Marsulex announces another quarter of solid growth in revenue and gross profit



    TORONTO, Aug. 1 /CNW/ - Marsulex Inc. (TSX: MLX) today announced results
for the three and six months ended June 30, 2007. Revenue for the quarter was
$77.3 million compared with $65.0 million in 2006, an increase of 19%. Gross
profit increased 28% to $25.1 million from $19.6 million in 2006. Earnings
before income taxes for the quarter were $6.6 million compared to $3.2 million
in 2006. Net earnings for the quarter were $5.4 million ($0.16 per share)
compared to $5.3 million in 2006 ($0.16 per share) with 2006 reflecting
approximately $0.10 per share in tax recoveries.


    
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                             Three months ending           Six months ending
    (in millions of                      June 30,                    June 30,
     dollars, except                          %                          %
     per share)            2007      2006    chg       2007      2006   chg
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    Revenue            $   77.3  $   65.0   18.9%  $  145.8  $  111.9   30.3%
    Gross profit           25.1      19.6   28.1%      49.0      36.7   33.5%
    Earnings before
     income taxes           6.6       3.2    106%       8.6       4.2    105%
    Net earnings            5.4       5.3    1.9%       6.8       5.9   15.3%
    Earnings per share
     - basic               0.16      0.16    n/a       0.21      0.18   16.7%
    Cash dividends per
     share                 0.15         -    n/a       0.30         -    n/a
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    Commenting on the results, Marsulex President and Chief Executive Officer,
Mr. Laurie Tugman, said, "The increase reflected higher contributions from
each of the Company's three operating groups. The additional revenue and
earnings from the Montreal facility expansion together with strong
contributions from Western Markets' water treatment products business and
Power Generation's Lower Colorado River Authority (LCRA) project were the main
drivers of the solid results for the quarter."

    Highlights

    -   The increase in second quarter gross margin for the Industrial
        Services Group reflects primarily the contribution from the Montreal
        facility expansion partially offset by lower remediation projects
        volumes for Stablex during the quarter.

    -   The spring "run-off" in Alberta resulted in higher sales of water
        treatment chemicals for the Western Markets Group.

    -   Power Generation's revenue and gross profit reflected increased
        project activity including the LCRA project.

    -   On June 5, 2007 the Company announced its second quarterly dividend
        which will be paid on August 15, 2007 to shareholders of record on
        close of business on July 16, 2007.

    -   On July 11, 2007, the Company announced it has agreed to provide an
        engineering design study for additional sulphur processing capacity
        at its Montreal facility.
    

    Mr. Tugman also noted, "The prospects for further growth in our markets
continue to be robust; however, the timing of any new project activity remains
difficult to predict."

    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 2007 results will be webcast live on www.marsulex.com and
www.newswire.ca on Thursday, August 2, 2007 at 10:00 a.m. Eastern Time.

    This news release may contain forward-looking statements. These
statements are based on current views and expectations that are subject to
risks, uncertainties and assumptions that are difficult to predict, including
the impact of acquisitions, risks, uncertainties and assumptions relating to
the timing and market acceptance of future products, competition in the
Company's markets, the Company's reliance on customers, fluctuations in
currency exchange rates, commodity prices or interest rates, the Company's
ability to maintain good relations with its employees, changes in laws or
regulations regarding the environment or other environmental liabilities, the
Company's ability to integrate acquisitions and the Company's ability to
protect its intellectual property.
    Actual results might differ materially from results suggested in any
forward-looking statements whether as a result of new information, future
developments or otherwise. Additional information identifying risks,
uncertainties and assumptions is contained in the Company's filings with the
securities regulatory authorities, which are available at www. sedar.com. All
forward-looking statements are expressly qualified in their entirety by this
Cautionary Statement.

    Management's Discussion and Analysis

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

    RESPONSIBILITY OF MANAGEMENT AND THE BOARD OF DIRECTORS

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

    COMPANY PROFILE AND BUSINESS SEGEMENTATION

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

    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)            2007      2006    chg       2007      2006    chg
    -------------------------------------------------------------------------

    Revenue            $ 77,286  $ 65,027   18.9%  $145,792  $111,894   30.3%
    Gross Profit         25,096    19,558   28.3%    48,953    36,737   33.3%
    Gross Profit as a
     percent of revenue    32.5%     30.1%             33.6%     32.8%
    Selling, general,
     administrative and
     other costs (SG&A),
     including foreign
     exchange &
     refinancing costs    7,684     5,900   29.6%    17,073    12,673   34.7%
    Depreciation,
     amortization and
     gain on redemption
     of debt              8,255     8,046    2.6%    17,502    15,187   15.2%
    Interest expense
     - net                2,527     2,459    2.8%     5,735     4,711   21.7%
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    Earnings before
     income taxes         6,630     3,153    110%     8,643     4,166    107%
    Income taxes          1,272    (2,115)   n/a      1,867    (1,766)   n/a
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    Net earnings       $  5,358  $  5,268    1.7%  $  6,776  $  5,932   14.2%
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    Total Comprehensive
     Income            $  4,151  $  5,014  -17.2%  $  5,353  $  5,805   -7.8%
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    Earnings per share
     -Basic            $   0.16  $   0.16    n/a   $   0.21  $   0.18   16.7%
    Earnings per share
     -Diluted          $   0.16  $   0.16    n/a   $   0.20  $   0.18   11.1%

    Cash dividends
     per share         $   0.15         -    n/a   $   0.30         -    n/a
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    Cash generated
     from operations
     before non-cash
     changes to
     working capital   $ 11,524  $  9,561          $ 21,434  $ 17,469
    Changes in non-cash
     working capital      3,399    (3,692)             (759)    1,719
    Cash provided by
     operations          14,923     5,869            22,193    19,188
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    The increase in revenue for the second quarter of 2007 included the Power
Generation Group's Lower Colorado River Authority ("LCRA") project. For the
first six months of 2007 the increase in revenue reflects the contribution
from the Power Generation projects, the increase resulting from the Petcoke
Services acquisition and the contribution from the Montreal facility
expansion.
    Gross profit increased in the second quarter of 2007 as a result of the
Montreal facility expansion and the mix and timing of Power Generation
projects. For both the second quarter and first six months of 2007 the
increase of gross profit as a percent of revenue largely reflects higher
margins for services provided by the Industrial Services Group offset by the
mix between Power Generation project revenues and technology licensing
revenues.
    Increased SG&A costs in the second quarter largely reflects $1.7 million
in higher costs for the long-term incentive plans measured against the
quarter-end closing price for Marsulex's common stock (a 22% increase in stock
price for the quarter and a 51% increase in stock price for the year) as well
as increased legal, general consulting and compliance activities primarily in
Corporate ($1.3 million). For the first six months in 2007, the increase in
SG&A primarily reflects the increase in Corporate costs relating to the higher
costs for the long-term incentive plans ($2.6 million) and legal and
consulting activities as well as the SG&A costs for the acquired business.
    During the quarter the Canadian dollar strengthened by approximately 5%
resulting in a $2.0 million foreign exchange gain (2006 - $0.9 million). A
substantial portion of the increase in the foreign exchange rate took place
late in the second quarter and therefore did not have a material impact to the
business during the first half of the year. If the Canadian dollar continues
to appreciate against the U.S. dollar, the impact to the second half of 2007
could be significant. A more detailed analysis of the Company's exposure to
foreign exchange fluctuations is included under Risk Factors in this MD&A.
    Increases in depreciation expense in the second quarter can be attributed
to the Montreal facility expansion while the increase for the first six months
also reflects the higher capital assets associated with the Petcoke Services
acquisition.
    Amortization expense for the second quarter and for the first six months
includes the amortization associated with the intangible assets resulting from
the Petcoke Services acquisition offset by the elimination of the amortization
associated with the deferred financing costs for the old credit facilities in
2007 ($0.5 million for the six months ended June 30).


