Marsulex announces strong second quarter 2008 results



    TORONTO, July 30 /CNW/ - Marsulex Inc. (TSX: MLX) today announced results
for the three and six months ended June 30, 2008. Revenue for the quarter was
$89.7 million compared with $77.3 million in 2007, an increase of 16.0%. Gross
profit increased 4.8% to $26.3 million from $25.1 million in 2007. Earnings
before income taxes for the quarter were $8.5 million compared to $6.6 million
in 2007. Net earnings for the quarter were $6.1 million ($0.18 per share)
compared to $5.4 million in 2007 ($0.16 per share).

    
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                               Three
    (in millions of    months ending              Six months ending
     dollars, except         June 30,                       June 30,
     per share)       2008      2007     % chg      2008       2007    % chg
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    Revenue        $   89.7  $   77.3     16.0%  $  164.3  $  145.8     12.7%
    Gross profit       26.3      25.1      4.8%      50.4      49.0      2.9%
    Earnings before
     income taxes       8.5       6.6     28.8%      13.8       8.6     60.5%
    Net earnings        6.1       5.4     13.0%       9.8       6.8     44.1%
    Earnings
     per share
     - basic           0.18      0.16     12.5%      0.29      0.21     38.1%

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    Commenting on the results, Marsulex President and Chief Executive
Officer, Mr. Laurie Tugman said, "Overall, our businesses continued to perform
well in the second quarter, with Industrial Services and MET (Marsulex
Environmental Technologies - previously the Power Generation segment)
reporting improvements in gross profit. Western Markets posted solid revenue
growth but this was more than offset by higher raw material input costs,
particularly sulphur."
    Mr. Tugman said the results for the first half of the year demonstrates
the strength of Marsulex's diverse base of operations and the capacity to
deliver reliable and consistent earnings and cash flow. "Despite indications
of a slowing North American economy, we remain confident in the Company's
business prospects. The new FGD contracts awarded to MET earlier this year are
now contributing to revenue, and opportunities for our Industrial Services
Group continue to be active and promising."
    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
second quarter 2008 results will be webcast live on www.marsulex.com and
www.newswire.ca on Thursday, July 31, 2008 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. To the extent any
forward-looking information in this news release constitutes future-oriented
financial information or financial outlooks, within the meaning of securities
laws, such information is being provided to demonstrate the potential of the
Company and readers are cautioned that this information may not be appropriate
for any other purpose. Future-oriented financial information and financial
outlooks, as with forward-looking information generally, are based on the
Assumptions and subject to the Risks.
    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 June 30, 2008 for Marsulex
Inc. ("Marsulex" or the "Company") and includes information available to July
29, 2008. 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, 2007 annual
report.
    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. To the extent any forward-looking
information constitutes future-oriented financial information or financial
outlooks, within the meaning of securities laws, such information is being
provided to demonstrate the potential of the Company and readers are cautioned
that this information may not be appropriate for any other purpose.
Future-oriented financial information and financial outlooks, as with
forward-looking information generally, are based on the Assumptions and
subject to the Risks. 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 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 interim 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 June 30, 2008 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. In
addition, the CEO and CFO concluded that the Company's internal controls over
financial reporting have been designed to provide reasonable assurance that
our financial reporting is reliable. There have been no changes to the design
of internal controls over financial reporting that occurred during the most
recent interim period ended June 30, 2008 that have materially or are
measurably likely to materially affect the internal controls over financial
reporting.

    COMPANY PROFILE

    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" - formerly 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.

    
    RESULTS OF CONSOLIDATED OPERATIONS

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                      Three months ending          Six months ending
    (in thousands of              June 30,                   June 30,
     dollars, except                          %                           %
     per share)             2008     2007    chg       2008      2007    chg
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    Revenue              $89,741  $77,286   16.1%  $164,254  $145,792   12.7%
    Gross Profit          26,323   25,096    4.9%    50,368    48,953    2.9%
    Gross Profit as a
     percent of revenue   29.30%   32.50%            30.70%    33.60%
    Selling, general,
     administrative and
     other costs (SG&A),
     including foreign
     exchange              7,855    7,684    2.2%    16,499    17,073   -3.4%
    Net refinancing
     expenses                  -        -     n/a         -       823     n/a
    Depreciation and
     amortization          8,003    8,255   -3.1%    16,017    16,679   -4.0%
    Interest expense
     - net                 1,946    2,527  -23.0%     4,095     5,735  -28.6%
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    Earnings before
     income taxes          8,519    6,630   28.5%    13,757     8,643   59.2%
    Income taxes           2,431    1,272   91.1%     3,990     1,867  113.7%
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    Net earnings
                         $ 6,088  $ 5,358   13.6%   $ 9,767   $ 6,776   44.1%
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    Total Comprehensive
     Income
                         $ 5,822  $ 4,151   40.3%   $11,017   $ 5,355  105.8%
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    Earnings per share
     --Basic             $  0.18  $  0.16   12.5%   $  0.29   $  0.21   38.1%
    Earnings per share
     --Diluted           $  0.18  $  0.16   12.5%   $  0.29   $  0.20   45.0%

    Cash dividends
     per share           $  0.16  $  0.15           $  0.32   $  0.30
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    Cash generated from
     operations before
     non-cash changes
     to working capital  $15,308  $11,524   32.8%   $28,615   $21,434   33.5%
    Changes in non-cash
     working capital       8,870    3,399  161.0%     7,918       759  943.2%
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    Cash provided by
     operations          $24,178  $14,923   62.0%   $36,533   $22,193   64.6%

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    Revenues for the quarter and the first six months of 2008 were higher
than the same periods in 2007 despite the impact of foreign exchange on U.S.
denominated revenues ($4.6 million for the quarter and $11.0 million for the
six month period). The primary reasons for the revenue increases were higher
sales of sulphur in Industrial Services, and increased revenue from sulphur
enhanced products in Western Markets. Revenue improvements for the six month
period also reflect higher project activity for MET.
    Increases in gross profit were more moderate due to the lag in pass
throughs of certain raw material input costs, most notably sulphur. The
increases for both the quarter and the first six months of 2008 also reflected
the negative impact of foreign exchange, $1.1 million for the quarter and $2.9
million for the first six months of 2008.

    
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                                     Three months ending   Six months ending
                                                 June 30,            June 30,
    (in thousands of dollars)             2008      2007      2008      2007
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    Selling general
     administrative, and other costs
      SGA, excluding long-term
       incentive plan                 $  7,525  $  7,833  $ 15,704  $ 16,817
      Long-term incentive plan             641     1,850       312     2,659
      Foreign exchange (gain) loss        (311)   (1,999)      483    (2,403)
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                                      $  7,855  $  7,684  $ 16,499  $ 17,073
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    As a % of revenue                     8.8%      9.9%     10.0%     11.7%
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    SGA costs for the second quarter and the first six months of 2008
(excluding long-term incentive plan expenses) were below 2007 costs due to
lower legal and consulting costs. Incentive plan expenses for 2007 reflect
higher mark-to-market adjustments for changes in the Company's underlying
share price (an increase of $4.50 per share in the first six months of 2007).
    Foreign exchange gains were recognized on an approximate 10% appreciation
in the closing value of the Canadian dollar in 2007 as compared to an
approximate 3% decrease in value against the U.S. dollar in 2008. A more
detailed analysis of the Company's exposure to foreign exchange fluctuations
is included under Risks and Uncertainties in this MD&A.

