Reko Announces First Quarter Results For Fiscal 2003
WINDSOR, Ontario--Dec. 10, 2002--Reko International Group Inc. (TSX:REK) announces its financial results for the three months ended October 31, 2002. Sales for the three months ended October 31, 2002, increased to $23.2 million, representing a 35.7% increase over last year's sales of $17.0 million.Gross margin increased to $5.4 million, or 23.3% of sales, from $3.4 million and 20.2% of sales for the same period last year. Net earnings were $1.6 million, or $0.20 per share, compared to $0.5 million, or $0.07 per share, last year.
"We are pleased with the results of our first fiscal quarter for 2003," stated Steve Reko, President and C.E.O. "The changes instituted in our manufacturing process and customer focus during the past 18 months continues to improve our operations and is reflected in our financial performance. We have continued our solid results in what remains a challenging marketplace for tooling and engineering services. As part of Reko's strategy of broadening its product offering, the Company has signed acquisition related letters of intent with two Michigan based companies. First, Reko recently announced the intention to purchase 49% of TMC, a minority owned mould company, which will provide another marketing opportunity for Reko. Second, we have signed a letter of intent to acquire an 80% interest in Superior Plastics' assets. The Superior acquisition allows Reko to provide overflow production services to our customers utilizing lean manufacturing as well as to continue the growth of our non-automotive business base."
"These two events continue Reko on the path we set earlier this year to develop the Reko 'Tool Box' of full service capabilities to our automotive, industrial and consumer products customers," stated Gordon Young, Chief Operating Officer. "This allows Reko to provide our customers more services through our coordinated sales and marketing efforts. We feel very confident that these efforts will bear fruit and add to Reko shareholder value."
During the first quarter, the Company has not purchased any common shares under the normal course issuer bid.
Financial Highlights (complete statements follow):
Period Ended October 31, Three Months
(in $,000 except per share amounts) Unaudited
Fiscal 2003 Fiscal 2002
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Sales $23,159 $17,068
Net Income 1,570 534
EPS (basic) .20 .07
Working Capital 33,750 25,740
Shareholders' Equity 58,598 54,974
Shareholders' Equity per Share 7.49 6.90
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REKO INTERNATIONAL GROUP INC.
CONSOLIDATED BALANCE SHEETS
As at October 31, 2002 with comparative figures for July 31, 2002
(in 000's except per share data)
October 31, July 31,
(unaudited) (audited)
2002 2002
----------------------------------------------------------------------
ASSETS
Current
Accounts receivable
- trade $22,847 $20,968
- sundry 807 811
Income taxes receivable 372 --
Work-in-progress 26,188 21,289
Prepaid expenses and deposits 516 767
---------------------------
50,730 43,835
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Capital Assets 56,079 56,910
Industrial Revenue Bond Proceeds -
restricted for capital expenditures 3,614 3,718
Goodwill (Note 2) -- 1,595
---------------------------
$ 110,423 $ 106,058
---------------------------
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LIABILITIES
Current
Bank indebtedness $2,124 $551
Accounts payable and accrued liabilities 8,291 6,363
Income taxes payable -- 691
Future income taxes 3,175 2,449
Current portion of long-term debt 3,390 2,879
--------------------------
16,980 12,933
--------------------------
Long-term debt 27,053 26,280
--------------------------
Future income taxes 6,048 6,215
--------------------------
Non-controlling interest 1,744 1,891
--------------------------
SHAREHOLDERS' EQUITY
Share capital 22,883 22,883
Contributed surplus 325 325
Retained earnings 34,844 34,869
Cumulative translation adjustment 546 662
--------------------------
58,598 58,739
--------------------------
$ 110,423 $ 106,058
--------------------------
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CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
Three months ended October 31, 2002 with comparative figures for 2001
(in 000's except per share data)
For the three months
ended October 31,
(unaudited)
2002 2001
----------------------------------------------------------------------
Sales $23,159 $17,068
Costs and Expenses
Cost of sales 16,494 12,157
Selling and administrative 2,794 2,192
Depreciation and amortization 1,248 1,470
--------------------------
20,536 15,819
--------------------------
Income from operations before the following 2,623 1,249
--------------------------
Interest
Long-term debt 395 379
Other - net 37 --
--------------------------
432 379
--------------------------
Income before income taxes and
non-controlling interest 2,191 870
--------------------------
Income taxes
Current (Recovered) 171 (309)
Future 568 648
