Reko International Group Inc.

Reko International Group Inc.

March 10, 2005 16:42 ET

Reko Announces Second Quarter Results for Fiscal 2005




MARCH 10, 2005 - 16:42 ET

Reko Announces Second Quarter Results for Fiscal 2005

WINDSOR, ONTARIO--(CCNMatthews - March 10, 2005) - Reko International
Group Inc. (TSX:REK) announces its financial results for the three
months ended January 31, 2005. Sales for the three months increased to
$24.8 million from $23.9 million last year. During the quarter, the
Company experienced strengthening sales in the metal parts and large
machining areas, but these improvements were offset by lower sales in
plastic parts production and laser machining due to the reduction in
volumes by our Tier-1 customers.

Gross margin for this quarter was 9.8% compared to 13.6% last year. This
reduction in margins reflects the impact of the unfavourable exchange
rates year-over-year, as well as lower sales prices in a very
competitive automotive market.

Reko continues to implement programs to reduce costs. These efforts are
not evident from results in the second quarter as selling and
administrative expenses increased to $3.8 million or 15.1% of sales,
compared to $3.3 million or 13.7% of sales in the previous year. It
should be noted, however, that expenses in the current year include
severance costs due to restructuring of the mould area of $350,000, as
well as a bad debt provision of $190,000 for work completed by our U.S.
operations for Tower Corporation, which filed for Chapter 11 in February
2005. Excluding these amounts, selling and administrative expenses would
have been 13.1% of sales for the quarter.

The net loss for this quarter was $1.2 million compared to a loss of
$956,000 last year.

"During the quarter, the Company reduced employees and its cost base in
the mould group, in order to reduce its cost of manufacturing. This is
expected to help offset the unfavourable exchange rates and competitive
pricing pressures from our U.S. competitors," stated Steve Reko,
President and CEO. "We have also consolidated some operations and made
organizational changes to strengthen our manufacturing base."

Financial Highlights (complete statements follow):
Period Ended January 31, Three Months Six Months
(in $,000 except per share (unaudited) (unaudited)
amounts) ----------------------------------------
Fiscal Fiscal Fiscal Fiscal
2005 2004 2005 2004
Sales $24,798 $23,859 $48,097 $48,315
Net Loss (1,200) (956) (1,368) (1.378)
EPS (basic) (0.15) (0.12) (0.18) (0.17)
Cash Flow from Operations
before Working Capital
Adjustment 281 779 303 1,572
Shareholders' Equity 53,661 55,687
Shareholders' Equity per
Share 6.89 7.11

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


As at January 31, 2005 with comparative figures for July 31, 2004
(in 000's)
January 31, July 31,
(unaudited) (audited)
2005 2004
Accounts receivable - trade $ 26,643 $ 31,508
- sundry 3,876 1,376
Work-in-progress 28,849 21,007
Prepaid expenses and deposits 1,091 1,040
60,459 54,931
Capital assets 53,822 56,555
$ 114,281 $ 111,486
Bank indebtedness $ 16,845 $ 8,078
Accounts payable and accrued
liabilities 11,802 9,152
Income taxes payable 349 157
Future income taxes 18 1,180
Current portion of long-term debt 6,110 8,992
35,124 27,559
Long-term debt 19,124 21,340
Future income taxes 6,078 5,891
Non-controlling interest 294 902
Share capital 22,790 22,922
Contributed surplus 517 325
Retained earnings 32,211 33,736
Cumulative translation adjustment (1,857) (1,189)
53,661 55,794
$ 114,281 $ 111,486

Six months ended January 31, 2005 with comparative figures for 2004
(in 000's except per share data)
For the three months For the six months
ended January 31, ended January 31,
(unaudited) (unaudited)
2005 2004 2005 2004
Sales $ 24,798 $ 23,859 $ 48,097 $ 48,315
Costs and Expenses
Cost of sales 20,989 19,179 39,424 38,615
Selling and
administrative 3,754 3,267 6,915 6,964
Depreciation and
amortization 1,391 1,443 2,832 2,896
26,134 23,889 49,171 48,475
Loss from operations
before the following (1,336) (30) (1,074) (160)
Long-term debt 346 355 724 720
Other - net 135 102 241 262
481 457 965 982
Loss before income taxes
and non-controlling
interest (1,817) (487) (2,039) (1,142)
Income taxes
Current (recovered) (707) 177 490 182
Future (recovered) 142 397 (1,075) 186
(565) 574 (585) 368
Loss before non
-controlling interest (1,252) (1,061) (1,454) (1,510)
interest 52 105 86 132
Net loss for the period (1,200) (956) (1,368) (1,378)
Retained earnings,
beginning of period
As previously
reported 33,411 34,628 33,736 35,050
Adoption of new
standard -- -- (157) --
As restated 33,411 34,628 33,579 35,050
Retained earnings, end
of period $ 32,211 $ 33,672 $ 32,211 $ 33,672
Basic loss per common
share $ (0.15) $ (0.12) $ (0.18) $ (0.17)
Fully diluted loss
per common share $ (0.15) $ (0.12) $ (0.18) $ (0.17)

