WINDSOR, ONTARIO -- (Marketwire) -- 06/03/10 -- Reko International Group Inc. (TSX: REK) today announced results for its third quarter ended April 30, 2010.
Financial Highlights (complete statements follow):
Three Months (unaudited) Nine Months (unaudited) -------------------------------------------------------- Fiscal 2010 Fiscal 2009 Fiscal 2010 Fiscal 2009 ---------------------------------------------------------------------------- Sales $ 9,329 $ 14,791 $ 27,379 $ 45,152 Net (loss) income (2,269) 240 (5,313) 1,552 EPS basic (0.36) 0.05 (0.83) 0.23 Working capital 11,507 16,831 Shareholders' equity 38,311 45,299 Shareholders' Equity per Share 5.97 6.70 ----------------------------------------------------------------------------
Consolidated sales for the quarter ended April 30, 2010, were $9.3 million, compared to $14.8 million in the prior year, a decrease of $5.5 million or 37.2%. The decrease in sales in the quarter continues to be related to volume decreases, changes in the value of the U.S. dollar and depressed market prices. Consolidated sales for the nine months ended April 30, 2010 were $27.4 million, compared to $45.2 million in the prior year, a decrease of 39.4%.
The gross loss for the three months ended April 30, 2010, was $0.5 million, or 5.2% of sales, compared to a gross profit of $2.5 million in the prior year. The significant decrease in gross profit over the prior year, of approximately $3.0 million, relates to an inability to secure sufficient sales to absorb overhead. The gross loss for the nine months ended April 30, 2010 was $1.0 million, or 3.5% of sales, compared to a gross profit of $8.8 million, or 19.5% of sales, in the prior year.
Selling and administrative expenses for the three months ended April 30, 2010 were $1.4 million, or 14.8% of sales, compared to $1.7 million, or 11.5% of sales for the same period in the prior year. While the selling, general and administrative expenses declined 17.6%, year over year, they remain high as a percentage of sales reflecting the abnormally low sales volumes experienced by Reko in the third quarter and year to date. Selling and administrative expenses for the nine months ended April 30, 2010 were $4.4 million, or 16.1% of sales, compared to $5.6 million, 12.4% of sales, in the prior year, a 21.4% decline.
Net loss for the quarter was $2.3 million or $0.36 per share, compared to income of $0.2 million, or $0.05 per share, in the same period of the prior year. Net loss for the nine months ended April 30, 2010 was $5.3 million, or $0.83 per share, compared to income of $1.6 million, or $0.23 per share, in the same period of the prior year.
"The third quarter of 2010 represented a challenging period for Reko," said Diane St. John, CEO. "The weaknesses in the capital equipment market continued and, combined with a weak U.S. dollar, resulted in a shortfall of sales revenue. As our order book has begun to rise, we are cautiously optimistic that, similarly to the increases in our automotive business, the capital equipment market may be beginning to improve. This improvement, combined with our market diversification initiatives should positively impact future revenues. As sales return to more appropriate levels, we will be in a stronger position to absorb our overhead costs."
Founded in 1976, Reko International Group (TSX: REK) is a highly integrated, technology driven engineering and manufacturing firm providing engineered solutions for the plastics segment of the automotive, aerospace and consumer product markets. In its eight production facilities in Ontario, Reko designs and manufactures precision moulds and other related industrial tooling, in addition to its own proprietary line of CNC machining centres.
REKO INTERNATIONAL GROUP INC. Third Quarter Report INTERIM CONSOLIDATED BALANCE SHEETS As at April 30, 2010 with comparative figures for July 31, 2009 (in 000's) ---------------------------------------------------------------------------- April 31, July 31, (unaudited) (audited) 2010 2009 ---------------------------------------------------------------------------- ASSETS Current Cash and cash equivalents $ - $ 3,084 Accounts receivable (Note 4) 10,138 17,959 Other receivables 222 204 Non-hedging financial derivatives (Note 4) 1,255 1,522 Income taxes receivable 21 24 Work-in-progress 16,264 14,852 Prepaid expenses and deposits 547 572 Future income taxes - 12 ---------------------------------------------------------------------------- 28,447 38,229 ---------------------------------------------------------------------------- Capital assets 34,482 37,512 Future income taxes 2,793 3,409 SR & ED tax credits 4,675 4,685 ---------------------------------------------------------------------------- $ 70,397 $ 83,835 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- LIABILITIES Current Bank indebtedness $ 9,396 $ 12,500 Accounts payable and accrued liabilities 5,270 6,148 Current portion of long-term debt 1,984 2,640 ---------------------------------------------------------------------------- 16,650 21,288 ---------------------------------------------------------------------------- Long-term debt 13,059 15,181 Future income taxes 2,377 3,749 SHAREHOLDERS' EQUITY Share capital (Note 2) 18,772 18,772 Contributed surplus 1,749 1,742 Retained earnings 17,790 23,103 ---------------------------------------------------------------------------- 38,311 43,617 ---------------------------------------------------------------------------- $ 70,397 $ 83,835 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
See accompanying notes to the interim consolidated financial statements
REKO INTERNATIONAL GROUP INC. Third Quarter Report INTERIM CONSOLIDATED STATEMENTS OF (LOSS) INCOME AND COMPREHENSIVE (LOSS) INCOME AND RETAINED EARNINGS Three months and nine months ended April 30, 2010 with comparative figures for April 30, 2009 (in 000's except per share data) ---------------------------------------------------------------------------- For the three months For the nine months ended April 30, ended April 30, (unaudited) (unaudited) 2010 2009 2010 2009 ---------------------------------------------------------------------------- Sales $ 9,329 $ 14,791 $ 27,379 $ 45,152 Costs and expenses Cost of sales 8,792 11,169 25,050 32,852 Selling and administrative 1,377 1,702 4,411 5,582 Amortization 1,020 1,129 3,280 3,495 -------------------------------------------------------- 11,189 14,000 32,741 41,929 -------------------------------------------------------- (Loss) income before the following (1,860) 791 (5,362) 3,223 -------------------------------------------------------- Interest on long- term debt 246 249 787 765 Interest on other interest bearing obligations, net 117 149 333 328 -------------------------------------------------------- 363 398 1,120 1,093 -------------------------------------------------------- (Loss) income before income taxes (2,223) 393 (6,482) 2,130 -------------------------------------------------------- Income taxes (recovered) Current -- 50 -- 82 Future 46 103 (1,169) 496 -------------------------------------------------------- 46 153 (1,169) 578 -------------------------------------------------------- Net (loss) income and comprehensive (loss) income (2,269) 240 (5,313) 1,552 -------------------------------------------------------- Retained earnings, beginning of period 20,059 24,216 23,103 22,904 Net (loss) income (2,269) 240 (5,313) 1,552 -------------------------------------------------------- Retained earnings, end of period $ 17,790 $ 24,456 $ 17,790 $ 24,456 -------------------------------------------------------- -------------------------------------------------------- (Loss) earnings per common share Basic $ (0.36) $ 0.05 $ (0.83) $ 0.23 -------------------------------------------------------- -------------------------------------------------------- Diluted $ (0.36) $ 0.05 $ (0.83) $ 0.23 -------------------------------------------------------- --------------------------------------------------------
