SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 6-K
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 2003
Commission File No. 333-09410
Marsulex Inc.
111 Gordon Baker Road, Suite 300
North York, ON
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 by check mark if the registrant is submitting the Form 6-K
in paper as permitted by Regulation S-T Rule 101(b)(1): ______________
Indicate by check mark if the registrant is submitting the Form 6-K
in paper as permitted by Regulation S-T Rule 101(b)(7): _______________
Indicate by check mark whether by furnishing the information
contained in this Form, the registrant 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__
If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b) : 82-
Documents Included as Part of this Report
No. Document
1. News Release dated November 6, 2003 ("MARSULEX REPORTS RESULTS
FOR THIRD QUARTER 2003")
MARSULEX [GRAPHIC OMITTED]
NEWS RELEASE
MARSULEX REPORTS RESULTS FOR THIRD QUARTER 2003
TORONTO, Canada, November 6, 2003 -- Marsulex Inc. (TSX: MLX) today
announced earnings before interest, taxes, depreciation and amortization
(EBITDA1) of $7.9 million for the third quarter ending September 30, 2003,
compared with $8.8 million for the same period last year. Revenue for the
period was $33.9 million compared with $34.0 million last year. Net earnings
were $2.6 million, or $0.08 per share basic, compared with net earnings of
$1.2 million for the same period last year ($0.04 per share basic).
EBITDA for the nine months ended September 30, 2003 was $24.1 million
compared with $21.1 million in the same period last year. Revenue for the
period was $103.0 million compared with $105.2 million last year; net
earnings were $7.6 million or $0.24 per share basic compared with $1.7
million, or $0.05 per share basic.
Marsulex President and Chief Executive Officer, David Gee, said he was
pleased with the results. When the effects of the strong Canadian dollar are
removed, the underlying strength of our core operations becomes very
apparent. The year to date results also show clearly that the debt
restructuring and cost reduction initiatives we have taken over the past
year continue to have a positive effect on net earnings."
Marsulex has three industry focused operating groups: Refinery Services,
Western Markets and Power Generation. The Refinery Services Group recorded
EBITDA of $6.2 million for the third quarter, an improvement of 5.1% over
the same period last year despite the impact of the lower US dollar on the
translation of the US denominated operations. All of the Group's operations
performed well during the quarter.
The Western Markets Group reported EBITDA for the quarter to $4.2 million
compared with $5.1 million last year, in line with expectations.
EBITDA for the Power Generation Group for the quarter was a profit of $0.1
million compared to a loss of $0.5 million for the same quarter in 2002.
This reflects higher revenue during the period from fees earned on the
Shajiao project in China as well as the group's continued investment in new
compliance solutions for the power sector.
In October, subsequent to the end of the third quarter, Marsulex acquired
Duke Energy Gas Transmission's sulphur products assets. The acquisition was
financed with existing cash. "The acquisition of these sulphur products
assets ensures the continuity of Marsulex's participation in a business that
has had a demonstrated record of reliable and sustainable earnings for many
years, " Mr. Gee said. "Marsulex has had a long history with this business -
having had the exclusive responsibility for marketing products from these
assets for almost 15 years."
The Company also held a ribbon cutting ceremony early in October celebrating
the recent completion of the construction of its portion of the Syncrude
project. Mr. Gee said, "This is an important milestone for the Company with
the project being completed on schedule, on budget and ready for
commissioning and startup which is tied to Syncrude's UE-1 upgrader
project."
Mr. Gee said that the strong performance of the business for the nine months
and the contribution of the sulphur products assets acquired from Duke for
most of the final quarter of the year, should enable Marsulex to report
improved EBITDA for the year, ahead of expectations.
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 2003 results
will be webcast live on www.newswire.ca/webcast Friday, November 7, 2003 at
10:00 a.m. Eastern Time.-----------------------
(1) EBITDA is defined as earnings before interest, tax, depreciation and
amortization, and can be calculated using the financial statement items
of earnings (loss) from continuing operations before income taxes, and
minority interest adjusted to exclude the impact of interest expense,
amortization of deferred charges, amortization of intangible assets,
unusual gains (losses), depreciation gains (losses) on disposal of
property, plant and equipment and interest income. Management considers
EBITDA to be a meaningful indicator of the Company's ability to service
and/or incur debt, however, it is not a defined measure of operating
performance under Canadian generally accepted accounting principles
(GAAP). Marsulex's calculation of EBITDA may be different than
calculation used by other entities.
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.
# # # #
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,
2003 2002
(unaudited)
- -----------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 27,096 $ 7,940
Cash held in trust (note 4(a)) 18,896 --
Accounts receivable 22,174 25,332
Due from Chemtrade Logistics 900 900
Inventories 1,800 1,888
Future tax asset 267 267
Prepaid expenses and other assets 1,106 1,102
- -----------------------------------------------------------------------------------------------------------------
72,239 37,429
Property, plant and equipment 144,059 134,424
Deferred charges and other assets, net of accumulated amortization 3,111 5,337
Goodwill and intangible assets, net of accumulated amortization 53,861 61,831
- -----------------------------------------------------------------------------------------------------------------
$273,270 $239,021
=================================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 8,639 $ 9,207
Accrued liabilities 13,033 11,348
Income taxes payable 2,496 838
Interest payable 2,102 --
- -----------------------------------------------------------------------------------------------------------------
26,270 21,393
Long-term debt (note 4(a)) 122,314 95,943
Deferred revenues 1,559 1,818
Other liabilities 8,484 9,888
Future tax liability 16,694 17,844
Shareholders' equity:
Capital stock (note 6) 57,738 57,625
Retained earnings 39,435 31,865
Foreign currency translation adjustment 776 2,645
- -----------------------------------------------------------------------------------------------------------------
97,949 92,135
- -----------------------------------------------------------------------------------------------------------------
$273,270 $239,021
=================================================================================================================
Subsequent event (note 3)
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
- --------------------------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------------------
Revenue $ 33,884 $ 34,036 $ 103,009 $ 105,248
Cost of sales and services 21,083 21,267 66,247 69,206
- --------------------------------------------------------------------------------------------------------------------------
Gross profit 12,801 12,769 36,762 36,042
Selling, general, administrative and other costs 4,478 4,839 14,617 15,773
Foreign exchange loss (gain) on monetary items (note 8) 430 (854) (1,917) (840)
Loss on disposal of property, plant and equipment -- -- -- 20
Depreciation 3,503 3,664 11,444 10,965
Unusual items (note 5) -- 1,251 -- (2,361)
Amortization of deferred charges and intangible assets 180 129 548 391
Interest expense 2,748 2,367 7,121 11,294
Interest capitalized (953) (392) (2,523) (1,952)
Interest income (315) (419) (482) (1,714)
- --------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes and minority interest 2,730 2,184 7,954 4,466
Income taxes (recovery):
Current 437 722 955 1,704
Future (341) (154) (571) (152)
- --------------------------------------------------------------------------------------------------------------------------
96 568 384 1,552
- --------------------------------------------------------------------------------------------------------------------------
Earnings before minority interest 2,634 1,616 7,570 2,914
Minority interest -- 439 -- 1,181
- --------------------------------------------------------------------------------------------------------------------------
Net earnings $ 2,634 $ 1,177 $ 7,570 $ 1,733
============================================================================= ============== ============== ==============
Earnings per share
Basic: $ 0.08 $ 0.04 $ 0.24 $ 0.05
Diluted: $ 0.08 $ 0.04 $ 0.24 $ 0.05
Consolidated Statement of Retained Earnings (unaudited)
For the nine months ended September 30, 2003 with comparative figures for 2002
(in thousands of dollars)
==========================================================================================================================
2003 2002
- --------------------------------------------------------------------------------------------------------------------------
Retained earnings, beginning of year: $ 31,865 $ 39,552
Premium on common stock purchased for cancellation -- (13)
Net earnings 7,570 1,733
==========================================================================================================================
Retained earnings, end of period $ 39,435 $ 41,272
==========================================================================================================================
MARSULEX INC.
