Jewett-Cameron Trading Company Ltd. — Q2 FY2014 10-Q
Reporting period: Quarter and six months ended February 28, 2014. Unaudited consolidated results, in U.S. dollars. The company distributes and manufactures specialty building and metal products, industrial wood products, agricultural seeds, and industrial tools, primarily in the United States.
Financial performance
| Metric | Three months ended Feb. 28, 2014 | Prior year | Six months ended Feb. 28, 2014 | Prior year |
|---|---|---|---|---|
| Sales | $9.733 million | $14.228 million | $17.739 million | $23.524 million |
| Gross profit / margin | $1.758 million / 18.1% | $2.440 million / 17.1% | $3.607 million / 20.3% | $4.431 million / 18.8% |
| Income from operations | $408,818 | $979,059 | $952,742 | $1.751 million |
| Net income | $237,398 | $790,631 | $569,977 | $1.271 million |
| EPS, basic and diluted | $0.08 | $0.25 | $0.18 | $0.41 |
- Quarterly sales fell 32%; six-month sales fell 25%. Gross margin improved, but lower sales drove down gross profit, operating income, and net income.
- Six-month operating cash flow was negative $1.852 million, compared with negative $3.241 million a year earlier. Investing cash flow was negative $70,575; financing cash flow was negative $569,019, reflecting share repurchases. Cash decreased $2.492 million to $5.817 million.
- At February 28, 2014, current assets were $20.183 million, current liabilities $2.087 million, and working capital $18.095 million. Total liabilities were $2.129 million. No bank borrowings were outstanding; the full $5 million credit line was unused and covenants were met.
- Receivables were $4.256 million and inventory $7.529 million. Six-month DSO improved to 43 days from 56, while inventory turnover increased to 103 days from 61.
Material changes and management commentary
- JCC, the lawn, garden, pet and other segment, had six-month sales of $11.930 million, down 20%. Supplier capacity constraints around Chinese New Year delayed shipments and new-product rollouts. Management did not expect those constraints to persist through the rest of the fiscal year. Higher raw-material costs, competition, and sales initiatives also pressured segment income.
- Seed segment sales fell 52% for six months, reflecting the departure of its lead salesman, less seed-cleaning demand as growers increasingly clean in-house, and reduced grass-seed acreage as growers shifted to higher-margin food crops.
- Industrial wood sales declined 16% for six months amid weak marine demand and boat manufacturers’ excess inventory. The company sold excess marine-related inventory in February and does not anticipate a significant near-term marine recovery.
- Industrial tools sales declined 23% for six months as the company wound down lower-margin product programs and focused on more profitable products.
- The prior-year comparable periods included a $353,852 gain on the sale of land. This nonrecurring gain increased prior-year reported income; the current six-month gain on asset sales was $4,109.
- The business is seasonal, with the first two fiscal quarters typically slower than the last two. Results to date are not necessarily indicative of full-year results. No specific earnings or revenue guidance was provided.
Capital allocation, risks and contingencies
- During the six months, the company repurchased and cancelled 58,180 shares for $569,019, or $9.78 per share. After quarter-end, it repurchased 255,313 additional shares for $2,486,571, or $9.74 per share, and terminated the related 10b5-1 plan. The filing reports 2,821,443 common shares outstanding on April 9, 2014.
- A longstanding litigation matter resulted in a favorable Oregon Supreme Court decision for the company in 2012. The company reported a $130,854 litigation reserve at February 28, 2014 and $13,249 of litigation-related interest income for the six-month period. Management reported no other material active or pending proceedings.
- Customer concentration is significant: the top ten customers accounted for 69% of six-month sales, and three customers represented 57% of receivables. Two suppliers each represented more than 10% of purchases; their aggregate purchases were $5.872 million.
- Other disclosed risks include demand and competition, supplier and shipment delays, interest-rate exposure on the credit line, foreign-exchange effects on some purchasing, and potential dilution from future stock issuance. Management stated disclosure controls were effective and reported no material changes in internal control during the quarter.
Important facts for investors to verify
- Whether delayed JCC orders and new-product launches recovered after quarter-end, and whether higher input costs continued to affect margins.
- How the seed segment’s sales and customer coverage developed following the lead salesman’s departure, and whether weak marine demand persisted.
- The cash and share-count effects of the post-quarter $2.487 million repurchase, and the company’s capital-allocation plans after terminating the repurchase plan.
- Receivables collection, inventory levels and turnover, and the company’s exposure to its largest customers and suppliers.
- Future operating cash flow and any changes in access to, use of, or covenant compliance under the $5 million credit facility.