

 
1.2

Total assets

 
2.2

 

 
2.2

 

 
1.2

 

 
1.2


Liabilities measured at fair value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair Value measurement at
April 30, 2012 using:
 
Fair Value measurement at
October 31, 2011 using:
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
$
 
$
 
$
 
$
 
$
 
$
 
$
 
$
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange collars

 
0.7

 

 
0.7

 

 
1.7

 

 
1.7

Total liabilities

 
0.7

 

 
0.7

 

 
1.7

 

 
1.7

Level 1 - Based on quoted market prices in active markets.
Level 2 - Inputs, other than quoted prices in active markets, that are observable, either directly or indirectly.
Level 3 - Unobservable inputs that are not corroborated by market data.
 
The following table presents the fair value of the Company’s derivative financial instruments and their classifications on the consolidated balance sheets as of April 30, 2012 and October 31, 2011:
Fair values of derivative instruments
 
 
Asset derivatives as of April 30, 2012
 
Asset derivatives as of October 31, 2011
 
Balance sheet location
 
Fair Value
 
Balance sheet location
 
Fair Value
 
 
 
$
 
 
 
$
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Foreign exchange forward contracts
Prepaid expenses and other
 
1.3

 
Prepaid expenses and other
 
0.2

Foreign exchange forward contracts
Other long-term assets
 
0.9

 
Other long-term assets
 
1.0

Total designated derivatives
 
 
2.2

 
 
 
1.2

 
Liability derivatives as of April 30, 2012
 
Liability derivatives as of October 31, 2011
 
Balance sheet location
 
Fair Value
 
Balance sheet location
 
Fair Value
 
 
 
$
 
 
 
$
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Foreign exchange forward contracts
Accounts payable and accrued liabilities
 
0.7

 
Accounts payable and accrued liabilities
 
1.4

Foreign exchange collars
Other long-term liabilities
 

 
Other long-term liabilities
 
0.3

Total designated derivatives
 
 
0.7

 
 
 
1.7


Foreign exchange forward contracts and other hedging arrangements

The Company utilizes financial instruments to manage the risk associated with fluctuations in foreign exchange rates. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The hedges are valued using a replacement cost

14

Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2012
(Dollar information in tabular form is expressed in millions of U.S. dollars, except per share information)

model, with inputs based on observed market rates.
As of April 30, 2012, the Company’s Canadian operations had entered into foreign exchange forward contracts to sell an aggregate amount of US$52.0 million. These contracts hedge the Canadian operations’ expected exposure to U.S. dollar denominated receivables and mature at the latest on October 2, 2013, at an average exchange rate of $1.038 Canadian. The mark-to-market value of these financial instruments as of April 30, 2012 was an unrealized gain of $2.1 million, which has been recorded in accumulated other comprehensive income in shareholders’ equity, net of associated income tax.
As of April 30, 2012, the Company’s Canadian operations had entered into foreign exchange forward contracts to sell an aggregate amount of €2.0 million. These contracts hedge the Canadian operations’ expected exposure to Euro denominated receivables and mature at the latest on October 5, 2012, at an average exchange rate of $1.34 Canadian. The mark-to-market value of these financial instruments as of April 30, 2012 was an unrealized gain of less than $0.1 million, which has been recorded in accumulated other comprehensive income in shareholders’ equity, net of associated income tax.
As of April 30, 2012, the Company’s Canadian operations had entered into foreign exchange collars to sell an aggregate amount of US$85.5 million. These contracts hedge the Canadian operations’ expected exposure to U.S. dollar denominated receivables and mature at the latest on December 31, 2013, at an average exchange rate of $0.9828 Canadian. The mark-to-market value of these financial instruments as of April 30, 2012 was an unrealized loss of $0.7 million, which has been recorded in accumulated other comprehensive income in shareholders’ equity, net of associated income tax.
Risks arising from financial instruments and risk management
The Company’s activities expose it to a variety of financial risks: market (including foreign exchange and interest rate) risk, credit risk and liquidity risk. The Company’s overall financial risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Company’s financial performance. The Company uses derivative financial instruments to hedge certain risk exposures. The Company does not purchase any derivative financial instruments for speculative purposes.
Financial risk management is the responsibility of the Company’s corporate finance team. The corporate finance team works with the Company’s operational personnel to identify, evaluate and, where appropriate, hedge financial risks. The Company’s corporate finance team also monitors material risks and discusses them with the audit committee of the board of directors.
 
