Reko International Group Inc.
TSX VENTURE : REK

Reko International Group Inc.

March 10, 2011 12:10 ET

Reko Refiles First Quarter 2011 Results

WINDSOR, ONTARIO--(Marketwire - March 10, 2011) - Reko International Group Inc. ("the Company") (TSX VENTURE:REK) announced today that it has re-filed Form 52-109F-2 Certification of Interim Filings of Diane St. John, the Chief Executive Officer, and Carl A. Merton, the Chief Financial Officer, (the "Officers' Certificates") dated December 2, 2010 for the period ending October 31, 2010.

While the Company's interim financial statements for the period ended October 31, 2010 were re-filed without any amendments, the Company corrected the financial disclosure in Note 4 to the interim financial statements. The Company incorrectly characterized the details of the final two payments on its mortgage payable as being due on June 1, 2011 in the amount of $9,813 and on July 1, 2011 in the amount of $1,319 in Note 4 of the financial statements, for total payments of $11,132. Note 4 should have indicated that the final two payments were both due on July 1, 2011, in the total amount of $10,616, which is consistent with the amounts included in the interim financial statements.

As of the date of this news release, the Officers' Certificates dated December 2, 2010 should be disregarded, as the Officers' Certificates dated March 10, 2011 supersede and replace the Officers' Certificates dated December 2, 2010.

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

REKO INTERNATIONAL GROUP INC.
First Quarter Report
 
 
INTERIM CONSOLIDATED BALANCE SHEETS    
As at October 31, 2010 with comparative figures for July 31, 2010 (in 000's)    
   October 31,  July 31,
   (unaudited)  (audited)
   2010  2010
ASSETS        
Current        
  Cash and cash equivalents $ -- $ 1,303
  Accounts receivable   13,699   10,657
  Other receivables   307   367
  Non-hedging financial derivatives   690   591
  Income taxes receivable   21   22
  Work-in-progress   17,014   19,826
  Prepaid expenses and deposits   667   536
    32,398   33,302
 
Capital assets   31,966   32,825
Future income taxes   2,818   2,814
SR & ED tax credits   4,253   4,460
  $ 71,435 $ 73,401
 
LIABILITIES        
Current        
  Bank indebtedness $ 15,725 $ 14,292
  Accounts payable and accrued liabilities   4,836   6,201
  Current portion of long-term debt   12,484   12,678
    33,045   33,171
 
Long-term debt   1,608   1,925
Future income taxes   1,910   2,149
 
SHAREHOLDERS' EQUITY        
Share capital   18,772   18,772
Contributed surplus   1,751   1,750
Retained earnings   14,349   15,634
    34,872   36,156
  $ 71,435 $ 73,401
 
 
See accompanying notes to the interim consolidated financial statements
 
 
INTERIM CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS AND RETAINED EARNINGS
Three months ended October 31, 2010 with comparative figures for October 31, 2009 (in 000's except per share data)
  For the three months  
  ended October 31,  
  (unaudited)  
    2010     2009  
Sales $ 9,841   $ 9,255  
Costs and expenses            
  Cost of sales   8,525     8,046  
  Selling and administrative   1,496     1,463  
  Amortization   937     1,066  
    10,958     10,575  
Loss before the following   (1,117 )   (1,320 )
   
   
Interest on long-term debt   226     278  
Interest on other interest bearing obligations, net   217     112  
    443     390  
Loss before income taxes   (1,560 )   (1,710 )
Future income taxes recovered   (275 )   (533 )
    (275 )   (533 )
Net loss and comprehensive loss   (1,287 )   (1,177 )
   
   
Retained earnings, beginning of period   15,634     23,103  
Net loss   (1,287 )   (1,177 )
Retained earnings, end of period $ 14,349   $ 21,926  
   
Loss per common share            
Basic $ (0.20 ) $ (0.18 )
Diluted $ (0.20 ) $ (0.18 )
 
 
See accompanying notes to the interim consolidated financial statements
 
 
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended October 31, 2010 with comparative figures for October 31, 2009 (in 000's)
  For the three months  
  ended October 31,  
  (unaudited)  
    2010     2009  
OPERATING ACTIVITIES            
Net loss for the period $ (1,287 ) $ (1,177 )
Adjustments for:            
  Amortization   937     1,066  
  Future income taxes   (275 )   (533 )
  SR & ED credits   242     (69 )
  (Gain) loss on sale of capital assets   (7 )   (60 )
  Stock option expense   1     4  
    (389 )   (800 )
Net change in non-cash working capital   (1,764 )   3,251  
Cash provided by operating activities   (2,153 )   2,451  
   
