Reko International Group Inc.
TSX : REK

Reko International Group Inc.

June 09, 2005 15:38 ET

Reko Announces Third Quarter Results For Fiscal 2005

WINDSOR, ONTARIO--(CCNMatthews - June 9, 2005) - Reko International Group Inc. (TSX:REK) announces its financial results for the three months ended April 30, 2005. Sales for the three months ended April 30, 2005 were $27.2 million as compared to $25.1 million last year. The Company was successful in increasing sales in an extremely competitive environment. Mould sales increased 18% over the same period last year. The Company focused on aligning its engineering and machining capabilities with the large Tier-1 automotive companies and is able to deliver larger programs with shorter lead times. Sales of dies and metal stampings also increased significantly during the period. There has been a dramatic decrease in production capacity in prototype dies and parts as more companies closed their doors in Michigan. The Company has been successful in being awarded this additional business resulting from the consolidation.

Gross margin for the period was $3.1 million, or 11.2% of sales, compared to $3.2 million, or 12.9% last year. Margins were impacted by competitive pricing due to overall weak demand in the industry. Material price increases for steel for moulds and resin used in part production put pressure on overall margins. To offset these pressures, the Company is reducing costs through fundamental structural changes and managing a more focused work force. The Company is setting targets for reducing costs to remain competitive.

Selling and administration costs were reduced to $3.2 million from $3.4 million last year. One Company objective is to decrease costs at all levels. Selling and administration expenses decreased during the quarter, largely as a result of a reduction in employee levels. Future quarters will benefit from the impact of cost reductions in this area.

The net loss for the period was $346,000, or $0.04 per share, compared to a loss of $570,000, or $0.07 per share last year.



Financial Highlights (complete statements follow):
---------------------------------------------------------------------
Period Ended April 30, Three Months Nine Months
(in $,000 except per share (unaudited) (unaudited)
amounts) ----------------------------------------
Fiscal Fiscal Fiscal Fiscal
2005 2004 2005 2004
---------------------------------------------------------------------

Sales $27,281 $25,131 $75,378 $73,446
Net Loss (346) (570) (1,714) (1,948)
EPS (basic) (0.04) (0.07) (0.22) (0.25)
Cash Flow from Operations
before Working Capital
Adjustment 1,054 557 1,357 2,129
Shareholders' Equity 53,312 55,491
Shareholders' Equity per
Share 7.15 7.08
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Founded in 1976, Reko International Group (TSX: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 centres.



REKO INTERNATIONAL GROUP INC. Third Quarter Report
CONSOLIDATED BALANCE SHEETS
As at April 30, 2005 with comparative figures for
July 31, 2004 (in 000's)
---------------------------------------------------------------------
April 30, July 31,
(unaudited) (audited)
2005 2004
---------------------------------------------------------------------
ASSETS
Current
Accounts receivable - trade $ 27,457 $ 31,508
- sundry 2,577 1,376
Work-in-progress 31,236 21,007
Prepaid expenses and deposits 907 1,040
------------------------
62,177 54,931
------------------------

Capital assets 52,998 56,555
------------------------
$ 115,175 $ 111,486
------------------------
------------------------
LIABILITIES
Current
Bank indebtedness $ 19,028 $ 8,078
Accounts payable and accrued liabilities 11,106 9,152
Income taxes payable 72 157
Future income taxes 684 1,180
Current portion of long-term debt 9,158 8,992
------------------------
40,048 27,559
------------------------
Long-term debt 16,101 21,340
------------------------
Future income taxes 5,452 5,891
------------------------
Non-controlling interest 262 902
------------------------
SHAREHOLDERS' EQUITY
Share capital 22,629 22,922
Contributed surplus 545 325
Retained earnings 31,865 33,736
Cumulative translation adjustment (1,727) (1,189)
------------------------
53,312 55,794
------------------------
$ 115,175 $ 111,486
------------------------
------------------------



