Marsulex announces another solid quarter



    TORONTO, Oct. 31 /CNW/ - Marsulex Inc. (TSX: MLX) today announced results
for the three and nine months ended September 30, 2007. Revenue for the
quarter was $68.7 million compared with $68.3 million in 2006. Gross profit
increased to $25.4 million from $24.8 million in 2006 despite the impact of
the stronger Canadian dollar on the Company's U.S. operations. Earnings before
income taxes for the quarter were $6.8 million compared to $3.1 million in
2006. Net earnings for the quarter were $5.4 million ($0.16 per share)
compared to $2.6 million in 2006 ($0.08 per share).

    

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    (in millions           Three months ending            Nine months ending
     of dollars,                  September 30,                 September 30,
     except per                             %                             %
     share)           2007      2006       chg      2007      2006       chg
    -------------------------------------------------------------------------
    Revenue       $   68.7  $   68.3       0.6% $  214.5  $  180.2      19.0%
    Gross profit      25.4      24.8       2.4%     74.3      61.5      20.8%
    Earnings before
     income taxes      6.8       3.1       119%     15.4       7.3       111%
    Net earnings       5.4       2.6       108%     12.2       8.5        44%
    Earnings per
     share  - basic   0.16      0.08       100%     0.37      0.26        42%

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    Commenting on the results, Marsulex President and Chief Executive
Officer, Mr. Laurie Tugman, said, "Results were in line with expectations.
Revenue and gross profit were consistent with the third quarter of 2006.
Significantly stronger pre-tax earnings reflect lower debt levels and the
associated lower interest costs. Year to date results reflect strong year over
year increases within the Industrial Services Group, in particular the
Montreal facility expansion and the Petcoke Services acquisition."

    
    Highlights

    -   On October 1, 2007 the Company announced the appointment of Mr. Keith
        McLeod to the new position of Senior Vice President, Operations.

    -   The quarter results for Industrial Services reflects increased
        volumes and fuel savings at the spent acid regeneration facility and
        improved margins on the processing of hazardous waste, petcoke, and
        prilled sulphur offset by the impact of foreign exchange.

    -   Western Markets Group reported higher sales and gross margin for
        water treatment chemicals in the third quarter which were more than
        offset by higher raw material costs, namely for sulphur, and lower
        sales of sulphide products.

    -   Power Generation's revenue and gross profit reflects increased
        project activity including the LCRA project offset by lower royalty
        revenue and the impact of foreign exchange.

    -   Financial results were favourably affected by foreign exchange gains
        of approximately $1.4 million in the quarter. This has been offset by
        an estimated $0.8 million in margin decrease in the quarter on U.S.
        denominated operations. On a year to date basis, the Company's U.S.
        denominated debt has decreased by $12 million as a result of
        favourable currency movement.

    -   On September 5, 2007 the Company announced a quarterly dividend of
        fifteen cents per share which will be paid on November 15, 2007 to
        shareholders of record on close of business on October 15, 2007.
    

    Mr. Tugman said, "The outlook for continued growth in our key business
segments remains positive. Although the timing of new project activity remains
difficult to predict, our ongoing focus on operating excellence and strong
customer relationships will generate stable results and position us for
further growth. The recent appointment of Keith McLeod is an important part of
our strategy to have a strong senior management team and to ensure operations
and customer relationships support our growth initiatives."

    Marsulex, which is based in Toronto, Ontario, is a leading provider of
industrial services, including environmental compliance solutions for air
quality control, processing or handling of industrial by-products or waste
streams, and is a producer and marketer of sulphur-based industrial chemicals.
The Company's services and products are provided to a broad base of industrial
customers in a wide range of industries. Website: www.marsulex.com

    A conference call with analysts and portfolio managers to review the
third quarter 2007 results will be webcast live on www.marsulex.com and
www.newswire.ca on Thursday, November 1, 2007 at 10:00 a.m. Eastern Time.

    This news release may contain forward-looking statements. These
    statements are based on current views and expectations that are subject
    to risks, uncertainties and assumptions that are difficult to predict,
    including the impact of acquisitions, risks, uncertainties and
    assumptions relating to the timing and market acceptance of future
    products, competition in the Company's markets, the Company's reliance on
    customers, fluctuations in currency exchange rates, commodity prices or
    interest rates, the Company's ability to maintain good relations with its
    employees, changes in laws or regulations regarding the environment or
    other environmental liabilities, the Company's ability to integrate
    acquisitions and the Company's ability to protect its intellectual
    property.

    Actual results might differ materially from results suggested in any
    forward-looking statements whether as a result of new information, future
    developments or otherwise. Additional information identifying risks,
    uncertainties and assumptions is contained in the Company's filings with
    the securities regulatory authorities, which are available at
    www.sedar.com. All forward-looking statements are expressly qualified in
    their entirety by this Cautionary Statement.


    Management's Discussion and Analysis

    The following commentary provides additional analysis of the operations
and financial position for the three and nine months ending September 30, 2007
for Marsulex Inc. ("Marsulex" or the "Company") and includes material
information available to October 30, 2007. It is supplementary information and
should be read in conjunction with the unaudited interim consolidated
financial statements, including the accompanying notes and with the
consolidated financial statements and corresponding notes included in the
annual report as of December 31, 2006. The commentary is based on current
views and expectations that are subject to risks, uncertainties, and
assumptions that are difficult to predict, including risks, uncertainties and
assumptions relating to the timing and market acceptance of future products,
competition in the Company's markets, reliance on customers, fluctuations in
currency exchange rates, commodity prices or interest rates, the Company's
ability to maintain good relations with its employees, changes in laws or
regulations regarding the environment or other environmental liabilities, the
Company's ability to integrate acquisitions, and the Company's ability to
protect its intellectual property. Actual results might differ materially from
results suggested in any forward-looking statements whether as a result of new
information, future developments or otherwise. Additional information
identifying risks, uncertainties and assumptions is contained in the Company's
filings with the securities regulatory authorities, which are available at
www.sedar.com. All forward-looking statements are expressly qualified in their
entirety by this Cautionary Statement. Additional information, including the
Annual Information Form is available on SEDAR at www.sedar.com and on the
Company's website at www.marsulex.com.

    RESPONSIBILITY OF MANAGEMENT AND THE BOARD OF DIRECTORS

    Management is responsible for the information disclosed in this MD&A and
the accompanying unaudited interim consolidated financial statements, and has
in place appropriate information systems, procedures and controls to ensure
that information used internally and disclosed externally is materially
complete and reliable. In addition, the Company's Audit Committee, on behalf
of the Board of Directors, provides an oversight role with respect to all
public financial disclosures made by the Company, and has reviewed and
approved this MD&A and the accompanying consolidated financial statements.
    The Chief Executive Officer ("CEO") and the Chief Financial Officer
("CFO") have evaluated the design and effectiveness of the Company's
disclosure controls and procedures as of September 30, 2007 and have concluded
that the Company's disclosure controls and procedures provide reasonable
assurance that material information relating to the Company, including its
consolidated subsidiaries, would be made known to them by others within those
entities, particularly during the period in which this report was being
prepared. However, due to the inherent limitations in control systems and
procedures, their evaluation can provide only reasonable, not absolute,
assurance that such disclosure controls and procedures are operating
effectively. There have been no changes to the design of internal controls
over financial reporting that occurred during the three months ended
September 30, 2007 that have materially or are measurably likely to materially
affect on the internal controls over financial reporting.

    COMPANY PROFILE AND BUSINESS SEGEMENTATION

    Marsulex is a leading provider of industrial services, primarily
environmental compliance solutions for air quality control and industrial
hazardous waste streams, and a leading producer and marketer of sulphur-based
industrial and water treatment chemicals. The Company's services are provided
to a broad base of customers in a wide range of industries. Increasingly
stringent environmental compliance regulations create opportunities for
Marsulex to apply its core competency of operating small to medium size
chemical plants efficiently and safely. In Western Canada, Marsulex produces
and markets sulphur-based industrial and water treatment chemicals.
    The Company's activities are divided into four reportable segments. The
three operating segments are: Industrial Services, Western Markets and Power
Generation. The fourth non-operating segment is Corporate Support, which
provides centralized services, such as finance, information systems, human
resources and risk management to the operating segments.

    
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    (in thousands          Three months ending            Nine months ending
     of dollars,                  September 30,                 September 30,
     except per                             %                             %
     share)           2007      2006       chg      2007      2006       chg
    -------------------------------------------------------------------------

    Revenue       $ 68,679  $ 68,333       0.5% $214,471  $180,227      19.0%
    Gross Profit    25,378    24,795       2.4%   74,331    61,532      20.8%
    Gross Profit
     as a percent
     of revenue       37.0%     36.3%               34.7%     34.1%
    Selling, general,
     administrative
     and other costs
     (SG&A), including
     foreign exchange
     & refinancing
     costs           7,895     7,775       1.5%   24,968    20,448      22.1%
    Depreciation,
     amortization
     and gain on
     redemption
     of debt         8,134     9,881     -17.7%   25,636    25,068       2.3%
    Interest
     expense
     - net           2,552     3,992     -36.1%    8,287     8,703     -4.78%
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    Earnings
     before
     income
     taxes           6,797     3,147       116%   15,440     7,313      111%
    Income taxes     1,350       574       135%    3,217    (1,192)     n/a
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    Net earnings  $  5,447  $  2,573       112% $ 12,223  $  8,505     43.7%

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    Total
     Comprehensive
     Income       $  5,210  $  2,742      90.0% $ 10,565  $  8,547     23.6%

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    Earnings per
     share
     - Basic      $   0.16  $   0.08       100% $   0.37  $   0.26      42.3%

    Earnings per
     share
     -Diluted     $   0.16  $   0.08       100% $   0.37  $   0.26      42.3%

    Cash dividends
     per share    $   0.15         -       n/a  $   0.45         -       n/a