Foreign exchange risk
The Company operates in Canada, the United States, Puerto Rico, Italy, France, the United Kingdom and Japan. Foreign exchange risk arises because the value of the local currency receivable or payable for transactions denominated in foreign currencies may vary due to changes in exchange rates (“transaction exposures”) and because the non-U.S. dollar denominated financial statements of the Company may vary on consolidation into the reporting currency of U.S. dollars (“translation exposures”).
The Company’s most significant transaction exposures arise in its Canadian operations. Approximately 90% of the revenues of the Canadian operations and approximately 10% of its operating expenses are transacted in U.S. dollars. As a result, the Company may experience transaction exposures because of volatility in the exchange rate between the Canadian and U.S. dollar. Based on the Company’s current U.S. denominated net inflows, as of April 30, 2012, fluctuations of +/-10% would, everything else being equal, have an annual effect on (loss) income from continuing operations before income taxes of approximately +/- $15.8 million, prior to hedging activities.
The objective of the Company’s foreign exchange risk management activities is to minimize transaction exposures and the resulting volatility of the Company’s earnings. The Company manages this risk by entering into foreign exchange contracts. As of April 30, 2012, the Company has entered into foreign exchange contracts to cover approximately 80% of its Canadian-U.S. dollar cash flow exposures for fiscal 2012. The Company does not currently hedge any translation exposures.
Translation gains and losses related to certain foreign currency denominated intercompany loans are included as part of the net investment in certain foreign subsidiaries, and are included in accumulated other comprehensive income in shareholders’ equity.
Credit risk
Credit risk arises from cash and cash equivalents held with banks and financial institutions, derivative financial

15

Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2012
(Dollar information in tabular form is expressed in millions of U.S. dollars, except per share information)

instruments (foreign exchange contracts with positive fair values), and credit exposure to customers, including outstanding accounts receivable. The maximum exposure to credit risk is equal to the carrying value of the financial assets.
The objective of managing counterparty credit risk is to prevent losses in financial assets. The Company regularly assesses the credit quality of the counterparties, taking into account their financial position, past experience and other factors. Management also regularly monitors the utilization of credit limits. In cases where the credit quality of a customer does not meet the Company’s requirements, a cash deposit is received before any services are provided. As of April 30, 2012 and October 31, 2011, the Company held deposits of $17.5 million and $17.9 million, respectively.

Liquidity risk
Liquidity risk arises when financial obligations exceed financial assets available at a particular point in time. The Company’s objective in managing liquidity risk is to maintain sufficient readily available reserves in order to meet its liquidity requirements at all times. The Company mitigates liquidity risk by maintaining cash and cash equivalents on-hand and through the availability of funding from credit facilities. As of April 30, 2012, the Company was holding cash and cash equivalents of $19.6 million and had undrawn lines of credit available to it of $60.1 million.

11.    Related party transactions

Revenues for contract manufacturing from a company controlled by Joaquin B. Viso (the “Viso Affiliate”), a director and significant shareholder of the Company, were less than $0.1 million and $0.1 million for the three and six months ended April 30, 2012, respectively, and were $0.1 million for each of the three and six months ended April 30, 2011. These transactions were conducted in the normal course of business and are recorded at the exchanged amounts. Accounts receivable at April 30, 2012 and October 31, 2011 were less than $0.1 million and nil, respectively, resulting from these transactions. In addition, Patheon manufactures a product for a third party for which the product’s intellectual property is owned by the Viso Affiliate. The manufacturing agreement was originally contracted between the third party and the Viso Affiliate, but has been administered directly between Patheon and the third party on normal commercial terms since 2003.
 
As of April 30, 2012 and October 31, 2011, the Company had an investment of $3.3 million and $3.3 million, respectively, representing an 18% interest in two Italian companies (collectively referred to as “BSP Pharmaceuticals”) whose largest investor was previously an officer of the Company until December 31, 2009. These companies specialize in the manufacture of cytotoxic pharmaceutical products. As a result of the shareholders’ agreement with the other investors in BSP Pharmaceuticals that provides the Company with significant influence over BSP Pharmaceuticals’ operations, the Company accounts for its investment in BSP Pharmaceuticals using the equity method. Accordingly, for the six months ended April 30, 2012 and 2011, the Company recorded investment income of approximately $0.1 million and $0.5 million, respectively.
In connection with its investment in BSP Pharmaceuticals, the Company has a management services agreement with BSP Pharmaceuticals that provides on-going sales and marketing services, and provided engineering and operational services during the construction of the BSP facility which was completed in 2008. There were no management fees recorded under this agreement for the three and six months ended April 30, 2012 and 2011, respectively. Accounts receivable at April 30, 2012 and October 31, 2011 include a balance of $0.3 million and $1.2 million, respectively, in connection with the management services agreement. These services were conducted in the normal course of business and are recorded at the exchanged amounts.
In connection with certain of BSP Pharmaceuticals’ bank financing, the Company had made commitments that it would not dispose of its interest in BSP Pharmaceuticals prior to January 1, 2011, and if needed, irrevocably inject equity (pro-rata) in order to ensure BSP complies with certain specific bank covenants.

