Reko International Group Inc.
TSX : REK

Reko International Group Inc.

March 05, 2009 14:53 ET

Reko Announces Second Quarter Profitability in Spite of Economic Gloom

WINDSOR, ONTARIO--(Marketwire - March 5, 2009) - Reko International Group Inc. (TSX:REK) today announced results for its second quarter ended January 31, 2009.



Financial Highlights (complete statements follow):

Three Months Six Months
(unaudited) (unaudited)
-------------------------------------
Fiscal Fiscal Fiscal Fiscal
2009 2008 2009 2008
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Sales $16,480 $11,766 $30,361 $27,250
Net income (loss) 875 (2,180) 1,312 (2,091)
EPS basic 0.12 (0.30) 0.18 (0.29)
Working capital 16,649 15,611
Shareholders' equity 45,345 45,491
Shareholders' Equity per Share 6.43 6.38
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Consolidated sales for the quarter ended January 31, 2009, were $16.5 million, compared to $11.8 million in the prior year, an increase of $4.7 million or 40.1%. The increase in sales in the quarter was primarily related to volume increases in the current quarter, the strength of the United States dollar versus the Canadian dollar and an abnormally low volume of sales in the prior year's second quarter. Consolidated sales for the six months ended January 31, 2009 were $30.4 million, compared to $27.3 million in the prior year, an increase of 11.4%.

The gross profit for the three months ended January 31, 2009, was $3.9 million, or 23.7% of sales, compared to a gross loss of $1.0 million in the prior year. The significant improvement in gross margin over the prior year, of approximately $5.0 million, relates to volume increases tied to the automotive industry, productivity and efficiency improvements made in the last two years, and increased foreign exchange rates, which were offset by changes in the fair value of foreign exchange contracts. The gross profit for the six months ended January 31, 2009 was $6.3 million, or 20.7% of sales, compared to $1.1 million, or 4% of sales, in the prior year.

Selling and administrative expenses for the three months ended January 31, 2009 were $2.3 million, or 14.4% of sales, compared to $2.3 million, or 19.7% of sales for the same period in the prior year. The decrease in selling and administrative expenses as a percentage of sales largely reflects the abnormally low sales volumes experienced in the second quarter of the prior year. Selling and administrative expenses for the six months ended January 31, 2009 were $3.9 million, or 12.8% of sales, compared to $3.9 million, or 14.3% of sales, in the prior year.

Net income for the quarter was $0.9 million, or $0.12 per share, compared to a loss of $2.2 million, or $0.30 per share, in the same period of the prior year. Net income for the six months ended January 31, 2009 was $1.3 million, or $0.18 per share, compared to a loss of $2.1 million, or $0.29 per share, in the same period of the prior year.

During the second quarter, 40,500 shares were purchased under Reko's normal course issuer bid at an average price of $1.00 per share.

"Reko's results in the second quarter provide the first visible evidence of all the hard work and sacrifices made by our dedicated employees over the last two years," said Diane St. John, CEO. "The many difficult times endured and decisions made during that period provided tangible results that we can all be proud of. The fact that they were achieved during these incredibly poor economic times speaks volumes of our company's abilities. While this is an impressive turnaround, it is important to understand that the economically strained environment will continue to impact new programme awards and payments from our customers. We celebrate our success but remain extremely cautious with our expectations for the remainder of the fiscal year."

Founded in 1976, Reko International Group (TSX:REK) is a highly integrated, technology driven engineering and manufacturing firm providing engineered solutions for the plastics segment of the automotive, aerospace and consumer product markets. In its ten production facilities in Ontario, Reko designs and manufactures precision moulds and other related industrial tooling, in addition to its own proprietary line of CNC machining centres.



REKO INTERNATIONAL GROUP INC.
Second Quarter Report

INTERIM CONSOLIDATED BALANCE SHEETS
As at January 31, 2009 with comparative figures
for July 31, 2008 (in 000's)
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January 31, July 31,
(unaudited) (audited)
2009 2008
---------------------------------------------------------------------------

ASSETS

Current

Accounts receivable - trade $ 14,767 $ 17,726
Other receivables 272 448
Income taxes receivable 23 246
Work-in-progress 21,893 15,604
Prepaid expenses and deposits 539 625
Future income taxes 483 804
Asset held for sale - 1,018
----------- -----------
37,977 36,471
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Capital assets 39,254 41,312
----------- -----------

Future income taxes 3,594 2,726
----------- -----------
$ 80,825 $ 80,509
----------- -----------
----------- -----------

LIABILITIES

Current

Bank indebtedness $ 7,660 $ 12,982
Non-hedging financial derivatives (Note 4) 4,171 284
Accounts payable and accrued liabilities 7,118 5,861
Current portion of long-term debt 2,379 2,453
----------- -----------
21,328 21,580
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Long-term debt 14,152 14,821
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SHAREHOLDERS' EQUITY

Share capital (Note 2) 20,605 20,798
Contributed surplus (Note 2) 524 406
Retained earnings 24,216 22,904
Accumulated other comprehensive income - -
----------- -----------
45,345 44,108
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$ 80,825 $ 80,509
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See accompanying notes to the interim consolidated financial statements



INTERIM CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
AND RETAINED EARNINGS
Three months and six months ended January 31, 2009 with comparative figures
for 2008 (in 000's except per share data)
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For the three For the six
months ended months ended
January 31, January 31,
(unaudited) (unaudited)
2009 2008 2009 2008
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Sales $ 16,480 $ 11,766 $ 30,361 $ 27,250

Costs and expenses
Cost of sales 11,450 11,523 21,683 23,793
Selling and administrative 2,380 2,313 3,880 3,898
Amortization 1,127 1,295 2,366 2,342
----------------------------------------
14,957 15,131 27,929 30,033
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Operating income (loss) 1,523 (3,365) 2,432 (2,783)
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Interest
Long-term debt 258 276 516 557
Other - net 39 84 179 190
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297 360 695 747
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Income (loss) before income taxes 1,226 (3,725) 1,737 (3,530)
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Income taxes (recovered)
Current (32) (14) 32 1
Future 383 (1,531) 393 (1,440)
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351 (1,545) 425 (1,439)
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Net income (loss) 875 (2,180) 1,312 (2,091)
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Other comprehensive income - - - -
----------------------------------------
Comprehensive income (loss) 875 (2,180) 1,312 (2,091)
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Retained earnings, beginning
of period 23,341 26,458 22,904 26,369
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Retained earnings, end of period $ 24,216 $ 24,278 $ 24,216 $ 24,278
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Earnings (loss) per common share