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    Cash generated
     from operations
     before non-cash
     changes to
     working
     capital      $ 12,440  $ 12,404            $ 33,875  $ 29,873
    Changes in
     non-cash
     working
     capital        (3,357)    9,284              (2,599)   11,003
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    Cash provided
     by operations   9,083    21,688              31,276    40,876

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    Revenues for the third quarter of 2007 were comparable to the same period
in 2006 despite the impact of foreign exchange on U.S. denominated revenues.
Revenue relating to the Power Generation Group's project activity including
the Lower Colorado River Authority ("LCRA") project were offset by lower
revenue for the Industrial Services and Western Markets groups. For the nine
months ended September 30, 2007 the increase in revenue reflects the
contribution from the Power Generation projects, the increase resulting from
the Petcoke Services acquisition and the contribution from the Montreal
facility expansion offset by the impact of foreign exchange.
    Gross profit increased in the third quarter of 2007 on improved margins
in the Industrial Services Group, partially offset by lower margins on higher
raw material costs in Western Markets. For the nine months ended September 30,
2007 the higher gross profit reflects increases for the Industrial Services
Group, (primarily from the Montreal facility expansion), and Power Generation
(higher project activity) offset by lower gross profit for Western Markets.
Despite some changes in mix, gross profit as a percentage of revenue was
consistent for both the three and nine month periods of 2007.
    The increased SG&A costs in the third quarter largely reflects increased
Corporate costs, primarily legal. For the nine months ended September 30,
2007, the increase in SG&A primarily reflects increased head count, travel and
related costs ($2.1 million), increased legal, general consulting and
compliance costs primarily in Corporate ($2.4 million), and increased costs
for the long-term incentive plans ($2.7 million). The increase in long-term
incentive plans is measured against the quarter-end closing price for
Marsulex's common stock, which increased by 3% in the quarter and 57% for the
year.
    Since the beginning of 2007, the Canadian dollar has strengthened
(against the U.S. dollar) by approximately 17% with year to year increases of
the average exchange rate of 7% and 2% respectively for the third quarter and
nine months ended September 30, 2007. The impact of the strengthening dollar
on the Company's financial results include:
    
    (a) a decrease in revenue and gross profits of $2.6 million and
        $0.8 million respectively for the first nine months of 2007 (for the
        quarter the impacts were a decrease of $2.5 million and $0.8 million
        respectively);

    (b) foreign exchange gains of $1.4 million for the quarter ($3.8 million
        for the nine month period) on monetary items including
        U.S.$10 million debt; and

    (c) foreign exchange gains of $10.1 million on U.S. $60 million debt
        offsetting the impact of U.S. denominated net assets which is
        reflected as an adjustment to other comprehensive income in the
        financial statements.
    

    A more detailed analysis of the Company's exposure to foreign exchange
fluctuations is included under Risk Factors in this MD&A.
    Increases in depreciation expense for the Montreal facility expansion and
the higher capital assets associated with the Petcoke Services acquisition
were offset by lower depreciation on assets that have been fully depreciated
and depreciation on U.S. dollar denominated assets.
    Amortization expense for the nine months ended September 30, 2007
includes the amortization associated with the intangible assets resulting from
the Petcoke Services acquisition offset by the elimination of the amortization
associated with the deferred financing costs for the old credit facilities in
2007 ($0.8 million for the nine months ended September 30, 2006).

    
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                           Three months ending            Nine months ending
                                 September 30,                 September 30,
    (in thousands                           %                             %
     of dollars)      2007      2006       chg      2007      2006       chg
    -------------------------------------------------------------------------

    Interest
     expense      $  2,722  $  4,302     -36.7% $  9,114  $ 11,805     -22.8%
    Interest
     capitalized         -       (80)      n/a         -    (2,515)      n/a
    Interest income   (170)     (230)    -26.1%     (827)     (587)     40.9%
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    Net interest
     expense      $  2,552  $  3,992     -36.1% $  8,287  $  8,703      -4.8%

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    Interest expense in the third quarter and for the nine months ended
September 30, 2007 reflects the reduced interest rates (overall year to date
weighted average rate of 6.9% for 2007 versus 7.8% for 2006) resulting from
the March 1st refinancing. The interest capitalized for the nine months ended
September 30, 2006 relates to the Montreal expansion project which was
completed in the third quarter of 2006.
    The increase in the quarterly pre-tax earnings reflects the overall
increase in the business from both, organic growth and acquisitions, as well
as reduced depreciation, amortization, and interest expenses.
    The Company's effective tax rate for the third quarter and for the nine
months ended September 30, 2007 was approximately 20% and 21% respectively as
compared to the Company's statutory rate of 36%. These rates reflect the
utilization of previously unrecognized U.S. tax loss carry forwards and a
recovery on its future tax liability as a result of changes in the Canadian
Federal tax rates that were substantively enacted during the second quarter of
2007. (In 2006 the Company recorded a $2.9 million recovery on future tax
liabilities for changes in the tax rates substantively enacted during the
second quarter). Given the recently announced rate reductions, the Company's
statutory rate is expected to be 29% by 2012.
    Cash tax is dependent on the Company's earnings by legal entity, the
availability of the tax losses and accelerated tax depreciation on property,
plant and equipment and other deductions to reduce taxable income. During the
nine months ended September 30, 2007 the Company paid cash taxes of
$3.4 million including installments of $1.1 million for 2006. Over the past
three years cash taxes have averaged less than $1 million per year.
    The increases in net earnings for the third quarter and for the nine
months ended September 30, 2007 reflect the higher earnings from the business,
including foreign exchange gains, and overall lower interest costs. The
effective tax rates for the third quarter and nine months of 2007 are
comparable to the same periods in 2006. The higher taxes are the result of the
increase in pre-tax earnings.
    Total comprehensive income for the third quarter and for the nine months
ended September 30, 2007 increased 90% and 24% respectively when compared to
the same periods in 2006. This represents net income being offset by the
effect of the strengthening of the Canadian dollar against the U.S. dollar on
the translation of the Company's investment in U.S. dollar denominated
self-sustaining net assets.

    REVIEW OF BUSINESS SEGMENTS

    Industrial Services Group

    Industrial Services provides services, including environmental compliance
solutions, to oil refiners and other industrial customers, primarily in the
U.S. and Canada. Services include the regeneration of spent sulphuric acid
produced during the octane enhancement of gasoline; the extraction and
recovery of sulphur from hydrogen sulphide gas created during the refining
process; the recovery of sulphur dioxide to ensure air quality compliance;
cutting and handling of petroleum coke; and the safe handling, treatment, and
disposal of industrial hazardous waste streams.

    
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                           Three months ending            Nine months ending
                                  September 30,                 September 30,
    (in thousands                           %                             %
     of dollars)      2007      2006       chg      2007      2006       chg
    -------------------------------------------------------------------------

    Revenue       $ 43,048  $ 46,744      -7.9% $ 131,291 $118,020      11.2%
    Gross Profit    17,622    16,060       9.7%    49,996   38,183      30.9%
    Gross Profit
     as a percent
     of revenue       40.9%     34.4%               38.1%     32.4%

    Capital
     expenditures
     (1)          $  2,194  $  7,293            $  8,116  $ 34,467
    Total
     assets(2)                                  $326,954  $350,520

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    (1) The above capital expenditures represent cash expenditures for
        capital assets. There was no accrual at September 30, 2007 and
        June 30, 2007. At March 31, 2007 $0.1 million was accrued for
        capital costs not yet paid against $3.9 million accrued at
        December 31, 2006.
    (2) 2006 assets are at December 31.
    

    The 8% decrease in third quarter revenue was the result of increased
spent acid volumes being offset by lower waste management revenues from the
timing of remediation projects (primarily in the U.S.), lower prilled sulphur
volumes, and the non-renewal of an unprofitable contract. The decrease in
revenues also reflects approximately $1.8 million for the impact of the
strengthening of the Canadian dollar on U.S. denominated revenues. The
increase in gross profit for the quarter reflects increased volumes and fuel
savings at the Company's spent acid regeneration facility and improved margins
on the processing of hazardous waste, petcoke, and prilled sulphur offset by
the impact of foreign exchange of approximately $0.7 million.
    For the nine months ended September 30, 2007 the 11% increase in revenues
reflects the Petcoke Services acquisition and Montreal expansion, and
increased volumes at the Company's spent acid regeneration facility, which
were partially offset by the timing of remediation projects in the waste
management operations, lower prilled sulphur volumes, and the impact of the
strengthening Canadian dollar. Revenue gains as well as improved margins for
the processing of hazardous waste, petcoke, and prilled sulphur were partially
offset by higher plant costs of approximately $0.8 million (principally Fort
McMurray), approximately $0.2 million in contract closure costs associated
with the unprofitable contract that was not renewed, and approximately
$0.6 million relating to the impact of foreign exchange.
    The increase in the gross profit as a percentage of revenue reflects the
factors described above.
    2006 capital expenditures relates primarily to the completion of the
Montreal facility expansion.
    The decrease in total assets is the result of the capital additions
during the nine months ended September 30, 2007 being offset by depreciation
expense and the impact of foreign exchange on the U.S. dollar denominated
assets.

    Western Markets Group

    Western Markets produces and provides sulphur-enhanced chemicals to
industrial customers and supplies alum, a water treatment chemical used by
municipalities and other industrial companies, for water and wastewater
treatment. The primary market for these and other chemicals is western Canada.
    The Group's product range includes: sulphuric acid; liquid sulphur
dioxide; aluminum sulphate ("alum"); sodium bisulphate; aqua ammonia; carbon
disulphide; hydrogen sulphide; and sulphur.

    
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                           Three months ending            Nine months ending
                                  September 30,                 September 30,
    (in thousands                           %                             %
      of dollars)     2007      2006       chg      2007      2006       chg
    -------------------------------------------------------------------------

    Revenue       $ 16,729  $ 16,914      -1.1% $ 48,200  $ 47,337       1.8%
    Gross Profit     6,217     7,251     -14.3%   17,994    18,876      -4.7%
    Gross Profit
     as a percent
     of revenue       37.2%     42.9%               37.3%     39.9%

    Capital
     expendi-
     tures        $    345  $    223            $  2,119  $    632
    Total assets
     (1)                                        $ 36,495  $ 35,742

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    (1) 2006 assets are at December 31.
    