12.    Income taxes

The Company accounts for income taxes under FASB ASC 740, Income Taxes (“ASC 740”). The Company calculates its quarterly tax provision consistent with the guidance provided by ASC 740-270, whereby the Company forecasts its estimated annual effective tax rate then applies that rate to its year-to-date pre-tax book (loss) income. The effective tax rate may be subject to fluctuations during the year as new information is obtained, which may affect the assumptions used to estimate the annual effective rate, including factors such as the valuation allowances against deferred tax assets, the recognition or de-recognition of tax benefits related to uncertain tax positions, or changes in or the interpretation of tax laws in jurisdictions where the Company conducts business. There is no tax benefit recognized on certain of the net operating losses incurred in foreign jurisdictions due to insufficient evidence supporting the Company's ability to use these losses in the future.
For the six months ended April 30, 2012 and 2011, the Company recorded a tax expense of $0.3 million and tax expense

16

Notes to Unaudited Consolidated Financial Statements for the Three and Six Months Ended April 30, 2012
(Dollar information in tabular form is expressed in millions of U.S. dollars, except per share information)

of $4.8 million, respectively.
There were no material changes in uncertain tax positions for the six months ended April 30, 2012 and 2011. The Company does not reasonably expect any change to the amount of uncertain tax positions within the next 12 months.

13.    Comprehensive (loss) income
  
Three months ended April 30,
Six months ended April 30,
  
2012
 
2011
2012
 
2011
(in millions of U.S. dollars)
$
 
$
$
 
$
Net loss attributable to restricted voting shareholders
(79.7
)
 
(10.4
)
(99.1
)
 
(6.8
)
Other comprehensive income, net of income taxes
 
 
 
 
 
 
Change in foreign currency gains (losses) on investments in subsidiaries, net of hedging activities
5.6

 
35.4

(6.8
)
 
36.5

Change in value of derivatives designated as foreign currency cash flow hedges
2.0

 
2.9

1.9

 
4.0

(Losses) gains on foreign currency cash flow hedges reclassified to consolidated statement of loss
(0.1
)
 
(1.2
)
0.1

 
(1.4
)
Amortization of pension related costs, net of tax
0.4

 
0.2

0.3

 
0.4

Curtailment impact and plan asset remeasurement, net of tax
6.0

 

6.0

 

Other comprehensive income for the period
13.9

 
37.3

1.5

 
39.5

Comprehensive (loss) income attributable to restricted voting shareholders
(65.8
)
 
26.9

(97.6
)
 
32.7



14.    Subsequent events

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion is designed to provide a better understanding of our consolidated financial statements, including a brief discussion of our business, key factors that impact our performance and a summary of our operating results. You should read the following discussion and analysis of financial condition and results of operations together with our unaudited consolidated financial statements and the related notes beginning on page 1 of this quarterly report on Form 10-Q and our audited financial statements and related notes beginning on page F-1 of our annual report on Form 10-K filed December 19, 2011 (our "2011 Form 10-K"). We historically prepared our consolidated financial statements and MD&A in conformity with accounting principles generally accepted in Canada and provided a supplemental reconciliation to U.S. GAAP. Effective November 1, 2011, we adopted U.S. GAAP as the reporting standard for our consolidated financial statements and MD&A. In addition to historical information, the following discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results could differ materially from those anticipated by the forward-looking statements due to important factors including, but not limited to, those set forth under “Item 1A. Risk Factors” of our 2011 Form 10-K. See “Forward Looking Statements.”
Executive Overview
We are a leading provider of commercial manufacturing outsourcing services ("CMO") and outsourced pharmaceutical development services ("PDS") to the global pharmaceutical industry, offering a wide range of services from developing drug candidates at the pre-formulation stage through the launch, commercialization and production of approved drugs. We have established our position as a market leader by leveraging our scale, global reach, specialized capabilities, broad service offerings, scientific expertise and track record of product quality and regulatory compliance to provide cost-effective solutions to our customers.
We have two reportable segments, CMO and PDS. Our CMO business manufactures prescription products in sterile dosage forms as well as solid and liquid conventional dosage forms, and we differentiate ourselves by offering specialized manufacturing capabilities relating to high potency, controlled substance and sustained release products. Our PDS business provides a broad range of development services, including early development services, finished dosage formulation of sterile and solid dosage forms, clinical trial packaging and associated analytical services. Additionally, our PDS business serves as a

17


pipeline for future commercial manufacturing opportunities.
Recent Business Highlights
The following is a summary of certain key financial results and non-financial events that occurred during and subsequent to the three and six months ended April 30, 2012:

