Business context and reporting period
Jewett-Cameron Trading Company Ltd. filed an unaudited Form 10-Q for the quarter ended May 31, 2017. The company and its subsidiaries operate primarily in the United States across four segments: industrial wood products; lawn, garden, pet and other products; seed processing and sales; and industrial tools and clamps. Financial amounts are in U.S. dollars.
Key financial metrics
| Metric | Three months ended May 31, 2017 | Three months ended May 31, 2016 | Nine months ended May 31, 2017 | Nine months ended May 31, 2016 |
|---|---|---|---|---|
| Sales | $16.72 million | $14.46 million | $36.64 million | $37.59 million |
| Gross profit / margin | $3.81 million / 22.8% | $3.18 million / 22.0% | $8.34 million / 22.7% | $7.59 million / 20.2% |
| Income from operations | $2.02 million | $1.50 million | $3.36 million | $2.73 million |
| Net income | $1.21 million | $0.91 million | $2.00 million | $1.57 million |
| Basic and diluted EPS | $0.53 | $0.37 | $0.88 | $0.64 |
| Cash provided by operating activities | $2.89 million | $1.44 million | $0.72 million | $2.69 million |
At May 31, 2017, cash was $4.87 million, accounts receivable $5.53 million, inventory $8.05 million, current assets $19.23 million, and working capital $16.31 million. Total assets were $22.48 million and total liabilities were $2.95 million. The company had no bank borrowings and had the full $3.0 million line of credit available; it reported compliance with the line’s covenants.
Material changes versus prior comparable periods
- Third-quarter sales rose 16%, gross margin improved by 0.8 percentage points, and net income increased 33% year over year. Management attributed the margin improvement mainly to higher eCommerce sales, partly offset by higher costs for certain raw materials, including cedar.
- Nine-month sales fell 3%, but gross margin increased by 2.5 percentage points and net income rose 27%. Operating expenses increased modestly: lower selling, general and administrative costs were more than offset by higher wages and employee benefits.
- Quarterly sales gains came from all segments except industrial tools: lawn, garden, pet and other sales increased 9%; seed sales increased 400% from a low prior-year comparison; industrial wood sales increased 22%; and industrial tools sales declined 23%. For the nine-month period, industrial wood sales fell 25%, while seed and industrial tools sales increased 10% and 43%, respectively.
- Nine-month operating cash flow decreased to $0.72 million from $2.69 million, despite higher earnings. Accounts receivable grew $2.19 million over the nine-month period, a key use of cash. Management cited seasonal sales and collection timing; nine-month days sales outstanding rose to 41 from 32.
- There was no litigation expense in the current nine-month period; the prior-year period included $115,990 related to litigation settled in fiscal 2016.
Outlook, risks and unusual items
- The filing gives no specific revenue or earnings guidance. Management cautioned that interim results are not necessarily indicative of full-year results and noted that the lawn, garden, pet and other business is seasonal, with the first two fiscal quarters generally slower.
- Management is expanding eCommerce and international sales channels, developing distributor relationships, and adding personnel to support new product lines and sales initiatives. The company began using its warehouse expansion during the second quarter of fiscal 2017.
- Customer concentration is significant: the top ten customers represented 79% of nine-month sales. Two customers accounted for 53% of accounts receivable at May 31, 2017. Two suppliers each represented at least 10% of nine-month purchases.
- Other stated risks include competition and demand changes, supplier or delivery delays, exposure to rising raw-material costs, limited trading volume in the company’s shares, and possible foreign-exchange effects as international sales expand. The company reported no material weaknesses in internal controls and effective disclosure controls.
- The board authorized a repurchase plan for up to 225,000 shares, scheduled to run June 1 through August 30, 2017. Subsequent to May 31, the company repurchased 40,660 shares for $511,959, or an average $12.59 per share. The historical Greenwood Forest Products litigation was settled in fiscal 2016; the filing reports no other material active or pending legal proceedings.
Important facts for investors to verify
- Whether the rise in receivables and the weaker nine-month operating cash flow reflect timing alone, and whether collections and days sales outstanding improve.
- How sustainable the improved gross margins are given raw-material cost pressures and the contribution from eCommerce.
- Whether the sharp quarterly seed-sales increase reflects a durable improvement or primarily weather and shipment timing; assess segment performance, particularly the nine-month industrial wood loss.
- The company’s exposure to key customers and suppliers, including the 79% of sales from its top ten customers and the 53% receivables concentration in two customers.
- The scale, execution and cash implications of the share-repurchase plan. The filing reports 2,286,294 shares outstanding at May 31 and 2,245,634 as of July 17, 2017.