Marsulex announces first quarter 2009 results



    TORONTO, April 29 /CNW/ - Marsulex Inc. (TSX: MLX) today announced
results for the three months ended March 31, 2009. Revenue for the quarter
decreased by 8.1% to $68.5 million from $74.5 million in the first quarter of
2008. Gross profit of $23.2 million was comparable to the $24.0 million in
2008. Earnings before income taxes for the quarter were $2.2 million compared
to $5.2 million in 2008. Net earnings for the quarter were $1.5 million ($0.05
per share) compared to $3.7 million in 2008 ($0.11 per share).

    
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                                                         Three months ending
    (in millions of dollars, except per                             March 31,
     share amounts)                           2009         2008         2007
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    Revenue                                  $68.5        $74.5         68.5
    Gross profit                              23.2         24.0         23.9
    Gross profit as a percent of revenue     33.8%        32.3%        34.8%
      Earnings before income taxes             2.2          5.2          2.0
    Net earnings                               1.5          3.7          1.4
    Earnings per share - basic                0.05         0.11         0.04
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    Commenting on the results, Marsulex President and Chief Executive
Officer, Mr. Laurie Tugman said, "Gross profit for the quarter was comparable
to that realized in the first quarter of 2008 despite the significant change
in economic conditions. Although revenue was lower than last year when strong
prices and demand for sulphur internationally and in North America had a
positive impact on results, it was exactly the same as our first quarter
revenue in 2007. Gross profit percent returned to historic levels on lower
input costs."
    Earnings before income taxes were lower as a result of severance costs,
the impact of foreign exchange, and the "mark-to-market" adjustment in long
term incentive plan costs offset by lower legal costs, which together totalled
approximately $3 million. Lower interest costs of approximately $1 million
mitigated the effect of these items.
    Mr. Tugman said that although economic conditions are having a negative
impact on some parts of the Company's business, the essential nature of
Marsulex services to many of its customers and long-term contracts provides a
lot of stability. "We are also paying close attention to our cost structure
and expect to emerge from these difficult times with increased operating
efficiencies while maintaining our strong balance sheet."
    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
first quarter 2009 results will be webcast live on www.marsulex.com and
www.newswire.ca on Thursday, April 30, 2009 at 10:00 a.m. Eastern Time.

    Information in this news release that is not current or historical
factual information may constitute forward-looking information, including
future-oriented financial information and financial outlooks, within the
meaning of securities laws. This information is based on certain assumptions
regarding expected growth, results of operations, performance, and business
prospects and opportunities (collectively, the "Assumptions"). While the
Company considers these Assumptions to be reasonable, based on information
currently available, they may prove to be incorrect. Forward-looking
information is subject to a number of risks, uncertainties and other factors
that could cause actual results to differ materially from what the Company
currently expects. These risks, uncertainties and other factors include, but
are not limited to: the Company's ability to renegotiate contracts; the impact
of acquisitions and growth opportunities; the timing and market acceptance of
future products; competition in the Company's markets; the Company's reliance
on customers; fluctuations in currency and exchange rates; commodity prices or
interest rates; the Company's ability to maintain good relations with its
employees; changes in the law 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
(collectively, the "Risks"). For more exhaustive information on these Risks
you should refer to our Company's filings with the securities regulatory
authorities, including the Company's most recently filed annual information
form, which is available on SEDAR at www.sedar.com. Additional information
relating to the Company can be found on the SEDAR website.
    Actual results may differ materially from what the Company currently
expects. Other than as required under securities laws, we do not undertake to
update any forward-looking information at any particular time. The reader
should not place undue importance on forward-looking information and should
not rely upon this information as of any other date. All forward-looking
information contained in this news release is expressly qualified in its
entirety by this cautionary statement.

    Management's Discussion and Analysis

    The following commentary provides additional analysis of the operations
and financial position for the fiscal period ended March 31, 2009 for Marsulex
Inc. ("Marsulex" or the "Company") and includes information available to April
28, 2009. This Commentary should be read in conjunction with the consolidated
financial statements, including the accompanying notes, management's report
and the auditor's report included in the Company's December 31, 2008 annual
report. All dollar amounts are stated in Canadian currency, unless otherwise
stated.
    Certain statements contained in this commentary may constitute
forward-looking information, including future-oriented financial information
and financial outlooks, within the meaning of securities laws. Forward-looking
information may relate to the Company's future outlook and anticipated events
or results and may include statements regarding the Company's future financial
position, business strategy, budgets, litigation, projected costs, capital
expenditures, financial results, taxes, plans and objectives. In some cases,
forward-looking information can be identified by terms such as "may", "will",
"should", "expect", "plan", "anticipate", believe", "intend", "estimate",
"predict", "potential", "continue", or other similar expressions concerning
matters that are not historical facts. Forward-looking information contained
in this commentary is based on certain assumptions regarding expected growth,
results of operations, performance, and business prospects and opportunities
(collectively, the "Assumptions"). While the Company considers these
Assumptions to be reasonable, based on information currently available, they
may prove to be incorrect. Forward-looking information is subject to a number
of risks, uncertainties and other factors that could cause actual results to
differ materially from what the Company currently expects. These risks,
uncertainties and other factors include, but are not limited to, the
following: the timing and market acceptance of future products, competition in
the Company's markets, the Company's reliance on customers, fluctuations in
currency and exchange rates, commodity prices or interest rates, the Company's
ability to maintain good relations with its employees, changes in the law 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 (collectively, the "Risks"). For more
exhaustive information on these Risks you should refer to the "Risks and
Uncertainties" section of this MD&A and to the Company's filings with the
securities regulatory authorities, including the Company's most recently filed
Annual Information Form, which is available on SEDAR at www.sedar.com and on
the Company's website at www.marsulex.com. Additional information relating to
the Company can be found on the SEDAR website. Other than as required under
securities laws, we do not undertake to update any forward-looking information
at any particular time. All forward-looking information contained in this
commentary is expressly qualified in its entirety by this cautionary
statement.

    RESPONSIBILITY OF MANAGEMENT AND THE BOARD OF DIRECTORS

    Management is responsible for the information disclosed in this MD&A and
the accompanying consolidated financial statements, and has in place
appropriate information systems, procedures and controls to provide reasonable
assurance 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"), together with other members of management, have evaluated the design
of the Company's disclosure controls and procedures as of March 31, 2009 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.
    The CEO and CFO have evaluated the design of the Company's internal
controls over financial reporting and have concluded that they have been
designed to provide reasonable assurance regarding the reliability of
financial reporting and preparation of financial statements in accordance with
Canadian Generally Accepted Accounting Principles ("Canadian GAAP"). Financial
statements for external purposes are prepared in accordance with Canadian
GAAP. There have been no changes to the design of internal controls over
financial reporting that occurred during the most recent interim period ended
March 31, 2009 that have materially affected or are measurably likely to
materially affect the internal controls over financial reporting.
    While the Officers of the Company have evaluated the design of disclosure
controls and procedures and internal controls over financial reporting as at
March 31, 2009 due to the limitations in control systems and procedures, their
evaluation can provide only reasonable, not absolute, assurance that such
disclosure controls and procedures and internal controls over financial
reporting are reliable.

