Jewett-Cameron Trading Company Ltd. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended February 29, 2016; filed April 13, 2016. Figures are unaudited and in U.S. dollars. The company distributes and manufactures specialty metal, wood, seed, and industrial tool products, primarily in the United States.
Financial results
| Metric | Three months ended Feb. 29, 2016 | Prior-year quarter | Six months ended Feb. 29, 2016 | Prior-year period |
|---|---|---|---|---|
| Sales | $11.19 million | $9.48 million | $23.13 million | $17.47 million |
| Gross profit | $2.04 million | $1.90 million | $4.42 million | $3.77 million |
| Gross margin | 18.2% | 20.1% | 19.1% | 21.6% |
| Income from operations | $340,617 | $466,704 | $1.23 million | $996,603 |
| Net income | $131,960 | $283,560 | $664,205 | $611,347 |
| Diluted EPS | $0.05 | $0.11 | $0.27 | $0.23 |
- Six-month operating cash flow was $1.25 million, versus cash used of $3.88 million in the prior-year period. Investing activities used $42,302; financing activities were zero.
- Cash was $5.63 million at February 29, up $1.21 million from August 31, 2015. Working capital increased to $15.87 million from $15.10 million. Current assets were $17.59 million and current liabilities $1.72 million.
- Total liabilities were $1.76 million; there was no bank borrowing. The company had a $3.0 million credit line entirely available and reported compliance with its covenants.
- Total assets were $19.95 million and stockholders’ equity was $18.19 million. No dividends had been declared since incorporation.
Material changes and management commentary
- Six-month sales rose 32%, led by Lawn, Garden, Pet and Other (JCC), up 36% to $17.38 million. Management cited new products, additional small and mid-sized customers, and earlier seasonal shipments; prior-year sales were also affected by severe winter weather and West Coast port delays.
- Industrial wood sales increased, but management said demand remained below historical levels due to continued weakness in the marine industry.
- Seed sales grew, but the segment recorded a six-month operating loss of $29,705, compared with income of $117,035 a year earlier. Management cited drought-related lower yields and declining seed-cleaning services.
- Industrial tools sales fell 41% for the six-month period; the segment reported an operating loss of $68,301 versus prior-year income of $63,182. Management cited increased competition and price reductions that lowered margins.
- Operating expenses increased 15% over six months. Wages and benefits rose partly because the company made a one-time additional 10% contribution to eligible employees’ 401(k) plans. Six-month 401(k) expense was $279,975, versus $111,365.
- Quarterly net income fell despite higher sales, reflecting lower gross margin, increased operating expenses, and a $115,990 litigation loss. Six-month net income increased despite that settlement expense.
Liquidity, contingencies, outlook, and risks
- The company settled long-running litigation with Greenwood Forest Products during the period, paying $200,000 in cash; the litigation reserve was eliminated. The filing reports a $115,990 litigation expense in the financial statements, but the segment note refers to $118,990; verify the amount.
- After quarter-end, the board approved a repurchase plan for up to 250,000 shares through August 25, 2016. By the filing date, 5,042 shares had been repurchased for $56,596.
- No quantified earnings or revenue guidance is provided. Management cautioned that first-half results are not necessarily indicative of the fiscal year; the business is seasonal, with the first two quarters historically slower.
- Key risks include customer and supplier concentration, product demand and competition, vendor delivery delays, and limited trading volume. The top ten customers represented 80% of six-month sales; two customers represented 59% of receivables. Three suppliers each accounted for at least 10% of purchases.
- The company noted exposure to changing U.S. interest rates and foreign-currency effects on some purchases, including from China, but said it did not expect interest-rate changes to have a material adverse operating impact. No derivatives were outstanding.
- Management said disclosure controls were effective and reported no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Reconcile the litigation expense discrepancy: $115,990 in the statements and MD&A versus $118,990 in the segment note.
- Assess whether lower gross margins and losses in the seed and industrial tools segments persist as product mix, competition, and input costs change.
- Monitor dependence on major customers and suppliers, and the concentration of receivables with two customers.
- Review the impact of the new share repurchase plan on cash, share count, and capital allocation.
- Confirm seasonal performance and full-year trends; the filing gives no formal financial guidance.