Basic $ 0.12 $ (0.30) $ 0.18 $ (0.29)
----------------------------------------
----------------------------------------

Diluted $ 0.12 $ (0.30) $ 0.18 $ (0.29)
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See accompanying notes to the interim consolidated financial statements



INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months and six months ended January 31, 2009 with comparative figures
for 2008 (in 000's)
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For the three For the six
months ended months ended
January 31, January 31,
(unaudited) (unaudited)
2009 2008 2009 2008
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OPERATING ACTIVITIES

Net income (loss) for
the period $ 875 $ (2,180) $ 1,312 $ (2,091)
Add non-cash items:
Amortization 1,127 1,295 2,366 2,342
Future income taxes 383 (1,531) 392 (1,440)
(Gain) loss on sale of
capital assets (18) - 2 -
Stock option expense
(Note 3) 3 10 10 18
---------------------------------------------
2,370 (2,406) 4,082 (1,171)


Net change in non-cash
working capital (544) 2,075 1,847 4,646
---------------------------------------------
Cash provided from (used in)
operating activities 1,826 (331) 5,929 3,475
---------------------------------------------

FINANCING ACTIVITIES

Net (payments)/proceeds
on bank indebtedness (1,279) 2,357 (5,322) (147)
Payments on long-term debt (374) (373) (743) (961)
Cost of repurchase of shares (40) (65) (84) (73)
---------------------------------------------

Cash (used in) provided from
financing activities (1,693) 1,919 (6,149) (1,181)
---------------------------------------------

INVESTING ACTIVITIES

Investment in capital assets (162) (1,294) (358) (2,239)
Proceeds on sale of capital
assets 18 - 1,036 -
---------------------------------------------

Cash (used in) provided from
investing activities (144) (1,294) 678 (2,239)
---------------------------------------------

Effect of foreign exchange
rate changes on cash
and cash equivalents 11 (294) (458) (55)
---------------------------------------------

Cash and cash equivalents,
beginning of period - - - -
---------------------------------------------

Cash and cash equivalents,
end of period $ - $ - $ - $ -
---------------------------------------------
---------------------------------------------

See accompanying notes to the interim consolidated financial statements


Notes to unaudited interim consolidated financial statements for the three and six months ended January 31, 2009

(in 000's, except for share and per share figures)

1. Significant accounting policies

Management prepared these unaudited interim consolidated financial statements in accordance with Canadian generally accepted accounting principles using the historical cost basis of accounting and approximation and estimates based on professional judgments. These unaudited interim consolidated financial statements contain all adjustments that management believes are necessary for a fair presentation of the Company's financial position, results of operations and cash flows. These statements should be read in conjunction with the Company's most recent annual consolidated financial statements. The accounting policies and estimates used in preparing these unaudited interim consolidated financial statements are consistent with those used in preparing the annual consolidated financial statements, except as noted below.

Changes in accounting policy

Effective August 1, 2008, the Company adopted the Canadian Institute of Chartered Accountants ("CICA") accounting standards Section 1535 "Capital Disclosures", Section 3031 "Inventories", Section 3862 "Financial Instruments - Disclosure" and Section 3863 "Financial Instruments - Presentation". The Company adopted these new recommendations with no restatement of prior periods.

Capital disclosures

The CICA issued a new accounting standard, Section 1535 "Capital disclosures", which requires disclosures of information about an entity's objectives, policies and processes for managing capital (Note 5).

Inventories

The CICA issued a new accounting standard, Section 3031 "Inventories", which requires inventory to be measured at the lower of cost and net realizable value. The standard does not apply to the portion of the Company's inventory that is based on the percentage of completion method. The standard provides guidance on the types of costs that can be capitalized and requires reversal of previous inventory write-downs if economic circumstances have changed to support the higher inventory values. The Company adopted this standard with no change in the classification or valuation of inventory in the Company's financial statements.

Financial instruments

The CICA issued new accounting standards, Section 3862 "Financial instruments - disclosure" and Section 3863 "Financial instruments - presentation", which require disclosures to enable users to evaluate the significance of financial instruments for the entity's financial position and performance, and the nature and extent of an entity's exposure to risks arising from financial instruments, including how the entity manages those risks. The new standards replace Section 3861 "Financial Instruments - Disclosure and Presentation" (Note 4).

2. Share capital

In July 2008, the Company announced its intention to make a normal course issuer bid to re-purchase, at market prices, for cancellation, up to 355,730 common shares representing approximately 5% of the outstanding common shares as at July 31, 2008. All purchases of common shares will be made at the market price at the time of the purchase in accordance with the rules and policies of the Toronto Stock Exchange. Subject to certain exceptions for block purchases, the maximum number of shares, which can be purchased per day during the bid, is limited to 1,000. During the quarter, the Company re-purchased 40,500 shares and no options were exercised.



Share capital transactions during the quarter were as follows:
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Shares Amount
---------------------------------------------------------------------------
Balance as at July 31, 2008 7,113,992 $ 20,798
Shares re-purchased in respect of normal
course issuer bid:
First quarter (25,600) (75)
Second quarter (40,500) (118)
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7,047,892 $ 20,605
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The share re-purchases were recorded at stated capital value of $2.92 per share with the difference between the amount recorded and the amount paid, of $1.79 per share, applied to contributed surplus.

3. Stock based compensation

The Company has established a stock option plan for directors, officers and key employees. The terms of the plan state that the aggregate number of shares, which may be issued and sold, will not exceed 10% of the issued and outstanding common shares of the Company on a non-diluted basis. The issue price of the shares shall be determined at the time of the grant based on the closing market price of the shares on the specified date of issue. Options shall be granted for a period of five years with a vesting progression of 30% in the year of the grant, 30% in the second year and 40% in the third year with the option expiring after five years. Options given to outside directors vest immediately and can be exercised immediately.

