Reko International Group Inc.
TSX : REK

Reko International Group Inc.

December 07, 2006 14:31 ET

Reko International Group Inc. Announces First Quarter Results for Fiscal 2007

WINDSOR, ONTARIO--(CCNMatthews - Dec. 7, 2006) - Reko International Group Inc. (TSX:REK) today announced results for its first quarter ended October 31, 2006.



Financial Highlights (complete statements follow):
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Period Ended October 31, Three Months
(in $,000 except per share amounts) Unaudited
Fiscal 2007 Fiscal 2006
---------------------------------------------------------------------------
Sales $13,281 $16,234
Net (Loss) Income (303) 613
EPS (basic) (0.04) 0.08
Working Capital 22,859 16,894
Shareholders' Equity 50,932 50,801
Shareholders' Equity per Share 6.81 6.66
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Consolidated sales from continuing operations for the quarter ended October 31, 2006, were $13.3 million, compared to $16.2 million last year - a decrease of $3.0 million, or 18.2%. A large mould program which had been awarded to Reko was placed on hold during the quarter pending further engineering changes by our customer. Due to weaker than normal program releases for moulds, the Company was unable to replace this business in such a short time period. The effects of the delay are expected to continue to negatively affect revenues in the second quarter.

Due to the low level of activity during the quarter, the Company's fixed operating costs were spread over a lower revenue base. As a result, in the first quarter of fiscal 2007, Reko's operating margin declined to $1.8 million, or 13.7% of sales, compared to $3.2 million, or 19.8% of sales, for the first quarter of fiscal 2006.

Selling and administrative expenses were comparable this quarter to the same period last year. However, due to the reduced sales volume, these expenses were 14.4% of sales for the period ended October 31, 2006 versus 11.5% for the equivalent period during the prior year.

Net loss from continuing operations for the quarter was $303,000, or $0.04 per share, compared to a net income of $613,000, or $0.08 per share, in the previous year.

The net income from discontinued operations was $268,000, or $0.04 per share, compared to a loss of $417,000, or $0.06, last year. Die and metal stamping operations were positively impacted by profitable sales from inventory of kirksite, a zinc alloy. Reko International estimates that disposition of the die and metal stamping operation will occur at a price that will not necessitate any write-down.

"The automotive sector continues to present a very challenging business environment for its participants," stated Steve Reko, Chairman and CEO. "The deferral of a large project, the revenues for which we were unable to replace on such short notice, very negatively affected the level of activity in the first quarter. As a result, the Company's performance for the quarter has been disappointing."

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



REKO INTERNATIONAL GROUP INC. First Quarter Report

INTERIM CONSOLIDATED BALANCE SHEETS
As at October 31, 2006 with comparative figures for July 31, 2006
(in 000's)
---------------------------------------------------------------------------
October 31, July 31,
(unaudited) (audited)
2006 2006
---------------------------------------------------------------------------
ASSETS
Current
Accounts receivable -trade $ 18,378 $ 19,124
-sundry 1,202 1,884
Income taxes receivable 48 --
Work-in-progress 21,920 21,531
Prepaid expenses and deposits 921 735
Discontinued operations (Note 3) 3,852 4,623
---------- ----------
46,321 47,897
---------- ----------

Capital assets 39,594 40,276
Discontinued operations (Note 3) 3,457 3,510
---------- ----------
$ 89,372 $ 91,683
---------- ----------
---------- ----------

LIABILITIES
Current
Bank indebtedness $ 11,605 $ 8,225
Accounts payable and accrued liabilities 5,793 5,824
Income taxes payable -- 235
Future income taxes 242 442
Current portion of long-term debt 2,840 2,708
Discontinued operations (Note 3) 2,982 5,084
---------- ----------
23,462 22,518
---------- ----------

Long-term debt 14,651 15,056
Discontinued operations (Note 3) 66 2,536
---------- ----------
14,717 17,592
Future income taxes 261 587

SHAREHOLDERS' EQUITY
Share capital (Note 4) 21,859 21,859
Contributed surplus (Note 2) 666 649
Retained earnings 29,958 29,993
Cumulative translation adjustment (1,551) (1,515)
---------- ----------
50,932 50,986
---------- ----------
$ 89,372 $ 91,683
---------- ----------
---------- ----------