See accompanying notes to the interim consolidated financial statements
REKO INTERNATIONAL GROUP INC. Third Quarter Report INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS Three months and nine months ended April 30, 2010 with comparative figures for April 30, 2009 (in 000's) ---------------------------------------------------------------------------- For the three months For the nine months ended April 30, ended April 30, (unaudited) (unaudited) 2010 2009 2010 2009 ---------------------------------------------------------------------------- OPERATING ACTIVITIES Net (loss) income for the period $ (2,269) $ 240 $ (5,313) $ 1,552 Adjustments for: Amortization 1,020 1,129 3,280 3,495 Future income taxes 46 103 (1,169) 496 SR&ED credits (65) -- 10 -- Gain on sale of capital assets (2) -- (18) -- Stock option expense (Note 3) 1 3 7 13 ----------------------------------------------------------- (1,269) 1,475 (3,203) 5,556 Net change in non-cash working capital 1,465 (5,501) 6,234 (4,111) ----------------------------------------------------------- Cash (used in) provided by operating activities 196 (4,026) 3,031 1,445 ----------------------------------------------------------- FINANCING ACTIVITIES Net proceeds (payments) on bank indebtedness 1,169 4,892 (20) (430) Payments on long- term debt (1,171) (360) (2,778) (1,103) Cost of repurchase of shares -- (292) -- (376) ----------------------------------------------------------- Cash (used in) provided by financing activities (2) 4,240 (2,798) (1,909) ----------------------------------------------------------- INVESTING ACTIVITIES Investment in capital assets (196) (214) (769) (572) Proceeds on sale of capital assets 2 -- 536 1,036 ----------------------------------------------------------- Cash (used in) provided by investing activities (194) (214) (233) 464 ----------------------------------------------------------- Effect of foreign exchange rate changes on cash and cash equivalents -- -- -- -- ----------------------------------------------------------- Cash and cash equivalents, beginning of period -- -- -- -- ----------------------------------------------------------- Cash and cash equivalents, end of period $ -- $ -- $ -- $ -- ----------------------------------------------------------- -----------------------------------------------------------
See accompanying notes to the interim consolidated financial statements
REKO INTERNATIONAL GROUP INC.
Third Quarter Report
Notes to unaudited interim consolidated financial statements for the three and nine months ended April 30, 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.
Changes in accounting policy
Effective August 1, 2009, the Company adopted the Canadian Institute of Chartered Accountants ("CICA") accounting standards Section 3064 "Goodwill and intangible assets." The Company adopted this new recommendation effective August 1, 2009 without restatement of prior periods.
2. Share capital
The Company had 6,420,920 common shares outstanding at July 31, 2009. During the quarter, no options were granted and no options were exercised. On July 13, 2009, the Company announced a normal course issuer bid, which expired on July 21, 2009 after being completely filled. In the opinion of the Board of Directors, such purchases may, from time-to-time, constitute a good use of corporate funds.
Share capital transactions during the quarter were as follows:
---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Shares Amount ---------------------------------------------------------------------------- Balance as at January 31, 2010 6,420,920 $ 18,772 Shares re-purchased in respect of normal course issuer bid: -- -- ---------------------------------------------------------------------------- Balance as at April 30, 2010 6,420,920 $ 18,772 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
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 April 30, 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:
April 30, July 31, 2010 2009 $ $ ---------------------------------------------------------------------------- Held for trading financial assets Cash and cash equivalents $ -- $ 3,084 Non-hedging financial derivatives 1,255 1,522 ---------------------------------------------------------------------------- $ 1,255 $ 4,810 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Held for trading financial liabilities Bank indebtedness $ 9,396 $ 12,500 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Loans and receivables Accounts receivable $ 10,138 $ 17,959 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Other financial liabilities Accounts payable and accrued liabilities $ 5,270 $ 6,148 Current portion of long-term debt 1,984 2,640 Long-term debt 13,059 15,181 ---------------------------------------------------------------------------- $ 20,313 $ 23,969 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
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 $15,043. Based on current interest rates for debt with similar terms and maturities, the fair value of the long-term debt is estimated to be $15,449.
Impairment losses recognized on trade receivables
During the quarter, the Company recorded the following transactions with respect to its allowance for doubtful accounts:
---------------------------------------------------------------------------- ---------------------------------------------------------------------------- April 30, 2010 ---------------------------------------------------------------------------- Opening allowance for doubtful accounts $ 821 Less: write-off of allowance and receivables (38) Plus: bad debt expense 50 Less: effect of foreign exchange on U.S. denominated balances (35) ---------------------------------------------------------------------------- Closing allowance for doubtful accounts $ 798 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
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 April 30, 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 April would, assuming all other variables remain constant, have decreased net income by $6, 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 April 30, 2010, the Company had entered into foreign exchange contracts to sell an aggregate amount of $24,100 (USD). These contracts hedge our expected exposure to U.S. dollar denominated net assets and mature at the latest on February 14, 2011, at an average exchange rate of $1.0732 Canadian. The mark-to-market value on these financial instruments as at January 31, 2010 was an unrealized gain of $1,255; the change in this value from January 31, 2010 has been recorded in net loss for the quarter and the change from July 31, 2009 has been recorded in the year-to-date figures.
