FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month of November 2002
Marsulex Inc.
111 Gordon Baker Road, Suite 300
North York, Ontario, Canada
M2H 3R1
Indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F:
Form 20-F X Form 40-F
------ -----
Indicate whether the registrant by furnishing the information contained in this
Form is also thereby furnishing the information to the Commission pursuant to
Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes No X
------ ------
MARSULEX
[GRAPHIC LOGO OMITTED]
NEWS RELEASE
MARSULEX REPORTS RESULTS FOR THIRD QUARTER 2002
TORONTO, Canada, November 6, 2002 -- Marsulex Inc. (TSX: MLX) today announced
earnings before interest, taxes, depreciation and amortization (EBITDA) from
continuing operations of $8.8 million for the third quarter ending September 30,
2002. Revenue for the period was $34.0 million and net earnings from continuing
operations were $1.2 million ($0.04 per share basic).
EBITDA from continuing operations for the nine months ended September 30, 2002
was $21.1 million. Net earnings were $1.7 million or $0.05 per share basic.
Revenue for the period was $105.2 million.
Marsulex President and Chief Executive Officer, David Gee, said he was pleased
with the performance which was in line with the Company's expectations. "The
results reflect a strong performance from the Refinery Services Group and a
continuation of the Western Markets Group's solid performance as well as the
Company's ongoing investment in outsourced air pollution control technologies
for electrical power generators." Mr. Gee said the results also underscored the
stability of the Company's core Refinery Services and Western Markets businesses
in the face of continuing challenging business conditions. EBITDA from the core
businesses has totaled $38.6 million over the past four quarters. After allowing
for corporate costs of approximately $2.3 million per quarter, the trailing 12
month EBITDA is over $29 million before the impact of the Company's continued
investment in the power generation sector.
The Refinery Services group reported EBITDA of $5.9 million for the third
quarter, the highest level recorded this year. The results include a modest
contribution from the site emissions facility at the BP refinery in Whiting,
Indiana which was completed during the quarter. The new facility was part of
last year's agreement with BP to extend the term of existing spent acid
regeneration contracts in Toledo and add responsibility for processing spent
acid from the Whiting refinery.
Western Markets reported EBITDA of $5.1 million for this quarter. This
performance was comparable to the same period last year after allowing for the
eastern North American sulphur removal assets that were included until July 18
last year when they were sold to Chemtrade Logistics.
Construction of the major outsourcing project for Syncrude proceeded according
to schedule during the quarter. The bid process for the Santee Cooper project in
South Carolina was concluded. Contracts are yet to be awarded and the company is
working towards securing acceptable financing through the construction period.
The Power Generation Group also continued to work on research and development
into new air quality compliance solutions for the power generation industry.
-more-
Comparison of the results for the Company and its operating groups with the same
period last year are affected by the sale of the Company's eastern North
American sulphur removal assets to Chemtrade Logistics Income Fund (the
Chemtrade Transaction) on July 18, 2001 and by the disposition of the Power
Generation group's parts and service business at the end of January 2002 and its
mechanical collectors business in the third quarter of last year. Contributions
of the eastern North American sulphur removal assets are included in Western
Markets' results for the nine months ended September 30, 2001 and the results of
Refinery Services are similarly impacted by changes to certain contractual
relationships that were restructured as a result of the Chemtrade Transaction.
In addition, the consolidated statements of operations and cash flow for the
first nine months of 2001 have been restated to reflect the disposal of the
discontinued operations of BCT Chemtrade Corporation which were also sold as
part of the Chemtrade Transaction.
During the third quarter, Marsulex successfully completed an offer to purchase
up to US$44.2 million principal amount of its outstanding 9 5/8% Senior
Subordinated Notes due 2008, at par, plus accrued interest. The offer fully
satisfies the Company's obligation under the terms of the indenture relating to
the Notes, as a result of the Chemtrade Transaction.
This news release may contain forward-looking statements. These statements are
based on current expectations that are subject to risks and uncertainties, and
the Company can give no assurance that these expectations are correct. Various
factors could cause actual results to differ materially from those projected in
such statements, including financial considerations and those predicting the
timing and market acceptance of future products. The Company disclaims any
intention or obligation to revise forward-looking statements whether as a result
of new information, future developments or otherwise. All forward-looking
statements are expressly qualified in their entirety by this Cautionary
Statement.
Marsulex, which is based in Toronto, Ontario, is a global provider of outsourced
environmental compliance solutions. The company's services encompass the
complete outsourcing of environmental compliance activities including the
ownership and operation of compliance assets. Website: www.marsulex.com.
----------------
A conference call with analysts to review the third quarter 2002 results will be
webcast live on www.newswire.ca/webcast on Thursday, November 7, 2002 at 10:00
a.m. -----------------------
# # # #
For further information:
David M. Gee or Laurie Tugman
President and CEO Executive Vice President & CFO
Tel: (416) 496-4178 Tel: (416) 496-4157
MARSULEX INC.
Consolidated Balance Sheets
(in thousands of dollars)
==================================================================================== ================== ======================
September 30, December 31,
2002 2001
(unaudited)
- ------------------------------------------------------------------------------------ ------------------ ----------------------
Assets
Current assets:
Cash and cash equivalents $ 30,980 $118,148
Accounts receivable 31,795 32,050
Due from Chemtrade Logistics (note 5c) -- 4,000
Note from Chemtrade Logistics (note 5c) -- 4,305
Inventories 2,055 3,217
Future tax asset 991 1,171
Prepaid expenses and other assets 1,695 931
- -------------------------------------------------------------------------------------- -------- --------
67,516 163,822
Property, plant and equipment 129,667 111,873
Deferred charges and other assets, net of accumulated amortization 6,338 8,698
Goodwill, net of accumulated amortization (note 3b) 58,402 58,899
- -------------------------------------------------------------------------------------- -------- --------
$261,923 $343,292
====================================================================================== ===========================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 7,576 $ 11,274
Accrued liabilities 13,692 21,259
Income taxes payable 21 1,453
Interest payable 2,312 --
Current portion of long-term debt -- 41,885
- -------------------------------------------------------------------------------------- -------- --------
23,601 75,871
Long-term debt 96,071 125,654
Deferred revenues 1,762 2,113
Other liabilities 9,901 9,993
Future tax liability 17,783 18,512
Minority interest 11,176 9,995
Shareholders' equity:
Capital stock (note 8) 57,625 57,505
Retained earnings 41,272 39,552
Foreign currency translation adjustment 2,732 4,097
- -------------------------------------------------------------------------------------- -------- --------
101,629 101,154
- -------------------------------------------------------------------------------------- -------- --------
$261,923 $343,292
====================================================================================== ============== ===========
MARSULEX INC.
Consolidated Statements of Operations (unaudited)
(in thousands of dollars, except per share amounts)
========================================================================== ========================== == ========== =============
Three months ended Nine months ended
September 30 September 30
- -------------------------------------------------------------------------- --------------------------- - -------------------------
2002 2001 2002 2001
(restated (restated
note 3c & 5b) note 3c & 5b)
- -------------------------------------------------------------------------- ------------ -------------- ------------ -------------
Revenue $ 34,036 $ 48,655 $ 105,248 $ 193,676
Cost of sales and services 20,369 30,982 65,576 124,520
- -------------------------------------------------------------------------- -------- -------- --------- ---------
Gross profit 13,667 17,673 39,672 69,156
Selling, general, administrative and other costs 4,883 8,818 18,563 36,480
Loss on disposal of property, plant and equipment -- -- 20 --
Depreciation 3,664 3,195 10,965 11,925
- -------------------------------------------------------------------------- -------- -------- --------- ---------
Earnings from continuing operations before the undernoted 5,120 5,660 10,124 20,751
Unusual items (note 4) (1,251) 54,111 2,361 54,111
Foreign exchange loss (note 3c) -- (664) -- (1,045)
Amortization of deferred charges (129) (186) (391) (928)
Interest income 419 1,424 1,714 2,131
Interest expense (1,975) (3,716) (9,342) (13,014)
- -------------------------------------------------------------------------- -------- -------- --------- ---------
Earnings from continuing operations before income taxes, minority 2,184 56,629 4,466 62,006
interest and amortization of goodwill
Income taxes
Current 722 2,932 1,704 3,948
Future (154) 5,827 (152) 6,457
- -------------------------------------------------------------------------- -------- -------- --------- ---------
568 8,759 1,552 10,405
Minority interest 439 359 1,181 1,038
- -------------------------------------------------------------------------- -------- -------- --------- ---------
Earnings from continuing operations before amortization of goodwill 1,177 47,511 1,733 50,563
Amortization of goodwill, net of income taxes (note 3b) -- 1,240 -- 3,155
- -------------------------------------------------------------------------- -------- -------- --------- ---------
Earnings from continuing operations 1,177 46,271 1,733 47,408
Earnings from discontinued operations, net of tax (note 5b) -- 15,347 -- 16,644
- -------------------------------------------------------------------------- -------- -------- --------- ---------
Net earnings $ 1,177 $ 61,618 $ 1,733 $ 64,052
========================================================================== ======== ======== ========= =========
Earnings per share
Basic before amortization of goodwill $0.04 $1.51 $0.05 $1.61
Basic from continuing operations $0.04 $1.47 $0.05 $1.50
Basic $0.04 $1.96 $0.05 $2.03
Diluted, before amortization of goodwill $0.04 $1.49 $0.05 $1.59
Diluted, from continuing operations $0.04 $1.45 $0.05 $1.49
Diluted $0.04 $1.93 $0.05 $2.02
Consolidated Statement of Retained Earnings (Deficit) (unaudited)
For the nine months ended September 30, 2002 with comparative figures for 2001
(in thousands of dollars)
=================================================================================================================================
2002 2001
- -------------------------------------------------------------------------- ------------ -------------- ------------ -------------
Retained earnings (deficit), beginning of year:
As previously reported $ 39,552 $(22,412)
Adjustment on adoption of foreign currency translation (note 3c) -- (1,522)
- -------------------------------------------------------------------------------------------------------- -------- --------
As restated 39,552 (23,934)
Premium on common stock purchased for cancellation (note 8a) (13) --
Net earnings 1,733 64,052
- -------------------------------------------------------------------------------------------------------- -------- --------
Retained earnings (deficit), end of period $ 41,272 $ 40,118
======================================================================================================== ======== ========
MARSULEX INC.
Consolidated Statements of Cash Flow (unaudited)
(in thousands of dollars)
============================================================================ ========================= ==========================
Three months ended Nine months ended
September 30 September 30
- ---------------------------------------------------------------------------- ------------------------- --------------------------
2002 2001 2002 2001
(restated (restated
note 3c & note 3c &
5b) 5b)
- ---------------------------------------------------------------------------- ------------ ------------ ------------- ------------
Cash provided by (used in):
Operating activities:
Net earnings $ 1,177 $ 61,618 $ 1,733 $ 64,052
Items not affecting cash:
Earnings from discontinued operations -- (15,347) -- (16,644)
Depreciation 3,664 3,195 10,965 11,925
Loss on disposal of property, plant and equipment -- -- 20 --
Unusual items (note 4) 1,185 (54,111) (2,427) (54,111)
Amortization of deferred charges and foreign exchange loss 129 850 391 1,973
Amortization of goodwill -- 1,250 -- 3,615
Future income taxes (154) 5,881 (152) 6,269
Minority interest 439 359 1,181 1,038
Other non cash items (414) 1,063 (514) 1,248
- -------------------------------------------------------------------------------- --------- --------- --------- ---------
6,026 4,758 11,197 19,365
Decrease (increase) in non-cash operating working capital, excluding cash
and cash equivalents and current portion of long-term debt 6,361 (15,148) (9,272) (18,036)
- -------------------------------------------------------------------------------- --------- --------- --------- ---------
Cash provided by (used in) continuing operations 12,387 (10,390) 1,925 1,329
Cash used in discontinued operations (note 5b) -- (2,204) -- (3,723)
Financing activities:
Increase in common stock (note 8b) -- -- 134 --
Repurchase of common stock (note 8a) (27) -- (27) --
Repayment of long-term debt (note 5d and note 10) (69,492) (37,723) (69,492) (37,723)
Increase (decrease) in other liabilities -- 169 -- 211
Cash provided by (used) in discontinued operations (note 5b) -- 76 -- (380)
- -------------------------------------------------------------------------------- --------- --------- --------- ---------
(69,519) (37,478) (69,385) (37,892)
Investment activities:
Proceeds on disposals (notes 5 and note 6) -- 128,991 3,358 128,991
Additions to property, plant and equipment (7,881) (5,041) (25,510) (14,063)
Increase in deferred charges -- (1,264) -- (2,906)
Decrease (increase) in notes receivable (note 5c and note 6) 787 -- (1,031) --
Acquisition of Harrowston Investment Limited (note 7) -- (2,979) -- (2,979)
Note from Chemtrade Logistics (note 5c) -- (4,305) 4,305 (4,305)
Cash provided by discontinued operations (note 5b) -- 28,447 -- 28,269
- -------------------------------------------------------------------------------- --------- --------- --------- ---------
(7,094) 143,849 (18,878) 133,007
Foreign exchange loss on cash held in foreign currency (379) (1,018) (830) (1,176)
- -------------------------------------------------------------------------------- --------- --------- --------- ---------
Increase (decrease) in cash and cash equivalents (64,605) 92,759 (87,168) 91,545
Cash and cash equivalents - beginning of period 95,585 30,785 118,148 31,999
- -------------------------------------------------------------------------------- --------- --------- --------- ---------
Cash and cash equivalents - end of period $ 30,980 $ 123,544 $ 30,980 $ 123,544
================================================================================ ========= ========= ========= =========
MARSULEX INC.
