Jewett-Cameron Trading Company Ltd. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended November 30, 2017; comparisons are with the three months ended November 30, 2016 unless noted. Financial statements are unaudited and presented in U.S. dollars.
Financial performance
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Sales | $9.414 million | $10.422 million | Down 9.7% |
| Gross profit / margin | $2.187 million / 23.2% | $2.394 million / 23.0% | Gross profit down 8.7%; margin up 0.2 percentage points |
| Income from operations | $570,302 | $792,505 | Down 28.0% |
| Net income | $322,433 | $485,920 | Down 33.6% |
| Basic and diluted EPS | $0.14 | $0.21 | Down $0.07 |
| Operating cash flow | $(290,285) | $605,062 | Turned negative |
Operating expenses were $1.616 million, up $14,509. Lower SG&A ($445,877 versus $551,048) was offset by higher wages and benefits ($1.098 million versus $982,249) and depreciation and amortization ($72,665 versus $68,640). A $27,552 loss on sale of property and equipment also reduced pretax income. Income tax expense was $223,007, compared with $308,405.
Liquidity, balance sheet and cash flow
- At November 30, 2017, cash was $5.560 million, total assets $22.357 million, current assets $19.084 million and current liabilities $2.310 million. Working capital was $16.774 million, up $339,186 from August 31, 2017.
- The company reported no bank debt and had the full $3.0 million revolving credit facility available. Its variable rate was 3.11% at quarter-end; the company said it was in compliance with the facility’s covenants.
- Cash declined $352,184 during the quarter. Operating cash use reflected, among other items, a $444,782 increase in prepaid expenses and a $312,590 increase in inventory. Capital expenditures were $61,899.
- Inventory was $9.120 million, including a $186,713 obsolescence allowance. Receivables were $3.364 million. Management reported 33 days sales outstanding versus 30 days a year earlier, and inventory turnover of 113 days versus 89 days.
Material changes and operating context
- Lawn, garden, pet and other: Sales fell 5% to $7.985 million and pretax segment income declined to $300,872 from $527,220. Management attributed the decline chiefly to a breakage issue involving a product sold to one retail customer. Following two reported incidents, the company and retailer issued a voluntary safety advisory and recall, withdrew remaining units from sale, provided a return allowance and destroyed remaining inventory.
- Industrial wood products: Sales decreased 31% to $662,454 amid weak demand; the segment’s pretax loss widened to $42,760 from $28,462. Management said the company would remain positioned to participate in the marine market if it rebounds.
- Industrial tools and clamps: Sales fell 47% to $298,196. Management said the prior-year quarter included a final large order from a customer that is no longer a customer; current sales were described as more consistent with historical results. Pretax segment income was $10,621 versus $40,407.
- Seed processing and sales: Sales edged down 2% to $468,575, while pretax segment income increased to $63,462 from $36,811. Management cited continued strong grass-seed demand.
The company distributes and manufactures specialty metal and wood products, processes and sells seed, and distributes industrial tools. It noted that its first two fiscal quarters are historically slower for the lawn, garden, pet and other business than the final two quarters. Management cautioned that quarterly results are not necessarily indicative of full-year FY2018 results.
Outlook, risks and other notable disclosures
- No specific revenue or earnings guidance was provided. Management cited advance purchases of specialty lumber for customers’ expected spring orders and accelerated specialty-metal purchases ahead of announced steel-price increases.
- Subsequent to quarter-end, the company received notice that its updated Adjust-a-Gate patent had been granted, extending protection for an additional 15 years.
- Customer and credit concentration are significant: the top ten customers accounted for 92% of quarterly sales; three customers represented 72% of receivables. Three suppliers each accounted for more than 10% of purchases, with aggregate purchases of $3.924 million.
- Other stated risks include demand and economic changes, reliance on major customers and suppliers, delivery delays, limited trading liquidity, possible shareholder dilution, interest-rate exposure and foreign-exchange exposure. The company reported no material pending legal proceedings, no derivatives, and effective disclosure controls; it identified no material changes in internal control during the quarter.
- The company adopted the revenue-recognition, deferred-tax presentation and inventory measurement standards discussed in the filing without material impact. Adoption of the new leases standard was not expected to have a material impact.
Most important facts for investors to verify
- Recall-related return allowances, destroyed inventory, any continuing product-liability exposure and the effect on subsequent sales and margins.
- Whether the sales and earnings declines persist, particularly in the lawn/garden/pet, industrial wood and tools segments, and how seasonal demand develops.
- Cash conversion and working-capital trends, including elevated inventory and prepaid purchases, against the reported negative operating cash flow.
- Customer and supplier concentration, the availability and covenant conditions of the $3.0 million credit line, and the company’s dependence on a small number of major accounts.
- Execution and commercial impact of the new Adjust-a-Gate patent and the company’s expectations for spring orders; the filing provides no quantified guidance.