Business context and reporting period
Jewett-Cameron Trading Company Ltd. filed this unaudited Form 10-Q for the first quarter of fiscal 2015, the three months ended November 30, 2014, with comparative results for the three months ended November 30, 2013. The company distributes and manufactures specialty metal, wood, seed, and industrial tool products, primarily in the United States. Its financial statements are prepared under U.S. GAAP and were prepared by management.
Financial performance and position
| Metric | Q1 FY2015 | Comparable period / prior balance-sheet date |
|---|---|---|
| Sales | $7.983 million | $8.006 million |
| Gross profit / margin | $1.870 million / 23.4% | $1.850 million / 23.1% |
| Income from operations | $529,899 | $543,924 |
| Net income | $327,787 | $332,579 |
| Basic and diluted EPS | $0.12 | $0.11 |
| Cash from operations | $(1.049) million | $(159,255) |
| Cash | $1.985 million | $4.328 million at August 31, 2014 |
| Working capital | $14.923 million | $15.816 million at August 31, 2014 |
| Total assets / liabilities | $18.737 million / $1.503 million | $19.692 million / $1.493 million at August 31, 2014 |
Operating cash use reflected principally a $1.591 million inventory increase and a $278,000 increase in receivables. Investing cash use was $1,280; financing cash use was $1.292 million for share repurchases. Cash declined by $2.343 million during the quarter. The company had no bank borrowings and had the full $1 million line of credit available; it reported compliance with the line’s covenants. Current assets were $16.361 million against current liabilities of $1.438 million.
Material changes versus the prior comparable period
- Sales declined $23,664, or about 0.3%; gross profit rose about 1.1%, and gross margin improved 0.3 percentage points.
- Operating income decreased about 2.6% and net income decreased about 1.4%. EPS increased from $0.11 to $0.12, primarily because the weighted-average share count fell following repurchases.
- Industrial wood products sales fell 32% to $993,000 amid weak marine and boat-manufacturer demand; the segment moved from a pretax loss to pretax income of $18,067.
- Lawn, garden, pet and other sales rose 8% to $5.889 million, but segment pretax income fell to $164,755 from $258,917. Management cited increased competition and high raw-material costs.
- Seed sales declined 5% to $705,000, mainly due to increased competition. Industrial tools sales rose 9% to $396,000.
- Inventory increased $1.591 million from August 31, while cash and working capital fell. The company repurchased and cancelled 118,969 shares for $1.292 million, at an average $10.86 per share.
Outlook, risks, contingencies and unusual items
No specific financial guidance was provided. Management cautioned that quarterly results are not necessarily indicative of the fiscal year. It described the lawn, garden, pet and other business as seasonal, with the first two fiscal quarters generally slower than the last two. Management reported weak marine demand and does not anticipate a significant near-term recovery, while continuing efforts to develop customers and applications. Higher raw-material costs and competition are pressuring margins.
A long-running Greenwood Forest Products lawsuit remains significant. In December 2014, after the quarter end, the Oregon Supreme Court accepted the company’s petition to review a ruling adverse to it. The filing states potential exposure of $1.8 million; the recorded litigation reserve was $110,726 at November 30, 2014. The outcome remains uncertain.
Other disclosed risks include customer and supplier concentration, demand and delivery risks, and limited trading liquidity. The top ten customers represented 72% of quarterly sales; two customers accounted for 55% of receivables. Three suppliers each represented more than 10% of purchases. The company also noted potential dilution from future equity issuance, interest-rate exposure on its credit line, and currency effects on some purchases from contract manufacturers. Disclosure controls were assessed as effective, with no material changes in internal control reported for the quarter.
Important facts for investors to verify
- Track inventory, receivables, cash conversion and working-capital needs; inventory turnover rose to 148 days from 125 days a year earlier, and DSO rose to 31 days from 25.
- Monitor the Supreme Court litigation and whether the reserve adequately reflects the stated $1.8 million potential exposure.
- Assess whether lawn and garden sales growth can translate into improved segment profitability despite competition and material costs.
- Evaluate continued share repurchases against cash generation, liquidity and the reduced $1 million credit facility.
- Consider customer, supplier and market concentration, including ongoing weakness in marine-related demand.