Teknion Corporation
TSX : TKN

Teknion Corporation

July 12, 2007 17:15 ET

Teknion Corporation Announces Second Quarter 2007 Results

TORONTO, ONTARIO--(Marketwire - July 12, 2007) - Teknion Corporation (TSX:TKN) announced its results today for the three and six months ended May 31, 2007.



Financial Highlights (complete statements and MD&A follow)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Periods ended May 31, Three Months Six Months
(in $000s except per ended May 31, 2007 ended May 31, 2007
share amounts)

---------------------------------------------------------------------------
2007 2006 2007 2006
Restated Restated
---------------------------------------------------------------------------
Sales $ 165,732 $ 164,365 $ 316,687 $ 298,398
EBITDA(1) $ 5,696 $ 11,472 $ 5,259 $ 9,579
Pre-tax earnings (loss) $ 239 $ 5,493 $ (5,624) $ (1,957)
Net earnings (loss) $ 150 $ 5,767 $ (5,789) $ (1,744)
EPS diluted $ 0.00 $ 0.09 $ (0.09) $ (0.02)
Shareholders' equity $ 212,243 $ 208,510 $ 212,243 $ 208,510
Common shares
outstanding 64,116,131 64,116,131 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

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Three Months Six Months
ended May 31 ended May 31
-----------------------------------------------------------------------
(in $000) 2007 2006 2007 2006
-----------------------------------------------------------------------
Sales:
Canada $ 63,704 $ 68,753 $ 112,769 $ 119,617
United States 84,263 81,234 168,880 148,959
International 17,765 14,378 35,038 29,822
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$ 165,732 $ 164,365 $ 316,687 $ 298,398
-----------------------------------------------------------------------


Sales for the second quarter of 2007 increased by 1% to $165.7 million as compared to $164.4 million in the same period of 2006. U.S. sales increased in the quarter by 3.7% in Canadian dollars and 6.1% in source currency. Canadian sales decreased by 7.3% and international sales increased by 23.6%.

Net earnings for the quarter were $150 thousand as compared to $5.8 million in the second quarter of the prior year.

"Industry growth has moderated, and the impact of currency exchange rates has had a negative effect on our results. Nonetheless, we continue to expect to achieve year-over-year revenue growth in the third quarter and for the year," commented David Feldberg, President and CEO.

Conference Call

Management will hold a conference call to discuss the second quarter results on Friday, July 13, 2007 at 8:00 a.m. (ET). The telephone numbers for the conference call are:

Local Toronto: 416-340-2216 Toll Free: 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 3228215. The Instant Replay will be available until midnight, July 20, 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 - Q2 2007
Management's Discussion and Analysis
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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 restated audited annual consolidated financial statements and annual restated MD&A are available at www.sedar.com.

Overview

For the second quarter of fiscal 2007, the Company reported a profit before income taxes of $239 thousand and sales of $165.7 million as compared to a profit before income taxes of $5.5 million and sales of $164.4 million in the second quarter of the prior year.



Results of Operations

---------------------------------------------------------------------------
Three months Six months
ended May 31 ended May 31
---------------------------------------------------------------------------
($000's except per share
amounts) 2007 2006 2007 2006
Restated Restated
---------------------------------------------------------------------------
Sales $ 165,732 $ 164,365 $ 316,687 $ 298,398
Gross margin $ 46,272 $ 48,425 $ 84,201 $ 80,429
Gross margin (% of sales) 27.9% 29.5% 26.6% 27.0%
Earnings (loss) before income
taxes $ 239 $ 5,493 $ (5,624) $ (1,957)
EBITDA(1) $ 5,696 $ 11,472 $ 5,259 $ 9,579
Net earnings (loss) $ 150 $ 5,767 $ (5,789) $ (1,744)
Earnings (loss) per share
(basic and diluted) $ 0.00 $ 0.10 $ (0.09) $ (0.02)
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(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 Six months
ended May 31 ended May 31
---------------------------------------------------------------------------
($000's) 2007 2006 2007 2006
---------------------------------------------------------------------------
Sales:
Canada $ 63,704 $ 68,753 $ 112,769 $ 119,617
United States 84,263 81,234 168,880 148,959
International 17,765 14,378 35,038 29,822
---------------------------------------------------------------------------
$ 165,732 $ 164,365 $ 316,687 $ 298,398
---------------------------------------------------------------------------


