Reko International Group Inc.
TSX : REK

Reko International Group Inc.

June 12, 2008 14:28 ET

Reko Announces Third Quarter Results for Fiscal 2008

WINDSOR, ONTARIO--(Marketwire - June 12, 2008) - Reko International Group Inc. (TSX:REK) today announced results for its third quarter ended April 30, 2008.



Financial Highlights (complete statements follow):

Three Months Nine Months
(unaudited) (unaudited)
----------------------------------------
Fiscal Fiscal Fiscal Fiscal
2008 2007 2008 2007
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Sales $14,787 $14,760 $42,037 $38,759
Net loss from continuing operations (382) (491) (2,473) (1,096)
EPS (basic) (0.05) (0.07) (0.35) (0.15)
Working capital 15,282 20,801
Shareholders' equity 45,095 48,660
Shareholders' Equity per Share 6.34 6.76
----------------------------------------------------------------------------


Consolidated sales for the quarter ended April 30, 2008 were $14.8 million, effectively the same as the previous year. Consolidated sales for the nine months ended April 30, 2008, were $42.0 million compared to $38.8 million in the prior year, an increase of $3.2 million, or 8.5%. During the quarter, a number of mould programmes previously delayed, were finally released and both automation and custom machining orders were stable. With mould orders returning to more normal levels and the carryover impacts in our current backlog, we are cautiously optimistic that sales will continue to exceed last year's results in the fourth quarter.

The gross margin for the three months ended April 30, 2008 was $1.3 million, or 9.1% of sales, compared to a gross profit of $1.9 million, or 13.2% of sales for the same period last year. Gross margin for the nine months ended April 30, 2008 was $2.5 million compared to $5.5 million, a decrease of $3.0 million. The decrease in gross margin was due to continued competitive pricing and a strong Canadian dollar. The Company continues to manage scheduled work hours and implement previously announced cost cutting initiatives.

Selling and administrative expenses for the quarter were $1.5 million, or 10.2% of sales, compared to $2 million, or 13.7% of sales, for the same period last year. Selling and administrative expenses for the year-to-date were $5.4 million compared to $5.7 million in the prior year, a decrease of $0.3 million. The S,G&A savings relate to the restructuring initiatives undertaken by the Company in the fourth quarter of 2007.

Net loss for the quarter was $382,000, or $0.05 per share, compared to a net loss of $491,000, or $0.07 per share, from continuing operations in the previous year. Net loss for the year-to-date was $2.5 million, or $0.35 per share, compared to $1.1 million, or $0.15 per share, from continuing operations in the previous year.

"During the quarter, with the positive impact of sales and a controlled cost structure, Reko International Group Inc. has posted improved results in an evolving automotive industry," stated Diane St. John, CEO. "A return to more regular programme releases and the continuous review of our cost structure, positions Reko International Group Inc. to meet the current challenges presented by our industry."

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.



INTERIM CONSOLIDATED BALANCE SHEETS
As at April 30, 2008 with comparative figures for July 31, 2007 (in 000's)
----------------------------------------------------------------------------
April 30, July 31,
(unaudited) (audited)
2008 2007
----------------------------------------------------------------------------
ASSETS
Current
Accounts receivable - trade $ 15,050 $ 22,014
Non-hedging financial derivatives 901 2,047
Income taxes receivable 815 159
Work-in-progress 17,747 11,166
Prepaid expenses and deposits 685 525
Future income taxes (Note 5) 847 231
Discontinued operations (Note 3) -- 128
------------- ------------
36,045 36,270
------------- ------------

Capital assets 44,250 41,946
Discontinued operations (Note 3) -- 2,466
------------- ------------
44,250 44,412
------------- ------------
Future income taxes (Note 5) 1,732 859
------------- ------------
$ 82,027 $ 81,541
------------- ------------
------------- ------------

LIABILITIES
Current
Bank indebtedness $ 13,405 $ 8,678
Accounts payable and accrued liabilities (Note 4) 5,891 6,133
Current portion of long-term debt 1,467 1,628
Discontinued operations (Note 3) -- 132
------------- ------------
20,763 16,571
------------- ------------

Long-term debt 16,169 17,266
------------- ------------

SHAREHOLDERS' EQUITY
Share capital (Note 6) 20,803 20,905
Contributed surplus (Note 7) 396 366
Retained earnings 23,896 26,369
Cumulative translation adjustment -- 64
Accumulated other comprehensive income -- --
------------- ------------
45,095 47,704
------------- ------------
$ 82,027 $ 81,541
------------- ------------
------------- ------------

See accompanying notes to the interim consolidated financial statements.