Notes to Consolidated Financial Statements
1. Basis of presentation
The unaudited interim period 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 statements except for the
change in accounting policies described in note 3 below. These unaudited
interim period financial statements do not include all the disclosures
required by generally accepted accounting principles and accordingly should
be read together with the audited annual consolidated financial statement
and the accompanying notes included in the Company's 2001 Annual Report.
2. Certain 2001 balances have been reclassified to conform to presentation
adopted in 2002.
3. Changes in accounting policies:
Effective January 1, 2002, the Company adopted the new recommendations of
the CICA. The adoption of Handbook Section 3870, "Stock-based compensation
and other stock-based payments", had no impact on the Company's previously
stated policy of accounting for stock options granted to employees as
capital transactions. The adoption of certain provisions of Section 1581,
"Business Combinations" relating to goodwill and intangible assets, and
Section 3062, "Goodwill and other intangible assets", did not have an
impact on the financial statements. The revisions to Section 1650, "Foreign
Currency Translation" resulted in a decrease to the January 1, 2001 opening
retained earnings of $1.5 million relating to the treatment of foreign
currency translation for long-term debt. The details of the accounting
policy changes are noted below:
a. Stock Compensation
The Company follows the settlement method to account for stock
options. Using this method, no expense is recognized for stock options
as the strike price is set at the market price on the day the awards
are issued. When the stock options are exercised, the proceeds
received by the Company are credited to common stock. The new
recommendations are applied prospectively to all stock-based payments
to non-employees, and to employee awards that are direct awards of
stock, call for settlement in cash or other assets, or are stock
appreciation rights that call for settlement by the issuance of equity
instruments, granted on or after January 1, 2002, except grants
outstanding at January 1, 2002 that call for settlement in cash or
other assets or stock appreciation rights that call for settlement in
equity instruments. Had the Company elected to recognize the cost of
its stock-based compensation based on the estimated fair value of
stock options granted subsequent to January 1, 2002, the Company's
results would have been as follows:
============================================================================== ========================== ======================
Three months ended Nine months ended
(in thousand of dollars, except per share amounts) September 30, 2002 September 30, 2002
- ------------------------------------------------------------------------------ -------------------------- ----------------------
Net earnings as reported $ 1,177 $ 1,733
Adjustment for stock options (57) (141)
- ----------------------------------------------------------------------------------- ------- -------
Pro forma net earnings $ 1,120 $ 1,592
- ----------------------------------------------------------------------------------- ------- -------
Pro forma basic earnings per share $ 0.04 $ 0.05
Pro forma diluted earnings per share $ 0.04 $ 0.05
=================================================================================== ======= =======
The fair value of each stock option granted in 2002 is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions:
================================================================================================ =======================
Nine months ended
September 30, 2002
- ------------------------------------------------------------------------------------------------ -----------------------
Weighted-average exercise price $3.95
Weighted-average fair value of options granted during the year $2.13
Expected life of options (years) 10
Expected stock price volatility 30%
Expected dividend yield 0%
Risk-free interest rate 5.6%
================================================================================================ ===============
MARSULEX INC.
Notes to Consolidated Financial Statements
Page 2
b. Business combinations and goodwill and other intangible assets:
Effective July 2001, generally accepted accounting standards require
that the purchase method of accounting be used for all business
combinations and specifies criteria that intangible assets acquired in
a business combination must meet to be recognized and reported
separately from goodwill. The Company does not have any intangible
assets which would be classified separately from goodwill. Further,
effective January 1, 2002 generally accepted accounting standards
require that goodwill no longer be amortized, but instead tested for
impairment at least annually by comparing carrying value of the
reporting unit to the respective fair value in accordance with the
provisions of Section 3062. The standard was implemented prospectively
and as a result, the amortization of goodwill ceased.
A review of business combinations prior to July 1, 2001 was performed
by the Company with no changes required to the book values of goodwill
and no previously unrecognized intangible assets were recorded. The
Company has also performed the initial impairment test for goodwill
and has determined that there is no impairment of the book value of
goodwill. Had this new standard been applied in the three months and
the nine months ended September 30, 2001 net earnings would have
increased by $1.2 million (3.9 cents basic and diluted earnings per
share) and $3.2 million (10.0 cents basic and diluted earnings per
share), respectively.
c. Foreign currency translation:
Effective January 1, 2002, generally accepted accounting standards
were amended to eliminate the deferral and amortization of foreign
currency translation differences resulting from the translation of
long-term monetary assets and liabilities denominated in foreign
currencies. All such translation differences that the Company
previously deferred and amortized are now charged directly to
earnings. Prior year financial statements have been restated
retroactively to adopt this new Section resulting in net earnings
decreasing $0.3 million for the three months ended September 30, 2001
(1.0 cent basic and diluted earnings per share for the three months
ended September 30, 2001). The balance of retained earnings at January
1, 2001 has been decreased by $1.5 million to reflect the cumulative
effect of the change on periods prior to that date.
4. Unusual items:
======================================================================= ========================= ==========================
(in thousand of dollars) Three months ended Nine months ended
September 30 September 30
----------------------------------------------------------------------- ------------------------- --------------------------
2002 2001 2002 2001
----------------------------------------------------------------------- ------------ ------------ ------------- ------------
Gain on disposal of sulphur removal assets (note 5a) -- $ 64,768 -- $ 64,768
Expenses incurred on early retirement of debt (notes 5d and note 10) (1,252) (7,038) (1,252) (7,038)
Write-off of deferred charges -- (3,619) -- (3,619)
Gain of disposal of parts and service business and other assets (note 6)
-- -- 3,612 --
- ------------------------------------------------------------------------------ ------- -------- ------- --------
Total unusual items $(1,252) $ 54,111 $ 2,360 $ 54,111
============================================================================== ======= ======== ======= ========
5. Sale of sulphur removal assets and BCT Chemtrade Corporation
On July 18, 2001, the Company completed the sale of its sulphur removal
services assets in eastern North America and of BCT Chemtrade Corporation
(BCT), a subsidiary of Marsulex, to Chemtrade Logistics Income Fund for
gross cash proceeds before costs of disposition of $167.2 million (the
Chemtrade Transaction) or $156.6 million net of costs of disposition,
comprised of $128.1 million for the sale of the sulphur removal assets and
$28.5 million for the sale of BCT.
a. The sale of the sulphur removal services asset in eastern North
America resulted in the following gain:
================================================================================================= =======================
Proceeds of disposition $ 128,142
Net book value and costs of sale 63,374
- --------------------------------------------------------------------------------------------------------- ---------
Gain on sale, before income taxes 64,768
Income taxes (9,921)
- --------------------------------------------------------------------------------------------------------- ---------
Gain on sale, net of tax $ 54,847
========================================================================================================= =========
b. The operations of BCT comprised one operating segment. Accordingly,
for reporting purposes, the gain on the sale, the results of
operations and cash flows of this business, to the date of sale, are
presented and disclosed as discontinued operations. Additional
information related to the discontinued operations is as follows:
MARSULEX INC.
Notes to Consolidated Financial Statements
Page 3
================================================================================== ======================= =======================
(in thousands of dollars) Three months ended Nine months ended
September 30, 2001 September 30, 2001
- --------------------------------------------------------------------------------- ----------------------- -----------------------
Revenue $ 5,798 $ 48,221
- --------------------------------------------------------------------------------- ---------------- --------
Earnings from operations before depreciation 508 2,754
- --------------------------------------------------------------------------------- ---------------- --------
Earnings before taxes 398 2,379
Provision for income taxes (80) (476)
Minority interest (99) (387)
- --------------------------------------------------------------------------------- ---------------- --------
Earnings from discontinued operations $ 219 $ 1,516
Gain on sale 15,863 15,863
Provision for income taxes (735) (735)
- --------------------------------------------------------------------------------- ---------------- --------
Net gain on disposal 15,128 15,128
- --------------------------------------------------------------------------------- ---------------- --------
Earnings from discontinued operations $ 15,347 $ 16,644
================================================================================= ================ ========
Cash provided by (used in):
Operating activities $ (2,204) $ (3,723)
Financing activities 76 (380)
Investment activities 28,447 28,269
- --------------------------------------------------------------------------------- ---------------- --------
Increase in cash and cash equivalents from discontinued operations $ 26,319 $ 24,166
================================================================================= ================ ========
c. As part of the Chemtrade Transaction, Chemtrade Logistics Inc. owed
the Company $4.0 million at December 31, 2001 relating to the
finalization of working capital, of which $1.3 million was collected
during second quarter 2002 and the remainder will be collected over
the next three years and is recorded in other assets. The note in the
amount of $4.3 million pursuant to an escrow agreement was received in
January 2002.
d. On July 18, 2001 the Company fully retired its outstanding 10.21%
Senior Notes and cancelled its US $50,000,000 operating credit
facility at an expense of $7,038,000. These expenses included the
write-off of deferred debt issuance costs and foreign exchange costs
of $4,344,000 and a make-whole payment of $2,694,000.
6. Disposal of parts and service business and other assets:
On January 31, 2002, the Company completed the sale of its parts and
service business and other assets for gross proceeds of $6.5 million, of
which $3.4 million was received in cash.
(in thousands of dollars)
- ----------------------------------------------------------------------------------------------------------------------------------
Proceeds of disposition $6,545
Net book value and costs of sale 2,933
- --------------------------------------------------------------------------------------------------------- ------
Gain on sale, before income taxes 3,612
Income taxes --
- --------------------------------------------------------------------------------------------------------- ------
Gain on sale, net of tax $3,612
========================================================================================================= ======
7. Acquisition of Harrowston Investments Limited:
On July 17, 2001, the Company purchased the shares of Harrowston
Investments Limited from its major shareholder, Harrowston Inc. for
$2,979,000; principal assets of Harrowston Investments Limited comprised of
future income tax assets. Harrowston Investment Limited was merged with the
Company.
8. Capital stock
a. On January 29, 2002, the Company announced its intention to make a
Normal Course Issuer Bid (NCIB) pursuant to which the Company may
purchase 1,339,053 of its common shares issued and outstanding. The
NCIB commenced on February 1, 2002 and will terminate on January 31,
2003 or such earlier date as the Company completes its purchases. The
purchases will be made for cancellation at the market price of such
shares at the time of acquisition. During the quarter ended September
30, 2002, the Company acquired 7,500 shares for cancellation for total
cash proceeds of $27,000.
MARSULEX INC.
Notes to Consolidated Financial Statements
Page 4
b. During the second quarter 2002, the Company issued 60,000 common
shares for cash proceeds of $133,800 upon the exercise of stock
options.
9. Income taxes
The overall effective income tax rate for the nine months ended September
30, 2002 was 34.8% compared to the statutory rate of 38.6% and to the
prior year effective rate of 15.0%. The effective income tax rate for the
three months ended September 30, 2002 was 26.0% compared to 14.6% for the
same period in 2001.
Given the nature and location of its operations, the Company would have
expected a tax rate of 37.0%. The effective rate can vary from the
expected rate due to the amount of current and prior year losses, the
benefit of which has not been recognized, and the costs associated with
the Company's current level of debt. The rate may fluctuate from period
to period.
The Company currently incurs approximately $2.0 million in cash taxes
each year. Management expects this to continue into the near future given
the significant tax losses available to offset future increases in
taxable income.
10. Offer to purchase bonds
On August 20, 2002 the Company completed the July 15, 2002 offer to
purchase its 9 5/8% Senior Subordinated Notes by purchasing the obligated
amount of US$44.2 million principal at par plus accrued interest of US$0.6
million. Although US$47.2 million was tendered, under both the terms of the
offer and the indenture, the Company was only obligated to purchase up to
the amount of unutilized cash proceeds resulting from the Chemtrade
Transaction.
As part of the purchase, the Company incurred expenses of $1,252,000
comprised of writing off of deferred debt issuance costs of $1,185,000 and
expenses incurred on the transaction of $67,000.
11. Segments
The Company's activities are divided into four reportable segments. The
three operating segments are Refinery Services, Western Markets and Power
Generation. The fourth non-operating segment is Corporate Support, which
provides project execution support, finance, information systems, human
resources and risk management to the preceding operating segments.
Refinery Services provides outsourced compliance solutions to major oil
refinery customers in the United States and Canada, primarily extraction
and recovery of sulphur from hydrogen sulphide gas created during the
refining process, S02 recovery to ensure air quality compliance and
regeneration of spent sulphuric acid produced during octane enhancement of
gasoline.
Western Markets provides environmental removal services, as well as
chemical products, to customers in Western Canada and until July 18, 2001
included the sulphur removal services in Eastern North America that was
sold as part of the Transaction.
Power Generation provides outsourced environmental services, primarily air
quality compliance, to customers in the power generation industry. The
segment also provides services to the cement industry through its patented
CP-Gyp process.
MARSULEX INC.