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

    Interest expense   $  2,716  $ 3,993  -31.98%  $  6,392  $  7,503 -14.81%
    Interest
     capitalized              -   (1,348)    n/a          -    (2,435)   n/a
    Interest income        (189)    (186)   1.61%      (657)     (357) 84.03%
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    Net interest
     expense           $  2,527  $ 2,459    2.77%  $  5,735  $  4,711  21.74%
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    Interest expense in the second quarter and for the first six months of
2007 reflects the reduced interest rates (overall weighted average rate of
6.5%) resulting from the March 1st refinancing. The interest capitalized in
the first quarter and for the first half of 2006 relates to the Montreal
expansion project which was completed in the third quarter of 2006.
    The increase in the period's pre-tax earnings reflects the overall
increase in the business from both organic growth and acquisitions.
    The Company's effective tax rate for the second quarter and first half of
2007 was approximately 19% and 22% respectively (as compared to the Company's
statutory rate of 36%). These rates reflect the utilization of previously
unrecognized U.S. tax loss carry forwards and a $0.5 million recovery on its
future tax liability as a result of changes in the Canadian Federal tax rates
that were substantively enacted during the second quarter. In the second
quarter of 2006 the Company recorded a $2.9 million recovery on future tax
liability for changes in the tax rates substantively enacted during that
period. The recently announced change to the Canadian Federal tax rates
becomes effective in 2011.
    Cash tax is dependent on the Company's earnings by legal entity, the
availability of the tax losses and accelerated tax depreciation on property,
plant and equipment and other deductions to reduce taxable income. During the
first half of 2007 the Company paid cash taxes of $3.1 million including
installments of $1.1 million for 2006. Historically, the average annual cash
taxes were less than $1 million for the past three years.
    The increases in net earnings for the second quarter and for the first
half of 2007 reflect the higher earnings from the business, including foreign
exchange gains, offset by the impact of the long-term incentive plan and the
costs associated with the refinancing resulting from the new accounting
pronouncements, as well as by higher depreciation and net interest costs. The
higher taxes resulted from the lower recovery on substantively enacted tax
rates.
    Total comprehensive income for the second quarter and first six months of
2007 decreased 17% and 8% respectively when compared to the same periods in
2006. This is the result of increases in net income being offset by the effect
of the strengthening of the Canadian dollar against the U.S. dollar on the
translation of the Company's investment in U.S. dollar denominated
self-sustaining net assets.

    REVIEW OF BUSINESS SEGMENTS

    Industrial Services Group

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


    
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                             Three months ending           Six months ending
                                         June 30,                    June 30,
    (in thousands of                          %                           %
     dollars)              2007      2006    chg       2007      2006    chg
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    Revenue            $ 42,368  $ 43,528   -2.7%  $ 88,243  $ 71,276   23.8%
    Gross Profit         15,914    12,389   28.5%    32,374    22,123   46.3%
    Gross Profit as a
     percent of revenue    37.6%     28.5%             36.7%     31.0%

    Capital
     expenditures(1)   $  1,616  $ 14,454          $  5,922  $ 27,174
    Total assets(2)                                $328,930  $350,520
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    (1) The above capital expenditures represent cash expenditures for
        capital assets. There was no accrual at June 30, 2007. At
        March 31, 2007 $0.1 million was accrued for capital costs not yet
        paid against $3.9 million accrued at December 31, 2006.
    (2) 2006 assets are at December 31.
    

    The 3% decrease in second quarter revenue was the result of the revenue
associated with the Montreal facility expansion being more than offset by the
lower waste management revenues resulting from the timing of remediation
projects, primarily in the U.S., and the non-renewal of an unprofitable
contract.
    The increases in revenue for the first six months were driven by the
Petcoke Services acquisition and Montreal expansion, and increased volumes and
fuel savings from the Company's spent acid regeneration facility partially
offset by the timing of remediation projects in the waste management
operations, and lower prilled sulphur volumes. Revenue gains were partially
offset by higher plant costs of approximately $0.7 million (principally Fort
McMurray) and approximately $0.2 million in contract closure costs associated
with the unprofitable contract that was not renewed.
    The impact of foreign exchange was not material for both the quarter and
for the first six months as the average exchange rates for those periods was
comparable to the prior year. A more detailed analysis of the Company's
exposure to foreign exchange fluctuations is included under Risk Factors in
this MD&A.
    The increase in the gross profit as a percentage of revenue reflects the
factors described above as well as improved margin on the processing of
hazardous waste.
    The decrease in capital expenditures relates to the completion of the
Montreal facility expansion.

    Western Markets Group

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


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

    Revenue            $ 16,971  $ 15,749    7.8%  $ 31,471  $ 30,423    3.4%
    Gross Profit          6,293     5,598   12.4%    11,777    11,625    1.3%
    Gross Profit as a
     percent of revenue    37.1%     35.5%             37.4%     38.2%

    Capital
     expenditures      $  1,388  $    367          $  1,774  $    409
    Total assets(1)                                $ 36,124  $ 35,742
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    (1) 2006 assets are at December 31.
    

    The increased revenue and gross profit during the second quarter of 2007
was largely due to the spring "run off" in Alberta resulting in higher sales
of the Group's water treatment chemicals. For the first six months the higher
sales of water treatment chemicals was offset by impact of the first quarter
2007 CN rail disruption which resulted in lower sales and higher costs.
    The increase in capital expenditures relates to the refurbishment of a
furnace at the Group's Prince George facility.

    Power Generation Group

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


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

    Revenue            $ 17,947  $  5,806  209.1%  $ 26,078  $ 10,251  154.4%
    Gross Profit          2,889     1,571   83.9%     4,802     2,989   60.7%
    Gross Profit as a
     percent of revenue    16.1%     27.1%             18.4%     29.2%

    Capital
     expenditures      $      9  $     7           $      9  $      7
    Total assets(1)                                $ 11,336  $  6,766
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    (1) 2006 assets are at December 31.
    

    The increase in the Group's revenue and gross profit for the second
quarter and for the first six months of 2007 reflects increased activities
relating to projects, including LCRA. Gross profit as a percent of revenue is
impacted by the mix between (a) project revenues, involving engineering and
construction related activities, and (b) royalty and licensing activities. The
reduced gross profit percentage is due to the mix of project revenues.