For purposes of calculating the stock-based compensation expense, the fair value of the stock options is estimated at the date of the grant using the Black-Scholes option-pricing model and the cost is amortized over the vesting period. The following assumptions were used in arriving at the fair value of options issued since August 1, 2005:

-- 5 year risk free interest rate of 2.03%

-- Average expected life of 5 years;

-- Average expected volatility of 32.38%; and,

-- Expected dividend yield of 0%.

During the quarter, no options were granted. Stock based compensation expensed for the three months ended January 31, 2009 was $3.

4. Financial instruments and risk management

Categories of financial assets and liabilities

Under Canadian generally accepted accounting principles, financial instruments are classified into one of the following five categories: held for trading, held to maturity investments, loans and receivables, available-for-sale financial assets and other financial liabilities. The carrying values of the Company's financial instruments are classified into the following categories:



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January 31, July 31,
2009 2008
$ $
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Held for trading financial liabilities
Bank indebtedness 7,660 12,982
Non-hedging financial derivatives 4,171 284
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11,831 13,266
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Loans and receivables
Accounts receivable - trade 14,767 17,726
Other receivables 272 448
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15,039 18,174
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Other financial liabilities
Accounts payable and accrued liabilities 7,118 5,861
Current portion of long-term debt 2,379 2,453
Long-term debt 14,152 14,821
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23,649 23,135
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The Company has determined the estimated fair values of its financial instruments based on appropriate valuation methodologies; however, considerable judgment is required to develop these estimates. The fair values of the Company's financial instruments are not materially different from their carrying value, with the exception of the Company's long-term debt of $16,531. Based on current interest rates for debt with similar terms and maturities, the fair value of the long-term debt is estimated to be $17,537.

Impairment losses recognized on trade receivables



During the quarter, the Company recorded the following transactions with
respect to its allowance for doubtful accounts:
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January 31,
2009
---------------------------------------------------------------------------
Opening allowance for doubtful accounts at October 31, 2008 726
Less: write-off of allowance and receivables -
Plus: bad debt expense 284
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Closing allowance for doubtful accounts 1,010
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Foreign exchange contracts

The Company utilizes financial instruments to manage the risk associated with fluctuations in foreign exchange. At January 31, 2009, the Company had entered into foreign exchange contracts to sell an aggregate amount of $25,900 (USD). These contracts hedge the Company's expected exposure to U.S. dollar denominated net assets and mature at the latest on February 16, 2010, at an average exchange rate of $1.0679 Canadian. The mark-to-market value on these financial instruments as at January 31, 2009 was an unrealized loss of $4,171, which has been recorded in net income (loss) for the quarter.



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Carrying &
Notional fair value
As at January Maturity Notional Average USD asset
31, 2009 value rate equivalent (liability)
---------------------------------------------------------------------------
Sell USD / Buy CAD 0 - 6 months $ 5,189 $0.9923 $ 6,800 $(1,611)
Sell USD / Buy CAD 7 - 12 months 3,747 1.2130 3,800 (53)
Sell USD / Buy CAD 7 - 12 months 508 1.2440 500 8
USD Call / CAD put 0 - 6 months 5,219 1.0260 5,200 19
CAD Call / USD put 0 - 6 months 4,132 1.0136 5,200 (1,068)
USD Call / CAD put 7 - 12 months 9,756 1.0775 9,600 156
CAD Call / USD put 7 - 12 months 7,978 1.0580 9,600 (1,622)
Elimination
of conjoined
put / calls (14,800) - (14,800) -
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$21,729 $1.0679 $25,900 $(4,171)
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Carrying &
Notional fair value
As at July Maturity Notional Average USD asset
31, 2008 value rate equivalent (liability)
---------------------------------------------------------------------------
Sell USD / Buy CAD 0 - 6 months $11,897 $1.0242 $11,900 $ (3)
Sell USD / Buy CAD 7 - 12 months 6,578 0.9923 6,800 (222)
USD Call / CAD put 7 - 12 months 7,928 1.0240 7,700 228
CAD Call / USD put 7 - 12 months 7,413 1.0100 7,700 (287)
Elimination of
conjoined
put / calls (7,700) 1.0130 (7,700) -
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$26,116 $1.0150 $26,400 $(284)
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Risks arising from financial instruments and risk management

The Company's activities expose it to a variety of financial risks: market risk (including foreign exchange and interest rate), credit risk and liquidity risk. The Company's overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Company's financial performance from quarter to quarter. The Company uses derivative financial instruments to achieve this objective. The Company does not purchase any derivative financial instruments for speculative purposes.

Risk management is the responsibility of the finance function. The Company identifies, evaluates and where appropriate engages in financial risk management. Material risks are monitored and reported to both the Audit Committee and the Board of Directors on a monthly basis.

Foreign exchange risk

The Company operates in Canada and its functional and reporting currency is Canadian dollars, however a significant portion of its sales are denominated in U.S. dollars. Foreign exchange risk arises because the amount of the receivable or payable for transactions denominated in a foreign currency may vary due to changes in exchange rates ("transaction exposures") and because certain long-term contractual arrangements denominated in a foreign currency may vary due to changes in exchange rates ("translation exposures").

The Company's balance sheet includes U.S. dollar denominated cash, accounts receivable, work-in-process, capital assets, future income taxes, bank indebtedness and accounts payable and accrued liabilities. The Company is required to revalue these U.S. dollar denominated items to their current Canadian dollar value at each period end.

The objective of the Company's foreign exchange risk management activities is to minimize translation exposures and the resulting volatility of the Company's earnings. The Company manages this risk by entering into foreign exchange option contracts.

Based on the Company's foreign currency exposures, as at January 31, 2009, a change in the U.S. dollar/Canadian dollar foreign exchange rate to reflect a 100 basis point strengthening of the U.S. dollar for the month of January would have decreased net income by $37. We caution that this sensitivity is based on an assumed net U.S. dollar denominated asset or liability balance at a point in time. The Company's net U.S. dollar denominated asset or liability position changes on a daily basis, sometimes materially.

Interest rate risk

The Company's interest rate risk primarily arises from its floating rate debt, in particular its bank indebtedness. At January 31 2009, $7,660 of the Company's total debt portfolio is subject to movements in floating interest rates.

