Jewett-Cameron Trading Company Ltd. — FY2018 Form 10-K
Reporting period: Fiscal year ended August 31, 2018; U.S. dollars. The filing is an audited annual report, with fourth-quarter results also presented. The company sells specialty wood and metal products, agricultural seed, and industrial tools through four operating segments. Its largest segment is lawn, garden, pet and other products (JCC).
Financial performance
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $53.923 million | $47.701 million | +13% |
| Gross profit / margin | $11.598 million / 21.5% | $11.079 million / 23.2% | Margin down 1.7 percentage points |
| Operating income | $4.276 million | $4.438 million | Down 4% |
| Income before taxes | $4.279 million | $4.465 million | Down 4% |
| Net income | $2.921 million | $2.727 million | Up 7% |
| Basic and diluted EPS | $0.66 | $0.60 | Up 10% |
| Cash from operations | $1.566 million | $2.390 million | Down $0.824 million |
Revenue growth came primarily from JCC, whose sales rose to $47.197 million from $39.273 million. Higher specialty lumber sales boosted volume but pressured company gross margin because lumber carries lower margins than metal products. Lower income-tax expense, reflecting the U.S. Tax Cuts and Jobs Act, helped lift net income despite lower operating and pretax income. EPS also benefited from fewer weighted-average shares following repurchases; share and per-share data reflect the May 2018 2-for-1 stock split.
Fourth-quarter FY2018 revenue was $11.233 million versus $11.062 million a year earlier; net income was $702,000 versus $726,000, and EPS was $0.16 in both periods.
Liquidity, debt and capital allocation
- At August 31, 2018, cash was $6.097 million, working capital was $18.346 million, and the current ratio was 9.4. Inventory rose $996,000 to $9.803 million.
- There was no bank borrowing at year-end. The company had a $3 million secured revolving credit facility fully available, priced at one-month LIBOR plus 175 basis points; the company reported covenant compliance.
- Operating cash flow fell as accounts receivable and inventory increased. Capital expenditures were $111,000, and cash increased $185,000 to $6.097 million.
- The company repurchased and cancelled 154,329 shares during FY2018 for $1.272 million. After year-end, it completed the 250,000-share plan with an additional 95,671 shares purchased for $893,376. No dividends have been declared.
Material changes, outlook and risks
- Tariffs: U.S. tariffs on certain Chinese imports, including company metal products, took effect September 24, 2018 at 10%, with increases to 25% scheduled for January 1, 2019. Management said uncertainty had already delayed customer acceptance of price increases in FY2018 Q4 and expected pressure on FY2019 sales and margins. The extent to which costs can be passed through remains uncertain.
- Other segments weakened: Seed sales fell 27%, with seed product sales down about 40%, amid late spring weather, reduced planting and excess clover-seed supply. MSI sales fell 38% following a large order from a former customer in FY2017 and increased competition; management wrote off about $71,000 of obsolete inventory and said further adjustments could occur in FY2019. Greenwood sales fell 8%, although its operating result improved to near breakeven.
- Recall and write-offs: JCC recalled a product after two breakage incidents, provided a retailer return allowance and destroyed remaining recalled inventory. Management did not expect significant future recall costs. Greenwood also wrote off $67,189 of obsolete inventory. Two expired patents were written off, leaving net intangible assets of $3,590.
- Concentration and execution: The top ten customers generated 85% of FY2018 sales, and the largest customer accounted for 38%. Two suppliers each represented more than 10% of purchases, with combined purchases of $25.264 million. The company also identified competition, supplier delivery delays, changing demand, cyber threats and possible financing needs as risks.
- Contingency: The company is defending a Pennsylvania product-liability action concerning an alleged kennel-related injury. Its insurer is providing the defense, and management stated that available insurance appeared sufficient; the case was in an early stage and its outcome was uncertain.
Management said existing working capital, retained earnings and available credit were adequate for the coming fiscal year. The company reported effective disclosure controls and internal control over financial reporting, with no material weaknesses identified; the external auditor did not attest to internal-control effectiveness. The auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- How FY2019 tariffs affected realized pricing, customer demand, sales and gross margins.
- Whether JCC’s sales growth and customer concentration are sustainable, particularly the 38% contribution from its largest customer.
- Whether the seed and MSI segments recover, and whether further inventory write-offs or restructuring occur.
- Cash conversion and inventory levels, given lower operating cash flow and higher year-end inventory.
- Updates on the product-liability case and any costs beyond insurance coverage, and the status of the completed share-repurchase plan.