INTERIM CONSOLIDATED STATEMENTS OF (LOSS) INCOME AND RETAINED EARNINGS
Three months ended October 31, 2006 with comparative figures for 2005
(in 000's except per share data)
---------------------------------------------------------------------------
For the three months
ended October 31,
(unaudited)
2006 2005
---------------------------------------------------------------------------
Sales $ 13,281 $ 16,234
Costs and expenses
Cost of sales 10,451 11,981
Selling and administrative 1,919 1,872
Depreciation and amortization 1,015 1,038
-----------------------
13,385 14,891
-----------------------
(Loss) income from continuing operations
before the following (104) 1,343
-----------------------
Gain on sale of capital assets -- (21)

Interest
Long-term debt 264 249
Other - net 152 180
-----------------------
416 408
-----------------------
(Loss) income before income taxes (520) 935
-----------------------
Income taxes
Current 15 320
Future (recovered) (232) 2
-----------------------
(217) 322
-----------------------
Net (loss) income from continuing operations (303) 613
Net income (loss) from discontinued operations
net of tax (Note 3) 268 (417)
-----------------------
Net (loss) income for the period (35) 196
Retained earnings, beginning of period 29,993 29,065
-----------------------
Retained earnings, end of period $ 29,958 $ 29,261
-----------------------
-----------------------

(Loss) income per common share from continuing
operations
Basic $ (0.04) $ 0.08
-----------------------
-----------------------
Fully diluted $ (0.04) $ 0.08
-----------------------
-----------------------

Income (loss) per common share from discontinued
operations
Basic $ 0.04 $ (0.06)
-----------------------
-----------------------
Fully diluted $ 0.04 $ (0.06)
-----------------------
-----------------------



INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended October 31, 2006 with comparative figures for 2005
(in 000's)
---------------------------------------------------------------------------
For the three months
ended October 31,
(unaudited)
2006 2005
---------------------------------------------------------------------------
OPERATING ACTIVITIES
Net (loss) income for the period $ (303) $ 613
Add non-cash items:
Depreciation and amortization 1,015 1,038
Future income taxes (232) 2
Stock option expense 17 17
-----------------------
497 1,670
Net change in non-cash working capital 929 892
-----------------------
Cash provided - continuing operating activities 1,426 2,562
-----------------------

FINANCING ACTIVITIES
Net payments on bank indebtedness (734) (1,176)
Payments on long-term debt (273) (736)
Cost of repurchase of shares -- (5)
-----------------------
Cash used - continuing financing activities (1,007) (1,917)
-----------------------

INVESTING ACTIVITIES
Investment in capital assets (343) (470)
-----------------------
Cash used - continuing investing activities (343) (470)
-----------------------
Effect of foreign exchange rate changes on
cash and cash equivalents (76) (175)
-----------------------

Net change in cash and cash equivalents during
the period from continuing operations -- --

Net change in cash and cash equivalents during
the period from discontinued operations -- --

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


Notes to Interim Consolidated Financial Statements at October 31, 2006 (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.

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 3.9%;

- Average expected life of 5 years;

- Average expected volatility of 40.96%.

During the period, no options were granted and $17 was recorded as compensation cost for the quarter.

3. Discontinued operations

During the period, the Company continued discussions to dispose of its operations in Proto-Techniques, Inc. It is expected that the sale of Proto-Techniques, Inc. will occur at a value above book value. The results of Proto-Techniques, Inc. have been included with the other discontinued operations, which include Superior Plastics, Inc., Novi Laser, Inc., Excel Decorating and Finishing, Inc. and The Mold Company, and these results have been classified separately in these consolidated financial statements.

The balance sheets on October 31, 2006 and July 31, 2006 include the following assets and liabilities related to the discontinued activities:



October 31, July 31,
2006 2006
---------- ---------

Accounts receivable - trade $1,717 $1,241
- sundry 767 474
Work-in-progress 1,136 2,706
Prepaid expense and deposits 232 202
---------- ---------
3,852 4,623

Equipment 3,457 3,510

Bank indebtedness -- 3,762
Accounts payable and accrued liabilities 232 995
Current portion of long-term debt 2,750 327
---------- ---------
2,982 5,084

Long-term debt 66 2,536


During the period, management has decided to transfer certain capital assets of a discontinued operation to a continuing operation, and thus, these assets have been reclassified in the current period and the comparative period to continuing operations.

In the current period, the Company repaid bank indebtedness of certain discontinued operations with the use of the continuing operations line of credit.