CONSOLIDATED STATEMENTS OF LOSS AND RETAINED EARNINGS
Nine months ended April 30, 2005 with comparative figures for
2004 (in 000's except per share data)
---------------------------------------------------------------------
For the three months For the nine months
ended April 30, ended April 30,
(unaudited) (unaudited)
2005 2004 2005 2004
---------------------------------------------------------------------
Sales $ 27,281 $ 25,131 $ 75,378 $ 73,446
Costs and Expenses
Cost of sales 22,800 20,428 62,224 59,043
Selling and administrative 3,168 3,417 10,083 10,381
Depreciation and
amortization 1,375 1,453 4,207 4,349
----------------------------------------
27,343 25,298 76,514 73,773
----------------------------------------
Loss from operations before
the following (62) (167) (1,136) (327)
----------------------------------------
Interest
Long-term debt 317 346 1,041 1,066
Other - net 202 186 443 448
----------------------------------------
519 532 1,484 1,514
----------------------------------------
Loss before income taxes and
non-controlling interest (581) (699) (2,620) (1,841)
----------------------------------------
Income taxes
Current (recovered) (260) 197 230 379
Future (recovered) 60 (286) (1,015) (100)
----------------------------------------
(200) (89) (785) 279
----------------------------------------
Loss before non-controlling
interest (381) (610) (1,835) (2,120)
Non-controlling interest 35 40 121 172
----------------------------------------
Net loss for the period (346) (570) (1,714) (1,948)
Retained earnings, beginning
of period
As previously reported 32,211 33,672 33,736 35,050
Adoption of new accounting
standard -- -- (157) --
----------------------------------------
As restated 32,211 33,672 33,579 35,050
----------------------------------------
Retained earnings, end of
period $ 31,865 $ 33,102 $ 31,865 $ 31,102
----------------------------------------
----------------------------------------
Basic loss per common share $ (0.04) $ (0.07) $ (0.22) $ (0.25)
----------------------------------------
----------------------------------------
Fully diluted loss per
common share $ (0.04) $ (0.07) $ (0.22) $ (0.25)
----------------------------------------
----------------------------------------



REKO INTERNATIONAL GROUP INC. Third Quarter Report
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended April 30, 2005 with comparative figures for 2004
(in 000's except per share data)
---------------------------------------------------------------------
For the three months For the nine months
ended April 30, ended April 30,
(unaudited) (unaudited)
2005 2004 2005 2004
---------------------------------------------------------------------
OPERATING ACTIVITIES
Net loss for the period $ (346) $ (570) $ (1,714) $ (1,948)
Add non-cash items:
Depreciation and
amortization 1,375 1,453 4,207 4,349
Future income taxes 60 (286) (1,015) (100)
Non-controlling interest (35) (40) (121) (172)
----------------------------------------
1,054 557 1,357 2,129
Net change in non-cash
working capital (2,631) 4,263 (6,386) 1,916
----------------------------------------
Cash (used) provided -
operating activities (1,577) 4,820 (5,029) 4,045
----------------------------------------
FINANCING ACTIVITIES
Net proceeds/(payments) on
bank indebtedness 2,313 (3,762) 11,507 (7,174)
Net (payments)/proceeds on
long-term debt (305) (781) (5,381) 730
Cost of re-purchase of shares (144) -- (263) --
----------------------------------------

Cash provided (used) -
financing activities 1,864 (4,543) 5,863 (6,444)
----------------------------------------
INVESTING ACTIVITIES
Investment in capital assets (263) (246) (737) (787)
Unused proceeds from bond
issue - restricted for
capital expenditures -- -- -- 3,025
----------------------------------------
Cash provided (used) -
investing activities (263) (246) (737) 2,238
----------------------------------------
Effect of foreign exchange
rate changes on cash and
cash equivalents (24) (31) (97) 161
----------------------------------------
Net change in cash and cash
equivalents during the period -- -- -- --
Cash and cash equivalents,
beginning of period -- -- -- --
----------------------------------------
Cash and cash equivalents,
end of period $ -- $ -- $ -- $ --
----------------------------------------
----------------------------------------

Refer to Note 5 for supplemental cash flow information.



Notes to Consolidated Financial Statements for April 30, 2005 (in 000's)
(Unaudited)


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 insignificant.