    COMPANY PROFILE AND BUSINESS SEGMENTATION

    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 have the potential to create
opportunities for Marsulex to apply its core competency of operating
processing 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 MET
("Marsulex Environmental Technologies"). 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.

    
    RESULTS OF CONSOLIDATED OPERATIONS
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                                                         Three months ending
    (in thousands of dollars, except per                            March 31,
     share amounts)                           2009         2008        % chg
    -------------------------------------------------------------------------

    Revenue                                $68,452      $74,513        -8.1%
    Gross Profit                            23,156       24,046        -3.7%
    Gross Profit as a percent of revenue     33.8%        32.3%
    Selling, general, administrative and
     other costs (SG&A), including
     foreign exchange                       11,619        8,645        34.4%
      Depreciation and amortization          8,271        8,014         3.2%
    Interest expense - net                   1,109        2,148       -48.4%
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    Earnings before income taxes             2,157        5,239       -58.8%
    Income taxes                               617        1,559       -60.4%
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    Net earnings                           $ 1,540      $ 3,680       -58.2%

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    Total comprehensive income             $ 1,706      $ 5,196       -67.2%
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    Earnings per share - Basic             $  0.05      $  0.11       -54.5%
    Earnings per share - Diluted           $  0.05      $  0.11       -54.5%

    Cash dividends per share               $  0.16      $  0.16          n/a
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    Cash generated from operations before
     non-cash changes to working capital   $12,658      $13,306        -4.9%
    Changes in non-cash working capital     (3,919)        (952)      311.7%
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    Cash provided by operations            $ 8,739      $12,354       -29.3%
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    Revenue for the first quarter of 2009 was $6.0 million lower than the same
period in 2008, which was primarily a result of lower volumes and sales of
sulphur-based products in Industrial Services and Western Markets offset by
the positive impact of foreign exchange on U.S. denominated revenues ($6.6
million).
    Gross profit for the first quarter of 2009 was comparable to the same
period in 2008 including the $1.9 million positive impact of foreign exchange.
The increase in gross profit as a percent of revenue, which returned to
historic levels, is largely the result of lower costs of sulphur-based
products within the Western Markets Group.

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                                                         Three months ending
                                                                    March 31,
    (In thousands of dollars)                 2009         2008        % chg
    -------------------------------------------------------------------------
    SG&A, excluding long-term incentive
     plan                                  $ 9,424      $ 8,179        15.2%
    Long-term incentive plan and director
     DSU's expense (recovery)                1,119         (329)         n/a
    Foreign exchange losses - monetary
     items                                   1,076          795        35.3%
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    Selling general administrative, and
     other costs                           $11,619      $ 8,645        34.4%
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    As a % of revenue                        17.0%        11.6%
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    The increase in SG&A costs for the first quarter reflects the increased
expense for the Company's long-term incentive plan resulting from
"mark-to-market" adjustments for changes in the underlying share price,
severance costs (approximately $0.5 million in Industrial Services and $0.3
million in Corporate), the impact of foreign exchange on the translation of
U.S. denominated SG&A ($0.6 million) and losses in U.S. denominated net
monetary liabilities ($0.3 million), increased personnel related costs ($0.4
million) in the business units, and offset by lower legal costs.
    At the end of March 31, 2009 the Company had approximately 885,000 units
outstanding under its long-term incentive and director DSU plans. Based on
these outstanding units, a $1 change of the Company's share price would result
in an approximate $0.9 million change in SG&A.
    Since the beginning of 2009, the Canadian dollar has depreciated 2.8%
against the U.S. dollar. Exchange rates at December 31, 2008 were $0.8166
versus $0.7935 at March 31, 2009. A more detailed analysis of the Company's
exposure to foreign exchange fluctuations is included under Risk &
Uncertainties in this MD&A.

    
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                                                         Three months ending
                                                                    March 31,
    (In thousands of dollars)                 2009         2008        % chg
    -------------------------------------------------------------------------
    Interest expense                       $ 1,175      $ 2,205       -46.7%
    Interest income                            (66)         (57)       15.8%
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    Net interest expense                   $ 1,109      $ 2,148       -48.4%
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    Lower net interest expense for the first quarter ended March 31, 2009
reflects lower debt and reduced interest rates (overall first quarter weighted
average rate of 3.1% for 2009 versus 5.5% for 2008) that resulted from
interest rate reductions in both the U.S. and Canada.
    The decrease in the quarterly pre-tax earnings reflects the lower
business results, increased SG&A costs and depreciation, offset by the
decreased interest expense.
    The effective tax rate for the first quarter of 2009 is 29%, which is
comparable to the same period in 2008 with lower taxes a result of the
decrease in pre-tax earnings.
    The 2009 tax rate, when compared to the statutory rate of 34%, reflects
the utilization of previously unrecognized foreign tax credits.
    Cash tax is dependent on the Company's earnings by legal entity, the
availability of tax losses and accelerated tax depreciation on property, plant
and equipment and other deductions to reduce taxable income. During the
quarter the Company paid $2.0 million in cash taxes relating to 2008 taxes
payable compared to $0.3 million in 2008.
    Total comprehensive income for the first quarter ended March 31, 2009
decreased $3.5 million when compared to the same period in 2008. This reflects
lower net earnings plus the impact of the strengthening U.S. dollar against
the Canadian dollar on the translation of the Company's investment in U.S.
dollar denominated self-sustaining net assets, which was reduced by
approximately $72 million at December 31, 2008.

    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
                                                                    March 31,
    (In thousands of dollars)                 2009         2008        % chg
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    Revenue                               $ 39,873     $ 45,303       -12.0%
    Gross Profit                            14,308       15,900       -10.0%
    Gross Profit as a percent of revenue     35.9%        35.1%

    Capital expenditures(1)               $  2,444     $    796       207.0%
    Total assets(2)                       $300,563     $305,957        -1.8%
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    (1) The above capital expenditures represent cash expenditures for
        capital assets.
    (2) 2008 assets are at December 31, 2008.
    