CASH FLOWS FROM FINANCING ACTIVITIES            
Proceeds from (net payments on) bank indebtedness   1,433     (1,946 )
Payments on long-term debt   (511 )   (1,011 )
Cash used in financing activities   922     (2,957 )
   
CASH FLOWS FROM INVESTING ACTIVITIES            
Investment in capital assets   (78 )   (111 )
Proceeds on sale of capital assets   7     586  
Cash provided by investing activities   (72 )   475  
Net change in cash and cash equivalents   (1,303 )   --  
Cash and cash equivalents, beginning of period   1,303     --  
Cash and cash equivalents, end of period $ --   $ --  
             
             
See accompanying notes to the interim consolidated financial statements

Notes to unaudited interim consolidated financial statements for the three months ended October 31, 2010

(in 000's, except for share and per share figures)

1. Significant accounting policies

Management prepared these unaudited 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 judgment. These unaudited 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 unaudited interim consolidated financial statements are consistent with those used in preparing the annual consolidated financial statements, except as noted below.

2. Share capital

The Company had 6,420,920 common shares outstanding at October 31, 2010. During the quarter, no options were granted and no options were exercised.

3. Stock based compensation

The Company has established a stock option plan for directors, officers and key employees. The terms of the plan state that the aggregate number of shares, which may be issued and sold, will not exceed 10% of the issued and outstanding common shares of the Company on a non-diluted basis. The issue price of the shares shall be determined at the time of the grant based on the closing market price of the shares on the specified date of issue. Options shall be granted for a period of five years with a vesting progression of 30% in the year of the grant, 30% in the second year and 40% in the third year with the option expiring after five years. Options given to outside directors vest immediately and can be exercised immediately.

During the quarter, no options were granted. Stock based compensation for the three months ended October 31, 2010 was $1.

4. Financial instruments and risk management

Categories of financial assets and liabilities

Under Canadian generally accepted accounting principles, financial instruments are classified into one of the following five categories: held for trading, held to maturity investments, loans and receivables, available-for-sale financial assets and other financial liabilities. The carrying values of the Company's financial instruments are classified into the following categories:

  October 31, July 31,
  2010 2010
  $ $
Held for trading financial assets        
  Cash and cash equivalents $ -- $ 1,303
  Non-hedging financial derivatives   690   591
  $ 690 $ 1,894
Held for trading financial liabilities        
  Bank indebtedness $ 15,725 $ 14,292
Loans and receivables        
  Accounts receivable $ 15,050 $ 10,657
Other financial liabilities        
  Accounts payable and accrued liabilities $ 4,836 $ 6,201
  Current portion of long-term debt   12,484   12,678
  Long-term debt   1,608   1,925
  $ 18,928 $ 20,804

The Company has determined the estimated fair values of its financial instruments based on appropriate valuation methodologies; however, considerable judgment is required to develop these estimates. The fair values of the Company's financial instruments are not materially different from their carrying value, with the exception of the Company's long-term debt of $14,092. Based on current interest rates for debt with similar terms and maturities, the fair value of the long-term debt is estimated to be $14,398.

Impairment losses recognized on trade receivables

During the quarter, the Company recorded the following transactions with respect to its allowance for doubtful accounts:

  October 31,  
  2010  
Opening allowance for doubtful accounts $ 679  
Less: write-off of allowance and receivables   --  
Plus: bad debt expense   --  
Plus: effect of foreign exchange on U.S. denominated balances   (6 )
Closing allowance for doubtful accounts $ 673  

Risks arising from financial instruments and risk management

The Company's activities expose it to a variety of financial risks: market risk (including foreign exchange and interest rate), credit risk and liquidity risk. The Company's overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Company's financial performance from quarter to quarter. The Company uses derivative financial instruments to achieve this objective. The Company does not purchase any derivative financial instruments for speculative purposes.

