Teknion Corporation
TSX : TKN

Teknion Corporation

April 11, 2007 17:00 ET

Teknion Corporation Announces First Quarter 2007 Results

TORONTO, ONTARIO--(CCNMatthews - April 11, 2007) - Teknion Corporation (TSX:TKN) announced its results today for the three months ended February 28, 2007.



Financial Highlights (complete statements and MD&A follow)

---------------------------------------------------------------------------
---------------------------------------------------------------------------
(in $000s except per share amounts) Three months ended
February 28
---------------------------------------------------------------------------
2007 2006
---------------------------------------------------------------------------
Sales $150,955 $134,033
EBITDA (1) $43 $(1,914)
Loss before income taxes $(5,383) $(7,471)
Net loss $(5,459) $(7,532)
EPS diluted $(0.09) $(0.12)
Shareholders' equity $212,873 $205,327
Common shares outstanding 64,116,131 64,116,131
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---------------------------------------------------------------------------

(1) EBITDA is defined as earnings before interest, income taxes,
depreciation and amortization and loss on assets held for sale.



Geographic Segmentation

---------------------------------------------------------------------------
(in $000s) Three months ended
February 28
---------------------------------------------------------------------------
2007 2006
---------------------------------------------------------------------------
Sales:
Canada $49,065 $50,864
United States 84,617 67,725
International 17,273 15,444
---------------------------------------------------------------------------
$150,955 $134,033
---------------------------------------------------------------------------


For the first quarter of 2007 the Company reported a loss before income taxes of $5.4 million and sales of $151.0 million as compared to a loss of $7.5 million and sales of $134.0 million in the prior year quarter. The first quarter of the Company's fiscal year is historically weaker than subsequent quarters.

Sales in the U.S. increased by 24.9% (26.5% in source currency), as compared to the first quarter of the prior year. Canadian sales declined by 3.5% reflecting the project nature of the Company's business. International sales increased by 11.8% reflecting strong sales in India, the U.K. and the Caribbean.

"First quarter revenue was in line with our expectations," commented David Feldberg, President and CEO. Mr. Feldberg continued, "While industry growth is moderating, the key economic determinants of demand - such as office vacancy and white-collar employment levels - remain solid. We expect that our revenues in the second quarter of this year will again show year-over-year growth."

Conference Call

Management will hold a conference call to discuss the first quarter results on Thursday, April 12, 2007 at 8:00 a.m. (ET). The dial-in number for the call is 416-340-2216 or 1-866-898-9626.

The conference call will also be broadcast live over the Internet. To access the webcast, please access the "Financial Reports" page of the "Investor Information" section at www.teknion.com and follow the conference call links at least 15 minutes prior to the beginning of the call.

The telephone number to listen to the call after it is completed (Instant Replay) is 416-695-5800 or 1-800-408-3053. The Passcode for the Instant Replay is 3218408. The Instant Replay will be available until midnight, April 19, 2007. The conference call will also be archived on Teknion's web site. Please access the "Financial Reports" page of the "Investor Information" section at www.teknion.com.

Cautionary Statement

Certain of the above statements are forward-looking statements with respect to the Company's future prospects. These statements involve risks and uncertainties that could cause the Company's financial results to differ materially from stated expectations as a consequence of a number of factors, including but not limited to: fluctuations in the Company's operating results due to product demand arising from competitive and general economic and business conditions in the Company's North American and international markets and operations; significant fluctuations in exchange rates for currencies in which the Company does business; changes in the cost of raw materials; the ability to maintain the proprietary nature of the Company's intellectual property in the design and manufacturing of its products; changes in the size and timing of customers' order patterns; changes in the Company's markets, including technology change, changes in customer requirements, frequent new product introductions by competitors and emerging standards; the Company's dependence on key personnel; the Company's dependence on key commitments from significant dealers and distributors; potential liabilities arising from product defects; environmental matters and other factors set forth in the Company's reports and filings with Canadian securities regulators. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Teknion Corporation (TSX:TKN) is a leading international designer, manufacturer and marketer of office systems and related office furniture products. Teknion's headquarters are located in Toronto, Ontario. The Company has offices and facilities in Canada, the United States, the United Kingdom and the Pacific Rim, and serves clients through a network of authorized dealers worldwide. Visit Teknion at www.teknion.com.