Notes to Consolidated Financial Statements
Page 5
Schedule of business segments (unaudited)
For the three months ended September 30
(in thousands of dollars)
- ------------------------ ----------------- ----------------- ------------------ ------------------ ------------------
Refinery Services Western Markets(2) Power Generation Corporate Support Total
- ------------------------ ----------------- ----------------- ------------------ ------------------ ------------------
2002 2001 2002 2001 2002 2001 2002 2001 2002 2001
- ------------------------ ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Revenue from external
customers $17,327 $18,459 $14,052 $18,613 $ 2,657 $11,583 $ -- $ -- $34,036 $48,655
======================== ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Earnings (loss) from
continuing operations
before depreciation,
including loss on
disposal $ 5,888 $ 5,354 $ 5,140 $ 5,427 $ (501) $ 760 $(1,743) $(2,686) $ 8,784 $ 8,855
Depreciation, including
loss on disposal 3,001 2,507 327 588 282 44 54 56 3,664 3,195
======================== ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Earnings (loss) from
continuing operations
before the undernoted $ 2,887 $ 2,847 $ 4,813 $ 4,839 $ (783) $ 716 $(1,797) $(2,742) $ 5,120 $ 5,660
======================== ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Capital expenditures
from continuing
operations $ 908 $ 3,761 $ 92 $ 60 $ 6,811 $ 1,220 $ 70 -- $ 7,881 $ 5,041
======================== ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Schedule of business segments (unaudited)
For the nine months ended September 30
(in thousands of dollars)
========================== ===================== ===================== ==================== =====================
Refinery Services Western Markets(2) Power Generation Corporate Support
========================== ===================== ===================== ==================== =====================
2002 2001 2002 2001 2002 2001 2002 2001
- -------------------------- ---------- ---------- ---------- ---------- ---------- --------- ---------- ----------
Revenue from external
customers $ 51,988 $ 52,559 $40,919 $102,748 $ 12,341 $ 38,369 $-- $--
========================== ===================== ===================== ==================== =====================
Earnings (loss) from
continuing operations
before depreciation,
including loss (gain)
on disposal $ 15,291 $ 17,543 $14,634 $ 25,631 $ (1,157) $ (1,066) $ (7,659) $ (9,432)
Depreciation, including
loss (gain) on disposal 8,980 7,709 976 3,703 867 147 162 366
========================== ===================== ===================== ==================== =====================
Earnings (loss) from
continuing operations
before the undernoted $ 6,311 $ 9,834 $13,658 $ 21,928 $ (2,024) $ (1,213) $ (7,821) $ (9,798)
========================== ===================== ===================== ==================== =====================
Capital expenditures
from continuing
operations $ 11,552 $ 8,175 $ 377 $ 551 $ 13,423 $ 5,256 $ 158 $ 81
========================== ===================== ===================== ==================== =====================
Total assets before
goodwill (1) $120,999 $103,385 $23,106 $ 23,742 $ 20,630 $ 21,089 $ 38,786 $ 136,177
Goodwill, net of
amortization (1) 46,002 46,425 4,468 4, 468 7,932 8,006 -- --
- -------------------------- -------- -------- ------- -------- -------- -------- -------- ---------
Total assets (1) $167,001 $149,810 $27,574 $ 28,210 $ 28,562 $ 29,095 $ 38,786 $ 136,177
- -------------------------- -------- -------- ------- -------- -------- -------- -------- ---------
(1) 2001 assets are at December 31
(2) Includes the sulphur removal services in eastern North America until July
18th for the quarter and the nine months in 2001.
(TABLE CONTINUED)
Schedule of business segments (unaudited)
For the nine months ended September 30
(in thousands of dollars)
========================== =====================
Total
========================== =====================
2002 2001
- -------------------------- ---------- ---------
Revenue from external
customers $105,248 $193,676
========================== ========== =========
Earnings (loss) from
continuing operations
before depreciation,
including loss (gain)
on disposal $ 21,109 $ 32,676
Depreciation, including
loss (gain) on disposal 10,985 11,925
========================== ========== =========
Earnings (loss) from
continuing operations
before the undernoted $ 10,124 $ 20,751
========================== ========== =========
Capital expenditures
from continuing
operations $ 25,510 $ 14,063
========================== ========== =========
Total assets before
goodwill (1) $203,521 $284,393
Goodwill, net of
amortization (1) 58,402 58,899
- -------------------------- -------- --------
Total assets (1) $261,923 $343,292
- -------------------------- -------- --------
(1) 2001 assets are at December 31
(2) Includes the sulphur removal services in eastern North America until July
18th for the quarter and the nine months in 2001.
MARSULEX INC. - THIRD QUARTER 2002
Management's Discussion & Analysis
The following provides additional analysis of Marsulex's operations and
financial position. It is supplementary information and should be read in
conjunction with the unaudited interim consolidated financial statements and
accompanying notes.
REVIEW OF THIRD QUARTER 2002
The results for the third quarter were in line with expectations and reflected a
solid operating performance from the Refinery Services group; steady results
from the Company's operations in western Canada; and ongoing investment in
outsourced air quality compliance services for the power generation industry.
Construction of the Refinery Services group's site emissions facility at BP's
Whiting, Indiana refinery, part of a package of environmental services provided
to BP in Whiting and Toledo, was completed during the quarter. The results
included fees earned from the start-up of the facility. The Power Generation
group focused on executing the new outsourcing projects for Syncrude in western
Canada and Santee Cooper in South Carolina, as well as continuing research and
development of new air quality compliance solutions for the power generation
industry.
On August 20, 2002 the Company completed the offer, announced on July 15, 2002
to purchase up to US$44.2 million of its 9 5/8% Senior Subordinated Notes. The
offer was made under the terms of the indenture relating to the Notes, as a
result of the Chemtrade Transaction. A total principal amount of US$47.2 million
was tendered. The Company acquired US$44.2 million principal amount of the Notes
plus accrued interest of US$0.6 million, fulfilling its obligations under the
terms of the indenture. The repurchase of the Senior Subordinated Notes has
reduced interest costs by approximately US$1.1 million per quarter.
RESULTS OF OPERATIONS
The Company is focused on providing outsourced environmental compliance
solutions to two principal industries: oil refining and electric power
generation. These services are provided through three operating segments:
Refinery Services, Western Markets and Power Generation. A fourth, non-operating
segment, Corporate, provides project execution support, finance, information
systems, human resources, and risk management to the operating segments.
Comparison of the results of the Company and its operating groups with the same
period last year are affected by the sale of the Company's sulphur removal
assets in North America to Chemtrade Logistics Income Fund (the Chemtrade
Transaction) that was completed on July 18, 2001 and by the disposition of
non-core businesses of the Power Generation group in the third quarter of 2001
and in January 2002. Contributions of the eastern North American sulphur removal
assets are included in Western Markets results for the nine months ended
September 30, 2001, and the results of Refinery Services are affected by changes
to certain contractual relationships that were restructured as a result of the
Chemtrade Transaction. In addition, the consolidated statements of operations
and cash flow for the nine months ended September 30, 2001 have been restated to
reflect the disposal of the discontinued operations of BCT Chemtrade Corporation
(which were also sold as part of the Chemtrade Transaction).
Revenue and Gross Profit
Consolidated revenue was $34.0 million for the third quarter 2002, down $14.7
million, or 30.2% from $48.7 million for the same period in 2001. Revenue for
the nine months was $105.2 million for 2002 compared with revenue of $193.7
million for the nine months ended September 30, 2001, a decline of $88.5 million
or 45.7%. The decline reflects the impact of the Chemtrade Transaction as the
third quarter and nine months ended in 2001 included the results for the sulphur
removal assets in eastern North America to July 18, 2001 and the disposal of
Power Generation assets.
Similarly, gross profit for the third quarter of 2002 was $13.7 million, a
decrease of $4.0 million or 22.6% from the same period in 2001. For the nine
months ended September 30, 2002 gross profit was $39.7 million a decrease of
$29.5 million or 42.6% when compared to the same period of 2001. Gross profit as
a percentage of revenue increased from 36.3% for the third quarter of 2001 to
40.3% for the same period of 2002 and from 35.7% for the nine months ended
September 30, 2001 to 37.7% for the same period of 2002.
Refinery Services provides outsourced compliance services to major oil refinery
customers in the United States and Canada, primarily extraction and recovery of
sulphur from hydrogen sulphide gas created during the refining process, SO2
recovery to ensure air quality compliance, and regeneration of spent sulphuric
acid produced during the octane enhancement of gasoline.
Refinery Services' revenue was $17.3 million for the third quarter of 2002
compared to $18.5 million for the third quarter in 2001 and $52.0 million for
the nine months of 2002 compared to $52.6 million for the same period in 2001.
The third quarter revenue was in line with expectations and included the fees
earned from the start up of the BP Whiting facility.
Western Markets provides environmental removal services as well as chemical
products to customers in Western Canada. The group produces a range of water
treatment and other sulphur-based chemicals at four plants based in three
locations in Western Canada. For example, it is one of the leading producers of
alum, a water treatment chemical used extensively by municipalities for water
and sewage treatment. This and other chemicals are marketed to customers in
North America.
Revenue for Western Markets in the third quarter of 2002 was $14.1 million
compared with $18.6 million for the same period in 2001, a decrease of 24.2%.
The revenue for the nine months ended September 30, 2002 was $40.9 million, down
$61.8 million or 60.2% from the same period in 2001. The 2001 revenue includes
revenue until July 18, 2001 relating to the sulphur removal assets included in
the Chemtrade Transaction. The lower revenue in 2002 compared to similar periods
in 2001 reflects the sale of these assets on July 18, 2001. On a comparable
basis, the revenue for Western Markets was similar to the prior year. When the
effects of the Chemtrade Transaction are ignored, Western Markets' revenue for
the nine months reflects strong seasonal demand in the second quarter of 2002
for the Company's water treatment and pulp and paper bleaching chemicals and is
the primary reason for the increase over the same periods in 2001.
Power Generation provides outsourced environmental services, primarily air
quality compliance, to customers in the power generation industry. These
services enable power generators to meet compliance obligations, as well as to
achieve fuel flexibility and access to the savings of lower cost high-sulphur
fuel. The group also provides services to the cement industry through its
patented CP-Gyp process which uses a by-product of the scrubbing process used by
some manufacturers and combines it with cement kiln dust to produce a useable
cement additive.
Revenue for the Power Generation group was $2.7 million in the third quarter of
2002, down 76.7% from $11.6 million for the same period in 2001. For the nine
months ended September 30, 2002, revenue was $12.3 million compared to $38.4
million for the same period of 2001, a 68.0% decrease. The decrease reflected
the disposal of the parts and service business in the first quarter of 2002 and
the sale of the mechanical collectors business in the third quarter of last
year. Revenue for the third quarter was largely composed of fees earned during
the quarter while the nine months results included revenue from the major FGD
system installation for Virginia Power which was substantially completed in the
first quarter of this year.
Selling, General, Administrative and Other Costs
Selling, general, administrative and other ("SGA") costs were $4.9 million in
the third quarter of 2002 compared to $8.8 million for the same period in 2001,
a decrease of $3.9 million or 44.3%. For the nine months ended September 30,
2002, SGA costs of $18.6 million were down $17.9 million or 49.0% from $36.5
million for the same period in 2001. The decrease in SGA costs was due primarily
to dispositions associated with the Chemtrade Transaction and the sale of
non-core assets in Power Generation. SGA costs for the third quarter and nine
months ended September 30, 2001 included the impact of the sales of the sulphur
removal assets, the mechanical collectors business, and the parts and service
business.
As a percent of revenue, SGA costs were 14.4% for the third quarter of 2002
(18.1% for the same period in 2001) and 17.7% for the nine months ended
September 30, 2002 (18.8% for the same period in 2001).
Earnings before interest, tax, depreciation and amortization (EBITDA)
EBITDA is presented because management believes it is a widely used financial
indicator of the Company's ability to service and/or incur debt. EBITDA is not a
recognized measure under Canadian generally accepted accounting principles
(GAAP) and should not be considered as an alternative to 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. The following details the Company's calculation of EBITDA:
====================================================== ============================ =============================
Three months ended Nine months ended
(in thousand of dollars) September 30 September 30
- ------------------------------------------------------ ---------------------------- -----------------------------
2002 2001 2002 2001
(restated (1)) (restated (1))
- ------------------------------------------------------ -------------- ------------- ------------- ---------------
Revenue $34,036 $48,655 $105,248 $193,676
Cost of sales and services 20,369 30,982 65,576 124,520
- ------------------------------------------------------ ------- ------- -------- --------
Gross profit 13,667 17,673 39,672 69,156
Selling, general, administrative and other costs 4,883 8,818 18,563 36,480
- ------------------------------------------------------ ------- ------- -------- --------
EBITDA $ 8,784 $ 8,855 $ 21,109 $ 32,676
====================================================== ======= ======= ======== ========
(1) See notes 5b of the unaudited interim consolidated financial statements
EBITDA for the third quarter of 2002 was $8.8 million compared to $8.9 million
for the same period in 2001. For the nine months ended September 30, 2002,
EBITDA decreased $11.6 million to $21.1 from $32.7 million for the same period
in 2001. The decrease in EBITDA for the nine months ended September 30, 2002 is
attributable primarily to the inclusion of the results of the sulphur removal
assets in eastern North America in the prior periods.
Third quarter 2002 EBITDA for Refinery Services was $5.9 million compared to
$5.4 million for the third quarter of 2001 and $15.3 million for the nine months
ended September 30, 2002 compared to $17.5 million for the same period of 2001.
