Jewett-Cameron Trading Company Ltd. — Form 10-Q Summary
Business and period: The company is a British Columbia holding company operating through U.S. subsidiaries in specialty metal and wood products, industrial wood products, seed processing and sales, and industrial tools. This unaudited report covers the first quarter of fiscal 2017, the three months ended November 30, 2016, and compares results with the three months ended November 30, 2015. Financial figures are in U.S. dollars.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Sales | $10.42 million | $11.94 million |
| Gross profit | $2.39 million | $2.38 million |
| Gross margin | 23.0% | 19.9% |
| Operating income | $792,505 | $885,204 |
| Net income | $485,920 | $532,245 |
| Basic and diluted EPS | $0.21 | $0.21 |
| Operating cash flow | $605,062 | $(45,146) |
| Capital expenditures | $225,622 | $10,526 |
Sales fell 12.7%, while gross profit edged up about 0.6% as cost of sales declined. Operating expenses increased to $1.60 million from $1.49 million, primarily reflecting higher wages and employee benefits ($982,249 versus $876,345). SG&A was $551,048 versus $542,793; depreciation and amortization was $68,640 versus $75,513. Net income declined about 8.7%. EPS was unchanged, benefiting from fewer weighted-average shares after fiscal 2016 repurchases.
Liquidity, balance sheet and cash flow
- At November 30, cash was $4.90 million, up $379,440 from August 31, 2016. Operating activities provided $605,062; investing activities used $225,622.
- Working capital was $14.78 million, compared with $14.45 million at August 31, 2016. Current assets were $16.84 million and current liabilities $2.06 million.
- Total assets were $20.10 million; total liabilities were $2.09 million. The company reported no bank borrowings and no stock options outstanding.
- A $3.0 million bank line of credit was entirely unused. Its rate was one-month LIBOR plus 175 basis points (2.37% at November 30); the company reported compliance with its covenants.
- Inventory declined $380,408 from August 31, while accounts receivable rose $44,185. DSO was 30 days versus 33; inventory turnover was 89 days versus 79.
Material changes and segment results
- Industrial wood products: Sales decreased 38% to $959,616; segment reported a $28,462 pretax loss versus $37,249 income. Management cited continued marine-industry weakness, while noting some new customers and uses for products.
- Lawn, garden, pet and other: Sales decreased 5% to $8.42 million; pretax income was $527,220 versus $665,399. Management attributed lower sales partly to unusually early seasonal shipments in the prior-year quarter and said this business is historically slower in the first half of the fiscal year.
- Seed processing and sales: Sales decreased 61% to $479,111; pretax income was $36,811 versus $47,195. Management cited lower seed prices; prior-year prices had been elevated by drought-related supply conditions.
- Industrial tools and clamps: Sales increased 89% to $564,050; pretax income was $40,407 versus a $29,015 loss. The increase reflected a large seasonal order placed earlier than in prior years.
The company hired a chief operating officer during the quarter, a new position responsible for day-to-day operations. It spent $225,622 on capital expenditures, compared with $10,526 a year earlier.
Outlook, risks and other notable items
- No specific earnings or revenue guidance was provided. Management cautioned that quarterly results are not necessarily indicative of full-year results.
- The warehouse expansion at the North Plains headquarters received conditional occupation permits after quarter-end; management intended to begin using it during fiscal 2017’s second quarter.
- Customer concentration is significant: the top ten customers represented 79% of quarterly sales, and three customers accounted for 70% of receivables. Management warns that losing major customers could materially reduce sales and profitability. Supplier purchasing is also concentrated.
- Other stated risks include weaker product demand, competition, vendor delivery delays, limited trading liquidity in the company’s shares, interest-rate exposure, and potential dilution from future equity issuance. The company reported average daily NASDAQ trading volume of 3,610 shares for the quarter.
- The Greenwood Forest Products litigation was settled in fiscal 2016 for a $200,000 cash payment; the filing reports no other material active or pending legal proceedings. No dividends have been declared since incorporation.
- Management said disclosure controls were effective and reported no material changes in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the sales declines in industrial wood and seed operations persist, and whether the cited demand, pricing and seasonal factors continue.
- Customer and receivable concentration, including the company’s ability to retain major customers and collect outstanding balances.
- Whether the improved gross margin and positive operating cash flow are sustainable despite lower revenue and higher operating expenses.
- Completion, costs and operational contribution of the warehouse expansion, and any future capital or financing requirements.
- Any subsequent changes in line-of-credit availability, covenant compliance, share repurchases or share count.