Consolidated Statements of Cash Flow (unaudited)
(in thousands of dollars)
==========================================================================================================================
Three months ended Nine months ended
September 30 September 30
- --------------------------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------------------
Cash provided by (used in):
Operating activities:
Net earnings $ 2,634 $ 1,177 $ 7,570 $ 1,733
Items not affecting cash:
Depreciation 3,503 3,664 11,444 10,965
Loss on disposal of property, plant and equipment -- -- -- 20
Gain on disposal of parts and services business and other assets -- -- -- (3,612)
Expenses incurred on the early retirement of debt (note 5) -- 1,185 -- 1,185
Amortization of deferred charges 71 129 220 391
Amortization of intangible assets 109 -- 328 --
Future income taxes (341) (154) (571) (152)
Minority interest -- 439 -- 1,181
Other non cash items 103 (414) 51 (514)
- --------------------------------------------------------------------------------------------------------------------------
6,079 6,026 19,042 11,197
Decrease (increase) in non-cash operating working capital 3,972 6,361 6,012 (9,272)
- --------------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 10,051 12,387 25,054 1,925
Financing activities:
Increase in capital stock (note 6(a)) 113 -- 113 134
Repurchase of common stock -- (27) -- (27)
Repayment of long-term debt (note 5(a)) -- (69,492) -- (69,492)
Increase in long-term debt (note 4(a)) -- -- 40,000 --
- --------------------------------------------------------------------------------------------------------------------------
113 (69,519) 40,113 (69,385)
Investing activities:
Proceeds on disposals of property, plant and equipment (note 5) -- -- -- 3,358
Additions to property, plant and equipment (4,366) (7,881) (27,898) (25,510)
Decrease (increase) in other assets 635 787 1,525 (1,031)
Decrease (increase) in cash held in trust (note 4(a)) 7,385 -- (18,896) --
Note from Chemtrade Logistics -- -- -- 4,305
- --------------------------------------------------------------------------------------------------------------------------
3,654 (7,094) (45,269) (18,878)
Foreign exchange gain (loss) on cash held in foreign currency 40 (379) (742) (830)
- --------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 13,858 (64,605) 19,156 (87,168)
Cash and cash equivalents - beginning of period 13,238 95,585 7,940 118,148
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents - end of period $ 27,096 $ 30,980 $ 27,096 $ 30,980
==========================================================================================================================
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 2 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
statements and the accompanying notes included in the Company's 2002
Annual Report.
2. Changes in accounting policies:
(a) Hedging Relationships:
The Company adopted the new CICA Accounting Guideline ("AcG 13")
Hedging Relationships on January 1, 2003. This guideline requires
the identification, designation, documentation and assessment of
the effectiveness of hedging relationships, for the purpose of
applying hedge accounting and discontinues hedge accounting of
existing hedges. The adoption of this standard did not have an
impact on its financial position since the Company's only material
hedging relationship relates to its US dollar denominated debt used
to acquire its US operations. This has been accounted for as a
hedging relationship as disclosed in note 1(h) to the consolidated
financial statements included in the Company's 2002 Annual Report.
(b) Disclosure of Guarantees:
On January 1, 2003 the Company adopted the new CICA Accounting
Guideline ("AcG 14"). The guideline requires a guarantor to
recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantees.
It also requires disclosure in interim and annual financial
statements of its obligations under certain guarantees it has
issued. The initial recognition and measurement provisions of AcG
14 are to be applied prospectively to guarantees issued or modified
after December 31, 2002. Adoption of AcG 14 did not have a material
impact on financial statements of the Company.
In the normal course of business, the Company enters into numerous
agreements that may contain features that meet the AcG 14
definition of a guarantee. The guideline defines a guarantee to be
a contract (including an indemnity) that contingently requires the
Company to make payments (either in cash, financial instruments,
other assets, shares of our stock or provision of services) to a
third party based on (i) changes in an underlying interest rate,
foreign exchange rate, equity or commodity instrument, index or
other variable, that is related to an asset, a liability or an
equity security of the counterparty, (ii) failure of another party
to perform under an obligating agreement or (iii) failure of
another third party to pay its indebtedness when due.
In the sale of all or a part of a business, in addition to possible
indemnification relating to failure to perform covenants and breach
of representations and warranties, the Company may agree to
indemnify against claims from the past conduct of the business.