    Revenues for the third quarter of 2007 are comparable with the same
period in 2006. Increases in weather related sales for water treatment
chemicals during the quarter were more than offset by reduced sale of sulphide
products, which in 2006 included ammonium sold, on an interim basis, to
Syncrude for use in its Flue Gas Desulphurization process. For the nine months
ended September 30, 2007 the higher sales of water treatment chemicals was
offset by the impact of the first quarter 2007 CN rail disruption which
resulted in lower sales and higher costs and lower volumes for sulphide
products, including ammonium. The decrease in gross profit and gross profit as
a per cent of revenues reflects higher costs, namely for sulphur which is used
in the production of some of the Group's products and costs related to
maintenance shutdowns.
    The increase in capital expenditures relates to the replacement of a
furnace at the Group's Prince George facility.

    Power Generation Group

    Power Generation provides environmental systems and services for air
quality compliance, primarily to electric utilities, and also to petrochemical
and general industrial customers worldwide.
    The activities associated with Power Generation include the design of
pollution control equipment, engineering and project management services, and
the licensing of technology.

    
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                           Three months ending            Nine months ending
                                  September 30,                 September 30,
    (in thousands                           %                             %
     of dollars)      2007      2006       chg      2007      2006       chg
    -------------------------------------------------------------------------

    Revenue       $  8,902  $  4,675      90.4% $ 34,980  $ 14,926     134.4%
    Gross Profit     1,539     1,484       3.7%    6,341     4,473      41.8%
    Gross Profit
     as a percent
     of revenue       17.3%     31.7%               18.1%     30.0%

    Capital
     expenditures $     43  $      -            $     52  $      7
    Total assets(1)                             $  6,896  $  6,766

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    (1) 2006 assets are at December 31.
    

    The increase in the Group's revenue and gross profit for the third
quarter and for the nine months ended September 30, 2007 reflects increased
activities relating to projects, including LCRA, offset by the impact of
foreign exchange; $0.8 million on revenues and $0.2 million on gross profit
for the year.
    Gross profit as a percent of revenue is impacted by the mix between (a)
project revenues, involving engineering and construction related activities,
and (b) royalty and licensing activities. The reduced gross profit percentage
is due to the mix of project revenues.
    The decrease in total assets is the result of the impact of foreign
exchange on the U.S. dollar denominated assets.

