Jewett-Cameron Trading Company Ltd. — Q2 FY2018 10-Q
Reporting period: Quarter and six months ended February 28, 2018. Unaudited consolidated results are in U.S. dollars. The company sells and distributes specialty wood, metal, garden and pet products, industrial tools, and agricultural seed, primarily in the United States.
Financial performance
| Metric | Q2 FY2018 | Q2 FY2017 | Six months FY2018 | Six months FY2017 |
|---|---|---|---|---|
| Sales | $13.34 million | $9.50 million | $22.76 million | $19.92 million |
| Gross profit | $2.64 million | $2.13 million | $4.82 million | $4.52 million |
| Gross margin | 19.8% | 22.4% | 21.2% | 22.7% |
| Income from operations | $720,244 | $548,234 | $1.29 million | $1.34 million |
| Net income | $508,298 | $309,013 | $830,731 | $794,933 |
| Diluted EPS | $0.23 | $0.14 | $0.37 | $0.35 |
| Operating cash flow | Not presented separately by quarter | $(3.06) million | $(2.17) million |
Quarterly sales rose 40%; six-month sales increased 14%. Management attributed the sales growth chiefly to JCC, which benefited from new customers and increased shipments of specialty lumber, including cedar fencing. Gross margin declined in both comparisons because lumber products represented a larger share of sales and carry lower margins. Quarterly operating income and net income improved, but six-month operating income declined despite higher sales; six-month net income rose modestly.
Liquidity, debt, and balance sheet
- At February 28, 2018, cash was $2.79 million, current assets were $19.50 million, current liabilities were $2.05 million, and working capital was $17.45 million. Working capital increased $1.01 million from August 31, 2017.
- Cash fell $3.12 million from August 31, 2017. Six-month operating cash use of $3.06 million primarily reflected increases in accounts receivable, inventory, prepaid expenses, and prepaid income taxes. Capital expenditures were $66,041.
- Accounts receivable was $6.06 million and inventory was $9.29 million; together they represented 79% of current assets. Management linked higher receivables to sales seasonality and cash-collection timing, and higher inventory to winter-delayed retailer purchases and advance purchases of metal products ahead of expected steel price increases.
- No borrowings were outstanding under the $3.0 million bank line of credit; the full amount was available. The facility is secured by receivables and inventory, bears interest at one-month LIBOR plus 1.75% (3.33% at period-end), and has financial covenants with which the company reported compliance. Total liabilities were $2.09 million; the filing reports no other debt.
Material changes, outlook, and risks
- Segment trends: Six-month lawn, garden, pet and other sales rose 24% to $19.32 million, while industrial wood sales fell 11% to $1.52 million, seed sales fell 15% to $1.39 million, and industrial tools sales fell to $523,000 from $1.00 million. Management cited weak industrial wood demand and increased competition in tools. The tools segment recorded a six-month pretax loss of $3,778.
- Product recall: During the six-month period, JCC and a retail customer voluntarily recalled a specific product after two breakage incidents; the CPSC issued a formal recall in March 2018. The company provided a return allowance and destroyed remaining units. Management said the recall significantly reduced JCC sales and income, but did not expect significant additional future costs. The filing does not quantify the recall’s financial impact.
- Unusual items and taxes: The company wrote off the remaining book value of two expired patents, contributing to higher depreciation and amortization. It also recorded a $27,022 six-month loss on sale of property and equipment. Management attributed lower income tax expense partly to the Tax Cuts and Jobs Act’s reduction in the federal tax rate.
- Seasonality and outlook: Management said JCC’s first two fiscal quarters are historically slower than the final two. It cautioned that interim results are not necessarily indicative of full-year results. No specific revenue, earnings, or margin guidance was provided. The company reported receiving a patent for its updated Adjust-A-Gate system, extending product protection by 15 years.
- Concentration and operating risks: The top ten customers represented 94% of six-month sales. Three customers accounted for 71% of receivables at February 28, 2018. Three suppliers each represented at least 10% of purchases; their combined purchases were $11.37 million. Risks discussed include customer loss, competition, product demand, supplier and delivery delays, limited share trading volume, and foreign-exchange exposure related to international sales and China sourcing.
- The company reported no material pending legal proceedings, no significant asset retirement obligations, effective disclosure controls, and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether higher sales and the company’s seasonal pattern translate into improved margins and operating income in the second half of FY2018.
- The final financial and reputational effects of the product recall, including any returns, claims, or costs beyond management’s current expectation.
- Whether receivables and inventory convert to cash as expected, given negative operating cash flow and customer and supplier concentration.
- Whether continued competition in industrial tools and weak industrial wood demand affect segment profitability.
- Any changes to credit-line availability, covenant compliance, or steel and other sourcing costs.