INTERIM CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS AND
RETAINED EARNINGS
Three months and nine months ended April 30, 2008 with comparative figures
for 2007 (in 000's except per share data)
----------------------------------------------------------------------------
For the three months For the nine months
ended April 30, ended April 30,
(unaudited) (unaudited)
2008 2007 2008 2007
----------------------------------------------------------------------------

Sales (Note 2) $ 14,787 $ 14,760 $ 42,037 $ 38,759

Costs and expenses
Cost of sales 12,339 11,748 36,132 30,178
Selling and administrative 1,510 2,019 5,408 5,734
Depreciation and amortization 1,099 1,060 3,441 3,101
--------------------------------------------
14,948 14,827 44,981 39,013
--------------------------------------------
Loss from continuing operations
before the following (161) (67) (2,944) (254)
--------------------------------------------
Loss (gain) on disposal of
capital assets 18 68 18 (53)

Interest
Long-term debt 274 259 831 784
Other - net 103 201 293 576
--------------------------------------------
395 528 1,142 1,307
--------------------------------------------
Loss before income taxes (556) (595) (4,086) (1,561)
--------------------------------------------

Income taxes (recovered)
Current 38 (372) 39 146
Future (212) 268 (1,652) (611)
--------------------------------------------
(174) (104) (1,613) (465)
--------------------------------------------
Net loss from continuing
operations (382) (491) (2,473) (1,096)
Net loss from discontinued
operations, net of tax (Note 3) -- (728) -- (387)
--------------------------------------------
Net loss (382) (1,219) (2,473) (1,483)

Other comprehensive income -- -- -- --
--------------------------------------------
Comprehensive loss (382) (1,219) (2,473) (1,483)
--------------------------------------------
Retained earnings, beginning
of period 24,278 29,729 26,369 29,993
--------------------------------------------
Retained earnings, end
of period $ 23,896 $ 28,510 $ 23,896 $ 28,510
--------------------------------------------
--------------------------------------------
Loss per common share from
continuing operations
Basic $ (0.05) $ (0.07) $ (0.35) $ (0.15)
--------------------------------------------
--------------------------------------------
Diluted $ (0.05) $ (0.07) $ (0.35) $ (0.15)
--------------------------------------------
--------------------------------------------
Loss per common share from
discontinued operations
Basic $ -- $ (0.10) $ -- $ (0.05)
--------------------------------------------
--------------------------------------------
Diluted $ -- $ (0.10) $ -- $ (0.05)
--------------------------------------------
--------------------------------------------

See accompanying notes to the interim consolidated financial statements.



INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months and nine months ended April 30, 2008 with comparative figures
for 2007 (in 000's)
----------------------------------------------------------------------------
For the three months For the nine months
ended April 30, ended April 30,
(unaudited) (unaudited)
2008 2007 2008 2007
----------------------------------------------------------------------------

OPERATING ACTIVITIES
Net loss from continuing
operations for the period $ (382) $ (491) $ (2,473) $ (1,096)
Add non-cash items:
Depreciation and amortization 1,099 1,060 3,441 3,101
Future income taxes (212) 268 (1,652) (611)
Gain (loss) on disposal of
capital assets 18 68 18 (53)
Stock option expense (Note 7) 8 20 26 54
--------------------------------------------
531 925 (640) 1,395

Net change in non-cash working
capital (4,359) 2,285 287 3,644
--------------------------------------------
Cash (used) provided from
operating activities (3,828) 3,210 (353) 5,039
--------------------------------------------

FINANCING ACTIVITIES

Net proceeds on bank
indebtedness 4,944 440 4,797 611
(Payments) proceeds on
long-term debt (383) 403 (1,344) (176)
Cost of repurchase of shares (29) (524) (102) (1,191)
--------------------------------------------

Cash provided (used) from
financing activities 4,532 319 3,351 (756)
--------------------------------------------

INVESTING ACTIVITIES
Investment in capital assets (874) (2,904) (3,113) (4,196)
Proceeds on disposal of
capital assets 21 39 21 160
--------------------------------------------

Cash used in investing
activities (853) (2,865) (3,092) (4,036)
--------------------------------------------
Effect of foreign exchange
rate changes on cash and
cash equivalents 149 (664) 94 (247)
--------------------------------------------
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 Interim Consolidated Financial Statements for April 30, 2008
(in 000's, except for share and per share figures)
(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 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 interim consolidated financial statements are consistent with those used in preparing the annual consolidated financial statements, except as noted below and in Note 2.