---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Carrying & As at April 30, 2010 Maturity Notional Average Notional fair value rate USD value asset equivalent (liability) ---------------------------------------------------------------------------- Sell USD / Buy CAD 0-6 months $ 11,995 1.0884 $ 11,200 $ 795 Sell USD / Buy CAD 7-12 months 6,254 1.0810 5,900 354 Sell USD / Buy CAD 12-18 months 5,632 1.0506 5,500 132 Sell USD / Buy CAD 18-24 months 1,474 1.0122 1,500 (26) ---------------------------------------------------------------------------- $ 25,355 $ 24,100 $ 1,255 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- As at July 31, Carrying & 2009 Maturity Notional Average Notional fair value rate USD value asset equivalent (liability) ---------------------------------------------------------------------------- Sell USD / Buy 0-6 CAD months $ 9,465 $ 1.1921 $ 8,500 $ 965 Sell USD / Buy 7-12 CAD months 7,955 1.1683 7,300 655 USD Call / CAD 0-6 put months 9,768 1.0775 9,600 168 CAD Call / USD 0-6 put months 9,334 1.0580 9,600 (266) Elimination of conjoined put / calls (9,600) 1.0856 (9,600) -- ---------------------------------------------------------------------------- $ 26,922 $ 1.1386 $ 25,400 $ 1,522 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
Interest rate risk
The Company's interest rate risk primarily arises from its floating rate debt, in particular its bank indebtedness. At April 30, 2010, $9,396 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 April 30, 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 $12, 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 these 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, April 30, 2010, sales to the Company's three largest customers represented 44.4% of its total sales. These same customers represent approximately 36.3% of its total accounts receivable, as at April 30, 2010.
Liquidity risk and relationship with primary lender
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 April 30, 2010, the Company has undrawn lines of credit available to it of approximately $10,604; however, under its current margining provisions with its lender, the maximum it can draw on its available undrawn lines of credit is limited to $5,707.
The Company met its financial covenants at the end of the third quarter of 2010. During the quarter, the Company renegotiated its Debt Service Coverage Ratio with its primary lender. For the current and next quarter, our primary lender has agreed to replace our quarterly Debt Service Coverage Ratio covenant with a minimum monthly EBITDA (earnings before interest, taxes, depreciation, amortization and non-cash charges, all as defined by our primary lender) covenant. The Company's current forecasts suggest that it will earn sufficient levels of EBITDA to meet its minimum monthly EBITDA covenant. Despite the Company's current forecasts suggesting the Company will achieve its replaced financial covenant, Reko is exposed to a number of risks, as discussed in the section of its MD&A identified as Risk & Uncertainties, that could prevent it from achieving its primary lender defined minimum monthly EBITDA covenant.
As part of the Company's existing debt agreements, three financial covenants are monitored and communicated, as required by the terms of credit agreements, by management to ensure compliance with the agreements. The covenants are: i) quarterly debt to equity ratio - calculated as total debt, excluding future income taxes divided by shareholders' equity minus minority interest, if any; ii) monthly EBITDA less cash taxes; and (iii) quarterly current ratio - calculated as current assets divided by current liabilities.
Disclosures related to exposure risks are included in the section "Liquidity and Capital Resources" of Management's Discussion and Analysis for the three months ended April 30, 2010, which is included as part of Reko's Third Quarter 2010 Report to shareholders, along with these interim consolidated financial statements. Accordingly, these disclosures are incorporated into these interim consolidated financial statements by cross-reference.
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 April 30, 2010, the above capital management criteria can be illustrated as follows:
---------------------------------------------------------------------------- ---------------------------------------------------------------------------- April 30, July 31, 2010 2009 $ $ ---------------------------------------------------------------------------- Net debt Bank indebtedness 9,396 12,500 Current portion of long-term debt 1,984 2,640 Long-term debt 13,059 15,181 Less: cash and cash equivalents -- (3,084) ---------------------------------------------------------------------------- Net debt 24,439 27,237 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Shareholders' equity 38,311 43,617 ---------------------------------------------------------------------------- Ratio 0.64 0.62 ----------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following is management's discussion and analysis of operations and financial position ("MD&A") and should be read in conjunction with the unaudited interim consolidated financial statements for the nine months ended April 30, 2010 and the audited consolidated financial statements and MD&A for the year ended July 31, 2009 included in our 2009 Annual Report to Shareholders. The unaudited interim consolidated financial statements for the nine months ended April 30, 2010 have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP"), and the audited consolidated financial statements for the year ended July 31, 2009 have been prepared in accordance with Canadian GAAP. When we use the terms "we", "us", "our", "Reko", or "Company", we are referring to Reko International Group Inc. and its subsidiaries.
This MD&A has been prepared by reference to the MD&A disclosure requirements established under National Instrument 51-102 "Continuous Disclosure Obligations" ("NI 51-102") of the Canadian Securities Administrators. Additional information regarding Reko, including copies of our continuous disclosure materials such as our annual information form, is available on our website at www.rekointl.com or through the SEDAR website at www.sedar.com.
In this MD&A, reference is made to gross profit (loss), which is not a measure of financial performance under Canadian GAAP. The Company calculates gross profit (loss) as sales less cost of sales (including depreciation and amortization). The Company included information concerning this measure because it is used by management as a measure of performance, and management believes it is used by certain investors and analysts as a measure of the Company's financial performance. This measure is not necessarily comparable to similarly titled measures used by other companies.
All amounts in this MD&A are expressed in 000's of Canadian dollars, except per share data and where otherwise indicated.
