Jewett-Cameron Trading Company Ltd. — FY2016 Form 10-K
Reporting period: Fiscal year ended August 31, 2016; U.S. dollars unless stated otherwise. The filing is an annual report, with quarterly results also provided. The company operates four segments: lawn, garden, pet and other; industrial wood products; seed processing and sales; and industrial tools and clamps.
Financial results and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $48.111 million | $42.238 million |
| Gross profit / margin | $9.737 million / 20.2% | $8.417 million / 19.9% |
| Operating income | $3.615 million | $2.924 million |
| Income before tax | $3.520 million | $2.956 million |
| Net income | $2.125 million | $1.774 million |
| Basic and diluted EPS | $0.87 | $0.69 |
| Cash from operations | $3.149 million | $2.831 million |
| Capital expenditures | $926,445 | $293,380 |
| Cash at year-end | $4.520 million | $4.416 million |
Working capital was $14.451 million, down from $15.103 million; the current ratio was 7.2. Total liabilities were $2.345 million and stockholders’ equity was $17.525 million. There was no bank borrowing at year-end. The company had an unused $3 million revolving credit facility, secured by accounts receivable and inventory, and reported compliance with its covenants. Operating cash flow exceeded share repurchases and capital spending combined.
Changes and segment performance
- Revenue increased 13.9%, primarily because JCC sales rose 19% to $39.286 million, reflecting acceptance of newer products and additional small and mid-sized customers. JCC segment income before tax increased to $3.254 million from $2.118 million.
- Industrial wood product sales were nearly flat at $4.704 million; the segment reported a $8,898 loss versus $91,552 income. Management cited continued weakness in the marine industry, alongside some new customers and product uses.
- Seed segment sales increased 5% to $2.927 million, but its loss widened to $193,208 from $23,096. Management cited reduced seed-cleaning services and drought-constrained supplies.
- Industrial tools and clamps sales fell 37% to $1.193 million; the segment moved to a $100,986 loss from $86,184 income. Increased competition and price reductions pressured margins.
- Operating expenses rose $628,000, principally because wages and benefits increased. The company made an additional 10% 401(k) contribution for eligible employees as a one-time compensation bonus; plan expense was $571,551 versus $242,960.
- Accounts receivable days improved to 25 from 32 and inventory days to 78 from 94. The company repurchased 175,538 shares for $2.125 million and the CEO returned 15,000 shares without payment. Weighted-average shares fell to 2.436 million from 2.582 million, contributing to higher EPS.
Outlook, risks and unusual items
Management stated that working capital, retained earnings and available credit were adequate for the coming fiscal year; the filing gives no numerical revenue or earnings guidance. A warehouse expansion began during FY2016, with $926,445 of property and equipment purchases; the filing describes the planned building as intended to support new product lines.
- Customer concentration is significant: the top ten customers generated 78% of FY2016 sales, and the largest customer generated 33%. Two customers represented 62% of year-end accounts receivable.
- Three suppliers each accounted for more than 10% of purchases. The company also identifies competition, economic and demand changes, supplier delivery delays, and potential loss of its credit facility as risks.
- Litigation with Greenwood Forest Products was settled during the year for a $200,000 cash payment. The company recorded $115,990 of litigation expense; the reserve was eliminated at settlement. The filing reports no other material active or pending legal proceedings.
- The company’s business is seasonal: JCC sales are typically higher from February through August. Foreign-currency exposure is described as limited, though exchange rates can affect purchases from contract manufacturers in China.
- Management concluded disclosure controls and internal control over financial reporting were effective as of August 31, 2016, with no material weakness identified. The independent auditor issued an unqualified opinion on the financial statements; its report did not attest to internal controls.
Investor verification priorities
- Assess the sustainability of JCC’s sales and profit growth and the effects of product introductions, seasonality and customer concentration.
- Review the deterioration in seed and industrial-tools segment results, including the causes and prospects for recovery.
- Verify the use, construction status and expected returns of the warehouse expansion and other capital spending.
- Consider the cash impact of share repurchases, the unused credit facility’s covenants and the company’s liquidity needs.
- Check the FY2016 one-time employee contribution and litigation settlement when comparing recurring earnings with prior periods.