Teknion Corporation - Q1 2007
Management's Discussion and Analysis
---------------------------------------------------------------------------


The following management's discussion and analysis ("MD&A") of the financial condition and results of operations for Teknion Corporation ("Teknion" or the "Company") should be read in conjunction with the Company's unaudited interim consolidated financial statements and the notes to those statements. In addition, the Company's continuous disclosure filings including the 2006 audited annual consolidated financial statements and annual MD&A are available at www.sedar.com.

Overview

For the first quarter of 2007 the Company reported a loss before income taxes of $5.4 million and sales of $151.0 million as compared to a loss of $7.5 million and sales of $134.0 million in the prior year quarter. In the immediately preceding quarter, the fourth quarter of 2006, the Company reported net earnings of $1.7 million and sales of $176.6 million. The first quarter of the Company's fiscal year is historically weaker than subsequent quarters.



Results of Operations

---------------------------------------------------------------------------
Three months Three months Three months
ended ended ended
---------------------------------------------------------------------------
(in $000s except
per share amounts) February 28, 2007 February 28, 2006 November 30, 2006
---------------------------------------------------------------------------
Sales $150,955 $134,033 $176,571
Gross margin $38,409 $31,983 $50,452
Gross margin
(% of sales) 25.4% 23.9% 28.6%
Earnings (loss)
before income
taxes $(5,383) $(7,471) $1,816
EBITDA (1) $43 $(1,914) $13,691
Net earnings (loss) $(5,459) $(7,532) $1,734
Earnings (loss) per
share (basic and
diluted) $(0.09) $(0.12) $0.02
---------------------------------------------------------------------------

(1) EBITDA is defined as earnings before interest, income taxes,
depreciation and amortization and loss on assets held for sale. The
term EBITDA is a non-GAAP financial measure and does not necessarily
have a standardized meaning amongst issuers. The Company believes that
EBITDA is a useful figure because it measures operating results before
allocating the cost of income taxes, interest and capital investments.
EBITDA is also commonly regarded as an indirect measure of operating
cash flow, an important indicator of the operating performance of any
business.



Geographic Segmentation

---------------------------------------------------------------------------
Three months Three months Three months
ended ended ended
---------------------------------------------------------------------------
(in $000s) February 28, 2007 February 28, 2006 November 30, 2006
---------------------------------------------------------------------------
Sales:
Canada $49,065 $50,864 $48,243
United States 84,617 67,725 109,284
International 17,273 15,444 19,044
---------------------------------------------------------------------------
$150,955 $134,033 $176,571
---------------------------------------------------------------------------


Sales for the first quarter ended February 28, 2007 increased by 12.6% to $151.0 million compared to the $134.0 million in the first quarter of the prior year. In the fourth quarter of the prior year sales were $176.6 million. The first quarter of the Company's fiscal year is historically weaker than subsequent quarters.

On a segmented basis U.S. sales increased by 24.9% to $84.6 million and 26.5% in source currency as compared to the first quarter of the prior year. This growth rate is significantly higher than the growth reported by the Business and Institutional Furniture Manufacturers Association ("BIFMA") for industry shipments as a whole. BIFMA reported U.S. industry growth of 4%. Teknion's sales in the first quarter of the prior year were negatively impacted as a result of extended lead times. Lead times returned to normal levels early in fiscal 2006 and have been sustained.

Canadian sales declined 3.5% to $49.1 million as compared to the first quarter of the prior year reflecting the project nature of the Company's business.

International sales increased 11.8% to $17.3 million, reflecting strong sales in India, the U.K. and the Caribbean.

Gross margin as a percentage of sales was 25.4% compared to 23.9% in the first quarter of the prior year. This improvement reflects higher capacity utilization as compared to the first quarter of the prior year and the impact of the Company's cost saving initiatives. The improvement occurred despite the negative impact of foreign exchange on the operating results. Teknion's effective rate, including hedges, was $U.S. 1.00 equals $CDN 1.20 in the first quarter of fiscal 2006 as compared to $U.S. 1.00 equals $CDN 1.14 in the first quarter of fiscal 2007. This change reduced gross margin by 2% of sales in fiscal 2007 as compared to 2006. Teknion did not realize the full benefit of the stronger U.S. dollar in the current quarter as a result of hedges placed in earlier periods. The details of the Company's foreign exchange contracts are outlined in note 7 of the interim consolidated financial statements.