Sales for the second quarter ended May 31, 2007, were $165.7 million in line with $164.4 million reported in the second quarter of the prior year and 9.8% higher than the first quarter of the current fiscal year. The first quarter is historically weaker overall than subsequent quarters.

On a segmented basis, compared to the prior year quarter, U.S. sales increased by 3.7% to $84.3 million in Canadian dollars and by 6.1% in source currency. For the six-month period, U.S. sales increased by 13.4% to $168.9 million in Canadian dollars and by 15.3% in source currency. The increase is a result of strong commercial project activity in the U.S. market. The growth rate in source currency was higher than the growth rate for the industry as reported by The Business and Institutional Furniture Manufacturers Association (BIFMA). BIFMA reported 5.8% industry growth for the quarter and 4.9% for the six-month period.

Canadian sales declined 7.3% to $63.7 million for the quarter and 5.7% to $112.8 million for the six-month period as compared to prior year periods. The decline is primarily a result of lower spending in 2007 by certain customers as compared to 2006 and increased competition in the marketplace. The Canadian market remains strong and activity levels are high. Second-quarter sales were 30% higher than the first quarter reflecting a traditionally strong quarter for Teknion in the Canadian market.

International sales increased by 23.6% to $17.8 million for the quarter and 17.5% to $35.0 million for the six-month period as compared to prior year periods. Strong growth was achieved in India and the Caribbean. As compared to the first quarter, sales increased by 2.8%. Teknion's international sales are influenced quarter-to-quarter by the timing of large projects.

Gross margin as a percentage of sales was 27.9% for the quarter and 26.6% for the six-month period as compared to 29.5% and 27.0% respectively in the prior year periods. The decline in gross margin occurred as a result of further weakening of the U.S. dollar relative to the Canadian dollar negatively affecting gross margin by approximately 1.9% of sales for both the quarter and the six-month period. The Company's cost reduction and price realization initiatives, and improved capacity utilization, have partially offset the negative impact of further weakening of the U.S. dollar relative to the Canadian dollar in the six-month period. Teknion's effective rate including hedges was $ U.S. 1.00 equals $ CDN 1.13 and $ U.S. 1.00 equals $ CDN 1.14 for the quarter and six-month periods respectively, as compared to $ U.S. 1.00 equals $ CDN 1.20 for both comparative periods of the prior year. The details of the Company's foreign exchange forward contracts are included in note 8 to the Interim Consolidated Financial Statements.

The improvement in gross margin in the second quarter compared to the first quarter reflects both higher capacity utilization and improved sales mix as compared to the first quarter of the current fiscal year when the gross margin was 25.1%.

Selling, general and administrative expenses ("SG&A") were $39.9 million for the quarter, 24.1% of sales, as compared to $37.0 million, 22.5% of sales, in the prior year quarter. For the six-month period, SG&A expenses were $77.2 million, 24.4% of sales, as compared to $70.6 million, 23.7% of sales, for the six-month period in the prior year. The current quarter and the six-month period include expenses of approximately $1.4 million and $1.9 million respectively relating to the implementation of a new order management system. The system is designed to streamline Teknion's order receipt, manufacturing scheduling, shipping/logistics and customer-facing processes. SG&A spending in the period also reflects higher costs associated with the introduction of a number of new products.

The Company's income tax expense of $89 thousand for the quarter and $165 thousand for the six-month period 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 restated 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 losses on translation of self-sustaining operations for the quarter total $2.1 million. The loss relates to the impact of the change in exchange rates on the Company's net investment in its foreign self-sustaining operations for the quarter since February 28, 2007.