Foreign exchange risk

The Company operates in Canada and its functional and reporting currency is Canadian dollars, however a significant portion of its sales are denominated in U.S. dollars. Foreign exchange risk arises because the amount of the receivable or payable for transactions denominated in a foreign currency may vary due to changes in exchange rates ("transaction exposures") and because certain long-term contractual arrangements denominated in a foreign currency may vary due to changes in exchange rates ("translation exposures").

The Company's balance sheet includes U.S. dollar denominated cash, accounts receivable, work-in-progress, capital assets, future income taxes, bank indebtedness and accounts payable and accrued liabilities. The Company is required to revalue these U.S. dollar denominated items to their current Canadian dollar value at each period end.

The objective of the Company's foreign exchange risk management activities is to minimize translation exposures and the resulting volatility of the Company's earnings. The Company manages this risk by entering into foreign exchange option contracts.

Based on the Company's foreign currency exposures, as at October 31, 2010, a change in the U.S. dollar/Canadian dollar foreign exchange rate to reflect a 100 basis point strengthening of the U.S. dollar for the month of October would, assuming all other variables remain constant, have increased net income by $19, with an equal but opposite effect for an assumed 100 basis point weakening of the U.S. dollar. We caution that this sensitivity is based on an assumed net U.S. dollar denominated asset or liability balance at a point in time. Our net U.S. dollar denominated asset or liability position changes on a daily basis, sometimes materially.

Foreign exchange contracts

The Company utilizes financial instruments to manage the risk associated with fluctuations in foreign exchange. At October 31, 2010, the Company had entered into foreign exchange contracts to sell an aggregate amount of $28,400 (USD). These contracts hedge our expected exposure to U.S. dollar denominated net assets and mature at the latest on May 15, 2012, at an average exchange rate of $1.0516 Canadian. The mark-to-market value on these financial instruments as at October 31, 2010 was an unrealized gain of $690; the change in this value from July 31, 2010 has been recorded in net loss for the quarter.

As at October 31, 2010 Maturity Notional value Average rate Notional USD equivalent Carrying & fair value asset (liability)  
Sell USD / Buy CAD 0 – 6 months $ 10,823   1.0611 $ 10,400 $ 423  
Sell USD / Buy CAD 7 – 12 months   10,202   1.0492   10,000   202  
Sell USD / Buy CAD 12 – 24 months   8,065   1.0417   8,000   65  
   
    $ 29,090   1.0516 $ 28,400 $ 690  
   
As at July 31, 2010 Maturity Notional value Average rate Notional USD equivalent Carrying & fair value asset (liability)  
Sell USD / Buy CAD 0 – 6 months $ 11,216 $ 1.0640 $ 10,800 $ 461  
Sell USD / Buy CAD 7 – 12 months   7,199   1.0590   7,000   198  
Sell USD / Buy CAD 13 – 24 months   6,976   1.0340   7,000   (23 )
   
    $ 25,391 $ 1.0538 $ 24,800 $ 591  

Interest rate risk

The Company's interest rate risk primarily arises from its floating rate debt, in particular its bank indebtedness. At October 31, 2010, $15,295 of the Company's total debt portfolio is subject to movements in floating interest rates.

Based on the value of interest-bearing financial instruments, subject to movements in floating interest rates, as at October 31, 2010, an assumed 0.5 percentage point increase in interest rates on the first day of the quarter would, assuming all other variables remain constant, have decreased net income by $19, with an equal but opposite effect for an assumed 0.5 percentage point decrease.

The objective of the Company's interest rate risk management activities is to minimize the volatility of the Company's earnings. Since the Company's exposure to floating interest rates is limited to its bank indebtedness, the Company's ability to effectively manage the volatility of interest rates is limited to locking portions of the Company's bank indebtedness into fixed rates for relatively short periods of time, usually 30 or 90 days.

Credit risk

Credit risk arises from cash and cash equivalents held with banks and financial institutions, derivative financial instruments as well as credit exposure to clients, including outstanding accounts receivable and unbilled contract revenue. The maximum exposure to credit risk is equal to the carrying value of the financial assets.

The objective of managing counterparty credit risk is to prevent losses in financial assets. The Company assesses the credit quality of the counterparties, taking into consideration their financial position, past experience and other factors. Management also monitors the utilization of credit limits regularly. In cases where credit quality of a client does not meet the Company's requirements sales opportunities may be terminated, progress payments may be required or continuing security interests in our products may be required.