    
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                        Three months ending         Six months ending
                                    June 30,                  June 30,
    (in thousands of                             %                         %
     dollars)                 2008     2007     chg     2008     2007     chg
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    Interest expense       $ 2,002  $ 2,716  -26.3%  $ 4,208  $ 6,392  -34.2%
    Interest income            (56)    (189) -70.4%     (113)    (657) -82.8%
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    Net interest expense   $ 1,946  $ 2,527  -23.0%  $ 4,095  $ 5,735  -28.6%
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    Weighted average
     interest rate            5.0%     6.6%             5.3%     7.1%
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    Lower net interest expense for the second quarter and the first six
months of 2008 reflects reduced interest rates that resulted from both the
March 1, 2007 refinancing, as well as recent interest rate reductions both in
Canada and the U.S.
    The increase in pre-tax earnings for the second quarter and first six
months of 2008 reflects the overall increase in the business, and reduced
depreciation, amortization, and interest expense.
    The effective tax rate for the second quarter and the first six months of
2008 was 29% compared to 19% and 21% for the second quarter and first six
months of 2007 respectively. (The effective tax rate for the second quarter of
2007 reflects decreases in substantively enacted rates.) The 2008 tax rate,
when compared to the statutory rate of 34%, reflects the utilization of
previously unrecognized U.S. tax loss carry forwards.
    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.
Historically, the Company has paid cash taxes of less than $2 million per
year.
    Total comprehensive income for the second quarter and first six months of
2008 increased 40% and 106% respectively when compared to the same periods in
2007. This reflects net earnings plus the effect of the changes of the U.S.
dollar against the Canadian 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           Six months ending
                                  June 30,                    June 30,
    (in thousands                             %                           %
     of dollars)            2008     2007    chg       2008      2007    chg
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    Revenue              $52,134  $42,368   23.1%  $ 97,437  $ 88,243   10.4%
    Gross Profit          17,661   15,914   11.0%    33,560    32,374    3.7%
    Gross Profit as a
     percent of revenue    33.9%    37.6%             34.4%     36.7%

    Capital
     expenditures(1)     $ 1,556  $ 1,616   -3.7%  $  2,352  $  5,922  -60.3%

    Total assets(2)                                $323,011  $317,921    1.6%
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    (1) The above capital expenditures represent cash expenditures for
        capital assets. There was no accrual at June 30, 2007 for capital
        costs against $3.9 million accrued for costs not yet paid at
        December 31, 2006.
    (2) 2007 assets are at December 31.
    

    Revenue and gross profit for the second quarter of 2008 increased by
23.1% and 11% respectively from the second quarter revenue and gross profit in
2007, with increased revenue from sulphur resulting from the increase in the
international price of sulphur being offset by the impact of foreign exchange
($3.0 million on revenue and $0.8 million on gross profit) and reduced Petcoke
volumes. For the first six months of 2008, revenue and gross profit increased
10.4% and 3.7% respectively reflecting increased sulphur revenue offset by the
impact of foreign exchange ($7.6 million on revenue and $2.2 million on gross
profit) and reduced Petcoke and hazardous waste volumes.
    Gross profit as a percent of revenue for the second quarter and the first
six months of 2008 when compared to the same periods in 2007 reflects the cost
associated with the sale of sulphur.
    In December 2007, the Company recorded charges for asset impairment
relating to the intangible assets on certain Venezuela Petcoke contracts of
its 50/50 joint venture ($3.2 million). The charges were recorded as a result
of notification from certain Venezuelan controlled refineries that the
contracts were to be terminated. Negotiations regarding the termination of
these contracts are continuing, and the Company continues to work with its
joint venture partner to resolve the termination of the contracts. Economic
conditions in Venezuela continue to be volatile and the finalization of the
negotiations has been delayed. As at June 30, 2008, the net book value of
joint venture net assets was approximately $2 million and related to working
capital items.

    Western Markets Group

    Western Markets produces and provides sulphur-enhanced chemicals to
industrial customers and supplies aluminum sulphate "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-enhanced 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; alum; sodium bisulphate; aqua ammonia; carbon disulphide; hydrogen
sulphide; and sulphur.

    
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                     Three months ending           Six months ending
                                 June 30,                    June 30,
    (in thousands of                           %                          %
     dollars)              2008     2007      chg      2008     2007     chg
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    Revenue             $20,090  $16,971    18.4%   $38,307  $31,471    21.7%
    Gross Profit          5,465    6,293   -13.2%    11,336   11,777    -3.7%
    Gross Profit as
     a percent of
     revenue              27.2%    37.1%              29.6%    37.4%

    Capital
     expenditures       $ 2,559  $ 1,388    84.4%   $ 3,817  $ 1,774   115.2%
    Total assets(1)                                 $42,140  $36,840    14.4%
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    (1) 2007 assets are at December 31.
    

    The increase in revenue for the first six months of 2008 reflected
increased prices relating to the cost pass through of sulphur and other raw
materials used to produce sulphur enhanced products partially offset by lower
sales of water treatment chemicals. The decline in gross profit as well as
gross profit as a percent of revenue reflects the impact of increased costs,
primarily sulphur, fuel, and other input costs.
    The increase in capital expenditures included maintenance capital
expenditures at the Group's Prince George facility.

    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           Six months ending
                                 June 30,                    June 30,
    (in thousands                              %                          %
     of dollars)           2008     2007      chg      2008     2007      chg
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    Revenue             $17,517  $17,947    -2.4%   $28,510  $26,078     9.3%
    Gross Profit          3,197    2,889    10.7%     5,472    4,802    14.0%
    Gross Profit as a
     percent of revenue   18.3%    16.1%              19.2%    18.4%

    Capital
     expenditures       $     -  $     9      n/a   $     -  $     9      n/a
    Total assets(1)                                 $14,099  $12,022    17.3%
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    (1) 2007 assets are at December 31.
    

    The Group's variance in revenue and gross profit reflects primarily the
timing of project activity. The impact of the strengthening of the Canadian
dollar on the Group's 2008 U.S. revenue was $1.6 million for the quarter and
$3.4 million for the first six months of 2008. The impact on the Group's U.S.
gross profit was $0.3 million for the quarter and $0.7 million for the first
six months of 2008.
    The increase in total assets is the result of billable work relating to
the timing of project activity as well as foreign exchange on the U.S. dollar
denominated assets.
    During 2008, the Group was awarded two contracts in North America with
revenues in excess of $120 million to design, supply and install wet Flue Gas
Desulphurization (FGD) and other systems. Engineering has commenced, and
start-up of the FGD systems is expected to occur within 18-36 months.