    LIQUIDITY AND CAPITAL RE

SOURCES Total assets were $382.6 million at September 30, 2007 compared to $439.9 million at December 31, 2006 reflecting the utilization of approximately $35 million in excess cash relating to the March 1, 2007 refinancing, depreciation and amortization, and the impact of foreign exchange on U.S. dollar denominated assets. The decrease in accounts receivable to $40.4 million at September 30, 2007 from $41.4 million at December 31, 2006 balance reflects the impact of foreign exchange on U.S. denominated assets. Inventories at September 30, 2007 were comparable to the December 31, 2006 balance, while prepaid expenses and other assets increased by $0.3 million primarily as a result of prepaid insurance which is renewed in May. The Company holds $1.1 million of Asset-Backed Commercial Paper ('ABCP') recorded as long-term investments. On August 15, 2007, the non-bank sponsored market in Canada for these investment certificates lost its liquidity, at least temporarily. On September 6, 2007, an investor committee was formed to oversee the proposed restructuring process of the ABCP's, and on October 15, 2007, the committee extended the original standstill period of mid-October 2007 to mid-December. The Company is assessing its alternatives and recourses to recover the full value of these investments. The amount invested in ABCP represents 0.3% of Marsulex's total assets and does not impact the Company's liquidity. At the time of the investment, these certificates were rated R1-High by Dominion Bond Rating Service. These investments have been reclassified as long-term assets until such time the liquidity of the market has returned. The fair value of the assets underlying the ABCPs and the outcome of any restructuring proposal is not presently determinable, but could give rise to a charge to the Company's earnings. The net book value of property, plant, and equipment at September 30, 2007 decreased to $210.3 million from the December 31, 2006 balance of $226.3 million. The decrease is the result of the capital additions during the first nine months of 2007 being offset by depreciation expense and the impact of foreign exchange on the U.S. dollar denominated assets. The increase in deferred charges and other assets to $8.5 million at September 30, 2007 from the December 31, 2006 balance of $5.6 million relates to expenditures for placements cells and for an engineering design study at the Montreal facility the costs of which are to be funded by the Company's customers. These increases were offset by a reduction in the January 1, 2007 net book value of deferred financing charges that were charged to opening retained earnings in 2007 as a result of the change in accounting to meet new CICA standards for Financial Instruments. Intangible assets decreased to $31.7 million from the December 31, 2006 balance of $36.3 million reflecting amortization expense for nine months of 2007. Goodwill decreased to $75.4 million from the December 31, 2006 balance of $81.3 million with the finalization of the purchase equation for the Petcoke Services acquisition. The remaining goodwill was unchanged except for the impact of the stronger Canadian dollar on U.S. denominated goodwill. Total current liabilities decreased by approximately $1.4 million to $62.8 million from the December 31, 2006 balance of $64.2 million. The decrease can be attributed to the reduction in the current portion of deferred revenues offset by the accrual of dividends payable to shareholders. Total debt at September 30, 2007 was $155.9 million, down from $208.6 million as at December 31, 2006, reflecting the March 1, 2007 refinancing, the impact of foreign exchange on the U.S. dollar denominated debt, and the repayment of amounts outstanding under the revolver and operating lines as discussed in the Financial Condition section of this MD&A. Financial Condition ------------------------------------------------------------------------- September December 30, 2007 31, 2006 ------------------------------------------------------------------------- Cash including current portion of cash held in trust (in millions of dollars) $ 8.1 $ 42.2 Debt (in millions of dollars) $ 155.9 $ 208.6 Net debt(1) (in millions of dollars) $ 147.8 $ 166.4 Debt to equity 1.4x 1.8x Net debt(1) to gross profit(2) 1.5x 1.9x Net debt(1) to equity 1.4x 1.5x Interest coverage (Gross Profit(2) to interest expense(2)) 7.7x 5.6x ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Net debt is defined as total debt less cash and cash equivalents, including cash held in trust. (2) Calculated for the latest twelve months. Cash and cash equivalents at the end of September 2007 were $8.1 million compared to $42.2 million at the end of 2006 primarily reflecting the cash utilized in the refinancing and the generation of positive cash flow. Excess cash continues to be invested in short-term, interest-bearing government or bank securities. The Company generates positive cash flows from operations that are used to fund maintenance and expansion capital projects and to meet debt obligations. The Company's growth strategy includes acquisition or expansion of processing operations, development of new technologies, and development or expansion of the Company's presence in new markets. To the extent required, the Company would seek new outside financing to fund this growth strategy. As a consequence of pursuing its strategy, the Company's financial leverage ratios may increase in the short term and will reduce with the full year contribution from any acquisition or from the commencement of earnings from expansion projects. On March 1, 2007, the Company completed a refinancing of its Senior Secured Credit facility and obtained an amended $205 million credit agreement with its existing bank syndicate. The new facility, which also includes an additional $75 million for lender approved acquisitions, provides the Company with flexibility to achieve its strategic goals, both organically and through acquisitions. The amended credit facility has a 5-year term with terms and conditions similar to the old facility. The new facility is secured by the assets of the Company, including its North American subsidiaries (except Marsol Canada Corporation, the subsidiary holding the Fort McMurray facility) and bears interest at floating base rates plus margins ranging from nil to 225 basis points. With the redemption of the Senior Secured Notes the Company is no longer an SEC registrant. At September 30, 2007, approximately $53 million of the $70 million Revolving Term facility and $20 million of the Revolving Operating Facility were undrawn. Under the recently adopted change in accounting standards for financial instruments, the Company recorded a charge of $1.0 million for financing costs relating to its March 1, 2007 refinancing. Marsulex's net debt to EBITDA ratio was 2.2 times (December 31, 2006 - 2.8 times) for the latest twelve months ended September 30, 2007. EBITDA is discussed in the Supplemental Information Section of this MD&A. At September 30, 2007, the Company had met all of its debt related covenants. Working Capital The Company's working capital and current ratio, excluding cash and cash equivalents, cash held in trust and the current portion of long-term debt, were as follows: ------------------------------------------------------------------------- September 30, December 31, September 30, 2007 2006 2006 ------------------------------------------------------------------------- Working capital(1) (in thousand of dollars) (13,525) (14,422) (2,519) Current ratio(1) 0.78 to 1.0 0.77 to 1.0 0.95 to 1.0 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Excludes cash and cash equivalents, cash held in trust and the current portion of long-term debt. The Company's cash on hand and positive cash flows in conjunction with the undrawn portions of the Revolving Term and Operating facilities provide the Company with sufficient working capital to meet its financial commitments. Given the nature of its business, it is not unusual for the Company to experience temporary fluctuations in working capital. Share Capital Outstanding ------------------------------------------------------------------------- As at October 30, September 30, December 31, 2007 2006 2006 ------------------------------------------------------------------------- Number of common shares 33,105,498 33,097,498 32,634,898 Number of options 642,665 650,665 1,113,265 ------------------------------------------------------------------------- ------------------------------------------------------------------------- For the nine months ended September 30, 2007 the Company issued 462,600 common shares for cash proceeds of $2.0 million upon the exercise of stock options. Subsequent to September 30, 2007 the Company issued 8,000 shares for cash proceeds of $30,000 upon the exercise of stock options. On November 28, 2006, Marsulex announced its intention to make a Normal Course Issuer Bid ("NCIB") pursuant to which the Company is entitled to purchase 1,500,000 of its issued and outstanding common shares. The NCIB commenced on November 30, 2006 and will terminate on November 29, 2007. All shares purchased under the issuer bid will be cancelled. During the period November 30, 2006 to September 30, 2007 no shares were acquired by the Company for cancellation. On March 7, 2007, the Board of Directors approved a dividend policy whereby the Company would pay regular quarterly dividends to its common shareholders. To the end of September 30, 2007 the Company has announced three dividend payments for approximately $4.9 million each (or 15 cents per share). All dividends on Marsulex common shares received by shareholders in 2007 and later are eligible dividends as defined in amendments to section 89 of the Income Tax Act (unless otherwise designated) and, accordingly, entitle an individual shareholder resident in Canada to a higher dividend gross-up and dividend tax credit. Company's share price information is as follows: ------------------------------------------------------------------------- As at October 30, September 30, December 31, September 30, 2007 2007 2006 2006 ------------------------------------------------------------------------- Closing share price $ 14.01 $ 13.70 $ 8.75 $ 8.80 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Related Party Transactions The Company has entered into a management services contract with its majority shareholder, Birch Hill Equity Partners for the supply of management and financial services. In addition, certain of the Company's Directors hold senior positions with firms that provide services to the Company. The Company incurred the following fees: ------------------------------------------------------------------------- Three months ending Nine months ending September 30, September 30, (in thousands % % of dollars) 2007 2006 chg 2007 2006 chg ------------------------------------------------------------------------- Fees to Birch Hill Equity Partners $ 103 $ 103 n/a $ 310 $ 310 n/a Fees to firms of certain Directors 285 261 9.2% 3,587 4,187 -14.3% ------------------------------------------------------------------------- ------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS Cash Flow from Operations For the third quarter and for nine months of 2007, the Company generated $9.1 million and $31.3 million respectively in cash from operations compared to $21.7 million and $40.9 million for the same periods in 2006. The decreases were primarily the result of increased operating earnings and the decrease in working capital primarily the reduction in the current portion of deferred revenues. Cash and cash equivalents at the end of September 30, 2007 were $7.6 million, down $32.4 million from $40.0 million at December 31, 2006. Cash on hand and cash generated from operations, along with the cash received from the issuance of capital stock, were utilized for the refinancing of the Company's debt as well as to fund the investment in capital additions and to pay dividends. Capital Expenditures ------------------------------------------------------------------------- Three months ending Nine months ending September 30, September 30, (in thousands of dollars) 2007 2006 2007 2006 ------------------------------------------------------------------------- Expansion projects(1) $ - $ 6,123 $ 4,289 $ 30,960 Maintenance capital(2) 3,472 2,229 7,871 5,446 ------------------------------------------------------------------------- Total capital expenditures $ 3,472 $ 8,352 $ 12,160 $ 36,406 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) The above capital expenditures represent cash expenditures for capital assets. At September 30, 2007, there are no accruals against $0.1 million accrued at March 31, 2007 and against $3.9 million accrued at December 31, 2006. (2) Including expenditures for placement cells (recorded as deferred charges). The decrease in expansion capital expenditures relates to the completion of the Montreal expansion. The Company has purchase commitments relating to the purchase of equipment under its maintenance capital program of approximately $2.9 million at September 30, 2007. The Company has purchase commitments relating to other projects of approximately $2.1 million at September 30, 2007. RISKS & UNCERTAINTIES There have been no changes in the Company's business risks described in the December 31, 2006 MD&A and Annual Information Form. The Company has U.S.