This MD&A is current to June 2, 2010.
OVERVIEW
Reko designs and manufactures a variety of engineered products and services for original equipment manufacturers ("OEMs") and their Tier 1 suppliers. These products include plastic injection molds, fixtures, gauges, lean cell factory automation, high precision custom machining and assemblies. Customers are typically OEMs or their Tier 1 suppliers and are predominantly in the automotive market. Divisions of Reko are generally invited to bid upon programmes comprised of a number of custom products used by the customer to produce a complete assembly or product.
For the automotive industry, the Company designs and builds plastic injection molds, hydro-forming dies, two shot molds, and compression molds. Injection molds range in size from less than one cubic foot to approximately four feet wide, ten feet long, and six feet high. They range in weight from approximately 100 pounds to 50 tons. Typically, plastic injection molds are expected to perform up to 1,000,000 production cycles with limited maintenance. Each production cycle lasts between 30 and 120 seconds. Reko has extensive experience and knowledge in mold design and material flow and the impact of pressure on segments of the mold/die. In addition, it designs and builds custom lean factory cell automation for use primarily in the automotive industry and specialty custom machines for other industries. The factory automation systems include asynchronous assembly and test systems, leak and flow test systems, robotic assembly/machines vision work cells and various welding systems. For the transportation and oil and gas industry, the Company machines customer supplied metal castings to customer indicated specifications.
Our design and manufacturing operations are carried on in eight manufacturing plants located at four industrial sites in the suburbs of the City of Windsor in Southwestern Ontario.
INDUSTRY TRENDS AND RISKS
Historically, our success has been primarily dependent upon (i) a favourable U.S. dollar versus the Canadian dollar; (ii) the levels of new model releases of automobiles and light trucks by North American OEMs; and, (iii) our ability to source molding and automation programmes with them. OEM new model releases can be impacted by many factors, including general economic and political conditions, interest rates, energy and fuel prices, labour relation issues, regulatory requirements, infrastructure, legislative changes, environmental emissions and safety issues.
The economic, industry and risk factors discussed in our Annual Information Form and Annual Report, each in respect of the year ended July 31, 2009, remain substantially unchanged in respect of the nine months ended April 30, 2010, however, the most significant of which are repeated below.
Continued support of our lenders could have a material impact on our profitability and continued sustainability
The Company is engaged in a capital-intensive business; has significant financing requirements placed on it by its customers; and its financial resources are inferior to the financial resources of our customer base. There can be no assurance that, if, and when the Company seeks additional equity or debt financing, it will be able to obtain the additional financial resources required to successfully compete in its markets on favourable commercial terms. The Company's continued relationship with its lenders is tied to the Company's ability to meet the financial covenant conditions placed on it by its lenders. During the past year, our lender has agreed, on multiple occasions to revisit and revise our financial covenants while the Company deals with general economic pressure, industry specific pricing pressure and certain operational issues. There can be no assurance as to the length of time our lender is willing to provide the Company to return its operations to its historically normal financial covenants. Further, additional equity financings may result in dilution to existing shareholders.
Current outsourcing and in-sourcing trends could materially impact our profitability
As global market conditions just begin to improve from the previous two years' financial lows, demand for our customers' products remains weak. During periods of weakened demand, our customers traditionally revisit outsourcing decisions as a method of maintaining their employment levels. As a result of this and other factors, some of our customers are deciding to perform in-house work that in the recent past would have been performed by Reko. Depending upon the depth and breadth of the current economic recovery, Reko may continue to experience significant reductions in securing out-sourced work from customers.
The increasing pressure from our customers to launch new awards without adequate design support could materially impact our profitability
As the automotive industry completes the restructuring of its operations and deals with the production volume volatility that is commonplace today, our OEM and Tier 1 customers continue to operate at substantially reduced design support levels for new vehicle launches. Without an adequate level of support, the quality of information provided to the tool builders to begin their work has dropped significantly. In addition, the tool builders' ability to manipulate the poor quality information is limited as the appropriate resources to approve the manipulations are not available from the OEM or Tier 1. This has introduced significant inefficiencies to the process and decreased the ability of the tool builder to manufacture molds on a profitable basis.
The consequences of deteriorating financial condition of a large number of our customers and their resultant inability to satisfy their financial obligations could materially impact our profitability and cash flow
The financial condition of our traditional customers has deteriorated in recent years due in part to high labour costs (including health care, pension and other post-employment benefit costs), high raw materials, commodities and energy prices, declining sales and other factors. This deterioration ultimately led to General Motors and Chrysler filing for Chapter 11 bankruptcy protection. Additionally, the volatility of gasoline prices has affected and could further threaten sales of certain of their models, such as full-size sport utility vehicles and light trucks. All of these conditions could further threaten the financial condition of some of our customers, putting additional pressure on us to reduce our prices and exposing us to greater credit risk. In the event that our customers are unable to satisfy their financial obligations or seek protection from their creditors, we may incur additional expenses as a result of our credit exposure.
Significant long-term fluctuations in relative currency values of the Euro, U.S. dollar and Canadian dollar could materially impact our profitability
Although we report our financial results in Canadian dollars, a significant portion of our sales are priced in U.S. dollars. Our profitability is affected by movements of the U.S. dollar against the Canadian dollar. However, as a result of economic hedging programmes employed, foreign currency transactions are not fully impacted by the recent movements in exchange rates. Economic hedging programmes are inherently short-term in nature. Despite these measures, significant long-term shifts in relative currency values could have an adverse effect on our profitability and financial condition and any sustained changes in relative currency values could adversely impact our competitiveness in both the short and long-terms.
CHANGES IN ACCOUNTING POLICY
On August 1, 2009, the Company adopted the Canadian Institute of Chartered Accountants ("CICA") accounting standards Section 3064 "Goodwill and intangible assets". The Company adopted this new recommendation effective August 1, 2009 without restatement of prior periods.