    LIQUIDITY AND CAPITAL RE

SOURCES Total assets for the Company were $399.9 million at June 30, 2008 compared to $380.1 million at December 31, 2007. Accounts receivable increased to $52.5 million at June 30, 2008 from $43.3 million at December 31, 2007 which reflects higher revenue in the first six months of 2008 as well as an increase of unbilled project related work. The Company holds $1.1 million of Asset-Backed Commercial Paper ("ABCP") recorded as long-term investments held in trust. The Company continues to classify these as long-term assets until such time as the liquidity of the market has returned. The ultimate fair value of the assets underlying the ABCP is uncertain, and the final outcome of the restructuring plan approved by the note holders on April 25, 2008 is not presently determinable; however, based on the information available to date, the Company continues to record a $200,000 provision to reflect its estimate of the fair market value of impairment. The Company has sufficient credit facilities to satisfy its financial obligations as they come due, and there will not be a material adverse impact on its business as a result of its holding of ABCP. The net book value of property, plant, and equipment at June 30, 2008 decreased to $203.3 million from a December 31, 2007 balance of $208.9 million. The decrease is the result of the capital additions during the first six months of 2008 and the impact of foreign exchange on U.S. dollar denominated assets being more than offset by depreciation expense. Deferred charges and other assets increased to $18.2 million at June 30, 2008 from the December 31, 2007 balance of $9.5 million as the Company continues to work with its customers on engineering design studies at the Montreal facility. The cost relating to these activities, including certain site preparation work, is not to exceed $25 million and will be funded by the customers. Intangible assets decreased $2.6 million from the December 31, 2007 balance of $27.1 million reflecting the amortization expense for the first six months of 2008. Goodwill increased to $74.6 million from the December 31, 2007 balance of $73.4 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 at June 30, 2008 were $86.6 million compared to the December 31, 2007 balance of $66.3 million. The increase can be attributed to an increase in the current portion of deferred revenues, resulting from MET's project related activity, as well as the increase in overall accounts payable reflecting the overall business activity. Financial Condition ------------------------------------------------------------------------- June 30, December 31, 2008 2007 ------------------------------------------------------------------------- Cash including current portion of cash held in trust (in millions of dollars) $ 17.4 $ 9.7 Debt (in millions of dollars) $ 156.0 $ 157.8 Net debt(1) (in millions of dollars) $ 138.6 $ 148.1 Debt to equity 1.4x 1.4x Net debt(1) to gross profit(2) 1.4x 1.5x Net debt(1) to equity 1.3x 1.3x Interest coverage (Gross Profit(2) to interest expense(2)) 10.6x 8.5x ------------------------------------------------------------------------- (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 generates positive cash flows from operations that are used to fund maintenance and expansion capital projects, to meet debt obligations, and to 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. At June 30, 2008, the following remained undrawn under the Company's lines of credit. ------------------------------------------------------------------------- Approved Limit Undrawn ------------------------------------------------------------------------- Revolving Term Facility $ 70,000 $ 53,000 Revolving Operating Facility 20,000 20,000 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Total debt at June 30, 2008 was $156.0 million, down from $157.8 million as at December 31, 2007, reflecting loan repayments offset by the impact of foreign exchange on the U.S. dollar denominated debt. The decrease in net debt of $9.5 million from the December 31, 2007 balance of $148.1 million largely reflects the impact of loan repayments and increase in operating cash flows offset by the impact of foreign exchange on U.S. dollar denominated debt. Marsulex's net debt to EBITDA ratio was 2.1 times (December 31, 2007 - 2.4 times) for the latest twelve months ended June 30, 2008. EBITDA is discussed in the Supplemental Financial Information section of this MD&A. At June 30, 2008, the Company had met all of its debt related covenants. Working Capital The Company's working capital and current ratio were as follows: ------------------------------------------------------------------------- June 30, December 31, June 30, 2008 2007 2007 ------------------------------------------------------------------------- Working capital(1) (in thousand of dollars) $ (8,188) $ (5,990) $ (6,946) Current ratio(1) 0.91 to 1.0 0.91 to 1.0 0.90 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 temporary fluctuations in working capital. Share Capital Outstanding ------------------------------------------------------------------------- As at July 30, June 30, December 31, 2008 2008 2007 ------------------------------------------------------------------------- Number of common shares 33,270,998 33,270,998 33,105,498 Number of options 477,165 477,165 642,665 ------------------------------------------------------------------------- ------------------------------------------------------------------------- For the three months ended June 30, 2008 the Company issued 149,000 common shares for cash proceeds of $1,052,000 upon the exercise of stock options. For the six months ended June 30, 2008 the Company issued 165,500 common shares for cash proceeds of $1,197,200 upon the exercise of stock options. 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. The Company's share price information is as follows: ------------------------------------------------------------------------- As at July 29, June 30, December 31, June 30, 2008 2008 2007 2007 ------------------------------------------------------------------------- Closing share price $ 12.75 $ 13.00 $ 14.49 $ 13.25 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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 Six months ending June 30, June 30, (in thousands % % of dollars) 2008 2007 chg 2008 2007 chg ------------------------------------------------------------------------- Fees to Birch Hill Equity Partners $ 104 $ 104 - $ 207 $ 207 - Fees to firms of certain Directors 3,816 2,994 27.5% 4,229 3,301 28.1% ------------------------------------------------------------------------- ------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS Cash Flow from Operations For the second quarter and the first six months of 2008, the Company generated $24.2 million and $36.5 million respectively in cash from operations compared to $14.9 million and $22.2 million for the same periods in 2007. The increases were primarily the result of increased operating earnings and deferred revenues. Cash and cash equivalents at June 30, 2008 were $16.6 million, up $7.6 million from $9.0 million at December 31, 2007. Cash on hand and cash generated from operations, were utilized to fund the investment in capital additions and deferred charges, and to pay dividends. Capital Expenditures ------------------------------------------------------------------------- Three months Six months ending ending (in thousands June 30, June 30, of dollars) 2008 2007 2008 2007 ------------------------------------------------------------------------- Expansion projects(1) $ - $ 350 $ 4 $ 4,290 Maintenance capital(2) 4,601 2,384 6,797 4,399 ------------------------------------------------------------------------- Total capital expenditures $ 4,601 $ 2,734 $ 6,801 $ 8,689 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) The above capital expenditures represent cash expenditures for capital assets. There was no accrual at June 30, 2007 for capital costs not yet paid against $3.9 million accrued at December 31, 2006. (2) Including expenditures for placement cells (recorded as deferred charges). 