Based on the value of interest-bearing financial instruments, subject to movements in floating interest rates, as at January 31, 2009, an assumed 0.5 percentage point increase in interest rates on the first day of the quarter would have decreased net income by $10, with an equal but opposite effect for an assumed 0.5 percentage point decrease.

The objective of the Company's interest rate risk management activities is to minimize the volatility of the Company's earnings. Since the Company's exposure to floating interest rates is limited to its bank indebtedness, the Company's ability to effectively manage the volatility of interest rates is limited to locking portions of the Company's bank indebtedness into fixed rates for relatively short periods of time, usually 30 or 90 days.

Credit risk

Credit risk arises from cash and cash equivalents held with banks and financial institutions, derivative financial instruments as well as credit exposure to clients, including outstanding accounts receivable and unbilled contract revenue. The maximum exposure to credit risk is equal to the carrying value of the financial assets.

The objective of managing counterparty credit risk is to prevent losses in financial assets. The Company assesses the credit quality of the counter parties, taking into consideration their financial position, past experience and other factors. Management also monitors the utilization of credit limits regularly. In cases where credit quality of a client does not meet the Company's requirements sales opportunities may be terminated, progress payments may be required or continuing security interests in our products may be required.

In the normal course of business, the Company is exposed to credit risk from its customers, the majority of whom are in the automotive industry. While these accounts receivable are subject to normal industry credit risks, the ultimate source of funds to pay our accounts receivable balances comes from the Detroit 3 original equipment manufacturers, which are currently rated below investment grade by credit rating agencies, and in the event that they are unable to satisfy their financial obligations or seek protection from their creditors, the Company may incur additional expenses as a result of such credit exposure.

For the three and six months ended, January 31, 2009, sales to the Company's three largest customers represented 20.1% and 21.7%, respectively, of total sales. These same customers represent approximately 16.5% of total accounts receivable, as at January 31, 2009.

Liquidity risk

Liquidity risk arises through an excess of financial obligations over available financial assets due at any point in time. The Company's objective in managing liquidity risk is to maintain sufficient readily available reserves in order to meet its liquidity requirements at any point in time. The Company achieves this by maintaining sufficient cash and cash equivalents and through the availability of funding from credit facilities. As at January 31, 2009, the Company has undrawn lines of credit available to it of approximately $12,340.

Disclosures related to exposure risks are included in the section "Liquidity and Capital Resources" of Management's Discussion and Analysis for the three and six months ended January 31, 2009, which is included as part of the Company's Second Quarter 2009 Report to shareholders, along with these interim consolidated financial statements. Accordingly, these disclosures are incorporated into these interim consolidated financial statements by cross-reference.

5. Management of capital

The Company's objective in managing capital is to ensure sufficient liquidity to pursue its organic growth strategy, while at the same time taking a conservative approach to financial leverage and management of financial risk. The Company's capital is composed of net debt and shareholders' equity. Net debt consists of interest-bearing debt less cash and cash equivalents. The Company's primary uses of capital are to finance increases in non-cash working capital and capital expenditures for capacity expansion. The Company currently funds these requirements out of its internally generated cash flows and when internally generated cash flow is insufficient, its revolving bank credit facility.

The primary measure used by the Company to monitor its financial leverage is its ratio of net debt to shareholders' equity, which it aims to maintain at less than 1:1. As at January 31, 2009 and July 31, 2008, the above capital management criteria can be illustrated as follows:



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January 31, July 31,
2009 2008
$ $
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Net debt
Bank indebtedness 7,660 12,982
Current portion of long-term debt 2,379 2,453
Long-term debt 14,152 14,821
Less: cash and cash equivalents - -
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Net debt 24,191 30,256
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Shareholders' equity 45,345 44,108
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Net debt to shareholders' equity 0.53 0.69
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In order to maintain or adjust its capital structure, the Company, upon approval from its Board of Directors, may issue or repay long-term debt, issue common shares, repurchase common shares, pay dividends or undertake other activities as deemed appropriate under the specific circumstances. The Company currently does not pay a dividend. However, the Company's Board of Directors periodically evaluates the merit of all possible adjustments to its capital structure.

The Company is not subject to any capital requirements imposed by a regulator.

MANAGEMENT'S DISCUSSION AND ANALYSIS

The following is management's interim discussion and analysis of operations and financial position ("MD&A") and should be read in conjunction with the unaudited interim consolidated financial statements for the three and six months ended January 31, 2009 and the audited consolidated financial statements and MD&A for the year ended July 31, 2008 included in our 2008 Annual Report to Shareholders. The unaudited interim consolidated financial statements for the three and six months ended January 31, 2009 have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP"), and the audited consolidated financial statements for the year ended July 31, 2008 have been prepared in accordance with Canadian GAAP. All amounts in this MD&A are presented in thousands of Canadian dollars, except per share figures, which are in Canadian dollars, unless otherwise noted. When we use the terms "we", "us", "our", "Reko", or "Company", we are referring to Reko International Group Inc. and its subsidiaries.

This MD&A has been prepared by reference to the MD&A disclosure requirements established under National Instrument 51-102 "Continuous Disclosure Obligations" ("NI 51-102") of the Canadian Securities Administrators. Additional information regarding, including copies of our continuous disclosure materials such as our annual information form, is available on our website at www.rekointl.com or through the SEDAR website at www.sedar.com.

In this MD&A, reference is made to gross margin, which is not a measure of financial performance under Canadian GAAP. The Company calculates gross margin as sales less cost of sales (including depreciation and amortization). The Company included information concerning this measure because it is used by management as a measure of performance, and management believes it is used by certain investors and analysts as a measure of the Company's financial performance. This measure is not necessarily comparable to similarly titled measures used by other companies.

This MD&A is current to March 4, 2009.

OVERVIEW

Reko designs and manufactures a variety of engineered products and services for original equipment manufacturers ("OEMs") and their Tier 1 suppliers. These products include plastic injection moulds, fixtures, gauges, lean cell factory automation, high precision custom machining, and assemblies. Customers are typically OEMs or their Tier 1 suppliers and are predominantly in the automotive market. Divisions of Reko are generally invited to bid upon programmes comprised of a number of custom products used by the customer to produce a complete assembly or product.

