ST. LAWRENCE CEMENT GROUP INC.
TSX : ST.A

ST. LAWRENCE CEMENT GROUP INC.

October 31, 2006 08:00 ET

St. Lawrence Cement Group Third Quarter Results

MONTREAL, QUEBEC--(CCNMatthews - Oct. 31, 2006) - St. Lawrence Cement Group Inc. (TSX:ST.A) (the "Company") reported sales of $454.6 million for the third quarter ended September 30, 2006, compared to $449.3 million for the same period last year, an increase of 1.2%. The higher sales reflect increased selling prices for construction materials and strong activity in construction services, offset by lower sales volumes and a negative foreign exchange impact of approximately $6.0 million on the translation of U.S. sales into Canadian currency for reporting purposes.

Sales volumes for cementitious materials in the quarter decreased by approximately 9% compared to the third quarter of last year while volumes for aggregates and ready-mix concrete decreased by 10% and 2%, respectively, compared to the same 2005 period. Demand for construction materials was affected mainly by a slowdown in residential construction activity in the Company's markets and to a lesser extent unfavourable weather conditions. In contrast, the Company's construction services business in Ontario continued to experience strong demand with a high level of backlogs.

ANALYSIS OF THIRD QUARTER

Gross profit for the third quarter decreased by $2.9 million to $110.7 million compared to the same period in 2005. This decrease is attributable to lower sales of construction materials, significantly higher costs of cement imported into the U.S., and increases in energy and distribution costs which were partly offset by higher selling prices.

Selling and administrative expenses for the third quarter amounted to $22.1 million compared to $24.1 million for the same period last year, a decrease of $2.0 million. The 2005 amount included $3.0 million of costs related to the implementation of a finance shared service centre with our sister company Holcim (US). The net increase in expenses of $1.0 million in the quarter is mainly due to higher employee future benefit expenses.

Depreciation expenses decreased by $1.2 million to $13.0 million compared to $14.2 last year. This reduction is explained by the completion of amortization, earlier in the year, of major information technology assets that went into service in 2003 as well as the favourable impact of the year-over-year appreciation of the Canadian dollar on the depreciation and amortization expense associated with our U.S. denominated assets. Consequently, operating profit increased to $75.6 million compared to $75.3 million for the third quarter of 2005.

Financial expenses increased to $5.4 million compared to $4.4 million for the third quarter last year reflecting the higher interest rates in the third quarter compared to the same 2005 period.

Net earnings for the third quarter were $42.3 million ($1.01 basic earnings per share) compared to $42.5 million ($1.02 basic earnings per share) for the third quarter of 2005.

YEAR-TO-DATE RESULTS

For the first nine months of 2006, sales increased 5.0% to $997.4 million compared to $950.0 million for the same period last year. Excluding the negative translation impact resulting from the year-over-year appreciation of the Canadian dollar, sales increased by 6.9%. The higher sales result from increased selling prices for construction materials and strong activity in construction services.

Gross profit was $226.7 million compared to $199.5 million for the same period last year, an increase of 13.6%. This improvement is mainly due to higher selling prices which more than offset the lower demand for the Company's products in the second and third quarters and increased import, energy, and distribution costs.

Selling and administrative expenses were $71.4 million, or $2.9 million lower than for the first nine months of 2005. The 2005 amount included $5.7 million of costs related to the implementation of the finance shared service centre. The net increase of $2.8 million is mainly attributable to increased employee future benefit expenses and severance costs. As a percentage of sales, selling and administrative expenses were stable at 7.2% for the first nine months of 2006 and the corresponding 2005 period (excluding the finance shared service implementation costs) reflecting continued tight management of controllable expenses.

Depreciation amounted to $40.7 million compared to $43.1 million for the first nine months of 2005. The reduction is due to the completion of amortization of major information technology assets that went into service in 2003 as well as favourable foreign currency translation. Operating profit for the nine months ended September 30, 2006 amounted to $114.6 million compared to $82.1 million last year, an increase of 39.6%.

Financial expenses amounted to $14.3 million compared to $12.3 million for the first nine months of 2005 reflecting higher interest rates compared to the same 2005 period.

In the second quarter of 2006 the Company recorded a reduction of $8.0 million in future income tax expense to reflect the impact of the 3% decrease in the Canadian federal income tax rate on future income tax liabilities. Excluding this adjustment, the effective tax rate for the nine month period ended September 30, 2006 was 38.8%.