Earnings on derivatives designated as cash flow hedges totaling $7.8 million relate to the Company's foreign exchange forward contracts for the sale of U.S. dollars in future periods. This gain reflects the difference between the exchange rates of forward foreign exchange contracts held, compared to the rates that would 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" for the purpose of determining earnings on derivatives.

Restatement

The Company has restated prior period financial statements to reflect an error discovered in the valuation of inventory held at the Company's Malaysian subsidiary. The inventory shown on the restated comparative financial statements at November 30, 2006 was overstated by $6.1 million and net earnings for the second quarter 2006 was overstated by $260 thousand and for the six-month period ended May 31, 2006 by $239 thousand. A review of the circumstances which resulted in the inventory overstatement is continuing. In addition, the Company is taking steps to improve controls in its Malaysian subsidiary. Refer to note 3 of the Interim Consolidated Financial Statements.




Quarterly Results

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($000's except per Q2 Q1 Q4 Q3
share amounts) 2007 2007 2006 2006
Restated Restated Restated
---------------------------------------------------------------------------
Sales $ 165,732 $ 150,955 $ 176,571 $ 156,285
Earnings (loss) before
income tax $ 239 $ (5,863) $ (634) $ 2,293
Net earnings (loss) $ 150 $ (5,939) $ (716) $ 2,191
Earnings (loss) per share
(basic and diluted) $ 0.00 $ (0.09) $ (0.01) $ 0.03
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Quarterly Results
---------------------------------------------------------------------------
($000's except per Q2 Q1 Q4 Q3
share amounts) 2006 2006 2005 2005
Restated Restated Restated
---------------------------------------------------------------------------
Sales $ 164,365 $ 134,033 $ 173,135 $ 145,605
Earnings (loss) before
income tax $ 5,493 $ (7,450) $ 8,662 $ (3,022)
Net earnings (loss) $ 5,767 $ (7,511) $ (11,820) $ (3,246)
Earnings (loss) per share
(basic and diluted) $ 0.10 $ (0.12) $ (0.18) $ (0.05)
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A discussion of the fluctuations in the quarterly results is included in the Company's 2006 restated annual MD&A. Discussion of the current quarter compared to comparative quarter in the prior year and the first quarter of the current fiscal year is included above.



Liquidity and Capital Resources

---------------------------------------------------------------------------
Three months Six months
ended May 31 ended May 31
---------------------------------------------------------------------------
($000's) 2007 2006 2007 2006
Restated Restated
---------------------------------------------------------------------------
Cash provided by operations
before working capital changes $ 5,043 $ 10,590 $ 5,013 $ 7,873

Change in non-cash operating
working capital $ 9,962 $ (3,841) $ (358) $ (6,047)
--------------------------------------------
Cash provided by operations -
after non-cash working
capital changes $ 15,005 $ 6,749 $ 4,655 $ 1,826
--------------------------------------------
--------------------------------------------
Shareholders' equity $ 212,243 $ 208,510 $ 212,243 $ 208,510

Net debt-to-equity(1) 0.32:1 0.40:1 0.32:1 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 in the quarter, before working capital changes, was $5.0 million as compared to $10.6 million in the prior year quarter reflecting the decrease in net earnings in the period. During the quarter non-cash working capital decreased by $10.0 million, reflecting a reduction in accounts receivable from strong collections in the second quarter.

For the six-month period, cash provided by operations before working capital changes was $5.0 million as compared to $7.9 million in the prior year period reflecting the increase in the net loss. During the six-month period non-cash working capital decreased $0.4 million. The decline of accounts receivable since year-end was offset by a decline in accounts payable and accrued liabilities arising from the timing of certain year-end payments.