The Montreal plant continued the strong performance that it has delivered all
year, and the Toledo plant operated at capacity throughout the period. The third
quarter results included the fees earned from the newly constructed site
emissions facility at BP Whiting. However, comparability with results of the
prior periods is impacted by changes to contractual relationships with Irving
Oil that were restructured as a result of the Chemtrade Transaction. Prior to
the Chemtrade Transaction, Marsulex processed spent acid for Irving's Saint John
refinery and as part of a major refinery expansion and upgrade, Irving
constructed its own on-site regeneration facility and Marsulex entered into a
new agreement with Irving to remove and distribute the excess sulphuric acid
produced by the new facility. The impact of the loss of the Irving regeneration
volume was more than offset by the new BP Whiting relationship. This year's
earnings
from the Irving regeneration volume have substantially disappeared as
they complete their transition to their new regeneration facility, and the acid
resale contract which replaced it was sold to Chemtrade.
Western Markets' EBITDA for the third quarter of 2002 was $5.1 million compared
to $5.4 million for the same period in 2001 and included the results from the
sulphur removal assets for only 18 days. For the nine months ended September 30,
2002, Western Markets' EBITDA was $14.6 million compared to $25.6 million for
the same period of 2001 reflecting the inclusion of the results from sulphur
removal assets in 2001 until July 18. On a comparable basis, Western Markets'
EBITDA was essentially flat to last year for the third quarter and ahead of last
year for the nine months ended September 30, 2002 reflecting seasonal demand in
the second quarter for the Company's water treatment and pulp and paper
bleaching chemicals.
EBITDA for Power Generation for the third quarter of 2002 was a loss of $0.5
million compared to earnings of $0.8 million for the third quarter of 2001,
while EBITDA for the nine months ended September 30, 2002 was essentially flat
when compared to the same period in 2001.
Corporate costs for the third quarter of 2002 of $1.7 million included a foreign
exchange gain on US denominated working capital of $0.9 million.
Depreciation and Amortization
Depreciation expense for the third quarter of 2002 was $3.7 million compared to
$3.2 million for the same period in 2001, an increase of $0.5 million or 15.6%.
For the nine months ended September 30, 2002, depreciation was $11.0 million
compared to $11.9 million for 2001 largely attributable to the reduction in
depreciation due to the disposition of fixed assets in the Chemtrade
Transaction.
The Company has adopted the new Canadian Institute of Chartered Accountants'
(CICA) Handbook Section 3062, "Goodwill and other intangible assets", effective
January 1, 2002. Under this section the Company no longer amortizes goodwill,
but instead goodwill will be tested annually for impairment by comparing the
carrying value of the reporting unit to the respective fair value. A review of
business combinations prior to July 1, 2001 was performed by the Company with no
changes required to the book values of goodwill and no previously unrecognized
intangible assets were recorded. The Company completed the annual impairment
test for goodwill during the second quarter and determined that there was no
impairment of the book value of goodwill. Had this new standard been applied in
the three months and the nine months ended September 30, 2001, net earnings
would have increased by $1.2 million and $3.2 million respectively.
Foreign Exchange Loss (Change in accounting policy)
Under the CICA Handbook revision to Section 1650, "Foreign currency
translation", foreign currency translation differences from the translation on
the Senior Notes outstanding as at September 30, 2001 are no longer deferred and
amortized but rather taken directly into income. Therefore, in accordance with
the revision, the net earnings for the third quarter have been restated to
reflect a decrease of $0.3 million. In addition, the January 1, 2001 opening
retained earnings has been decreased by $1.5 million to reflect the cumulative
effect of the change on periods prior to that date. There is no impact to the
third quarter and nine months ended September 30, 2002 and September 30, 2001
earnings because the Senior Notes were fully retired on July 18, 2001 as part of
the Chemtrade Transaction.
Interest Expense, Net
Net interest expense was $1.6 million in the third quarter of 2002, a decrease
of $0.7 million or 30.4% over the $2.3 million net expense for the same period
in 2001 and is the result of the purchase of the Senior Subordinated Notes. For
the nine months, net interest expense was $7.6 million, a decrease of $3.3
million or 30.3% from the net interest expense of $10.9 million for the same
period last year reflecting the reduced debt level of the Company.
Income Taxes
The overall effective income tax rate for the nine months ended September 30,
2002 was 34.8% compared to the statutory rate of 38.6% and to the prior year
effective rate of 15.0%. The effective income tax rate for the three months
ended September 30, 2002 was 26.0% compared to 14.6% for the same period in
2001.
Given the nature and location of its operations, the Company would have expected
a tax rate of 37.0%. The effective rate can vary from the expected rate due to
the amount of current and prior year losses, the benefits of which have not been
recognized, and the costs associated with the Company's current of debt. The
rate may fluctuate from period to period.
The Company currently incurs approximately $2.0 million in cash taxes each year.
Management expects this to continue into the near future given the significant
tax losses available to offset future increases in taxable income.
CONSOLIDATED BALANCE SHEETS
Total assets were $261.9 million at September 30, 2002 compared to $343.3
million at December 31, 2001.
The net book value of property, plant, and equipment at September 30, 2002
increased by $17.8 million over the December 31, 2001 balance of $111.9 million.
This increase is primarily due to capital additions during the nine months ended
September 30, 2002 of $25.5 million reduced by depreciation expense of $11.0
million, disposals, and the impact of a stronger Canadian dollar versus the US
dollar for US property, plant, and equipment, the impact of which is included in
the foreign currency translation adjustment.
Accounts receivable decreased by $0.3 million to $31.8 million from the December
31, 2001 balance of $32.1 million. Accounts payable decreased by $3.7 million to
$7.6 million from the December 31, 2001 balance of $11.3 million, while accrued
liabilities decreased $7.6 million when compared to the December 31, 2001
balance of $21.3 million largely due to the reduced activity on the major Power
Generation project substantially completed in the first quarter of 2002.
Inventory has decreased $1.1 million as a result of the disposal of the parts
and services business in January of 2002. Prepaid expenses at the end of the
third quarter increased by $0.8 million due to prepaid insurance. The $4.3
million owed pursuant to an escrow agreement was collected in January of 2002.
The amount of $2.7 million owed by Chemtrade Logistics Inc. relating to the
finalization of the working capital remains outstanding with $1.3 million being
collected during the second quarter of 2002 and the remainder due over the next
three years.
On August 20, 2002 the Company completed the July 15, 2002 offer to purchase its
9 5/8% Senior Subordinated Notes by purchasing the obligated amount of US$44.2
million principal at par plus accrued interest of $0.6 million. Although US$47.2
million was tendered, under both the terms of the offer and the indenture the
Company was only obligated to purchase up to the amount of unutilized cash
proceeds resulting from the Chemtrade Transaction. In addition, the remaining
debt decreased by $0.9 million during the nine months of 2002 due to the
strengthening of the Canadian dollar versus its US counterpart. The foreign
exchange gain relating to the US denominated Senior Subordinated Notes is
included in the foreign currency translation adjustment.
Share Capital Outstanding
September 30, 2002 December 31, 2001
- --------------------------------------------------------------- --------------------------- -------------------------
Number of common shares 26,833,550 26,781,050
Number of convertible shares, non-voting 4,720,182 4,720,182
Number of options 2,729,750 2,736,500
During the second quarter, 60,000 common shares were issued upon the exercise of
stock options for cash proceeds of $133,800.
On January 29, 2002, the Company filed a Notice of Intention to make a Normal
Course Issuer Bid with the Toronto Stock Exchange, pursuant to which the Company
may purchase up to 1,339,053 of its common shares, representing approximately 5%
of its 26,781,050 issued and outstanding common shares. During the nine months
ended September 30, 2002 the Company acquired 7,500 shares for $27,150 for
cancellation pursuant to the Notice of Intention to make a Normal Course Issuer
Bid.
The Company continues to believe that the current market price of its common
shares does not fully reflect the value of its business and its future business
prospects and represents a discount to management's estimate of the underlying
net asset value of the shares.
The adoption of the CICA Handbook Section 3870, "Stock-based compensation and
other stock-based payments" by the Company effective January 1, 2002, had no
impact on the Company's previously stated policy of accounting for stock options
granted to employees as capital transactions.
Financial Condition & Liquidity
(in millions of dollars) September 30, 2002 December 31, 2001
- -------------------------------------------------------------- --------------------------- -------------------------
Debt $ 96.1 $ 167.5
Debt to Equity 0.9x 1.7x
Net debt (1) $ 65.1 $ 49.4
Net debt to EBITDA (2) 2.3x 1.3x
Net debt to Equity 0.6x 0.5x
Interest coverage (EBITDA to interest expense) 2.3x 2.3x
============================================================== =========================== =========================
(1) Net debt is defined as total debt less cash and cash equivalents.
(2) EBITDA for the last twelve months ended September 30, 2002 includes the
results of the sulphur removal assets in eastern North America for the
period ending July 1, 2001 to July 17, 2001.
Cash and cash equivalents at the end of the third quarter 2002 were $31.0 with
excess cash continuing to be invested in short-term, interest-bearing deposits.
This cash, together with any new operating credit facility, will be utilized
for, but not limited to, acquisitions or expansions of processing operations,
development of new technologies, and development or expansion of the Company's
presence in new markets.
As a result of the Chemtrade Transaction on July 18, 2001, the Company was
obligated to make an offer within 380 days to purchase the Senior Subordinated
Notes. Under the terms of the indenture, the total amount offered was limited to
the net cash proceeds from the Chemtrade Transaction reduced by the repayment of
the Senior Notes and funds committed and applied on capital projects in the next
360 days. Notwithstanding the foregoing, the Company was not required to
purchase more than 25% of the original principal amount (US $26,250,000) prior
to the fifth anniversary, June 30, 2003, and accordingly this amount has been
recorded as the current portion of long-term debt at June 30, 2002 and at
December 31, 2001. The remaining amount, if any, would be required to be
included in a second offer to purchase to be made on the fifth anniversary. As
previously noted, on August 20, 2002 the Company completed the offer purchase a
portion of the Senior Subordinated Notes fully
satisfying its obligation under the terms of the indenture and therefore the
Company will not be making a second offer on the fifth anniversary of the
Senior Subordinated Notes.
Currently the Company has commitments in excess of $200 million relating to the
Syncrude and Santee Cooper projects. These commitments exceed current cash
balances and internally generated cash; therefore, the Company intends to raise
funds to cover its commitments during the construction period of the two
projects. Any funds remaining as a result of Senior Subordinated Notes not being
tendered would be used to satisfy capital commitments during the construction
period. Although the Company's financial indicators had improved subsequent to
the Chemtrade Transaction, the assumption of increased debt during the
construction period will cause these indicators to change until the projects are
completed.
Until new financing is in place, the Company is at risk as to the availability
of new credit and the associated interest rates.
Working Capital
The Company's working capital, excluding cash and cash equivalents and current
portion of long-term debt, was $12.9 million at September 30, 2002 compared to
$11.7 million at December 31, 2001. The $1.2 million increase in working capital
was primarily the result of the decrease in accounts payable and accrued
liabilities. Given the size of the Company and the significant planned capital
expenditures, it is not unusual for the Company to experience temporary
fluctuations in working capital.
The increase in working capital resulted in an increase in the current ratio,
excluding cash and cash equivalents and the current portion of long-term debt,
from 1.34:1 in 2001 to 1.55:1 in 2002.
CONSOLIDATED STATEMENTS OF CASH FLOWS
During the third quarter of 2002, the Company generated $6.0 million in cash
from operations before changes in non-cash working capital, compared to $4.8
million for the same period in 2001 and is the result of the lower net interest
expense and current taxes. For the nine months ended September 30, 2002, $11.2
million in cash from operations before changes in non-cash working capital was
generated, compared to $19.4 million for the same period in 2001. The decrease
for the nine months ended September 2002 was due to the lower EBITDA resulting
from inclusion of the sulphur removal assets in eastern North America until July
18, 2001.
Cash and cash equivalents at the end of the third quarter of 2002 was $31.0
million down from $118.1 million at December 31, 2001. Cash provided by
operations, cash generated by the disposal of non-core Power Generation assets,
and the amounts collected from Chemtrade Logistics relating to the Chemtrade
Transaction were offset by the purchase of the Senior Subordinated Notes, the
capital additions and an increase in non-cash working capital.
Capital expenditures for the third quarter of 2002 were $7.9 million compared to
$5.0 million for the same period of 2001 and $25.5 million for the nine months
of 2002 compared to $14.1 million for the nine months of 2001. The increase for
the nine months ended September 30, 2002 was primarily due to the increase in
capital expenditures associated with the BP Whiting project on which
construction was completed in the third quarter of 2002.
Construction on the Syncrude project is under way. As a result of the fixed
price contracts the Company has in place, the current labour conditions of the
Fort McMurray area should not have any significant impact on the Company's
timing or expected capital investment for the project. The project is scheduled
for completion and startup in 2004, with the startup tied to the overall
completion of the Upgrader project.
The bid process for the Santee Cooper project has concluded with contracts yet
to be awarded as the Company is working towards securing financing through the
construction period that provides an acceptable risk profile to Marsulex.
OUTLOOK
The steady performances of the Company's core businesses in the third quarter
are expected to continue in the final quarter of the year, with the usual
allowances for seasonal factors. This would produce earnings for 2002 in line
with the prior year's results.
The trailing four quarters EBITDA for the core businesses of $38.6 million, less
the trailing four quarters of corporate costs of approximately $2.3 million per
quarter, suggests an annual EBITDA for the core businesses of over $29 million
before the impact of Power Generation.
