Jewett-Cameron Trading Company Ltd. — Q2 FY2017 Form 10-Q
Reporting period: Three and six months ended February 28, 2017; comparative periods ended February 29, 2016. The company distributes and manufactures specialty building and metal products, industrial wood products, seed, and industrial tools, primarily in the United States. Financial statements are unaudited and expressed in U.S. dollars.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Sales | $9.50 million, down 15% year over year | $19.92 million, down 14% |
| Gross profit / margin | $2.13 million / 22.4%, versus $2.04 million / 18.2% | $4.52 million / 22.7%, versus $4.42 million / 19.1% |
| Operating income | $548,234, versus $340,617 | $1.34 million, versus $1.23 million |
| Net income | $309,013, versus $131,960 | $794,933, versus $664,205 |
| Diluted EPS | $0.14, versus $0.05 | $0.35, versus $0.27 |
| Operating cash flow | $(2.77) million, versus $1.30 million provided | $(2.17) million, versus $1.25 million provided |
Lower sales were offset by stronger gross margins and lower quarterly operating expenses. Prior-year net income included a $115,990 litigation expense; that matter was settled in fiscal 2016. Six-month operating expenses were broadly flat at $3.18 million.
Segments and material changes
- Lawn, garden, pet and other (JCC): Six-month sales fell 10% to $15.59 million; operating income declined to $1.29 million from $1.41 million. The prior-year comparison benefited from seasonal orders shipped earlier than usual.
- Industrial wood (Greenwood): Six-month sales declined 41% to $1.70 million, and the segment reported a $63,876 loss versus $44,412 income. Management said demand remained below historical levels and expected some second-half improvement based on customer indications.
- Seed: Six-month sales declined 30% to $1.64 million, mainly due to lower seed prices than in the prior-year drought-affected period. The segment returned to operating income of $96,864 from a $29,405 loss.
- Industrial tools and clamps (MSI): Six-month sales rose 83% to $999,901, and operating income was $79,696 versus a $68,301 loss. Management attributed growth to e-commerce and distributor efforts.
Liquidity, cash flow and capital resources
At February 28, 2017, cash was $2.02 million, down $2.50 million from August 31, 2016. Working capital increased to $15.06 million from $14.45 million. The six-month operating cash outflow reflected increased receivables and inventory, along with reduced payables and accrued liabilities. Receivables were $4.55 million and inventory $8.89 million; together they represented 82% of current assets. Six-month capital expenditures were $335,014, primarily corporate and administrative. The company began using its completed warehouse expansion during the quarter.
There was no borrowing under the $3.0 million bank line, which remained fully available; the company reported compliance with its covenants. The rate was one-month LIBOR plus 175 basis points (2.53% at period-end). Total liabilities were $1.38 million, including $1.35 million of current liabilities. No dividends have been declared.
Outlook, risks and other notable items
- No formal earnings or sales guidance was provided. Management cautioned that first-half results are not necessarily indicative of full-year results; JCC is seasonally stronger in the second half.
- Management is broadening JCC sales channels, including e-commerce and international sales, and developing MSI e-commerce and distributor channels.
- Customer concentration is significant: the top ten customers represented 78% of six-month sales, and two customers accounted for 52% of receivables. Purchases were also concentrated among two suppliers accounting for at least 10% each.
- Receivable collection days increased to 41 for the six-month period from 30; inventory turnover increased to 100 days from 77. These trends warrant monitoring alongside the operating cash outflow.
- Risks disclosed include customer demand and competition, reliance on major customers and suppliers, vendor delivery delays, access to the credit line, limited trading volume in the stock, potential dilution from future equity issuance, and interest-rate and foreign-currency exposure.
- The long-running Greenwood Forest Products litigation was settled in fiscal 2016 for a $200,000 cash payment; no other material pending legal proceedings were reported. The company reported effective disclosure controls and no material internal-control changes during the quarter.
Important facts for investors to verify
- Whether management’s anticipated second-half improvement in Greenwood demand materializes.
- Whether receivable collection and inventory turnover normalize and operating cash flow improves.
- How lower consolidated sales and segment-level trends develop, particularly at JCC and Greenwood.
- The extent of customer and supplier concentration and the company’s ability to maintain its undrawn credit facility and covenant compliance.