Capital additions totaled $7.2 million for the quarter and $16.4 million for the six-month period. Capital additions are expected to approximate $35 million for the year; however, this amount could vary 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 May 31, 2007 is $6.9 million and recorded as derivative instrument asset 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.

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
May 31, November 30,
2007 2006
---------------------------------------------------------------------------
Restated
Assets (See Note 3)

Current assets:
Cash $ 7,650 $ 5,862
Accounts receivable 110,720 129,521
Inventory 50,325 51,913
Prepaid expenses and other deposits 5,488 4,620
Income taxes receivable 801 427
Future income taxes 1,027 2,724
Derivative instruments asset (Note 2) 6,875 -
Asset held for sale - 21,079
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182,886 216,146

Property, plant and equipment 143,699 136,900
Prepaid rent 10,535 11,089
Goodwill 30,874 30,874

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$ 367,994 $ 395,009
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Liabilities and Shareholders' Equity

Current liabilities:
Operating loans $ 56,455 $ 53,091
Accounts payable and accrued liabilities 78,523 96,154
Due to affiliated companies 283 824
Current portion of long-term debt and
capital lease obligations 2,376 1,830
Liability held for sale - 13,853
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137,637 165,752

Long-term debt and capital lease obligations 17,087 15,579
Future income taxes 1,027 3,914
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155,751 184,055

Shareholders' equity:
Share capital (Note 6) 107,005 107,005
Retained earnings 108,136 113,925
Contributed surplus 1,193 376
Accumulated other comprehensive income
(Note 4) (4,091) (10,352)
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212,243 210,954

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$ 367,994 $ 395,009
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TEKNION CORPORATION
Consolidated Interim Statements of Earnings
(Unaudited)

Periods ended May 31, 2007 and 2006

(in thousands of dollars, Three months ended Six months ended
except per share amounts) May 31 May 31
---------------------------------------------------------------------------
---------------------------------------------------------------------------
2007 2006 2007 2006
---------------------------------------------------------------------------
Restated Restated
(See Note 3) (See Note 3)

Sales $ 165,732 $ 164,365 $ 316,687 $ 298,398

Cost of sales 119,460 115,940 232,486 217,969

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Gross margin 46,272 48,425 84,201 80,429

Expenses:
Selling, general and
administrative 39,912 36,953 77,223 70,613
Depreciation and
amortization 4,386 4,730 8,579 9,273
--------------------------------------------------------------------------
44,298 41,683 85,802 79,886
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Earnings (loss) from
operations 1,974 6,742 (1,601) 543

Interest expense, net 1,071 1,249 2,304 2,263
Loss on disposal of
property, plant and
equipment 664 - 1,719 237
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Earnings (loss) before
income taxes 239 5,493 (5,624) (1,957)

Income taxes:
Current (Note 5) 89 (274) 165 (213)

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Net earnings (loss) $ 150 $ 5,767 $ (5,789) $ (1,744)
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Earnings (loss) per share:
Basic and diluted $ 0.00 $ 0.09 $ (0.09) $ (0.02)
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Consolidated Interim Statements of Other Comprehensive Income
(Unaudited)

Periods ended May 31, 2007 and 2006

(in thousands of dollars, Three months ended Six months ended
except per share amounts) May 31 May 31
---------------------------------------------------------------------------
---------------------------------------------------------------------------
2007 2006 2007 2006
---------------------------------------------------------------------------
Restated Restated
(See Note 3) (See Note 3)

Net earnings (loss) $ 150 $ 5,767 $ (5,789) $ (1,744)
---------------------------------------------------------------------------

Other comprehensive income
(loss), net of tax:
Unrealized losses on
translation of
self-sustaining
operations (2,138) (406) (29) (1,003)
Earnings on derivatives
designated as cash
flow hedges 7,757 - 6,859 -
--------------------------------------------------------------------------
Other comprehensive
income (loss) 5,619 (406) 6,830 (1,003)