Six months ended January 31, 2005 with comparative figures for 2004
(in 000's except per share data)
For the three months For the six months
ended January 31, ended January 31,
(unaudited) (unaudited)
2005 2004 2005 2004
Net loss for the
period $ (1,200) $ (956) $ (1,368) $ (1,378)
Add non-cash items:
Depreciation and
amortization 1,391 1,443 2,832 2,896
Future income taxes 142 397 (1,075) 186
interest (52) (105) (86) (132)
281 779 303 1,572
Net change in non-cash
working capital (4,795) (2,412) (3,755) (1,868)
Cash (used) - operating
activities (4,514) (1,633) (3,452) (296)
Net proceeds/(payments)
on bank indebtedness 6,569 (3,062) 9,194 (3,412)
Net (payments)/proceeds
on long-term debt (1,284) 5,394 (4,661) 1,511
Cost of re-purchase of
shares (119) -- (119) --

Cash provided (used) -
financing activities 5,166 2,332 4,414 (1,901)

Investment in capital
assets (586) (720) (889) (1,020)
Unused proceeds from bond
issue - restricted for
capital expenditures -- -- -- 3,025
Cash (used) provided -
investing activities (586) (720) (889) 2,005
Effect of foreign exchange
rate changes on cash
and cash equivalents (66) 21 (73) 192
Net change in cash and
cash equivalents during
the period -- -- -- --
Cash and cash equivalents,
beginning of period -- -- -- --
Cash and cash equivalents,
end of period $ -- $ -- $ -- $ --

Notes to Consolidated Financial Statements for January 31, 2005 (in

1. Significant accounting policies

Management prepared these 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 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 changes in cash flows. These statements should
be used in conjunction with the Company's most recent annual
consolidated financial statements. The accounting policies used in
preparing these interim consolidated financial statements are consistent
with those used in preparing the annual consolidated financial
statements except for the following:

Stock based compensation: Effective August 1, 2004, the Company adopted
the revised Canadian Institute of Chartered Accountants Handbook,
Section 3870: "Stock-based compensation and other stock based payments"
("CICA 3870"). The Company has adopted the fair value method of
accounting for stock based compensation and recognizes compensation
expense for all stock options granted to employees and directors. The
Company only issues stock options to employees, including directors. The
fair value of the options issued in the year is determined using the
Black-Scholes option-pricing model. The estimated fair value of the
options is amortized to income over the vesting period.

Prior to August 1, 2004, the Company disclosed the pro-forma net income
and earnings per share as if the fair value based accounting method had
been used to account for stock-based compensation.

Asset retirement obligations: Effective August 1, 2004, the Company
retroactively adopted the Canadian Institute of Chartered Accountants
("CICA") Handbook Section 3110, "Asset Retirement Obligations". The new
recommendations require that the recognition of the fair value of
obligations associated with the retirement of tangible long-lived assets
be recorded in the period the asset is put into use with a corresponding
increase to the carrying amount of the related asset. The obligations
recognized are statutory, contractual or legal obligations. The
liability is accreted over time for changes in the fair value of the
liability through charges to accretion which is included in depletion,
depreciation and accretion expense. The costs capitalized to the related
assets are amortized to earnings in a manner consistent with the
depletion and depreciation of the underlying asset. The impact of the
adoption of the new standard on the financial statements is

Notes to Consolidated Financial Statements for January 31, 2005 (in

2. Stock-based compensation (in thousands of dollars, except per share

The fair value of the stock options granted since August 1, 2002 was
determined using the Black-Scholes option-pricing model based on the
following underlying assumptions:

- 5 year risk free interest rate of 3.52%;

- Average expected life of 5 years;

- Average expected volatility of 48.13%.

Beginning August 1, 2004, the Company has adopted revised CICA 3870
retroactively and has chosen not to restate prior periods as permitted
under the revised Handbook Section. The effect of the restatement was an
increase in contributed surplus in the amount of $157 for the fair value
of options granted after August 1, 2002 and a reduction in the balance
of opening retained earnings by $157 as the cumulative effect of the
change on prior periods for the amount that would have been expensed. As
at January 31, 2005, $16 was recorded as the compensation cost for the

3. Business acquisition

Effective March 1, 2003, the Company purchased an 80% interest in
Superior Plastics, Inc. and Excel Decorating and Finishing Inc., both
U.S. based companies. The transaction was a purchase of capital assets
and inventory. The purchase price was $5,904 (U.S. $4,000). Net assets
acquired as assigned values were as follows:

Equipment $4,570
Inventory 2,810
Less: non-controlling interest 1,476

The final purchase price was subject to a price adjustment for obsolete
inventory. During the previous quarter, a price adjustment was effected
resulting in an increase in ownership of Superior Plastics, Inc. of 9.4%
and a reduction in non-controlling interest of $500.

4. Share capital

In July 2004, the Company announced its intention to make a normal
course issuer bid to re-purchase at market prices for cancellation up to
391,820 common shares representing approximately 5% of the outstanding
common shares as at July 31, 2004. During the quarter the Company
re-purchased 44,800 shares.