Typically, the term and amount of such indemnification will be
limited by the agreement. The nature of these indemnification
agreements prevents the Company from estimating the potential
liability that the Company could be required to pay to
counterparties. Where the Company believes the payment of an amount
is likely and the amount can be reasonably estimated, the amounts
will be accrued. As disclosed in note 14(c) to the consolidated
financial statements included in the Company's 2002 Annual Report,
the Company has indemnified Chemtrade Logistics Inc. for Notices
and Findings of Violation relating to a facility it purchased and
it is management's assessment that the most likely outcome will not
have a material impact upon the financial position of the Company.
MARSULEX INC.
Notes to Consolidated Financial Statements
Page 2
3. Subsequent Event
On October 7, 2003 the Company acquired the sulphur products assets in
Prince George, British Columbia from Duke Energy Gas Transmission. The
purchase price, including estimated acquisition costs, was approximately
$12,800,000 financed by the Company entirely through existing cash. The
acquisition will be accounted for using the purchase method of
accounting and will be consolidated from the date of acquisition.
4. Long-term Debt
============================================================================
September, 30 December 31,
(in thousands of dollars) 2003 2002
----------------------------------------------------------------------------
Long-term Loan
7.3%, maturing 2019 (note 3(a)) $ 40,000 $ --
Senior Subordinated Notes:
9-5/8% US $60,766,000, maturing 2008 82,314 95,943
----------------------------------------------------------------------------
Total debt 122,314 95,943
Less current portion -- --
----------------------------------------------------------------------------
$ 122,314 $ 95,943
============================================================================
(a) On June 5, 2003 a wholly owned subsidariary of the Company entered
into a Long-term Loan agreement to finance its portion of the
construction of the environmental compliance facilities at
Syncrude's Mildred Lakes oil sands facility in Alberta. The loan is
secured by the subsidiary's assets. A general guarantee is provided
by the Company until the successful startup of the facility as
defined in the loan agreement at which time the general guarantee
is released and the loan will be secured by the subsidiary's
assets. If, after the successful startup of the facility, the
subsidiary fails to perform its operating obligations, the Company
will become responsible for the operation of the facility and as a
result the servicing of the debt.
The loan bears interest at a fixed rate of 7.3% per annum with a
monthly interest only payment required until the startup of the
facility at which time the repayment of principal will be made over
the next 15 years. The repayment of principal is expected to
commence January 2005 with principal repayments due as follows:
-------------------------------------------------------------------
(in thousands of dollars)
-------------------------------------------------------------------
2004 --
2005 $ 1,370
2006 1,473
2007 1,585
2008 1,704
Thereafter 33,868
===================================================================
MARSULEX INC.
Notes to Consolidated Financial Statements
Page 3
4. Long-term Debt (continued)
(a) Under the terms of the agreement $40,000,000 was advanced to a loan
account which is held in trust. As construction of the facility
progresses, cash draws are made on the loan with the remaining
amount held in trust and recorded separately in current assets as
cash held in trust. As defined in the agreement, $7.5 million of
the funds are required to remain in trust until the successful
comissioning and startup of the facility.
(b Standard & Poors revised its credit rating of the Company on June
2, 2003 to BB- from the BB rating received in June 1998 and
consequently, the rating on the Senior Subordinated Notes was
revised to B from the 1998 rating of B+.
5. Unusual items:
============================================================================================
Three months ended Nine months ended
(in thousands of dollars) September 30 September 30
--------------------------------------------------------------------------------------------
2003 2002 2003 2002
--------------------------------------------------------------------------------------------
Expenses incurred on the early
retirement of debt (note 5(a)) -- $ 1,251 -- $ 1,251
Gain on disposal of parts and service
business and other assets (note 5(b)) -- -- -- (3,612)
--------------------------------------------------------------------------------------------
Total unusual items -- $ 1,251 -- $ (2,361)
============================================================================================
(a) 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 $69,492,000 (US $44,234,000) principal at par
plus accrued interest of $929,000 (US $591,000). Although US
$47,230,000 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
$1,251,000 comprised of writing off of deferred debt issuance costs
of $1,185,000 and expenses incurred on the transaction of $66,000.
(b) 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
=====================================================================
6. Capital stock
(a) During the third quarter in 2003, the Company issued 40,000 common
shares for cash proceeds of $113,000 upon the exercise of stock
options.
MARSULEX INC.
Notes to Consolidated Financial Statements
Page 4
(b) On June 17, 2003 the Company announced its intention to make a
Normal Course Issuer Bid (NCIB), pursuant to which the Company is
entitled to purchase 1,341,677 of its common shares issued and
outstanding. The NCIB commenced on June 19, 2003 and will terminate
on June 18, 2004. The purchases will be made for cancellation at
the market price of such shares at the time of acquisition. No
shares were acquired by the Company for cancellation during the
period June 19, 2003 to September 30, 2003.
7. Stock compensation
The Company's results would have been as follows had it elected to
recognize the cost of its stocked-based compensation based on the
estimated fair value of stock options granted subsequent to January 1,
2002:
============================================================================================
Three months ended Nine months ended
(in thousands of dollars, September 30 September 30
except per share amounts)
--------------------------------------------------------------------------------------------
2003 2002 2003 2002
--------------------------------------------------------------------------------------------
Net earnings as reported $ 2,634 $ 1,177 $ 7,570 $ 1,733
Adjustment for stock options (34) (57) (136) (141)
--------------------------------------------------------------------------------------------
Pro forma net earnings 2,600 1,120 7,434 1,592
--------------------------------------------------------------------------------------------
Pro forma basic earnings per share 0.08 0.04 0.24 0.05
Pro forma diluted earnings per share 0.08 0.04 0.24 0.05
============================================================================================
During the period no new options were granted. The fair value of the
stock options was estimated in 2002 and there are no changes to
assumptions used in the Black-Scholes option-pricing model.
8. Foreign exchange gains and losses on monetary items:
The gains or losses arising from the translation of monetary assets and
liabilities denominated in US dollars have been translated into Canadian
dollars at the rate of exchange in effect at the balance sheet date and
the resulting holding gains or losses are recorded in the statement of
operations. In addition, all of the Company's US denominated revenues
and expenses of its US operations have been translated into its Canadian
dollar reporting currency at the average rate in effect during the year.