    Revenue and gross profit for the first quarter of 2009 declined by 12%
and 10%, respectively, when compared to the first quarter revenue and gross
profit in 2008. The decrease resulted from lower prilled sulphur revenue,
lower Petcoke and Toledo volumes and the timing of hazardous waste processed
from remediation projects being partially offset by the positive impact of
foreign exchange ($4.2 million on revenue and $1.4 million on gross profit)
and lower input costs, namely fuel. The Group also incurred approximately $0.2
million of severance costs which were included in the costs of goods sold.
Gross profit as a percent of revenue for the first quarter of 2009 was
consistent with 2008.
    The increase in capital expenditures includes $1.2 million in
expenditures relating to the construction of a treatment basin for the
hazardous waste processing facility in Blainville.

    Western Markets Group

    Western Markets produces and provides sulphur-based 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 is western Canada earning revenues by providing
sulphur-based chemicals to the pulp and paper industry, as well as water
treatment chemicals used by municipalities throughout Alberta and Saskatchewan
for water and wastewater treatment.
    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
                                                                    March 31,
    (In thousands of dollars)                 2009         2008        % chg
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    Revenue                               $ 16,009     $ 18,217       -12.1%
    Gross Profit                             6,277        5,871         6.9%
    Gross Profit as a percent of revenue     39.2%        32.2%

    Capital expenditures                  $    572     $  1,258       -54.5%
    Total assets(1)                       $ 37,156     $ 40,201        -7.6%
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    (1) 2008 assets are at December 31.
    

    Revenue for the first quarter of 2009 was down 12.1% in comparison to the
same period in 2008 reflecting decreased sales and volumes primarily of
sulphur-based products. Gross profit was up 6.9% for the first quarter of 2009
and gross profit as a percent of revenue returned to historic levels as the
increase reflected lower input costs, primarily sulphur and fuel.
    The decrease in capital expenditures reflects the 2008 maintenance
capital expenditures relating to the Group's Prince George facility
(approximately $0.5 million) and the replacement of Sulphides railcars.

    MET (Marsulex Environmental Technologies)

    MET 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 MET include the design of pollution
control equipment, engineering and project management services, and the
licensing of technology.

    
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                                                         Three months ending
                                                                    March 31,
    (In thousands of dollars)                 2009         2008        % chg
    -------------------------------------------------------------------------
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    Revenue                               $ 12,570     $ 10,993        14.3%
    Gross Profit                             2,571        2,275        13.0%
    Gross Profit as a percent of revenue     20.5%        20.7%

    Capital expenditures                  $      -     $      -          n/a
    Total assets(1)                       $ 11,019     $  9,006        22.4%
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    (1) 2008 assets are at December 31.
    

    For the first quarter of 2009, the Group's increase in revenue and gross
profit primarily reflected the positive impact of foreign exchange partially
offset by the timing of project activity. The positive impact of the weakening
of the Canadian dollar on the Group's U.S. revenue and gross profit were $2.4
million and $0.5 million respectively.
    Gross profit as a percent of revenue for the first quarter was comparable
to the prior year.
    The increase in total assets is the result of billable work relating to
the timing of project activity and the impact of foreign exchange on the U.S.
dollar denominated assets.