2007 expansion capital expenditures relate to the completion of the Montreal expansion. RISKS & UNCERTAINTIES There have been no material changes in the Company's business risks described in the December 31, 2007 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 Six months ending June 30, June 30, % % 2008 2007 chg 2008 2007 chg ------------------------------------------------------------------------- Average U.S. exchange rates 0.9931 0.9104 9.1% 0.9947 0.8810 12.9% Closing U.S. exchange rates(1) 0.9817 0.9404 4.4% 0.9817 0.9404 4.4% ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) The December 31, 2007 closing rate was 1.0120; December 31, 2006 closing rate was 0.8582 The Company recorded the following foreign exchange loss (gains): ------------------------------------------------------------------------- Three months ending Six months ending June 30, June 30, (in thousands of dollars) 2008 2007 2008 2007 ------------------------------------------------------------------------- Foreign exchange loss (gain) on net monetary items $ (219) $(1,104) $ 178 $(1,407) Foreign exchange loss (gain) on Senior Secured Term Loan (92) (895) 305 (996) ------------------------------------------------------------------------- $ (311) $(1,999) $ 483 $(2,403) ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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 the hazardous waste treatment and disposal operation. U.S. $60 million of the Senior Secured Credit Facility is considered to be a hedge of the Company's net investment in self-sustaining operations. The foreign exchange loss for the first six months of 2008 relating to this portion of the term loan is approximately $1.5 million and 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 first six months ending June 30, 2008: ------------------------------------------------------------------------- Six months ending (in thousand of dollars) June 30, 2008 ------------------------------------------------------------------------- Gross profit $ (228) SG&A costs 48 Foreign exchange on net monetary items(1) 115 Foreign exchange on Senior Secured Term Loan 100 ------------------------------------------------------------------------- Earnings from operations before the under noted 35 Depreciation and amortization of deferred charges and intangible assets 42 Net interest expense 18 ------------------------------------------------------------------------- Earnings before income taxes $ 95 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Assumes U.S. denominated monetary items remain unchanged. CHANGES IN ACCOUNTING POLICIES Financial Instruments - Disclosures On January 1, 2008, the Company adopted Section 3862, Financial Instruments - Disclosures. This Section describes the required disclosures related to the significance of financial instruments on the entity's financial position and performance and the nature and extent of risks arising from financial instruments to which the entity is exposed and how the entity manages those risks. This Section complements the principles of recognition, measurement and presentation of financial instruments of Sections 3855, Financial Instruments - Recognition and Measurement, 3863, Financial Instruments - Presentation and 3864, Hedges. In adopting this Section, the Company now presents sensitivity information regarding accounts receivable / credit risk, foreign exchange risk, liquidity risk, commodity prices risk, interest rate risk, and long-term investment risk. Financial Instruments - Presentation On January 1, 2008, the Company adopted Section 3863, Financial Instruments - Presentation, replacing Section 3861, Financial Instruments - Disclosure and Presentation. This Section establishes standards for presentation of financial instruments and non-financial derivatives. Capital Disclosures On January 1, 2008, the Company adopted Section 1535, Capital Disclosures. This Section establishes standards for disclosing information about an entity's capital and how it is managed to enable users of financial statements to evaluate the entity's objectives, policies and procedures for managing capital. The adoption of the above noted standards did not have a material impact on the consolidated financial statements of the Company, other than the additional disclosures, required as a result of the adoption. Inventory The Company adopted CICA Section 3031, Inventories, effective January 1, 2008. Section 3031 prescribes the accounting treatment of inventories and provides guidance on the determination of cost and its subsequent recognition as an expense, and provides guidance on the cost formulas used to assign costs to inventories. These changes did not have a significant impact on the Company's financial position, earnings or cash flows. 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 and indirect costs (variable and fixed). 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. The Company uses a standard cost system which is reviewed and updated quarterly. Adjustments made are charged to the Consolidated Statements of Operations and Comprehensive Income during the quarter in which the standard costs are changed. Cost of goods sold for the quarter and six months ended June 30, 2008 does not include $675,500 and $1,253,000 of depreciation expense relating to factory buildings and equipment. New Accounting Policies 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 will have no impact on the Company's consolidated financial statements. 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 for critical areas such as revenue recognition; property, plant, and equipment; and income taxes; - determining the financial reporting implication of the differences; - developing a plan for implementing the changes; and - monitoring the progress of the implementation. OUTLOOK The Company continues to experience steady financial performance despite the slowdown in the North American economy and the relative strength of the Canadian dollar against the U.S. dollar. The long-term growth prospects continue to be positive with robust business development activity. QUARTERLY OPERATING PERFORMANCE Selected Quarterly Financial Information ------------------------------------------------------------------------- (In millions of dollars, except per share amounts) Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 2008 2008 2007 2007 2007 2007 2006 2006 ------------------------------------------------------------------------- Revenue 89.7 74.5 73.0 68.7 77.3 68.5 69.4 68.3 Gross Profit 26.3 24.0 24.0 25.4 25.1 23.9 27.5 24.8 SG&A and other costs 7.8 8.6 10.9 7.9 7.7 9.4 9.6 7.8 Other (income) expenses - - 3.4 - - 0.8 2.8 - Depreciation and amortization, including (gains) losses on disposals 8.0 8.0 8.1 8.1 8.3 8.4 9.1 10.0 Interest expense 2.0 2.2 2.5 2.7 2.7 3.7 4.1 4.3 Earnings (loss) before income taxes 8.5 5.2 (0.6) 6.8 6.6 2.0 2.3 3.1 Net earnings (loss) 6.1 3.7 7.5 5.4 5.4 1.4 (1.4) 2.6 Basic earnings (loss) per share 0.18 0.11 0.23 0.17 0.16 0.04 (0.04) 0.08 Diluted earnings (loss) per share 0.18 0.11 0.23 0.16 0.16 0.04 (0.05) 0.08 Cash generated from operations before non-cash working capital 15.3 13.3 13.1 12.4 11.5 9.9 12.2 12.4 Changes in non-cash operating working capital 8.9 (0.9) (3.9) (3.3) 3.4 (2.6) 8.8 9.3 Cash provided by operations 24.2 12.4 9.2 9.1 14.9 7.3 21.0 21.7 Total Assets 399.9 389.0 380.1 382.6 390.3 393.4 439.9 423.7 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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's project and licensing activities results in variances in the Group's quarterly results. For the four quarters ended June 30, 2008, revenue averaged $76.5 million per quarter while for the four quarters ended June 30, 2007, revenue averaged $70.9 million per quarter. For the four quarters ended June 30, 2008, gross profit averaged $25.0 million per quarter while for the four quarters ended June 30, 2007, gross profit averaged $25.3 million per quarter. In addition to business seasonality, the Company's quarterly revenue and gross profit have been affected primarily by the following: - Increase of project activity with MET projects; - The net impact resulting from the increase in raw material costs, primarily sulphur; and, - The impact of foreign exchange. 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 8.8% of revenue in the second quarter of 2008 on higher revenues. The second quarter of 2007 includes the impact of foreign exchange gains of $2.0 million and $1.0 million respectively while the fourth quarter of 2007 reflected the cost of legacy litigation. The decrease in average depreciation and amortization is related to reduced depreciation on certain assets that are fully depreciated, reduced amortization on deferred financing costs resulting from the change in accounting policy in 2007 and the reduction in intangible assets resulting from the 2007 impairment charge. 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 second quarter 2008 non-cash working capital reflects the change in the current portion of deferred revenue. 