---------------------------------------------------------------------------
Comprehensive income
(loss) $ 5,769 $ 5,361 $ 1,041 $ (2,747)
---------------------------------------------------------------------------
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Consolidated Interim Statements of Retained Earnings
(Unaudited)

Periods ended May 31, 2007 and 2006

(in thousands of dollars, Three months ended Six months ended
except per share amounts) May 31 May 31
---------------------------------------------------------------------------
---------------------------------------------------------------------------
2007 2006 2007 2006
---------------------------------------------------------------------------
Restated Restated
(See Note 3) (See Note 3)

Retained earnings,
beginning of period $ 107,986 $ 106,683 $ 113,925 $ 114,194

Net earnings (loss) 150 5,767 (5,789) (1,744)

---------------------------------------------------------------------------
Retained earnings, end
of period $ 108,136 $ 112,450 $ 108,136 $ 112,450
---------------------------------------------------------------------------
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TEKNION CORPORATION
Consolidated Interim Statements of Cash Flows
(Unaudited)

Periods ended May 31, 2007 and 2006

(in thousands of dollars, Three months ended Six months ended
except per share amounts) May 31 May 31
---------------------------------------------------------------------------
---------------------------------------------------------------------------
2007 2006 2007 2006
---------------------------------------------------------------------------
Restated Restated
(See Note 3) (See Note 3)

Cash provided by (used in):

Operations:
Net earnings (loss) $ 150 $ 5,767 $ (5,789) $ (1,744)
Items not affecting cash:
Depreciation and
amortization 4,386 4,730 8,579 9,273
Loss on disposal of
property, plant
and equipment 664 - 1,719 237
Foreign exchange (gain)
loss (300) - 227 -
Amortization of
stock-based compensation 143 93 277 107
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5,043 10,590 5,013 7,873
Change in non-cash
operating working capital 9,962 (3,841) (358) (6,047)
--------------------------------------------------------------------------
15,005 6,749 4,655 1,826

Financing:
Operating loans (9,974) (6,083) 3,364 8,027
Proceeds from financing 2,642 - 2,642 -
Repayment of liability
held for sale - - (14,189) -
Repayment of long-term
debt and capital lease
obligations (636) (879) (1,061) (1,883)
--------------------------------------------------------------------------
(7,968) (6,962) (9,244) 6,144

Investing:
Purchase of property,
plant and equipment (6,637) (5,993) (14,158) (12,061)
Proceeds on disposition
of equipment under
sale-leaseback 448 1,493 448 1,493
Proceeds on disposal of
property, plant
and equipment 9 - 21,017 165
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(6,180) (4,500) 7,307 (10,403)


Effect of foreign exchange
changes on cash (633) 30 (930) (97)
---------------------------------------------------------------------------

Increase in cash 224 (4,683) 1,788 (2,530)

Cash, beginning of period 7,426 12,588 5,862 10,435

---------------------------------------------------------------------------
Cash, end of period $ 7,650 $ 7,905 $ 7,650 $ 7,905
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Supplemental cash flow
information:
Interest paid $ 1,127 $ 1,369 $ 2,428 $ 2,485
Interest received 55 59 124 138
Income taxes paid 357 269 487 1,011
Income taxes recovered 61 5 176 424

Supplemental disclosure
relating to non-cash
investing and financing
activities:
Acquisition of property,
plant and equipment
through:
Capital leases $ - $ 3,309 $ 45 $ 3,309
Tenant inducements 554 - 2,206 -


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

Periods ended May 31, 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 May 31, 2007 is $6.9 million and recorded as derivative instruments asset on the consolidated balance sheet.

3. Restatement of prior period financial statements

The Company has restated prior period financial statements to reflect the discovery of an error resulting from a special review of the valuation of inventory held at the Company's Malaysian subsidiary. The inventory shown on the comparative financial statements at November 30, 2006 was overstated by $6.1 million (February 28, 2006 - $2.3 million) and net earnings for the second quarter 2006 was overstated by $260 thousand and for the six-month period $239 thousand.