Revenues for the three months ended April 30, 2012 increased $11.5 million, or 6.8%, to $181.5 million, from $170.0 million for the three months ended April 30, 2011. Excluding the $17.4 million impact of the reservation fee and accelerated deferred revenue recorded in the second quarter of last year, revenues increased by 18.9%.
Gross profit for the three months ended April 30, 2012 increased 162.0%  from the second quarter of fiscal 2011, excluding the $17.4 million benefit from the reservation fee and accelerated deferred revenue recorded in the second quarter of last year.
Loss before discontinued operations for the three months ended April 30, 2012 was $79.6 million, compared to loss before discontinued operations of $10.3 million for the same period of prior year. This increase was primarily driven by the after tax impact of the previously announced impairment charges of $57.9 million and repositioning expenses of $4.9 million, as well as the after tax impact of $4.7 million from the increased consulting fees relating to our strategic initiatives.
Adjusted EBITDA for the three months ended April 30, 2012 decreased $3.2 million to $9.7 million, from $12.9 million for the three months ended April 30, 2011. Excluding the impact of the prior-year termination of a manufacturing supply agreement, Adjusted EBITDA would have increased $14.2 million. Adjusted EBITDA in the three months ended April 30, 2012 was also impacted by $6.0 million in consulting fees related to our strategic initiatives.
We recorded a $57.9 million impairment charge for the impairment of long-term assets at our Swindon, U.K. facility during the second quarter of fiscal 2012. The impairment charge will not result in any current or future cash expenditures.
On May 9, 2012, we announced a plan of termination (the “Plan of Termination”) that is expected to result in a workforce reduction of approximately 91 employees across our global PDS and CMO segments. In the U.K., we have begun the consultative process with the works councils representing the employees at the Swindon and Milton Park facilities. Subject to these consultations, we expect to complete the Plan of Termination across all affected sites by the end of fiscal 2012. In connection with the Plan of Termination, we recorded approximately $5.4 million of estimated expenses associated with employee termination benefits during the second quarter of fiscal 2012. We anticipate that we may further adjust the size of the workforce at the Swindon facility as we continue our transformation process, with a total of approximately 400 jobs at risk of redundancy.
On February 15, 2012, we appointed Stuart Grant as our Executive Vice President, Chief Financial Officer.
On February 13, 2012, Ramsey Frank resigned as Chairman of the Board and a director of our company. The Board appointed Paul S. Levy, Managing Director, JLL Partners Inc. ("JLL Partners"), as our new Chairman and appointed Nicholas O'Leary, Senior Associate, JLL Partners, to our Board of Directors, filling the vacant seat left by the departure of Mr. Frank. The Board also appointed Michel Lagarde, an existing member of the Board, as Chair of our Corporate Governance Committee and Daniel Agroskin, Managing Director at JLL Partners, and also an existing member of the Board, to our Corporate Governance Committee, filling the positions vacated by Mr. Frank.
On January 19, 2012, we and PROCAPS S.A. announced an agreement to provide a line of prescription pharmaceutical soft-gel product development and manufacturing services.  The capabilities we gain via this new offering include large scale commercial supply of prescription soft gel capsules for the North American, European and Asian markets. 
On December 15, 2011, our Board appointed Michel Lagarde, Principal, JLL Partners as a director of our company.  Mr. Lagarde replaced Thomas S. Taylor, Managing Director, JLL Partners, who left our Board effective December 15, 2011.  Mr. Lagarde replaced Mr. Taylor as the Chairman of our Compensation and Human Resources Committee ("CHR Committee") and is a member of our Audit and Corporate Governance Committees.
On November 1, 2011, Eric W. Evans, our then Chief Financial Officer, resigned. In connection with Mr. Evans's employment agreement, we incurred a severance charge of approximately $0.4 million in the three months ended

18


January 31, 2012.
Opportunities and Trends
Our target markets include the highly fragmented global market for the manufacture of finished pharmaceutical dosage forms and for PDS. According to PharmSource, a provider of pharmaceutical outsourcing business information, the CMO market totaled $11.7 billion in 2010, and could experience marginal growth of roughly 1% (in conservative scenarios) to as much as 3% - 5% annually during 2011 to 2015. PharmSource also estimates that the outsourced PDS market totaled approximately $1.3 billion in 2010, with growth projections in the 2011 to 2015 period approaching 3% annually. We are one of only a few industry participants that can provide a broad range of CMO and PDS services.
Pharmaceutical outsourcing service providers have faced challenges in recent years due to the uncertain economic environment. In the research and development area, emerging pharmaceutical companies have faced funding uncertainties due to limited access to capital, and many larger companies have decreased or delayed product development spending due to uncertainties surrounding industry consolidation, overall market weakness and the regulatory approval environment. As a result, decision-making related to the awarding of new outsourcing projects has slowed during recent years for similar reasons.
Puerto Rico Operations
We closed our Carolina facility in Puerto Rico effective January 31, 2009. We completed the sale of this property on February 17, 2012 for a nominal amount. The results of the Carolina operations have been reported in discontinued operations in the three and six months ended April 30, 2012 and 2011.
In December 2009, we announced our plan to consolidate our Puerto Rico operations into our manufacturing site located in Manati and ultimately close or sell our plant in Caguas. As a result of additional time required to transition manufacturing operations from Caguas to Manati due to longer than expected customer regulatory time lines and increased product demand, an offer received during fiscal 2010 to purchase the facility was rescinded. The transition will continue beyond the end of calendar year 2012, and we now estimate the total project repositioning expenses to be $13.2 million, of which $12.2 million has been incurred as of April 30, 2012. The consolidation also results in accelerated depreciation of Caguas assets of approximately $12.0 million over the life of the project. Because the business in the Caguas facility is being transferred within the existing site network, its results of operations are included in continuing operations.