    LIQUIDITY AND CAPITAL RE

SOURCES Total assets for the Company were $382.9 million at March 31, 2009 compared to the $394.9 million at December 31, 2008. Accounts receivable decreased to $36.1 million at March 31, 2009 from $39.3 million at December 31, 2008 which reflects the lower revenue for the first quarter of 2009 and the timing of payments partially offset by the impact of the changes in the translation of U.S. dollar denominated receivables. ------------------------------------------------------------------------- March 31, December 31, 2009 2008 ------------------------------------------------------------------------- Accounts receivable, gross $ 37,305 $ 40,379 Allowance for doubtful accounts (1,180) (1,094) ------------------------------------------------------------------------- Accounts receivable, net $ 36,125 $ 39,285 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- March 31, December 31, 2009 2008 ------------------------------------------------------------------------- Accounts receivable denominated in U.S. dollars $ 20,181 $ 19,347 Accounts receivable which are more than 60 days beyond date of invoice 2,378 3,372 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Inventories, prepaid expenses and other assets at March 31, 2009 were comparable to December 31, 2008 balances. The Company holds investments in the amount of $0.9 million, which were invested 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. The Company has classified these investments as held-for-trading and has presented them on the consolidated balance sheet as long-term since it is expected these assets will not be realized within a 365-day period. On January 21, 2009, the Pan-Canadian Investors Committee for Third Party Asset Backed Commercial Paper announced that the restructuring plan had been fully implemented. Pursuant to the plan, the Company received restructured ABCP in the form of longer term notes. The ultimate amount recovered from the notes will not be material to the Company's consolidated financial statements. Currently, the Company has sufficient cash and credit facilities to satisfy its financial obligations as they come due. The net book value of property, plant, and equipment at March 31, 2009 decreased to $198.4 million from a December 31, 2008 balance of $201.4 million. The decrease is the result of the capital additions during the first quarter of 2009 and the impact of foreign exchange on U.S. dollar denominated assets being more than offset by depreciation expense. Intangible assets decreased to $22.5 million from the December 31, 2008 balance of $23.6 million reflecting the amortization expense for the first quarter of 2009 partially offset by the impact of foreign exchange. Goodwill increased to $83.8 million from the December 31, 2008 balance of $82.4 million with goodwill being unchanged except for the impact of changes in the Canadian dollar on the translation of U.S. denominated goodwill. Total current liabilities balance decreased to $81.4 million from the December 31, 2008 balance of $83 million. The balance reflects a decrease in accounts payable and accrued liabilities, partially offset by the increase in the current portion of long term debt. The current debt increase is primarily a result of the $4.9 million mandatory principal repayments, on the $122 million Senior Secured Credit Facility (maturing February 28, 2012), which begin on March 31, 2010. Financial Condition ------------------------------------------------------------------------- March 31, December 31, 2009 2008 ------------------------------------------------------------------------- Cash including current portion of cash held in trust (in millions of dollars) $ 31.1 $ 36.8 Debt (in millions of dollars) $ 154.5 $ 152.5 Net debt(1) (in millions of dollars) $ 123.4 $ 115.7 Debt to equity 1.5x 1.3x Net debt(1) to equity 1.2x 1.0x Interest coverage (Gross Profit(2) to interest expense(2)) 15.2x 13.3x ------------------------------------------------------------------------- ------------------------------------------------------------------------- (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. The excess amount of cash and cash equivalents, including cash held in trust, is invested in "overnight", bank backed interest-bearing deposits and government backed treasury bills. The Company continues to invest a significant proportion of its excess cash in government backed T-bills forgoing higher returns in favour of security. The Company generates positive cash flows from operations that are used to fund maintenance and expansion capital projects, meet debt obligations and make dividend payments. 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 additional 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. Given current economic conditions, it is believed that access to additional credit, should it be required to fund growth initiatives, would be at interest rates that are higher than prevailing rates with the existing credit facility. At March 31, 2009, the following remained undrawn under the Company's lines of credit. ------------------------------------------------------------------------- Approved Limit Undrawn ------------------------------------------------------------------------- Revolving Term Facility $ 70,000 $ 70,000 Revolving Operating Facility 20,000 20,000 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Total debt at March 31, 2009 was $154.5 million, up slightly from $152.5 million as at December 31, 2008, reflecting the impact of foreign exchange on the U.S. dollar denominated debt ($2.5 million). The increase in net debt of $7.8 million from the December 31, 2008 balance of $115.7 million largely reflects the decrease in cash and cash equivalents, and the impact of foreign exchange on U.S. dollar denominated debt. The interest rate on the Long-term Loan is fixed under contractual agreements and bears interest of 7.3% per annum. The Senior Secured Credit Facility, maturing in 2012, is subject to near-term interest rate fluctuations as interest is at variable rates. The loan can be drawn as LIBOR, Bankers' Acceptance and prime rate loans with margins ranging from 100 to 225 basis points and prime rate loans with margins ranging from 0 to 125 basis points. At March 31, 2009, the interest rates were: - U.S. LIBOR loan (U.S. $70 million) - 0.50% plus 100 basis points - Cdn. Bankers' Acceptance loan - 0.86% plus 100 basis points - Cdn. Prime rate loan - 2.50% plus 0 basis points Based on the outstanding balances at March 31, 2009, a 1% increase in LIBOR, Bankers' Acceptances and prime rate would increase the Company's interest payments by U.S. $882,168, $333,000 and $3,000, respectively. The Company's net debt to EBITDA ratio was 1.9 times (December 31, 2008 - 1.7 times) for the latest twelve months ended March 31, 2009. EBITDA is discussed in the Supplemental Financial Information section of this MD&A. At March 31, 2009, the Company had met all of its debt related covenants. Working Capital The Company's working capital and current ratio were as follows: ------------------------------------------------------------------------- March 31, December 31, March 31, 2009 2008 2008 ------------------------------------------------------------------------- Working capital(1) (in thousands of dollars) (8,632) (803) (6,072) Current ratio(1) 0.89 to 1.0 0.99 to 1.0 0.92 to 1.0 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Includes cash and cash equivalents and cash held in trust. 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 a negative working capital position. Share Capital Outstanding ------------------------------------------------------------------------- April 28, March 31, December 31, 2009 2009 2008 ------------------------------------------------------------------------- Number of common shares 32,832,698 32,815,698 33,312,748 Number of options 295,165 312,165 435,415 ------------------------------------------------------------------------- ------------------------------------------------------------------------- On November 14, 2008, the Company commenced a Normal Course Issuer Bid ("NCIB") pursuant to which the Company is entitled to purchase 1,650,000 of its issued and outstanding common shares. The NCIB terminates no later than November 13, 2009. All shares purchased under the issuer bid will be cancelled. On January 27, 2009 the Company purchased for cancellation 620,300 of its common shares pursuant to a block purchase exemption under its NCIB. The shares were purchased at a cost of $7.25 per share for a total cost of approximately $4.5 million. Following the purchase, the Company has additional availability under the NCIB to purchase up to 1,029,700 million of its common shares prior to November 13, 2009. For the three months ended March 31, 2009, the Company issued 123,250 common shares for cash proceeds of $378,225 upon the exercise of stock options. Subsequent to March 31, 2009 the Company issued 17,000 common shares for cash proceeds of $65,450 as a result of stock options being exercised. 