UNUSUAL ITEMS
Renegotiated financial covenants with primary lender
During the quarter, the Company requested certain revised financial covenants with its primary lender for Reko's third and fourth quarters. The lender agreed to the revised financial covenants and a term sheet between the Company and the lender was signed on May 27, 2010.
During the quarter, the Company requested a revised financial covenant with a secondary lender for Reko's fiscal 2010 year. The lender provided verbal confirmation that it would amend the fiscal 2010 financial covenant. As of the effective date of this MD&A, while the Company has not received written confirmation of the financial covenant, Reko anticipates that the secondary lender and Reko will be able to resolve the outstanding financial covenant issue in advance of the end of its 2010 fiscal year.
AVERAGE FOREIGN EXCHANGE/FINANCIAL AND OTHER INSTRUMENTS
Reko is exposed to the impacts of changes in the foreign exchange rate between Canadian and United States ("U.S.") dollars. More specifically, approximately 90% of the Company's sales and 20% of its costs are incurred in U.S. dollars. In addition, the Company maintains a significant asset on its balance sheet which represents unutilized non-capital losses available to reduce future taxable income in the U.S. and it operates a sales office in the U.S., where it maintains working capital and capital assets.
In order to minimize our exposure to the impacts of changes in the foreign exchange rate, the Company maintains a forward foreign exchange hedging programme ("Programme"). Reko's Programme is based on maintaining our net exposure to the U.S. dollar (total U.S. exposure less forward foreign exchange contracts) between positive and negative $2,000,000. This Programme is designed to minimize the Company's exposure to foreign exchange risks over the mid-term. As a consequence of this mid-term exposure protection, the Company is subject to short-term paper gains and losses on its net exposure to the U.S. dollar, most particularly during periods when our net exposure to the U.S. is outside of our target exposure. During periods of rapid fluctuation in the foreign exchange rate between the Canadian dollar and the U.S. dollar, regardless of our net exposure to the U.S. dollar, the Company can generate significant gains or losses, which will materially impact financial results. These significant gains or losses are entirely related to mark-to-market accounting rules and represent the product of our net exposure to the U.S. dollar and the change during any given month of the value of the U.S. dollar in relation to the Canadian dollar.
During each of the last four quarters, the maximum amount of the Company's month-end exposure to the U.S. dollar has been:
---------------------------------------------------------------------------- Forward Total U.S. foreign exposure exchange Net exposure before hedging contracts to the U.S. Fiscal Period programme booked dollar ---------------------------------------------------------------------------- Q3 - 2010 $ 23,488 $ 24,100 $ (612) Q2 - 2010 $ 23,798 $ 25,600 $ (1,802) Q1 - 2010 $ 29,937 $ 27,300 $ 2,637 Q4 - 2009 $ 31,201 $ 24,200 $ 7,001 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
As a result of the Company's purchase of forward foreign exchange contracts ("FFECs"), the Company is subject to changes in foreign exchange rates that may not be consistent with changes in the current quoted foreign exchange rates. More specifically, the Company's foreign exchange risk is split such that its net exposure to the U.S. dollar, as detailed above, is subject to the change in market foreign exchange rates on a monthly basis and the remainder of its U.S. dollar exposure is subject to foreign exchange risks based on the specific foreign exchange rates contained in its FFECs. The table below presents a comparison between actual foreign exchange rates and Reko's effective rate on its booked FFECs.
---------------------------------------------------------------------------- For the three months ended April 30, 2010 ------------------------------------------------ 2010 2009 ------------------------------------------------ Reko Reko effective effective Actual rate Actual rate ---------------------------------------------------------------------------- U.S. Dollar equals Canadian Dollar 1.0285 1.0911 1.2445 1.1033 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- For the nine months ended April 30, ------------------------------------------------ 2010 2009 ------------------------------------------------ Reko Reko effective effective Actual rate Actual rate ---------------------------------------------------------------------------- U.S. Dollar equals Canadian Dollar 1.0520 1.1158 1.1900 1.0578 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
The Company's FFECs represent agreements with an intermediary to trade a specified amount of U.S. dollars for Canadian dollars at a specific rate on a specific date. Currently, the date is between one and two years after the date on which the FFEC is booked. The specific rate entered into is not necessarily indicative of what either the intermediary or Reko believes the foreign exchange rate will be on the date the settlement of the trade occurs, rather it is a rate set by the intermediary which Reko can either accept or reject.
During the third quarter, the Company recorded a pre-tax gain of approximately $51 related to the fair value of its U.S. dollar exposures, as compared to a pre-tax loss of $157 in the prior year's third quarter. For the year to date, the Company recorded a pre- tax gain of $368, as compared to a pre-tax loss of $600 in the prior year to date. These foreign exchange gains or losses are reported as part of our sales.
At the end of the third quarter of fiscal 2010, we held FFECs of $24,100 compared to $26,100 at the end of the third quarter of fiscal 2009. During fiscal 2010, on average, we have had $25,800 of FFECs outstanding monthly, the same amount as in the prior year. During the prior year, our ability to enter FFECs was adversely impacted by mandate of our intermediary, due to the losses in our then existing FFECs. The losses in our then existing FFECs were a function of holding FFECs with average values near 1.05 when the actual foreign exchange rate was 1.25.
The following table outlines the level of FFECs presently maintained and the average effective rate of these contracts:
---------------------------------------------------------------------------- Contract value booked Effective average Fiscal Period (000's) rate ---------------------------------------------------------------------------- Q3 - 2010 $ 24,100 1.0732 Q4 - 2010 $ 18,300 1.0632 Q1 - 2010 $ 12,900 1.0601 Q2 - 2011 $ 10,000 1.0523 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
The Company notes that at current levels of FFECs and U.S. dollar denominated assets and liabilities, an increase in the value of the U.S. dollar against the Canadian dollar results in the Company recording losses and an increase in the value of the Canadian dollar against the U.S. dollar results in financial gains for the Company.
Foreign currency transactions are recorded at rates in effect at the time of the transaction. FFECs are recorded at month-end at their fair value, with unrealized holding gains and losses recorded in sales.