For the automotive industry, the Company designs and builds plastic injection moulds, hydro-forming dies, two shot moulds and compression moulds. Injection moulds range in size from less than one cubic foot to approximately four feet wide, ten feet long, and six feet high. They range in weight from approximately 100 pounds to 50 tons. Typically, plastic injection moulds are expected to perform up to 1,000,000 production cycles with limited maintenance. Each production cycle lasts between 30 and 120 seconds. Reko has extensive experience and knowledge in mould design and material flow and the impact of pressure on segments of the mould. In addition, it designs and builds custom lean factory cell automation for use primarily in the automotive industry and custom design specialty machines for other industries. The factory automation systems include asynchronous assembly and test systems, leak and flow test systems, robotic assembly/machines vision work cells and various welding systems. For the transportation and oil and gas industries, the Company machines customer supplied castings to customer indicated specifications.

Our design and manufacturing activities are carried on in ten manufacturing plants located at four industrial sites in the suburbs of the City of Windsor in Southwestern Ontario.

INDUSTRY TRENDS AND RISKS

Our success has been primarily dependent upon the levels of new model releases of cars and light trucks by North American original equipment manufacturers ("OEM") and our ability to source moulding and automation programmes with them. OEM new model releases can be impacted by many factors, including general economic and political conditions, interest rates, energy and fuel prices, labour relation issues, regulatory requirements, infrastructure, legislative changes, environmental emissions and safety issues.

The economic, industry and risk factors discussed in our Annual Information Form and Annual Report, each in respect of the year ended July 31, 2008, remain substantially unchanged in respect of the three and six months ended January 31, 2009.

CHANGES IN ACCOUNTING POLICY

Effective August 1, 2008, the Company adopted the Canadian Institute of Chartered Accountants ("CICA") accounting standards Section 1535 "Capital Disclosures", Section 3031 "Inventories", Section 3862 "Financial Instruments - Disclosure" and Section 3863 "Financial Instruments - Presentation". The Company adopted these new recommendations effective August 1, 2008 without a restatement of prior periods and without any material impacts on financial results.

Capital disclosures

The CICA issued a new accounting standard, Section 1535 "Capital disclosures", which requires disclosures of information about an entity's objectives, policies and processes for managing capital.

Inventories

The CICA issued a new accounting standard, Section 3031 "Inventories", which requires inventory to be measured at the lower of cost and net realizable value. The standard provides guidance on the types of costs that can be capitalized and requires reversal of previous inventory write-downs if economic circumstances have changed to support the higher inventory values. The Company adopted this standard with no change in the classification or valuation of inventory in the Company's financial statements.

Financial instruments

The CICA issued new accounting standards, Section 3862 "Financial instruments - disclosure" and Section 3863 "Financial instruments - presentation", which require disclosures to enable users to evaluate the significance of financial instruments for the entity's financial position and performance, and the nature and extent of an entity's exposure to risks arising from financial instruments, including how the entity manages those risks.

FOREIGN EXCHANGE

As a result of the Company's foreign exchange hedging programme, the Company's exposure to changes in the trading value between the Canadian and United States dollars is not consistent with the actual changes in trading value. The table below presents the average foreign exchange rates that effectively applied to Reko versus the actual average foreign exchange rates observed in the market for the periods identified. These foreign currency exchange rates impact our reported sales, expenses and income each period.



---------------------------------------------------------------------------
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For the three months For the six months
ended January 31, ended January 31, 2009

2009 2008 2009 2008
---------------------------------------------------------------------------
Reko Reko Reko Reko
Effective Effective Effective Effective
Actual Rate Actual Rate Actual Rate Actual Rate
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U.S.
Dollar
equals
Canadian
Dollar 1.2263 1.0522 0.9938 1.0429 1.1629 1.0350 1.0069 1.0690
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Reko's forward exchange contract programme is based on maintaining sufficient forward exchange contracts at all times that are practically equal to the U.S. dollar value of our cash, accounts receivable and work-in-progress, net of any U.S. dollar denominated debt. This programme is designed to minimize the Company's exposure to foreign exchange risks over the short term. Previously, the Company adopted a more long-term approach to its forward exchange programme and included the U.S. dollar value of its backlog of booked business that has yet to kick-off. This was designed to minimize the Company's exposure to foreign exchange risks over the long-term but exposed the Company to significant short-term fluctuations related to foreign exchange rate changes.

Despite this change to a more short-term approach to the Company's forward exchange contract programme, during periods of rapid fluctuation in the foreign exchange rate between the Canadian dollar and the U.S. dollar, the Company can generate significant gains or losses, which will materially impact financial results. Under the previous long-term approach these gains or losses would have been substantially higher.

During the quarter, the Company recorded an unrealized accounting loss of $571 (2008: $791). This net unrealized foreign exchange loss is included in sales. For the year to date, the Company recorded an unrealized accounting loss of $ 513 (2008: $453).

Forward foreign exchange contracts

At the end of the second quarter of fiscal 2009, we held forward foreign exchange contracts of $25,900 compared to $28,300 at the end of the second quarter of fiscal 2008. During fiscal 2009, on average, we have had $26,000 of forward foreign exchange contracts outstanding monthly, as compared to $30,700 in fiscal 2008, year-to-date. The decline in forward foreign exchange contracts largely relates to the change from a long-term hedging approach to a short-term hedging approach.

As a result of the forward foreign exchange contracts programme employed, foreign currency transactions in the current period were not, and in future periods may not, be fully impacted by movements in exchange rates. The following table outlines the level of forward exchange contracts presently maintained and the average effective rate of these contracts:



-------------------------------------------------
-------------------------------------------------

Fiscal period Contract value Effective
booked (000's) average rate
-------------------------------------------------

Q3 - 2009 $ 25,900 1.0679

Q4 - 2009 20,400 1.0906

Q1 - 2010 13,900 1.1207

Q2 - 2010 3,900 1.2159
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-------------------------------------------------


UNUSUAL ITEMS

Settlement of accounts receivable insurance claim

During the quarter, the Company received a $1,200 (USD) settlement from the bankrupt estate of Plastech Engineered Products, Inc. and its affiliates ("Plastech"). The settlement related to the Company's claims for deliveries made immediately prior to Plastech filing for Chapter 11 in the U.S. and for administrative claims, representing goods shipped to Plastech after its bankruptcy filing. Approximately $400 of the settlement proceeds related to recoveries previously made by Reko against its accounts receivable insurer and as such were repaid to the accounts receivable insurer. While the settlement concluded our dealings with the bankrupt estate of Plastech, the Company still maintains its secured claims against Chrysler, Ford and GM, related to shipments with Plastech.