Foreign currency translation

During the first quarter, management evaluated the classification of the two remaining active U.S. subsidiaries, which were classified as self-sustaining. In considering factors such as the procurement of revenue, how financing was obtained and where binding decision making occurred, management concluded that these previously classified self-sustaining subsidiaries were, in fact, fully integrated. Thus, the temporal method of foreign currency translation should be used with the current rate applied to monetary assets and liabilities, and historical rates applied to non-monetary assets and liabilities. This did not have a significant impact on these consolidated financial statements.

Financial instruments, equity and comprehensive income

In January 2005, the Canadian Institute of Chartered Accountants approved Handbook Sections 1530, "Comprehensive Income"; 3251, "Equity"; 3855, "Financial Instruments - Recognition and Measurement"; and 3861, "Financial Instruments - Disclosure and Presentation". The Company adopted these new recommendations effective August 1, 2007 with no restatement of prior periods.

Financial instruments

Under the new standards, all of the Company's financial assets and financial liabilities are to be classified as held for trading, held to maturity investments, loans and receivables, available-for-sale financial assets, or other financial liabilities. All financial instruments are measured at fair value on initial recognition. Held for trading financial instruments, which include cash and cash equivalents and non-hedging financial derivatives, are measured at fair value and all gains and losses are included in net income in the period in which they arise. Loans and receivables, which include accounts receivable, current portion of long-term debt and long-term-debt, are recorded at amortized cost using the effective interest method. Other financial liabilities, which include accounts payable and accrued liabilities, are recorded at amortized cost using the effective interest method. The Company does not currently have any held to maturity investments or available for sale financial assets. The implementation of the new section had neither a positive nor negative impact on the financial results of the Company.

Equity

Section 3251, "Equity", establishes standards for the presentation of equity and unrealized gains and losses in equity during the reporting period. The main feature of this new standard is the requirement of an enterprise to present separately each of the unrealized gains and losses in equity during the reporting period. The new standard replaces Section 3250, "Surplus", and also incorporates amendments resulting from the issuance of Section 1530.

Comprehensive income

Other comprehensive income includes unrealized gains and losses on translation of a Company's net investment in self-sustaining foreign operations, and to the extent that cash flow hedges are effective, the change in their fair value, net of income taxes. Other comprehensive income is presented below net income on the Consolidated Statements of Income and Comprehensive Income. Comprehensive income is composed of net income and other comprehensive income.

Accumulated other comprehensive income is a separate component of shareholders' equity which includes the accumulated balances of all components of other comprehensive income which are recognized in comprehensive income but excluded from net income.

The Company does not currently maintain any financial instruments that require disclosure within other comprehensive income.

2. Revenue recognition

As detailed in the company's revenue recognition policy, revenue is recognized based on the percentage of completion method, provided the contract has progressed to the point where total costs can be reasonably estimated. Historically, the company considered all jobs, which were at least 50% complete to have progressed to the point where total costs could be reasonably estimated. After a detailed review of estimation abilities, manufacturing abilities and historical results, management determined that a job has progressed to the point where total costs can be reasonably estimated once that job has completed all aspects of engineering and design. Historically, this occurs somewhere between 15% and 25%, depending upon the complexity of the job. This change in management estimate was implemented with an effective date of August 1, 2007. The impact of this change in management estimate is an increase in sales of $1,741 and an increase of gross profit of $45 in the third quarter and an increase in sales of $1,831 and an increase in gross profit of $27 for the nine months ended April 30, 2008.

3. Discontinued operations

During the period, the Company re-classified its remaining assets, liabilities, equity, revenues and expenses, which were previously classified as "Discontinued Operations" into continuing operations as the entities are now substantially disposed.