-based operations and reports in Canadian dollars and therefore is exposed to foreign exchange fluctuations in the following three areas: (1) monetary assets and liabilities, working capital and the U.S. denominated portion of the Senior Secured Term Loan; (2) revenues and expenses; and (3) the self-sustaining operations including the portion of the Senior Secured Term Loan designated as a hedge. Highlights of exchange rate movements for the quarter are as follows: ------------------------------------------------------------------------- Three months ending Nine months ending September 30, September 30, (in thousands % % of dollars) 2007 2006 chg 2007 2006 chg ------------------------------------------------------------------------- Year-to-date average U.S. exchange rates 0.9556 0.8920 7.1% 0.9046 0.8842 2.3% Closing U.S. exchange rates(1) 1.0037 0.8966 11.9% 1.0037 0.8966 15.3% ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) The closing U.S. exchange rate at December 31, 2006 was 0.8582. Since January 1, 2007, the Canadian dollar has increased by 17% compared to the U.S. dollar. The Company recorded the following foreign exchange gains and losses: ------------------------------------------------------------------------- Three months ending Nine months ending September 30, September 30, (in thousands of dollars) 2007 2006 2007 2006 ------------------------------------------------------------------------- Foreign exchange gains on net monetary items $ (711) $ (1) $ (2,118) $ (337) Foreign exchange gain on Senior Secured Term Loan (671) 5 (1,667) (759) ------------------------------------------------------------------------- $ (1,382) $ 4 $ (3,785) $ (1,096) ------------------------------------------------------------------------- ------------------------------------------------------------------------- The foreign exchange translation of the U.S. $10 million portion of the Senior Secured Term Loan is used primarily to offset the foreign exchange fluctuations associated with the U.S. revenues generated by Stablex. U.S. $60 million of the Senior Secured Term Loan is considered to be a hedge of the Company's net investment in self-sustaining operations. The 2007 foreign exchange gain of approximately $10.1 million relating to this portion of the loan is recorded, net of tax, as part of comprehensive income. The following table illustrates the foreign exchange impact of a one-cent increase in the value of the Canadian dollar on the Company's U.S. denominated operating results for the nine months ending September 30, 2007: ------------------------------------------------------------------------- Nine months ending (in thousand of dollars) September 30, 2007 ------------------------------------------------------------------------- Gross profit $ (295) SG&A costs 67 Foreign exchange on net monetary items(1) 71 Foreign exchange on Senior Secured Term Loan 98 ------------------------------------------------------------------------- Earnings from operations before the under noted (59) Depreciation and amortization of deferred charges and intangible assets 68 Net interest expense 37 ------------------------------------------------------------------------- Earnings before income taxes $ 46 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Assumes U.S. denominated monetary items remain unchanged. CHANGES IN ACCOUNTING POLICIES Financial instruments, recognition and measurement In January 2005, the CICA released new Handbook Section 3855, Financial Instruments, Recognition and Measurement, effective for annual and interim periods beginning on or after October 1, 2006. This new section requires companies to record all financial instruments on the balance sheet at fair value, with changes in fair value recognized in income or other comprehensive income, as appropriate, each period. In addition, the Company has elected to account for transaction costs related to the issuance of financial instruments that are held for trading as a charge to the statement of operations in the period in which they arise. With respect to embedded derivatives, the Company has elected to recognize only those derivatives embedded in contracts issued, acquired or substantively modified on or after January 1, 2003 as permitted by the transitional provisions set out in section 3855. The adoption of this new section resulted in the after tax adjustments to opening retained earnings of approximately $1.5 million relating to the recognition of an approximate $0.2 million loss associated with the fair value of the Senior Subordinated Notes and an approximate $1.3 million charge relating to the financing costs for the Senior Secured Term Loan and the Senior Subordinated Notes that were previously deferred and amortized. The value of embedded derivative financial instruments as at January 1, 2007 was insignificant. Comprehensive income and equity In January 2005, the CICA released new Handbook Section 1530, Comprehensive Income and Section 3251, Equity effective for annual and interim periods beginning on or after October 1, 2006. Section 1530 establishes standards for reporting comprehensive income. Section 3251 establishes standards for the presentation of equity and changes in equity during the reporting period. In order to comply with the new standard, the Company has included a separate Statement of Shareholders Equity as part of its consolidated financial statements. The effect of exchange rate variations on the translation of the Company's net assets of self-sustaining foreign operations has been recorded as Accumulated Other Comprehensive Income, net of tax. Hedges In January 2005, the CICA released new Handbook Section 3865, Hedges, effective for annual and interim periods beginning on or after October 1, 2006. This new section establishes standards for when and how hedge accounting may be applied. The Company has designated U.S. $60 million of the Senior Secured Term Loan and the Senior Subordinated Notes, as a hedge of the net investment in self-sustaining operations. ACCOUNTING PRINCIPLES ISSUED BUT NOT YET IMPLEMENTED Financial instruments - disclosure and presentation In December 2006, the CICA published the following two sections of the CICA Handbook: Section 3862, Financial Instruments - Disclosures and Section 3863, Financial Instruments - Presentation. These standards introduce disclosure and presentation requirements that will enable financial statements' users to evaluate, and enhance their understanding of, the significance of financial instruments for the entity's financial position, performance and cash flows, and the nature and extent of risks arising from financial instruments to which the entity is exposed, and how those risks are managed. Capital disclosures In December 2006, the CICA published section 1535 of the Handbook, Capital disclosures, which requires disclosure of (i) an entity's objectives, policies and processes for managing capital; (ii) quantitative data about what the entity regards as capital; (iii) whether the entity has complied with any capital requirements; and (iv) if it has not complied, the consequences of such non-compliance. This information will enable financial statements' users to evaluate the entity's objectives, policies and processes for managing capital. Inventories In January 2007, the CICA published section 3031 of the Handbook, Inventories, which prescribes the accounting treatment for inventories. Section 3031 provides guidance on the determination of costs and its subsequent recognition as an expense, and provides guidance on the cost formulas used to assign costs to inventories. These standards must be adopted by the Company for the fiscal year beginning on January 1, 2008. While the Company is currently assessing the impact of these new recommendations on its financial statements, it does not expect the recommendations to have a significant impact on its financial position, earnings or cash flows. OUTLOOK Revenue and gross profit for the quarter were consistent with the same period in 2006 despite the negative impact of a strengthening Canadian dollar. For the remainder of 2007, the Company expects to see continued margin erosion on U.S. denominated operations which account for approximately 50% of Marsulex's revenue base. Capital expenditures are expected to increase in the fourth quarter with planned maintenance activities and spending on the engineering design study at the Montreal facility. Notwithstanding, the outlook for continued growth in the Company's key business segments remains positive. QUARTERLY OPERATING PERFORMANCE Selected Quarterly Financial Information ------------------------------------------------------------------------- 3rd Quarter 2nd Quarter 1st Quarter 4th Quarter ------------------------------------------------------------------------- (In millions of dollars, except per share amounts) 2007 2006 2007 2006 2007 2006 2006 2005 ------------------------------------------------------------------------- Revenue 68.7 68.3 77.3 65.0 68.5 46.9 69.4 47.5 Gross Profit 25.4 24.8 25.1 19.6 23.9 17.2 27.5 17.3 SG&A and other costs 7.9 7.8 7.7 5.9 10.4 6.8 9.6 6.4 Unusual items, (gains) losses - - - - - - - (0.3) Depreciation and amortization, including (gains) losses on disposals 8.1 10.0 8.3 8.0 8.2 7.2 11.9 6.9 Interest expense 2.7 4.3 2.7 4.0 3.7 3.5 4.1 3.6 Earnings (loss) before income taxes 6.8 3.1 6.6 3.2 2.0 1.0 2.3 1.6 Net earnings (loss) 5.4 2.6 5.4 5.3 1.4 0.7 (1.4) (0.4) Basic earnings (loss) per share 0.16 0.08 0.16 0.16 0.04 0.02 (0.04) (0.01) Cash generated from operations before non-cash working capital 12.4 12.4 11.5 9.6 9.9 7.9 12.2 8.9 Changes in non-cash operating working capital (3.3) 9.3 3.4 (3.7) (2.6) 5.4 8.8 (5.5) Cash provided by operations 9.1 21.7 14.9 5.9 7.3 13.3 21.0 3.4 Total Assets 382.6 423.7 390.3 420.8 393.4 376.8 439.9 374.4 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Review of Quarterly Trends The volumes processed by the Industrial Services Group may be affected by the market demand and seasonal variations of the refineries' products, generally peaking during the summer driving season. The revenues from these customers are largely stable year over year and are somewhat insulated through contractual minimum volume requirements. The Stablex operations are also affected by seasonality as the industrial waste streams processed include site remediation projects where activity generally peaks through the summer months and slows, as the waste materials freeze, in the winter months. Western Markets Group volumes and revenues are generally stable year over year although some products may experience seasonal fluctuations. For example, the water treatment needs of its municipal customers generally peak during the spring "run off" and summer seasons. The timing of revenues earned from Power Generation Group projects and licensing activities results in variances in the Group's quarterly results. For the four quarters ended September 30, 2007, revenues averaged $71.0 million per quarter while for the four quarters ended September 30, 2006, revenues averaged $56.9 million per quarter. For the four quarters ended September 30, 2007, gross profit averaged $25.5 million per quarter while for the four quarters ended September 30, 2006, gross profit averaged $19.7 million per quarter. In addition to business seasonality, the Company's quarterly revenue and gross profit have been affected primarily by the following: - The Montreal facility expansion completed in the third quarter of 2006; - The acquisition of Petcoke Services on April 1, 2006. SG&A and other costs have averaged on an annual basis between 12 - 13% of revenues over the past two years. SG&A and other costs were 11.5% of revenue in the third quarter of 2007 primarily due to higher legal costs in Corporate being offset by the foreign exchange gain of $1.3 million. SG&A in the first and second quarters of 2007 reflect the higher costs of the Company's long- term incentive plan and $1.0 million in refinancing costs that were expensed in the first quarter of 2007. The increase in depreciation and amortization for the four quarters ended September 30, 2007 reflects the depreciation and amortization associated with the start-up of the Montreal facility expansion, the fair market value increments of the assets acquired as part of the Petcoke Services acquisition, and a $2.8 million impairment charge recorded in the fourth quarter of 2006. These increases were offset by reduced amortization of deferred finance costs (that was eliminated with the new accounting pronouncement for financial instruments) and reduced depreciation on certain assets that are fully depreciated. Cash generated by operations is also impacted by seasonal fluctuations in revenues as well as the quarterly changes in non-cash working capital. Given the size of the Company and the significant expansion capital expenditures incurred, it is not unusual for the Company to experience temporary fluctuations from quarter to quarter in working capital. The change in the third quarter 2007 non-cash working capital reflects the reduction in the current portion of deferred revenue. The change in the third and fourth quarters of 2005 and the second and third quarters of 2006 reflected the timing in settlement of working capital items largely relating to the Montreal expansion and payments received on Power Generation projects. In the first quarter of 2006, the Company began receiving fees relating to the Montreal expansion. SUPPLEMENTAL FINANCIAL INFORMATION EBITDA is a supplemental, non-generally accepted accounting principle financial measure. EBITDA is defined as earnings before interest, taxes, depreciation, and amortization or "EBITDA." It is used by management internally not only to measure the performance of the business as a whole, but also to measure the performance of the individual segments, and it forms the primary basis upon which employees of the Company receive incentive compensation. EBITDA is also used by the Company as a basis to measure compliance with certain debt covenants. EBITDA is presented as supplemental information because management, through its discussions with key stakeholders of the Company including shareholders, analysts and other financial institutions, believes it is a widely used