Jewett-Cameron Trading Company Ltd. — FY2015 Form 10-K
Reporting period: Fiscal year ended August 31, 2015. The filing is an annual report; fourth-quarter figures are included below. Financial amounts are in U.S. dollars unless stated otherwise.
Business context
The company operates four segments: lawn, garden, pet and other products (JCC); industrial wood products (Greenwood); seed processing and sales (JCSC); and industrial tools and clamps (MSI). JCC is the largest segment, accounting for about 78% of FY2015 sales. The company primarily serves U.S. customers and has seasonal home-improvement sales.
Financial results and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Sales | $42.24 million | $42.34 million |
| Gross profit / margin | $8.42 million / 19.9% | $8.38 million / 19.8% |
| Operating income | $2.92 million | $3.08 million |
| Income before taxes | $2.96 million | $3.12 million |
| Net income | $1.77 million | $1.86 million |
| Basic and diluted EPS | $0.69 | $0.63 |
| Cash from operations | $2.83 million | $0.38 million |
FY2015 sales declined less than 1%; gross margin was nearly flat, while operating income fell about 5% and net income about 5%. EPS rose because share repurchases reduced weighted-average shares. Operating cash flow improved substantially, aided by working-capital movements, including lower inventory and prepaid taxes.
Fourth-quarter sales were $11.48 million, gross profit $2.40 million, net income $702,000 and EPS $0.27, compared with $9.27 million, $1.82 million, $352,000 and $0.12, respectively, in FY2014’s fourth quarter.
At year-end, cash was $4.42 million, working capital $15.10 million, and the current ratio 8.2. Total liabilities were $2.13 million; there was no bank borrowing. The company had a fully available $3 million secured line of credit, increased from $1 million during FY2015, and reported compliance with its covenants. Capital spending was $293,380, and share repurchases used $2.45 million. No dividends have been declared.
Material changes and segment performance
- Greenwood: Sales fell 14% to $4.67 million amid weak demand; the segment moved from a $36,000 operating loss to $92,000 operating profit.
- JCC: Sales increased less than 1% to $32.90 million, while operating income declined 9% to $2.09 million. Metal-product sales fell and wood-product sales rose.
- JCSC: Sales grew 12% to $2.78 million and operating loss narrowed to $23,000; management cited improved sales but continuing pressure on seed-cleaning demand and grass acreage.
- MSI: Sales grew 13% to $1.88 million, but operating income declined to $117,000 as competition and price reductions pressured margins.
- Accounts receivable rose to $3.69 million and DSO increased to 32 days from 21. Inventory declined to $8.35 million, with inventory days roughly flat at 94 versus 95.
Outlook, risks and unusual items
Management stated that current working capital, retained earnings and the available credit line should provide adequate funding for the coming fiscal year; the filing gives no quantified earnings or revenue guidance. Management described JCC’s business as seasonal and reported that prolonged winter weather delayed the 2015 lawn-and-garden season, while West Coast port disruptions delayed China-sourced products and increased freight costs. It did not anticipate a significant near-term recovery in Greenwood’s marine market.
Customer concentration is significant: the top ten customers generated 71% of FY2015 sales and the largest customer 30%. Three suppliers each represented more than 10% of purchases. Other risks include competition, demand weakness, supplier delivery delays, interest-rate exposure on the variable-rate credit facility, and limited trading liquidity in the shares.
A long-running Greenwood Forest Products lawsuit remained unresolved. In September 2015, after fiscal year-end, the Oregon Supreme Court reversed the Court of Appeals’ decision and remanded the matter for further proceedings, denying the defendants’ request for a new trial. The company reported a $90,671 litigation reserve at August 31, 2015; the ultimate outcome remains uncertain. The company also repurchased and cancelled 227,798 shares during FY2015. Its CEO voluntarily returned 15,000 shares without payment and reduced his salary effective April 1, 2015.
The independent auditor issued an unqualified opinion on the financial statements. Management concluded that disclosure controls and internal control over financial reporting were effective at August 31, 2015; the auditor did not provide an internal-control attestation.
Important facts for investors to verify
- Developments and potential financial exposure in the pending Greenwood Forest Products litigation, including whether the reserve remains adequate.
- Whether customer and supplier concentration, particularly the largest customer’s 30% sales share, has changed.
- Collection trends following the increase in DSO, and whether FY2015 operating cash flow is sustainable given working-capital effects.
- JCC’s recovery from weather and port disruptions, and the outlook for Greenwood’s weak marine-related demand.
- Continued availability and covenant compliance of the $3 million credit facility, and the company’s future capital-allocation plans.