The balance sheet at July 31, 2007, includes the following assets and liabilities related to discontinued activities:



2007
------

Cash $ 71
Accounts Receivable - trade 36
Prepaid expense and deposits 21
------
128
------

Capital assets 2,466
------

Accounts payable and accrued liabilities 45
Current portion of long-term debt 87
------
132
------


The statement of loss for the three months and nine months ended April 30, 2007 includes the following related to discontinued operations:



For the three For the nine
months ended months ended
April 30, 2007 April 30, 2007
---------------- ----------------

Sales for the period $14,774 $42,064
Sales from continuing operations 14,760 38,759
Sales from discontinued operations 14 3,305

Operating expenses related to
discontinued operations 742 3,692

Net income from discontinued operations (728) (387)


4. Related party transactions

Accounts payable and accrued liabilities include $408 of related party liabilities to a shareholder with regard to fulfillment of a contractual obligation. The contractual obligation will be completely paid by fiscal year end.

5. Income taxes

During the previous quarter, the Company adjusted its future taxes by $300. The adjustment in future taxes is due to a change in the enacted Federal statutory rates. The decrease in the Federal statutory rate from 19% to 15% commenced January 2008, and will be fully implemented by January 2012. The reduction in the Federal statutory tax rate resulted in a $300 reduction in the future tax liability pertaining primarily to capital assets.

6. Share capital

In July 2007, the Company announced its intention to make a normal course issuer bid to re-purchase, at market prices, for cancellation up to 357,525 common shares representing approximately 5% of the outstanding common shares as at July 31, 2007. During the quarter, the Company re-purchased 10,100 shares and no options were exercised.



Shares Amount
----------- ---------
Balance July 31, 2007 7,150,492 $20,905
Re-purchase in respect of normal course issuer bid:
First Quarter (2,600) (8)
Second Quarter (22,200) (65)
Third Quarter (10,100) (29)
----------- ---------
7,125,692 $20,803
----------- ---------
----------- ---------


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 $2.25 per share, applied to contributed surplus.

7. Stock based compensation

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 3.04%;

- Average expected life of 5 years;

- Average expected volatility of 30.10%.

During the period, no options were granted, and for the three months ended April 30, 2008, $8 was recorded as compensation cost for the quarter. For the nine months ended April 30, 2008, $26 was recorded as compensation cost.

8. Subsequent event

Subsequent to the period ended April 30, 2008, Reko International Group Inc. initiated further restructuring activities with a total cost of approximately $250.

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 nine months ended April 30, 2008 and the audited consolidated financial statements and MD&A for the year ended July 31, 2007 included in our 2007 Annual Report to Shareholders. The unaudited interim consolidated financial statements for the nine months ended April 30, 2008 have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP"), and the audited consolidated financial statements for the year ended July 31, 2007 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 May 30, 2008.

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.

Injection moulds are manufactured using milling machines that cut away metal from steel or aluminum blocks. Skilled mould makers assemble and finish surface details. 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.

The factory automation systems include stand alone lean manufacturing cells, asynchronous assembly and test systems, leak and flow test systems, robotic assembly/machines vision work cells and various welding systems. Our strength in engineering, design, and machining proves very effective in achieving additional sales volume. This business has benefited from the cross over selling of the Reko "Tool Box" in that the majority of the current business is from customers that, initially, were Reko's mould customers.

We expanded our products to include larger two-shot moulds, low-pressure moulds, and foam moulds. Reko has extensive experience and knowledge in mould design and material flow and the impact of pressure on segments of the die.

The large custom machining business involves the precision machining of large components. Predominantly non-automotive, it supplies the transportation (rail) and energy (oil and gas) industries.

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 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, 2007, remain substantially unchanged in respect of the nine months ended April 30, 2008, with the exception of the following:

- as a result of the strengthened value of the Canadian dollar relative to the U.S. dollar, our manufacturing facilities may have greater difficulty competing with facilities located outside Canada; and,

- reduction in the pressure from our customer base to source mould manufacture in China. Despite this reduction, price pressures to meet "Made in China" pricing remains.

CHANGES IN ACCOUNTING POLICY

COMPREHENSIVE INCOME AND FINANCIAL INSTRUMENTS

In January 2005, the Canadian Institute of Chartered Accountants approved Handbook Sections 1530 - "Comprehensive Income"; 3251, "Equity"; 3855, "Financial Instruments - Recognition and Measurement"; 3861, "Financial Instruments - Disclosure and Presentation"; and 3865, "Hedges". Reko adopted these new recommendations effective August 1, 2007, without restatement of prior periods.