The Company has self-sustaining operations holding US dollar assets and
liabilities and the US dollar-denominated Senior Subordinated Notes used
in the acquisition of the self-sustaining operations are considered to
be a hedge of this net investment. Gains or losses arising from the
translation of the financial statements of the self-sustaining
operations including the Senior Subordinated Notes are deferred in the
foreign currency translation adjustment account that is part of the
shareholders' equity on the balance sheet.
9. Comparative figures:
Certain 2002 balances have been reclassified to conform to presentation
adopted in 2003.
MARSULEX INC.
Notes to Consolidated Financial Statements
Page 5
10. Business 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 centralized services, such as 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 upgrades sulphur-based by-products produced as part of
air quality compliance activities.
Power Generation provides outsourced environmental services, primarily
air quality compliance, to customers in the power generation industry.
MARSULEX INC.
Notes to Consolidated Financial Statements
Page 6
10. Business segments (continued):
Schedule of business segments (unaudited)
==========================================================================================================================
For the three months ended September 30 Refinery Services Western Markets Power Generation
(in thousands of dollars)
2003 2002 2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------------------
Revenue from external customers 17,583 17,327 13,333 14,052 2,968 2,657
==========================================================================================================================
Earnings (loss) before the undernoted 6,231 5,888 4,249 5,140 54 (501)
Depreciation, including loss on disposal 2,871 3,001 334 327 250 282
Unusual items -- -- -- -- -- --
Amortization of deferred charges
and intangible assets -- -- -- -- -- --
Interest expense -- -- -- -- -- --
Interest capitalized -- -- -- -- -- --
Interest income -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes,
and minority interest 3,360 2,887 3,915 4,813 (196) (783)
==========================================================================================================================
Capital expenditures 4,192 908 118 92 5 6,811
==========================================================================================================================
Schedule of business segments (unaudited)
==========================================================================================================================
For the nine months ended September 30 Refinery Services Western Markets Power Generation
(in thousands of dollars)
2003 2002 2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------------------
Revenue from external customers 54,526 51,988 40,910 40,919 7,573 12,341
==========================================================================================================================
Earnings (loss) before the undernoted 19,042 15,291 12,150 14,634 (1,328) (1,157)
Depreciation, including loss on disposal 9,541 8,980 999 976 755 867
Unusual items -- -- -- -- -- --
Amortization of deferred charges
and intangible assets -- -- -- -- -- --
Interest expense -- -- -- -- -- --
Interest capitalized -- -- -- -- -- --
Interest income -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes,
and minority interest 9,501 6,311 11,151 13,658 (2,083) (2,024)
- --------------------------------------------------------------------------------------------------------------------------
Total assets before goodwill and
intangible assets (1) 142,875 131,595 20,653 22,378 6,435 9,609
Goodwill and intangible assets (1) 42,596 49,441 4,468 4,468 6,797 7,922
- --------------------------------------------------------------------------------------------------------------------------
Total assets (1) 185,471 181,036 25,121 26,846 13,232 17,531
==========================================================================================================================
Capital expenditures 27,324 11,552 353 377 83 13,423
==========================================================================================================================
(1) 2002 assets at December 31
[Table Continued]
Schedule of business segments (unaudited)
===================================================================================================
For the three months ended September 30 Corporate Support Total
(in thousands of dollars)
2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------
Revenue from external customers -- -- 33,884 34,036
===================================================================================================
Earnings (loss) before the undernoted (2,641) (1,743) 7,893 8,784
Depreciation, including loss on disposal 48 54 3,503 3,664
Unusual items -- 1,251 -- 1,251
Amortization of deferred charges
and intangible assets 180 129 180 129
Interest expense 2,748 2,367 2,748 2,367
Interest capitalized (953) (392) (953) (392)
Interest income (315) (419) (315) (419)
- ---------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes,
and minority interest (4,349) (4,733) 2,730 2,184
===================================================================================================
Capital expenditures 51 70 4,366 7,881
===================================================================================================
Schedule of business segments (unaudited)
===================================================================================================
For the nine months ended September 30 Corporate Support Total
(in thousands of dollars)
2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------
Revenue from external customers -- -- 103,009 105,248
===================================================================================================
Earnings (loss) before the undernoted (5,802) (7,659) 24,062 21,109
Depreciation, including loss on disposal 149 162 11,444 10,985
Unusual items -- (2,361) -- (2,361)
Amortization of deferred charges
and intangible assets 548 391 548 391
Interest expense 7,121 11,294 7,121 11,294
Interest capitalized (2,523) (1,952) (2,523) (1,952)
Interest income (482) (1,714) (482) (1,714)
- ---------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes,
and minority interest (10,615) (13,479) 7,954 4,466
- ---------------------------------------------------------------------------------------------------
Total assets before goodwill and
intangible assets (1) 49,446 13,608 219,409 177,190
Goodwill and intangible assets (1) -- -- 53,861 61,831
- ---------------------------------------------------------------------------------------------------
Total assets (1) 49,446 13,608 273,270 239,021
===================================================================================================
Capital expenditures 138 158 27,898 25,510
===================================================================================================
(1) 2002 assets at December 31
MARSULEX
MARSULEX INC. - Third Quarter 2003
- -------------
MANAGEMENT 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 consolidated financial statements and accompanying notes.
REVIEW OF THIRD QUARTER 2003
o EBITDA for the third quarter of 2003 was significantly ahead of the third
quarter of 2002 after adjusting for the negative effect of foreign
exchange on EBITDA which totaled approximately $2 million.
o The Refinery Services Group reported higher EBITDA than last year,
reflecting solid performances from each part of the group's operations.
The results were achieved despite the impact of the lower US dollar on US
denominated earnings.
o Western Markets Group recorded EBITDA that met expectations, and as
indicated previously, was lower than the exceptional levels reported in
the same period last year.
o The Power Generation Group reported a breakeven performance for the
quarter, which reflected fees from the Shajiao project in China offset by
the group's continuing investment in air quality compliance solutions for
the power sector.
o The Company completed the construction of its portion of the Syncrude
project on schedule, on budget and ready for commissioning and startup,
which is tied to Syncrude's UE-1 upgrader project.
o On October 7, 2003 the Company acquired the Prince George, British
Columbia sulphur products assets from Duke Energy Gas Transmission for a
purchase price, including an estimate of related fees and expenses, of
approximately $12.8 million financed entirely through existing cash. The
operation upgrades molten sulphur, a by-product of environmental controls
in the western Canadian oil and gas industry, into higher value
industrial chemicals, which are used primarily for the forest products
and water treatment industries. Following completion of the acquisition,
the operation will be integrated into the Company's Western Markets Group
and it will contribute to earnings starting in the fourth quarter.