RESULTS OF OPERATIONS
Sales
Sales for the three months ended April 30, 2010 decreased $5,462, or 36.9%, to $9,329 compared to $14,791 in fiscal 2009.
The decrease in sales was largely related to:
-- The continued impacts of the global credit crisis and its resultant impacts on capital equipment orders, most particularly impacting our businesses tied to out-sourcing of machining and non-automotive machine building; -- Lower sales dollars earned per hour of work on our automotive work largely as a result of increased pricing pressures associated with Tier I automotive suppliers searching to replace lost production margins; and -- Lower sales dollars earned per hour of work on our automotive work as compared to our original budgets.
These factors were partially offset by:
-- Increases in the awards we are sourced, which we out-source, often in off-shore markets; and, -- Changes in the fair value of U.S. dollar assets and liabilities, as described above.
While the Company continues to actively quote and receive new orders, certain products continue to experience customer-initiated delays. These delays impact the Company's ability to proactively manage the timing and amount of work completed during each quarter, as well as impact the ability of the Company to absorb fixed overhead costs.
Sales for the nine months ended April 30, 2010 decreased $17,773, or 39.4%, to $27,379 compared to $45,152 in the same period last year. The decrease in sales for the nine months ended April 30, 2010 resulted from the same issues as those experienced in the three months ended April 30, 2010.
Gross loss
The gross loss for the three months ended April 30, 2010 decreased $2,975 to $482 or 5.2% of sales, compared to gross profit of $2,493, or 16.9% of sales, in the same period in the previous fiscal year.
The decrease in gross profit was largely related to:
-- Extremely low work volumes that were insufficient to absorb our fixed overhead costs; and, -- Low sales dollars earned per hour on our automotive work for the reasons identified above. This factor was partially offset by: -- Productivity and efficiency improvements resulting from the current year's and last year's restructuring activities; and, -- Changes in the fair value of U.S. dollar assets and liabilities, as described above.
The gross profit of $8,805, or 19.5% of sales, for the nine months ended April 30, 2009, decreased by $9,756 in the current year to a gross loss of $951, or 3.5% of sales, primarily for the same reasons identified above supplemented by the gain on the sale of unutilized land and building during the first quarter.
Selling and administration
Selling and administration expenses ("S,G&A") decreased by $325, or 19.1%, to $1,377, or 14.8% of sales for the three months ended April 30, 2010, compared to $1,702, or 11.5% of sales for the same period in the prior year.
The decrease in S,G&A was produced by savings achieved as a result of:
-- Reductions in wages and benefits due to the current year and prior year's restructuring efforts; -- Reductions in the year-to-date restructuring charges compared to the prior year; -- The cost of commissioned sales representatives, due to decreased sales during the quarter; -- Lower levels of travel and promotion consistent with our decreased sales levels during the quarter; and, -- Reductions related to accounts receivable insurance, telephone and office and miscellaneous expenses.
These factors were partially offset by increases in bank charges.
S,G&A for the nine months ended April 30, 2010 decreased by $1,171, or 21.0%, to $4,411, or 16.1% of sales, compared to $5,582 or 12.4% of sales in the same period last year, primarily for the reasons listed above.
Earnings overview
Net loss for the three months ended April 30, 2010 was $2,269, or $0.36 per share, compared to net income of $240, or $0.05 per share, in the same period of the prior year.
Net loss for the nine months ended April 30, 2010 was $5,313 or $0.83 per share, compared to net income of $1,552, or $0.23 per share, in the same period of the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow used in operations decreased $3,830 from $4,026 for the third quarter last year compared to $196 in the current year. The decrease in cash flow used in operations is primarily a result of:
-- Reductions in our working capital balances, most particularly accounts receivable. This factor was partially offset by: -- Decrease in net income offset by non-cash charges, including but not limited to amortization and future income taxes.
For the nine months ended April 30, 2010, cash flow from operations increased $1,586 to $3,031 compared to $1,445 for the same period last year.
Financial covenants
The Company met its financial covenants at the end of the third quarter of 2010. During the quarter, the Company renegotiated its Debt Service Coverage Ratio with its primary lender. For the current and next quarter, our primary lender has agreed to replace our quarterly Debt Service Coverage Ratio covenant with a minimum monthly EBITDA (earnings before interest, taxes, depreciation, amortization and non-cash charges, all as defined by our primary lender) covenant. The Company's current forecasts suggest that it will earn sufficient levels of EBITDA to meet its minimum monthly EBITDA covenant. Despite the Company's current forecasts suggesting the Company will achieve its replaced financial covenant, Reko is exposed to a number of risks, as discussed in the section of this MD&A identified as Risk & Uncertainties that could prevent it from achieving its primary lender defined minimum monthly EBITDA covenant.
Reko is in the process of revising its financial covenant with a secondary lender prior to its first measurement date on July 31, 2010. While the Company anticipates being able to renegotiate this financial covenant, it does not have a written agreement with the secondary lender to revise this financial covenant by that measurement date.
---------------------------------------------------------------------------- Payments due by period ---------------------------------------------------------- Contractual Less than 1 After 5 obligations Total year 1 - 3 years 4 - 5 years years ---------------------------------------------------------------------------- Long-term debt $ 14,394 $ 1,652 $ 12,492 $ 250 -- Capital lease obligations 649 331 318 -- -- Operating leases 4 3 1 -- -- Purchase obligations -- -- -- -- -- Other long-term obligations -- -- -- -- -- ---------------------------------------------------------------------------- Total contractual obligations $ 15,047 $ 1,986 $ 12,811 $ 250 -- ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
Capital assets and investment spending
For the three months ended April 30, 2010, the Company invested $196 in capital assets. For the nine months ended April 30, 2010, the Company invested $769 in capital assets. The entire amount of this spending is considered maintenance capital expenditures intended to refurbish or replace assets consumed in the normal course of business.