In addition to optimizing the revenue potential of these businesses and looking
for broadened relationships, the Company is also paying close attention to cost
controls and has taken a number of initiatives in this area in recent months.
The Power Generation group will continue to focus on execution of the Syncrude
and Santee Cooper projects and on the development of new air quality compliance
solutions for power generators.
Forward-looking Statements
The foregoing may contain forward-looking statements. These statements are based
on current expectations that are subject to risks and uncertainties, and the
Company can give no assurance that these expectations are correct. Various
factors could cause actual results to differ materially from those projected in
such statements, including financial considerations and those predicting the
timing and market acceptance of future products. The Company disclaims any
intention or obligation to revise forward-looking statements whether as a result
of new information, future developments or otherwise. All forward-looking
statements are expressly qualified in their entirety by this Cautionary
Statement.
- --------------------------------------------------------------------------------
MARSULEX 2002 Q3
THIRD QUARTER REPORT
- --------------------------------------------------------------------------------
President's Letter
Marsulex produced solid results for the third quarter ended September 30, 2002,
demonstrating again that the Company's well-established core businesses are able
to generate predictable high quality earnings and cash flow.
As noted in previous reports and elsewhere in this report, comparison of this
year's results to the same periods last year is not particularly meaningful
because of the Chemtrade Transaction. As well, the restructuring of certain
contractual relationships in the Refinery Services group as a result of the
Chemtrade Transaction and the disposition of non-core businesses of the Power
Generation group last year and early this year also make comparisons difficult.
Operations
The Refinery Services group had its strongest quarter of the past 15 months,
generating EBITDA of $5.9 million which was 9% higher than the same quarter last
year, and 16% ahead of the second quarter this year. The group's Montreal plant
again performed well as it has all year, and the Toledo plant operated at
capacity. The results included fees from the Marsulex-owned site emissions
facility at the BP refinery in Whiting, Indiana that was completed during the
quarter.
Western Markets group had another solid quarter, posting EBITDA of $5.1 million.
These results were consistent with the same quarter last year after allowing for
the effect of the eastern North American sulphur removal assets that were
included for approximately two and a half weeks until their sale to Chemtrade.
The results are an affirmation that our core businesses with their solid
long-term customer relationships provide a sound base of earnings as well as a
foundation for further growth. Taking the past four quarters, which allows for
seasonality, Refinery Services and Western Markets produced EBITDA of $38.6
million. Our corporate costs on a trailing four-quarter basis averaged $2.3
million a quarter. Combining the rolling four quarters of earnings and the
corporate cost run rate gives an annual EBITDA for our core businesses of over
$29 million.
The potential to grow these businesses is demonstrated by the start-up of the
new facility at BP Whiting. The new outsourced service is part of the package
deal we made with BP last year that extended our existing relationship with BP
in Toledo for 15 years and added the spent acid needs of BP's facility in
Whiting, Indiana for a similar period.
The focus of the Power Generation group in the third quarter continued to be on
executing the Syncrude and Santee Cooper projects which incorporate our
proprietary gas cleaning technology. Construction of the Syncrude project is now
well underway. Completion and startup is still scheduled for 2004, although this
timing is tied to Syncrude's overall completion of their Upgrader project.
The bid process for construction of the Santee Cooper project has been completed
although contracts are yet to be awarded. We are working towards securing
financing through the construction phase that will provide an acceptable risk
profile for Marsulex.
Senior Subordinated Notes Offer
As a result of the Chemtrade transaction, on July 15, 2002 we commenced an offer
to purchase up to US$44.2 million of the principal amount of the Senior
Subordinated Notes at par plus accrued interest. The offer was over-subscribed
with a total of $47.2 million being tendered. The full amount of the offer of
$44.2 million plus accrued interest of $0.6 million was paid out on a pro rata
basis on August 20, 2002. This fully satisfies our obligation under the terms of
the indenture.
Outlook
We expect the steady performances of our core businesses, with allowances for
the usual seasonal variations, to continue in the fourth quarter and therefore
produce earnings for 2002 in line with last year.
We are also pursuing the development of new air quality compliance solutions for
power generators. This involves both our own proprietary technology as well as
innovative strategic partnerships that will increase our ability to offer total
outsourcing solutions.
/s/David M Gee
David M Gee
President & Chief Executive Officer
Management's Discussion and Analysis
The following provides additional analysis of Marsulex's operations and
financial position. It is supplementary information and should be read in
conjunction with the unaudited interim consolidated financial statements and
accompanying notes.
REVIEW OF THIRD QUARTER 2002
The results for the third quarter were in line with expectations and reflected a
solid operating performance from the Refinery Services group; steady results
from the Company's operations in western Canada; and ongoing investment in
outsourced air quality compliance services for the power generation industry.
Construction of the Refinery Services group's site emissions facility at BP's
Whiting, Indiana refinery, part of a package of environmental services provided
to BP in Whiting and Toledo, was completed during the quarter. The results
included fees earned from the start-up of the facility. The Power Generation
group focused on executing the new outsourcing projects for Syncrude in western
Canada and Santee Cooper in South Carolina, as well as continuing research and
development of new air quality compliance solutions for the power generation
industry.
On August 20, 2002 the Company completed the offer, announced on July 15, 2002
to purchase up to US$44.2 million of its 9 5/8% Senior Subordinated Notes. The
offer was made under the terms of the indenture relating to the Notes, as a
result of the Chemtrade Transaction. A total principal amount of US$47.2 million
was tendered. The Company acquired US$44.2 million principal amount of the Notes
plus accrued interest of US$0.6 million, fulfilling its obligations under the
terms of the indenture. The repurchase of the Senior Subordinated Notes has
reduced interest costs by approximately US$1.1 million per quarter.
RESULTS OF OPERATIONS
The Company is focused on providing outsourced environmental compliance
solutions to two principal industries: oil refining and electric power
generation. These services are provided through three operating segments:
Refinery Services, Western Markets and Power Generation. A fourth, non-operating
segment, Corporate, provides project execution support, finance, information
systems, human resources, and risk management to the operating segments.
Comparison of the results of the Company and its operating groups with the same
period last year are affected by the sale of the Company's sulphur removal
assets in North America to Chemtrade Logistics Income Fund (the Chemtrade
Transaction) that was completed on July 18, 2001 and by the disposition of
non-core businesses of the Power Generation group in the third quarter of 2001
and in January 2002. Contributions of the eastern North American sulphur removal
assets are included in Western Markets results for the nine months ended
September 30, 2001, and the results of Refinery Services are affected by changes
to certain contractual relationships that were restructured as a result of the
Chemtrade Transaction. In addition, the consolidated statements of operations
and cash flow for the nine months ended September 30, 2001 have been restated to
reflect the disposal of the discontinued operations of BCT Chemtrade Corporation
(which were also sold as part of the Chemtrade Transaction).
Revenue and Gross Profit
Consolidated revenue was $34.0 million for the third quarter 2002, down $14.7
million, or 30.2% from $48.7 million for the same period in 2001. Revenue for
the nine months was $105.2 million for 2002 compared with revenue of $193.7
million for the nine months ended September 30, 2001, a decline of $88.5 million
or 45.7%. The decline reflects the impact of the Chemtrade Transaction as the
third quarter and nine months ended in 2001 included the results for the sulphur
removal assets in eastern North America to July 18, 2001 and the disposal of
Power Generation assets.
Similarly, gross profit for the third quarter of 2002 was $13.7 million, a
decrease of $4.0 million or 22.6% from the same period in 2001. For the nine
months ended September 30, 2002 gross profit was $39.7 million a decrease of
$29.5 million or 42.6% when compared to the same period of 2001. Gross profit as
a percentage of revenue increased from 36.3% for the third quarter of 2001 to
40.3% for the same period of 2002 and from 35.7% for the nine months ended
September 30, 2001 to 37.7% for the same period of 2002.
Refinery Services provides outsourced compliance services to major oil refinery
customers in the United States and Canada, primarily extraction and recovery of
sulphur from hydrogen sulphide gas created during the refining process, SO2
recovery to ensure air quality compliance, and regeneration of spent sulphuric
acid produced during the octane enhancement of gasoline.
Refinery Services' revenue was $17.3 million for the third quarter of 2002
compared to $18.5 million for the third quarter in 2001 and $52.0 million for
the nine months of 2002 compared to $52.6 million for the same period in 2001.
The third quarter revenue was in line with expectations and included the fees
earned from the start up of the BP Whiting facility.
Western Markets provides environmental removal services as well as chemical
products to customers in Western Canada. The group produces a range of water
treatment and other sulphur-based chemicals at four plants based in three
locations in Western Canada. For example, it is one of the leading producers of
alum, a water treatment chemical used extensively by municipalities for water
and sewage treatment. This and other chemicals are marketed to customers in
North America.
Revenue for Western Markets in the third quarter of 2002 was $14.1 million
compared with $18.6 million for the same period in 2001, a decrease of 24.2%.
The revenue for the nine months ended September 30, 2002 was $40.9 million, down
$61.8 million or 60.2% from the same period in 2001. The 2001 revenue includes
revenue until July 18, 2001 relating to the sulphur removal assets included in
the Chemtrade Transaction. The lower revenue in 2002 compared to similar periods
in 2001 reflects the sale of these assets on July 18, 2001. On a comparable
basis, the revenue for Western Markets was similar to the prior year. When the
effects of the Chemtrade Transaction are ignored, Western Markets' revenue for
the nine months reflects strong seasonal demand in the second quarter of 2002
for the Company's water treatment and pulp and paper bleaching chemicals and is
the primary reason for the increase over the same periods in 2001.
Power Generation provides outsourced environmental services, primarily air
quality compliance, to customers in the power generation industry. These
services
enable power generators to meet compliance obligations, as well as to
achieve fuel flexibility and access to the savings of lower cost high-sulphur
fuel. The group also provides services to the cement industry through its
patented CP-Gyp process which uses a by-product of the scrubbing process used by
some manufacturers and combines it with cement kiln dust to produce a useable
cement additive.
Revenue for the Power Generation group was $2.7 million in the third quarter of
2002, down 76.7% from $11.6 million for the same period in 2001. For the nine
months ended September 30, 2002, revenue was $12.3 million compared to $38.4
million for the same period of 2001, a 68.0% decrease. The decrease reflected
the disposal of the parts and service business in the first quarter of 2002 and
the sale of the mechanical collectors business in the third quarter of last
year. Revenue for the third quarter was largely composed of fees earned during
the quarter while the nine months results included revenue from the major FGD
system installation for Virginia Power which was substantially completed in the
first quarter of this year.
Selling, General, Administrative and Other Costs
Selling, general, administrative and other ("SGA") costs were $4.9 million in
the third quarter of 2002 compared to $8.8 million for the same period in 2001,
a decrease of $3.9 million or 44.3%. For the nine months ended September 30,
2002, SGA costs of $18.6 million were down $17.9 million or 49.0% from $36.5
million for the same period in 2001. The decrease in SGA costs was due primarily
to dispositions associated with the Chemtrade Transaction and the sale of
non-core assets in Power Generation. SGA costs for the third quarter and nine
months ended September 30, 2001 included the impact of the sales of the sulphur
removal assets, the mechanical collectors business, and the parts and service
business.
As a percent of revenue, SGA costs were 14.4% for the third quarter of 2002
(18.1% for the same period in 2001) and 17.7% for the nine months ended
September 30, 2002 (18.8% for the same period in 2001).
Earnings before interest, tax, depreciation and amortization (EBITDA)
EBITDA is presented because management believes it is a widely used financial
indicator of the Company's ability to service and/or incur debt. EBITDA is not a
recognized measure under Canadian generally accepted accounting principles
(GAAP) and should not be considered as an alternative to 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. The following details the Company's calculation of EBITDA:
- ------------------------------------------------------------------------
Three months Nine months
(in thousand of ended ended
dollars) September 30 September 30
- ------------------------------------------------------------------------
2002 2001 2002 2001
(restated(1)) (restated(1))
- ------------------------------------------------------------------------
Revenue $34,036 $48,655 $105,248 $193,676
Cost of sales and
services 20,369 30,982 65,576 124,520
- ------------------------------------------------------------------------
Gross profit 13,667 17,673 39,672 69,156
Selling, general,
administrative
and other costs 4,883 8,818 18,563 36,480
- ------------------------------------------------------------------------
EBITDA $8,784 $8,855 $21,109 $32,676
- ------------------------------------------------------------------------
(1) See note 5b of the unaudited interim consolidated financial statements
EBITDA for the third quarter of 2002 was $8.8 million compared to $8.9 million
for the same period in 2001. For the nine months ended September 30, 2002,
EBITDA decreased $11.6 million to $21.1 from $32.7 million for the same period
in 2001. The decrease in EBITDA for the nine months ended September 30, 2002 is
attributable primarily to the inclusion of the results of the sulphur removal
assets in eastern North America in the prior periods.
Third quarter 2002 EBITDA for Refinery Services was $5.9 million compared to
$5.4 million for the third quarter of 2001 and $15.3 million for the nine months
ended September 30, 2002 compared to $17.5 million for the same period of 2001.
