Jewett-Cameron Trading Company Ltd. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2019, the three months ended November 30, 2018; comparative period ended November 30, 2017. Financial statements are unaudited and expressed in U.S. dollars. The company distributes and manufactures specialty metal, wood, seed, and industrial-tool products, primarily for U.S. customers.
Key financial results
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Sales | $9.07 million | $9.41 million | Down 3.7% |
| Gross profit / margin | $2.31 million / 25.5% | $2.19 million / 23.2% | Gross profit up 5.6% |
| Operating income | $479,009 | $570,302 | Down 16.0% |
| Income before taxes | $496,160 | $545,440 | Down 9.0% |
| Income tax expense | $146,466 | $223,007 | Down 34.3% |
| Net income / diluted EPS | $349,694 / $0.08 | $322,433 / $0.07 | Net income up 8.5% |
| Operating cash flow | $223,733 | $(290,285) | Improved |
Gross margin improved with a more favorable mix, including higher metal-product and lower wood-product sales. Net margin was approximately 3.9%, versus 3.4% a year earlier. Operating expenses rose 13.2% to $1.83 million, including higher selling and administrative costs and wages; depreciation and amortization declined. Lower tax expense reflected the reduced federal tax rate under the Tax Cuts and Jobs Act. Interest and other income was $17,151, compared with $2,690; there was no current-quarter asset-sale loss, versus $27,552 in the prior-year quarter.
Liquidity, balance sheet, and capital
- At November 30, 2018, cash was $5.43 million, total assets $23.65 million, current assets $20.59 million, and current liabilities $2.74 million. Working capital was $17.86 million, down $488,000 from August 31, 2018.
- Inventory increased $1.12 million to $10.93 million, as the company sourced additional products from China ahead of scheduled tariff increases. Accounts receivable declined to $3.73 million from $4.15 million. Management reported DSO of 37 days versus 33 and inventory turnover of 140 days versus 113.
- Operating cash flow was positive, but cash declined $669,643 to $5.43 million, principally reflecting $893,376 spent on share repurchases. There were no capital expenditures in the quarter.
- No borrowings were outstanding under the $3.0 million secured U.S. Bank line of credit; the full amount was available. The stated rate was one-month LIBOR plus 175 basis points (4.07% at quarter-end), and the company reported compliance with its covenants. The filing reports no other debt balance.
- The company repurchased and cancelled 95,671 shares during the quarter for $893,376, averaging $9.34 per share. Shares outstanding were 4,218,988 at November 30, 2018; no stock options were outstanding. The previously authorized 250,000-share plan was completed October 25, 2018.
Segment and period changes
- Lawn, garden, pet and other: Sales fell 12% to $6.99 million; segment pretax income fell to $173,821 from $300,872. Lower wood sales and the absence of prior-year Black Friday promotional products contributed; metal sales benefited from a new customer launch. The prior-year quarter also included a product recall.
- Industrial wood products: Sales rose 68% to $1.11 million, and the segment moved from a $42,760 pretax loss to $33,596 income. Management cited product-mix refinement and increased direct-to-end-user sales.
- Seed processing and sales: Sales rose 62% to $756,910, but pretax income declined to $10,433 from $63,462. Lower-than-normal U.S. clover-seed supply supported sales, while depressed seed prices constrained margins.
- Industrial tools and clamps: Sales fell 32% to $204,075; the segment recorded a $3,737 pretax loss versus $10,621 income. Management cited difficult competitive conditions and said its review of the business could lead to further write-offs or adjustments in fiscal 2019.
Outlook, risks, and contingencies
The filing provides no specific financial guidance. Management cautions that first-quarter results are not necessarily indicative of the full fiscal year. U.S. tariffs of 10% to 25% on certain Chinese imports took effect September 24, 2018. A planned increase to 25% from January 1, 2019 was suspended during trade negotiations, but could be implemented later. Management is working with suppliers and customers and has begun price increases where possible; inability to pass on tariff costs, or resulting weaker demand, could pressure sales and gross margins.
Other stated risks include customer concentration (the top ten customers represented 76% of quarterly sales; three customers accounted for 55% of receivables), supplier concentration, product demand and delivery disruptions, competition, limited trading volume in the shares, cyber risks, and potential dilution from future equity issuance. A Pennsylvania product-liability case alleges injuries after a dog escaped from a kennel product. The matter is in an early stage; the company intends to defend it, and its insurer is providing a defense. Management said insurance appeared sufficient for the exposure at the filing date. Disclosure controls were assessed as effective, with no material changes in internal control reported during the quarter.
Important facts for investors to verify
- Whether tariffs are extended or increased, and whether price adjustments offset the cost without impairing demand or margins.
- Whether inventory levels, inventory turnover, and customer collections improve, given the quarter’s inventory build and higher DSO.
- Whether the lawn, garden, pet and other segment stabilizes and the industrial-tools review results in additional charges.
- The outcome and insurance coverage of the Pennsylvania litigation, as the filing describes the matter as early-stage and its outcome uncertain.
- How continued capital allocation, including repurchases, affects cash and share count; the company stated it has never declared a dividend.