The sales related to discontinued activities amount to $1,673 (2005: $7,991). In addition, an amortization value of nil (2005: $158) is included in the operating expenses related to discontinued operations. The Company has recognized a future tax expense of $136 and a future tax benefit of $203 in 2005, netted against the loss from discontinued operations.



October 31, October 31,
2006 2005
---------- ----------
Sales for the period $14,954 $24,225
Sales from continuing operations 13,281 16,234
Sales from discontinued operations 1,673 7,991

Operating expenses related to discontinued
operations 1,405 8,408

Net income (loss) from discontinued operations 268 (417)

The cash flow restatement for discontinued
operations as follows:

Net cash provided (used) by operating
activities 359 (518)

Net cash (used) provided by financing
activities (370) 476

Net cash provided by investing activities -- (55)

Effect of foreign exchange rate changes on
cash and cash equivalents 11 97
---------- ----------
Net cash and cash equivalents used in
discontinued operations $ -- $ --
---------- ----------

Long-term debt as related to discontinued
operations is as follows:

October 31, July 31,
2006 2006
---------- ----------
Industrial Revenue Bonds - principal
repayments commenced December 2003, interest
paid monthly, due in full January 2007 $ 2,645 $ 2,665

Loan payable - 4.85% repayable $12 monthly
including interest, due in full in May 2008,
secured by equipment 171 198
---------- ----------

2,816 2,863

Deduct principal portion included in current
liabilities from discontinued operations 2,750 327
---------- ----------
Long-term portion $ 66 $ 2,536
---------- ----------
---------- ----------


During the period, the Company disposed of inventory of Proto-Techniques, Inc., resulting in a gain of $779. The Company has also made arrangements to repay the entire debt obligation in January 2007 with respect to the Industrial Revenue Bonds and has classified the entire amount as current debt.

The estimate of the loss from discontinued operations is based on management's best estimates and assumptions with respect to a variety of items. There is a risk that the assumptions and resulting estimates may change with the passage of time and the availability of additional information and facts. Changes to the estimate of the loss on disposal will be recognized as a gain or loss on discontinued operations during the period that such changes are determinable.

4. Share capital

In July 2006, the Company announced its intention to make a normal course issuer bid to re-purchase at market prices for cancellation up to 373,775 common shares representing approximately 5% of the outstanding common shares as at July 31, 2006. During the period, the Company did not repurchase any shares and no options were exercised.

The following is management's interim discussion and analysis of operations and financial position and should be read in conjunction with the consolidated financial statements and Management's Discussion and Analysis in the Company's 2006 Annual Report.

This MD&A has been prepared by reference to the new 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 its continuous disclosure materials such as its annual information form, is available on its 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 generally accepted principles ("GAAP"). The Company calculates gross margin as sales less cost of sales. 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 November 30, 2006.

Management's Discussion and Analysis

The financial results for the first quarter ended October 31, 2006 have been restated to reflect the classification of Proto-Techniques, Inc. as discontinued operations. Results from this operation have been classified as "Discontinued Operations."

Sales

Revenue from continuing operations for the three months ended October 31, 2006 were $13.3 million compared to $16.2 million for the same period last year. The quarter began with Reko being awarded a large mould program in our order book that would have had a positive impact on our capacity utilization. Unfortunately, this mould program was placed on hold by our customer due to engineering changes. In addition, due to the weaker than normal releases of mould programs, we were unable to replace this project with sufficient alternate work. Revenue from our larger custom machining and automation was insufficient to offset the negative impact of the deferred order.

Gross Margin

Gross margin in the first quarter was $1.8 million, or 13.7% of sales, compared to $3.2 million, or 19.8% of sales, for the same period last year. Due to the lower sales volume, as a result of the deferred mould program, there was insufficient margin contribution to cover our fixed operating costs during the period. During the quarter, the Company focused on controlling the variable expenses, as well as opportunities for improvement in its manufacturing processes.

Selling and Administration

Selling and administrative expenses were $1.9 million, which were comparable to the level experienced in the previous year. As a percentage of revenue, however, selling and administrative costs were 14.4% of sales compared to 11.5% in the prior year. This percentage increase was due to the lower sales volume resulting from the deferral of the large mould program. The percentage of selling and administrative expenses relative to sales should decline as sales return to normal levels.