Financial instruments

Under the new standards, financial assets and financial liabilities are to be classified as held for trading, held to maturity investments, loans and receivables, available for sale financial assets or other financial liabilities. All financial instruments are measured at fair value on initial recognition. Held for trading financial instruments, which include cash and cash equivalents and non-hedging financial derivatives, are measured at fair value and all gains and losses are included in net income in the period in which they arise. Loans and receivables, which include accounts receivable, current portion of long-term debt, and long-term debt, are recorded at amortized cost using the effective interest method. Other financial liabilities, which include accounts payable and accrued liabilities, are recorded at amortized cost using the effective interest method. Reko does not currently have any held to maturity investments or available for sale financial assets. The implementation of the new section had neither a positive nor negative impact on the financial results of the Company.

Equity

Section 3251, "Equity", establishes standards for the presentation of equity and unrealized gains and losses in equity during the reporting period. The main feature of this new standard is the requirement for an enterprise to present separately each of the unrealized gains and losses in equity during the reporting period. The standard replaces Section 3250, "Surplus", and incorporates amendments resulting from the issuance of Section 1530.

Comprehensive income

Other comprehensive income would include the unrealized gains and losses in translation of net investments in self-sustaining operations, and to the extent that cash flow hedges are effective, the change in their fair value, net of income taxes, and unrealized gains and losses on available for sale financial assets. Other comprehensive income is to be presented below net income in the Consolidated Statements of Income and Comprehensive Income. Comprehensive income is comprised of net income and other comprehensive income.

Accumulated other comprehensive income is a separate component of shareholders' equity, which includes the accumulated balances of all components of other comprehensive income which are recognized in comprehensive income, but excluded from net income.

The Company does not currently maintain any financial instruments whose change in fair value would require disclosure within other comprehensive income.

UNUSUAL ITEMS

FOREIGN CURRENCY TRANSLATION

During a previous quarter, management evaluated the classification of the two remaining active U.S. subsidiaries, which were classified as self-sustaining. In considering factors such as the procurement of revenue, how financing was obtained and where binding decision making occurred, management concluded that these previously classified self-sustaining subsidiaries were, in fact, integrated. Thus, the temporal method of foreign currency translation should be used with the current rate applied to monetary assets and liabilities, and historical rates applied to non-monetary assets and liabilities. This did not have a significant impact on these consolidated financial statements.

INCOME TAXES

During the second quarter, the Federal government announced a gradual reduction in future federal income tax rates from 19% to 15%, which commenced January 2008, and is to be fully implemented by January 2012. As a result of the income tax decrease, the future tax liability was revalued in the second quarter, resulting in a decrease of $300 in the liability and a $300 increase in net income.



AVERAGE FOREIGN EXCHANGE
------------------------

For the three For the nine
months ended April 30, months ended April 30,
---------------------------------- -------------------------------
2008 2007 2008 2007
--------------- ----------------- --------------- ---------------
Reko Reko Reko Reko
Effective Effective Effective Effective
Actual Rate Actual Rate Actual Rate Actual Rate
--------------- ----------------- --------------- ---------------
U.S.
Dollar
equals
Canadian
Dollar 1.0060 1.1088 1.1450 1.1466 1.0010 1.1212 1.1406 1.1627


The preceding table compares the average foreign currency exchange rates for the disclosed periods and the average effective rates of the forward exchange contracts we booked during that period. This foreign currency exchange impacts our reported sales and income. At the end of the third quarter of 2008, we held forward exchange contracts of $26,650 compared to $27,650 at the end of the third quarter of 2007. During fiscal 2008, on average, we have had $29,200 of forward exchange contracts outstanding monthly, as compared to $31,050 in fiscal 2007, year-to-date. The decline in forward exchange contracts largely relates to declining volumes.

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 accounts receivable, work-in-process and our backlog of booked business that has yet to kick-off, net of any US dollar denominated debt. This programme is designed to minimize the Company's exposure to foreign exchange risks over the long-term. As a consequence of this long-term exposure protection, the Company is subject to short-term paper gains and losses on its exposed foreign exchange contracts. 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.