financial indicator of the Company's operating profitability and performance before the effects of capital investment and financing decisions. Since EBITDA is not a recognized measure under Canadian generally accepted accounting principles (GAAP), it should not be considered in isolation of, or as a substitute for net earnings, consolidated cash flow from operations or any other measure of performance required by GAAP or as an indicator of the Company's operating performance. The Company's method of calculating EBITDA may differ from other companies and accordingly, the Company's EBITDA may not be comparable to measures used by other companies. In addition, this measure does not necessarily represent funds available for discretionary use and is not necessarily a measure of the Company's ability to fund its cash requirements. The Company's non-GAAP performance measure, EBITDA, has certain material limitations as follows: - It does not include interest expense. Because the Company has borrowed money to finance some of its operations, interest is a necessary part of the Company's costs and ability to generate revenue. Therefore, any measure that excludes interest has material limitations; - It does not include depreciation and amortization expense. Because the Company must utilize capital assets in order to generate revenues, depreciation and amortization expense is a necessary and ongoing part of the Company's costs. Therefore, any measure that excludes depreciation and amortization expense has material limitations; - It does not include taxes. Because the payment of taxes is a necessary and ongoing part of the Company's operations, any measure that excludes taxes has material limitations. Management compensates for these limitations by considering the economic effect of the excluded expense items independently as well as in connection with its analysis of net earnings. Because EBITDA is used to evaluate the Company's financial performance, it is reconciled to net earnings which is the most comparable financial measure calculated and presented in accordance to GAAP. The following is a reconciliation of EBITDA to net earnings: Supplemental selected information: ------------------------------------------------------------------------- For the three months ending September 30, 2007 (In thousands Industrial Western Power Corporate of dollars) Services Markets Generation Support Total ------------------------------------------------------------------------- Earnings (loss) before the undernoted (EBITDA) $ 14,855 $ 5,581 $ 529 $ (3,482) $ 17,483 Depreciation 5,586 650 23 70 6,329 Amortization of deferred charges and intangible assets 1,805 - - - 1,805 Interest expense - net - - - 2,552 2,552 ------------------------------------------------------------------------- Earnings (loss) before income taxes 7,464 4,931 506 (6,104) 6,797 Income taxes - - - 1,350 1,350 ------------------------------------------------------------------------- Net earnings (loss) $ 7,464 $ 4,931 $ 506 $ (7,454) $ 5,447 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- For the three months ending September 30, 2006 (In thousands Industrial Western Power Corporate of dollars) Services Markets Generation Support Total ------------------------------------------------------------------------- Earnings (loss) before the undernoted (EBITDA) $ 13,294 $ 6,674 $ 459 $ (3,407) $ 17,020 Depreciation, including loss on disposal 6,967 593 24 73 7,657 Amortization of deferred charges and intangible assets 1,882 - - 342 2,224 Interest expense - net - - - 3,992 3,992 ------------------------------------------------------------------------- Earnings (loss) before income taxes 4,445 6,081 435 (7,814) 3,147 Income taxes - - - 574 574 ------------------------------------------------------------------------- Net earnings (loss) $ 4,445 $ 6,081 $ 435 $ (8,388) $ 2,573 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- For the nine months ending September 30, 2007 (In thousands Industrial Western Power Corporate of dollars) Services Markets Generation Support Total ------------------------------------------------------------------------- Earnings (loss) before the undernoted (EBITDA) $ 41,310 $ 16,120 $ 3,388 $ (11,455) $ 49,363 Depreciation, including loss on disposal 17,310 1,900 74 212 19,496 Amortization of deferred charges and intangible assets 5,317 - - - 5,317 Gain realized on redemption of Senior Subordinated Notes - - - (177) (177) Cost of refinancing - - - 1,000 1,000 Interest expense - net - - - 8,287 8,287 ------------------------------------------------------------------------- Earnings (loss) before income taxes 18,683 14,220 3,314 (20,777) 15,440 Income taxes - - - 3,217 3,217 ------------------------------------------------------------------------- Net earnings (loss) $ 18,683 $ 14,220 $ 3,314 $ (23,994) $ 12,223 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- For the nine months ending September 30, 2006 (In thousands Industrial Western Power Corporate of dollars) Services Markets Generation Support Total ------------------------------------------------------------------------- Earnings (loss) before the undernoted (EBITDA) $ 30,290 $ 17,343 $ 1,494 $ (8,043) $ 41,084 Depreciation, including loss on disposal 16,797 1,772 71 176 18,816 Amortization of deferred charges and intangible assets 4,739 - - 1,513 6,252 Interest expense - net - - - 8,703 8,703 ------------------------------------------------------------------------- Earnings (loss) before income taxes 8,754 15,571 1,423 (18,435) 7,313 Income tax recovery - - - (1,192) (1,192) ------------------------------------------------------------------------- Net earnings (loss) $ 8,754 $ 15,571 $ 1,423 $ (17,243) $ 8,505 ------------------------------------------------------------------------- ------------------------------------------------------------------------- EBITDA for the third quarter of 2007 was $17.5 million compared to $17.0 million for the same period of 2006 and EBITDA for the first nine months of 2007 was $49.4 million compared to $41.1 million for the same period of 2006. The increases were primarily due to the contribution from start-up of the Montreal facility expansion in the third quarter of 2006, the project activity in the Power Generation Group, and the foreign exchange gains. These increases were offset by the impact of the increased stock price on the long- term incentive plan and higher SG&A costs, primarily in Corporate. MARSULEX INC. Consolidated Balance Sheets (In thousands of dollars) ------------------------------------------------------------------------- September 30, December 31, 2007 2006 (unaudited) ------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 7,645 $ 40,039 Cash held in trust 440 2,151 Accounts receivable 40,434 41,438 Inventories 1,214 1,198 Future income tax asset 206 206 Prepaid expenses and other assets 5,515 5,204 ------------------------------------------------------------------------- 55,454 90,236 Long-term investments held in trust (note 11) 1,100 - Property, plant and equipment 210,298 226,339 Deferred charges and other assets 8,547 5,634 Intangible assets 31,730 36,322 Goodwill 75,428 81,325 ------------------------------------------------------------------------- $ 382,557 $ 439,856 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 22,487 $ 22,143 Accrued liabilities 22,725 20,153 Income taxes payable 3,795 4,244 Interest payable 569 169 Dividends payable to shareholders (note 7) 4,966 - Current portion of deferred revenue 6,352 15,759 Current portion of long-term debt (note 5) 1,864 1,765 ------------------------------------------------------------------------- 62,758 64,233 Long-term debt (note 5) 154,000 206,815 Deferred revenue 13,952 13,111 Employee future benefits 2,398 2,239 Other liabilities 8,884 9,879 Future income tax liability 31,415 30,657 Shareholders' equity: Capital stock (note 6) 63,114 61,084 Retained earnings 47,547 51,691 Accumulated other comprehensive income (loss) (1,511) 147 ------------------------------------------------------------------------- 109,150 112,922 ------------------------------------------------------------------------- $ 382,557 $ 439,856 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes to consolidated financial statements MARSULEX INC. Consolidated Statements of Operations and Comprehensive Income (unaudited) (In thousands of dollars, except per share amounts) ------------------------------------------------------------------------- Three months ending Nine months ending September 30, September 30, 2007 2006 2007 2006 ------------------------------------------------------------------------- Revenue $ 68,679 $ 68,333 $ 214,471 $ 180,227 Cost of sales and services 43,301 43,538 140,140 118,695 ------------------------------------------------------------------------- Gross profit 25,378 24,795 74,331 61,532 Selling, general, administrative and other costs 9,277 7,771 28,753 21,544 Depreciation 6,329 7,657 19,496 18,816 Amortization of deferred charges and intangible assets 1,805 2,224 5,317 6,252 Foreign exchange gain on monetary items (711) (1) (2,118) (337) Foreign exchange (gain) loss on long-term debt (671) 5 (1,667) (759) Gain realized on redemption of Senior Subordinated Notes (note 5) - - (177) - Cost of refinancing (note 5) - - 1,000 - Interest expense - net (note 10) 2,552 3,992 8,287 8,703 ------------------------------------------------------------------------- Earnings before income taxes 6,797 3,147 15,440 7,313 Income taxes (recovery): Current 1,385 632 3,398 1,493 Future (35) (58) (181) (2,685) ------------------------------------------------------------------------- 1,350 574 3,217 (1,192) ------------------------------------------------------------------------- Net earnings $ 5,447 $ 2,573 $ 12,223 $ 8,505 Other comprehensive income Effect of change in foreign exchange on the translation of net assets of self-sustaining operations, net of tax (237) 169 (1,658) 42 ------------------------------------------------------------------------- Total comprehensive income $ 5,210 $ 2,742 $ 10,565 $ 8,547 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Earnings per share (note 8): Basic $ 0.16 $ 0.08 $ 0.37 $ 0.26 Diluted $ 0.16 $ 0.08 $ 0.37 $ 0.26 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes to consolidated financial statements MARSULEX INC. Consolidated Statements of Cash Flows (unaudited) (In thousands of dollars) ------------------------------------------------------------------------- Three months ending Nine months ending September 30, September 30, 2007 2006 2007 2006 ------------------------------------------------------------------------- Cash provided by (used in): Operating activities: Net earnings $ 5,447 $ 2,573 $ 12,223 $ 8,505 Items not affecting cash: Depreciation 6,329 7,657 19,496 18,816 Amortization of deferred charges and intangible assets 1,805 2,224 5,317 6,252 Foreign exchange (gain) loss on long-term debt (671) 5 (1,667) (759) Gain realized on redemption of Senior Subordinated Notes - - (177) - Future income tax recovery (35) (58) (181) (2,685) Accretion of asset retirement obligations 23 20 69 59 Other non-cash items (458) (17) (1,205) (315) Decrease (increase) in non-cash operating working capital (3,357) 9,284 (2,599) 11,003 ------------------------------------------------------------------------- Cash provided by operating activities 9,083 21,688 31,276 40,876 Financing activities: Increase in long-term debt (note 5) - - 31,494 31,500 Repayment of long-term debt (note 5) (445) (414) (72,408) (1,219) Issuance of capital stock (note 6) - - 2,030 991 Dividends paid (4,965) - (9,905) - ------------------------------------------------------------------------- (5,410) (414) (48,789) 31,272 Investing activities: Additions to property, plant and equipment (2,675) (7,800) (10,513) (35,697) Increase in deferred charges (2,090) (876) (3,686) (2,089) Acquisition, net of cash (note 4) - (20) - (28,992) Decrease (increase) in cash and investments held in trust 634 (103) 611 133 ------------------------------------------------------------------------- (4,131) (8,799) (13,588) (66,645) Foreign exchange loss on cash held in foreign currency (747) (23) (1,293) (181) ------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents (1,205) 12,452 (32,394) 5,322 Cash and cash equivalents - beginning of period 8,850 5,619 40,039 12,749 ------------------------------------------------------------------------- Cash and cash equivalents - end of period $ 7,645 $ 18,071 $ 7,645 $ 18,071 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Supplemental cash flow information: Interest paid $ 2,127 $ 2,491 $ 8,281 $ 10,206 Income taxes paid, net of refunds 307 406 3,367 1,261 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes to consolidated financial statements MARSULEX INC. Consolidated Statements of Shareholders' Equity (unaudited) (In thousands of dollars, except share amounts) ------------------------------------------------------------------------- Accumulated Other Compre- Total Number of hensive Share- Common Capital Retained Income holders' Shares Stock Earnings ("AOCI") Equity ------------------------------------------------------------------------- Balance, December 31, 2005 32,409,898 $ 60,093 $ 44,611 $ 2,187 $ 106,891 Exercise of stock options 225,000 991 - - 991 Net income for the period - - 8,505 - 8,505 Effect of change in foreign exchange on the translation of net assets of self-sustaining foreign operations, net of tax - - - 42 42 ------------------------------------------------------------------------- Balance, September 30, 2006 32,634,898 $ 61,084 $ 53,116 $ 2,229 $ 116,429 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Balance, December 31, 2006 32,634,898 $ 61,084 $ 51,691 $ 147 $ 112,922 Exercise of stock options 462,600 2,030 - - 2,030 Adjustment to opening retained earnings, relating to changes in accounting policies, net of tax (note 3) - - (1,496) - (1,496) Dividends (note 7) - - (14,871) - (14,871) Net income for the period - - 12,223 - 12,223 Effect of change in foreign exchange on the translation of net assets of self-sustaining foreign operations, net of tax - - - (1,658) (1,658) ------------------------------------------------------------------------- Balance, September 30, 2007 33,097,498 $ 63,114 $ 47,547 $ (1,511) $ 109,150 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes to consolidated financial statements MARSULEX INC. Notes to Consolidated Financial Statements (unaudited) (in thousand of dollars) 1. Basis of presentation: The unaudited consolidated financial statements have been prepared by the Company in accordance with Canadian generally accepted accounting principles. The preparation of the financial data is based on accounting policies and practices consistent with those used in the preparation of the audited annual consolidated financial statements (except for changes as described in note 3). These unaudited consolidated financial statements do not include all of the disclosures required by generally accepted accounting principles for annual financial statements and accordingly should be read together with the audited annual consolidated financial statements and the accompanying notes included in the Company's 2006 Annual Report. These consolidated financial statements include the accounts of Marsulex Inc. (the Company) and its subsidiaries from their respective dates of acquisition. All intercompany transactions have been eliminated. 