    LIQUIDITY AND CAPITAL RE

SOURCES Total assets were $390.3 million at June 30, 2007 compared to $439.9 million at December 31, 2006 reflecting the utilization of approximately $35 million in excess cash relating to the March 1, 2007 refinancing, depreciation and amortization, and the impact foreign exchange on U.S. dollar denominated assets. Accounts receivable at June 30, 2007 of $41.4 million is comparable to the December 31, 2006 balance. Inventories at June 30, 2007 were comparable to the December 31, 2006 balance, while prepaid expenses and other assets increased by $0.7 million primarily as a result of prepaid insurance which is renewed in May. The net book value of property, plant, and equipment at June 30, 2007 decreased to $215.2 million from the December 31, 2006 balance of $226.3 million. The decrease is the result of the capital additions during the first six months of 2007 being offset by depreciation expense and the impact of foreign exchange on the U.S. dollar denominated assets. The decrease in deferred charges and other assets to $4.6 million at June 30, 2007 from the December 31, 2006 balance of $5.6 million relates primarily to the reduction in the January 1, 2007 net book value of deferred financing charges that were charged to opening retained earnings in 2007 as a result of the change in accounting to meet new CICA standards for Financial Instruments. Intangible assets decreased to $33.3 million from the December 31, 2006 balance of $36.3 million reflecting amortization expense for the first six months of 2007. Goodwill decreased to $77.7 million from the December 31, 2006 balance of $81.3 million with the finalization of the purchase equation for the Petcoke Services acquisition. The remaining goodwill was unchanged except for the impact of the stronger Canadian dollar on U.S. denominated goodwill. Total current liabilities increased by approximately $2.3 million to $66.5 million from the December 31, 2006 balance of $64.2 million. The increase can be attributed to the second cash dividend payable in August of 2007 offset by the timing in payments and the reduction in the current portion of deferred revenues. Total debt at June 30, 2007 was $161.0 million, down from $208.6 million as at December 31, 2006, reflecting the March 1, 2007 refinancing, the impact of foreign exchange on the U.S. dollar denominated debt, and the repayment of amounts outstanding under the revolver and operating lines as discussed in the Financial Condition section of this MD&A. Financial Condition ------------------------------------------------------------------------- June 30, December 31, 2007 2006 ------------------------------------------------------------------------- Cash including cash held in trust (in millions of dollars) $ 11.0 $ 42.2 Debt (in millions of dollars) $ 161.0 $ 208.6 Net debt(1) (in millions of dollars) $ 150.0 $ 166.4 Debt to equity 1.4x 1.8x Net debt(1) to gross profit(2) 1.5x 1.9x Net debt(1) to equity 1.3x 1.5x Interest coverage (Gross Profit(2) to interest expense(2)) 6.8x 5.6x ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Net debt is defined as total debt less cash and cash equivalents, including cash held in trust. (2) Calculated for the latest twelve months. Cash and cash equivalents at the end of June 2007 were $11.0 million compared to $42.2 million at the end of 2006 primarily reflecting the cash utilized in the refinancing and the generation of positive cash flow. Excess cash continues to be invested in short-term, interest-bearing deposits. The Company generates positive cash flows from operations that are used to fund maintenance and expansion capital projects and to meet debt obligations. The Company's growth strategy includes acquisition or expansion of processing operations, development of new technologies, and development or expansion of the Company's presence in new markets. To the extent required, the Company would seek new outside financing to fund this growth strategy. As a consequence of pursuing its strategy, the Company's financial leverage ratios may increase in the short term and will reduce with the full year contribution from any acquisition or from the commencement of earnings from expansion projects. On March 1, 2007, the Company completed a refinancing of its Senior Secured Credit facility and obtained an amended $205 million credit agreement with its existing bank syndicate. The new facility, which also includes an additional $75 million for lender approved acquisitions, provides the Company with flexibility to achieve its strategic goals, both organically and through acquisitions. The amended credit facility has a 5-year term with terms and conditions similar to the old facility. The new facility is secured by the assets of the Company, including its North American subsidiaries (except Marsol Inc., the subsidiary holding the Fort McMurray facility) and bears interest at floating base rates plus margins ranging from nil to 225 basis points. With the redemption of the Senior Secured Notes the Company is no longer an SEC registrant. At June 30, 2007, approximately $53 million of the $70 million Revolving Term facility and $20 million of the Revolving Operating Facility were undrawn. Under the recently adopted change in accounting standards for financial instruments, the Company recorded a charge of $1.0 million for financing costs relating to its March 1, 2007 refinancing. Marsulex's net debt to EBITDA ratio was 2.2 times (December 31, 2006 - 2.8 times) for the latest twelve months ended June 30, 2007. EBITDA is discussed in the Supplemental Information Section of this MD&A. At June 30, 2007, the Company had met all of its debt related covenants. Working Capital The Company's working capital and current ratio, excluding cash and cash equivalents, cash held in trust and the current portion of long-term debt, were as follows: ------------------------------------------------------------------------- June 30, December 31, June 30, 2007 2006 2006 ------------------------------------------------------------------------- Working capital(1) (in thousands of dollars) (16,140) (14,422) 4,840 Current ratio(1) 0.75 to 1.0 0.77 to 1.0 1.10 to 1.0 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Excludes cash and cash equivalents, cash held in trust and the current portion of long-term debt. The Company's cash on hand and positive cash flows in conjunction with the undrawn portions of the Revolving Term and Operating facilities provide the Company with sufficient working capital to meet its financial commitments. Given the nature of its business, it is not unusual for the Company to experience temporary fluctuations in working capital. Share Capital Outstanding ------------------------------------------------------------------------- As at July 30, June 30, December 31, 2007 2007 2006 ------------------------------------------------------------------------- Number of common shares 33,097,498 33,097,498 32,634,898 Number of options 650,665 650,665 1,113,265 ------------------------------------------------------------------------- ------------------------------------------------------------------------- For the three months ended June 30, 2007 the Company issued 197,350 common shares for cash proceeds of $0.9 million upon the exercise of stock options. For the six months ended June 30, 2007 the Company issued 462,600 common shares for cash proceeds of $2.0 million upon the exercise of stock options. On November 28, 2006, Marsulex announced its intention to make a Normal Course Issuer Bid ("NCIB") pursuant to which the Company is entitled to purchase 1,500,000 of its issued and outstanding common shares. The NCIB commenced on November 30, 2006 and will terminate on November 29, 2007. All shares purchased under the issuer bid will be cancelled. During the period November 30, 2006 to July 30, 2007 no shares were acquired by the Company for cancellation. On March 7, 2007, the Board of Directors approved a dividend policy whereby the Company would pay regular quarterly dividends to its common shareholders. The first quarterly dividend of 15 cents per share (approximately $4.9 million) was paid on May 2, 2007 to common shareholders of record on April 16, 2007. On June 5, 2007 the Company announced that it would pay a second cash dividend of 15 cents per share payable on August 15, 2007 to common shareholders of record at the close of business on July 16, 2007. All dividends on Marsulex common shares received by shareholders in 2007 and later are eligible dividends as defined in amendments to section 89 of the Income Tax Act (unless otherwise designated) and, accordingly, entitle an individual shareholder resident in Canada to a higher dividend gross-up and dividend tax credit. Company's share price information is as follows: ------------------------------------------------------------------------- December As at July 30, June 30, 31, June 30, 2007 2007 2006 2006 ------------------------------------------------------------------------- Closing share price $ 14.50 $ 13.25 $ 8.75 $ 8.25 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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) 2007 2006 chg 2007 2006 chg ------------------------------------------------------------------------- Fees to Birch Hill Equity Partners $ 103 $ 103 n/a $ 207 $ 207 n/a Fees to firms of certain Directors 2,994 3,561 -15.9% 3,302 3,926 -15.9% ------------------------------------------------------------------------- ------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS Cash Flow from Operations For the second quarter and for the first six months of 2007, the Company generated $14.9 million and $22.2 million