Reko International Group Inc.
TSX VENTURE : REK

Reko International Group Inc.

April 28, 2011 12:40 ET

Reko Announces Strategic Business Transformation

WINDSOR, ONTARIO--(Marketwire - April 28, 2011) - Reko International Group Inc. (TSX VENTURE:REK) today announced the implementation of a strategic business transformation. The transformation will place greater emphasis on its custom machining operations, reduce fixed costs and eliminate excess capacity in its plastic injection mold building operations.

The initiative addresses four key issues: improve the profitability of our plastic injection molding building business; reduce corporate borrowings; divest non-strategic business assets; and, improve the Company's overhead cost structure. After completing the restructuring, the Company's competitive position in the North American market will be enhanced and a solid foundation for future profitability will have been created.

Operational implications

The operational implications of the strategic business transformation project include:

  • Closure of 7 plants in Oldcastle, Ontario – The Company will consolidate the plastic injection mold operations with its factory automation operations at its Lakeshore Automation facility. The real estate associated with current plastic injection mold building operations will be vacated and sold. This will result in a reduction of the Company's manufacturing footprint from approximately 310,000 square feet to 150,000 square feet;

  • Elimination of excess machining capacity – The Company will concentrate its machining operations on large parts to be machined to high tolerances with its most efficient and effective machines, resulting in a decrease in machining capacity from approximately 60 machines to 30 machines. As part of this concentration on high value operations, the Company will cease to provide EDM (Electric Discharge Machining), Gundrilling and Try- out functions in-house;

  • Employee head count rationalization – The Company will reduce its current employee headcount of approximately 225 employees to approximately 160 employees.

The Company anticipates completing the steps associated with implementing the transformation by its year-end, July 31, 2011 and anticipates completing all non-strategic business divestitures by the end of its 2012 fiscal year.

Financial implications

The financial implications of the strategic business transformation include:

  • Improvement to overhead cost structure – After implementing the initiative, the Company forecasts its labour costs year over year will decrease by $3.5 million and fixed costs by $4 million;

  • Improvements to debt service costs – After implementing the initiative and divesting all non-strategic assets, the Company forecasts its annual debt service costs will decrease to $2.3 million.

In total, the initiative is estimated to result in $7.5 million of after-tax charges, after-tax gains on the sale of real estate of approximately $2.0 million and generation of $9.5 million in cash. The cash generated will be used to finance the cash expenditures required in the plan and all remaining amounts used to reduce outstanding debt.

The quarter by quarter financial implications will depend on specific transaction details, such as the timing of real estate sales, timing of reductions of working capital associated with plastic injection mold building projects and proceeds realized from non-strategic business asset divestitures.

$7.5 million of after-tax charges

The Company currently anticipates taking:

  • $3.0 million in after-tax charges related to the write-down of non-strategic business assets, which will be expensed in the current quarter;

  • $2.2 million in after-tax charges related to severance, which will be expensed in the current quarter;

  • $1.6 million in after-tax charges related to the carrying costs associated with real estate while it is held for sale, which will be expensed as period costs as incurred;

  • $0.5 million in after-tax charges related to moving strategic business assets from the closed facilities to their new facility, which will be expensed as period costs as incurred but which the Company anticipates will occur in the fourth quarter of 2011; and,

  • $0.2 million in after-tax charges related to asset restoration costs, which will be expensed as part of disposition costs of the real estate being held for sale.

$2.0 million of after-tax gains on the sale of real estate

The Company does not anticipate a write-down of its real estate. Based on current appraised values for the real estate, the Company anticipates recording an after-tax gain of between $1.7 million and $2.4 million. Portions of this gain will be recorded as income as each real estate asset is sold.

$9.5 million in cash generated from initiative

The Company anticipates generating cash from its strategic business transformation, as follows:

  • $1.3 million in net proceeds from the sale of non-strategic business assets – The Company anticipates realizing on these proceeds during the first quarter of fiscal 2012;

  • $4.2 million in net proceeds from the sale of real estate assets – The Company anticipates realizing on these proceeds over the next 27 months; and,

  • $4.0 million reduction in working capital associated with plastic injection mold builds – The Company anticipates working capital reductions beginning in the first quarter of 2013.

"These initiatives mark a major and necessary transformation in our business. Our goal is to create a business that is more strategically focused and better suited to today's business environment," said Diane St. John, CEO of Reko International Group Inc. "The changing landscape in the automotive market we serve required that we evaluate our operations and adapt our cost structure to market conditions. We anticipate efficiency gains from the co-location of our mold and automation manufacturing into a single facility that is conveniently located beside our Concorde facility. Additionally, we believe that this will allow us more flexibility in adapting to changing market conditions in all areas of our business. During this transformation, the impact upon families and the community will be very painful; however, this initiative is critical to the survival and future success of Reko as an organization."

Founded in 1976, Reko International Group (TSX VENTURE:REK) is a manufacturing firm providing high precision machining of very large parts, as well as tooling and automated solutions for the transportation, energy, automotive, aerospace and consumer product markets, all delivered through its nine production facilities in Ontario.

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.
- Reko Global Services, LLC.

Neither TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.

Contact Information

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