Results of Operations
The results of the Carolina operations have been segregated and reported as discontinued operations for the three months ended April 30, 2012 and 2011.

Three Months Ended April 30, 2012 Compared to Three Months Ended April 30, 2011
 

19


 
Three months ended April 30,
 
2012
 
2011
 
$
 
%
(in millions of U.S. dollars)
$
 
$
 
Change
 
Change
Revenues
181.5

 
170.0

 
11.5

 
6.8

Cost of goods sold
147.5

 
139.6

 
7.9

 
5.7

Gross profit
34.0

 
30.4

 
3.6

 
11.8

Selling, general and administrative expenses
34.7

 
24.8

 
9.9

 
39.9

Repositioning expenses
6.0

 
0.7

 
5.3

 
757.1

Impairment charge
57.9

 

 
57.9

 

Loss on sale of fixed assets

 
0.2

 
(0.2
)
 
(100.0
)
Operating (loss) income
(64.6
)
 
4.7

 
(69.3
)
 

Interest expense, net
6.5

 
6.4

 
0.1

 
1.6

Foreign exchange loss, net
0.5

 
6.2

 
(5.7
)
 
(91.9
)
Other (income) expense, net

 
0.3

 
(0.3
)
 
(100.0
)
Loss from continuing operations before income taxes
(71.6
)
 
(8.2
)
 
(63.4
)
 
(773.2
)
Provision for income taxes
8.0

 
2.1

 
5.9

 
281.0

Loss before discontinued operations
(79.6
)
 
(10.3
)
 
(69.3
)
 
(672.8
)
Loss from discontinued operations
(0.1
)
 
(0.1
)
 

 

Net loss attributable to restricted voting shareholders
(79.7
)
 
(10.4
)
 
(69.3
)
 
(666.3
)
Basic and diluted loss per share
 
 
 
 
 
 
 
From continuing operations
$(0.616)
 
$(0.080)
 
 
 
 
From discontinued operations
$(0.001)
 
$(0.001)
 
 
 
 
 
$(0.617)
 
$(0.081)
 
 
 
 
Weighted-average number of shares outstanding during period—basic and diluted (in thousands)
129,168

 
129,168

 
 
 
 

Operating (Loss) Income Summary
Revenues for the three months ended April 30, 2012 increased $11.5 million, or 6.8%, to $181.5 million, from $170.0 million for the three months ended April 30, 2011. Excluding currency fluctuations, revenues for the three months ended April 30, 2012 would have been approximately 9.4% higher than the same period of prior year. CMO revenues for the three months ended April 30, 2012 increased $8.5 million, or 6.1%, to $147.0 million, from $138.5 million for the three months ended April 30, 2011. The increase in North American and Italian operations more than offset by the $17.4 million impact from the reservation fee and accelerated deferred revenue recorded in the second quarter of fiscal 2011. PDS revenues for the three months ended April 30, 2012 increased $3.0 million, or 9.5%, to $34.5 million, from $31.5 million for the three months ended April 30, 2011.
Gross profit for the three months ended April 30, 2012 increased $3.6 million, or 11.8%, to $34.0 million, from $30.4 million for the three months ended April 30, 2011. Increase in gross profit was primarily due to higher volumes, a decrease in depreciation expense of $1.9 million and a reduction in inventory write-offs of $1.7 million, partially offset by unfavorable mix associated with replacing all the reservation fee and accelerated deferred revenue with other production. Gross profit in the second quarter would have increased by $21.0 million, or 162.0%, excluding the benefit from the prior year reservation fee and accelerated deferred revenue.
Selling, general and administrative expenses for the three months ended April 30, 2012 increased $9.9 million, or 39.9%, to $34.7 million, from $24.8 million for the three months ended April 30, 2011. The increase was primarily due to higher consulting fees related to our strategic and operational review and transformation, and higher compensation expense. Foreign exchange had a favorable impact of $0.8 million on selling, general and administrative expenses versus prior year.
Repositioning expenses for the three months ended April 30, 2012 increased $5.3 million, or 757.1%, to $6.0 million, from $0.7 million for the same period of prior year. The increase was primarily due to higher expenses in connection with the Plan of Termination, which resulted in approximately $5.4 million of expense associated with employee termination benefits, recorded during the second quarter of fiscal 2012.
Impairment charges for the three months ended April 30, 2012 were $57.9 million relating to winding down or transferring PDS and non-cephalosporin commercial production from our Swindon, U.K. facility to other facilities.