Earnings Overview

Net loss for the quarter was $303,000, or $0.04 per share, compared to a net income of $613,000, or $0.08, for the same period last year. The deterioration in Reko's profitability was a direct result of the very low level of revenues experienced in the first quarter.

Discontinued Operations

The net income from discontinued operations for the quarter ended October 31, 2006 was $268,000, or $0.04 per share. This compares to the previous year's net loss of $417,000, or $0.06 per share. The net income resulted from the profitable sale from inventory of kirksite, a zinc alloy.

Liquidity and Capital Resources

Cash flow, after working capital requirements, was $1.4 million for the quarter, compared to $2.6 million for the same period last year. Long-term debt was reduced through scheduled principal repayments. Minimal investments were made in capital assets during the quarter.

During the quarter, trade receivables and work-in-progress remained relatively stable. Bank indebtedness increased from $8.2 million to $11.6 million. The major portion of this increase was the result of funds from continuing operations being used for the repayment of the discontinued operations bank indebtedness.



---------------------------------------------------------------------------
Payments Due by Period
--------------------------------------------
Less than 1 - 3 4 - 5 After
Contractual Obligations ($000) Total 1 year years years 5 years
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Long-term debt $12,866 $ 552 $1,220 $11,094 $ --
---------------------------------------------------------------------------
Capital lease obligations 4,625 2,288 1,632 705 --
---------------------------------------------------------------------------
Operating leases -- -- -- -- --
---------------------------------------------------------------------------
Purchase obligations -- -- -- -- --
---------------------------------------------------------------------------
Other long-term obligations -- -- -- -- --
---------------------------------------------------------------------------
Total contractual
obligations $17,491 $2,840 $2,852 $11,799 $ --
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Quarterly Results

The following table sets out certain financial information for each of the eight fiscal quarters up to and including the first quarter of fiscal 2007 ended October 31, 2006.



($ thousands except per share amounts)
---------------------------------------------------------------------------

Jan/05 Apr/05 July/05 Oct/05
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Sales $16,025 $16,887 $15,400 $16,234
---------------------------------------------------------------------------
Net (loss) income from continuing
operations (896) (79) 258 613
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(Loss) earnings per share from
continuing operations:
Basic (0.11) (0.01) 0.03 0.08
Diluted (0.11) (0.01) 0.03 0.08
---------------------------------------------------------------------------
Net (loss) income (1,200) (346) (3,505) 196
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(Loss) earnings per share:
Basic (0.15) (0.04) (0.46) 0.03
Diluted (0.15) (0.04) (0.46) 0.03
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Jan/06 Apr/06 July/06 Oct/06
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Sales $16,918 $21,978 $12,329 $13,281
---------------------------------------------------------------------------
Net income (loss) from continuing
operations 1,075 644 899 (303)
---------------------------------------------------------------------------
Earnings (loss) per share from
continuing operations:
Basic 0.14 0.09 0.12 (0.04)
Diluted 0.14 0.09 0.12 (0.04)
---------------------------------------------------------------------------
Net income (loss) 82 (241) 891 (35)
---------------------------------------------------------------------------
Earnings (loss) per share:
Basic 0.01 (0.03) 0.12 (0.00)
Diluted 0.01 (0.03) 0.12 (0.00)
---------------------------------------------------------------------------


Normal Course Issuer Bid

Under the Company's current normal course issuer bid, no shares were purchased during the quarter ended October 31, 2006. Subsequent to the end of the quarter, the Company purchased, for cancellation, 25,500 shares at a cost of $3.49. The Company's directors believe that, from time-to-time, such purchases constitute an appropriate use of corporate funds.

Outlook

As previously mentioned, the Company's revenue was negatively affected by a delay in a major mould program. Portions of this program have been released near the end of the quarter, as well as subsequent to the quarter. Due to the late release of the program, we believe the second quarter will be negatively impacted. We will continue to aggressively manage our costs and resources until we reach normal operating capacity levels.

Our outlook, going forward, has not changed significantly. We are being challenged by the uncertainties in the automotive environment. Pricing pressures continue to escalate as the North American automotive industry endeavours to restructure and regain lost market share. We will continue to be diligent in our focus to reduce our manufacturing costs and implement the required structured changes to reduce overhead costs in order to increase profitability.

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 2006 Annual Report, in our 2006 Annual Information Form and, from time to time, in other reports and filings made by the Company with securities regulatory.

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.
    Michael Dunn
    Vice President Finance
    (519) 737-6974
    Website: www.rekointl.com