The settlement proceeds represent only a portion of the Company's accounts receivable due from Plastech and the Company remains exposed to credit risk attached to the remaining accounts receivable balances of $942 (USD), the majority of which relate to post-petition purchase orders. The Company currently maintains reserves against this balance, which on a net basis represents management's current best estimate of the net realizable value on the Plastech balances.

RESULTS OF OPERATIONS

Sales

Sales for the three months ended January 31, 2009 increased $4,714, or 40.1% to $16,480 compared to $11,766 in the same period last year. The increase in sales relates to:

-- volume increases throughout the quarter; and,

-- changes in the fair value of our forward foreign exchange contracts, as described above.

Sales for the six months ended January 31, 2009, increased $3,111, or 11.4% to $30,361 compared to $27,250 in the same period last year, primarily for the reasons listed above.

Gross margin

The gross profit for the second quarter increased $4,955 to $3,903 or 23.6% of sales, compared to a gross loss of $1,052, or negative 8.9% of sales, for the same period in the prior year.

The increase in gross margin as a percentage of total sales for the second quarter was primarily the result of:

-- volume increases during the entire quarter at all of our facilities;

-- productivity and efficiency improvements resulting from last year's restructuring efforts;

-- changes in the fair value of our forward foreign exchange contracts. During the quarter, the fair value adjustments on our forward foreign exchange contracts consumed $571 of gross margin; in the prior year, the fair value adjustments consumed $791; and,

-- increased effective foreign exchange rates.

Gross margin for the six months ended January 31, 2009, increased $5,197, or 20.8% of sales, to $6,312 compared to $1,115, or 4.1% of sales, for the same period in the prior year, primarily for the reasons listed above.

Selling and administration

Selling and administration expenses ("S,G&A") increased by 2.9%, to $2,380, or 14.4% of sales, for the three months ended January 31, 2009, compared to $2,313, or 19.7% of sales, for the same period last year.

The increase in S,G&A for the three months ended January 31, 2009, relates primarily to:

-- an increase in the allowance for doubtful accounts to reflect a worsening of economic conditions in our customer base;

-- a restructuring reserve of $363; and,

-- a strategic increase in staffing associated with the technical aspects of our sales process.

These factors were partially offset by:

-- a one-time charge of $780 related to contractual obligations to the estate of our previous CEO and restructuring charges totaling $150, incurred in the prior year;

-- impacts of cost reduction actions taken in the second and fourth quarters of 2008; and,

-- the elimination, during the prior year, of the requirement for manufacturing entities in Canada to pay capital tax.

S,G&A for the six months ended January 31, 2009, decreased by 8.1%, to $3,580, or 11.8% of sales, compared to $3,898, or 14.3% of sales, in the same period last year, primarily for the reasons listed above.

Earnings overview

The net income for the quarter was $875, or $0.12 per share, compared to a net loss of $2,180, or $0.30 per share, in the same period of the prior year.

The net income for the six months ended January 31, 2009 was $1,312, or $0.18 per share, compared to a net loss of $2,091, or $0.29 per share, in the same period of the prior year.

LIQUIDITY AND CAPITAL RESOURCES

Cash flow from operations increased $2,157 to $1,826 for the quarter compared to cash used in operations of $331 for the same period last year.

The increase in cash flow from operations is primarily a result of:

-- increases in net income net of reduction in future income taxes; and,

-- reductions in our non-cash working capital.

For the six months ended January 31, 2009, cash flow from operations increased $2,454 to $5,929 compared to cash generated by operations of $3,475 for the same period last year.

The increase in cash flow from operations is primarily a result of significant accounts receivable collections, in excess of new work entered into during the first quarter of fiscal 2008.

During the quarter, the Company extended its operating line-of-credit facility with its primary lender for the remainder of calendar 2009. The only significant change to the facility, as a result of the extension, is an increase of approximately 300 basis points in our borrowing rates, which while large effectively increases the Company's borrowing rates to current market rates. The Company believes it has sufficient operating room with respect to its financial covenants for the remainder of this year and does not anticipate being in breach of any of its financial covenants during the remainder of this period.



---------------------------------------------------------------------------
---------------------------------------------------------------------------
Payments Due by Period
--------------------------------------------------
Less than After
Contractual Obligations Total 1 year 1 - 3 years 4 - 5 years 5 years
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Long-term debt $13,611 $ 860 $12,751 $ - $ -
---------------------------------------------------------------------------
Capital lease
obligations 2,920 1,519 1,401 - -
---------------------------------------------------------------------------
Operating leases - - - - -
---------------------------------------------------------------------------
Purchase obligations - - - - -
---------------------------------------------------------------------------
Other long-term
obligations - - - - -
---------------------------------------------------------------------------
Total contractual
obligations $16,531 $2,379 $14,152 $ - $ -
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Capital assets and investment spending

In the second quarter of fiscal 2009, we invested $162 in capital assets. The vast majority of this spending relates to maintenance capital expenditures intended to refurbish or replace assets consumed in the normal course of business.

For the six months ended January 31, 2009, we invested $358 in capital assets, largely related to maintenance capital expenditures.

Cash resources

As at January 31, 2009, Reko had borrowed $7,660 on its revolving line of credit, compared to $12,982 at July 31, 2008, $8,939 at October 31, 2008 and $8,461 at January 31, 2009. The revolver borrowings decreased by $1,279 in the quarter, $5,322 for the six months ended January 31, 2008 and $801 from the prior year. As previously reported, we expect borrowings to continue to display a mid-term trend of increasing over the next four quarters.