Net earnings increased to $68.0 million ($1.62 basic earnings per share) compared to $3.4 million ($0.08 basic earnings per share) for the first nine months of 2005. Excluding the adjustment in future income tax expense in the second quarter, basic earnings per share for the nine month period ended September 30, 2006 was $1.43. Excluding the after-tax write-down of $37.8 million related to the Greenport project, basic earnings per share for the nine month period ended September 30, 2005 was $0.99, an increase of 44.4%.

RESULTS BY SEGMENT

The Ontario division increased sales for the third quarter to $285.7 million compared to $257.6 million for the same period last year, an increase of 10.9%. Although demand for construction materials was lower than in the same 2005 period, this was offset by increased prices and stronger construction services revenue. Operating profit for the third quarter increased to $50.1 million compared to $47.6 million last year, an increase of 5.2%. For the first nine months of 2006, sales reached $582.6 million, an increase of $50.2 million over the prior year while operating profit rose to $67.3 million, or $8.2 million higher than the same period in 2005.

Quebec and Atlantic division sales decreased by $18.5 million to $85.6 million for the third quarter as a result of lower construction services revenues and softer demand for construction materials. Operating profit decreased by only $0.7 million, to $17.5 million for the third quarter compared to $18.2 million for the same period last year reflecting the lower proportion of construction services revenues in the sales mix. For the first nine months of 2006, sales reached $195.0 million, a decrease of $18.9 million over the prior year while operating profit increased 27.2% to $27.1 million compared to corresponding 2005 period.

The U.S. division posted a sales increase of 1.9% in local currency for the third quarter; however, reported sales decreased by 4.9% to $83.3 million compared to $87.6 million due to an unfavourable foreign exchange impact of $5.7 million. This improvement, in local currency, reflected higher selling prices which were offset by weaker demand for cementitious products in the quarter. Operating profit decreased by $1.5 million to $8.0 million for the third quarter mainly as a result of significantly higher import costs. For the first nine months of 2006, sales amounted to $219.8 million compared to $203.7 million in the same 2005 period, an increase of 7.9%. Excluding the negative translation impact, sales increased by 16.6%. Operating profit amounted to $20.2 million compared to $1.7 million for the first nine months of last year.

LIQUIDITY AND CAPITAL RESOURCES

Funds from operations for the first nine months of 2006 increased by $16.4 million to $103.9 million compared to last year, in line with the higher net earnings before the non-cash adjustments of $8.0 million to future income taxes in 2006 and the after-tax Greenport project write-down of $37.8 million in 2005. Working capital requirements increased by $4.3 million to $105.7 million compared to last year. Net cash used for operations was $1.8 million compared to $13.9 million for the same period last year. As a result of the seasonal nature of our business, working capital requirements are variable throughout the year. Therefore, year-over-year comparisons of statements of cash flows and balance sheet items such as accounts receivable, inventories and accounts payable and accrued liabilities are generally more meaningful than with the previous quarter or year-end.

The Company ended the third quarter in a comfortable financial position with a ratio of long-term debt on total capitalization of 24:76 compared to 27:73 at the end of the third quarter of 2005. Total long-term debt, including the current portion payable, as of September 30, 2006 amounted to $255.7 million compared to $272.7 million for the same 2005 period. The decrease is related to the favourable currency translation of U.S. denominated debt on the balance sheet and a reduction of $42.0 million in cash and cash equivalents in the period compared to last year, offset by increases in capital expenditures and working capital requirements. As at September 30, 2006 the Company held cash and cash equivalents of $1.0 million compared to $43.0 million at September 30, 2005.

DIVIDENDS

A dividend of $0.14 per share ($0.14 last year) was paid on August 1, 2006 to shareholders of record on July 15, 2006. In addition a dividend of $0.14 per share has been declared for payment on November 1, 2006 to shareholders of record on October 15, 2006.

OUTLOOK

Due to a more significant slow down in housing construction than expected, business conditions in our markets are generally below the summer forecast from the Portland Cement Association. Most markets continue to show a decline in demand compared to last year. Reflecting this reversal in trend, the Company expects lower sales volumes of construction materials in the fourth quarter of 2006. Furthermore, as a result of the seasonal nature of construction activity, weather conditions will also be a key factor in the Company's sales volumes and construction services revenue during the fourth quarter.

St. Lawrence Cement Group is a leading producer and supplier of products and services for the construction industry, namely cement, concrete, aggregates and construction. The company operates in Canada and on the eastern seaboard of the United States, and employs a total of 3,200 people.



