Jewett-Cameron Trading Company Ltd. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended February 28, 2015. The U.S.-dollar consolidated financial statements are unaudited and management-prepared. The company manufactures and distributes specialty metal, wood, seed, and industrial-tool products, primarily in the United States.
Financial performance
| Metric | Three months ended Feb. 28, 2015 | Three months ended Feb. 28, 2014 | Six months ended Feb. 28, 2015 | Six months ended Feb. 28, 2014 |
|---|---|---|---|---|
| Sales | $9.483 million | $9.733 million | $17.466 million | $17.739 million |
| Gross profit | $1.902 million | $1.758 million | $3.772 million | $3.607 million |
| Gross margin | 20.1% | 18.1% | 21.6% | 20.3% |
| Operating income | $467,000 | $409,000 | $997,000 | $953,000 |
| Net income | $284,000 | $237,000 | $611,000 | $570,000 |
| Diluted EPS | $0.11 | $0.08 | $0.23 | $0.18 |
| Operating cash flow | $(2.835) million | $(1.693) million | $(3.884) million | $(1.852) million |
Quarterly sales declined 3%, while net income rose 19%; for the six-month period, sales declined 2% and net income increased 7%. Higher gross margins supported earnings, while operating expenses increased 6% for the quarter and 5% for the half year. Management said per-share results also benefited from share repurchases reducing weighted-average shares.
Balance sheet and liquidity
- At February 28, cash was $12,193, down from $4.328 million at August 31, 2014. Accounts receivable rose to $5.034 million from $2.443 million, and inventory rose to $11.103 million from $9.154 million.
- Working capital was $15.257 million, compared with $15.816 million at August 31, 2014. Current assets were $17.191 million and current liabilities were $1.934 million.
- Bank indebtedness was $875,386, versus none at August 31, 2014. The company had a $1 million secured line of credit, with $124,614 available at period-end; the rate was one-month LIBOR plus 1.75% (1.92% then). The company reported compliance with financial covenants. After quarter-end, the facility was increased to $3 million.
- Six-month cash used in operations was $3.884 million, largely reflecting higher receivables and inventory. Investing cash outflow was $14,697. Financing included $875,386 of credit-line proceeds and $1.292 million spent repurchasing shares.
- Total liabilities were $1.992 million and stockholders’ equity was $17.518 million at February 28, 2015.
Business developments, outlook, and risks
- Management attributed sales pressure to supplier delivery delays, severe winter weather, and West Coast port slowdowns. Port-related delays and higher freight costs were expected to continue into the fiscal third quarter. The filing gives no numerical earnings or revenue guidance and cautions that interim results may not indicate full-year performance.
- Segment trends were mixed: six-month sales increased 7% at lawn, garden, pet and other, 28% at industrial tools, and were relatively flat at seed; industrial wood sales fell substantially, reflecting weak demand and the prior-year sale of excess marine-related inventory. Management did not anticipate a significant near-term marine-market recovery.
- JCC faced competitive pressure and higher raw-material costs, which management said weighed on margins. Seed operations faced lower cleaning-service demand and reduced grass-seed acreage. MSI sales benefited from a focus on higher-turnover, higher-margin products.
- Share repurchases totaled 118,969 shares for $1.292 million in the first fiscal quarter; none were made during the second quarter. The company had authorized a new plan for up to 300,000 shares through August 14, 2015. After quarter-end it repurchased 1,103 shares for $11,406.
- A long-running Oregon lawsuit was before the state Supreme Court for review. The company reported potential exposure of approximately $1.9 million and a litigation reserve of $104,138 at February 28, 2015; the outcome remains uncertain.
- After an independent director and audit committee chair died in March 2015, the company reported that its audit committee had two independent members rather than the three required by Nasdaq. It has a cure period to appoint a qualified director; failure to regain compliance could lead to delisting.
- Other disclosed risks include customer and supplier concentration, inventory and receivable collection risk, shipping disruptions, competition, variable-rate borrowing, and limited trading volume. The top ten customers represented 69% of six-month sales; one customer represented 38% of receivables.
Key facts investors should verify
- Whether receivables are collected and inventory converts to sales, given higher balances, slower turnover, and negative operating cash flow.
- Progress and any changes in the Oregon litigation, including potential exposure versus the recorded reserve.
- Use and availability of the expanded $3 million credit line, covenant compliance, and liquidity needs.
- Nasdaq audit committee compliance, the director appointment, and any listing consequences.
- Effects of port and supplier disruptions, customer and supplier concentration, and margin pressure on subsequent-quarter results.