RESULTS OF OPERATIONS
The Company is focused on providing outsourced environmental compliance
solutions to the oil refining and power generation industries through its
Refinery Services and Power Generation operating groups. The Western Markets
Group upgrades and distributes sulphur-based by-products produced as part of
air quality compliance. A fourth, non-operating group, Corporate, provides
centralized services such as project execution support, finance, information
systems, human resources, and risk management to the operating groups.
Revenue and Gross Profit
Consolidated revenue was $33.9 million for the third quarter in 2003,
comparable to the $34.0 million for the same period in 2002, reflecting the
improved Refinery Services performance and the fees earned by the Power
Generation Group Shajiao project, offset by lower revenues from Western
Markets. Revenue for the nine months ended September 30, 2003 was $103.0
million compared with $105.2 million for the nine months ended September 30,
2002, a decrease of $2.2 million, or 2.1%. This primarily reflects the
improved performance in Refinery Services, offset by the completion of the
Virginia Power project in the first quarter of 2002.
Gross profit for the third quarter in 2003 of $12.8 million was comparable
to the gross profit for the same period in 2002. For the nine months ended
September 30, 2003 gross profit was $36.8
million, up $0.8 million or 2.2% when compared to the $36.0 million for the
same period in 2002. As a percentage of revenue, gross profit increased from
37.6% for the third quarter in 2002 to 37.8% for the same period in 2003. Gross
profit as a percent of revenue increased from 34.2% for the nine months ended
September 30, 2002 to 35.7% for the same period in 2003. This reflects the
improved quality of earnings resulting from the Company's increased focus on
outsourced air quality compliance solutions.
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 $17.6 million for the third quarter in 2003
compared to $17.3 million for the same period in 2002, and was $54.5 million
for the nine months ended September 30, 2003 compared to $52.0 million for the
same period in 2002. This reflects solid performances in 2003 from all of the
Group's operations. The results were negatively affected by the impact of the
lower US dollar. The rate used to translate the US denominated refinery
results in the current period was a year to date average rate of 1.4272
compared to the 2002 year to date average of 1.5668.
Western Markets upgrades sulphur-based by-products produced as part of air
quality compliance activities. For example, it is one of the leading suppliers
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 for the third quarter in 2003 was $13.3 million
compared with $14.1 million for the same period in 2002, a decrease of 5.7%.
This decline in revenue from the unusually high levels last year was
anticipated and is due mainly to last year's strong demand for pulp and paper
bleaching chemicals and for water treatment chemicals. For the nine months
ended September 30, 2003 and for the same period in 2002, revenue for Western
Markets was $40.9 million.
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. A newly developed service -- CleanStack(TM) -- a solution for sulphur
trioxide emissions of utilities is now being marketed.
Revenue for Power Generation was $3.0 million for the third quarter in 2003,
up $0.3 million from the same period in 2002 and reflects the fees earned on
the Shajiao project. Revenue for the Power Generation Group was $7.6 million
for the nine months ended September 30, 2003 compared to $12.3 million for the
same period in 2002, a decrease of $4.7 million. The decrease was primarily
the result of the completion of the Virginia Power project in the first
quarter of 2002 partially offset by the fees earned on the Shajiao project.
Selling, General, Administrative and Other Costs ("SGA")
SGA costs were $4.5 million for the third quarter in 2003 compared to $4.8
million for the same period in 2002, a decrease of $0.3 million or 6.3%. For
the nine months ended September 30, 2003, SGA costs were $14.6 million
compared to $15.8 million for the same period in 2002, a decrease of $1.2
million or 7.6%. The decrease reflects the positive impact of cost saving
initiatives implemented in the last half of 2002 in both the operating and
corporate groups.
Foreign Exchange Gains and Losses
The Company has US based operations and reports in Canadian dollars and
therefore can be exposed to foreign exchange fluctuations in the following
three areas, (1) monetary assets and liabilities, primarily working capital,
(2) revenues and expenses, and (3) the self-sustaining operations including
the Senior Subordinated Notes.
Monetary Assets and Liabilities, Primarily Working Capital
The gains or losses arising from the translation of US dollar denominated
monetary assets and liabilities, excluding the US self-sustaining operations,
have been translated into Canadian dollars at the rate of exchange in effect
at the balance sheet date and the gains and losses resulting from holding
these assets and liabilities since the previous balance sheet date are
recorded in the statement of operations. The 22.4(cent) decline in the US
dollar from the December 31, 2002 rate of 1.5789 to the September 30, 2003
rate of 1.3546, resulted in the foreign exchange gain of $1.9 million for the
nine months ended September 30, 2003 on the US denominated net monetary
liability position. During the third quarter of 2003, the September 30, 2003
rate increased from the June 30, 2003 rate of 1.3489 although the impact was
offset by the decrease in net liabilities and resulted in the foreign exchange
loss of $0.4 million for the third quarter in 2003. If the US dollar remains
unchanged at the more recent rate of 1.3362 at November 4, 2003 and there is
no change in the net monetary items, the foreign exchange gain of $1.9 million
would be increased by approximately $0.1 million in the fourth quarter.
Revenues and Expenses
In addition to the above holding gain, the financial results of the Company
are impacted by foreign exchange fluctuations when translating the Company's
US operating results into its Canadian dollar reporting currency. Unlike other
Canadian companies whose US denominated revenues are exposed when matched
against Canadian expenses, the impact of exchange fluctuations on the
Company's EBITDA is limited as both the revenues and expenses for these
operations are denominated in US dollars and are translated at the average
rate in effect during the year. The Company's debt and related interest
expense are also denominated in US dollars and hedges the US dollar cash flow
from operations and when combined with US dollar depreciation and amortization
expenses, limits the exposure to net income. The following table illustrates
the foreign exchange impact of a one-cent decline in the US dollar on the
Company's US denominated operating results for the nine months ended September
30, 2003:
===============================================================================
(in thousand of dollars)
- -------------------------------------------------------------------------------
Gross Profit (129)
SGA costs 41
- -------------------------------------------------------------------------------
EBITDA (88)
Depreciation and amortization of deferred
charges and intangible assets 63
Net Interest expense 44
- -------------------------------------------------------------------------------
Earnings before income taxes and minority interest (1) 19
===============================================================================
(1) This excludes the foreign exchange impact on translation of US denominated
monetary assets and liabilities.