In the fourth quarter of the prior year, gross margin was 28.6%. The fourth quarter experienced higher capacity utilization (sales were $176.6 million in the fourth quarter), and a better effective exchange rate due to the positive impact of hedges. The change in exchange rate, including the impact of hedges, reduced Teknion's gross margin in the first quarter of the current year as compared to the fourth quarter of the prior year by 1.4% of sales.

Selling, general and administrative expenses ("SG&A") were $37.3 million, or 24.7% of sales, compared to $33.7 million and 25.1% of sales in the first quarter of 2006. The current quarter includes expenses of approximately $500 thousand relating to the implementation of a new order management system. As implementation is in the early stages, expenses will increase in subsequent quarters. This system is designed to streamline Teknion's order receipt, manufacturing scheduling, shipping/logistics and customer-facing processes.

Loss on disposal of property, plant and equipment includes the impact of office and showroom moves in the U.S. and equipment dispositions in Canada.

The Company's income tax expense in the current quarter and the first and fourth quarters of the prior year reflects estimated cash taxes payable with respect to the periods. The Company has significant tax losses, which can be applied against future earnings as outlined in its 2006 annual consolidated financial statements.

Consolidated Interim Statement of Other Comprehensive Income

As outlined in note 2 to the Interim Consolidated Financial Statements, the Company has adopted new CICA Handbook section 1530. As reflected on the Consolidated Interim Statement of Other Comprehensive Income, unrealized gains on translation of self-sustaining operations total $2.1 million. The gain relates to the impact of the change in exchange rates on the Company's net investment in its foreign self-sustaining operations since November 30, 2006.

Losses on derivatives, designated as cash flow hedges totaling $898 thousand, relate to the Company's foreign exchange forward contracts for the sale of U.S. dollars in future periods. This loss reflects the difference between the exchange rates of forward foreign exchange contracts held, compared to the rates that could have been achieved if the Company had entered into these contracts at the end of the fiscal quarter. In other words, the Company's forward foreign exchange contracts have been 'marked to market.'



Quarterly Results

---------------------------------------------------------------------------
($000s except per Q1 Q4 Q3 Q2
share amounts) 2007 2006 2006 2006
---------------------------------------------------------------------------
Sales $150,955 $176,571 $156,285 $164,365
Earnings (loss) before
income tax $(5,383) $1,816 $3,374 $5,753
Net earnings (loss) $(5,459) $1,734 $3,272 $6,027
Earnings (loss) per share
(basic and diluted) $(0.09) $0.02 $0.05 $0.10
---------------------------------------------------------------------------



---------------------------------------------------------------------------
($000s except per Q1 Q4 Q3 Q2
share amounts) 2006 2005 2005 2005
---------------------------------------------------------------------------
Sales $134,033 $173,135 $145,605 $151,584
Earnings (loss) before
income tax $(7,471) $9,163 $(3,022) $448
Net earnings (loss) $(7,532) $(11,319) $(3,246) $234
Earnings (loss) per share
(basic and diluted) $(0.12) $(0.17) $(0.05) $(0.00)
---------------------------------------------------------------------------


A discussion of the fluctuations in the quarterly results are included in the Company's 2006 annual MD&A. Discussion of the current quarter compared to the prior year comparative quarter and the immediately preceding quarter is included above.



Liquidity and Capital Resources

---------------------------------------------------------------------------
Three months Three months
ended ended
---------------------------------------------------------------------------
(in $000s) February 28, 2007 February 28, 2006
---------------------------------------------------------------------------
Cash from (used) in operations
before non-cash working capital
changes $451 $(2,738)

Cash used in operations after
non-cash working capital changes $(10,350) $(4,923)

Shareholders' equity $212,873 $205,327

Net debt-to-equity (1) 0.36:1 0.40:1

---------------------------------------------------------------------------

(1) Net debt is defined as operating loans plus long-term debt and capital
lease obligations (including current portion) less cash.


Cash provided by operations before working capital changes was $451 thousand as compared to cash used of $2.7 million in the first quarter of the prior year. The improvement relates primarily to the decline in the operating loss in the current period as compared to the first quarter last year.

During the quarter, non-cash working capital increased by $10.8 million. This increase reflects the net effect of the significant reduction of both accounts receivable and accounts payable and accrued liabilities. The decline in accounts receivable of $13.0 million reflects collection of amounts owing from the strong sales of the fourth quarter. The decline in accounts payable and accrued liabilities reflects the timing of certain year-end payments and the impact of lower sales volume and the corresponding lower level of purchases in the quarter.