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 June 30, 2008 (In thousands of Industrial Western Corporate dollars) Services Markets MET Support Total ------------------------------------------------------------------------- Earnings (loss) before the undernoted (EBITDA) $ 14,978 $ 4,807 $ 2,192 $ (3,509) $ 18,468 Depreciation 5,482 681 28 71 6,262 Amortization of deferred charges and intangible assets 1,741 - - - 1,741 Interest expense - net - - - 1,946 1,946 ------------------------------------------------------------------------- Earnings (loss) before income taxes $ 7,755 $ 4,126 $ 2,164 $ (5,526) $ 8,519 Income taxes - - - 2,431 2,431 ------------------------------------------------------------------------- Net earnings (loss) $ 7,755 $ 4,126 $ 2,164 $ (7,956) $ 6,089 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- For the three months ending June 30, 2007 (In thousands of Industrial Western Corporate dollars) Services Markets MET Support Total ------------------------------------------------------------------------- Earnings (loss) before the undernoted (EBITDA) $ 13,170 $ 5,653 $ 1,979 $ (3,390) $ 17,412 Depreciation, including loss on disposal 5,781 624 25 71 6,501 Amortization of deferred charges and intangible assets 1,754 - - - 1,754 Interest expense - net - - - 2,527 2,527 ------------------------------------------------------------------------- Earnings (loss) before income taxes $ 5,635 $ 5,029 $ 1,954 $ (5,988) $ 6,630 Income taxes - - - 1,272 1,272 ------------------------------------------------------------------------- Net earnings (loss) $ 5,635 $ 5,029 $ 1,954 $ (7,260) $ 5,358 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- For the six months ending June 30, 2008 (In thousands of Industrial Western Corporate dollars) Services Markets MET Support Total ------------------------------------------------------------------------- Earnings (loss) before the undernoted (EBITDA) $ 28,246 $ 0,026 $ 3,362 $ (7,765) $ 33,869 Depreciation, including loss on disposal 11,050 1,367 57 142 12,616 Amortization of deferred charges and intangible assets 3,401 - - - 3,401 Gain realized on redemption of Senior Subordinated Notes - - - - - Cost of refinancing - - - - - Interest expense - net - - - 4,095 4,095 ------------------------------------------------------------------------- Earnings (loss) before income taxes $ 13,795 $ 8,659 $ 3,305 $(12,002) $ 13,757 Income taxes - - - 3,990 3,990 ------------------------------------------------------------------------- Net earnings (loss) $ 13,795 $ 8,659 $ 3,305 $(15,992) $ 9,767 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- For the six months ending June 30, 2007 (In thousands of Industrial Western Corporate dollars) Services Markets MET Support Total ------------------------------------------------------------------------- Earnings (loss) before the undernoted (EBITDA) $ 26,455 $ 10,539 $ 2,859 $ (7,973) $ 31,880 Depreciation, including loss on disposal 11,724 1,250 51 142 13,167 Amortization of deferred charges and intangible assets 3,512 - - - 3,512 Interest expense - net - - - (177) (177) Cost of refinancing 1,000 1,000 Interest expense - net - - - 5,735 5,735 ------------------------------------------------------------------------- Earnings (loss) before income taxes $ 11,219 $ 9,289 $ 2,808 $(14,673) $ 8,643 Income tax recovery - - - 1,867 1,867 ------------------------------------------------------------------------- Net earnings (loss) $ 11,219 $ 9,289 $ 2,808 $(16,540) $ 6,776 ------------------------------------------------------------------------- ------------------------------------------------------------------------- EBITDA for the second quarter of 2008 was $18.5 million compared to $17.4 million for the same period of 2007 and EBITDA for the first six months of 2008 was $33.9 million compared to $31.9 million for the same period of 2007. Increased year over year contributions from the Industrial Services, MET and the lower cost of long-term incentive were offset by the impact of foreign exchange. MARSULEX INC. Consolidated Balance Sheets (unaudited) (In thousands of dollars) ------------------------------------------------------------------------- June 30, December 31, 2008 2007 ------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents (note 5) $ 16,603 $ 9,022 Cash held in trust 781 687 Accounts receivable 52,536 43,337 Inventories (note 3) 3,420 2,973 Future income tax asset 491 491 Prepaid expenses and other assets 4,566 3,813 ------------------------------------------------------------------------- 78,397 60,323 Long-term investments held in trust (note 4(f)) 900 900 Property, plant and equipment 203,317 208,929 Deferred charges and other assets 18,220 9,531 Intangible assets 24,451 27,053 Goodwill 74,573 73,410 ------------------------------------------------------------------------- $ 399,858 $ 380,146 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 29,198 $ 22,267 Accrued liabilities 27,157 28,342 Income taxes payable 2,842 1,642 Dividends payable to shareholders (note 7) 5,322 5,297 Interest payable 380 515 Current portion of deferred revenue 19,718 6,352 Current portion of long-term debt 1,968 1,898 ------------------------------------------------------------------------- 86,585 66,313 Long-term debt 154,074 155,941 Deferred revenue 10,993 13,329 Employee future benefits 2,068 2,009 Other liabilities 8,034 7,855 Future tax liability 27,254 25,442 Shareholders' equity: Capital stock 64,341 63,144 Retained earnings 48,847 49,701 Accumulated other comprehensive income (loss) (2,338) (3,588) ------------------------------------------------------------------------- 110,850 109,257 ------------------------------------------------------------------------- $ 399,858 $ 380,146 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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 Six months ending June 30, June 30, 2008 2007 2008 2007 ------------------------------------------------------------------------- Revenue $ 89,741 $ 77,286 $ 164,254 $ 145,792 Cost of sales and services 63,418 52,190 113,886 96,839 ------------------------------------------------------------------------- Gross profit 26,323 25,096 50,368 48,953 Selling, general, administrative and other costs 8,166 9,683 16,016 19,476 Depreciation 6,262 6,501 12,616 13,167 Amortization 1,741 1,754 3,401 3,512 Foreign exchange loss (gain) on monetary items (219) (1,104) 178 (1,407) Foreign exchange loss (gain) on long-term debt (92) (895) 305 (996) Gain realized on redemption of Senior Subordinated Notes - - - (177) Cost of refinancing - - - 1,000 Interest expense - net (note 10) 1,946 2,527 4,095 5,735 ------------------------------------------------------------------------- Earnings before income taxes 8,519 6,630 13,757 8,643 Income taxes: Current 1,080 1,830 1,699 2,013 Future 1,351 (558) 2,291 (146) ------------------------------------------------------------------------- 2,431 1,272 3,990 1,867 ------------------------------------------------------------------------- Net earnings 6,088 5,358 9,767 6,776 Other comprehensive income Effect of change in foreign exchange on the translation of net assets of self- sustaining operations, net of tax (note 11) (266) (1,207) 1,250 (1,421) ------------------------------------------------------------------------- Total comprehensive income $ 5,822 $ 4,151 $ 11,017 $ 5,355 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Earnings per share (note 8): Basic $ 0.18 $ 0.16 $ 0.29 $ 0.21 Diluted $ 0.18 $ 0.16 $ 0.29 $ 0.20 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes to consolidated financial statement MARSULEX INC. Consolidated Statements of Shareholders' Equity (unaudited) (In thousands of dollars, except share amounts) ------------------------------------------------------------------------- Accumulated Other Total Number of Compre- Share- Common Capital Retained hensive holders' Shares Stock Earnings Income Equity ------------------------------------------------------------------------- Balance, December 31, 2006 32,634,898 $ 61,084 $ 51,691 $ 147 $ 112,922 Adjustment to opening retained earnings, relating to changes in accounting policies, net of tax - - (1,496) - (1,496) Exercise of stock options 462,600 2,030 - - 2,030 Dividends - - (9,905) - (9,905) Net income for the period - - 6,776 - 6,776 Effect of change in foreign exchange on the translation of net assets of self-sustaining foreign operations, net of tax (note 11) - - - (1,421) (1,421) ------------------------------------------------------------------------- Balance, June 30, 2007 33,097,498 $ 63,114 $ 47,066 $ (1,274) $ 108,906 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Balance, December 31, 2007 33,105,498 $ 63,144 $ 49,701 $ (3,588) $ 109,257 Exercise of stock options 165,500 1,197 - - 1,197 Dividends - - (10,621) - (10,621) Net income for the period - - 9,767 - 9,767 Effect of change in foreign exchange on the translation of net assets of self-sustaining foreign operations, net of tax (note 11) - - - 1,250 1,250 ------------------------------------------------------------------------- Balance, June 30, 2008 33,270,998 $ 64,341 $ 48,847 $ (2,338) $ 110,850 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes to consolidated financial statements MARSULEX INC. Consolidated Statements of Cash Flows (unaudited) (In thousands of dollars) ------------------------------------------------------------------------- Three months ending Six months ending June 30, June 30, 2008 2007 2008 2007 ------------------------------------------------------------------------- Cash provided by (used in): Operating activities: Net earnings $ 6,088 $ 5,358 $ 9,767 $ 6,776 Items not affecting cash: Depreciation and amortization 8,003 8,255 16,017 16,679 Gain realized on redemption of Senior Subordinated Notes - - - (177) Foreign exchange loss (gain) on long-term debt (92) (895) 305 (996) Future income taxes 1,351 (558) 2,291 (146) Accretion of asset retirement obligations 24 23 48 46 Other non-cash items (66) (659) 187 (748) Change in non-cash operating working capital 8,870 3,399 7,918 759 ------------------------------------------------------------------------- Cash provided by operating activities 24,178 14,923 36,533 22,193 Financing activities: Increase (decrease) in long-term debt (3,000) (3,000) (3,000) 31,494 Repayment of long-term debt (470) (438) (932) (71,963) Issuance of capital stock 1,052 936 1,197 2,030 Dividends paid (5,299) (4,940) (10,595) (4,940) ------------------------------------------------------------------------- (7,717) (7,442) (13,330) (43,379) Investing activities: Additions to property, plant and equipment (4,193) (3,082) (6,340) (7,839) Increase in deferred charges (5,000) (317) (9,311) (1,595) Increase (decrease) in cash held in trust (47) 16 (94) (23) ------------------------------------------------------------------------- (9,240) (3,383) (15,745) (9,457) Foreign exchange loss on cash held in foreign currency (5) (546) 123 (546) ------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents 7,216 3,552 7,581 (31,189) Cash and cash equivalents - beginning of period 9,387 5,298 9,022 40,039 ------------------------------------------------------------------------- Cash and cash equivalents - end of period $ 16,603 $ 8,850 $ 16,603 $ 8,850 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Supplemental cash flow information: Interest paid $ 2,005 $ 2,727 $ 4,234 $ 6,154 Income taxes paid, net of refunds 443 788 689 3,060 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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 2007 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: Inventories: The Company adopted CICA Section 3031, Inventories, effective January 1, 2008. Section 3031 prescribes the accounting treatment of inventories and 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 changes did not have a significant impact on the Company's financial position, earnings or cash flows. 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 and indirect costs (variable and fixed). 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. The Company uses a standard cost system which is reviewed and updated quarterly. Adjustments made are charged to the Consolidated Statements of Operations and Comprehensive Income during the quarter in which the standard costs are changed. Cost of goods sold for the three months and six months ended June 30, 2008 does not include $675,500 and $1,253,000 of depreciation expense relating to factory buildings and equipment. 4. Financial instruments: Overview: The Company has exposure to the following risks from its use of financial instruments: - Accounts recievable/credit risk - Foreign exchange risk - Liquidity risk - Commodity price risk - Interest rate risk - Long-term investment risk This note presents information about the Company's exposure to each of the above risks, the Company's objectives, policies and processes for measuring and managing risk, and the Company's management of capital. Specific notes represent quantitative disclosures included with these consolidated financial statements. The Company has a comprehensive risk management framework that is used to identify and analyze the risks faced by the Company, to set appropriate limits and controls, and to monitor risks and adherence to limits. This framework, as well as the related management policies and systems, are reviewed regularly to reflect changes in market conditions and the Company's activities. The Board of Directors, through its various committees, has overall responsibility for overseeing how management monitors compliance with the Company's risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks faced by the Company. a) Accounts receivable/credit risk: Credit risk stems primarily from the potential of customers to meet their contractual obligations. The amounts reported in the balance sheet are net of allowances for doubtful accounts, estimated by the Company's management based on prior experience and their assessment of the current economic environment. The Company analyzes and reviews the financial health of the current customers on an ongoing basis and applies rigorous evaluation procedures to all new accounts. Credit reports and financial statements are used to set credit limits for each customer. The Company provides its products and services under long-term contracts primarily to large industrial customers; the largest customer represents 11.1% of the total revenues for the six months ended June 30, 2008. In the period ending June 30, 2008, the maximum credit risk to which the Company is exposed represents the fair value of accounts receivable. Management regularly reviews the collectability of accounts receivable and when collection is not reasonable or certain, adjusts the allowance for doubtful accounts accordingly. --------------------------------------------------------------------- June 30, December 31, 2008 2007 --------------------------------------------------------------------- Accounts receivable, gross $ 52,932 $ 43,962 Allowance for doubtful accounts (396) (625) --------------------------------------------------------------------- Accounts receivable, net $ 52,536 $ 43,337 --------------------------------------------------------------------- --------------------------------------------------------------------- --------------------------------------------------------------------- June 30, December 31, 2008 2007 --------------------------------------------------------------------- % of accounts received denominated in U.S. dollars 58.0% 50.7% % of accounts received which are past due, but not impaired 5.3% 5.4% --------------------------------------------------------------------- --------------------------------------------------------------------- b) Foreign exchange risk: 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) revenues and expenses; (2) monetary assets and liabilities, working capital and the U.S. denominated portion of the Senior Secured Term Loan; and (3) the self-sustaining operations including the portion of the Senior Secured Term Loan designated as a hedge. The Company's exposure to foreign currency risk relating to its financial instruments was as follows based on notional amounts: --------------------------------------------------------------------- June 30, December 31, 2008 2007 --------------------------------------------------------------------- U.S. dollar net working capital liability $ (11,516) $ (7,314) U.S. dollar portion of Senior Secured Term Loan (10,000) (10,000) --------------------------------------------------------------------- Net U.S. dollar net monetary items affecting net earnings $ (21,516) $ (17,314) --------------------------------------------------------------------- --------------------------------------------------------------------- U.S. dollar portion of Senior Secured Term Loan, hedge on investment in self sustaining operations $ (60,000) $ (60,000) U.S. dollar net investment in self sustaining operations 79,661 76,920 --------------------------------------------------------------------- --------------------------------------------------------------------- U.S. dollar net monetary items affecting comprehensive income $ 19,661 $ 16,920 --------------------------------------------------------------------- --------------------------------------------------------------------- $70 million of the Company's Senior Secured Term Loan is denominated in U.S. dollars. 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 the hazardous waste treatment and disposal operation. The remaining 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 2008 foreign exchange gain of approximately $2 million relating to this portion of the loan is recorded, net of tax, as part of comprehensive income. A one-cent increase of the Canadian dollar against its U.S. dollar counterpart on these U.S. dollar denominated assets and liabilities, assuming these amounts remain unchanged, is as follows: --------------------------------------------------------------------- Net Equity Earnings --------------------------------------------------------------------- June 30, 2008, effect of foreign exchange gain (loss) $ (197) $ 215 --------------------------------------------------------------------- --------------------------------------------------------------------- c) Liquidity risk: Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company's approach to managing liquidity is to ensure that it will always have sufficient liquidity to meet its liabilities when due, without incurring unacceptable losses or risking damage to the Company's reputation. The Company generates positive cash flows from operations that are used to fund maintenance and expansion capital projects and to meet debt obligations and to 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. At June 30, 2008, the following remained undrawn under the Company's lines of credit. --------------------------------------------------------------------- Approved Limit Undrawn --------------------------------------------------------------------- Revolving Term Facility $ 70,000 $ 53,000 Revolving Operating Facility 20,000 20,000 --------------------------------------------------------------------- --------------------------------------------------------------------- Contractual Commitments: ------------------------------------------------------------------------- (In thousands of There- dollars) 2008 2009 2010 2011 2012 after Total ------------------------------------------------------------------------- 7.3% Long- term Loan(1) 966 2,041 2,195 2,361 2,540 24,034 34,137 Senior Secured Credit Facility(2), - - 18,400 20,700 