The Montreal plant continued the strong performance that it has delivered all
year, and the Toledo plant operated at capacity throughout the period. The third
quarter results included the fees earned from the newly constructed site
emissions facility at BP Whiting. However, comparability with results of the
prior periods is impacted by changes to contractual relationships with Irving
Oil that were restructured as a result of the Chemtrade Transaction. Prior to
the Chemtrade Transaction, Marsulex processed spent acid for Irving's Saint John
refinery and as part of a major refinery expansion and upgrade, Irving
constructed its own on-site regeneration facility and Marsulex entered into a
new agreement with Irving to remove and distribute the excess sulphuric acid
produced by the new facility. The impact of the loss of the Irving regeneration
volume was more than offset by the new BP Whiting relationship. This year's
earnings from the Irving regeneration volume have substantially disappeared as
they complete their transition to their new regeneration facility, and the acid
resale contract which replaced it was sold to Chemtrade.
Western Markets' EBITDA for the third quarter of 2002 was $5.1 million compared
to $5.4 million for the same period in 2001 and included the results from the
sulphur removal assets for only 18 days. For the nine months ended September 30,
2002, Western Markets' EBITDA was $14.6 million compared to $25.6 million for
the same period of 2001 reflecting the inclusion of the results from sulphur
removal assets in 2001 until July 18. On a comparable basis, Western Markets'
EBITDA was essentially flat to last year for the third quarter and ahead of last
year for the nine months ended September 30, 2002 reflecting seasonal demand in
the second quarter for the Company's water treatment and pulp and paper
bleaching chemicals.
EBITDA for Power Generation for the third quarter of 2002 was a loss of $0.5
million compared to earnings of $0.8 million for the third quarter of 2001,
while EBITDA for the nine months ended September 30, 2002 was essentially flat
when compared to the same period in 2001.
Corporate costs for the third quarter of 2002 of $1.7 million included a foreign
exchange gain on US denominated working capital of $0.9 million.
Depreciation and Amortization
Depreciation expense for the third quarter of 2002 was $3.7 million compared to
$3.2 million for the same period in 2001, an increase of $0.5 million or 15.6%.
For the nine months ended September 30, 2002, depreciation was $11.0 million
compared to $11.9 million for 2001 largely attributable to the reduction in
depreciation due to the disposition of fixed assets in the Chemtrade
Transaction.
The Company has adopted the new Canadian Institute of Chartered Accountants'
(CICA) Handbook Section 3062, "Goodwill and other intangible assets", effective
January 1, 2002. Under this section the Company no longer amortizes goodwill,
but instead goodwill will be tested annually for impairment by comparing the
carrying value of the reporting unit to the respective fair value. A review of
business combinations prior to July 1, 2001 was performed by the Company with no
changes required to the book values of goodwill and no previously unrecognized
intangible assets were recorded. The Company completed the annual impairment
test for goodwill during the second quarter and determined that there was no
impairment of the book value of goodwill. Had this new standard been applied in
the three months and the nine months ended September 30, 2001, net earnings
would have increased by $1.2 million and $3.2 million respectively.
Foreign Exchange Loss (Change in accounting policy)
Under the CICA Handbook revision to Section 1650, "Foreign currency
translation", foreign currency translation differences from the translation on
the Senior Notes outstanding as at September 30, 2001 are no longer deferred and
amortized but rather taken directly into income. Therefore, in accordance with
the revision, the net earnings for the third quarter have been restated to
reflect a decrease of $0.3 million. In addition, the January 1, 2001 opening
retained earnings has been decreased by $1.5 million to reflect the cumulative
effect of the change on periods prior to that date. There is no impact to the
third quarter and nine months ended September 30, 2002 and September 30, 2001
earnings because the Senior Notes were fully retired on July 18, 2001 as part of
the Chemtrade Transaction.
Interest Expense, Net
Net interest expense was $1.6 million in the third quarter of 2002, a decrease
of $0.7 million or 30.4% over the $2.3 million net expense for the same period
in 2001 and is the result of the purchase of the Senior Subordinated Notes. For
the nine months, net interest expense was $7.6 million, a decrease of $3.3
million or 30.3% from the net interest expense of $10.9 million for the same
period last year reflecting the reduced debt level of the Company.
Income Taxes
The overall effective income tax rate for the nine months ended September 30,
2002 was 34.8% compared to the statutory rate of 38.6% and to the prior year
effective rate of 15.0%. The effective income tax rate for the three months
ended September 30, 2002 was 26.0% compared to 14.6% for the same period in
2001.
Given the nature and location of its operations, the Company would have expected
a tax rate of 37.0%. The effective rate can vary from the expected rate due to
the amount of current and prior year losses, the benefits of which have not been
recognized, and the costs associated with the Company's current of debt. The
rate may fluctuate from period to period.
The Company currently incurs approximately $2.0 million in cash taxes each year.
Management expects this to continue into the near future given the significant
tax losses available to offset future increases in taxable income.
CONSOLIDATED BALANCE SHEETS
Total assets were $261.9 million at September 30, 2002 compared to $343.3
million at December 31, 2001.
The net book value of property, plant, and equipment at September 30, 2002
increased by $17.8 million over the December 31, 2001 balance of $111.9 million.
This increase is primarily due to capital additions during the nine months ended
September 30, 2002 of $25.5 million reduced by depreciation expense of $11.0
million, disposals, and the impact of a stronger Canadian dollar versus the US
dollar for US property, plant, and equipment, the impact of which is included in
the foreign currency translation adjustment.
Accounts receivable decreased by $0.3 million to $31.8 million from the December
31, 2001 balance of $32.1 million. Accounts payable decreased by $3.7 million to
$7.6 million from the December 31, 2001 balance of $11.3 million, while accrued
liabilities decreased $7.6 million when compared to the December 31, 2001
balance of $21.3 million largely due to the reduced activity on the major Power
Generation project substantially completed in the first quarter of 2002.
Inventory has decreased $1.1 million as a result of the disposal of the parts
and services business in January of 2002. Prepaid expenses at the end of the
third quarter increased by $0.8 million due to prepaid insurance. The $4.3
million owed pursuant to an escrow agreement was collected in January of 2002.
The amount of $2.7 million owed by Chemtrade Logistics Inc. relating to the
finalization of the working capital remains outstanding with $1.3 million being
collected during the second quarter of 2002 and the remainder due over the next
three years.
On August 20, 2002 the Company completed the July 15, 2002 offer to purchase its
9 5/8% Senior Subordinated Notes by purchasing the obligated amount of US$44.2
million principal at par plus accrued interest of $0.6 million. Although US$47.2
million was tendered, under both the terms of the offer and the indenture the
Company was only obligated to purchase up to the amount of unutilized cash
proceeds resulting from the Chemtrade Transaction. In addition, the remaining
debt decreased by $0.9 million during the nine months of 2002 due to the
strengthening of the Canadian dollar versus its US counterpart. The foreign
exchange gain relating to the US denominated Senior Subordinated Notes is
included in the foreign currency translation adjustment.
Share Capital Outstanding September 30, December 31,
2002 2001
- ------------------------------------------------------------------------
Number of common shares 26,833,550 26,781,050
Number of convertible
shares, non-voting 4,720,182 4,720,182
Number of options 2,729,750 2,736,500
During the second quarter, 60,000 common shares were issued upon the exercise of
stock options for cash proceeds of $133,800.
On January 29, 2002, the Company filed a Notice of Intention to make a Normal
Course Issuer Bid with the Toronto Stock Exchange, pursuant to which the Company
may purchase up to 1,339,053 of its common shares, representing approximately 5%
of its 26,781,050 issued and outstanding common shares. During the nine months
ended September 30, 2002 the Company acquired 7,500 shares for $27,150 for
cancellation pursuant to the Notice of Intention to make a Normal Course Issuer
Bid.
The Company continues to believe that the current market price of its common
shares does not fully reflect the value of its business and its future business
prospects and represents a discount to management's estimate of the underlying
net asset value of the shares.
The adoption of the CICA Handbook Section 3870, "Stock-based compensation and
other stock-based payments" by the Company effective January 1, 2002, had no
impact on the Company's previously stated policy of accounting for stock options
granted to employees as capital transactions.
Financial Condition & Liquidity
(in millions of dollars) September December 31,
30, 2002 2001
- ------------------------------------------------------------------------
Debt $ 96.1 $ 167.5
Debt to Equity 0.9x 1.7x
Net debt (1) $65.1 $ 49.4
Net debt to EBITDA (2) 2.3x 1.3x
Net debt to Equity 0.6x 0.5x
Interest coverage (EBITDA to
interest expense) 2.3x 2.3x
- ------------------------------------------------------------------------
(1) Net debt is defined as total debt less cash and cash equivalents.
(2) EBITDA for the last twelve months ended September 30, 2002 includes the
results of the sulphur removal assets in eastern North America for the
period ending July 1, 2001 to July 17, 2001.
Cash and cash equivalents at the end of the third quarter 2002 were $31.0 with
excess cash continuing to be invested in short-term, interest-bearing deposits.
This cash, together with any new operating credit facility, will be utilized
for, but not limited to, acquisitions or expansions of processing operations,
development of new technologies, and development or expansion of the Company's
presence in new markets.
As a result of the Chemtrade Transaction on July 18, 2001, the Company was
obligated to make an offer within 380 days to purchase the Senior Subordinated
Notes. Under the terms of the indenture, the total amount offered was limited to
the net cash proceeds from the Chemtrade Transaction reduced by the repayment of
the Senior Notes and funds committed and applied on capital projects in the next
360 days. Notwithstanding the foregoing, the Company was not required to
purchase more than 25% of the original principal amount (US $26,250,000) prior
to the fifth anniversary, June 30, 2003, and accordingly this amount has been
recorded as the current portion of long-term debt at June 30, 2002 and at
December 31, 2001. The remaining amount, if any, would be required to be
included in a second offer to purchase to be made on the fifth anniversary. As
previously noted, on August 20, 2002 the Company completed the offer purchase a
portion of the Senior Subordinated Notes fully satisfying its obligation under
the terms of the indenture and therefore the Company will not be making a second
offer on the fifth anniversary of the Senior Subordinated Notes.
Currently the Company has commitments in excess of $200 million relating to the
Syncrude and Santee Cooper projects. These commitments exceed current cash
balances and internally generated cash; therefore, the Company intends to raise
funds to cover its commitments during the construction period of the two
projects. Any funds remaining as a result of Senior Subordinated Notes not being
tendered would be used to satisfy capital commitments during the construction
period. Although the Company's financial indicators had improved subsequent to
the Chemtrade Transaction, the assumption of increased debt during the
construction period will cause these indicators to change until the projects are
completed.
Until new financing is in place, the Company is at risk as to the availability
of new credit and the associated interest rates.
Working Capital
The Company's working capital, excluding cash and cash equivalents and current
portion of long-term debt, was $12.9 million at September 30, 2002 compared to
$11.7 million at December 31, 2001. The $1.2 million increase in working capital
was primarily the result of the decrease in accounts payable and accrued
liabilities. Given the size of the Company and the significant planned capital
expenditures, it is not unusual for the Company to experience temporary
fluctuations in working capital.
The increase in working capital resulted in an increase in the current ratio,
excluding cash and cash equivalents and the current portion of long-term debt,
from 1.34:1 in 2001 to 1.55:1 in 2002.
CONSOLIDATED STATEMENTS OF CASH FLOWS
During the third quarter of 2002, the Company generated $6.0 million in cash
from operations before changes in non-cash working capital, compared to $4.8
million for the same period in 2001 and is the result of the lower net interest
expense and current taxes. For the nine months ended September 30, 2002, $11.2
million in cash from operations before changes in non-cash working capital was
generated, compared to $19.4 million for the same period in 2001. The decrease
for the nine months ended September 2002 was due to the lower EBITDA resulting
from inclusion of the sulphur removal assets in eastern North America until
July 18, 2001.
Cash and cash equivalents at the end of the third quarter of 2002 was $31.0
million down from $118.1 million at December 31, 2001. Cash provided by
operations, cash generated by the disposal of non-core Power Generation assets,
and the amounts collected from
Chemtrade Logistics relating to the Chemtrade Transaction were offset by the
purchase of the Senior Subordinated Notes, the capital additions and an increase
in non-cash working capital.
Capital expenditures for the third quarter of 2002 were $7.9 million compared to
$5.0 million for the same period of 2001 and $25.5 million for the nine months
of 2002 compared to $14.1 million for the nine months of 2001. The increase for
the nine months ended September 30, 2002 was primarily due to the increase in
capital expenditures associated with the BP Whiting project on which
construction was completed in the third quarter of 2002.
Construction on the Syncrude project is under way. As a result of the fixed
price contracts the Company has in place, the current labour conditions of the
Fort McMurray area should not have any significant impact on the Company's
timing or expected capital investment for the project. The project is scheduled
for completion and startup in 2004, with the startup tied to the overall
completion of the Upgrader project.
The bid process for the Santee Cooper project has concluded with contracts yet
to be awarded as the Company is working towards securing financing through the
construction period that provides an acceptable risk profile to Marsulex.
OUTLOOK
The steady performances of the Company's core businesses in the third quarter
are expected to continue in the final quarter of the year, with the usual
allowances for seasonal factors. This would produce earnings for 2002 in line
with the prior year's results.
The trailing four quarters EBITDA for the core businesses of $38.6 million, less
the trailing four quarters of corporate costs of approximately $2.3 million per
quarter, suggests an annual EBITDA for the core businesses of over $29 million
before the impact of Power Generation.
In addition to optimizing the revenue potential of these businesses and looking
for broadened relationships, the Company is also paying close attention to cost
controls and has taken a number of initiatives in this area in recent months.