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

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 3.44%;

- Average expected life of 5 years;

- Average expected volatility of 45.56%.

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 April 30, 2005, $11 was recorded as the compensation cost for the quarter.

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 at assigned values were as follows:



Equipment $4,570
Inventory 2,810
------
7,380
Less: non-controlling interest 1,476
------
$5,904
------
------


The final purchase price was subject to a price adjustment for obsolete inventory. During the first 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 fiscal year the Company re-purchased 99,900 shares.



Shares Amount
--------- -------
Balance July 31, 2004 7,836,401 $22,922
Re-purchase in respect to
normal course issuer bid:
Second Quarter 44,800 132
Third Quarter 55,100 161
--------- -------
7,736,501 $22,629
--------- -------
--------- -------


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.

5. Supplemental cash flow information

During the year, capital asset additions in the amount of $638 were netted against proceeds from a new capital lease obligation.

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

Overview

The North American automotive market is currently experiencing serious challenges due to lower profits and excess inventory levels. The recent downgrading of two automotive companies' credit quality has placed additional pressure on all participants in the automotive manufacturing industry. During this difficult time period, Reko aims to continue to reduce its operating costs, improve manufacturing efficiencies and focus on value-added business sales. The Company's ability to cross-sell the production capabilities and services within the Reko "Tool Box" provides Reko with an important means by which to differentiate itself from more specialized competitors.

Sales

Sales for the three months ended April 30, 2005 were $27.2 million compared to $25.1 million last year. Higher sales for mould programs contributed to this increase in sales volume. The Company has aligned itself with the larger Tier-1 automotive companies as a global tool integrator. The Company offers its diversified range of services using the Reko "Tool Box" marketing strategy and has been successful in penetrating additional markets. Higher prototype dies and metal stampings also contributed to the increase in sales volume. Over the past year, there has been a consolidation of prototype shops due to lower demand and increasing price reduction pressure. The Company has been successful in capturing this additional sales business and plans increased growth over the next year.

Gross Margin

The gross margin for the period was $3.1 million, or 11.2% of sales, compared to $3.2 million, or 12.9% of sales for the same period last year. Although the Company was successful in securing additional revenues in the mould area, some of these orders required additional outsourcing due to short lead times for delivery. Due to excess capacity in the mould industry, prices remain very competitive, necessitating bidding at reduced margins. As a result of lower plastic parts sales, fixed costs were amortized over a lower revenue base, thereby reducing gross margins. In addition, within the plastic parts area, increasing resin costs continued to be a problem, as these cost increases cannot be passed on to customers in the current environment.

Selling and Administration

Selling and administration costs decreased to $3.2 million, or 11.6% of sales, compared to $3.4 million, or 13.6% of sales last year. The difficult operating environment within the automotive industry has necessitated cost reductions to remain competitive. To that end, Reko has undertaken a program aimed at reducing the work force. As a result, selling and administration expenses are below levels in the previous quarter and year ago levels.

Earnings Overview

Although far from satisfactory, net loss for the quarter was improved to $346,000 or 4 cents per share, compared to the loss of $570,000 or 7 cents per share in the prior year.

Liquidity and Capital Resources

Cash flow from operations was $1.1 million for the three months ended April 30, 2005. This was a major improvement over the same period last year, when cash flow was $557,000.

During the quarter, the Company reduced long-term debt by an additional $2.0 million using current bank borrowing facilities. In order to diversify its capital base the Company has engaged an independent valuator with the intention of using the Company's real estate as a source of financing. The appraisals confirm that the value of Reko's real estate significantly exceeds the value at which it is carried on the Company's financial statements. Reko is evaluating a plan to mortgage properties with the view to reduce its reliance on bank borrowing.

Normal Course Issuer Bid

During the quarter, the Company purchased for cancellation, an additional 55,100 common shares at an average price of $2.62. At May 31, 2005, the Company has purchased for cancellation 150,700 shares at an average price of $2.71. The directors of the Company believe that in view of the fact that such shares have been purchased at less than half of the tangible book value, such purchases will serve to enhance shareholder value.

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.



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


SUBSIDIARIES:

Canada:
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- 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
    www.rekointl.com