In the normal course of business, the Company is exposed to credit risk from its customers, the majority of whom are in the automotive industry. While these accounts receivable are subject to normal industry credit risks, the ultimate source of funds to pay our accounts receivable balances may come from the Detroit 3 original equipment manufacturers, which are currently rated below investment grade by credit rating agencies, two of whom left United States bankruptcy protection in the last year, and in the event that they are unable to satisfy their financial obligations or seek protection from their creditors, the Company may incur additional expenses as a result of such credit exposure. The Company may be able to mitigate a portion of this credit risk through the use of accounts receivable insurance, when and if available to individual customers.

For the three months ended, October 31, 2010, sales to the Company's three largest customers represented 32% of its total sales. These same customers represent approximately 41% of its total accounts receivable, as at October 31, 2010.

Liquidity risk

Liquidity risk arises through an excess of financial obligations over available financial assets due at any point in time. The Company's objective in managing liquidity risk is to maintain sufficient readily available reserves in order to meet its liquidity requirements at any point in time. The Company achieves this by maintaining sufficient cash and cash equivalents and through the availability of funding from credit facilities. As at October 31, 2010, the Company has undrawn lines of credit available to it of approximately $4,275; however, under its current margining provisions with its lender, the maximum it can draw on its available undrawn lines of credit is limited to $3,262.

The Company's mortgage on its land and building is due before the end of the year on July 1, 2011, in the total amount of $10,616. The Company has begun discussions with its existing and prospective lenders, and has obtained an updated valuation of its capital assets in support of its efforts to refinance this obligation.

The Company met its financial covenants at the end of the first quarter of 2011. The Company's current financial forecasts suggest that it will earn sufficient levels of EBITDA to meets its minimum monthly EBITDA covenant for the second quarter of 2011, the only period for which the covenant is already set. Despite the Company's current forecasts suggesting the Company will achieve this financial covenant, the Company is exposed to a number of risks that could prevent it from achieving its primary lender defined monthly minimum EBITDA covenant.

5. Management of capital

The Company's objective in managing capital is to ensure sufficient liquidity to pursue its organic growth strategy, while at the same time taking a conservative approach to financial leverage and management of financial risk. The Company's capital is composed of net debt and shareholders' equity. Net debt consists of interest-bearing debt less cash and cash equivalents. The Company's primary uses of capital are to finance increases in non-cash working capital and capital expenditures for capacity expansion. The Company currently funds these requirements out of its internally generated cash flows and when internally generated cash flow is insufficient, its revolving bank credit facility.

The primary measure used by the Company to monitor its financial leverage is its ratio of net debt to shareholders' equity, which it aims to maintain at less than 1.0:1. As at October 31, 2010, the above capital management criteria can be illustrated as follows:

  October 31, July 31,  
  2010 2010  
  $ $  
Net debt      
  Bank indebtedness 15,725 14,292  
  Current portion of long-term debt 12,484 12,678  
  Long-term debt 1,608 1,925  
  Less: cash and cash equivalents -- (1,303 )
Net debt 29,871 27,997  
Shareholders' equity 34,872 36,156  
Ratio 0.86 0.77  

As part of the Company's existing debt agreements, three financial covenants are monitored and communicated, as required by the terms of credit agreements, on a monthly, quarterly or annual basis depending on the covenant by management to ensure compliance with the agreements. The annual covenant is a debt service ratio – calculated as EBITDA less cash taxes (for the previous 52 weeks) divided by interest coverage plus repayments of long-term debt (based on the upcoming 52 weeks). The quarterly covenants are: i) debt to equity ratio – calculated as total debt, excluding future income taxes divided by shareholders' equity minus minority interest, if any; and (iii) current ratio – calculated as current assets, which for the first quarter of 2011 excludes all amounts related to the mortgage obligation, divided by current liabilities. The monthly covenant is a minimum EBITDA target.

REKO INTERNATIONAL
GROUP INC.
5390 Brendan Lane
Oldcastle, Ontario
N0R 1L0
http://www.rekointl.com/
 
SUBSIDIARIES/DIVISIONS:
 
Canada: 
• Reko Tool & Mould (1987) Inc.
 
     Divisions –
 
     - Reko Automation and Machine Tool
     - Concorde Machine Tool
 
 
United States:
• Reko International Sales Inc.
• Reko International Holdings Inc.
• Reko Global Services, LLC

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

Contact Information

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