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. 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 March 31, (In thousands of dollars) 2009 2008 % chg ------------------------------------------------------------------------- Fees to Birch Hill Equity Partners $ 111 $ 104 6.7% Fees to firms of certain Directors 197 414 -52.4% ------------------------------------------------------------------------- ------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS Cash Flow from Operations For the first quarter of 2009, the Company generated $8.8 million in cash from operations compared to $12.4 million for the same period in 2008. The decrease was primarily the result of decreased operating earnings, taxes payable and accrued liabilities. Cash and cash equivalents at the end of March 31, 2009 were $29.7 million, down $6.3 million from $36 million at December 31, 2008. Cash on hand and cash generated from operations were utilized to fund the investment in capital additions, to pay dividends, and to purchase the shares under the NCIB. Capital Expenditures ------------------------------------------------------------------------- Three months ending March 31, (In thousands of dollars) 2009 2008 ------------------------------------------------------------------------- Maintenance capital(1) $ 3,238 $ 2,199 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Including expenditures for placement cells (recorded as other assets). The Company is expecting to spend approximately $18 - 19 million on maintenance capital expenditures in 2009, excluding incremental expenditures it will incur on the two Ohio facilities per the terms of the USEPA settlement agreement. RISKS & UNCERTAINTIES There have been no changes in the Company's business risks described in the December 31, 2008 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. Highlights of exchange rate movements for the quarter are as follows: ------------------------------------------------------------------------- Three months ending March 31, 2009 2008 % chg ------------------------------------------------------------------------- Average U.S. exchange rates 0.8034 0.9962 -19.4% Closing U.S. exchange rates 0.7935 0.9729 -18.4% ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) The December 31, 2008 closing rate was 0.8166. Components of foreign exchange: ------------------------------------------------------------------------- Three months ending March 31, (Gains/(losses) in thousands of dollars) 2009 2008 ------------------------------------------------------------------------- Impact on gross margin and SG&A $ 1,300 $ (1,500) Impact on U.S. denominated net monetary items (1,076) (795) Impact on Comprehensive Income 166 1,516 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The impact on gross margin and SG&A reflects the increased year-over-year U.S. dollar average rate. The decrease in comprehensive income is a result of the impact of the strengthening U.S. dollar against the Canadian dollar on the translation of the Company's investment in U.S. dollar denominated self-sustaining net assets, which was reduced at December 31, 2008. The Company's exposure to foreign currency risk relating to its financial instruments was as follows based on notional amounts: ------------------------------------------------------------------------- March 31, December 31, 2009 2008 ------------------------------------------------------------------------- U.S. dollar net working capital asset $ 30,671 $ 28,997 U.S. dollar portion of Senior Secured Term Loan (70,000) (70,000) ------------------------------------------------------------------------- Net U.S. dollar net monetary items affecting net earnings $ (39,329) $ (41,003) ------------------------------------------------------------------------- ------------------------------------------------------------------------- U.S. dollar net monetary items affecting comprehensive income(1) $ 4,489 $ 4,372 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) U.S. dollar net investment in self-sustaining foreign operations. The following table illustrates the foreign exchange impact of a one-cent decrease in the value of the Canadian dollar on the Company's U.S. denominated operating results for the quarter ending March 31, 2009: ------------------------------------------------------------------------- (In thousands of dollars) ------------------------------------------------------------------------- Gross profit $ 130 SG&A costs (40) ------------------------------------------------------------------------- Earnings from operations before the under noted 90 Depreciation and amortization of deferred charges and intangible assets (20) Net interest expense - ------------------------------------------------------------------------- Earnings before income taxes $ 70 ------------------------------------------------------------------------- ------------------------------------------------------------------------- A one-cent decrease would also lead to a decrease in earnings from operations of approximately $0.6 million as a result of the translation of U.S. dollar denominated net monetary liabilities (assuming U.S. denominated monetary items remain unchanged). CHANGES IN ACCOUNTING POLICIES Goodwill and Intangible Assets In February 2008, the CICA approved Handbook Section 3064 Goodwill and Intangible Assets, replacing previous guidance. The new section establishes standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets subsequent to its initial recognition. Standards concerning goodwill are unchanged. This new standard is applicable to fiscal years beginning on or after October 1, 2008. The Company has evaluated the new section and determined that adoption of these new requirements did not have a material impact on the Company's consolidated financial statements. Credit Risk and the Fair Value of Financial Assets and Financial Liabilities In January 2009, the CICA approved EIC 173 Credit Risk and the Fair Value of Financial Assets and Financial Liabilities. This guidance clarified that an entity's own credit risk and the credit risk of the counterparty should be taken into account in determining the fair value of financial assets and financial liabilities including derivative instruments. This guidance is applicable to fiscal periods ending on or after January 20, 2009. The Company has evaluated the new EIC and determined that adoption of the new requirement did not have a material impact on the Company's consolidated financial statements. NEW ACCOUNTING POLICIES Business Combinations In October 2008, the CICA issued Handbook Section 1582, Business Combinations, which established new standards for accounting for business combinations. This is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2011. The Company is considering early adoption to coincide with the adoption of International Financial Reporting Standards. Non-Controlling Interests In October 2008, the AcSB issued Handbook Section 1602, Non-Controlling Interests, to provide guidance on accounting for non-controlling interests subsequent to a business combination. The section is effective for fiscal years beginning on or after January, 2011. Adoption of International Financial Reporting Standards In January 2006, the CICA Accounting Standards Board ("AcSB") adopted a strategic plan for the direction of accounting standards in Canada. The AcSB has recently confirmed that accounting standards in Canada for public companies are to converge with International Financial Reporting Standards ("IFRS") effective for fiscal periods beginning on or after January 1, 2011. The Company has assembled an IFRS transition team which has started to assess the impact of the convergence of Canadian GAAP and IFRS, and which will involve: - assessing the implications of IFRS 1--First-time adoption of IFRS; - assessing the differences between existing Canadian GAAP and IFRS at a high level; - determining the financial reporting implication of the differences; - evaluating information technology and data systems required for implementation; - presentations to the Board of Directors and Audit Committee with status updates; - developing a plan for implementing the changes; and - monitoring the progress of the implementation. While a number of differences between current Canadian GAAP and IFRS have been identified, the areas of highest potential impact are as follows: property, plant and equipment, IFRS 1, provisions, impairment of assets, certain aspects of revenue recognition and income taxes. The Company expects the transition to IFRS to impact financial reporting, business processes, internal controls and information systems. The IFRS transition team has assembled a sub-committee, including a representative from the plant operating group, which will be responsible for an in depth review of its property, plant and equipment as it relates to the implementation of IFRS. As well, the team has begun analyzing potential impact