Earnings from Fully
operations diluted EPS Retained
Period Inventory overstatement / overstatement / earnings
ended overstatement (understatement) (understatement) overstatement
---------------------------------------------------------------------------
First
Quarter,
2007 6,542 480 nil 480

Fourth
Quarter,
2006 6,062 2,450 $ 0.03 2,450

Third
Quarter,
2006 3,612 1,081 $ 0.02 1,081

Second
Quarter,
2006 2,531 260 nil 260

First
Quarter,
2006 2,271 (21) nil (21)

Year ended
November
30, 2006 6,062 3,770 $ 0.05 3,770

December 1,
2005 opening
retained
earnings
adjustment 501

December 1,
2004 opening
retained
earnings
adjustment 1,791


4. Accumulated other comprehensive income As at
May 31
----------------------
----------------------
2007 2006
----------------------
Accumulated other comprehensive income (loss) on
cash flow hedges
Balance beginning of period $ - $ -
Impact of new cash flow hedge accounting rules on
December 1, 2006 (569) -
Unrealized gains (losses) on derivatives
designated as cash flow hedges 6,334 -
Reclassification of earnings on cash flow losses 525 -
----------------------
Balance end of period $ 6,290 $ -
----------------------

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 (29) (1,003)
----------------------
Balance end of period $ (10,381) $ (11,146)
----------------------

----------------------
Total accumulated other comprehensive loss $ (4,091) $ (11,146)
----------------------


5. 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 Six months ended
May 31 May 31
--------------------------------------
2007 2006 2007 2006
Restated Restated
(See Note 3) (See Note 3)
--------------------------------------
Income (loss) before income taxes $ 239 $ 5,493 $ (5,624) $ (1,957)
--------------------------------------
Combined statutory tax rate 36.1% 36.1% 36.1% 36.1%
--------------------------------------
Computed income taxes (recovery) $ 86 $ 1,983 $ (2,030) $ (706)
Increase (decrease) resulting from:
Canadian federal and provincial
rate reductions (58) 225 (92) 84
International rate differences (112) (611) (434) (614)
Valuation allowance 481 (1,687) 2,856 1,086
Corporate minimum taxes 15 (274) 30 (224)
Other differences (323) 90 (165) 161
--------------------------------------
$ 89 $ (274) $ 165 $ (213)
--------------------------------------


6. Share capital

The Company has 64,116,131 issued and outstanding shares as at May 31, 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 May 31, 2007, there are 3,127,170 subordinate voting shares issuable pursuant to outstanding stock options. There were no stock options exercised in the quarter. As at June 25, 2007, there were no changes to the number of shares issued and outstanding reported above.

7. 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 May 31, 2007, there were 161,818 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 May 31, 2007, there were 161,818 units (2006 - nil) awarded and outstanding of which none were vested. The Company recorded an expense of $54,000 for the quarter (2006 - nil) and $99,000 for six months (2006 - nil).

8. 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 May 31, 2007, the Company had outstanding foreign exchange contracts for the remainder of 2007 to sell U.S. $50 million at an average rate of exchange of $1.15 and for 2008, contracts to sell U.S. $28 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. $4 million at an average exchange rate of $1.16 with cancellation rates between $1.04 to $1.06 Canadian. The Company has U.S. $2 million of options for 2008 at an average rate of $1.18 with cancellation rates at $1.11 Canadian.



9. Geographic segmented information

Three months ended Six months ended
May 31 May 31
---------------------------------------------
---------------------------------------------
2007 2006 2007 2006
---------------------------------------------
Sales:
Canada $ 63,704 $ 68,753 $ 112,769 $ 119,617
United States 84,263 81,234 168,880 148,959
International 17,765 14,378 35,038 29,822
---------------------------------------------
$ 165,732 $ 164,365 $ 316,687 $ 298,398
---------------------------------------------


10. 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