20



Operating (loss) income for the three months ended April 30, 2012 decreased $69.3 million to a loss of $64.6 million (-35.6% of revenues), from income of $4.7 million (2.8% of revenues) for the three months ended April 30, 2011 as a result of the factors discussed above.
Foreign Exchange Losses
Foreign exchange loss for the three months ended April 30, 2012 was $0.5 million, compared to $6.2 million for the same period of prior year. The foreign exchange loss for the three months ended April 30, 2012 was primarily due to operating exposures. The foreign exchange loss for the three months ended April 30, 2011 was primarily due to operating exposures, partially offset by hedging gains. The hedging contracts resulted in losses of less than $0.1 million for the three months ended April 30, 2012 compared to gains of $1.3 million for the three months ended April 30, 2011.
Loss from Continuing Operations Before Income Taxes
We reported a loss from continuing operations before income taxes of $71.6 million for the three months ended April 30, 2012, compared to $8.2 million for the three months ended April 30, 2011. The operating items discussed above were the primary drivers of the year over year variance.
Income Taxes
Income taxes were an expense of $8.0 million for the three months ended April 30, 2012, compared to $2.1 million for the three months ended April 30, 2011. The increase in tax expense was primarily driven by the mix of income and loss from our operating units and pre-tax losses in some entities for which no tax benefits were recognized.
Loss before Discontinued Operations and Loss Per Share from Continuing Operations
We recorded a loss before discontinued operations for the three months ended April 30, 2012 of $79.6 million, compared to $10.3 million for the three months ended April 30, 2011. The loss per share from continuing operations for the three months ended April 30, 2012 was 61.6¢ compared to 8.0¢ for the three months ended April 30, 2011.
Loss and Loss Per Share from Discontinued Operations
Discontinued operations for the three months ended April 30, 2012 and 2011 include the results of the Carolina, Puerto Rico operations. Financial details of the operating activities of the Carolina operations are disclosed in “Note 2—Discontinued operation, plant consolidations and asset impairments.” The loss from discontinued operations for the three months ended April 30, 2012 was $0.1 million, or 0.1¢ per share, compared to a loss of $0.1 million, or 0.1¢ per share, for the three months ended April 30, 2011. These costs relate to the final wind down following the sale of the Carolina facility.
Net Loss Attributable to Restricted Voting Shareholders and Loss Per Share
Net loss attributable to restricted voting shares for the three months ended April 30, 2012 was $79.7 million, or 61.7¢ per share, compared to $10.4 million, or 8.1¢ per share, for the three months ended April 30, 2011.
The computation of net loss per share did not include 11,005,335 and 12,435,824 outstanding options in the three months ended April 30, 2012 and 2011, respectively, because such options were anti-dilutive in nature.
Revenues and Adjusted EBITDA by Business Segment
The following discussion provides information regarding our business segments. References in this MD&A to “Adjusted EBITDA” are to income (loss) before discontinued operations before repositioning expenses, interest expense, foreign exchange losses reclassified from other comprehensive (loss) income, refinancing expenses, gains and losses on sale of fixed assets, gain on extinguishment of debt, income taxes, asset impairment charges, depreciation and amortization and other income and 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 Adjusted EBITDA should not be construed as an alternative to net income (loss) determined in accordance with accounting principles generally accepted in the United States as an indicator of performance. Adjusted EBITDA is used by management as an internal measure of profitability. We have included Adjusted EBITDA because we believe that this measure is used by certain investors to assess our financial performance before non-cash charges and certain costs that we do not believe are reflective of our underlying business.

21



A reconciliation of Adjusted EBITDA to (loss) income before discontinued operations is set forth below:
 
 
Three months ended April 30,
 
Six months ended April 30,
 
2012
 
2011
 
2012
 
2011
 
$
 
$
 
$
 
$
Adjusted EBITDA
9.7

 
12.9

 
0.5

 
41.6

Depreciation and amortization
(10.8
)
 
(13.5
)
 
(21.4
)
 
(28.4
)
Repositioning expenses
(6.0
)
 
(0.7
)
 
(6.8
)
 
(1.5
)
Interest expense, net
(6.5
)
 
(6.4
)
 
(13.0
)
 
(12.7
)
Impairment charge
(57.9
)
 

 
(57.9
)
 

Loss on sale of fixed assets

 
(0.2
)
 

 
(0.2
)
Provision for income taxes
(8.0
)
 
(2.1
)
 
(0.3
)
 
(4.8
)
Other
(0.1
)
 
(0.3
)
 

 
(0.5
)
Loss before discontinued operations
(79.6
)
 
(10.3
)
 
(98.9
)
 
(6.5
)

The following provides certain information regarding our business segments for the three months ended April 30, 2012 and 2011:  
 
Three months ended April 30,
 
2012
 
2011
 
$
 
%
(in millions of U.S. dollars)
$
 
$
 
Change
 
Change
Revenues
 
 
 
 
 
 
 
Commercial Manufacturing
 
 
 
 
 
 
 
North America
83.3

 
63.3

 
20.0

 
31.6

Europe
63.7

 
75.2

 
(11.5
)
 
(15.3
)
Total Commercial Manufacturing
147.0

 
138.5

 
8.5

 
6.1

Pharmaceutical Development Services
34.5

 
31.5

 
3.0

 
9.5

Total Revenues
181.5

 
170.0

 
11.5

 
6.8

Adjusted EBITDA
 
 
 