respectively in cash from operations compared to $5.9 million and $19.2 million for the same periods in 2006. The increases were primarily the result of increased operating earnings and improved working capital management. Cash and cash equivalents at the end of June 30, 2007 were $8.9 million, down $31.2 million from $40.0 million at December 31, 2006. Cash on hand and cash generated from operations, along with the cash received from the issuance of capital stock, were utilized for the refinancing of the Company's debt as well as to fund the investment in capital additions. Capital Expenditures ------------------------------------------------------------------------- Three months ending Six months ending (in thousands of June 30, June 30, dollars) 2007 2006 2007 2006 ------------------------------------------------------------------------- Expansion projects(1) $ 350 $ 12,684 $ 4,290 $ 24,845 Maintenance capital(2) 2,384 2,484 4,399 3,087 ------------------------------------------------------------------------- Total capital expenditures $ 2,734 $ 15,168 $ 8,689 $ 27,932 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) The above capital expenditures represent cash expenditures for capital assets. At June 30, 2007, there are no accruals against $0.1 million accrued at March 31, 2007 and against $3.9 million accrued at December 31, 2006. (2) Including expenditures for placement cells (recorded as deferred charges). The decrease in expansion capital expenditures relate to the completion of the Montreal expansion. The Company has purchase commitments relating to the purchase of equipment under its maintenance capital program of approximately $1.5 million at June 30, 2007. RISKS & UNCERTAINTIES There have been no changes in the Company's business risks described in the December 31, 2006 MD&A and Annual Information Form. The Company has U.S.-based operations and reports in Canadian dollars and therefore is exposed to foreign exchange fluctuations in the following three areas: (1) monetary assets and liabilities, working capital and the U.S. denominated portion of the Senior Secured Term Loan; (2) revenues and expenses; and (3) the self-sustaining operations including the portion of the Senior Secured Term Loan designated as a hedge. Highlights of exchange rate movements for the quarter are as follows: ------------------------------------------------------------------------- Three months ending Six months ending June 30, June 30, % % 2007 2006 chg 2007 2006 chg ------------------------------------------------------------------------- Year-to-date average U.S. exchange rates 0.9104 0.8907 2.2% 0.8810 0.8800 0.11% Closing U.S. exchange rates(1) 0.9404 0.8969 4.9% 0.9404 0.8969 4.9% ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) The closing U.S. exchange rate at December 31, 2006 was 0.8582. The Company recorded the following foreign exchange gains and losses: ------------------------------------------------------------------------- Three months ending Six months ending (in thousands of June 30, June 30, dollars) 2007 2006 2007 2006 ------------------------------------------------------------------------- Foreign exchange gains on net monetary items $ (1,104) $ (124) $ (1,407) $ (336) Foreign exchange gain on Senior Secured Term Loan (895) (783) (996) (764) ------------------------------------------------------------------------- $ (1,999) $ (907) $ (2,403) $ (1,100) ------------------------------------------------------------------------- ------------------------------------------------------------------------- The foreign exchange translation of the U.S. $10 million portion of the Senior Secured Term Loan is used primarily to offset the foreign exchange fluctuations associated with the U.S. revenues generated by Stablex. U.S. $60 million of the Senior Secured Term Loan is considered to be a hedge of the Company's net investment in self-sustaining operations. The foreign exchange gain relating to this portion of the term loan is $6.1 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 six months ending June 30, 2007: ------------------------------------------------------------------------- Six months (in thousand of dollars) ending June 30, 2007 ------------------------------------------------------------------------- Gross profit $ (220) SG&A costs 53 Foreign exchange on net monetary items(1) 109 Foreign exchange on Senior Secured Term Loan 112 ------------------------------------------------------------------------- Earnings from operations before the under noted 54 Depreciation and amortization of deferred charges and intangible assets 47 Net interest expense 30 ------------------------------------------------------------------------- Earnings before income taxes $ 131 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Assumes U.S. denominated monetary items remain unchanged. CHANGES IN ACCOUNTING POLICIES Financial instruments, recognition and measurement In January 2005, the CICA released new Handbook Section 3855, Financial Instruments, Recognition and Measurement, effective for annual and interim periods beginning on or after October 1, 2006. This new section requires companies to record all financial instruments on the balance sheet at fair value, with changes in fair value recognized in income or other comprehensive income, as appropriate, each period. In addition, the Company has elected to account for transaction costs related to the issuance of financial instruments that are held for trading as a charge to the statement of operations in the period in which they arise. With respect to embedded derivatives, the Company has elected to recognize only those derivatives embedded in contracts issued, acquired or substantively modified on or after January 1, 2003 as permitted by the transitional provisions set out in section 3855. The adoption of this new section resulted in the after tax adjustments to opening retained earnings of approximately $1.5 million relating to the recognition of an approximate $0.2 million loss associated with the fair value of the Senior Subordinated Notes and an approximate $1.3 million charge relating to the financing costs for the Senior Secured Term Loan and the Senior Subordinated Notes that were previously deferred and amortized. The value of embedded derivative financial instruments as at January 1, 2007 was insignificant. Comprehensive income and equity In January 2005, the CICA released new Handbook Section 1530, Comprehensive Income and Section 3251, Equity effective for annual and interim periods beginning on or after October 1, 2006. Section 1530 establishes standards for reporting comprehensive income. Section 3251 establishes standards for the presentation of equity and changes in equity during the reporting period. In order to comply with the new standard, the Company has included a separate Statement of Shareholders Equity as part of its consolidated financial statements. The effect of exchange rate variations on the translation of the Company's net assets of self-sustaining foreign operations has been recorded as Accumulated Other Comprehensive Income, net of tax. Hedges In January 2005, the CICA released new Handbook Section 3865, Hedges, effective for annual and interim periods beginning on or after October 1, 2006. This new section establishes standards for when and how hedge accounting may be applied. The Company has designated U.S. $60 million of the Senior Secured Term Loan and the Senior Subordinated Notes, as a hedge of the net investment in self-sustaining operations. ACCOUNTING PRINCIPLES ISSUED BUT NOT YET IMPLEMENTED Financial instruments - disclosure and presentation In December 2006, the CICA published the following two sections of the CICA Handbook: Section 3862, Financial Instruments - Disclosures and Section 3863, Financial Instruments - Presentation. These standards introduce disclosure and presentation requirements that will enable financial statements' users to evaluate, and enhance their understanding of, the significance of financial instruments for the entity's financial position, performance and cash flows, and the nature and extent of risks arising from financial instruments to which the entity is exposed, and how those risks are managed. Capital disclosures In December 2006, the CICA published section 1535 of the Handbook, Capital disclosures, which requires disclosure of (i) an entity's objectives, policies and processes for managing capital; (ii) quantitative data about what the entity regards as capital; (iii) whether the entity has complied with any capital requirements; and (iv) if it has not complied, the consequences of such non-compliance. This information will enable financial statements' users to evaluate the entity's objectives, policies and processes for managing capital. Inventories In January 2007, the CICA published section 3031 of the Handbook, Inventories, which prescribes the accounting treatment for inventories. Section 3031 provides guidance on the determination of costs and its subsequent recognition as an expense, and provides guidance on the cost formulas used to assign costs to inventories. These standards must be adopted by the Company for the fiscal year beginning on January 1, 2008. While the Company is currently assessing the impact of these new recommendations on its financial statements, it does not expect the recommendations to have a significant impact on its financial position, earnings or cash flows. OUTLOOK Revenue growth for the quarter remained strong with higher project activity in the Power Generation Group. Gross profit increased in all three business segments. Activity in the Company's markets continues to be robust as evidenced