areas in further detail and will assemble sub-committees for each area in the second quarter of 2009. In addition, the transition team has met with several information technology service providers to help it assess and evaluate the impact of the implementation on its core financial system. The team is currently reviewing its options. Finally, the Company's financial management held an IFRS information session with members of the Company's Board of Directors. During the session, management provided the Board with a review of timeline for implementation, the implications of the new standards to the business, a status of the project, and an overview of the impact to the financial statements (as experienced in Europe by comparable companies). OUTLOOK Given declines in economic conditions and its associated impact on commodity prices, the Company anticipates some decrease in revenues, particularly in more volume sensitive business sectors, as well as lower input costs for some parts of the business. Marsulex should continue to benefit from a low interest rate environment as well as a strong balance sheet. The Company continues to explore growth opportunities and assess cost savings opportunities which will position it well for 2010 and beyond. QUARTERLY OPERATING PERFORMANCE Selected Quarterly Financial Information ------------------------------------------------------------------------- 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ------------------------------------------------------------------------- (In millions of dollars, except per share amounts) 2009 2008 2008 2007 2008 2007 2008 2007 ------------------------------------------------------------------------- Revenue 68.5 74.5 89.7 77.3 83.2 68.7 75.2 73.0 Gross Profit 23.2 24.0 26.3 25.1 28.1 25.4 27.2 24.0 SG&A and other costs 11.6 8.6 7.8 7.7 7.8 7.9 12.4 10.9 Other expenses - - - - - - 1.8 3.4 Depreciation and amortization, including (gains) losses on disposals 8.3 8.0 8.0 8.3 8.2 8.1 8.9 8.1 Interest expense - net 1.1 2.2 2.0 2.7 1.8 2.7 1.5 2.5 Earnings (loss) before income taxes 2.2 5.2 8.5 6.6 10.3 6.8 2.6 (0.6) Net earnings 1.5 3.7 6.1 5.4 7.6 5.4 3.3 7.5 Basic earnings per share 0.05 0.11 0.18 0.16 0.23 0.17 0.10 0.23 Diluted earnings per share 0.05 0.11 0.18 0.16 0.23 0.16 0.09 0.23 Cash generated from operations before non-cash working capital 12.6 13.3 15.3 11.5 17.9 12.4 14.4 13.1 Changes in non- cash operating working capital (3.9) (0.9) 8.9 3.4 8.3 (3.3) 3.4 (3.9) Cash provided by operations 8.7 12.4 24.2 14.9 26.2 9.1 17.8 9.2 Total Assets 382.9 389.0 399.9 390.3 388.8 382.6 394.9 380.1 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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 MET projects and licensing activities results in variances in the Group's quarterly results. For the four quarters ended March 31, 2009, revenue averaged $79.1 million per quarter while for the four quarters ended March 31, 2008, revenue averaged $73.4 million per quarter. For the four quarters ended March 31, 2009, gross profit averaged $26.2 million per quarter while for the four quarters ended March 31, 2008, gross profit averaged $24.6 million per quarter. In addition to business seasonality, the Company's quarterly revenue and gross profit have been affected primarily by the following: - The net impact resulting from the changes in the price of sulphur on revenue and gross profit; and - The impact of foreign exchange fluctuations on revenue, profit and SG&A. 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 17.0% of revenue in the first quarter of 2009. The percentage increase in the first quarter of 2009 is primarily a result of lower revenues, increased expense for the Company's long-term incentive plan resulting from "mark-to-market" adjustments for changes in the underlying share price, severance costs, the impact of foreign exchange on the translation of U.S. denominated SG&A and exchange losses on U.S. denominated net monetary liabilities, and increased personnel related costs in the business units, offset by lower legal costs. Average depreciation and amortization for the quarter ended March 31, 2009 is consistent with the same period in 2008. 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 first quarter 2009 non-cash working capital largely reflects the change in taxes payable and accrued liabilities. 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 March 31, 2009 (In thousands of Industrial Western Corporate dollars) Services Markets MET Support(1) Total ------------------------------------------------------------------------- Earnings (loss) before the undernoted (EBITDA) $ 10,722 $ 5,476 $ 1,044 $ (5,705) $ 11,537 Depreciation 5,758 833 23 70 6,684 Amortization of deferred charges and intangible assets 1,587 - - - 1,587 Interest expense - net - - - 1,109 1,109 ------------------------------------------------------------------------- Earnings (loss) before income taxes 3,377 4,643 1,021 (6,884) 2,157 Income taxes - - - 617 617 ------------------------------------------------------------------------- Net earnings (loss) $ 3,377 $ 4,643 $ 1,021 $ (7,501) $ 1,540 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- For the three months ending March 31, 2008 (In thousands of Industrial Western Corporate dollars) Services Markets MET Support(1) Total ------------------------------------------------------------------------- Earnings (loss) before the undernoted (EBITDA) $ 13,269 $ 5,219 $ 1,170 $ (4,257) $ 15,401 Depreciation, including loss on disposal 5,568 685 29 71 6,353 Amortization of deferred charges and intangible assets 1,661 - - - 1,661 Interest expense - net - - - 2,148 2,148 ------------------------------------------------------------------------- Earnings (loss) before income taxes 6,040 4,534 1,141 (6,476) 5,239 Income taxes - - - 1,559 1,559 ------------------------------------------------------------------------- Net earnings (loss) $ 6,040 $ 4,534 $ 1,141 $ (8,035) $ 3,680 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 1. Summary of Corporate Support ------------------------------------------------------------------------- Three months ending March 31, (In thousands of dollars) 2009 2008 ------------------------------------------------------------------------- Corporate costs $ 3,510 $ 3,789 Long-term incentive plans and Directors DSU's 1,119 (329) Foreign exchange losses 1,076 795 ------------------------------------------------------------------------- Corporate Support costs $ 5,705 $ 4,257 ------------------------------------------------------------------------- ------------------------------------------------------------------------- EBITDA for the first quarter of 2009 was $11.5 million compared to $15.4 million for the same period of 2008. Decreased sales and volumes in Industrial Services and Western Markets, severance costs, and the higher cost of long-term incentive were partially offset by the impact of foreign exchange and the timing of MET project activity. MARSULEX INC. Consolidated Balance Sheets (unaudited) (In thousands of dollars) ------------------------------------------------------------------------- March 31, December 31, 2009 2008 ------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents (note 4) $ 29,691 $ 35,986 Cash held in trust (note 4) 1,385 837 Accounts receivable 36,125 39,285 Inventories (note 5) 3,465 3,425 Future income tax asset 725 725 Prepaid expenses and other assets 1,390 1,955 ------------------------------------------------------------------------- 72,781 82,213 Long-term investments held in trust 900 900 Property, plant and equipment 198,410 201,402 Other assets 4,505 4,417 Intangible assets 22,544 23,570 Goodwill 83,792 82,431 ------------------------------------------------------------------------- $ 382,932 $ 394,933 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 17,392 $ 19,835 Accrued liabilities 21,824 23,851 Income taxes payable 1,304 2,810 Dividends payable to shareholders (note 6) 5,249 5,329 Interest payable 270 362 Current portion of deferred revenue 28,422 28,788 Current portion of long-term debt 6,952 2,041 ------------------------------------------------------------------------- 81,413 83,016 Long-term debt 147,540 150,451 Deferred revenue 9,861 10,220 Employee future benefits 1,808 1,855 Other liabilities 10,210 9,866 Future income tax liability 25,886 25,646 Shareholders' equity: Capital stock 63,663 64,488 Retained earnings 42,069 49,075 Accumulated other comprehensive income 482 316 ------------------------------------------------------------------------- 106,214 113,879 ------------------------------------------------------------------------- $ 382,932 $ 394,933 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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 March 31, 2009 2008 ------------------------------------------------------------------------- Revenue $ 68,452 $ 74,513 Cost of sales and services (excluding depreciation, note 5) 45,296 50,467 ------------------------------------------------------------------------- Gross