Cash resources/working capital requirements
As at April 30, 2010, Reko had borrowed $9,396 on its revolving line of credit, compared to $8,227 at January 31, 2010 and $12,552 at April 30, 2009. The revolver borrowings increased by approximately $1,169 in the quarter and decreased approximately $3,157 for the year. We expect borrowings to display a mid-term trend of increasing over each of the next four quarters.
Reko has a $20,000 revolver available to it; however, based on our current lender defined margining capabilities, our borrowings are limited to $15,103 of which approximately $5,707 were unused and available at April 30, 2010. Under the terms of our credit facilities, Reko must achieve certain financial covenants including a maximum Total Debt to Tangible Net Worth, a minimum Current Ratio and a minimum monthly EBITDA target.
Contractual obligations and off-balance sheet financing
Except as disclosed elsewhere in this MD&A, there have been no material changes with respect to the contractual obligations of the Company during the year.
Reko does not maintain any off balance sheet financing.
Share capital
The Company had 6,420,920 common shares outstanding at April 30, 2010. During the third quarter, Reko did not grant any options and there was no exercising of any existing options. In addition, since the Company's normal course issuer bid expired on July 21, 2009, after being completely filled, the Company did not purchase any shares during the quarter.
Outstanding share data
---------------------------------------------------------------------------- Maximum number issuable if convertible, exercisable or exchangeable for Designation of security Number outstanding common shares ---------------------------------------------------------------------------- Common shares 6,420,920 Stock options issued 117,000 Stock options exercisable 91,100 ---------------------------------------------------------------------------- Total (maximum) number of common shares 6,512,020 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
CRITICAL ACCOUNTING ESTIMATES
The Company's discussion and analysis of its results of operations and financial position is based upon the consolidated financial statements, which have been prepared in accordance with Canadian GAAP. The preparation of the consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and various other assumptions that are believed to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities. On an ongoing basis, management evaluates these estimates. However, actual results differ from these estimates under different assumptions or conditions.
Management believes the following critical accounting policies affect the more significant judgements and estimates used in the preparation of the consolidated financial statements of the Company. Management has discussed the development and selection of the following critical accounting policies with the Audit Committee of the Board of Directors and the Audit Committee has reviewed its disclosure relating to critical accounting estimates in this MD&A.
Allowances for doubtful accounts receivable
In order for management to establish appropriate allowances for doubtful accounts receivable, estimates are made with regard to economic conditions, potential recoverability through our accounts receivable insurer, and the probability of default by individual customers. The failure to estimate correctly could result in bad debts being either higher or lower than the determined provision as of the date of the balance sheet.
Revenue recognition and tooling and machinery contracts
Revenue from tooling and machinery contracts is recognized on the percentage of completion basis. The percentage of completion basis recognizes revenue and cost of sales on a progressive basis throughout the completion of the tooling or machinery.
Tooling and machinery contracts are generally fixed; however price changes, change orders and program cancellation may affect the ultimate amount of revenue recorded with respect to a contract. Contract costs are estimated at the time of signing the contract and are reviewed at each reporting date. Adjustments to the original estimates of total contract costs are often required as work progresses under the contract. When the current estimates of total contract revenue and total contract costs indicate a loss, a provision for the entire loss on the contract is made. Factors that are considered in arriving at the forecasted profit or loss on a contract include, amongst other items, cost overruns, non-reimbursable costs, change orders and potential price changes.
Impairment of long-lived assets
Management evaluates capital assets for impairment whenever indicators of impairment exist. Indicators of impairment include prolonged operating losses or a decision to dispose of, or otherwise change the use of, an existing capital asset. If the sum of the future cash flows expected to result from the asset, undiscounted and without interest charges, is less than the reported value of the asset, asset impairment must be recognized in the financial statements. The amount of impairment to be recognized is calculated by subtracting the fair value of the asset from the reported value of the asset.
Management believes that accounting estimates related to capital assets are 'critical accounting estimates' because: (i) they are subject to significant measurement uncertainty and are susceptible to change as management is required to make forward-looking assumptions regarding their impact on current operations; and (ii) any resulting impairment loss could have a material impact on the consolidated net income and on the amount of assets reported on the Company's consolidated balance sheet.
Future income taxes and SR&ED tax credits
Future tax assets, in respect of loss carry forwards and scientific research and experimental design credits related primarily to legal entities in Canada and the United States, are recorded in the Company's books. The Company evaluates the realization of its future tax assets by assessing the valuation allowance and by adjusting the amount of such allowance, if necessary. The facts used to assess the likelihood of realization are a forecast of future taxable income and available tax planning strategies that could be implemented to realize the future tax assets. The Company has, and continues to use, tax planning strategies to realize future tax assets in order to avoid the potential loss of benefits.
CONTROLS AND PROCEDURES
Management is responsible for implementing, maintaining and testing the operating effectiveness of adequate systems of disclosure controls and procedures. There are inherent limitations to the effectiveness of any system of disclosure including the possibility of human error and circumvention or overriding of the controls and procedures. Accordingly, even effective controls and procedures can only provide reasonable assurance of achieving their corporate objectives.
Our management used the Committee of Sponsoring Organizations of the Treadway Commission (COSO) framework to evaluate the effectiveness of internal controls over financial reporting. We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures during fiscal 2009, and concluded that Reko's controls and procedures are operating effectively to ensure that the information required to be disclosed is accumulated and communicated to management including the Chief Executive Officer and the Chief Financial Officer. A similar evaluation will be performed throughout fiscal 2010.
Based on these evaluations, the Chief Executive Officer and the Chief Financial Officer concluded that Reko's disclosure controls and procedures and internal controls over financial reporting do not include any material weaknesses and that they were effective in recording, processing, summarizing and reporting information required to be disclosed within the time period specified in the Canadian Securities Administrators (CSA) rules.
QUARTERLY RESULTS
The following table sets out certain unaudited financial information for each of the eight fiscal quarters up to and including the third quarter of fiscal 2010, ended April 30, 2010. The information has been derived from the Company's unaudited consolidated financial statements, which in management's opinion, have been prepared on a basis consistent with the audited consolidated financial statements contained elsewhere in this MD&A and include all adjustments necessary for a fair presentation of the information presented. Past performance is not a guarantee of future performance and this information is not necessarily indicative of results for any future period.