2. Seasonality of the business: The revenue generated by the Company may be affected by seasonal variation of customers' activities, generally peaking during the summer. 3. Change in accounting policies Effective January 1, 2007, the Company adopted the new CICA Handbook Standards relating to financial instruments. These new standards have been adopted on a prospective basis with no restatement of prior period financial statements. a) Section 3855, "Financial Instruments - Recognition and Measurement" provides guidance on the recognition and measurement of financial assets, financial liabilities and derivative financial instruments. This new standard requires that all financial assets and liabilities be classified as either: held-to- maturity, held-for-trading, loans and receivables, available-for- sale, or other financial liabilities. The initial and subsequent recognition depends on their initial classification. Held-to-maturity financial assets are initially recognized at their fair values and subsequently measured at amortized cost using the effective interest method. Impairment losses are charged to net earnings in the period in which they arise. Held-for-trading financial instruments are carried at fair value with changes in the fair value charged or credited to net earnings in the period in which they arise. Loans and receivables are initially recognized at their fair values, with any resulting premium or discount from the face value being amortized to income or expense using the effective interest method. Impairment losses are charged to net earnings in the period in which they arise. Available-for-sale financial instruments are carried at fair value with changes in the fair value charged or credited to other comprehensive income. Impairment losses are charged to net earnings in the period in which they arise. Other financial liabilities are initially measured at cost or at amortized cost depending upon the nature of the instrument with any resulting premium or discount from the face value being amortized to income or expense using the effective interest method. All derivative financial instruments meeting certain recognition criteria are carried at fair value with changes in fair value charged or credited to income or expense in the period in which they arise. The standard requires the Company to make certain elections, upon initial adoption of the new rules, regarding the accounting model to be used to account for each financial instrument. This new section also requires that transaction costs incurred in connection with the issuance of financial instruments either be capitalized and presented as a reduction of the carrying value of the related financial instrument or expensed as incurred. If capitalized, transaction costs must be amortized to income using the effective interest method. This section does not permit the restatement of financial statements of prior periods. The following is a summary of the accounting model the Company has elected to apply to each of its significant categories of financial instruments outstanding as of January 1, 2007: Cash and cash equivalents, including cash held in trust Held-for-trading Accounts receivable Loans and receivables Accounts payable and accrued liabilities Other liabilities Long-term debt Senior Secured Term Loan and revolvers Held-for-trading Long-term Loan - Fort McMurray Facility Other liabilities Senior Subordinated Notes Held-for-trading In addition, the Company has elected to account for transaction costs related to the issuance of financial instruments that are held for trading as a charge to the statement of operations in the period in which they arise. With respect to embedded derivatives, the Company has elected to recognize only those derivatives embedded in contracts issued, acquired or substantively modified on or after January 1, 2003 as permitted by the transitional provisions set out in section 3855. As a result of the adoption of this section, the Company recorded a $1.5 million decrease to opening retained earnings for the recognition of an approximate $0.2 million loss associated with the fair value of the Senior Subordinated Notes and an approximate $1.3 million charge relating to the financing costs for the Senior Secured Term Loan and the Senior Subordinated Notes that were previously deferred and amortized. The value of embedded derivative financial instruments as at January 1, 2007 was insignificant. b) Section 3865, "Hedges" allows optional treatment providing that hedges be designated as either fair value hedges, cash flow hedges or hedges of a self-sustaining foreign operation. The Company has designated U.S. $60 million of the Senior Secured Term Loan that was amended on February 28, 2007 as a hedge of the net investment in the self sustaining operations. Until its redemption on March 1, 2007, the Senior Subordinated Notes were designated as a hedge of the net investment in the self-sustaining operations. c) Section 1530, "Comprehensive Income", along with Section 3251, "Equity" which amends Section 3250, "Surplus", require enterprises to separately disclose comprehensive income and its components in the financial statements. Further, enterprises are required to present changes in equity during the period as well as components of equity at the end of the period, including comprehensive income. Major components of Other Comprehensive Income include changes in fair value of financial assets classified as available- for-sale, the changes in fair value of effective cash flow hedging items, and exchange gains and losses arising from the translation of the financial statements of self-sustaining foreign operations. The effect of exchange rate variations on the translation of the Company's net assets of self-sustaining foreign operations has been recorded as Accumulated Other Comprehensive Income, net of tax. 4. Acquisition of Oxbow Industrial Services, LLC (the Petroleum Coke ("Petcoke") Services business) On April 1, 2006 the Company completed the acquisition of Oxbow Industrial Services, LLC, a leading provider of in-refinery petcoke cutting and bulk handling services to major oil refineries in the U.S. Gulf Coast and West Coast and Venezuela, from Oxbow Carbon & Minerals LLC. The purchase price of the acquisition was U.S. $27 million (approximately $31 million Canadian), excluding transaction costs of approximately $0.7 million. The results of operations have been consolidated from April 1, 2006, the effective date of acquisition. The acquisition has been accounted for using the purchase method of accounting. The final purchase price allocation, including acquisition costs, is as follows: --------------------------------------------------------------------- Net working capital $ 5,974 Property, plant and equipment 8,263 Intangibles 12,757 Goodwill 5,776 Other long term liabilities (10) Future tax liability (960) --------------------------------------------------------------------- Total Purchase Price 31,800 Less: Cash assumed on acquisition (2,710) --------------------------------------------------------------------- Total purchase price less cash assumed on acquisition $ 29,090 --------------------------------------------------------------------- --------------------------------------------------------------------- The value assigned to the intangible assets related to customer relationships having estimated useful lives of 10 years. Goodwill of $5.8 million, generated as a result of the acquisition, represents the excess of purchase price consideration over the estimated fair value of the net assets acquired. The Company has claims or possible claims of approximately $1.3 million that have been presented to the vendors and has recorded a provision of approximately $0.5 million to the purchase equation. 5. Long-term debt On February 28, 2007 the Company obtained a $205 million amended credit facility with its existing syndicate of banks over a new 5-year term, maturing on February 28, 2012 and incurred approximately $1.0 million in related financing costs that were expensed during the period. The agreement provides for a $115.0 million Senior Secured Term Loan ($70.0 million denominated in U.S. dollars), a $70.0 million Revolving Term Facility, and a $20.0 million Revolving Operating Facility with the facilities carrying variable rates of interest and secured by the assets of Marsulex Inc. and its subsidiaries (excluding Marsol Canada Corporation). The facilities under the amended agreement can be drawn as LIBOR, bankers' acceptance loans with margins ranging from 100 to 225 basis points and prime rate loans with margins ranging from nil to 125 basis points. Under the terms of the amended facility, interest is paid monthly with quarterly mandatory principal repayments for the Senior Secured Term Loan beginning on March 31, 2010, with any drawn amounts due as follows: 16% by December 31, 2010, 18% by September 30, 2011, and 66% on maturity. --------------------------------------------------------------------- September 30, December 31, 2007 2006 --------------------------------------------------------------------- Senior Secured Term Loan, maturing February 2012 $ 103,342 $ 100,935 Revolving Term Facility, maturing February 2012 17,000 - Long-term Loan - Fort McMurray Facility 7.3%, maturing 2019 35,522 36,834 Senior Subordinated Notes 9-5/8% U.S. $60,766,000, maturing June 2008 - 70,811 --------------------------------------------------------------------- Total debt 155,864 208,580 Less current portion 1,864 1,765 --------------------------------------------------------------------- $ 154,000 $ 206,815 --------------------------------------------------------------------- --------------------------------------------------------------------- On March 1, 2007, the Company drew $139.0 million from the amended credit facility, and together with available cash redeemed the U.S. $60.8 million of outstanding 9-5/8% Senior Subordinated Notes and refinanced $101.0 million of the existing Senior Secured Term loans. At September 30, 2007, $53 million of the Revolving Term Loan and $20.0 million of the Revolving Operating Facility were undrawn and available for general corporate purposes. The Senior Subordinated Notes were redeemed at par with accrued interest of U.S. $942,000. 6. Capital stock: On November 28, 2006, the Company announced its intention to make a Normal Course Issuer Bid ("NCIB") pursuant to which the Company is entitled to purchase 1,500,000 of its issued and outstanding common shares. The NCIB commenced on November 30, 2006 and will terminate on November 29, 2007. All shares purchased under the issuer bid will be cancelled. During the period November 30, 2006 to September 30, 2007 no shares were acquired by the Company for cancellation. 7. Dividend: On September 5, 2007 the Company announced the payment of a cash dividend of 15 cents per share on November 15, 2007 to common shareholders of record at the close of business on October 15, 2007. 