 
 
 
 
Commercial Manufacturing
 
 
 
 
 
 
 
North America
10.5

 
0.2

 
10.3

 


Europe
3.6

 
16.8

 
(13.2
)
 
(78.6
)
Total Commercial Manufacturing
14.1

 
17.0

 
(2.9
)
 
(17.1
)
Pharmaceutical Development Services
5.0

 
5.9

 
(0.9
)
 
(15.3
)
Corporate Costs
(9.4
)
 
(10.0
)
 
(0.6
)
 
(6.0
)
Total Adjusted EBITDA
9.7

 
12.9

 
(3.2
)
 
(24.8
)

Commercial Manufacturing
Total CMO revenues for the three months ended April 30, 2012 increased $8.5 million, or 6.1%, to $147.0 million, from $138.5 million for the three months ended April 30, 2011. Had local currency exchange rates remained constant to the rates of the three months ended April 30, 2011, CMO revenues for the three months ended April 30, 2012 would have been approximately 9.0% higher than the same period of prior year. Excluding the $17.4 million impact from the reservation fee and accelerated deferred revenue recorded in the second quarter of fiscal 2011, total CMO revenues for the three months ended April 30, 2012 would have increased $25.9 million, or 21.4% from the same period of prior year.
North American CMO revenues for the three months ended April 30, 2012 increased $20.0 million, or 31.6%, to $83.3 million, from $63.3 million for the three months ended April 30, 2011. The increase was due to an increase in customer demand across most North American sites.
European CMO revenues for the three months ended April 30, 2012 decreased $11.5 million, or 15.3%, to $63.7 million, from $75.2 million for the three months ended April 30, 2011. Had European currency exchange rates remained constant to the rates of the three months ended April 30, 2011, European CMO revenues for the three months ended April 30, 2012 would have

22


been approximately 10.2% lower than the same period of prior year. This reduction was primarily due to the non-recurrence of the $17.4 million in reservation fee and accelerated deferred revenue recorded in the second quarter of fiscal 2011, partially offset by increases in Italian operations.

Total CMO Adjusted EBITDA for the three months ended April 30, 2012 decreased $2.9 million, or 17.1%, to $14.1 million, from $17.0 million for the three months ended April 30, 2011. This represents an Adjusted EBITDA margin of 9.6% for the three months ended April 30, 2012 compared to 12.3% for the three months ended April 30, 2011. Had local currency exchange rates and foreign exchange gains and losses remained constant to those of the three months ended April 30, 2011, CMO Adjusted EBITDA for the three months ended April 30, 2012 would have been approximately $3.2 million lower. The decrease was driven by unfavorable mix primarily from replacing all of the reservation fee and accelerated deferred revenue with other production and $4.6 million in consulting fees related to our strategic initiatives, partially offset by higher volumes, reduced foreign exchange losses of $3.2 million and a decrease in inventory write-offs of $1.7 million.
North American Adjusted EBITDA for the three months ended April 30, 2012 increased $10.3 million, to $10.5 million, from $0.2 million for the three months ended April 30, 2011. The increase was primarily driven by higher volumes and reduction of foreign exchange losses of $2.5 million, and a decrease in inventory write-offs of $0.8 million, partially offset by $1.1 million in consulting fees related to our strategic initiatives. North American CMO recorded $1.4 million in estimated repositioning expenses relating to the Plan of Termination and Puerto Rican operations in the three months ended April 30, 2012 that were not included in Adjusted EBITDA.
European Adjusted EBITDA for the three months ended April 30, 2012 decreased $13.2 million, or 78.6%, to $3.6 million, from $16.8 million for the three months ended April 30, 2011. The decrease was primarily driven by the lower revenue resulting from the non-recurrence of the $17.4 million in reservation fee and accelerated deferred revenue recorded in the second quarter of fiscal 2011 and $3.5 million in consulting fees related to our strategic initiatives. These were partially offset by reduction of foreign exchange losses of $0.8 million, a decrease in inventory write-offs of $0.8 million. European CMO recorded $1.5 million in estimated repositioning expenses relating to the Plan of Termination and $55.1 million in an asset impairment charge in the three months ended April 30, 2012 that were not included in Adjusted EBITDA.
Pharmaceutical Development Services
Total PDS revenues for the three months ended April 30, 2012 increased by $3.0 million, or 9.5%, to $34.5 million, from $31.5 million for the three months ended January 31, 2011. Had the local currency rates remained constant to the three months ended April 30, 2011, PDS revenues for the three months ended April 30, 2012 would have been 10.8% higher than the same period of prior year. Higher development activities from new contracts across most sites contributed to the improved performance.
Total PDS Adjusted EBITDA for the three months ended April 30, 2012 decreased by $0.9 million, or 15.3%, to $5.0 million, from $5.9 million for the three months ended April 30, 2011. Had local currency exchange rates and foreign exchange gains and losses remained constant to those of the three months ended April 30, 2011 , PDS Adjusted EBITDA for the three months ended April 30, 2012 would have been approximately $0.5 million higher than reported. Included in the current quarter was $1.4 million in consulting costs relating to our strategic initiatives. PDS recorded $3.1 million in estimated repositioning expenses relating to the Plan of Termination and $2.8 million in an asset impairment charge in the three months ended April 30, 2012 that were not included in Adjusted EBITDA.
Corporate Costs
Corporate costs for the three months ended April 30, 2012 decreased $0.6 million, or 6.0%, to $9.4 million, from $10.0 million for the three months ended April 30, 2011 primarily due to increased compensation related expenses, which were more than offset by $3.1 million in reduced foreign exchange losses versus the prior year.