profit 23,156 24,046 Selling, general, administrative and other costs (note 11) 10,543 7,850 Depreciation 6,684 6,353 Amortization 1,587 1,661 Foreign exchange losses on monetary items 1,076 795 Interest expense - net (note 9) 1,109 2,148 ------------------------------------------------------------------------- Earnings before income taxes 2,157 5,239 Income taxes: Current 316 619 Future 301 940 ------------------------------------------------------------------------- 617 1,559 ------------------------------------------------------------------------- Net earnings $ 1,540 $ 3,680 Other comprehensive income Effect of change in foreign exchange on the translation of net assets of self-sustaining foreign operations, net of tax (note 10) 166 1,516 ------------------------------------------------------------------------- Total comprehensive income $ 1,706 $ 5,196 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Earnings per share (note 7): Basic $ 0.05 $ 0.11 Diluted $ 0.05 $ 0.11 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes to consolidated financial statement MARSULEX INC. Consolidated Statements of Shareholders' Equity (unaudited) (In thousands of dollars, except share amounts) ------------------------------------------------------------------------- Accu- mulated Other Compre- Total Number of hensive Share- Common Capital Retained Income holders' Shares Stock Earnings ("AOCI") Equity ------------------------------------------------------------------------- Balance, December 31, 2007 33,105,498 $ 63,144 $ 49,701 $ (3,588) $ 109,257 Exercise of stock options 16,500 145 - - 145 Dividend (note 6) - - (5,299) - (5,299) Net income for the period - - 3,680 - 3,680 Effect of change in foreign exchange on the translation of net assets of self-sustaining foreign operations, net of tax (note 10) - - - 1,516 1,516 ------------------------------------------------------------------------- Balance, March 31, 2008 33,121,998 $ 63,289 $ 48,082 $ (2,072) $ 109,299 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Balance, December 31, 2008 33,312,748 $ 64,488 $ 49,075 $ 316 $ 113,879 Exercise of stock options 123,250 378 - - 378 Normal Course Issuer Bid purchase and cancellation (620,300) (1,203) (3,294) - (4,497) Dividend (note 6) - - (5,252) - (5,252) Net income for the period - - 1,540 - 1,540 Effect of change in foreign exchange on the translation of net assets of self-sustaining foreign operations, net of tax (note 10) - - - 166 166 ------------------------------------------------------------------------- Balance, March 31, 2009 32,815,698 $ 63,663 $ 42,069 $ 482 $ 106,214 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes to consolidated financial statements MARSULEX INC. Consolidated Statements of Cash Flows (unaudited) (In thousands of dollars) ------------------------------------------------------------------------- Three months ending March 31, 2009 2008 ------------------------------------------------------------------------- Cash provided by (used in): Operating activities: Net earnings $ 1,540 $ 3,680 Items not affecting cash: Depreciation and amortization 8,271 8,014 Foreign exchange loss on long-term debt 2,496 397 Future income taxes 301 940 Accretion of asset retirement obligations 25 24 Other non-cash items 25 251 Change in non-cash operating working capital (3,919) (952) ------------------------------------------------------------------------- Cash provided by operating activities 8,739 12,354 Financing activities: Repayment of long-term debt (496) (462) Issuance of common shares 378 145 Repurchase of common shares (4,497) - Dividend paid (5,330) (5,296) ------------------------------------------------------------------------- (9,945) (5,613) Investing activities: Additions to property, plant and equipment (3,032) (2,146) Increase in other assets (1,584) (4,311) Increase in cash held in trust (548) (47) ------------------------------------------------------------------------- (5,164) (6,504) Foreign exchange loss on cash held in foreign currency 75 128 ------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents (6,295) 365 Cash and cash equivalents - beginning of period 35,986 9,022 ------------------------------------------------------------------------- Cash and cash equivalents - end of period $ 29,691 $ 9,387 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Supplemental cash flow information: Interest paid $ 1,264 $ 2,319 Income taxes paid, net of refunds 1,951 246 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes to consolidated financial statements MARSULEX INC. Notes to Consolidated Financial Statements (unaudited) (In thousands 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 2008 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: Goodwill and intangibles: The Company adopted CICA Section 3064, effective January 1, 2009, which replaced Section 3062, Goodwill and Other Intangible Assets and Section 3450, Research and Development. The new standard provides guidance on the recognition, measurement, presentation and disclosure of goodwill and intangible assets and has been adopted on a retrospective basis. The adoption of this new standard did not have a material impact on the Company's financial statement disclosures or results of operations. EIC 173 - Credit risk and the fair value of financial assets and financial liabilities: In January 2009, the CICA approved EIC 173 Credit Risk and the Fair Value of Financial Assets and Financial Liabilities. This guidance clarified that an entity's own credit risk and the credit risk of the counterparty should be taken into account in determining the fair value of financial assets and financial liabilities including derivative instruments. This guidance is applicable to fiscal periods ending on or after January 20, 2009. The Company has evaluated the new EIC and determined that adoption of the new requirement did not have a material impact on the Company's consolidated financial statements. 4. Cash and cash equivalents, including cash held in trust: --------------------------------------------------------------------- March 31, December 31, 2009 2008 --------------------------------------------------------------------- Bank deposits $ 11,507 $ 9,011 Government treasury bills 19,569 27,812 --------------------------------------------------------------------- $ 31,076 $ 36,823 --------------------------------------------------------------------- --------------------------------------------------------------------- 5. Inventories: Inventories of raw materials, semi-finished products and finished goods are stated at the lower of cost and net realizable value. The measurement of inventories includes the direct costs of materials, labour, cost of conversions and other costs needed to bring inventories to their present location and condition. The cost of conversion includes a systematic allocation of fixed and variable overhead production costs incurred to convert materials into finished goods. Fixed production overhead costs are allocated using normal production capacity of the production facility. Costs are determined using a first in, first out basis. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs for sale and distribution. --------------------------------------------------------------------- March 31, December 31, 2009 2008 --------------------------------------------------------------------- Raw materials and work in progress $ 835 $ 1,029 Finished goods 1,124 877 Supplies inventory 1,506 1,519 --------------------------------------------------------------------- $ 3,465 $ 3,425 --------------------------------------------------------------------- --------------------------------------------------------------------- Cost of sales for the period ended March 31, 2009 does not include $795,200 (2008 - $577,500) of depreciation expense for factory buildings and equipment. 6. Dividend: On March 4, 2009 the Company announced the payment of a cash dividend of 16 cents per share on May 15, 2009 to common shareholders of record at the close of business on April 15, 2009. 