--------------------------
739 339
--------------------------
Income before non-controlling interest 1,452 531
Non-controlling interest 118 3
--------------------------
Net income for the period 1,570 534
Retained earnings, beginning of period
As previously reported 34,869 30,235
Adoption of new accounting standard (Note 2) (1,595) --
--------------------------
As restated 33,274 30,235
--------------------------
Retained earnings, end of period $34,844 $30,769
--------------------------
--------------------------
Basic income per Common Share $0.20 $0.07
--------------------------
--------------------------
Fully diluted income per Common Share $0.20 $0.07
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended October 31, 2002 with comparative figures for 2001
(in 000's except per share data)
For the three months
ended October 31,
(unaudited)
2002 2001
----------------------------------------------------------------------
OPERATING ACTIVITIES
Net income for the period $1,570 $534
Add non-cash items:
Depreciation and amortization 1,248 1,470
Future income taxes 568 648
Non-controlling interest (118) (3)
-------------------------
3,268 2,649
Net change in non-cash working capital (5,740) (1,353)
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Cash (used) provided - operating activities (2,472) 1,296
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FINANCING ACTIVITIES
Net proceeds/(payments) on bank indebtedness 1,574 (128)
Net proceeds on long-term debt 1,156 300
-------------------------
Cash provided - financing activities 2,730 172
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INVESTING ACTIVITIES
Investment in capital assets (332) (123)
Unused proceeds from bond issue - restricted
for capital expenditures 45 (28)
-------------------------
Cash (used) - investing activities (287) (151)
-------------------------
Effect of foreign exchange rate changes on
cash and cash equivalents 29 72
-------------------------
Net change in cash and cash
equivalents during the period -- 1,389
Cash and cash equivalents, beginning of period -- --
-------------------------
Cash and cash equivalents, end of period $-- $1,389
-------------------------
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Notes to Consolidated Financial Statements for the Three Months Ended October 31, 2002 with comparative figures for 2001 (Unaudited)
1. Significant accounting policies
These interim financial statements have been prepared in accordance with Canadian generally accepted accounting principles (GAAP), using the same accounting policies as Note 1 of the consolidated financials statements for the year ended July 31, 2002, except as disclosed in Note 2.
2. New accounting pronouncements
i) Goodwill amortization
During fiscal 2003, the Company adopted the new recommendations of the Canadian Institute of Chartered Accountants regarding the amortization of goodwill. It states that goodwill not be amortized but be reviewed annually for recording of an impairment loss if required. Effective August 1, 2002, the Company is following the guidelines with respect to the adoption of the recommendations prospectively. Goodwill was not amortized in the period. Although the prior year has not been restated, net income and earnings per share in the prior period quarter would have been higher by $22 with no effect on earnings per share and for the year ended July 31, 2002 would have been higher by $88 and $0.01 respectively had the change in accounting policy been applied retroactively.
ii) Goodwill impairment tests
Effective August 1, 2002, the Company has evaluated goodwill on a Company basis. The impairment test used the fair market value of the publicly traded stock as compared to the book value of the stock and concluded that an impairment loss be recorded in the amount of $1,595 to opening retained earnings.
iii) Stock-Based Compensation
Effective August 1, 2002, the Company has adopted the recommendations of the Canadian Institute of Chartered Accountants on accounting for stock-based compensation. The standard requires that a fair-value-based method of accounting be applied to all stock-based payments to employees. However, the new standard permits the Company to continue its existing policy of recording no compensation cost on the granting of stock options to employees. Consideration paid by employees on the exercise of stock options is recorded as share capital. No restatement of prior periods was required as a result of the adoption of the new standard.
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 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 equal cumulative vesting over that period and 20% being exercisable immediately upon issue. Options given to directors will vest immediately and can be exercised immediately. Effective September 24, 2002, amendments to the plan include a vesting progression of 30% in the year of grant, 30% in the second year, and 40% in the third year with the term still being 5 years. No options have been issued under this new plan.