---------------------------------------------------------------------------- July/08 Oct/08 Jan/09 Apr/09 ---------------------------------------------------------------------------- Sales $ 14,091 $ 13,881 $ 16,480 $ 14,791 Net income (loss) (1,055) 437 875 240 Earnings (loss) per share: Basic (0.14) 0.06 0.12 0.05 Diluted (0.14) 0.06 0.12 0.05 ---------------------------------------------------------------------------- July/09 Oct/09 Jan/10 Apr/10 ---------------------------------------------------------------------------- Sales $ 10,128 $ 9,255 $ 8,794 $ 9,329 Net income (loss) (1,353) (1,177) (1,867) (2,269) Earnings (loss) per share: Basic (0.20) (0.18) (0.29) (0.36) Diluted (0.20) (0.18) (0.29) (0.36) ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
NORMAL COURSE ISSUER BID
The Company's normal course issuer bid expired on July 21, 2009, when it was completely filled.
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)
For Reko's financial year ended July 31, 2012, Reko will no longer report its financial results using Canadian GAAP, as a result of changes announced by The Canadian Institute of Chartered Accountants in March 2008. Instead it will report its financial results using IFRS. This change affects all entities that are considered publicly accountable entities. Reko is considered a publicly accountable entity due to its listing on the Toronto Stock Exchange.
While not all GAAP and IFRS are different, one of the most significant changes deals with the overriding premise in GAAP that financial reporting is based on historical cost, while IFRS' overriding premise is fair value.
Due to the potential pervasiveness of the changes inherent in moving to IFRS, a significant amount of time is necessary for management to plan its implementation. Possible impacts, besides external financial reporting, include, but are not limited to: banking agreements, business processes, information systems, employee and management incentive programmes, and legal agreements.
During the past two years, management:
-- Engaged internal resources to understand the new rules; -- Educated its primary accounting staff on the differences between GAAP and IFRS; -- Concentrated its efforts on those portions of IFRS that are different than GAAP; -- Identified those business processes that have the potential for amendment to properly transition to IFRS; -- Finalized its policy selections both on conversion and post conversion; and, -- Evaluated new financial statement disclosure.
As a result of this analysis, management has determined that the following financial statement line items will be impacted by the conversion to IFRS:
-- Capital assets - on conversion to IFRS, Reko will need to revalue its capital assets. Reko is currently collecting information before deciding whether this revaluation will be based on fair value assessments or reconsideration of prior year amortization. At the present time, insufficient information is available to determine whether or not the revaluation of our capital assets will result in an increase or decrease in their net book value and whether or not the amount will be material; -- Current portion of deferred income taxes - under IFRS, there is no requirement nor is it allowed, to calculate and present the current portion of deferred income taxes (that portion of deferred income taxes expected to be recognized in the current year) as part of an entity's financial statements. Accordingly, Reko advises that the current portion of its deferred income taxes will be reduced to $Nil on conversion to IFRS. This reduction to $Nil, will impact the amount of the Company's current assets in future periods and any financial ratios or covenants that include the calculation of current assets; -- Deferred income taxes - on conversion to IFRS, Reko will need to revalue its capital assets. As a result of revaluing its capital assets, Reko will also revalue its deferred income taxes as it relates to its capital assets. At the present time, insufficient information is available to determine whether or not the revaluation of deferred income taxes will be material and whether deferred income taxes will increase or decrease as a result; -- Contributed surplus - on conversion to IFRS, Reko will need to revalue its contributed surplus as a result of timing differences in the recognition of stock compensation expenses. Until August 1, 2011, Reko is unable to calculate the exact amount of this adjustment. As a result of this adjustment, Reko anticipates its contributed surplus will increase however it does not expect the amount to be material; -- Retained earnings - as a result of all of the above items, Reko's opening retained earnings on conversion to IFRS will change to reflect the cumulative impact of each of the above items; and, -- Amortization expense - on conversion to IFRS, Reko will revalue its capital assets. As a result of this revaluation, Reko's expected amortization expense will increase or decrease, in similar proportion and direction with the increase or decrease in the revaluation of its capital assets. As indicated in our discussion on capital assets, insufficient information is available to determine whether amortization expenses in the future will increase or decrease or whether it is by a material amount or not upon conversion to IFRS.
Going forward, management is concentrating on the quantification of the impact of the changes to the financial statements in preparation for our conversion to IFRS on August 1, 2011.
This MD&A contains forward-looking information and forward-looking statements within the meaning of applicable securities laws. We use words such as "anticipate", "plan", "may", "will", "should", expect", "believe", "estimate" and similar expressions to identify forward-looking information and statements. Such forward-looking information and statements are based on assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions and expected future developments, as well as other factors we believe to be relevant and appropriate in the circumstances. Readers are cautioned not to place undue reliance on forward-looking information and statements, as there can be no assurance that the assumptions, plans, intentions or expectations upon which such statements are based will occur. Forward-looking information and statements are subject to known and unknown risks, uncertainties, assumptions and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed, implied or anticipated by such information and statements. These risks are described in the Company's MD&A included in our 2009 Annual Information Form, this MD&A and, from time to time, in other reports and filings made by the Company with securities regulators.
While the Company believes that the expectations expressed by such forward-looking information and statements are reasonable, there can be no assurance that such expectations and assumptions will prove to be correct. In evaluating forward-looking information and statements, readers should carefully consider the various factors, which could cause actual results or events to differ materially from those, indicated in the forward- looking information and statements. Readers are cautioned that the foregoing list of important factors is not exhaustive. Furthermore, the Company disclaims any obligations to update publicly or otherwise revise any such factors of any of the forward-looking information or statements contained herein to reflect subsequent information, events or developments, changes in risk factors or otherwise.
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.
Contacts:
Reko International Group Inc.
Carl A. Merton
Chief Financial Officer
(519) 737-6974
www.rekointl.com
