Jewett-Cameron Trading Company Ltd. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended February 29, 2012. Financial statements are unaudited and reported in U.S. dollars. The company distributes and processes wood, lawn and garden, pet, seed, and industrial tool products through four operating segments.
Financial performance
| Metric | Three months ended Feb. 29, 2012 | Prior-year quarter | Six months ended Feb. 29, 2012 | Prior-year six months |
|---|---|---|---|---|
| Sales | $11.75 million | $11.86 million | $18.99 million | $17.95 million |
| Gross profit | $2.09 million | $2.13 million | $3.56 million | $3.57 million |
| Gross margin | 17.8% | 17.9% | 18.7% | 19.9% |
| Income from operations | $672,436 | $755,337 | $835,371 | $834,031 |
| Net income (loss) | $1.29 million | $496,949 | $1.35 million | ($349,386) |
| Basic and diluted EPS | $0.71 | $0.25 | $0.73 | ($0.16) |
| Operating cash flow | Not separately provided for the quarter | $273,050 | ($1.50 million) |
Quarterly sales fell 1%; six-month sales rose 6%. Six-month gross profit was nearly flat despite higher sales, as higher material and transportation costs reduced gross margin. Six-month operating expenses declined slightly. Quarterly SG&A increased, while wages and benefits were broadly stable.
Liquidity, balance sheet, and capital allocation
- At February 29, 2012, cash was $4.31 million, down from $6.77 million at August 31, 2011. Current assets were $16.01 million and current liabilities $2.30 million, yielding working capital of $13.71 million, versus $14.97 million at fiscal year-end.
- Cash decreased by $2.46 million over the six months. Operating activities provided $273,050; investing activities used $43,581; financing activities used $2.69 million, primarily for share repurchases.
- The company reported no bank borrowings and had an unused $5 million line of credit. It said it was in compliance with the facility’s financial covenants. The stated rate was one-month LIBOR plus 200 basis points.
- During the six months, the company repurchased and cancelled 298,587 shares for approximately $2.69 million. Shares outstanding were 1,609,870 at February 29, 2012, compared with 1,908,457 at August 31, 2011.
- Accounts receivable were $3.95 million and inventory $6.48 million. The filing reports no dividends since incorporation.
Segments and material changes
- Lawn, garden, pet and other: Six-month sales increased 2% to $10.95 million, but segment pretax income declined to about $880,000 from about $983,000, excluding litigation items, as margins were pressured by costs. Management described the business as seasonal, with the first two fiscal quarters typically slower.
- Seed processing and sales: Six-month sales rose 39% to about $3.26 million; segment pretax income increased to $120,593. Management cited higher cereal and livestock feed prices but said demand remained relatively weak.
- Industrial wood products: Six-month sales fell 6% to $3.71 million. The segment remained loss-making, though its pretax loss improved to $120,214 from $243,156. Management cited weak boat-manufacturing demand and continued efforts to find other uses and customers.
- Industrial tools and clamps: Six-month sales rose 15% to $1.07 million, while pretax income declined to $9,548 from $40,824.
Unusual items, outlook, and risks
Reported earnings include a one-time $1.44 million reversal of litigation reserves and accrued interest after a favorable Oregon Supreme Court decision in February 2012. The decision reversed part of the prior appellate ruling, but the case was returned to the Oregon Court of Appeals for further consideration. The filing says the reversal increased current-period income and tax expense. Prior-year six-month results included $962,137 of litigation loss and $408,014 of related interest expense. Results excluding these items are not presented as a single consolidated adjusted measure.
The company provided no specific financial guidance. Management cautioned that interim results are not necessarily indicative of full-year results. It cited slow economic recovery, weak boat-industry demand, rising input and transportation costs, and seasonality. Additional disclosed risks include customer concentration (top ten customers represented 55% of six-month sales), customer receivable concentration (three customers represented 58% of receivables), dependence on significant suppliers, delivery delays, limited trading volume in the shares, and possible dilution from future share or preferred-stock issuance. Management reported effective disclosure controls and no identified material weaknesses in internal controls.
Important facts for investors to verify
- Follow the litigation on remand and assess whether any remaining reserve or payment exposure may arise; the filing reports a $184,286 litigation reserve at February 29, 2012.
- Separate recurring operating performance from the $1.44 million litigation-related reversal when evaluating reported net income and EPS.
- Monitor gross margins, material and freight costs, seasonal performance, and recovery in the marine and boat-manufacturing customer base.
- Review cash usage and remaining authorization under the share repurchase plan, which allowed repurchases of up to 300,000 shares and was scheduled to run through May 18, 2012, subject to early limitation or termination.
- Assess working-capital movements, customer and supplier concentration, and availability and covenant terms of the unused $5 million credit line.