Consolidated Statements
of Earnings and Retained Earnings

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(millions of For the three month For the nine month
Canadian period ended period ended
dollars September 30, September 30, September 30, September 30,
except per 2006 2005 2006 2005
share data) (unaudited) (unaudited) (unaudited) (unaudited)
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Sales 454.6 449.3 997.4 950.0
Cost of sales 343.9 335.7 770.7 750.5
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Gross profit 110.7 113.6 226.7 199.5
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Expenses
Selling and
administrative 22.1 24.1 71.4 74.3
Depreciation and
amortization
of property,
plant and
equipment and
other long-term
assets 13.0 14.2 40.7 43.1
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35.1 38.3 112.1 117.4
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Operating profit 75.6 75.3 114.6 82.1

Other expenses 1.2 0.8 2.4 3.1
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Earnings before
interest, taxes
and unusual
items 74.4 74.5 112.2 79.0

Unusual expense
(Note 2) - - - 65.5
Financial
expenses 5.4 4.4 14.3 12.3
Loss (gain)
on sale of
assets 0.1 (0.1) (0.2) (1.0)
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Earnings before
income taxes 68.9 70.2 98.1 2.2

Provision for
(recovery of)
income taxes
Current 24.5 22.1 36.3 21.3
Future 2.1 5.6 (6.2) (22.5)
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26.6 27.7 30.1 (1.2)
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Net earnings 42.3 42.5 68.0 3.4

Retained earnings
at beginning of
period 519.0 457.4 505.2 508.4

Dividends (5.9) (5.9) (17.8) (17.8)
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Retained earnings
at end of period 555.4 494.0 555.4 494.0
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Basic earnings
per share 1.01 1.02 1.62 0.08
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Diluted earnings
per share 1.00 1.01 1.62 0.08
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Weighted average
number of
outstanding
shares used
in computing
basic earnings
per share
(millions) 42.0 41.8 41.9 41.8
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Weighted average
number of
outstanding shares
used in computing
diluted earnings
per share (millions) 42.1 41.9 42.1 41.9
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The accompanying notes are an integral part of the interim
consolidated financial statements.



Consolidated Balance Sheets

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As at As at As at
September 30, December 31, September 30,
(millions of Canadian dollars) 2006 2005 2005
---------------------------------------------------------------------
(unaudited) (audited) (unaudited)
ASSETS
Current assets
Cash and cash equivalents 1.0 10.8 43.0
Accounts receivable 211.8 173.8 175.9
Inventories 169.3 148.4 137.2
Prepaid expenses and other 14.6 4.0 16.1
Income taxes recoverable 11.3 - 12.4
Future income taxes 7.5 7.5 12.2
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415.5 344.5 396.8

Property, plant and equipment 770.0 733.1 721.7
Goodwill 75.2 75.2 75.2
Investments and other assets 28.0 30.7 42.9
Employee future benefits 4.1 6.3 4.3
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1,292.8 1,189.8 1,240.9
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LIABILITIES AND SHAREHOLDERS'
EQUITY

Current liabilities
Accounts payable and accrued
liabilities 193.3 213.0 179.1
Dividends payable 5.9 5.9 5.9
Construction advances, net 9.1 12.9 6.2
Current portion of long-term debt 34.7 0.2 0.6
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243.0 232.0 191.8

Employee future benefits 4.4 4.2 3.3
Long-term provision (Note 3) 27.3 27.5 25.9
Long-term debt 221.0 168.0 272.1
Future income taxes 145.0 151.1 151.9

Shareholders' equity
Share capital 138.2 136.7 135.5
Cumulative translation
adjustment (43.1) (35.9) (34.5)
Retained earnings 555.4 505.2 494.0
Contributed surplus 1.6 1.0 0.9
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652.1 607.0 595.9

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1,292.8 1,189.8 1,240.9
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Disclosure of guarantees (Note 5)

The accompanying notes are an integral part of the interim
consolidated financial statements.



Consolidated Statements of Cash Flows

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For the three month For the nine month
(millions of period ended period ended
Canadian September 30, September 30, September 30, September 30,
dollars 2006 2005 2006 2005
---------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)

OPERATIONS
Net earnings 42.3 42.5 68.0 3.4
Depreciation
and amortization 13.0 14.2 40.7 43.1
Future income
taxes 2.1 5.6 (6.2) (22.5)
Unusual expense
(Note 2) - - - 65.5
Loss (gain) on
sale of assets 0.1 (0.1) (0.2) (1.0)
Other 0.6 0.3 1.6 (1.0)
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Funds from
operations 58.1 62.5 103.9 87.5