As a result of the forward 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 Contract value booked
Period (000's) Effective average rate
----------------------------------------------------------------------------

Q3 - 2008 $26,650 1.0249

Q4 - 2008 21,100 1.0114

Q1 - 2009 14,700 0.9957

Q2 - 2009 9,200 0.9921


During the quarter, the Company incurred a pre-tax gain of approximately $300 related to the fair value of its forward exchange contracts.

The Company notes that at current levels of Forward Exchange Contracts, U.S. dollar denominated debt, Unbilled Contract Revenue and Accounts Receivable, an increase in the value of the U.S. dollar against the Canadian dollar results in the Company recording gains and an increase in the value of the Canadian dollar against the U.S. dollar results in financial losses for the Company. Future periods may experience greater or less exposure based on the net level of U.S. dollar denominated net assets or liabilities.

Foreign currency transactions are recorded at rates in effect at the time of the transaction. Forward exchange contracts are recorded at month-end at their fair value, with unrealized holding gains and losses recorded in sales.

SUBSEQUENT EVENT - RESTRUCTURING CHARGES

Subsequent to the end of the quarter, the Company finalized the restructuring of its workforce, as initially announced in the second quarter. After several quarters of process improvements, Reko identified approximately 10% of its positions that could be eliminated without impacting capacity. The cuts impacted virtually every department of the Company. As a result of finalizing the restructuring, the Company will accrue an additional $250 of restructuring costs in the fourth quarter. The changes are anticipated to generate annualized savings of an additional $1million over those announced in the second quarter. The restructuring costs will be charged to cost of sales and selling and administrative costs.

As a result of the restructuring, the Company believes it is better positioned to respond to commodity type pricing from its customers and it reflects the changing market in which Reko competes, as an increasing volume of work sourced to Reko is built in low cost countries, as opposed to our North American plants.

RESULTS OF OPERATIONS

The financial results for the third quarter ended April 30, 2008 present all remaining assets, liabilities, equity, revenues and expenses of The Mold Company, Superior Plastics, Inc., Excel Decorating and Finishing, Inc., Novi Laser, Inc. and Proto-Techniques, Inc. as continuing operations. In the prior year's financial statements, these entities' assets, liabilities, equity, revenue and expenses were reflected as "Discontinued Operations". This change in classification is consistent with the requirements of Canadian GAAP for Discontinued Operations, where businesses not disposed of within a fixed period of time after they are first presented as discontinued operations, are reclassified as continuing operations. The change in classification did not result in a material change to these consolidated financial statements.

Revenue recognition

As detailed in the Company's revenue recognition policy, revenue is recognized based on the percentage of completion method, provided the contract has progressed to the point where total costs can be reasonably estimated. Historically, the Company considered all jobs, which were at least 50% complete to have progressed to the point where total costs could be reasonably estimated. After a detailed review of estimation abilities, manufacturing abilities and historical results, management determined that a job has progressed to the point where total costs can be reasonably estimated once that job has completed all aspects of engineering and design. Historically, this occurs somewhere between 15% and 25%, depending upon the complexity of the job. This change in management estimate was implemented with an effective date of August 1, 2007. The impact of this change in management estimate is an increase in sales of $1,741 and an increase of gross profit of $45, in the third quarter. For the nine months ended April 30, 2008, sales increased $1,831 and gross profit increased $27.

Sales

Sales for the three months ended April 30, 2008 were $14.8 million, the same amount as in the same period last year.

While sales dollars were the same amount as the prior year, mould programme releases increased in the third quarter. This increase was partially offset by:

- reduction in Reko's effective foreign exchange rate;

- greater complexity of the mould programmes and specialty machine orders worked on than originally contemplated resulting in less revenue earned per hour of work; and,

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

Sales for the nine months ended April 30, 2008 increased $3.2 million, or 8.5%, to $42.0 million compared to $38.8 million for the same period last year.

The increase in sales for the first nine months of the year primarily related to increased orders associated with our automation products and to the change in interpretation of our revenue recognition policy.

While the Company continues to actively quote and receive new orders, mould programme releases continue to experience customer-initiated delays, although at a slower pace in the third quarter than the rest of 2008. These delays impact the Company's ability to proactively manage the timing and amount of work completed during each quarter, as well as impact the ability of the Company to absorb our relatively fixed overhead costs.