Teknion's net debt-to-equity ratio was 0.36:1 at quarter end as compared to 0.35:1 at November 30, 2006 and 0.40:1 at February 28, 2006. The operating line increased in the quarter to finance the increase in working capital and the purchase of fixed assets, partly offset by the proceeds on sale and repayment on the mortgage of the Company's U.S. headquarters building. Capital spending in the quarter totaled $9.2 million ($7.5 million net of tenant inducements) and included leasehold improvements and furnishings relating to the relocation of the Company's U.S. headquarters; costs associated with the implementation of a new order management system; and tooling for a number of products to be launched later this year. Capital additions for the year are expected to approximate $35 million; however, this amount could increase depending on the classification of certain costs related to the implementation of the aforementioned order management system. Net capital expenditures are substantially reduced by proceeds totaling $21 million on the sale of Teknion's U.S. headquarters building.

New CICA Reporting Requirements

On December 1, 2006, the Company adopted CICA Handbook Sections 1530 Comprehensive Income, Section 3251 Equity, Section 3855 Financial Instruments - Recognition and Measurement, Section 3861 Financial Instruments - Disclosure and Presentation and Section 3865 Hedges. Section 1530 establishes standards for reporting and presenting comprehensive income, which is defined as the change in equity from transactions and other events from non-owner sources. Other comprehensive income refers to items recognized in comprehensive income that are excluded from net income calculated in accordance with generally accepted accounting principles.

Section 3861 establishes standards for presentation of financial instruments and non-financial derivatives, and identifies the information that should be disclosed about them. Under the new standards, policies followed for periods prior to the effective date generally are not reversed and therefore, the comparative figures have not been restated except for the requirement to restate currency translation adjustment as part of other comprehensive income. Section 3865 describes when and how hedge accounting can be applied as well as the disclosure requirements. Hedge accounting enables the recording of gains, losses, revenues and expenses from derivative financial instruments in the same period as for those related to the hedged item.

Section 3855 prescribes when a financial asset, financial liability or non-financial derivative is to be recognized on the balance sheet and at what amount, requiring fair value or cost-based measures under different circumstances. Under Section 3855, financial instruments must be classified into one of these five categories: held-for-trading, held-to-maturity, loans and receivables, available-for-sale financial assets or other financial liabilities. All financial instruments, including derivatives, are measured in the balance sheet at fair value except for loans and receivables, held to maturity investments and other financial liabilities, which are measured at amortized cost. Subsequent measurement and changes in fair value will depend on their initial classification, as follows: held-for-trading financial assets are measured at fair value and changes in fair value are recognized in net earnings; available-for-sale financial instruments are measured at fair value with changes in fair value recorded in other comprehensive income until the investment is derecognized or impaired at which time the amounts would be recorded in net earnings.

Under adoption of these new standards, the Company designated its cash as held-for-trading, which is measured at fair value. Accounts receivable are classified as loans and receivables, which are measured at amortized cost. Bank indebtedness, accounts payable and accrued liabilities, long-term debt and capital lease obligations are classified as other financial liabilities, which are measured at amortized cost.

All derivative instruments, including embedded derivatives, are recorded in the statement of earnings at fair value unless exempted from derivative treatment as a normal purchase and sale. All changes in their fair value are recorded in earnings unless cash flow hedge accounting is used, in which case changes in fair value are recorded in other comprehensive income. The Company has elected to apply this accounting treatment for all embedded derivatives in host contracts entered into on or after December 1, 2002. The impact of the change in accounting policy related to embedded derivatives was not material.

The Company enters into foreign currency forward contracts and foreign currency option contracts to hedge foreign exchange exposure on anticipated sales. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in other comprehensive income. Any gain or loss in fair value relating to the ineffective portion is recognized immediately in the statement of earnings in other income (expense). The impact on opening retained earnings was not material. Upon adoption of the new standards, the Company remeasured its cash flow hedge derivatives at fair value. The portion of the fair value of the hedged item totaled $0.6 million. The fair value of the contracts as at February 28, 2007 is $1.8 million and recorded as derivative instrument liability on the consolidated balance sheet.