82,805 - 121,905 Interest on loans(2) 3,144 7,420 6,961 5,829 2,417 6,733 32,504 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Long-term Loan to finance the construction of the Fort McMurray facility is secured by the assets of a wholly owned subsidiary of the Company, Marsol Canada LP. If the subsidiary fails to perform its operating obligations, the Company will become responsible for the operation of the facility and will service the debt with the cash flows generated from the facility. The loan bears interest at a fixed rate of 7.3% per annum with monthly repayments of principal, which commenced in January 2005, due over 15 years. (2) Interest on U.S. denominated loans is calculated using the June 30, 2008 closing rate of 1.0186 Other commitments include: --------------------------------------------------------------------- June 30, December 31, 2008 2007 --------------------------------------------------------------------- Net post-retirement benefits liability 2,068 2,009 Asset retirement obligations 1,742 1,694 Other liabilities 6,292 6,161 Future tax liability 27,254 25,442 --------------------------------------------------------------------- --------------------------------------------------------------------- Off Balance Sheet Arrangements: All of the Company's subsidiaries have been consolidated and are reflected in the Company's financial statements. The Company does not have any off balance sheet arrangements. d) Commodity price risk: Industrial chemicals sold by the Company are subject to market price fluctuations. In addition, supply and demand imbalances can lead to isolated price erosion. The Company's end-use contracts generally have a "meet or release" provision. As a result, competitive pressure can cause the Company to lower selling prices in order to retain the volume. The Company attempts to reduce its exposure to market price fluctuations through contracts where commodity price exposure is either shared with or born entirely by the customer. Although the Company plans to continue entering into new contracts and renegotiating existing contracts that include minimum volume requirements or guaranteed fees in order to increase the stability of its cash flows, there can be no assurance that it will be successful in renegotiating existing contracts or entering into new contracts with these terms. e) Interest rate risk: The Company is exposed to changes in interest rates, which may impact its cost of borrowing. As at June 30, 2008 approximately 78% of the Company's total debt is variable rate debt and subject to near-term interest rate fluctuations. 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, refinanced on March 1, 2007 and 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 nil to 125 basis points. At June 30, 2008, the interest rates were: U.S. LIBOR loan (U.S. $70 million) - 2.46% plus 125 basis points Cdn. Bankers' Acceptance loan - 3.17% plus 125 basis points Cdn. Prime rate loan - 4.75% plus 25 basis points Based on the outstanding balances at June 30, 2008, a 1% increase in LIBOR, Bankers' Acceptances and prime rate would increase the Company's interest payments by U.S. $713,000, $503,000 and $3,000, respectively. f) Long-term investments risk: The Company holds investments in the amount of $1,100,000 ($900,000 net of provision), which were invested in Canadian third party Asset- Backed Commercial Paper ("ABCP"). 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. The ultimate fair value of the assets underlying the ABCP is uncertain and the final outcome of the restructuring plan approved by the noteholders on April 25, 2008 is not presently determinable; however, based on the information available to date, the Company continues to have a $200,000 provision to reflect its estimate of the fair market value of the investments. The ultimate amount recovered from the investment in ABCP will not be material to the Company's consolidated financial statements. The Company has sufficient credit facilities to satisfy its financial obligations as they come due, and there will not be a material adverse impact on its business as a result of its holdings of ABCP. g) Fair values: The carrying value of the following financial instruments at June 30, 2008 approximates their fair value: Cash and cash equivalents, including cash held in trust Accounts receivable Long-term investment held in trust Accounts payable and accrued liabilities Long term debt Senior Secured Term Loan and revolvers Long-term Loan - Fort McMurray Facility 5. Cash and cash equivalents, including cash held in trust: --------------------------------------------------------------------- June 30, December 31, 2008 2007 --------------------------------------------------------------------- Bank deposits $ 9,336 $ 8,557 Government treasury bills 8,048 1,152 --------------------------------------------------------------------- $ 17,384 $ 9,709 --------------------------------------------------------------------- --------------------------------------------------------------------- 6. Capital management: The Company generates positive cash flows from operations that are used to fund maintenance and expansion capital projects and to meet debt obligations and to 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. The Company's primary objectives of managing capital are: - Ensure the longevity of its capital to support continued operations and shareholder returns. - Safeguard its ability to continue as a going concern and to meet its obligations. - To seek additional financing to fund its growth strategy. Although, the Company is not subject to any externally imposed capital requirements and does not presently utilize any quantitative measures to monitor its capital, it does adhere to certain financial debt covenants and ratio's prescribed by its debt agreements. These include interest coverage ratios and leverage ratios. 7. Dividend: On June 12, 2008 the Company announced the payment of a cash dividend of 16 cents per share on August 15, 2008 to common shareholders of record at the close of business on July 15, 2008. 8. Earnings (loss) per share: The following table sets forth the computation of diluted earnings per share: --------------------------------------------------------------------- Three months ending Six months ending June 30, June 30, 2008 2007 2008 2007 --------------------------------------------------------------------- Numerator: Net earnings available to common shareholders $ 6,088 $ 5,358 $ 9,767 $ 6,776 --------------------------------------------------------------------- Denominator (shares in thousands): Weighted average common shares outstanding 33,188 32,987 33,147 32,835 Effect of dilutive securities: Employee stock options 404 510 418 572 --------------------------------------------------------------------- Adjusted weighted average shares and assumed conversions 33,592 33,497 33,565 33,407 --------------------------------------------------------------------- Earnings per share - Diluted $ 0.18 $ 0.16 $ 0.29 $ 0.20 --------------------------------------------------------------------- --------------------------------------------------------------------- 9. Pensions and Other Post-Retirement Benefits (impact of current market conditions): Components of Net Periodic Benefit Cost for Defined Benefit Plans --------------------------------------------------------------------- Three months ending June 30, Other Benefits Pension Benefits --------------------------------------------------------------------- (in thousands of dollars) 2008 2007 2008 2007 --------------------------------------------------------------------- Service cost $ 221 $ 206 $ 7 $ 7 Interest cost 208 187 13 11 Expected return on plan assets (226) (240) 1 2 Amortization of actuarial and investment loss 11 53 - 1 --------------------------------------------------------------------- Post retirement benefits expense $ 214 $ 206 $ 21 $ 21 --------------------------------------------------------------------- --------------------------------------------------------------------- --------------------------------------------------------------------- Six months ending June 30, Other Benefits Other Benefits --------------------------------------------------------------------- (in thousands of dollars) 2008 2007 2008 2007 --------------------------------------------------------------------- Service cost $ 442 $ 412 $ 13 $ 14 Interest cost 416 374 26 22 Expected return on plan assets (452) (480) 2 4 Amortization of actuarial and investment loss 22 106 - 2 --------------------------------------------------------------------- Post retirement benefits expense $ 428 $ 412 $ 41 $ 42 --------------------------------------------------------------------- --------------------------------------------------------------------- 10. Net interest expense: --------------------------------------------------------------------- Three months ending Six months ending June 30, June 30, (In thousands of dollars) 2008 2007 2008 2007 --------------------------------------------------------------------- Interest expense $ 2,002 $ 2,716 $ 4,208 $ 6,392 Interest income (56) (189) (113) (657) --------------------------------------------------------------------- $ 