Self-sustaining Operations
The Company's US based operations are considered to be self-sustaining as
they are both operationally and financially independent. The US dollar
denominated Senior Subordinated Notes were used to finance these operations
and provide a natural hedge of the assets. As a result, gains or losses
arising from the translation of the assets and liabilities of the
self-sustaining operations including the Senior Subordinated Notes are
deferred in the foreign currency translation
adjustment account that is part of the shareholders' equity on the
balance sheet. This recognizes the long-term nature of the investment and that
fluctuations in foreign exchange rates do not affect the Company's current
earnings.
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 reconciliation of EBITDA
to the consolidated statements of operations and to the segmented results of
operations as presented in note 10 of the consolidated financial statements.
The consolidated statement of operations:
================================================================================================================
Three Months ended Nine Months ended
September 30 September 30
- ----------------------------------------------------------------------------------------------------------------
(in thousand of dollars) 2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------------
EBITDA 7,893 8,784 24,062 21,109
Loss on disposal of property, plant and equipment -- -- -- 20
Depreciation 3,503 3,664 11,444 10,965
Unusual items loss (gain) -- 1,251 -- (2,361)
Amortization of deferred charges and intangible assets 180 129 548 391
Interest expense 2,748 2,367 7,121 11,294
Interest capitalized (953) (392) (2,523) (1,952)
Interest income (315) (419) (482) (1,714)
- ----------------------------------------------------------------------------------------------------------------
Earnings before income taxes and minority interest 2,730 2,184 7,954 4,466
================================================================================================================
EBITDA for the third quarter in 2003 was $7.9 million compared to $8.8 million
for the same period in 2002. As a percent of revenue, EBITDA for the third
quarter in 2003 was 23.3% compared to 25.9% for the same period in 2002,
largely reflecting the impact of the third quarter 2003 foreign exchange loss.
For the nine months ended September 30, 2003 EBITDA was $24.1 million compared
to $21.1 million for the same period in 2002, which as a percent of revenue
was 23.4% for the nine months ended September 30, 2003, and 20.1% for the same
period in 2002. On a four-quarter rolling basis, EBITDA as a percentage of
revenue in the third quarter of 2003 of 22.8% continued to exceed the 20%
target and the third quarter 2002 percentage of 18.9% despite the foreign
exchange loss in the third quarter in 2003.
The operating segments for the third quarter ended September 30:
=======================================================================================================================
(in thousands of dollars) Refinery Services Western Markets Power Generation Corporate Support
2003 2002 2003 2002 2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------------------------
Revenue from external customers 17,583 17,327 13,333 14,052 2,968 2,657 -- --
- -----------------------------------------------------------------------------------------------------------------------
Earnings (loss) from continuing
operations before the undernoted 6,231 5,888 4,249 5,140 54 (501) (2,641) (1,743)
Depreciation, including loss on
disposal 2,871 3,001 334 327 250 282 48 54
Unusual items -- -- -- -- -- -- -- 1,251
Amortization of deferred charges
and intangible assets -- -- -- -- -- -- 180 129
Interest expense -- -- -- -- -- -- 2,748 2,367
Interest capitalized -- -- -- -- -- -- (953) (392)
Interest income -- -- -- -- -- -- (315) (419)
- -----------------------------------------------------------------------------------------------------------------------
Earnings (loss) (1) 3,360 2,887 3,915 4,813 (196) (783) (4,349) (4,733)
=======================================================================================================================
The operating segments for the nine months ended September 30:
=========================================================================================================================
(in thousands of dollars) Refinery Services Western Markets Power Generation Corporate Support
2003 2002 2003 2002 2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------------------------
Revenue from external customers 54,526 51,988 40,910 40,919 7,573 12,341 -- --
- -------------------------------------------------------------------------------------------------------------------------
Earnings (loss) from continuing
operations before the undernoted 19,042 15,291 12,150 14,634 (1,328) (1,157) (5,802) (7,659)
Depreciation, including loss on 9,541 8,980 999 976 755 867 149 162
disposal
Unusual items -- -- -- -- -- -- -- (2,361)
Amortization of deferred charges
and intangible assets -- -- -- -- -- -- 548 391
Interest expense -- -- -- -- -- -- 7,121 11,294
Interest capitalized -- -- -- -- -- -- (2,523) (1,952)
Interest income -- -- -- -- -- -- (482) (1,714)
- -------------------------------------------------------------------------------------------------------------------------
Earnings (loss) (1) 9,501 6,311 11,151 13,658 (2,083) (2,024) (10,615) (13,479)
=========================================================================================================================
(1) Earnings (loss) before income taxes, and minority interest.
For the third quarter in 2003, EBITDA for Refinery Services was $6.2 million
compared to $5.9 million for the same period in 2002. The results reflected
the continuation of the strong performances for the entire group's operations.
These results were recorded despite the foreign exchange impact on the US
denominated Refinery Services operations. For the nine months ended September
30, 2003, EBITDA for the group was $19.0 million compared to $15.3 million for
the same period in 2002 and is primarily the result of the general improvement
over last year in the group's operations.
Western Markets' EBITDA for the third quarter in 2003 was $4.2 million, down
$0.9 million when compared to $5.1 million for the third quarter in 2002. For
the nine months ended September 30, 2003, EBITDA for the group was $12.2
million compared to $14.6 million for the same period in 2002. Revenues were
flat to last year but were offset by higher energy and raw material costs.
EBITDA for Power Generation for the third quarter in 2003 was a profit of
$0.1 million compared to a loss of $0.5 million for the same period in
2002. For the nine months ended September 30, 2003, the Power Generation
Group generated a loss of $1.3 million compared to a loss of $1.2 million
for the same period in 2002. This reflects the Company's continued
investment in this strategic business and the completion of the Virginia
Power project in the first quarter of 2002, offset by the fees earned on
the Shajiao project. The Power Generation segment also includes the Company's
first outsourcing agreement in the cement industry with Holcim Inc., under
which the customer takes all of the production from the Company's CP-Gyp
facility in Dundee, Michigan. For a number of reasons, the customer stopped
accepting product in March of 2003 and the Company subsequently idled the
plant. In accordance with the terms of the agreement, arbitration is being
pursued. As noted in the 2002 Annual Report, the Company had a net asset
value at December 31, 2002 in the CP-Gyp facility and operations of
approximately US $5 million.