Outlook

Management continues to believe that, over the long term, the worldwide business environment will increasingly require that organizations utilize costly office space more effectively and improve the working environment to increase employee productivity. The Company also believes that these factors, combined with increased commercial construction and capital spending, as well as the growing use of technology and the increasing awareness of workplace health and safety, will allow growth in the contract office furniture industry to exceed growth in GDP.

While industry growth has been decelerating in recent months, the Company believes that key economic industry drivers (corporate profits, commercial construction, and white-collar employment) remain supportive of continued growth in customer demand. Most industry observers believe that the industry will continue to grow in 2007.

The Company remains confident that its focused growth strategies, combined with its comprehensive product lines, innovative designs and extensive dealer network, will enable the Company to capitalize on continued demand in its markets.

The Company's strategies for future growth and improvement to its operating results are to continue to: develop its sales and marketing initiatives to expand its presence and market share, focusing on market segments where the Company previously did not have a strong presence; leverage the strength and economies of scale resulting from the vertical integration and recent modernization of its manufacturing facilities and processes; maintain its focus on design and innovation to ensure it can respond quickly with new and enhanced products to meet the needs of its customers; continue its focus on cost improvement and efficiency; and make prudent acquisitions that meet the Company's long-term strategic objectives.

As a result of these strategies and an anticipated improvement in the market for the Company's products, and despite the deterioration of the U.S./Canadian dollar exchange rate, management expects continued improvement in fiscal 2007 compared to fiscal 2006. However, the anticipated one-time expenses related to the implementation of a new order management system during fiscal 2007 and described under the heading Selling, General and Administrative Expenses, will partially offset the positive impact of the operating improvements.

Cautionary Statement

Certain of the above statements are forward-looking statements that involve risks and uncertainties. Actual results could differ materially as a consequence of a number of factors, including: fluctuations in the Company's operating results due to product demand arising from competitive and general economic and business conditions in the Company's North American and international markets and operations; significant fluctuations in exchange rates for currencies in which the Company does business; changes in the cost of raw materials; the ability to maintain the proprietary nature of the Company's intellectual property in the design and manufacturing of its products; changes in the size and timing of customers' order patterns; changes in the Company's markets, including technology change, changes in customer requirements, frequent new product introductions by competitors and emerging standards; the Company's dependence on key personnel; the availability of financing for the Company; the Company's dependence on key commitments from significant dealers and distributors; potential liabilities arising from product defects; environmental matters and other factors set forth in the Company's reports and filings with Canadian securities regulators. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Teknion Corporation (TSX:TKN) is a leading international designer, manufacturer and marketer of office systems and related office furniture products. Teknion's headquarters are located in Toronto, Ontario. The company has offices and facilities in Canada, the United States, the United Kingdom, and the Pacific Rim, and serves clients through a network of authorized dealers worldwide. Visit Teknion at www.teknion.com.



TEKNION CORPORATION
Consolidated Balance Sheets
(Unaudited)

(in thousands of dollars)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
As at As at
February 28, November 30,
2007 2006
---------------------------------------------------------------------------

Assets

Current assets:
Cash $ 7,426 $ 5,862
Accounts receivable 116,527 129,521
Inventory 59,360 57,975
Prepaid expenses and other deposits 5,617 4,620
Income taxes receivable 428 427
Future income taxes 1,027 1,027
Asset held for sale - 21,079
--------------------------------------------------------------------------
190,385 220,511

Property, plant and equipment 142,224 136,900
Prepaid rent 10,812 11,089
Goodwill 30,874 30,874

---------------------------------------------------------------------------
$ 374,295 $ 399,374
---------------------------------------------------------------------------

Liabilities and Shareholders' Equity

Current liabilities:
Operating loans $ 66,429 $ 53,091
Accounts payable and accrued liabilities 74,400 96,154
Due to affiliated companies 652 824
Current portion of long-term debt and
capital lease obligations 1,843 1,830
Derivative instruments liability (Note 2) 1,804 -
Liability held for sale - 13,853
--------------------------------------------------------------------------
145,128 165,752

Long-term debt and capital lease obligations 15,267 15,579
Future income taxes 1,027 1,027
---------------------------------------------------------------------------
161,422 182,358

Shareholders' equity:
Share capital (Note 5) 107,005 107,005
Retained earnings 114,528 119,987
Contributed surplus 1,050 376
Accumulated other comprehensive income (Note 3) (9,710) (10,352)
--------------------------------------------------------------------------
212,873 217,016