Gross margin

The gross profit for the third quarter decreased $603 to $1,349 or 9.1% of sales, compared to $1,952, or 13.2% of sales, for the same period in the prior year.

The gross profit for the year-to-date decreased $3,016 to $2,464, or 5.9% of sales, compared to $5,480, or 14.1% of sales, for the same period in the prior year.

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

- demands for commodity-type pricing from our customer base;

- the mould programmes and specialty machine orders worked on involved greater complexity than originally contemplated resulting in less revenue earned per hour of work; and,

- lower effective foreign exchange rates on U.S. sales.

These factors were partially offset by:

- productivity and efficiency improvements resulting from last year's restructuring charges.

The decrease in gross margin as a percentage of total sales for the year-to-date period was primarily the result of:

- the issues identified above; and,

- lower margins in our automation facility as a result of building two large machines for internal purposes, as internal builds are transferred at cost to affiliates.

Selling and administration

Selling and administration expenses ("S,G&A") decreased by $509, or 25.2%, to $1,510, or 10.2%, of sales for the three months ended April 30, 2008, compared to $2,019, or 13.7%, of sales for the same period last year.

The decrease in S,G&A for the three months ended April 30, 2008, relates primarily to impacts of cost reduction actions taken in the fourth quarter of 2007.

Selling and administration expenses ("S,G&A") decreased by $326, or 5.7%, to $5,408, or 12.9%, of sales for the nine months ended April 30, 2008, compared to $5,734, or 14.8%, of sales for the same period last year.

The decrease in S,G&A for the nine months ended April 30, 2008, relates primarily to the impacts of cost reduction actions taken in the fourth quarter of 2007, partially offset by:

- accruals with respect to payments to be made under the employment contract of our former CEO, made in the second quarter; and,

- restructuring charges made in the second quarter, discussed above.

Excluding the accruals related to Mr. Reko's employment contract and the restructuring charges, S,G&A costs for the nine months ending April 30, 2008 would have been $4,388, or 10.4% of sales, a reduction of $1,346 from the same period in the prior year.

Earnings overview

The net loss for the quarter was $382, or $0.05 per share, compared to a net loss of $491, or $0.07 per share, in the prior year.

The year-to-date net loss was $2,473, or $0.35 per share, compared to a net loss of $1,096, or $0.15 per share, in the prior year.

Discontinued operations

As previously discussed, the Company no longer accounts for the remaining assets and liabilities of its former U.S. operations as discontinued operations. In the prior year, net loss from discontinued operations for the first nine months of the year was $387, or a loss of $0.05 per share, and for the three months ended April 30, was $728, or a loss of $0.10 per share.

LIQUIDITY AND CAPITAL RESOURCES

Cash flow from operations decreased $7,038 to cash used in operations of $3,828 for the quarter compared to cash generated by operations of $3,210 for the same period last year.

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

- decrease in net income offset by increases in non-cash charges related to future income taxes;

- increases in work-in-process as the volume of mould programme releases and automation orders increased in the quarter;

- slowing collections of accounts receivable balances as prior period's historic lows move from unbilled contract revenue to accounts receivable; and

- building a large machining centre for internal use, which was not financed after completion.

During the year-to-date period, a capital lease on a machining centre came up for renewal. However, the Company decided to finance the remaining balance on the machining centre internally, using existing bank lines.

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, absent a rapid increase in the value of the Canadian dollar against the U.S. dollar.



----------------------------------------------------------------------------
Payments Due by Period
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Less than 4 - 5 After
Contractual Obligations Total 1 year 1 - 3 years years 5 years
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Long-term debt $14,232 $ 831 $13,402 $ -- $ --
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Capital lease obligations 3,403 636 2,767 -- --
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Operating leases -- -- -- -- --
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Purchase obligations -- -- -- -- --
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Other long-term
obligations -- -- -- -- --
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Total contractual
obligations $17,636 $1,467 $16,169 $ -- $ --
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Capital assets and investment spending

In the third quarter of 2008, we invested $874 in capital assets. While a portion of this spending can be considered maintenance capital expenditure intended to refurbish or replace assets consumed in the normal course of business, a large portion of the investment consisted of manufacturing equipment required to support volumes associated with new long term contracts for the machining facility.

In fiscal 2008 to date, $3,113 has been invested in capital assets.

During the final quarter of the year, capital asset investments should be less than $600.