by the announced engineering design study at the Montreal facility. Notwithstanding, the timing of any new project activity remains difficult to predict. QUARTERLY OPERATING PERFORMANCE Selected Quarterly Financial Information ------------------------------------------------------------------------- (In millions of dollars, except per 2nd Quarter 1st Quarter 4th Quarter 3rd Quarter share -------------------------------------------------------------- amounts) 2007 2006 2007 2006 2006 2005 2006 2005 ------------------------------------------------------------------------- Revenue 77.3 65.0 68.5 46.9 69.4 47.5 68.3 43.4 Gross Profit 25.1 19.6 23.9 17.2 27.5 17.3 24.8 15.7 SG&A and other costs 7.7 5.9 10.4 6.8 9.6 6.4 7.8 5.4 Unusual items, (gains) losses - - - - - (0.3) - 2.0 Depreciation and amortization, including (gains) losses on disposals 8.3 8.0 8.2 7.2 11.9 6.9 9.9 6.5 Interest expense 2.7 4.0 3.7 3.5 4.1 3.6 4.3 3.0 Earnings (loss) before income taxes 6.6 3.2 2.0 1.0 2.3 1.6 3.1 (0.4) Net earnings (loss) 5.4 5.3 1.4 0.7 (1.4) (0.4) 2.6 (0.9) Basic earnings (loss) per share 0.16 0.16 0.04 0.02 (0.04) (0.01) 0.08 (0.03) Cash generated from operations before non- cash working capital 11.5 9.6 9.9 7.9 12.2 8.9 12.4 7.5 Changes in non-cash operating working capital 3.4 (3.7) (2.6) 5.4 8.8 (5.5) 9.3 5.6 Cash provided by operations 14.9 5.9 7.3 13.3 21.0 3.4 21.7 13.1 Total Assets 390.3 420.8 393.4 376.8 439.9 374.4 423.7 375.5 ------------------------------------------------------------------------- Cash generated by operations is impacted by the quarterly changes in non- cash working capital that typically reflect the impact of the seasonal fluctuations in revenues and the interest accrual associated with the Senior Subordinated Notes which is paid on June 30 and December 31 of each year (redeemed as at March 1, 2007). Given the size of the Company and the significant expansion capital expenditures incurred, it was not unusual for the Company to experience temporary fluctuations from quarter to quarter in working capital. The change in the second quarter 2007 non-cash working capital reflects the reduction in the current portion of deferred revenue. The change in the third and fourth quarters of 2005 and the second and third quarters of 2006 reflected the timing in settlement of working capital items largely relating to the Montreal expansion and payments received on Power Generation projects. In the first quarter of 2006, the Company began receiving fees relating to the Montreal expansion. SUPPLEMENTAL FINANCIAL INFORMATION EBITDA is a supplemental, non-generally accepted accounting principle financial measure. EBITDA is defined as earnings before interest, taxes, depreciation, and amortization or "EBITDA." It is used by management internally not only to measure the performance of the business as a whole, but also to measure the performance of the individual segments, and it forms the primary basis upon which employees of the Company receive incentive compensation. EBITDA is also used by the Company as a basis to measure compliance with certain debt covenants. EBITDA is presented as supplemental information because management, through its discussions with key stakeholders of the Company including shareholders, analysts and other financial institutions, believes it is a widely used financial indicator of the Company's operating profitability and performance before the effects of capital investment and financing decisions. Since EBITDA is not a recognized measure under Canadian generally accepted accounting principles (GAAP), it should not be considered in isolation of, or as a substitute for net earnings, consolidated cash flow from operations or any other measure of performance required by GAAP or as an indicator of the Company's operating performance. The Company's method of calculating EBITDA may differ from other companies and accordingly, the Company's EBITDA may not be comparable to measures used by other companies. In addition, this measure does not necessarily represent funds available for discretionary use and is not necessarily a measure of the Company's ability to fund its cash requirements. The Company's non-GAAP performance measure, EBITDA, has certain material limitations as follows: - It does not include interest expense. Because the Company has borrowed money to finance some of its operations, interest is a necessary part of the Company's costs and ability to generate revenue. Therefore, any measure that excludes interest has material limitations; - It does not include depreciation and amortization expense. Because the Company must utilize capital assets in order to generate revenues, depreciation and amortization expense is a necessary and ongoing part of the Company's costs. Therefore, any measure that excludes depreciation and amortization expense has material limitations; - It does not include taxes. Because the payment of taxes is a necessary and ongoing part of the Company's operations, any measure that excludes taxes has material limitations. Management compensates for these limitations by considering the economic effect of the excluded expense items independently as well as in connection with its analysis of net earnings. Because EBITDA is used to evaluate the Company's financial performance, it is reconciled to net earnings which is the most comparable financial measure calculated and presented in accordance to GAAP. The following is a reconciliation of EBITDA to net earnings: Supplemental selected information: ------------------------------------------------------------------------- For the three months ending June 30, 2007 (In thousands Industrial Western Power Corporate of dollars) Services Markets Generation Support Total ------------------------------------------------------------------------- Earnings (loss) before the undernoted (EBITDA) $ 13,170 $ 5,653 $ 1,979 $ (3,390) $ 17,412 Depreciation 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 three months ending June 30, 2006 (In thousands Industrial Western Power Corporate of dollars) Services Markets Generation Support Total ------------------------------------------------------------------------- Earnings (loss) before the undernoted (EBITDA) $ 9,464 $ 5,106 $ 721 $ (1,633) $ 13,658 Depreciation, including loss on disposal 5,127 591 24 50 5,792 Amortization of deferred charges and intangible assets 1,588 - - 666 2,254 Interest expense - net - - - 2,459 2,459 ------------------------------------------------------------------------- Earnings (loss) before income taxes 2,749 4,515 697 (4,808) 3,153 Income tax recovery - - - (2,115) (2,115) ------------------------------------------------------------------------- Net earnings (loss) $ 2,749 $ 4,515 $ 697 $ (2,693) $ 5,268 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- For the six months ending June 30, 2007 (In thousands Industrial Western Power Corporate of dollars) Services Markets Generation 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 Gain realized on redemption of Senior Subordinated Notes - - - (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 taxes - - - 1,867 1,867 ------------------------------------------------------------------------- Net earnings (loss) $ 11,219 $ 9,289 $ 2,808 $ (16,540) $ 6,776 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- For the six months ending June 30, 2006 (In thousands Industrial Western Power Corporate of dollars) Services Markets Generation Support Total ------------------------------------------------------------------------- Earnings (loss) before the undernoted (EBITDA) $ 16,996 $ 10,669 $ 1,035 $ (4,636) $ 24,064 Depreciation, including loss on disposal 9,830 1,179 47 103 11,159 Amortization of deferred charges and intangible assets 2,857 - - 1,171 4,028 Interest expense - net - - - 4,711 4,711 ------------------------------------------------------------------------- Earnings (loss) before income taxes 4,309 9,490 988 (10,621) 4,166 Income tax recovery - - - (1,766) (1,766) ------------------------------------------------------------------------- Net earnings (loss) $ 4,309 $ 9,490 $ 988 $ (8,855) $ 5,932 ------------------------------------------------------------------------- ------------------------------------------------------------------------- EBITDA for the second quarter of 2007 was $17.4 million compared to $13.7 million for the same period of 2006 and EBITDA for the first six months of 2007 was $31.9 million compared to $24.1 million for the same period of 2006. The increases were primarily due to the contribution from start-up of the Montreal facility expansion in the third quarter of 2006, the project activity in the Power Generation Group, and the foreign exchange gains. These increases were offset by the impact of the increased stock price on the long-term incentive plan and the increase in SG&A costs, primarily in corporate. MARSULEX INC. Consolidated Balance Sheets (In thousands of dollars) ------------------------------------------------------------------------- June 30, December 31, 2007 2006 (unaudited) ------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 8,850 $ 40,039 Cash held in trust 2,174 2,151 Accounts receivable 41,372 41,438 Inventories 1,046 1,198 Future income tax asset 206 206 Prepaid expenses and other assets 5,902 5,204 ------------------------------------------------------------------------- 59,550 90,236 Property, plant and equipment 215,185 226,339 Deferred charges and other assets 4,610 5,634 Intangible assets 33,261 36,322 Goodwill 77,713 81,325 ------------------------------------------------------------------------- $ 390,319 $ 439,856 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 