---------------------------------------------------------------------------
$ 374,295 $ 399,374
---------------------------------------------------------------------------
---------------------------------------------------------------------------



TEKNION CORPORATION
Consolidated Interim Statements of Earnings
(Unaudited)

Periods ended February 28, 2007 and 2006

Three months ended
(in thousands of dollars, except per share amounts) February 28
---------------------------------------------------------------------------
---------------------------------------------------------------------------
2007 2006
---------------------------------------------------------------------------

Sales $ 150,955 $ 134,033

Cost of sales 112,546 102,050

---------------------------------------------------------------------------
Gross margin 38,409 31,983

Expenses:
Selling, general and administrative 37,311 33,660
Depreciation and amortization 4,193 4,543
--------------------------------------------------------------------------
41,504 38,203
---------------------------------------------------------------------------

Loss from operations (3,095) (6,220)

Interest expense, net 1,233 1,014
Loss on disposal of property, plant
and equipment 1,055 237
---------------------------------------------------------------------------
Loss before income taxes (5,383) (7,471)

Income taxes:
Current (Note 4) 76 61

---------------------------------------------------------------------------
Net loss $ (5,459) $ (7,532)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Loss per share:
Basic and diluted $ (0.09) $ (0.12)
---------------------------------------------------------------------------
---------------------------------------------------------------------------



Consolidated Interim Statements of Other Comprehensive Income
(Unaudited)

Periods ended February 28, 2007 and 2006

Three months ended
(in thousands of dollars, except per share amounts) February 28
---------------------------------------------------------------------------
---------------------------------------------------------------------------
2007 2006
---------------------------------------------------------------------------

Net loss $ (5,459) $ (7,532)
---------------------------------------------------------------------------

Other comprehensive loss, net of tax:
Unrealized gains (losses) on translation
of self-sustaining operations 2,109 (597)
Losses on derivatives designated as cash
flow hedges (898) -
--------------------------------------------------------------------------
Other comprehensive income (loss) 1,211 (597)

---------------------------------------------------------------------------
Comprehensive loss $ (4,248) $ (8,129)
---------------------------------------------------------------------------
---------------------------------------------------------------------------



Consolidated Interim Statements of Retained Earnings
(Unaudited)

Periods ended February 28, 2007 and 2006

Three months ended
(in thousands of dollars) February 28
---------------------------------------------------------------------------
---------------------------------------------------------------------------
2007 2006
---------------------------------------------------------------------------

Retained earnings, beginning of period $ 119,987 $ 116,486

Net loss (5,459) (7,532)

---------------------------------------------------------------------------
Retained earnings, end of period $ 114,528 $ 108,954
---------------------------------------------------------------------------
---------------------------------------------------------------------------



TEKNION CORPORATION
Consolidated Interim Statements of Cash Flows
(Unaudited)

Periods ended February 28, 2007 and 2006

Three months ended
(in thousands of dollars) February 28
---------------------------------------------------------------------------
---------------------------------------------------------------------------
2007 2006
---------------------------------------------------------------------------

Cash provided by (used in):

Operations:
Net loss $ (5,459) $ (7,532)
Items not affecting cash:
Depreciation and amortization 4,193 4,543
Loss on disposal of property, plant
and equipment 1,055 237
Foreign exchange loss 528 -
Amortization of stock-based compensation 134 14
-------------------------------------------------------------------------
451 (2,738)
Change in non-cash operating working capital (10,801) (2,185)
--------------------------------------------------------------------------
(10,350) (4,923)

Financing:
Operating loans 13,338 14,110
Repayment of liability held for sale (14,189) -
Repayment of long-term debt and capital
lease obligations (425) (1,004)
--------------------------------------------------------------------------
(1,276) 13,106

Investments:
Purchase of property, plant and equipment (7,521) (6,068)
Proceeds on disposal of property, plant
and equipment 21,008 165
--------------------------------------------------------------------------
13,487 (5,903)

Effect of foreign exchange changes on cash (297) (127)
---------------------------------------------------------------------------

Increase in cash 1,564 2,153

Cash, beginning of period 5,862 10,435

---------------------------------------------------------------------------
Cash, end of period $ 7,426 $ 12,588
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Supplemental cash flow information:
Interest paid $ 1,301 $ 1,116
Interest received 69 79
Income taxes paid 130 742
Income taxes recovered 115 419