The Power Generation group will continue to focus on execution of the Syncrude
and Santee Cooper projects and on the development of new air quality compliance
solutions for power generators.
Forward-looking Statements
The foregoing may contain forward-looking statements. These statements are based
on current expectations that are subject to risks and uncertainties, and the
Company can give no assurance that these expectations are correct. Various
factors could cause actual results to differ materially from those projected in
such statements, including financial considerations and those predicting the
timing and market acceptance of future products. The Company disclaims any
intention or obligation to revise forward-looking statements whether as a result
of new information, future developments or otherwise. All forward-looking
statements are expressly qualified in their entirety by this Cautionary
Statement.
MARSULEX INC.
Consolidated Balance Sheets
(in thousands of dollars)
===============================================================================================================================
September 30 December 31
2002 2001
(unaudited)
- -------------------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 30,980 $118,148
Accounts receivable 31,795 32,050
Due from Chemtrade Logistics (note 5c) -- 4,000
Note from Chemtrade Logistics (note 5c) -- 4,305
Inventories 2,055 3,217
Future tax asset 991 1,171
Prepaid expenses and other assets 1,695 931
- -------------------------------------------------------------------------------------------------------------------------------
67,516 163,822
Property, plant and equipment 129,667 111,873
Deferred charges and other assets, net of accumulated amortization 6,338 8,698
Goodwill, net of accumulated amortization (note 3b) 58,402 58,899
- -------------------------------------------------------------------------------------------------------------------------------
$261,923 $343,292
===============================================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 7,576 $ 11,274
Accrued liabilities 13,692 21,259
Income taxes payable 21 1,453
Interest payable 2,312 --
Current portion of long-term debt -- 41,885
- -------------------------------------------------------------------------------------------------------------------------------
23,601 75,871
Long-term debt 96,071 125,654
Deferred revenues 1,762 2,113
Other liabilities 9,901 9,993
Future tax liability 17,783 18,512
Minority interest 11,176 9,995
Shareholders' equity:
Capital stock (note 8) 57,625 57,505
Retained earnings 41,272 39,552
Foreign currency translation adjustment 2,732 4,097
- -------------------------------------------------------------------------------------------------------------------------------
101,629 101,154
- -------------------------------------------------------------------------------------------------------------------------------
$ 261,923 $343,292
===============================================================================================================================
MARSULEX INC.
Consolidated Statements of Operations (unaudited)
(in thousands of dollars, except per share amounts)
===================================================================================================================================
Three months ended Six months ended
September 30 September 30
- ----------------------------------------------------------------------------------------------------------------------------------
2002 2001 2002 2001
(restated (restated
note 3c & note 3c & 4a)
4a)
- ----------------------------------------------------------------------------------------------------------------------------------
Revenue $34,036 $48,655 $105,248 $193,676
Cost of sales and services 20,369 30,982 65,576 124,520
- ----------------------------------------------------------------------------------------------------------------------------------
Gross profit 13,667 17,673 39,672 69,156
Selling, general, administrative and other costs 4,883 8,818 18,563 36,480
Loss on disposal of property, plant and equipment -- -- 20 --
Depreciation 3,664 3,195 10,965 11,925
- ----------------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations before the undernoted 5,120 5,660 10,124 20,751
Unusual items (note 4) (1,251) 54,111 2,361 54,111
Foreign exchange loss (note 3c) -- (664) -- (1,045)
Amortization of deferred charges (129) (186) (391) (928)
Interest income 419 1,424 1,714 2,131
Interest expense (1,975) (3,716) (9,342) (13,014)
- ----------------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations before income taxes, minority 2,184 56,629 4,466 62,006
interest and amortization of goodwill
Income taxes
Current 722 2,932 1,704 3,948
Future (154) 5,827 (152) 6,457
- ----------------------------------------------------------------------------------------------------------------------------------
568 8,759 1,552 10,405
Minority interest 439 359 1,181 1,038
- ----------------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations before amortization of goodwill 1,177 47,511 1,733 50,563
Amortization of goodwill, net of income taxes (note 3b) -- 1,240 -- 3,155
- ----------------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations 1,177 46,271 1,733 47,408
Earnings from discontinued operations, net of tax (note 5b) -- 15,347 -- 16,644
- ----------------------------------------------------------------------------------------------------------------------------------
Net earnings $1,177 $61,618 $1,733 $64,052
===================================================================================================================================
Earnings per share
Basic before amortization of goodwill $0.04 $1.51 $0.05 $1.61
Basic from continuing operations $0.04 $1.47 $0.05 $1.50
Basic $0.04 $1.96 $0.05 $2.03
Diluted, before amortization of goodwill $0.04 $1.49 $0.05 $1.59
Diluted, from continuing operations $0.04 $1.45 $0.05 $1.49
Diluted $0.04 $1.93 $0.05 $2.02
Consolidated Statement of Retained Earnings (Deficit) (unaudited) For the nine
months ended September 30, 2002 with comparative figures for 2001 (in thousands
of dollars)
================================================================================================================
2002 2001
- ----------------------------------------------------------------------------------------------------------------
Retained earnings (deficit), beginning of year:
As previously reported $39,552 $(22,412)
Adjustment on adoption of foreign currency translation (note 3c) -- (1,522)
- ----------------------------------------------------------------------------------------------------------------
As restated 39,552 (23,934)
Premium on common stock purchased for cancellation (note 8a) (13) --
Net earnings 1,733 64,052
- ----------------------------------------------------------------------------------------------------------------
Retained earnings, end of period $41,272 $40,118
================================================================================================================
MARSULEX INC.
Consolidated Statements of Cash Flow (unaudited)
(in thousands of dollars)
===================================================================================================================================
Three months ended Six months ended
September 30 September 30
- ----------------------------------------------------------------------------------------------------------------------------------
2002 2001 2002 2001
(restated note (restated note
3c & 5a) 3c & 5a)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash provided by (used in):
Operating activities:
Net earnings $1,177 $61,618 $1,733 $64,052
Items not affecting cash:
Earnings from discontinued operations -- (15,347) -- (16,644)
Depreciation 3,664 3,195 10,965 11,925
Loss on disposal of property, plant and equipment -- -- 20 --
Unusual items (note 4) 1,185 (54,111) (2,427) (54,111)
Amortization of deferred charges and foreign exchange loss 129 850 391 1,973
Amortization of goodwill -- 1,250 -- 3,615
Future income taxes (154) 5,881 (152) 6,269
Minority interest 439 359 1,181 1,038
Other non cash items (414) 1,063 (514) 1,248
- ----------------------------------------------------------------------------------------------------------------------------------
6,026 4,758 11,197 19,365
Decrease (increase) in non-cash operating working capital,
excluding cash and cash equivalents and current portion of
long-term debt 6,361 (15,148) (9,272) (18,036)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash provided by (used in) continuing operations 12,387 (10,390) 1,925 1,329
Cash used in discontinued operations (note 5b) -- (2,204) -- (3,723)
Financing activities:
Increase in common stock (note 8b) -- -- 134 --
Repurchase of common stock (note 8a) (27) -- (27) --
Repayment of long-term debt (note 5d and note 10) (69,492) (37,723) (69,492) (37,723)
Increase (decrease) in other liabilities -- 169 -- 211
Cash provided by (used) in discontinued operations (note -- 76 -- (380)
5b)
- ----------------------------------------------------------------------------------------------------------------------------------
(69,519) (37,478) (69,385) (37,892)
Investment activities:
Proceeds on disposals (notes 5 and note 6) -- 128,991 3,358 128,991
Additions to property, plant and equipment (7,881) (5,041) (25,510) (14,063)
Increase in deferred charges -- (1,264) -- (2,906)
Decrease (increase) in notes receivable (note 5c and note 787 -- (1,031) --
6)
Acquisition of Harrowston Investment Limited (note 7) -- (2,979) -- (2,979)
Note from Chemtrade Logistics (note 5c) -- (4,305) 4,305 (4,305)
Cash provided by discontinued operations (note 5b) -- 28,447 -- 28,269
- ----------------------------------------------------------------------------------------------------------------------------------
(7,094) 143,849 (18,878) 133,007
Foreign exchange loss on cash held in foreign currency (379) (1,018) (830) (1,176)
- ----------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (64,605) 92,759 (87,168) 91,545
Cash and cash equivalents - beginning of period 95,585 30,785 118,148 31,999
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents - end of period $30,980 $123,544 $30,980 $123,544
===================================================================================================================================
MARSULEX INC.
Notes to Consolidated Financial Statements
6. Basis of presentation
The unaudited interim period 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 statements except for the
change in accounting policies described in note 3 below. These unaudited
interim period financial statements do not include all the disclosures
required by generally accepted accounting principles and accordingly should
be read together with the audited annual consolidated financial statement
and the accompanying notes included in the Company's 2001 Annual Report.
7. Certain 2001 balances have been reclassified to conform to presentation
adopted in 2002.
8. Changes in accounting policies:
Effective January 1, 2002, the Company adopted the new recommendations of
the CICA. The adoption of Handbook Section 3870, "Stock-based compensation
and other stock-based payments", had no impact on the Company's previously
stated policy of accounting for stock options granted to employees as
capital transactions. The adoption of certain provisions of Section 1581,
"Business Combinations" relating to goodwill and intangible assets, and
Section 3062, "Goodwill and other intangible assets", did not have an
impact on the financial statements. The revisions to Section 1650, "Foreign
Currency Translation" resulted in a decrease to the January 1, 2001 opening
retained earnings of $1.5 million relating to the treatment of foreign
currency translation for long-term debt. The details of the accounting
policy changes are noted below:
a. Stock Compensation
The Company follows the settlement method to account for stock options.
Using this method, no expense is recognized for stock options as the
strike price is set at the market price on the day the awards are
issued. When the stock options are exercised, the proceeds received by
the Company are credited to common stock. The new recommendations are
applied prospectively to all stock-based payments to non-employees, and
to employee awards that are direct awards of stock, call for settlement
in cash or other assets, or are stock appreciation rights that call for
settlement by the issuance of equity instruments, granted on or after
January 1, 2002, except grants outstanding at January 1, 2002 that call
for settlement in cash or other assets or stock appreciation rights
that call for settlement in equity instruments. Had the Company elected
to recognize the cost of its stock-based compensation based on the
estimated fair value of stock options granted subsequent to January 1,
2002, the Company's results would have been as follows:
=====================================================================================================
(in thousand of dollars, except per share amounts) Three months ended Nine months ended
September 30, 2002 September 30, 2002
-----------------------------------------------------------------------------------------------------
Net earnings as reported $1,177 $1,733
Adjustment for stock options (57) (141)
-----------------------------------------------------------------------------------------------------
Pro forma net earnings $1,120 $1,592
-----------------------------------------------------------------------------------------------------
Pro forma basic earnings per share $0.04 $0.05
Pro forma diluted earnings per share $0.04 $0.05
=====================================================================================================
The fair value of each stock option granted in 2002 is estimated on the
date of grant using the Black-Scholes option-pricing model with the
following assumptions:
=====================================================================================================
Nine months ended
September 30, 2002
-----------------------------------------------------------------------------------------------------
Weighted-average exercise price $3.95
Weighted-average fair value of options granted during the year $2.13
Expected life of options (years) 10
Expected stock price volatility 30%
Expected dividend yield 0%
Risk-free interest rate 5.6%
-----------------------------------------------------------------------------------------------------
MARSULEX INC.
Notes to Consolidated Financial Statements
Page 2
b. Business combinations and goodwill and other intangible assets:
Effective July 2001, generally accepted accounting standards require
that the purchase method of accounting be used for all business
combinations and specifies criteria that intangible assets acquired in
a business combination must meet to be recognized and reported
separately from goodwill. The Company does not have any intangible
assets which would be classified separately from goodwill. Further,
effective January 1, 2002 generally accepted accounting standards
require that goodwill no longer be amortized, but instead tested for
impairment at least annually by comparing carrying value of the
reporting unit to the respective fair value in accordance with the
provisions of Section 3062. The standard was implemented prospectively
and as a result, the amortization of goodwill ceased.
A review of business combinations prior to July 1, 2001 was performed
by the Company with no changes required to the book values of goodwill
and no previously unrecognized intangible assets were recorded. The
Company has also performed the initial impairment test for goodwill and
has determined that there is no impairment of the book value of
goodwill. Had this new standard been applied in the three months and
the nine months ended September 30, 2001 net earnings would have
increased by $1.2 million (3.9 cents basic and diluted earnings per
share) and $3.2 million (10.0 cents basic and diluted earnings per
share), respectively.
c. Foreign currency translation:
Effective January 1, 2002, generally accepted accounting standards were
amended to eliminate the deferral and amortization of foreign currency
translation differences resulting from the translation of long-term
monetary assets and liabilities denominated in foreign currencies. All
such translation differences that the Company previously deferred and
amortized are now charged directly to earnings. Prior year financial
statements have been restated retroactively to adopt this new Section
resulting in net earnings decreasing $0.3 million for the three months
ended September 30, 2001 (1.0 cent basic and diluted earnings per share
for the three months ended September 30, 2001). The balance of retained
earnings at January 1, 2001 has been decreased by $1.5 million to
reflect the cumulative effect of the change on periods prior to that
date.