Cash resources

As at April 30, 2008, Reko had borrowed $13,405 on its revolving line of credit, compared to $8,461 at January 31, 2008. The revolver borrowings increased by approximately $4,900 in the quarter. While we expect borrowings to continue to display a mid-term trend of increasing over the next six quarters, multiple one-time adjustments may occur which will lower the amount of our borrowings. Immediately after the onetime adjustment, our revolver borrowings are expected to continue their rising trend. In particular, the Company has filed insurance claims against its accounts receivable insurer for approximately $4,000. Receipt of the insurance funds, while unpredictable, is expected late in Q4 or early in Q1. In addition, the Company internally financed $4,000 of machinery additions during the past 12 months, which depending on market conditions could be financed in the short, mid or long-term.

Reko has a $20,000 revolver available to it, of which $6,600 was unused and available at the end of the second quarter. While our revolver is currently capped at its $20,000 limit, our borrowing base exceeded this amount. 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. As previously discussed, Reko is currently positioned positively with respect to its ability to meet these financial covenants 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 year.

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 third quarter of fiscal 2008, ended April 30, 2008.



----------------------------------------------------------------------------
July/06 Oct/06 Jan/07 Apr/07
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Sales $12,367 $13,281 $10,718 $14,760
----------------------------------------------------------------------------
Net income (loss) from continuing
operations 899 (303) (302) (491)
----------------------------------------------------------------------------
Earnings (loss) per share from
continuing operations:
Basic 0.12 (0.04) (0.04) (0.07)
Diluted 0.12 (0.04) (0.04) (0.07)
----------------------------------------------------------------------------
Net income (loss) 891 (35) (229) (1,219)
----------------------------------------------------------------------------
Earnings (loss) per share:
Basic 0.12 (0.00) (0.03) (0.17)
Diluted 0.12 (0.00) (0.03) (0.17)
----------------------------------------------------------------------------

July/07 Oct/07 Jan/08 Apr/08
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Sales $10,618 $15,484 $11,766 $14,388
----------------------------------------------------------------------------
Net (loss) income from continuing
operations (456) 89 (2,180) (383)
----------------------------------------------------------------------------
(Loss) earnings per share from
continuing operations:
Basic (0.07) 0.01 (0.30) (0.06)
Diluted (0.07) 0.01 (0.30) (0.06)
----------------------------------------------------------------------------
(Loss) net income (3,032) 89 (2,180) (383)
----------------------------------------------------------------------------
(Loss) earnings per share:
Basic (0.42) 0.01 (0.30) (0.06)
Diluted (0.42) 0.01 (0.30) (0.06)
----------------------------------------------------------------------------


NORMAL COURSE ISSUER BID

Under the Company's current normal course issuer bid, during the third quarter, 10,100 shares were purchased for cancellation at an average cost of $2.25. The Company's directors believe that, from time-to-time, such purchases constitute an appropriate use of corporate funds.

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 generally accepted accounting practices ("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, while management is considering the implication of adopting IFRS early, it has not decided the specific date of its adopting IFRS. This change affects all entities that are considered publicly accountable entities. Management believes that Reko will be considered a publicly accountable entity due to its listing on the Toronto Stock Exchange.

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, with a number of situations requiring asset write-down but no opportunities to write assets back up. IFRS's overriding premise is fair value. Under fair value reporting both asset write-down and write-ups are likely.

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 next quarter, 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 the next MD&A issued by the Company.

OUTLOOK

Over the last year, fluctuations in the purchasing power of the U.S. dollar in Canadian terms have had dramatic impacts on the Company's operating results. In this environment both short and long term planning is extremely challenging. Continuing price pressures, a lack of mould programme releases from the North American original equipment manufacturers and the weakening U.S. dollar have resulted in sharply lower profitability expectations for Canadian tool and mould manufacturers. Despite these conditions, the Company has been able to diversify its reliance on the automotive industry and has seen some increases in mould programme releases.

The weak U.S. dollar necessitates ongoing investment aimed at achieving operating efficiencies and cost reductions, both of which were targeted during the Company's recent restructuring. As Reko continues to manage costs through reduced break-even levels, including targeted use of low-cost country alliances, and reduces our reliance on the automotive industry, we believe we have positioned ourselves to best respond to a very challenging operating environment.

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 2007 Annual Report, in our 2007 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