Supplemental disclosure relating to non-cash
investing and financing activities:
Acquisition of property, plant and equipment
through:
Capital leases $ 45 $ -
Tenant inducements 1,652 -



TEKNION CORPORATION
Notes to Interim Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands of dollars)

Periods ended February 28, 2007 and 2006


1. Basis of presentation

These interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles; however, they do not include all of the disclosure requirements for annual consolidated financial statements. These interim consolidated financial statements follow the same accounting policies as were used for the consolidated financial statements for the year ended November 30, 2006 except as described in note 2. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended November 30, 2006, including notes thereto.

2. Changes in accounting policies

On December 1, 2006, the Company adopted CICA Handbook Sections 1530, "Comprehensive Income", Section 3251 "Equity", Section 3855, "Financial Instruments - Recognition and Measurement", Section 3861, "Financial Instruments - Disclosure and Presentation" and Section 3865, "Hedges." Section 1530 establishes standards for reporting and presenting comprehensive income, which is defined as the change in equity from transactions and other events from non-owner sources. Other comprehensive income refers to items recognized in comprehensive income that are excluded from net income calculated in accordance with generally accepted accounting principles.

Section 3861 establishes standards for presentation of financial instruments and non-financial derivatives, and identifies the information that should be disclosed about them. Under the new standards, policies followed for periods prior to the effective date generally are not reversed and therefore, the comparative figures have not been restated except for the requirement to restate currency translation adjustment as part of other comprehensive income. Section 3865 describes when and how hedge accounting can be applied as well as the disclosure requirements. Hedge accounting enables the recording of gains, losses, revenues and expenses from derivative financial instruments in the same period as for those related to the hedged item.

Section 3855 prescribes when a financial asset, financial liability or non-financial derivative is to be recognized on the balance sheet and at what amount, requiring fair value or cost-based measures under different circumstances. Under Section 3855, financial instruments must be classified into one of these five categories: held-for-trading, held-to-maturity, loans and receivables, available-for-sale financial assets or other financial liabilities. All financial instruments, including derivatives, are measured in the balance sheet at fair value except for loans and receivables, held to maturity investments and other financial liabilities which are measured at amortized cost. Subsequent measurement and changes in fair value will depend on their initial classification, as follows: held-for-trading financial assets are measured at fair value and changes in fair value are recognized in net earnings; available-for-sale financial instruments are measured at fair value with changes in fair value recorded in other comprehensive income until the investment is derecognized or impaired at which time the amounts would be recorded in net earnings.

Under adoption of these new standards, the Company designated its cash as held-for-trading, which is measured at fair value. Accounts receivable are classified as loans and receivables, which are measured at amortized cost. Bank indebtedness, accounts payable and accrued liabilities, long-term debt and capital lease obligations are classified as other financial liabilities, which are measured at amortized cost.

All derivative instruments, including embedded derivatives, are recorded in the statement of earnings at fair value unless exempted from derivative treatment as a normal purchase and sale. All changes in their fair value are recorded in earnings unless cash flow hedge accounting is used, in which case changes in fair value are recorded in other comprehensive income. The Company has elected to apply this accounting treatment for all embedded derivatives in host contracts entered into on or after December 1, 2002. The impact of the change in accounting policy related to embedded derivatives was not material.

The Company enters into foreign currency forward contracts and foreign currency option contracts to hedge foreign exchange exposure on anticipated sales. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in other comprehensive income. Any gain or loss in fair value relating to the ineffective portion is recognized immediately in the statement of earnings in other income (expense). The impact on opening retained earnings was not material. Upon adoption of the new standards, the Company remeasured its cash flow hedge derivatives at fair value. The portion of the fair value of the hedged item totaled $0.6 million. The fair value of the contracts as at February 28, 2007 is $1.8 million and recorded as derivative instruments liability on the consolidated balance sheet.