Reko is able to borrow against its operating line through certain margining requirements which are based on the amount of accounts receivable, work-in-process and inventory balances pledged to the bank ("borrowing base"). As these balances increase, so to does our ability to borrow on our operating line. However, the total amount of Reko's borrowing is capped at $20,000. As at January 31, 2009, Reko's borrowing base exceeded the $20,000 cap on its operating line. Reko had the difference between its borrowing and its cap, i.e. $12,340, as unused and available borrowing capabilities under its operating line.

Under the terms of our credit facilities, Reko must achieve certain financial covenants including a maximum Total Debt to Tangible Net Worth, a minimum Current Ratio and a minimum Debt Service Coverage Ratio. The Company believes that, subject to usual business risks including, but not limited to, those described in our 2008 Annual Information Form: (1) its financial resources are sufficient to fund projected capital expenditures and debt service requirements; and, (2) it is positioned positively with respect to its ability to meet its financial covenants, in the normal course of business over the remainder of the fiscal year.

Contractual obligations and off-balance sheet financing

There have been no material changes with respect to the contractual obligations of the Company during the quarter. In addition, Reko does not maintain any off balance sheet financing.

QUARTERLY RESULTS

The following table sets out certain financial information for each of the eight fiscal quarters up to and including the first quarter of fiscal 2009, ended January 31, 2009.



---------------------------------------------------------------------------
---------------------------------------------------------------------------
Apr/07 July/07 Oct/07 Jan/08
---------------------------------------------------------------------------

Sales $14,760 $10,618 $15,484 $11,766
Net income (loss) from
continuing operations (491) (456) 89 (2,180)
Earnings (loss) per share from
continuing operations:
Basic (0.07) (0.07) 0.01 (0.30)
Diluted (0.07) (0.07) 0.01 (0.30)
Net (loss) income (1,219) (2,142) 89 (2,180)
Earnings (loss) per share:
Basic (0.17) (0.31) 0.01 (0.30)
Diluted (0.17) (0.31) 0.01 (0.30)
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Apr/08 July/08 Oct/08 Jan/09
---------------------------------------------------------------------------

Sales $14,388 $14,091 $13,881 $16,480
Net (loss) income from
continuing operations (383) (1,055) 437 875
(Loss) earnings per share from
continuing operations:
Basic (0.06) (0.14) 0.06 0.12
Diluted (0.06) (0.14) 0.06 0.12
Net (loss) income (383) (1,055) 437 875
(Loss) earnings per share:
Basic (0.06) (0.14) 0.06 0.12
Diluted (0.06) (0.14) 0.06 0.12
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CRITICAL ACCOUNTING ESTIMATES

The Company's discussion and analysis of its results of operations and financial position is based upon the consolidated financial statements, which have been prepared in accordance with Canadian GAAP. The preparation of the consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and various other assumptions that are believed to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities. On an ongoing basis, management evaluates these estimates. However, actual results differ from these estimates under different assumptions or conditions.

Management believes the following critical accounting policies affect the more significant judgments and estimates used in the preparation of the consolidated financial statements of the Company. Management has discussed the development and selection of the following critical accounting policies with the Audit Committee of the Board of Directors and the Audit Committee has reviewed its disclosure relating to critical accounting estimates in this MD&A.

Revenue recognition and tooling and machinery contracts

Revenue from tooling and machinery contracts is recognized on the percentage of completion basis. The percentage of completion basis recognizes revenue and cost of sales on a progressive basis throughout the completion of the tooling or machinery.

Tooling and machinery contracts are generally fixed; however price changes, change orders and programme cancellation may affect the ultimate amount of revenue recorded with respect to a contract. Contract costs are estimated at the time of signing the contract and are reviewed at each reporting date. Adjustments to the original estimates of total contract costs are often required as work progresses under the contract. When the current estimates of total contract revenue and total contract costs indicate a loss, a provision for the entire loss on the contract is made. Factors that are considered in arriving at the forecasted profit or loss on a contract include, amongst other items, cost overruns, non-reimbursable costs, change orders and potential price changes.

Allowance for doubtful accounts

In order for management to establish appropriate allowances for doubtful accounts, estimates are made with regard to economic conditions and the probability of default by individual customers. The failure to estimate correctly could result in bad debts being either higher or lower than the determined provision as of the date of the balance sheet. Reko has provided several references to both its short-term and long-term ability to realize on its accounts receivable, in light of Reko's exposure to the Detroit-3 and the auto industry as a whole. Reko thereby incorporates all of those references herein.

Impairment of long-lived assets

Management evaluates capital assets for impairment whenever indicators of impairment exist. Indicators of impairment include prolonged operating losses or a decision to dispose of, or otherwise change the use of, an existing capital asset. If the sum of the future cash flows expected to result from the asset, undiscounted and without interest charges, is less than the reported value of the asset, asset impairment must be recognized in the financial statements. The amount of impairment to be recognized is calculated by subtracting the fair value of the asset from the reported value of the asset.

Management believes that accounting estimates related to capital assets are 'critical accounting estimates' because: (i) they are subject to significant measurement uncertainty and are susceptible to change as management is required to make forward-looking assumptions regarding their impact on current operations; and (ii) any resulting impairment loss could have a material impact on the consolidated net income and on the amount of assets reported on the Company's consolidated balance sheet.

Future income taxes

Future tax assets in respect of loss carry forwards and scientific research and experimental design credits relate primarily to legal entities in Canada and the United States. The Company evaluates the realization of its future tax assets by assessing the valuation allowance and by adjusting the amount of such allowance, if necessary. The facts used to assess the likelihood of realization are a forecast of future taxable income and available tax planning strategies that could be implemented to realize the future tax assets. The Company has, and continues to use, tax planning strategies to realize future tax assets in order to avoid the potential loss of benefits.

SHARE CAPITAL AND NORMAL COURSE ISSUER BID

The Company has 7,047,892 common shares outstanding at January 31, 2009. During the quarter, the Company did not grant any options and no options were exercised. During the first quarter, the Company granted 35,000 options to directors, officers and key employees and no options were exercised.

Under the Company's current normal course issuer bid, during the first quarter, 40,500 shares were purchased for cancellation at an average cost of $1.00. The Company's directors believe that, from time-to-time, such purchases constitute an appropriate use of corporate funds.