28,219 $ 22,143 Accrued liabilities 21,192 20,153 Income taxes payable 3,409 4,244 Interest payable 201 169 Dividends payable to shareholders (note 7) 4,965 - Current portion of deferred revenue 6,680 15,759 Current portion of long-term debt (note 5) 1,830 1,765 ------------------------------------------------------------------------- 66,496 64,233 Long-term debt (note 5) 159,174 206,815 Deferred revenue 13,319 13,111 Employee future benefits 2,345 2,239 Other liabilities 9,280 9,879 Future income tax liability 30,799 30,657 Shareholders' equity: Capital stock (note 6) 63,114 61,084 Retained earnings 47,066 51,691 Accumulated other comprehensive income (loss) (1,274) 147 ------------------------------------------------------------------------- 108,906 112,922 ------------------------------------------------------------------------- $ 390,319 $ 439,856 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes to consolidated financial statements MARSULEX INC. Consolidated Statements of Operations and Comprehensive Income (unaudited) (In thousands of dollars, except per share amounts) ------------------------------------------------------------------------- Three months ending Six months ending June 30, June 30, 2007 2006 2007 2006 ------------------------------------------------------------------------- Revenue $ 77,286 $ 65,027 $ 145,792 $ 111,894 Cost of sales and services 52,190 45,469 96,839 75,157 ------------------------------------------------------------------------- Gross profit 25,096 19,558 48,953 36,737 Selling, general, administrative and other costs 9,683 6,807 19,476 13,773 Depreciation 6,501 5,792 13,167 11,159 Amortization of deferred charges and intangible assets 1,754 2,254 3,512 4,028 Foreign exchange gain on monetary items (1,104) (124) (1,407) (336) Foreign exchange gain on long-term debt (895) (783) (996) (764) Gain realized on redemption of Senior Subordinated Notes (note 5) - - (177) - Cost of refinancing (note 5) - - 1,000 - Interest expense - net (note 10) 2,527 2,459 5,735 4,711 ------------------------------------------------------------------------- Earnings before income taxes 6,630 3,153 8,643 4,166 Income taxes: Current 1,830 571 2,013 861 Future (558) (2,686) (146) (2,627) ------------------------------------------------------------------------- 1,272 (2,115) 1,867 (1,766) ------------------------------------------------------------------------- Net earnings 5,358 5,268 6,776 5,932 Other comprehensive income Effect of change in foreign exchange on the translation of net assets of self-sustaining operations, net of tax (1,207) (254) (1,421) (127) ------------------------------------------------------------------------- Total comprehensive income $ 4,151 $ 5,014 $ 5,355 $ 5,805 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Earnings per share (note 8): Basic $ 0.16 $ 0.16 $ 0.21 $ 0.18 Diluted $ 0.16 $ 0.16 $ 0.20 $ 0.18 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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, 2007 2006 2007 2006 ------------------------------------------------------------------------- Cash provided by (used in): Operating activities: Net earnings $ 5,358 $ 5,268 $ 6,776 $ 5,932 Items not affecting cash: Depreciation 6,501 5,792 13,167 11,159 Amortization of deferred charges and intangible assets 1,754 2,254 3,512 4,028 Foreign exchange gain on long-term debt (895) (783) (996) (764) Gain realized on redemption of Senior Subordinated Notes - - (177) - Future income taxes (558) (2,686) (146) (2,627) Accretion of asset retirement obligations 23 19 46 39 Other non-cash items (659) (303) (748) (298) Decrease (increase) in non-cash operating working capital 3,399 (3,692) 759 1,719 ------------------------------------------------------------------------- Cash provided by operating activities 14,923 5,869 22,193 19,188 Financing activities: Increase in long-term debt (note 5) - 31,500 34,494 31,500 Decrease in Revolving Term loan (3,000) - (3,000) - Repayment of long-term debt (note 5) (438) (406) (71,963) (805) Issuance of capital stock (note 6) 936 107 2,030 991 Dividends paid (4,940) - (4,940) - ------------------------------------------------------------------------- (7,442) 31,201 (43,379) 31,686 Investing activities: Additions to property, plant and equipment (3,082) (15,131) (7,839) (27,897) Increase in deferred charges (317) (800) (1,595) (1,213) Acquisition, net of cash (note 4) - (28,972) - (28,972) Increase in cash held in trust 16 311 (23) 236 ------------------------------------------------------------------------- (3,383) (44,592) (9,457) (57,846) Foreign exchange gain on cash held in foreign currency (546) (169) (546) (158) ------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents 3,552 (7,691) (31,189) (7,130) Cash and cash equivalents - beginning of period 5,298 13,310 40,039 12,749 ------------------------------------------------------------------------- Cash and cash equivalents - end of period $ 8,850 $ 5,619 $ 8,850 $ 5,619 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Supplemental cash flow information: Interest paid $ 2,727 $ 5,859 $ 6,154 $ 7,714 Income taxes paid, net of refunds 788 760 3,060 855 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes to consolidated financial statements MARSULEX INC. Consolidated Statements of Shareholders' Equity (unaudited) (In thousands of dollars, except share amounts) ------------------------------------------------------------------------- Accumulated Other Compre- Total Number of hensive Share- Common Capital Retained Income holders' Shares Stock Earnings ("AOCI") Equity ------------------------------------------------------------------------- Balance, December 31, 2005 32,409,898 $ 60,093 $ 44,611 $ 2,187 $ 106,891 Exercise of stock options 225,000 991 - - 991 Net income for the period - - 5,932 - 5,932 Effect of change in foreign exchange on the translation of net assets of self-sustaining foreign operations, net of tax - - - (127) (127) ------------------------------------------------------------------------- Balance, June 30, 2006 32,634,898 $ 61,084 $ 50,543 $ 2,060 $ 113,687 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Balance, December 31, 2006 32,634,898 $ 61,084 $ 51,691 $ 147 $ 112,922 Exercise of stock options 462,600 2,030 - - 2,030 Adjustment to opening retained earnings, relating to changes in accounting policies, net of tax (note 3) - - (1,496) - (1,496) Dividends (note 7) - - (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 - - - (1,421) (1,421) ------------------------------------------------------------------------- Balance, June 30, 2007 33,097,498 $ 63,114 $ 47,066 $ (1,274) $ 108,906 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes to consolidated financial statements MARSULEX INC. Notes to Consolidated Financial Statements (unaudited) (in thousand of dollars) 1. Basis of presentation: The unaudited consolidated financial statements have been prepared by the Company in accordance with Canadian generally accepted accounting principles. The preparation of the financial data is based on accounting policies and practices consistent with those used in the preparation of the audited annual consolidated financial statements (except for changes as described in note 3). These unaudited consolidated financial statements do not include all of the disclosures required by generally accepted accounting principles for annual financial statements and accordingly should be read together with the audited annual consolidated financial statements and the accompanying notes included in the Company's 2006 Annual Report. These consolidated financial statements include the accounts of Marsulex Inc. (the Company) and its subsidiaries from their respective dates of acquisition. All intercompany transactions have been eliminated. 2. Seasonality of the business: The revenue generated by the Company may be affected by seasonal variation of customers' activities, generally peaking during the summer. 3. Change in accounting policies Effective January 1, 2007, the Company adopted the new CICA Handbook Standards relating to financial instruments. These new standards have been adopted on a prospective basis with no restatement of prior period financial statements. a) Section 3855, "Financial Instruments - Recognition and Measurement" provides guidance on the recognition and measurement of financial assets, financial liabilities and derivative financial instruments. This new standard requires that all financial assets and liabilities be classified as either: held-to-maturity, held-for-trading, loans and receivables, available-for-sale, or other financial liabilities. The initial and subsequent recognition depends on their initial classification. Held-to-maturity financial assets are initially recognized at their fair values and subsequently measured at amortized cost using the effective interest method. Impairment losses are charged to net earnings in the period in which they arise. Held-for-trading financial instruments are carried at fair value with changes in the fair value charged or credited to net earnings in the period in which they arise. Loans and receivables are initially recognized at their fair values, with any resulting premium or discount from the face value being amortized to income or expense using the effective interest method. Impairment losses are charged to net earnings in the period in which they arise. Available-for-sale financial instruments are carried at fair value with changes in the fair value charged or credited to other comprehensive income. Impairment losses are charged to net earnings in the period in which they arise. Other financial liabilities are initially measured