Net changes in
working capital
balances 33.5 (6.1) (105.7) (101.4)
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Net cash provided
(used) by
operations 91.6 56.4 (1.8) (13.9)
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INVESTMENTS
Additions to
property, plant
and equipment (39.2) (10.7) (85.4) (48.0)
Proceeds from sale
of assets 0.2 3.0 0.8 5.0
(Increase) decrease
in long-term
receivables (0.1) (2.3) 0.6 (1.1)
Other (1.3) 3.6 0.5 1.9
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Net cash used for
investments (40.4) (6.4) (83.5) (42.2)
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FINANCING
Share capital issued 0.2 0.3 0.8 0.8
Redemption of shares - (0.1) (0.4) (0.1)
Repayment of loans
to officers
included in
share capital 0.1 0.4 1.1 1.0
(Decrease) increase
in long-term debt (45.9) (15.3) 91.9 79.1
Dividends paid (6.0) (5.9) (17.9) (17.8)
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Net cash (used)
provided by
financing (51.6) (20.6) 75.5 63.0
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Net (decrease)
increase in cash
and cash
equivalents (0.4) 29.4 (9.8) 6.9
Cash and cash
equivalents,
beginning of
period 1.4 13.6 10.8 36.1
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Cash and cash
equivalents, end
of period 1.0 43.0 1.0 43.0
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The accompanying notes are an integral part of the interim
consolidated financial statements.



Summary of Quarterly Net Earnings (Loss)
(unaudited)
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(millions of Canadian dollars) 2006 2005 2004
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First quarter (9.3) (23.6) (19.3)
Second quarter 35.0 (15.5) 27.5
Third quarter 42.3 42.5 39.2
Fourth quarter - 17.2 19.7
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Net earnings to date 68.0 20.6 67.1
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Segmented Information
(unaudited)
For the three month period ended September 30
---------------------------------------------------------------------
Quebec & United
(millions of Ontario Atlantic States Total
Canadian dollars) 2006 2005 2006 2005 2006 2005 2006 2005
---------------------------------------------------------------------
Sales to
external
customers 285.7 257.6 85.6 104.1 83.3 87.6 454.6 449.3
Inter-segment
sales 5.0 6.7 0.6 0.7 - - 5.6 7.4
Operating profit 50.1 47.6 17.5 18.2 8.0 9.5 75.6 75.3


For the nine month period ended September 30
---------------------------------------------------------------------
Quebec & United
(millions of Ontario Atlantic States Total
Canadian dollars) 2006 2005 2006 2005 2006 2005 2006 2005
---------------------------------------------------------------------
Sales to
external
customers 582.6 532.4 195.0 213.9 219.8 203.7 997.4 950.0
Inter-segment
sales 10.8 15.6 1.7 1.4 - - 12.5 17.0
Operating
profit 67.3 59.1 27.1 21.3 20.2 1.7 114.6 82.1



Financial Summary
(unaudited)
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For the nine month For the year ended
(millions of period ended September 30 December 31
Canadian dollars) 2006 2005 2005 2004 2003
---------------------------------------------------------------------
Sales 997.4 950.0 1,317.8 1,278.0 1,149.2

Net earnings 68.0 3.4 20.6 67.1 65.4

Funds from operations 103.9 87.5 128.4 136.8 120.2

Per share values
Basic earnings 1.62 0.08 0.49 1.61 1.58
Operating cash flow 2.48 2.09 3.07 3.29 2.91
Dividends 0.42 0.42 0.56 0.52 0.50

Total assets 1,292.8 1,240.9 1,189.8 1,213.3 1,143.1

Long-term debt 221.0 272.1 168.0 186.5 229.1

Future income taxes
liabilities 145.0 151.9 151.1 173.4 165.7

Shareholders' equity 652.1 595.9 607.0 610.5 590.1

Long-term debt on total
capitalization 24:76 27:73 18:82 20:80 23:77

Return on average
equity (%) 10.9 0.6 3.4 11.2 11.2



General Information
---------------------------------------------
As at September 30, 2006
---------------------------------------------

Stock listings
Toronto Stock Exchange
Trading symbol ST.A
Stock price (last 9 months)
Closing $28.76
High $36.00
Low $26.75

Book value $15.53

Outstanding shares
Class A (1 vote) 26,725,951
Class B (3 votes) 15,252,848
Special 517,069

Approximate "Float" (Class A) 15,537,846

Corporate Office
1945 Graham Boulevard
Mount Royal, Quebec H3R 1H1
Telephone : (514) 340-1881
Fax : (514) 342-8154
www.stlawrencecement.com


NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

As at September 30, 2006

(tabular amounts are expressed in millions of Canadian dollars except per share data) (unaudited)

1. Basis of presentation

The interim consolidated financial statements included in this interim report are unaudited and reflect normal and recurring adjustments which are, in the opinion of the Company, considered necessary for fair presentation. These financial statements have been prepared in conformity with Canadian generally accepted accounting principles. The same accounting policies as described in the Company's latest annual report have been used. These consolidated financial statements, however, do not include all disclosures required under Canadian generally accepted accounting principles and accordingly should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's latest annual report. The Company's business is seasonal, with slow construction activity generally resulting in net losses during the first quarter of each year. As a result, earnings of any one interim period should not be considered as indicative of results for an entire year.