3. Accumulated other comprehensive income As at
February 28
--------------------
--------------------
2007 2006
--------------------
Accumulated other comprehensive loss on cash
flow hedges
Balance beginning of period $ - $ -
Impact of new cash flow hedge accounting rules on
December 1, 2006 (569) -
Unrealized losses on derivatives designated as
cash flow hedges (1,214) -
Reclassification of earnings on cash flow losses 316 -
--------------------
Balance end of period $ (1,467) $ -
--------------------

Accumulated other comprehensive loss on translation
of net foreign operations
Balance beginning of period $(10,352) $ (10,143)
Unrealized gain (loss) on translation of net
foreign operations 2,109 (597)
--------------------
Balance end of period $ (8,243) $ (10,740)
--------------------

--------------------
Total accumulated other comprehensive loss $ (9,710) $ (10,740)
--------------------


4. Income taxes

Income taxes have been determined in accordance with the legislation prevailing in Canada and the applicable foreign jurisdictions. The effective income tax rate differs from the basic Canadian combined federal and provincial tax rates as follows:



Three months ended
February 28
--------------------
--------------------
2007 2006
--------------------
Loss before income taxes $ (5,383) $ (7,471)
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Combined statutory tax rate 36.1% 36.1%
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Computed income taxes (recovery) $ (1,943) $ (2,697)
Increase (decrease) resulting from:
Canadian federal and provincial rate reductions (34) (141)
International rate differences (361) (1)
Valuation allowance 2,241 2,779
Corporate minimum taxes 15 50
Other differences 158 71
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$ 76 $ 61
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5. Share capital

The Company has 64,116,131 issued and outstanding shares as at February 28, 2007. There are 39,919,846 multiple voting shares which carry 10 votes per share and are convertible into subordinate voting shares on a one-for-one basis. The Company also has 24,196,285 subordinate voting shares which carry one vote per share. In addition, as at February 28, 2007, there are 3,132,795 subordinate voting shares issuable pursuant to outstanding stock options. There were no stock options exercised in the quarter. As at March 23, 2007, there were no changes to the number of shares issued and outstanding reported above.

6. Deferred share unit (DSU) and restricted share unit (RSU) plans

In February 2007, the Company implemented a DSU and RSU plan for senior officers of the Company. Under the DSU plan, senior officers may elect to receive a portion of their cash bonus in the form of deferred share units which vest immediately. As amounts were awarded in exchange for cash bonuses expensed but unpaid in the prior fiscal year, no expense was recorded in the current period. Units are redeemable in subordinate voting shares (or in cash at the Company's option), only when an officer ceases to be an employee and must be redeemed by December 31 of the year following that event. As at February 28, 2007, there were 136,536 units outstanding (2006 - nil).

Under the RSU plan, senior officers receive an award of RSU's which vest at the end of three years, at which time the units are paid to the employee in subordinate voting shares (or in cash at the Company's option). The compensation expense is recognized evenly over the vesting period except where the employee is eligible to retire prior to the vesting date, in which case the expense is recognized between the grant date and the date the employee is eligible to retire. As at February 28, 2007, there were 136,536 units (2006 - nil) awarded and outstanding of which none were vested. The Company recorded an expense of $45,000 for the quarter (2006 - nil).

7. Foreign exchange contracts

The Company enters into foreign exchange contracts to limit its exposure to foreign exchange fluctuations on future revenue and expenditure streams. As at February 28, 2007, the Company had outstanding foreign exchange contracts for the remainder of 2007 to sell U.S. $76 million at an average rate of exchange of $1.14 and for 2008, contracts to sell U.S. $12 million at an average exchange rate of $1.17. In addition for 2007, the Company holds foreign exchange options that cancel if at any time the exchange rate falls below agreed upon rates. For 2007, the Company has options for U.S. $10 million at an average exchange rate of $1.16 with cancellation rates between $1.05 to $1.09 Canadian. The Company has U.S. $10 million of options for 2008 at an average rate of $1.18 with cancellation rates between $1.09 to $1.11 Canadian.



8. Geographic segmented information Three months ended
February 28
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----------------------
2007 2006
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Sales:
Canada $ 49,065 $ 50,864
United States 84,617 67,725
International 17,273 15,444
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$ 150,955 $ 134,033
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9. Comparative Figures

Certain 2006 figures have been reclassified to conform with the financial statement presentation adopted in 2007.

Contact Information

  • Teknion Corporation
    Steven E. Cohen
    Senior Vice President, Corporate Development
    (416) 661-1577, ext. 2456
    or
    Teknion Corporation
    Scott E. Bond
    Senior Vice President, Chief Financial Officer & Secretary
    (416) 661-1577, ext. 2391
    Website: www.teknion.com