at cost or at amortized cost depending upon the nature of the instrument with any resulting premium or discount from the face value being amortized to income or expense using the effective interest method. All derivative financial instruments meeting certain recognition criteria are carried at fair value with changes in fair value charged or credited to income or expense in the period in which they arise. The standard requires the Company to make certain elections, upon initial adoption of the new rules, regarding the accounting model to be used to account for each financial instrument. This new section also requires that transaction costs incurred in connection with the issuance of financial instruments either be capitalized and presented as a reduction of the carrying value of the related financial instrument or expensed as incurred. If capitalized, transaction costs must be amortized to income using the effective interest method. This section does not permit the restatement of financial statements of prior periods. The following is a summary of the accounting model the Company has elected to apply to each of its significant categories of financial instruments outstanding as of January 1, 2007: Cash and cash equivalents, including cash held in trust Held-for-trading Accounts receivable Loans and receivables Accounts payable and accrued liabilities Other liabilities Long-term debt Senior Secured Term Loan and revolvers Held-for-trading Long-term Loan - Fort McMurray Facility Other liabilities Senior Subordinated Notes Held-for-trading In addition, the Company has elected to account for transaction costs related to the issuance of financial instruments that are held for trading as a charge to the statement of operations in the period in which they arise. With respect to embedded derivatives, the Company has elected to recognize only those derivatives embedded in contracts issued, acquired or substantively modified on or after January 1, 2003 as permitted by the transitional provisions set out in section 3855. As a result of the adoption of this section, the Company recorded a $1.5 million decrease to opening retained earnings for the recognition of an approximate $0.2 million loss associated with the fair value of the Senior Subordinated Notes and an approximate $1.3 million charge relating to the financing costs for the Senior Secured Term Loan and the Senior Subordinated Notes that were previously deferred and amortized. The value of embedded derivative financial instruments as at January 1, 2007 was insignificant. b) Section 3865, "Hedges" allows optional treatment providing that hedges be designated as either fair value hedges, cash flow hedges or hedges of a self-sustaining foreign operation. The Company has designated U.S. $60 million of the Senior Secured Term Loan that was amended on February 28, 2007 as a hedge of the net investment in the self-sustaining operations. Until its redemption on March 1, 2007, the Senior Subordinated Notes were designated as a hedge of the net investment in the self-sustaining operations. c) Section 1530, "Comprehensive Income", along with Section 3251, "Equity" which amends Section 3250, "Surplus", require enterprises to separately disclose comprehensive income and its components in the financial statements. Further, enterprises are required to present changes in equity during the period as well as components of equity at the end of the period, including comprehensive income. Major components of Other Comprehensive Income include changes in fair value of financial assets classified as available- for-sale, the changes in fair value of effective cash flow hedging items, and exchange gains and losses arising from the translation of the financial statements of self-sustaining foreign operations. The effect of exchange rate variations on the translation of the Company's net assets of self-sustaining foreign operations has been recorded as Accumulated Other Comprehensive Income, net of tax. 4. Acquisition of Oxbow Industrial Services, LLC (the Petroleum Coke ("Petcoke") Services business) On April 1, 2006 the Company completed the acquisition of Oxbow Industrial Services, LLC, a leading provider of in-refinery petcoke cutting and bulk handling services to major oil refineries in the U.S. Gulf Coast and West Coast and Venezuela, from Oxbow Carbon & Minerals LLC. The purchase price of the acquisition was U.S. $27 million (approximately $31 million Canadian), excluding transaction costs of approximately $0.7 million. The results of operations have been consolidated from April 1, 2006, the effective date of acquisition. The acquisition has been accounted for using the purchase method of accounting. The final purchase price allocation, including acquisition costs, is as follows: --------------------------------------------------------------------- Net working capital $ 5,974 Property, plant and equipment 8,263 Intangibles 12,757 Goodwill 5,776 Other long term liabilities (10) Future tax liability (960) --------------------------------------------------------------------- Total Purchase Price 31,800 Less: Cash assumed on acquisition (2,710) --------------------------------------------------------------------- Total purchase price less cash assumed on acquisition $ 29,090 --------------------------------------------------------------------- --------------------------------------------------------------------- The value assigned to the intangible assets related to customer relationships having estimated useful lives of 10 years. Goodwill of $5.8 million, generated as a result of the acquisition, represents the excess of purchase price consideration over the estimated fair value of the net assets acquired. The Company has claims or possible claims of approximately $1.1 million that have been presented to the vendors and has recorded a provision of approximate $0.5 million to the purchase equation. 5. Long-term debt On February 28, 2007 the Company obtained a $205 million amended credit facility with its existing syndicate of banks over a new 5-year term, maturing on February 28, 2012 and incurred approximately $1.0 million in related financing costs that were expensed during the period. The agreement provides for a $115.0 million Senior Secured Term Loan ($70.0 million denominated in U.S. dollars), a $70.0 million Revolving Term Facility, and a $20.0 million Revolving Operating Facility with the facilities carrying variable rates of interest and secured by the assets of Marsulex Inc. and its subsidiaries (excluding Marsol Inc.). The facilities under the amended agreement can be drawn as LIBOR, bankers' acceptance loans with margins ranging from 100 to 225 basis points and prime rate loans with margins ranging from nil to 125 basis points. Under the terms of the amended facility, interest is paid monthly with quarterly mandatory principal repayments for the Senior Secured Term Loan beginning on March 31, 2010, with any drawn amounts due as follows: 16% by December 31, 2010, 18% by September 30, 2011, and 66% on maturity. June 30, December 31, 2007 2006 --------------------------------------------------------------------- Senior Secured Term Loan, maturing February 2012 $ 108,037 $ 100,935 Revolving Term Facility, maturing February 2012 17,000 - Long-term Loan - Fort McMurray Facility 7.3%, maturing 2019 35,967 36,834 Senior Subordinated Notes 9-5/8% U.S. $60,766,000, maturing June 2008 - 70,811 --------------------------------------------------------------------- Total debt 161,004 208,580 Less current portion 1,830 1,765 --------------------------------------------------------------------- $ 159,174 $ 206,815 --------------------------------------------------------------------- --------------------------------------------------------------------- On March 1, 2007, the Company drew $139.0 million from the amended credit facility, and together with available cash redeemed the U.S. $60.8 million of outstanding 9-5/8% Senior Subordinated Notes and refinanced $101.0 million of the existing Senior Secured Term loans. At June 30, 2007, $53 million of the Revolving Term Loan and $20.0 million of the Revolving Operating Facility were undrawn and available for general corporate purposes. The Senior Subordinated Notes were redeemed at par with accrued interest of U.S. $942,000. 6. Capital stock: On November 28, 2006, the Company announced its intention to make a Normal Course Issuer Bid ("NCIB") pursuant to which the Company is entitled to purchase 1,500,000 of its issued and outstanding common shares. The NCIB commenced on November 30, 2006 and will terminate on November 29, 2007. All shares purchased under the issuer bid will be cancelled. During the period November 30, 2006 to June 30, 2007 no shares were acquired by the Company for cancellation. 7. On June 5, 2007 the company announced the payment of a cash dividend of 15 cents per share on August 15, 2007 to common shareholders of record at the close of business on July 16, 2007. 