2. Unusual expense

For several years, the Company was engaged in the permitting process for a replacement cement plant in Greenport, New York. Altogether, 17 federal, state and local permits and approvals were needed before construction could begin. Among the required permits, the New York State Department of State (DOS) certification was key to qualify for other approvals. On April 19, 2005, the Company received a negative determination from the DOS, which ruled that the proposed plant was inconsistent with the state's Coastal Zone Policies.

Following careful review of the impacts of the DOS decision, the Company's Board of Directors decided not to appeal the DOS decision and to withdraw the project from the permitting process.

Consequently, the Company recorded, as an unusual expense, an amount of $65.5 million before income taxes (US$ 53.3 million) in the quarter ended June 30, 2005, reflecting the write-down of capitalized development costs related to this project. This unusual expense amounts to $37.8 million on an after-tax basis (US$ 30.7 million).

3. Long-term provision

The asset retirement obligation is included in the long-term provision balance in the consolidated balance sheet.

The analysis of the asset retirement obligation for the nine months ended September 30, 2006 is as follows:



Balance as at December 31, 2005 $ 27.5
Additional liability for 2006 due to changes in estimates 1.0
Accretion expense 0.9
Payment of obligation (2.1)
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Balance as at September 30, 2006 $ 27.3
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Included in depreciation and amortization of property, plant and equipment and other long-term assets, is a charge of $0.9 million for the amortization of the asset retirement cost.

The following assumptions were used to estimate the fair values of the obligation as at September 30, 2006:



Total undiscounted amount of the estimated cash flows $ 160.6
Expected timing of payment of the cash flows 2006 to 2060
Risk-free interest rate 3 % to 5.23%


The estimate of the total liability for future asset retirement obligation is subject to change, based on amendments to laws and regulations and as new information concerning the Company's operations becomes available. Future changes, if any, to the estimated total liability as a result of amended requirements, laws, regulations and operating assumptions may be significant and would be recognized prospectively as a change in estimate, when applicable.

4. Stock-based compensation and other stock-based payments

The Company applies the fair value based method to all employee stock options granted on or after January 1, 2003. Under the fair value based method, the compensation cost is measured at fair value at the date of grant and is expensed over the award's vesting period.

Had compensation expense been determined based upon fair values at the date of grant for awards issued in 2002 under all plans, the Company's pro forma net earnings and earnings per share for the nine month period ended September 30 would have been as follows:



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2006 2005
---------------------------------------------------------------------
Reported net earnings $68.0 $3.4
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Adjustment using the fair market value
method:
Special shares purchase plan (0.1) (0.2)
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Adjusted pro forma net earnings $67.9 $3.2
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Basic earnings per share $1.62 $0.08
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Adjusted pro forma basic earnings per
share $1.62 $0.08
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Diluted earnings per share $1.62 $0.08
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Adjustment using fair market value
method (0.01) -
---------------------------------------------------------------------
Adjusted pro forma diluted earnings per
share $1.61 $0.08
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The pro forma disclosure omits the effect of awards granted prior to
January 1, 2002.

5. Disclosure of guarantees

The Company has entered into various guarantee agreements that arose
out of transactions related to goods purchased from suppliers and to
borrowings of the Company's customers.

The following table provides the undiscounted maximum amount of
potential future payments for each major group of guarantees:

Standby letters of credit $7.3
Guarantees on customer debts 1.0
--------------------------------------------------------------
Total $ 8.3


6. Employee future benefits

The Company's total net benefit cost for the three and nine month periods ended September 30, 2006 was $3.1 million and $9.5 million respectively ($2.0 million and $6.1 million for the three and nine month periods ended September 30, 2005).

7. Comparative figures

Certain 2005 comparative figures have been reclassified to conform with the basis of presentation adopted in the current year.

Contact Information

  • Source :
    Nicole Jarry
    Director, Corporate Communications
    514-340-1555, ext. 206
    or
    Dean Bergmame
    Vice President and Chief Financial Officer
    514-340-1555 ext. 223