7. Earnings per share: The following table sets forth the computation of diluted earnings per share: --------------------------------------------------------------------- Three months ending March 31, 2009 2008 --------------------------------------------------------------------- Numerator: Net earnings available to common shareholders $ 1,540 $ 3,680 --------------------------------------------------------------------- Denominator (shares in thousands): Weighted average common shares outstanding 32,900 33,106 Effect of dilutive securities: Employee stock options 258 430 --------------------------------------------------------------------- Adjusted weighted average shares and assumed conversions 33,158 33,536 --------------------------------------------------------------------- Earnings per share - Diluted $ 0.05 $ 0.11 --------------------------------------------------------------------- --------------------------------------------------------------------- 8. Pensions and Other Post-Retirement Benefits: Components of Net Periodic Benefit Cost for Defined Benefit Plans --------------------------------------------------------------------- Three months ending March 31, Pension Benefits Other Benefits --------------------------------------------------------------------- 2009 2008 2009 2008 --------------------------------------------------------------------- Service cost $ 108 $ 221 $ 3 $ 7 Interest cost 185 208 15 13 Expected return on plan assets (178) (226) - 1 Amortization of actuarial and investment loss (1) 11 (1) - --------------------------------------------------------------------- Post retirement benefits expense $ 114 $ 214 $ 17 $ 21 --------------------------------------------------------------------- --------------------------------------------------------------------- 9. Net interest expense: --------------------------------------------------------------------- Three months ending March 31, 2009 2008 --------------------------------------------------------------------- Interest expense $ 1,175 $ 2,205 Interest income (66) (57) --------------------------------------------------------------------- $ 1,109 $ 2,148 --------------------------------------------------------------------- --------------------------------------------------------------------- 10. Effect of change in foreign exchange on the translation of net assets of self-sustaining operations, net of tax: --------------------------------------------------------------------- Three months ending March 31, 2009 2008 --------------------------------------------------------------------- Foreign exchange gain on the translation of net assets of self-sustaining operations $ 166 $ 1,909 Future tax expense on the translation of U.S. dollar denominated debt - (393) --------------------------------------------------------------------- $ 166 $ 1,516 --------------------------------------------------------------------- --------------------------------------------------------------------- 11. Stock-based compensation: Performance Share Units ("PSU's") and Deferred Share Units ("DSU's") are accounted for using the intrinsic value method such that the value of the share units at the vesting date, including a dividend credit, together with the subsequent changes in the common share price in relation to the unit issue price are recorded as compensation expense and included in selling, general, administrative and other costs ("SG&A"). --------------------------------------------------------------------- Three months ending March 31, 2009 2008 --------------------------------------------------------------------- Expense/(Recovery) - Director DSU's $ 186 $ (102) Expense/(Recovery) - PSU's 933 (227) --------------------------------------------------------------------- $ 1,119 $ (329) --------------------------------------------------------------------- --------------------------------------------------------------------- --------------------------------------------------------------------- March 31, December 31, 2009 2008 Number of Liability Number of Liability Units valued at Units valued at Outstanding $8.80 Outstanding $8.80 --------------------------------------------------------------------- PSUs 389,820 $ 3,430 347,265 $ 2,778 DSUs 495,564 4,361 528,465 4,228 --------------------------------------------------------------------- --------------------------------------------------------------------- 12. Financial instruments: Categories of financial assets and liabilities: --------------------------------------------------------------------- March 31, 2009 --------------------------------------------------------------------- Accounting Fair Market Carrying Policy Value Value --------------------------------------------------------------------- Cash and cash equivalents in trust Held-for-trading $ 31,076 $ 31,076 Accounts Loans and receivable receivable 36,125 36,125 Long-term investments held in trust Held-for-trading 900 900 Accounts payable, accrued liabilities and other liabilities Other liabilities 49,426 49,426 Long-term debt, senior secured term loan and revolvers Held-for-trading 121,817 121,817 Long-term loan, Fort McMurray Facility Other liabilities 33,176 32,675 --------------------------------------------------------------------- --------------------------------------------------------------------- --------------------------------------------------------------------- December 31, 2008 --------------------------------------------------------------------- Accounting Fair Market Carrying Policy Value Value --------------------------------------------------------------------- Cash and cash equivalents in trust Held-for-trading $ 36,823 $ 36,823 Accounts Loans and receivable receivable 39,285 39,285 Long-term investments held in trust Held-for-trading 900 900 Accounts payable, accrued liabilities and other liabilities Other liabilities 53,552 53,552 Long-term debt, senior secured term loan and revolvers Held-for-trading 119,321 119,321 Long-term loan, Fort McMurray Facility Other liabilities 33,690 33,171 --------------------------------------------------------------------- --------------------------------------------------------------------- 13. Business segments: The Company's activities are divided into four reportable segments. The three operating segments are: Industrial Services, Western Markets, and MET. 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. MET 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 March 31 Industrial (In thousands Services Western Markets MET of dollars) 2009 2008 2009 2008 2009 2008 ------------------------------------------------------------------------- Revenue from external customers $ 39,873 $ 45,303 $ 16,009 $ 18,217 $ 12,570 $ 10,993 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Gross profit $ 14,308 $ 15,900 $ 6,277 $ 5,871 $ 2,571 $ 2,275 SG&A(1) 3,586 2,631 801 652 1,527 1,105 Foreign exchange losses - - - - - - ------------------------------------------------------------------------- Earnings (loss) before the under noted $ 10,722 $ 13,269 $ 5,476 $ 5,219 $ 1,044 $ 1,170 Depreciation, including loss on disposal 5,758 5,568 833 685 23 29 Amortization of other charges and intangible assets 1,587 1,661 - - - - Net Interest expense - - - - - - ------------------------------------------------------------------------- Earnings (loss) before income taxes $ 3,377 $ 6,040 $ 4,643 $ 4,534 $ 1,021 $ 1,141 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Capital expenditures $ 2,444 $ 796 $ 572 $ 1,258 $ - $ - ------------------------------------------------------------------------- ------------------------------------------------------------------------- Total assets before goodwill and intangible assets(2) $205,018 $210,568 $ 32,688 $ 35,733 $ 4,696 $ 2,862 Goodwill and intangible assets, net of accumulated amortization (2) 95,545 95,389 4,468 4,468 6,323 6,144 ------------------------------------------------------------------------- Total assets(2) $300,563 $305,957 $ 37,156 $ 40,201 $ 11,019 $ 9,006 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ----------------------------------------------------- For the three months ended Inter-segment March 31 Revenue Corporate (In thousands Support Total of dollars) 2009 2008 2009 2008 ----------------------------------------------------- Revenue from external customers $ - $ - $ 68,452 $ 74,513 ----------------------------------------------------- ----------------------------------------------------- Gross profit $ - $ - $ 23,156 $ 24,046 SG&A(1) 4,629 3,462 10,543 7,850 Foreign exchange losses 1,076 795 1,076 795 ----------------------------------------------------- Earnings (loss) before the under noted $ (5,705) $ (4,257) $ 11,537 $ 15,401 Depreciation, including loss on disposal 70 71 6,684 6,353 Amortization of other charges and intangible assets - - 1,587 1,661 Net Interest expense 1,109 2,148 1,109 2,148 ----------------------------------------------------- Earnings (loss) before income taxes $ (6,884) $ (6,476) $ 2,157 $ 5,239 ----------------------------------------------------- ----------------------------------------------------- Capital expenditures $ 16 $ 92 $ 3,032 $ 2,146 ----------------------------------------------------- ----------------------------------------------------- Total assets before goodwill and intangible assets(2) $ 34,194 $ 39,769 $276,596 $288,932 Goodwill and intangible assets, net of accumulated amortization (2) - - 106,336 106,001 ----------------------------------------------------- Total assets(2) $ 34,194 $ 39,769 $382,932 $394,933 ----------------------------------------------------- ----------------------------------------------------- (1) Selling, general, administrative and other costs. (2) 2008 assets are at December 31st.

For further information:

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

Organization Profile

MARSULEX INC.

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