Corporate costs for the third quarter in 2003 were $2.6 million compared to
$1.7 million for the same period in 2002. For the nine months ended September
30, 2003, corporate costs were $5.8 million compared to $7.7 million for the
same period in 2002. The following table illustrates that when the impact of
foreign exchange gains and losses are ignored, Corporate costs have decreased
and reflect the cost savings initiated last year.
================================================================================
Three Months ended Nine Months ended
September 30 September 30
- --------------------------------------------------------------------------------
(in thousand of dollars) 2003 2002 2003 2002
- --------------------------------------------------------------------------------
Corporate costs 2,211 2,597 7,719 8,499
Foreign exchange losses (gains) 430 (854) (1,917) (840)
- --------------------------------------------------------------------------------
Net costs 2,641 1,743 5,802 7,659
================================================================================
Depreciation
Depreciation expense for the third quarter in 2003 was $3.5 million compared
to $3.7 million for the same period in 2002, an decrease of $0.2 million or
5.4%. For the nine months ended September 30, 2003, depreciation was $11.4
million, up $0.4 million over the same period in 2002. This increase is
primarily attributable to depreciation relating to the new BP Whiting facility
offset by lower depreciation expense for the US denominated operations.
Interest Expense, net of interest income and capitalized interest
================================================================================
Three Months ended Nine Months ended
September 30 September 30
- --------------------------------------------------------------------------------
(in thousand of dollars) 2003 2002 2003 2002
- --------------------------------------------------------------------------------
Interest expense 2,748 2,367 7,121 11,294
Interest capitalized (953) (392) (2,523) (1,952)
Interest income (315) (419) (482) (1,714)
- --------------------------------------------------------------------------------
Net interest expense 1,480 1,556 4,116 7,628
================================================================================
Net interest expense was $1.5 million for the third quarter in 2003, a
decrease of $0.1 million or 6.3% from the $1.6 million net interest expense
for the same period in 2002 the result of the interest costs relating to the
completion of the Syncrude project financing offset by the lower cost of the
interest due to foreign exchange on the US denominated debt. For the nine
months ended September 30, 2003, net interest expense was $4.1 million
compared to $7.6 million for the same period in 2002. The decrease is
primarily the result of the purchase of the Senior Subordinated Notes in
August 2002 and the lower interest cost due to foreign exchange on the US
denominated debt.
The reduction in interest income is due to lower cash balances.
Income Taxes
Total income tax expense for the third quarter in 2003 was $0.1 million on
earnings before income taxes and minority interest of $2.7 million. For the
nine months ended September 30, 2003, income tax expense was $0.4 million on
earnings before income taxes and minority interest of $8.0 million. This
resulted in an overall effective income tax rate of 3.7% and 5.0% for the
third quarter and nine months ended September 30, 2003, compared to a
statutory rate of 36.6% and reflects the utilization of tax loss carryforwards
the benefit of which has not been previously recognized.
The Company continues to expect cash taxes for the 2003 year to be under $1
million.
Net Earnings
For the third quarter in 2003, the Company earned $2.6 million compared to a
net earnings of $1.2 million for the same period in 2002, a $1.4 million
improvement. This is the result of the improvement in EBITDA offset by the
impact of foreign exchange. The net earnings for the nine months ended
September 30, 2003 was $7.6 million compared to net earnings of $1.7 million
for the same period in 2002. The nine months ended in 2002 included the net
gain of $2.4 million relating to the sale of the parts and services business
and the costs on the early retirement of debt. When the impact of these
unusual items is removed from the nine months in 2002, the Company's earnings
improved $8.3 million and reflect the improved EBITDA, the reduced net
interest expense resulting from the purchase of the Senior Subordinated Notes
and the elimination of the minority interest resulting from the acquisition of
the remaining 35% interest in Sulconam Inc.
CONSOLIDATED BALANCE SHEETS
Total assets were $273.3 million at September 30, 2003 compared to $239.0
million at December 31, 2002.
The net book value of property, plant, and equipment at September 30, 2003
increased to $144.1 million from the December 31, 2002 balance of $134.4
million. This increase is primarily due to capital additions during the nine
months in 2003 of $27.9 million offset by depreciation expense of $11.4
million, and the foreign exchange 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 $3.1 million to $22.2 million from the
December 31, 2002 balance of $25.3 million. Total current liabilities
increased by $4.9 million to $26.3 million from the December 31, 2002 balance
of $21.4 million reflecting the timing in payments relating to income taxes
and interest accrued on the Senior Subordinated Notes which is payable on
December 31, 2003.
The $26.4 million increase in debt from the December 31, 2002 balance is the
result of the $40.0 million loan relating to the Syncrude project offset by
the impact of the strengthening of the Canadian dollar versus its US
counterpart on the US denominated Senior Subordinated Notes. 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,
2003 2002
- -------------------------------------------------------------------------------
Number of common shares 26,873,550 26,833,550
Number of convertible shares, non-voting 4,720,182 4,720,182
Number of options 2,597,449 2,674,450
===============================================================================
During the third quarter, 40,000 common shares were issued upon the exercise
of stock options for cash proceeds of $113,000.
On June 17, 2003, the Company filed a Notice of Intention to make a Normal
Course Issuer Bid (NCIB) with the Toronto Stock Exchange, pursuant to which
the Company may purchase up to 1,341,677 of its common shares, representing
approximately 5% of its 26,833,550 issued and outstanding common shares at
June 12, 2003. The NCIB commenced on June 19, 2003 and will terminate on June
18, 2004. The purchases will be made for cancellation at the market price of
such shares at the time of acquisition. During the period June 19, 2003 and
September 30, 2003, the Company did not acquire any shares for cancellation
pursuant to the Notice of Intention to make a Normal Course Issuer Bid.