Six Months Ended April 30, 2011 Compared to Six Months Ended April 30, 2010
 

23


 
Six months ended April 30,
 
2012
 
2011
 
$
 
%
(in millions of U.S. dollars)
$
 
$
 
Change
 
Change
Revenues
335.4

 
345.7

 
(10.3
)
 
(3.0
)
Cost of goods sold
287.0

 
273.1

 
13.9

 
5.1

Gross profit
48.4

 
72.6

 
(24.2
)
 
(33.3
)
Selling, general and administrative expenses
69.2

 
52.6

 
16.6

 
31.6

Repositioning expenses
6.8

 
1.5

 
5.3

 
353.3

Impairment charge
57.9



 
57.9

 


Loss on sale of fixed assets

 
0.2

 
(0.2
)
 
(100.0
)
Operating (loss) income
(85.5
)
 
18.3

 
(103.8
)
 
(567.2
)
Interest expense, net
13.0

 
12.7

 
0.3

 
2.4

Foreign exchange loss, net
0.2

 
6.8

 
(6.6
)
 
(97.1
)
Other (income) expense, net
(0.1
)
 
0.5

 
(0.6
)
 
(120.0
)
Loss from continuing operations before income taxes
(98.6
)
 
(1.7
)
 
(96.9
)
 


Provision for income taxes
0.3

 
4.8

 
(4.5
)
 
(93.8
)
Loss before discontinued operations
(98.9
)
 
(6.5
)
 
(92.4
)
 
 
Loss from discontinued operations
(0.2
)
 
(0.3
)
 
0.1

 
33.3

Net loss attributable to restricted voting shareholders
(99.1
)
 
(6.8
)
 
(92.3
)
 
 
Basic and diluted loss per share
 
 
 
 
 
 
 
From continuing operations
(0.766
)
 
(0.050
)
 
 
 
 
From discontinued operations
(0.002
)
 
(0.002
)
 
 
 
 
 
(0.768
)
 
(0.052
)
 
 
 
 
Weighted-average number of shares outstanding during period—basic and diluted (in thousands)
129,168

 
129,168

 
 
 
 
 
 
 
 
 
 
 
 
Operating Income Summary
Revenues for the six months ended April 30, 2012 decreased $10.3 million, or 3.0%, to $335.4 million, from $345.7 million for the six months ended April 30, 2011. Excluding currency fluctuations, revenues for the six months ended April 30, 2012 would have been approximately 1.4% lower than the same period of prior year. CMO revenues for the six months ended April 30, 2012 decreased $17.3 million, or 6.0%, to $269.9 million, from $287.2 million for the six months ended April 30, 2011. The decline was primarily due to the reservation fee and accelerated deferred revenue recorded in the first six months of fiscal 2011, the impact of which was $50.3 million, partially offset by stronger results from North American operations. PDS revenues for the six months ended April 30, 2012 increased $7.0 million, or 12.0%, to $65.5 million, from $58.5 million for the six months ended April 30, 2011.
Gross profit for the six months ended April 30, 2012 decreased $24.2 million, or 33.3%, to $48.4 million, from $72.6 million for the six months ended April 30, 2011. The decrease in gross profit was primarily due to lower volumes, unfavorable mix associated with replacing the majority of the reservation fee and deferred revenues with other production, partially offset by a decrease in depreciation expense of $5.4 million and a reduction in inventory write-offs of $2.4 million. Gross profit in the six month period would have increased by $26.1 million, or 117.0%, excluding the benefit from the prior year reservation fee and accelerated deferred revenue.
Selling, general and administrative expenses for the six months ended April 30, 2012 increased $16.6 million, or 31.6%, to $69.2 million, from $52.6 million for the six months ended April 30, 2011. The increase was primarily due to higher consulting fees related to our strategic and operational review and transformation, and higher compensation expense. Foreign exchange had a favorable impact of $1.0 million on selling, general and administrative expenses versus prior year.
Repositioning expenses for the six months ended April 30, 2012 increased $5.3 million, or 353.3%, to $6.8 million, from $1.5 million for the same period of prior year. The increase was primarily due to the Plan of Termination which required us to record approximately $5.4 million of estimated expenses associated with employee termination benefits during the second quarter of fiscal 2012.
Impairment charges for the six months ended April 30, 2012 were $57.9 million relating to the winding down or

24