8. Earnings (loss) per share: The following table sets forth the computation of diluted earnings per share: --------------------------------------------------------------------- Three months ending Nine months ending September 30, September 30, 2007 2006 2007 2006 --------------------------------------------------------------------- Numerator: Net earnings available to common shareholders $ 5,447 $ 2,573 $ 12,223 $ 8,505 --------------------------------------------------------------------- Denominator (shares in thousands): Weighted average common shares outstanding 33,097 32,612 32,924 32,635 Effect of dilutive securities: Employee stock options 454 567 538 558 --------------------------------------------------------------------- Adjusted weighted average shares and assumed conversions 33,551 33,179 33,462 33,193 --------------------------------------------------------------------- --------------------------------------------------------------------- Earnings per share - Diluted $ 0.16 $ 0.08 $ 0.37 $ 0.26 --------------------------------------------------------------------- --------------------------------------------------------------------- 9. Pensions and Other Post-Retirement Benefits: Components of Net Periodic Benefit Cost for Defined Benefit Plans --------------------------------------------------------------------- Three months ending Nine months ending September 30, September 30, Pension Other Pension Other Benefits Benefits Benefits Benefits --------------------------------------------------------------------- (in thousands of dollars) 2007 2006 2007 2006 2007 2006 2007 2006 --------------------------------------------------------------------- Service cost $ 206 $ 191 $ 7 $ 5 $ 618 $ 571 $ 21 $ 17 Interest cost 187 182 11 10 561 584 33 30 Expected return on plan assets (224) (216) - - (672) (635) - - Amortization of transition obligations (assets) (16) (17) 2 1 (48) (49) 5 5 Amortization of actuarial and investment loss 53 15 1 (5) 159 24 3 - --------------------------------------------------------------------- Post retirement benefits expense $ 206 $ 155 $ 21 $ 11 $ 618 $ 495 $ 62 $ 52 --------------------------------------------------------------------- --------------------------------------------------------------------- 10. Net interest expense: --------------------------------------------------------------------- Three months ending Nine months ending September 30, September 30, (In thousands of dollars) 2007 2006 2007 2006 --------------------------------------------------------------------- Interest expense $ 2,722 $ 4,302 $ 9,114 $ 11,805 Interest capitalized - (80) - (2,515) Interest income (170) (230) (827) (587) --------------------------------------------------------------------- $ 2,552 $ 3,992 $ 8,287 $ 8,703 --------------------------------------------------------------------- --------------------------------------------------------------------- 11. Long term investments held in trust: The Company holds investments in the amount of $1.1 million, which were invested during the third quarter of 2007 in Canadian third party Asset-Backed Commercial Paper ("ABCP"). At the time of the investment, these certificates were rated by Dominion Bond Rating Service ("DBRS") as R1-High, which met the criteria of the Company's investment guidelines. On August 15th, the non-bank sponsored market in Canada for these investments lost its liquidity, at least temporarily. On September 6, 2007, an investor committee was formed to oversee the proposed restructuring process of the ABCP's, and on October 15, 2007, the committee extended the original standstill period of mid-October 2007 to mid-December. The Company is assessing its alternatives and recourses to recover the full value of these investments. The Company has reclassified the ABCP's as long-term since it believes that these assets will not be realized within a 365-day period. The fair value of the assets underlying the ABCP and the outcome of any restructuring proposal is not presently determinable, but could give rise to a charge to the Company's earnings. The Company has sufficient credit facilities to satisfy its financial obligations as they come due, and does not expect there will be a material adverse impact on its business as a result of this current ABCP liquidity issue. 12. Comparative Figures Certain 2006 comparative figures have been reclassified to conform to the financial presentation adapted in 2007. 13. Business segments: The Company's activities are divided into four reportable segments. The three operating segments are: Industrial Services, Western Markets, and Power Generation. The fourth non-operating segment is Corporate Support, which provides centralized services, such as finance, information systems, human resources and risk management to the operating segments. Industrial Services provides services, including environmental compliance solutions, to oil refiners and other industrial customers, primarily in the U.S. and Canada. Services include the regeneration of spent sulphuric acid produced during the octane enhancement of gasoline; the extraction and recovery of sulphur from hydrogen sulphide gas created during the refining process; the recovery of sulphur dioxide to ensure air quality compliance; cutting and handling of petroleum coke; and the safe handling, treatment, and disposal of industrial hazardous waste streams. Western Markets produces and provides sulphur-enhanced chemicals to industrial customers and supplies alum, a water treatment chemical used by municipalities and other industrial companies, for water and wastewater treatment. The primary market for these and other chemicals is Western Canada. Power Generation provides environmental systems and services for air quality compliance, primarily to electric utilities, and also to petrochemical and general industrial customers worldwide. --------------------------------------------------------------------- For the three months ended September 30 Industrial Services Western Markets (in thousands of dollars) 2007 2006 2007 2006 --------------------------------------------------------------------- Revenue from external customers $ 43,048 $ 46,744 $ 16,729 $ 16,914 --------------------------------------------------------------------- --------------------------------------------------------------------- Gross profit $ 17,622 $ 16,060 $ 6,217 $ 7,251 SG&A(1) 2,767 2,766 636 577 Foreign exchange losses (gains) - - - - --------------------------------------------------------------------- Earnings (loss) before the under noted $ 14,855 $ 13,294 $ 5,581 $ 6,674 Depreciation, including loss on disposal 5,586 6,967 650 593 Amortization of deferred charges and intangible assets 1,805 1,882 - - Net Interest expense - - - - --------------------------------------------------------------------- Earnings (loss) before income taxes $ 7,464 $ 4,445 $ 4,931 $ 6,081 --------------------------------------------------------------------- --------------------------------------------------------------------- Capital expenditures $ 2,194 $ 7,293 $ 345 $ 223 --------------------------------------------------------------------- --------------------------------------------------------------------- --------------------------------------------------------------------- For the three months ended Inter-segment Revenue September 30 Power Generation Corporate Support (in thousands of dollars) 2007 2006 2007 2006 --------------------------------------------------------------------- Revenue from external customers $ 8,902 $ 4,675 $ - $ - --------------------------------------------------------------------- --------------------------------------------------------------------- Gross profit $ 1,539 $ 1,484 $ - $ - SG&A(1) 1,010 1,025 4,864 3,403 Foreign exchange losses (gains) - - (1,382) 4 --------------------------------------------------------------------- Earnings (loss) before the under noted $ 529 $ 459 $ (3,482) $ (3,407) Depreciation, including loss on disposal 23 24 70 73 Amortization of deferred charges and intangible assets - - - 342 Net Interest expense - - 2,552 3,992 --------------------------------------------------------------------- Earnings (loss) before income taxes $ 506 $ 435 $ (6,104) $ (7,814) --------------------------------------------------------------------- --------------------------------------------------------------------- Capital expenditures $ 43 $ - $ 93 $ 284 --------------------------------------------------------------------- --------------------------------------------------------------------- ----------------------------------------------- For the three months ended September 30 Total (in thousands of dollars) 2007 2006 ----------------------------------------------- Revenue from external customers $ 68,679 $ 68,333 ----------------------------------------------- ----------------------------------------------- Gross profit $ 25,378 $ 24,795 SG&A(1) 9,277 7,771 Foreign exchange losses (gains) (1,382) 4 ----------------------------------------------- Earnings (loss) before the under noted $ 17,483 $ 17,020 Depreciation, including loss on disposal 6,329 7,657 Amortization of deferred charges and intangible assets 1,805 2,224 Net Interest expense 2,552 3,992 ----------------------------------------------- Earnings (loss) before income taxes $ 6,797 $ 3,147 ----------------------------------------------- ----------------------------------------------- Capital expenditures $ 2,675 $ 7,800 ----------------------------------------------- ----------------------------------------------- --------------------------------------------------------------------- For the nine months ended September 30 Industrial Services Western Markets (in thousands of dollars) 2007 2006 2007 2006 --------------------------------------------------------------------- Revenue from external customers $ 131,291 $ 118,020 $ 48,200 $ 47,337 --------------------------------------------------------------------- --------------------------------------------------------------------- Gross profit $ 49,996 $ 38,183 $ 17,994 $ 18,876 SG&A(1) 8,686 7,893 1,874 1,533 Foreign exchange losses (gains) - - - - --------------------------------------------------------------------- Earnings (loss) before the under noted $ 41,310 $ 30,290 $ 16,120 $ 17,343 Depreciation, including loss on disposal 17,310 16,797 1,900 1,772 Amortization of deferred charges and intangible assets 5,317 4,739 - - Gain realized on redemption of Senior Subordinated Notes - - - - Cost of Refinancing - - - - Net Interest expense - - - - --------------------------------------------------------------------- Earnings (loss) before income taxes $ 18,683 $ 8,754 $ 14,220 $ 15,571 --------------------------------------------------------------------- --------------------------------------------------------------------- Capital expenditures $ 8,116 $ 34,467 $ 2,119 $ 632 --------------------------------------------------------------------- --------------------------------------------------------------------- Total assets before goodwill and intangible assets(2) $ 229,263 $ 243,188 $ 32,027 $ 31,274 Goodwill and intangible assets, net of accumulated amortization(2) 97,691 107,332 4,468 4,468 --------------------------------------------------------------------- Total assets(2) $ 326,954 $ 350,520 $ 36,495 $ 35,742 --------------------------------------------------------------------- --------------------------------------------------------------------- --------------------------------------------------------------------- For the nine months ended Inter-segment Revenue September 30 Power Generation Corporate Support (in thousands of dollars) 2007 2006 2007 2006 --------------------------------------------------------------------- Revenue from external customers $ 34,980 $ 14,926 $ - $ (56) --------------------------------------------------------------------- --------------------------------------------------------------------- Gross profit $ 6,341 $ 4,473 $ - $ - SG&A(1) 2,953 2,979 15,240 9,139 Foreign exchange losses (gains) - - (3,785) (1,096) --------------------------------------------------------------------- Earnings (loss) before the under noted $ 3,388 $ 1,494 $ (11,455) $ (8,043) Depreciation, including loss on disposal 74 71 212 176 Amortization of deferred charges and intangible assets - - - 1,513 Gain realized on redemption of Senior Subordinated Notes - - (177) - Cost of Refinancing - - 1,000 - Net Interest expense - - 8,287 8,703 --------------------------------------------------------------------- Earnings (loss) before income taxes $ 3,314 $ 1,423 $ (20,777) $ (18,435) --------------------------------------------------------------------- --------------------------------------------------------------------- Capital expenditures $ 52 $ 7 $ 227 $ 591 --------------------------------------------------------------------- --------------------------------------------------------------------- Total assets before goodwill and intangible assets(2) $ 1,897 $ 919 $ 12,212 $ 46,828 Goodwill and intangible assets, net of accumulated amortization(2) 4,999 5,847 - - --------------------------------------------------------------------- Total assets(2) $ 6,896 $ 6,766 $ 12,212 $ 46,828 --------------------------------------------------------------------- --------------------------------------------------------------------- ----------------------------------------------- For the nine months ended September 30 Total (in thousands of dollars) 2007 2006 ----------------------------------------------- Revenue from external customers $ 214,471 $ 180,227 ----------------------------------------------- ----------------------------------------------- Gross profit $ 74,331 $ 61,532 SG&A(1) 28,753 21,544 Foreign exchange losses (gains) (3,785) (1,096) ----------------------------------------------- Earnings (loss) before the under noted $ 49,363 $ 41,084 Depreciation, including loss on disposal 19,496 18,816 Amortization of deferred charges and intangible assets 5,317 6,252 Gain realized on redemption of Senior Subordinated Notes (177) - Cost of Refinancing 1,000 - Net Interest expense 8,287 8,703 ----------------------------------------------- Earnings (loss) before income taxes $ 15,440 $ 7,313 ----------------------------------------------- ----------------------------------------------- Capital expenditures $ 10,514 $ 35,697 ----------------------------------------------- ----------------------------------------------- Total assets before goodwill and intangible assets(2) $ 275,399 $ 322,209 Goodwill and intangible assets, net of accumulated amortization(2) 107,158 117,647 ----------------------------------------------- Total assets(2) $ 382,557 $ 439,856 ----------------------------------------------- ----------------------------------------------- (1) Selling, general, administrative and other costs. (2) 2006 assets are at December 31st

For further information:

For further information: Laurie Tugman, President and CEO, Tel: (416)
496-4157; William Martin, Chief Financial Officer, Tel: (416) 496-4164

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MARSULEX INC.

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