As at October 31, 2002, the following options and warrants were outstanding:
Number of Options Exercise Price Expiry
215,400 4.50 2004
20,000 2.40 2005
60,000 2.84 2006
7,809 1.94 2005
10,000 1.90 2006
85,000 2.82 2007
2,000 4.10 2007
110,000 4.40 2007
The weighted average of the options is as follows:
Number of Weighted Average
Options Exercise Price
Outstanding at the beginning
of the period 510,209 $ 4.30
Granted during the period 110,000 $ 4.40
Expired during the period (110,000) $ 6.60
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Outstanding at the end of the
period October 31, 2002 510,209 $ 3.83
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Exercisable at the end of the period 307,844 $ 3.89
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The description of the method and significant assumptions used during the period to estimate the fair values of options, including the weighted average information, is as follows:
i) Expected life of five years;
ii) Expected dividends - nil;
iii) Expected volatility of 54%;
iv) Total compensation cost recognized in income for the stock-based employee compensation awards - nil;
v) Amounts charged or credited to contributed surplus in respect of stock based employee compensation awards - nil;
vi) Amounts credited to share capital in respect of stock-based employee compensation awards - nil.
During the period, the Company granted 110,000 stock options to various employees. The Company does not record a charge for compensation costs upon granting of stock options. Had compensation cost for the stock-based plan been determined based on the fair value at the grant dates for awards under the stock option plan consistent with the fair value based method of accounting for stock-based compensation, the Company's net income and income per share would have been reduced to the pro-forma amounts indicated below:
October 31, 2002
$000's (except
earnings per share)
--------------------
Net income As reported $1,570
Pro forma 1,525
Basic earnings per share As reported $0.20
Pro forma $0.20
The pro forma amounts presented exclude the effects of awards granted prior to the adoption of the new accounting standards on stock-based compensation on prior periods, in accordance with the recommendations of CICA Section 3870.
The following is management's interim discussion and analysis of operations and financial position and should be used in conjunction with the consolidated financial statements and Management's Discussion and Analysis included in the Company's 2001 Annual Report.
Management's Discussion and Analysis Overview
During the first quarter, the Company was successful in increasing sales volume, margins and net income compared to last year's quarter. These results were achieved despite excess capacity in the industries where we compete and the general soft economic climate. The Company believes its customer focus, together with its lean manufacturing process, will continue to maintain Reko as a leader in the industry.
Revenue
Reko continued to grow its operations and sales during the first quarter. Sales increased from $17.0 million last year to $23.2 million. The increase in revenue is attributable to growth in moulds and hydro forming dies compared to last year, together with higher volume in prototype dies and parts. The Company has consolidated its sales force and is concentrating its efforts in marketing Reko's 'Tool Box' of products.
Gross Margin
The gross margin during the period was 23.3% increasing from 20.2% of sales for last year. This increase resulted in a gross margin of $5.4 million for the quarter, up from $3.4 million last year. Higher sales volumes and tighter cost controls, together with reduced depreciation expense, contributed to the margin improvements.
Selling and Administration
Selling and administrative expenses increased from $2.2 million last year to $2.8 million this year. As a percentage of sales dollars, expenses were 12.1% of sales, down from 12.8% last year. The majority of the dollar increases in expenses results from the additional management and sales salaries costs as the Company expands its sales force to focus on sales growth through diversification both in customers and products.
Earnings Overview
Net income for the quarter was $1.6 million, or $0.20 per share, increasing from $0.5 million, or $0.07 per share, last year.
Liquidity and Capital Resources
Cash flow (before working capital adjustments) for the three months ended October 31, 2002, was $3.3 million, increasing from $2.6 million from the same period last year. During the quarter, the Company entered into capital leases in the amount of $379,000 U.S. at 5.62% for a 5-year term. The Company also locked in $2.0 million U.S. dollars of its long-term debt for 12-month period at a rate of 2.88%. Management expects the Company's cash requirements will be met by its cash flow and bank credit facilities.
Information in the previous discussion relating to projected growth, changing market conditions, improvements in productivity and future results constitutes forward-looking statements. Actual results in future periods may differ materially from the forward-looking statements because of a number of risks and uncertainties including, but not limited to, economic factors, industry cyclicality and the demand for the Company's technology, products and services.
Founded in 1976, Reko International Group is a highly integrated, technology driven engineering and manufacturing firm providing engineered solutions for the plastic and metal forming segment of the automotive, aerospace and consumer product markets. In its twelve production facilities in Ontario and Michigan, Reko designs and manufactures precision moulds, dies, metal stampings and other related industrial tooling, in addition to its own proprietary line of CNC machining centers.