Financial Condition & Liquidity
- -------------------------------------------------------------------------------
September 30, December 31,
2003 2002
- -------------------------------------------------------------------------------
Cash and cash equivalents and cash held
in trust (in millions of dollars) $ 46.0 $ 7.9
Debt (in millions of dollars) $122.3 $95.9
Net debt (1) (in millions of dollars) $ 76.3 $88.0
Debt to Equity 1.2x 1.0x
Net debt to EBITDA (2) 2.5x 3.1x
Net debt to Equity 0.8x 1.0x
Interest coverage (EBITDA(2) to interest
expense net of capitalized interest(3)) 4.9x 2.5x
===============================================================================
(1) Net debt is defined as total debt less cash and cash equivalents and cash
held in trust.
(2) For the last four quarters ending September 30, 2003 and
December 31, 2002.
(3) Interest expense net of capitalized interest for the last four quarters
ending September 30, 2003 and December 31, 2002.
Cash and cash equivalents at the end of the third quarter in 2003 were $27.1
million compared to $7.9 million at December 31, 2002 with excess cash
invested in short-term, interest-bearing deposits. The increase is the result
of the increase in cash from operations and the cash received from the
Syncrude project financing.
During the second quarter in 2003 the Company secured long term financing for
the Syncrude project and $40.0 million was advanced to a loan account which is
held in trust. Cash draws are made on this account as construction of the
facilty progresses. As of September 30, 2003, $21.1 million in cash was drawn
from the account to fund the capital expenditures made by the Company on the
project leaving a balance of $18.9 million held in trust and recorded
separately in current assets as cash held in trust. $11.4 million of this
balance will be used to fund the remaining capital commitments, which includes
the costs of commissioning the facility. Under the terms of the agreement,
$7.5 million of the funds are
required to remain in trust until the facility is successfully started up and
commissioned at which time it will become available for general use.
The financing is secured by the assets of a wholly owned subsidiary of the
Company and by a general guarantee from the Company until the successful
startup of the facility as defined under the terms of the loan agreement, at
which time the general guarantee is released and the loan will be secured by
the subsidiary's assets. If, after the successful startup of the facility, the
subsidiary fails to perform its operating obligations, the Company will become
responsible for the operation of the facility.
The loan bears interest at a fixed rate of 7.3% per annum with a monthly
interest-only payment required until the successful startup of the facility,
at which time the repayment of principal will be made over the next 15 years
with repayments expected to commence in January 2005.
The Company generates positive cash flows from operations which are used to
meet its obligations under the Senior Subordinated Notes and to fund its
growth strategy. The growth strategy includes acquisition or expansion of
processing operations, development of new technologies, and development or
expansion of the Company's presence in new markets and, to the extent
required, the Company will seek new outside financing to fund this growth
strategy.
The focus on long term fee-based contracts contributes to the Company's
positive and stable cash flows, but given its reliance on debt to finance the
growth strategy, S&P revised its credit rating of the Company on June 2, 2003
to BB- from the BB rating received in June 1998. Consequently, the rating on
the Senior Subordinated Notes was revised to B from the 1998 rating of B+. The
revised rating did not have an impact on the current debt related covenants.
Although some of the Company's financial indicators have improved, the
increased debt for the Syncrude project will cause these indicators to change
until the project is completed.
Working Capital
The Company's working capital, excluding cash and cash equivalents, cash held
in trust, and current portion of long-term debt, was under $0.1 million at
September 30, 2003 compared to $8.1 million at December 31, 2002 and is
primarily the result of the decrease in accounts receivable and the increase
in current liabilities, namely taxes payable and accrued interest expense.
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 decrease in working capital resulted in a decrease in the current ratio,
excluding cash and cash equivalents and cash held in trust, from 1.38:1 at the
end of 2002 to 1:1 at the end of the third quarter in 2003.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash Flow from Operations
For the third quarter in 2003, the Company generated $6.1 million in cash from
operations before changes in non-cash working capital, compared to $6.0
million for the same period in 2002 and for the nine months ended September
30, 2003 cash from operation before changes in non-cash working capital was
$19.0 million, compared to $11.2 million for the same period in 2002. The $7.8
million increase was due to the increase in earnings and the lower interest
expense. The significant improvement in the changes to non-cash operating
working capital when comparing to last year is largely due to the reduction in
the investment in working capital to support Power Generation projects in the
prior year. This reduction is a direct result of the transitioning over the
last few years of the Power Generation Group's focus to licensing and
technology income.
Capital Expenditures
===============================================================================
Three Months ended Nine months ended
September 30 September 30
- -------------------------------------------------------------------------------
(in thousand of dollars) 2003 2002 2003 2002
- -------------------------------------------------------------------------------
Expansion projects 3,023 6,120 24,620 20,785
Maintenance capital 1,343 1,761 3,278 4,725
- -------------------------------------------------------------------------------
Total capital expenditures (1) 4,366 7,881 27,898 25,510
===============================================================================
(1) During the three months ended September 30, 2003 $953,000 of financing
costs were capitalized (three months ended September 2002--$392,000) and
for the nine months ended September 30, 2003 $2,523,000 of financing
costs were capital during (nine months ended September 30,
2002--$1,952,000).
Capital expenditures for the third quarter in 2003 were $4.4 million compared
to $7.9 million for the same period in 2002 and for the nine months ended
September 30, 2003, capital expenditures were $27.9 million compared to $25.5
million for the same period in 2002.
The Company completed the construction of its Syncrude project on schedule and
on budget in September of this year with commissioning expected late in 2004
with startup and the related revenue stream from outsourced services expected
to begin January 2005. Syncrude will reimburse the Company for its carrying
costs during the period between the completion of construction and the startup
of the facility. Startup is tied to the overall completion of Syncrude's
Upgrader Expansion project.
OUTLOOK
The Company expects a strong performance from its core operating businesses
with the Refinery Services Group achieving significantly improved results over
last year and Western Markets reporting lower earnings more in line with its
historical performance. Investment by the Power Generation Group will
continue, with emphasis on the CleanStack(TM) SO3 emissions solution and the
development of international business through new projects and the appointment
of additional licensees.
The Company believes that with the expected performance of the Company's core
businesses, together with the added contribution from the recently acquired
sulphur products assets to be integrated into Western Markets, EBITDA for the
year is to be ahead of expectations.
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.
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 10, 2003 By: /s/ Lucio Milanovich
--------------------
Lucio Milanovich
Director, Finance