Shares Amount
--------- ---------
Balance July 31, 2004 7,836,401 $22,922
Re-purchase in respect to
normal course issuer bid 44,800 132
--------- ---------
7,791,601 $22,790
--------- ---------
--------- ---------

The share re-purchases were recorded at the stated capital value of
$2.92 per share with the difference between the amount recorded and the
amount paid credited to contributed surplus.

The following is management's interim discussion and analysis of
operations and financial position and should be used in conjunction with
the consolidated financial statements and Management's Discussion and
Analysis included in the Company's 2004 Annual Report.

Management's Discussion and Analysis


During the second quarter, the Company was adversely affected by the
unfavourable exchange rates, which reduced sales for our Canadian
operation by approximately $2.2 million. In addition, excess capacity
continues in the mould area resulting in significant downward pricing
pressure from our customers. Plastic part production volume was also
reduced due to customer inventory rebalancing during January.


Sales for the three months ended January 31, 2005, were $24.8 million
compared to $23.9 million last year. This growth in sales volume
resulted from growth in metal dies and parts, machining, and automation.
Plastic part production sales decreased year-over-year by 17% due to
lower demand by our Tier-1 customers. Mould sales were comparable to
last year, with orders increasing at the end of the quarter.

Gross Margin

The gross margin for the period was 9.8% of sales as compared to 13.6%
last year. During the quarter, the margins for moulds were
unsatisfactory. Due to pricing pressure by our customers, some programs
were awarded at reduced prices. To offset the effect of lower prices,
the Company has restructured its manufacturing capacities. The Company
reviewed its manufacturing cost base and re-aligned supervisory
personnel and reduced overall employment in mould manufacturing by 8%.
Also, certain manufacturing processes were relocated and consolidated
into one area to improve scheduling efficiencies and reduce
transportation expenses. These actions will reduce our costs of
manufacturing in future quarters. Reduced customer demand for plastic
parts resulted in low capacity utilization during the quarter. Margins
were low because the fixed costs were amortized over fewer units of
production. Resin prices continue to increase and add additional cost
pressure. Excess capacity at this facility will negatively impact
margins until sales increase to acceptable levels.

As sales increased substantially, controls were tightened and margins
for metal dies and parts improved quarter-over-quarter.

Large machining was an area of strength during the quarter. Increased
demand by a customer for machining large locomotive crankcases has
necessitated the addition of a large horizontal CNC milling machine to
complete this work. The machine, which cost $1.35 million, including a
rotary table, was installed in February 2005.

Selling and Administration

Selling and administrative expenses increased to $3.8 million, or 15.1%
of sales for this quarter compared to $3.3 million, or 13.7% of sales
last year. During the quarter, the Company reduced its workforce in the
mould area in order to reduce its manufacturing cost base. The severance
cost associated with this reduction was $350,000. These expenditures are
expected to produce annual savings of $1.3 million going forward. Also,
our U.S. operations were adversely affected by a provision for bad debt
due to Tower Corporation filing for bankruptcy protection in February
2005. This amount added $190,000 to costs during the period.

Earnings Overview

Net loss for the quarter ended January 31, 2005 was $1.2 million, or
$0.15 per share, compared to a loss of $0.9 million, or $0.12 per share,
last year.

Liquidity and Capital Resources

Cash flow (before working capital adjustments) for the three months
ending January 31, 2005, was $.3 million compared to $.8 million last
year. During the quarter, $2.4 million of long-term debt came due. The
interest rate on this debt was 8.27%, and the loan has been refinanced
at the 30-day banker's acceptance rate plus bank spread. As of February
28, 2005, the rate on this loan was 2.61% plus bank spread. This loan is
classified as a current liability.

In February 2005, the Company entered into a capital lease to finance
the acquisition of a large horizontal boring machine at Concorde Machine
Tool. The lease is for a 5-year term and 10-year amortization at a rate
of 5.38%. Investment in capital assets was $586,000 during the quarter.
The Company has significant manufacturing capacity and, as a result,
capital spending requirements were minimal during the quarter.

Management believes the Company's cash resources will be sufficient to
fund its normal working capital requirements.

Normal Course Issuer Bid

During the quarter, the Company purchased for cancellation, 44,800
common shares at a cost of $2.65 under this issuer bid. In February, an
additional 6,200 shares were acquired at $2.65 and cancelled.

Information in the previous discussion relating to projected growth,
changing market conditions, improvements in productivity and future
results constitutes forward-looking statements. Actual results in future
periods may differ materially from the forward-looking statements
because of a number of risks and uncertainties including, but not
limited to, economic factors, industry cyclicality and the demand for
the Company's technology, products and services.

5390 Brendan Lane
Oldcastle, Ontario
N0R 1L0


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

United States:
- Proto-Techniques, Inc.
- Superior Plastics Inc.
- Excel Decorating & Finishing Inc.
- Novi Laser Inc.


Contact Information

    Reko International Group Inc.
    Michael Dunn
    Vice President Finance
    (519) 737-6974