1,946 $ 2,527 $ 4,095 $ 5,735 --------------------------------------------------------------------- --------------------------------------------------------------------- 11. Effect of change in foreign exchange on the translation of net assets of self-sustaining operations, net of tax: --------------------------------------------------------------------- Three months ending Six months ending June 30, June 30, (In thousands of dollars) 2008 2007 2008 2007 --------------------------------------------------------------------- Foreign exchange gain (loss) on the translation of net assets of self- sustaining operations $ (175) $ (2,092) $ 948 $ (2,429) Future tax (expense) recovery (91) 885 302 1,008 --------------------------------------------------------------------- $ (266) $ (1,207) $ 1,250 $ (1,421) --------------------------------------------------------------------- --------------------------------------------------------------------- 12. Stock-based compensation: Under the Company's long-term incentive compensation plan the Company grants Performance Share Units (PSU's) to the certain employees. The number of units granted and the vesting period, typically three years, is determined by the Board of Directors. At the end of the vesting period the PSU's are automatically converted to Deferred Share Units (DSU's) or, at the holder's election, into cash. These awards 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 expenses (SGA). For the period ending June 30, 2008, the Company recorded the following amounts relating to this balance. --------------------------------------------------------------------- Three months ending Six months ending June 30, June 30, (In thousands of dollars) 2008 2007 2008 2007 --------------------------------------------------------------------- Expense - Director DSU's $ 108 $ 258 $ 6 $ 479 Expense - PSU's 533 1,592 306 2,180 --------------------------------------------------------------------- $ 641 $ 1,850 $ 312 $ 2,659 --------------------------------------------------------------------- --------------------------------------------------------------------- --------------------------------------------------------------------- June 30, 2008 December 31, 2007 Number of Liability Number of Liability Units valued at Units valued at Outstanding $13.00 Outstanding $14.49 --------------------------------------------------------------------- PSUs 403,752 $ 5,249 308,824 $ 4,475 DSUs 357,242 4,644 423,090 6,131 --------------------------------------------------------------------- --------------------------------------------------------------------- Based on the outstanding units at June 30, 2008, a $1 change in the Company's share price would result in an approximate $0.8 million change to SGA. 13. Business segments: The Company's activities are divided into four reportable segments. The three operating segments are: Industrial Services, Western Markets, and MET (Marsulex Environmental Technologies - formerly 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. MET provides environmental systems and services for air quality compliance, primarily to electric utilities, and also to petrochemical and general industrial customers worldwide. MARSULEX INC. Notes to Consolidated Financial Statements (unaudited) ------------------------------------------------------------------------- For the three months ended June 30 (in thousands of Industrial Services Western Markets MET dollars) 2008 2007 2008 2007 2008 ------------------------------------------------------------------------- Revenue from external customers $ 52,134 $ 42,368 $ 20,090 $ 16,971 $ 17,517 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Gross profit $ 17,661 $ 15,914 $ 5,465 $ 6,293 $ 3,197 SG&A(1) 2,683 2,744 658 640 1,005 Foreign exchange losses (gains) - - - - - ------------------------------------------------------------------------- Earnings (loss) before the under noted $ 14,978 $ 13,170 $ 4,807 $ 5,653 $ 2,192 Depreciation, including loss on disposal 5,482 5,781 681 624 28 Amortization of deferred charges and intangible assets 1,741 1,754 - - - Gain realized on redemption of Senior Subordinated Notes - - - - - Cost of refinancing - - - - - Net Interest expense - - - - - ------------------------------------------------------------------------- Earnings (loss) before income taxes $ 7,755 $ 5,635 $ 4,126 $ 5,029 $ 2,164 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Capital expenditures $ 1,556 $ 1,616 $ 2,559 $ 1,388 $ - ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- For the three months ended June 30 Inter-segment Revenue (in thousands of MET Corporate Support Total dollars) 2007 2008 2007 2008 2007 ------------------------------------------------------------------------- Revenue from external customers $ 17,947 $ - $ - $ 89,741 $ 77,286 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Gross profit $ 2,889 $ - $ - $ 26,323 $ 25,096 SG&A(1) 910 3,820 5,389 8,166 9,683 Foreign exchange losses (gains) - (311) (1,999) (311) (1,999) ------------------------------------------------------------------------- Earnings (loss) before the under noted $ 1,979 $ (3,509) $ (3,390) $ 18,468 $ 17,412 Depreciation, including loss on disposal 25 71 71 6,262 6,501 Amortization of deferred charges and intangible assets - - - 1,741 1,754 Gain realized on redemption of Senior Subordinated Notes - - - - - Cost of refinancing - - - - - Net Interest expense - 1,946 2,527 1,946 2,527 ------------------------------------------------------------------------- Earnings (loss) before income taxes $ 1,954 $ (5,526) $ (5,988) $ 8,519 $ 6,630 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Capital expenditures $ 9 $ 78 $ 69 $ 4,193 $ 3,082 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- For the six months ended June 30 (in thousands of Industrial Services Western Markets MET dollars) 2008 2007 2008 2007 2008 ------------------------------------------------------------------------- Revenue from external customers $ 97,437 $ 88,243 $ 38,307 $ 31,471 $ 28,510 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Gross profit $ 33,560 $ 32,374 $ 11,336 $ 11,777 $ 5,472 SG&A(1) 5,314 5,919 1,310 1,238 2,110 Foreign exchange losses (gains) - - - - - ------------------------------------------------------------------------- Earnings (loss) before the under noted $ 28,246 $ 26,455 $ 10,026 $ 10,539 $ 3,362 Depreciation, including loss on disposal 11,050 11,724 1,367 1,250 57 Amortization of deferred charges and intangible assets 3,401 3,512 - - - Gain realized on redemption of Senior Subordinated Notes - - - - - Cost of Refinancing - - - - - Net Interest expense - - - - - ------------------------------------------------------------------------- Earnings (loss) before income taxes $ 13,795 $ 11,219 $ 8,659 $ 9,289 $ 3,305 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Capital expenditures $ 2,352 $ 5,922 $ 3,817 $ 1,774 $ - ------------------------------------------------------------------------- ------------------------------------------------------------------------- Total assets before goodwill and intangible assets(2) $ 233,566 $ 226,884 $ 37,672 $ 32,372 $ 8,988 Goodwill and intangible assets, net of accumulated amortization(2) 89,445 91,037 4,468 4,468 5,111 ------------------------------------------------------------------------- Total assets(2) $ 323,011 $ 317,921 $ 42,140 $ 36,840 $ 14,099 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- For the six months ended June 30 Inter-segment Revenue (in thousands of MET Corporate Support Total dollars) 2007 2008 2007 2008 2007 ------------------------------------------------------------------------- Revenue from external customers $ 26,078 $ - $ - $ 164,254 $ 145,792 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Gross profit $ 4,802 $ - $ - $ 50,368 $ 48,953 SG&A(1) 1,943 7,282 10,376 16,016 19,476 Foreign exchange losses (gains) - 483 (2,403) 483 (2,403) ------------------------------------------------------------------------- Earnings (loss) before the under noted $ 2,859 $ (7,765) $ (7,973) $ 33,869 $ 31,880 Depreciation, including loss on disposal 51 142 142 12,616 13,167 Amortization of deferred charges and intangible assets - - - 3,401 3,512 Gain realized on redemption of Senior Subordinated Notes - - (177) - (177) Cost of Refinancing - - 1,000 - 1,000 Net Interest expense - 4,095 5,735 4,095 5,735 ------------------------------------------------------------------------- Earnings (loss) before income taxes $ 2,808 $ (12,002) $ (14,673) $ 13,757 $ 8,643 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Capital expenditures $ 9 $ 171 $ 134 $ 6,340 $ 7,839 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Total assets before goodwill and intangible assets(2) $ 7,064 $ 20,608 $ 13,363 $ 300,834 $ 279,683 Goodwill and intangible assets, net of accumulated amortization(2) 4,958 - - 99,024 100,463 ------------------------------------------------------------------------- Total assets(2) $ 12,022 $ 20,608 $ 13,363 $ 399,858 $ 380,146 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Selling, general, administrative and other costs. (2) 2007 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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