9. Unusual items:
=======================================================================================================================
(in thousand of dollars) Three months ended Nine months ended
September 30 September 30
-----------------------------------------------------------------------------------------------------------------------
2002 2001 2002 2001
-----------------------------------------------------------------------------------------------------------------------
Gain on disposal of sulphur removal assets (note 5a) -- $64,768 -- $64,768
Expenses incurred on early retirement of debt (notes 5d and note 10) (1,252) (7,038) (1,252) (7,038)
Write-off of deferred charges -- (3,619) -- (3,619)
Gain of disposal of parts and service business and other assets
(note 6) -- -- 3,612 --
-----------------------------------------------------------------------------------------------------------------------
Total unusual items $(1,252) $54,111 $2,360 $54,111
=======================================================================================================================
10. Sale of sulphur removal assets and BCT Chemtrade Corporation
On July 18, 2001, the Company completed the sale of its sulphur removal
services assets in eastern North America and of BCT Chemtrade Corporation
(BCT), a subsidiary of Marsulex, to Chemtrade Logistics Income Fund for
gross cash proceeds before costs of disposition of $167.2 million (the
Chemtrade Transaction) or $156.6 million net of costs of disposition,
comprised of $128.1 million for the sale of the sulphur removal assets and
$28.5 million for the sale of BCT.
a. The sale of the sulphur removal services asset in eastern North America
resulted in the following gain:
-----------------------------------------------------------------------
Proceeds of disposition $128,142
Net book value and costs of sale 63,374
-----------------------------------------------------------------------
Gain on sale, before income taxes 64,768
Income taxes (9,921)
-----------------------------------------------------------------------
Gain on sale, net of tax $ 54,847
=======================================================================
b. The operations of BCT comprised one operating segment. Accordingly, for
reporting purposes, the gain on the sale, the results of operations and
cash flows of this business, to the date of sale, are presented and
disclosed as discontinued operations. Additional information related to
the discontinued operations is as follows:
MARSULEX INC.
Notes to Consolidated Financial Statements
Page 3
=================================================================================================================
(in thousands of dollars) Three months ended Nine months ended
September 30, 2001 September 30, 2001
-----------------------------------------------------------------------------------------------------------------
Revenue $5,798 $48,221
-----------------------------------------------------------------------------------------------------------------
Earnings from operations before depreciation 508 2,754
-----------------------------------------------------------------------------------------------------------------
Earnings before taxes 398 2,379
Provision for income taxes (80) (476)
Minority interest (99) (387)
-----------------------------------------------------------------------------------------------------------------
Earnings from discontinued operations $219 $1,516
Gain on sale 15,863 15,863
Provision for income taxes (735) (735)
-----------------------------------------------------------------------------------------------------------------
Net gain on disposal 15,128 15,128
-----------------------------------------------------------------------------------------------------------------
Earnings from discontinued operations $15,347 $16,644
=================================================================================================================
Cash provided by (used in):
Operating activities $(2,204) $(3,723)
Financing activities 76 (380)
Investment activities 28,447 28,269
-----------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents from discontinued operations $26,319 $24,166
=================================================================================================================
c. As part of the Chemtrade Transaction, Chemtrade Logistics Inc. owed the
Company $4.0 million at December 31, 2001 relating to the finalization
of working capital, of which $1.3 million was collected during second
quarter 2002 and the remainder will be collected over the next three
years and is recorded in other assets. The note in the amount of $4.3
million pursuant to an escrow agreement was received in January 2002.
e. On July 18, 2001 the Company fully retired its outstanding 10.21%
Senior Notes and cancelled its US $50,000,000 operating credit facility
at an expense of $7,038,000. These expenses included the write-off of
deferred debt issuance costs and foreign exchange costs of $4,344,000
and a make-whole payment of $2,694,000.
6. Disposal of parts and service business and other assets:
On January 31, 2002, the Company completed the sale of its parts and
service business and other assets for gross proceeds of $6.5 million,
of which $3.4 million was received in cash.
(in thousands of dollars)
----------------------------------------------------------------------
Proceeds of disposition $6,545
Net book value and costs of sale 2,933
----------------------------------------------------------------------
Gain on sale, before income taxes 3,612
Income taxes --
----------------------------------------------------------------------
Gain on sale, net of tax $3,612
======================================================================
7. Acquisition of Harrowston Investments Limited:
On July 17, 2001, the Company purchased the shares of Harrowston
Investments Limited from its major shareholder, Harrowston Inc. for
$2,979,000; principal assets of Harrowston Investments Limited
comprised of future income tax assets. Harrowston Investment Limited
was merged with the Company.
8. Capital stock
a. On January 29, 2002, the Company announced its intention to make a
Normal Course Issuer Bid (NCIB) pursuant to which the Company may
purchase 1,339,053 of its common shares issued and outstanding. The
NCIB commenced on February 1, 2002 and will terminate on January 31,
2003 or such earlier date as the Company completes its purchases. The
purchases will be made for cancellation at the market price of such
shares at the time of acquisition. During the quarter ended September
30, 2002, the Company acquired 7,500 shares for cancellation for total
cash proceeds of $27,000.
b. During the second quarter 2002, the Company issued 60,000 common shares
for cash proceeds of $133,800 upon the exercise of stock options.
MARSULEX INC.
Notes to Consolidated Financial Statements
Page 4
9. Income taxes
The overall effective income tax rate for the nine months ended September
30, 2002 was 34.8% compared to the statutory rate of 38.6% and to the prior
year effective rate of 15.0%. The effective income tax rate for the three
months ended September 30, 2002 was 26.0% compared to 14.6% for the same
period in 2001.
Given the nature and location of its operations, the Company would have
expected a tax rate of 37.0%. The effective rate can vary from the expected
rate due to the amount of current and prior year losses, the benefit of
which has not been recognized, and the costs associated with the Company's
current level of debt. The rate may fluctuate from period to period.
The Company currently incurs approximately $2.0 million in cash taxes each
year. Management expects this to continue into the near future given the
significant tax losses available to offset future increases in taxable
income.
10. Offer to purchase bonds
On August 20, 2002 the Company completed the July 15, 2002 offer to
purchase its 9 5/8% Senior Subordinated Notes by purchasing the obligated
amount of US$44.2 million principal at par plus accrued interest of US$0.6
million. Although US$47.2 million was tendered, under both the terms of the
offer and the indenture, the Company was only obligated to purchase up to
the amount of unutilized cash proceeds resulting from the Chemtrade
Transaction.
As part of the purchase, the Company incurred expenses of $1,252,000
comprised of writing off of deferred debt issuance costs of $1,185,000 and
expenses incurred on the transaction of $67,000.
11. Segments
The Company's activities are divided into four reportable segments. The
three operating segments are Refinery Services, Western Markets and Power
Generation. The fourth non-operating segment is Corporate Support, which
provides project execution support, finance, information systems, human
resources and risk management to the preceding operating segments.
Refinery Services provides outsourced compliance solutions to major oil
refinery customers in the United States and Canada, primarily extraction
and recovery of sulphur from hydrogen sulphide gas created during the
refining process, S02 recovery to ensure air quality compliance and
regeneration of spent sulphuric acid produced during octane enhancement of
gasoline.
Western Markets provides environmental removal services, as well as
chemical products, to customers in Western Canada and until July 18, 2001
included the sulphur removal services in Eastern North America that was
sold as part of the Transaction.
Power Generation provides outsourced environmental services, primarily air
quality compliance, to customers in the power generation industry. The
segment also provides services to the cement industry through its patented
CP-Gyp process.
MARSULEX INC.
Notes to Consolidated Financial Statements
Page 5
Schedule of business segments (unaudited)
For the three months ended September 30
(in thousands of dollars)
========================== ===================== ===================== ==================== ===================== ==================
Refinery Services Western Markets(2) Power Generation Corporate Support Total
========================== ===================== ===================== ==================== ===================== ==================
2002 2001 2002 2001 2002 2001 2002 2001 2002 2001
- -------------------------- ---------- ---------- ---------- ---------- ---------- --------- ---------- ---------- ---------- -------
Revenue from external
customers $17,327 $18,459 $14,052 $18,613 $ 2,657 $11,583 $ -- $ -- $34,036 $48,655
========================== ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Earnings (loss) from
continuing operations
before depreciation,
including loss on
disposal $ 5,888 $ 5,354 $ 5,140 $ 5,427 $ (501) $ 760 $(1,743) $(2,686) $ 8,784 $ 8,855
Depreciation, including
loss on disposal 3,001 2,507 327 588 282 44 54 56 3,664 3,195
========================== ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Earnings (loss) from
continuing operations
before the undernoted $ 2,887 $ 2,847 $ 4,813 $ 4,839 $ (783) $ 716 $(1,797) $(2,742) $ 5,120 $ 5,660
========================== ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Capital expenditures
from continuing
operations $ 908 $ 3,761 $ 92 $ 60 $ 6,811 $ 1,220 $ 70 -- $ 7,881 $ 5,041
========================== ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Schedule of business segments (unaudited)
For the nine months ended September 30
(in thousands of dollars)
========================== ===================== ===================== ==================== =====================
Refinery Services Western Markets(2) Power Generation Corporate Support
========================== ===================== ===================== ==================== =====================
2002 2001 2002 2001 2002 2001 2002 2001
- -------------------------- ---------- ---------- ---------- ---------- ---------- --------- ---------- ----------
Revenue from external
customers $ 51,988 $ 52,559 $40,919 $102,748 $ 12,341 $ 38,369 $-- $--
========================== ======== ======== ======= ======== ======== ======== ======== =========
Earnings (loss) from
continuing operations
before depreciation,
including loss (gain)
on disposal $ 15,291 $ 17,543 $14,634 $ 25,631 $ (1,157) $ (1,066) $ (7,659) $ (9,432)
Depreciation, including
loss (gain) on disposal 8,980 7,709 976 3,703 867 147 162 366
========================== ======== ======== ======= ======== ======== ======== ======== =========
Earnings (loss) from
continuing operations
before the undernoted $ 6,311 $ 9,834 $13,658 $ 21,928 $ (2,024) $ (1,213) $ (7,821) $ (9,798)
- -------------------------- -------- -------- ------- -------- -------- -------- -------- ---------
Capital expenditures
from continuing
operations $ 11,552 $ 8,175 $ 377 $ 551 $ 13,423 $ 5,256 $ 158 $ 81
========================== ======== ======== ======= ======== ======== ======== ======== =========
Total assets before
goodwill (1) $120,999 $103,385 $23,106 $ 23,742 $ 20,630 $ 21,089 $ 38,786 $ 136,177
Goodwill, net of
amortization (1) 46,002 46,425 4,468 4, 468 7,932 8,006 -- --
- -------------------------- -------- -------- ------- -------- -------- -------- -------- ---------
Total assets (1) $167,001 $149,810 $27,574 $ 28,210 $ 28,562 $ 29,095 $ 38,786 $ 136,177
- -------------------------- -------- -------- ------- -------- -------- -------- -------- ---------
(3) 2001 assets are at December 31
(4) Includes the sulphur removal services in eastern North America until July
18th for the quarter and the nine months in 2001.
Schedule of business segments (unaudited)
For the nine months ended September 30
(in thousands of dollars)
========================== =====================
Total
========================== =====================
2002 2001
- -------------------------- ---------- ----------
Revenue from external
customers $105,248 $193,676
========================== ========== ==========
Earnings (loss) from
continuing operations
before depreciation,
including loss (gain)
on disposal $ 21,109 $ 32,676
Depreciation, including
loss (gain) on disposal 10,985 11,925
========================== ======== ========
Earnings (loss) from
continuing operations
before the undernoted $ 10,124 $ 20,751
- -------------------------- -------- --------
Capital expenditures
from continuing
operations $ 25,510 $ 14,063
========================== ======== ========
Total assets before
goodwill (1) $203,521 $284,393
Goodwill, net of
amortization (1) 58,402 58,899
- -------------------------- -------- --------
Total assets (1) $261,923 $343,292
- -------------------------- -------- --------
(1) 2001 assets are at December 31
(2) Includes the sulphur removal services in eastern North America until July
18th for the quarter and the nine months in 2001.
MARSULEX
[GRAPHIC LOGO OMITTED]
Management Team Head Office
David Gee 111 Gordon Baker Road
President & Chief Executive Officer Suite 300
Toronto, Ontario
Laurie Tugman M2H 3R1
Executive Vice President
& Chief Financial Officer Tel: (416) 496-9655
Fax: (416) 496-4155
Robert Cardell
Vice President & General Manager, Stock Exchange Listing
Power Generation Group The Toronto Stock Exchange
Stock symbol: MLX
Eric Denman
Vice President, Transfer Agent and Registrar
Operational Excellence Computershare Investor Services
100 University Avenue
Edward R. (Ted) Irwin 11th Floor
Vice President, Finance Toronto, Ontario
M5J 2Y1
Doug Osborne
Vice President, Shareholder inquiry line:
Western Markets Group 1-800-663-9097
Brian Stasiewicz Investor Information
Vice President, Shareholders or other interested parties
Refinery Services seeking financial information about the
company are invited to call:
Judith George
Corporate Secretary Laurie Tugman
Executive Vice President
& Chief Financial Officer
(416) 496-4157
Financial Calendar 2002
Fiscal year end: December 31
Interim reports mailed:
May, August, November
Web Site
www.marsulex.com
----------------
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MARSULEX INC.
November 14, 2002 By: /s/Lucio Milanovich
________________________________
Lucio Milanovich
Director, Finance