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, 2007 2006 2007 2006 --------------------------------------------------------------------- Numerator: Net earnings available to common shareholders $ 5,358 $ 5,268 $ 6,776 $ 5,932 Denominator (shares in thousands): Weighted average common shares outstanding 32,987 32,612 32,835 32,600 Effect of dilutive securities: Employee stock options 510 576 572 571 --------------------------------------------------------------------- Adjusted weighted average shares and assumed conversions 33,497 33,188 33,407 33,171 --------------------------------------------------------------------- --------------------------------------------------------------------- Earnings per share - Diluted $ 0.16 $ 0.16 $ 0.20 $ 0.18 --------------------------------------------------------------------- --------------------------------------------------------------------- 9. Pensions and Other Post-Retirement Benefits: Components of Net Periodic Benefit Cost for Defined Benefit Plans --------------------------------------------------------------------- Three months ending June 30, Six months ending June 30, (in thousands Other Pension Other Other of dollars) Benefits Benefits Benefits Benefits --------------------------------------------------------------------- 2007 2006 2007 2006 2007 2006 2007 2006 --------------------------------------------------------------------- Service cost $ 206 $ 190 $ 7 $ 6 $ 412 $ 380 $ 14 $ 12 Interest cost 187 201 11 10 374 402 22 20 Expected return on plan assets (224) (209) - - (448) (419) - - Amortization of transition obligations (assets) (16) (16) 2 2 (32) (32) 4 4 Amortization of actuarial and investment loss 53 4 1 2 106 9 2 5 --------------------------------------------------------------------- Post retirement benefits expense $ 206 $ 170 $ 21 $ 20 $ 412 $ 340 $ 42 $ 41 --------------------------------------------------------------------- --------------------------------------------------------------------- 10. Net interest expense: --------------------------------------------------------------------- Three months ending Six months ending (in thousands June 30, June 30, of dollars) 2007 2006 2007 2006 --------------------------------------------------------------------- Interest expense $ 2,716 $ 3,993 $ 6,392 $ 7,503 Interest capitalized - (1,348) - (2,435) Interest income (189) (186) (657) (357) --------------------------------------------------------------------- $ 2,527 $ 2,459 $ 5,735 $ 4,711 --------------------------------------------------------------------- --------------------------------------------------------------------- 11. Comparative Figures Certain 2006 comparative figures have been reclassified to conform to the financial presentation adapted in 2007. 12. Business segments: The Company's activities are divided into four reportable segments. The three operating segments are: Industrial Services, Western Markets, and Power Generation. The fourth non-operating segment is Corporate Support, which provides centralized services, such as finance, information systems, human resources and risk management to the operating segments. Industrial Services provides services, including environmental compliance solutions, to oil refiners and other industrial customers, primarily in the U.S. and Canada. Services include the regeneration of spent sulphuric acid produced during the octane enhancement of gasoline; the extraction and recovery of sulphur from hydrogen sulphide gas created during the refining process; the recovery of sulphur dioxide to ensure air quality compliance; cutting and handling of petroleum coke; and the safe handling, treatment, and disposal of industrial hazardous waste streams. Western Markets produces and provides sulphur-enhanced chemicals to industrial customers and supplies alum, a water treatment chemical used by municipalities and other industrial companies, for water and wastewater treatment. The primary market for these and other chemicals is Western Canada. Power Generation provides environmental systems and services for air quality compliance, primarily to electric utilities, and also to petrochemical and general industrial customers worldwide. ------------------------------------------------------------------------- For the three months ended June 30 Industrial Western Power (in thousands Services Markets Generation of dollars) 2007 2006 2007 2006 2007 2006 ------------------------------------------------------------------------- Revenue from external customers $ 42,368 $ 43,528 $ 16,971 $ 15,749 $ 17,947 $ 5,806 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Gross profit $ 15,914 $ 12,389 $ 6,293 $ 5,598 $ 2,889 $ 1,571 SG&A(1) 2,744 2,925 640 492 910 850 Foreign exchange losses (gains) - - - - - - ------------------------------------------------------------------------- Earnings (loss) before the under noted $ 13,170 $ 9,464 $ 5,653 $ 5,106 $ 1,979 $ 721 Depreciation, including loss on disposal 5,781 5,127 624 591 25 24 Amortization of deferred charges and intangible assets 1,754 1,588 - - - - Net Interest expense - - - - - - ------------------------------------------------------------------------- Earnings (loss) before income taxes $ 5,635 $ 2,749 $ 5,029 $ 4,515 $ 1,954 $ 697 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Capital expenditures $ 1,616 $ 14,454 $ 1,388 $ 367 $ 9 $ 7 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ----------------------------------------------------- For the three Inter-segment months ended Revenue June 30 Corporate (in thousands Support Total of dollars) 2007 2006 2007 2006 ----------------------------------------------------- Revenue from external customers $ $ (56) $ 77,286 $ 65,027 ----------------------------------------------------- ----------------------------------------------------- Gross profit $ - $ - $ 25,096 $ 19,558 SG&A(1) 5,389 2,540 9,683 6,807 Foreign exchange losses (gains) (1,999) (907) (1,999) (907) ----------------------------------------------------- Earnings (loss) before the under noted $ (3,390) $ (1,633) $ 17,412 $ 13,658 Depreciation, including loss on disposal 71 50 6,501 5,792 Amortization of deferred charges and intangible assets - 666 1,754 2,254 Net Interest expense 2,527 2,459 2,527 2,459 ----------------------------------------------------- Earnings (loss) before income taxes $ (5,988) $ (4,808) $ 6,630 $ 3,153 ----------------------------------------------------- ----------------------------------------------------- Capital expenditures $ 69 $ 303 $ 3,082 $ 15,131 ----------------------------------------------------- ----------------------------------------------------- ------------------------------------------------------------------------- For the six months ended June 30 Industrial Western Power (in thousands Services Markets Generation of dollars) 2007 2006 2007 2006 2007 2006 ------------------------------------------------------------------------- Revenue from external customers $ 88,243 $ 71,276 $ 31,471 $ 30,423 $ 26,078 $ 10,251 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Gross profit $ 32,374 $ 22,123 $ 11,777 $ 11,625 $ 4,802 $ 2,989 SG&A(1) 5,919 5,127 1,238 956 1,943 1,954 Foreign exchange losses (gains) - - - - - - ------------------------------------------------------------------------- Earnings (loss) before the under noted $ 26,455 $ 16,996 $ 10,539 $ 10,669 $ 2,859 $ 1,035 Depreciation, including loss on disposal 11,724 9,830 1,250 1,179 51 47 Amortization of deferred charges and intangible assets 3,512 2,857 - - - - Gain realized on redemption of Senior Subordinated Notes - - - - - - Cost of Refinancing - - - - - - Net Interest expense - - - - - - ------------------------------------------------------------------------- Earnings (loss) before income taxes $ 11,219 $ 4,309 $ 9,289 $ 9,490 $ 2,808 $ 988 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Capital expenditures $ 5,922 $ 27,174 $ 1,774 $ 409 $ 9 $ 7 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Total assets before goodwill and intangible assets(2) $227,759 $243,188 $ 31,656 $ 31,274 $ 6,001 $ 919 Goodwill and intangible assets, net of accumulated amortiz- ation(2) 101,171 107,332 4,468 4,468 5,335 5,847 ------------------------------------------------------------------------- Total assets(2) $328,930 $350,520 $ 36,124 $ 35,742 $ 11,336 $ 6,766 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ----------------------------------------------------- For the six Inter-segment months ended Revenue June 30 Corporate (in thousands Support Total of dollars) 2007 2006 2007 2006 ----------------------------------------------------- Revenue from external customers $ - $ (56) $145,792 $111,894 ----------------------------------------------------- ----------------------------------------------------- Gross profit $ - $ - $ 48,953 $ 36,737 SG&A(1) 10,376 5,736 19,476 13,773 Foreign exchange losses (gains) (2,403) (1,100) (2,403) (1,100) ----------------------------------------------------- Earnings (loss) before the under noted $ (7,973) $ (4,636) $ 31,880 $ 24,064 Depreciation, including loss on disposal 142 103 13,167 11,159 Amortization of deferred charges and intangible assets - 1,171 3,512 4,028 Gain realized on redemption of Senior Subordinated Notes (177) - (177) - Cost of Refinancing 1,000 - 1,000 - Net Interest expense 5,735 4,711 5,735 4,711 ----------------------------------------------------- Earnings (loss) before income taxes $(14,673) $(10,621) $ 8,643 $ 4,166 ----------------------------------------------------- ----------------------------------------------------- Capital expenditures $ 134 $ 307 $ 7,839 $ 27,897 ----------------------------------------------------- ----------------------------------------------------- Total assets before goodwill and intangible assets(2) $ 13,929 $ 46,828 $279,345 $322,209 Goodwill and intangible assets, net of accumulated amortiz- ation(2) - - 110,974 117,647 ----------------------------------------------------- Total assets(2) $ 13,929 $ 46,828 $390,319 $439,856 ----------------------------------------------------- ----------------------------------------------------- (1) Selling, general, administrative and other costs. (2) 2006 assets are at December 31st

For further information:

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

Organization Profile

MARSULEX INC.

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