Outstanding share data

---------------------------------------------------------------------------
---------------------------------------------------------------------------
Maximum number issuable
if convertible,
exercisable or exchangeable
Designation of security Number outstanding for common shares
---------------------------------------------------------------------------
Common shares 7,047,892
Stock options issued 120,000
Stock options exercisable 103,900
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Total (maximum) number of
common shares 7,151,792
---------------------------------------------------------------------------
---------------------------------------------------------------------------


CONTROLS AND PROCEDURES

There were no changes in our internal controls over financial reporting that occurred during the six months ended January 31, 2009 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)

For Reko's financial year ended July 31, 2012, at the latest, Reko will no longer report its financial results using Canadian GAAP, as a result of changes announced by The Canadian Institute of Chartered Accountants in March 2008. The changes provide for adoption at an earlier date at the Company's discretion. At the present time management has not decided the specific date for adopting IFRS.

While not all GAAP and IFRS's are different, one of the most significant changes deals with the overriding premise in GAAP that the financial reporting is based on historical cost, while IFRS's overriding premise is fair value.

Due to the potential pervasiveness of the changes inherent in moving to IFRS, a significant amount of time is necessary for management to plan its implementation. Possible impacts, besides external financial reporting, include, but are not limited to: banking agreements, business processes, information systems, employee and management incentive programmes, and legal agreements.

At the present time, management's implementation has focused on understanding the new rules, concentrating efforts on those portions of IFRS that are different than GAAP and identifying the need to change business processes. Based on management's initial procedures related to the implementation, it has reached a preliminary assessment that no changes to business processes will be required and any changes to the IFRS framework will not have an impact on our internal controls over financial reporting.

During the year, management's concentration will be on assessing which portion of IFRS will result in reporting differences versus existing GAAP. The results of this assessment will be reported in future MD&As issued by the Company.

OUTLOOK

Recent announcements in the automotive industry suggest a significant reduction in new vehicle models between now and 2010. Combined with these recent announcements is a risk of bankruptcy of one or more of the Detroit 3 and / or a potentially significant number of Tier 1 suppliers. Current pressure on the long-term credit market also presents issues for our automation and custom machining facilities as their lines of business are tied to capital equipment spending by end users. In addition, significant risks exist with respect to delays in the receipt of payments for existing capital projects by the Detroit 3. As a result of these concerns, the Company remains vigilant in its drive to improve liquidity but on a short-term basis, liquidity will be under significant pressure for the remainder of the year.

In the long-term, the recent economic challenges have increased Reko's competitive position. The appreciation of the U.S. dollar versus the Canadian dollar represents a long-term positive for Reko, although the short-term impact of the appreciation of the U.S. dollar was softened by our foreign exchange forward programme. In addition, the cash flow challenges being forced on the supply base from the OEMs and Tier 1 suppliers suggest that only those entities with significant liquidity, superior financial strength and the strongest balance sheets will survive and prosper, while those without these qualities will be led by short-term decision making to survive on a month-to-month basis until their ultimate demise.

Our profitable first and second quarters combined with our backlog levels for mould programmes, specialty machine orders and custom machining continues to place Reko in a more positive position than it was in the prior year. As we warned in the previous quarter, the majority of our backlog is consumed over a relatively short period and requires constant replenishment. In these uncertain times for the automotive industry, our ability to replenish our backlog during the current quarter was not as effective as in the previous two quarters. Accordingly, the Company does not expect profits levels achieved in the second quarter to continue into the third quarter. The Company believes that it will be able to replenish its backlog during the fourth quarter and regain the position it had during the first quarter, before the end of this fiscal year.

This news release contains forward-looking information and forward-looking statements within the meaning of applicable securities laws. We use words such as "anticipate", "plan", "may", "will", "should", expect", "believe", "estimate" and similar expressions to identify forward-looking information and statements. Such forward-looking information and statements are based on assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions and expected future developments, as well as other factors we believe to be relevant and appropriate in the circumstances. Readers are cautioned not to place undue reliance on forward-looking information and statements, as there can be no assurance that the assumptions, plans, intentions or expectations upon which such statements are based will occur. Forward-looking information and statements are subject to known and unknown risks, uncertainties, assumptions and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed, implied or anticipated by such information and statements. These risks, uncertainties and assumptions include, among other things: industry cyclicality; global economic conditions, causing decreases in automobile production volumes and demand for capital goods; changing demand for specific models or products; price reduction pressures; pressure to absorb certain fixed costs; dependence on major customers and changes in such customers' financial capabilities; technological changes; compliance with various laws; obtaining necessary permits and consents; fluctuations in currency exchange and interest rates; employee work stoppages; dependence on key employees; the competitive nature of the automotive and capital goods industries, including competition with suppliers operating in low cost countries; product supply and demand; the conduct of business in foreign countries; and other risks, uncertainties and assumptions as described in the Company's Management's Discussion and Analysis included in our 2008 Annual Report, in our 2008 Annual Information Form and, from time to time, in other reports and filings made by the Company with securities regulators.

While the Company believes that the expectations expressed by such forward-looking information and statements are reasonable, there can be no assurance that such expectations and assumptions will prove to be correct. In evaluating forward-looking information and statements, readers should carefully consider the various factors, which could cause actual results or events to differ materially from those, indicated in the forward-looking information and statements. Readers are cautioned that the foregoing list of important factors is not exhaustive. Furthermore, the Company disclaims any obligations to update publicly or otherwise revise any such factors of any of the forward-looking information or statements contained herein to reflect subsequent information, events or developments, changes in risk factors or otherwise.



REKO INTERNATIONAL GROUP INC.
5390 Brendan Lane
Oldcastle, Ontario
N0R 1L0
www.rekointl.com

SUBSIDIARIES/DIVISIONS:

Canada:
-------


- Reko Tool & Mould (1987) Inc.
Divisions -
- Reko Automation and
Machine Tool

- Concorde Machine Tool

United States:
--------------

- Reko International Sales Inc.
- Reko International Holdings Inc.


Contact Information

  • Reko International Group Inc.
    Carl A. Merton
    Chief Financial Officer
    (519) 737-6974
    Website: www.rekointl.com