Jewett-Cameron Trading Company Ltd. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2014, three months ended November 30, 2013; comparative period ended November 30, 2012. Financial statements are unaudited and stated in U.S. dollars. The company distributes and manufactures specialty metal, wood, seed, and industrial tool products, primarily in the United States.
Financial performance
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Sales | $8.01 million | $9.30 million | Down $1.29 million (13.9%) |
| Gross profit | $1.85 million | $1.99 million | Down $141,227 |
| Gross margin | 23.1% | 21.4% | Up 1.7 percentage points |
| Income from operations | $543,924 | $772,385 | Down 29.6% |
| Net income | $332,579 | $480,746 | Down 30.8% |
| Basic and diluted EPS | $0.11 | $0.15 | Down $0.04 |
| Operating cash flow | $(159,255) | $59,200 | Down $218,455 |
Management attributed the higher gross margin to a more favorable mix of higher-margin metal products; higher raw material costs continued to constrain margins. Increased selling costs also weighed on earnings.
Liquidity, balance sheet, and cash flow
- At November 30, 2013, cash was $8.10 million, total assets $22.23 million, total liabilities $1.30 million, and stockholders’ equity $20.93 million. The company reported no bank borrowings.
- Working capital was $18.38 million, versus $18.04 million at August 31, 2013. The $5 million bank line of credit was unused and available; the company said it complied with its covenants.
- Cash declined $212,373 during the quarter. Operating cash flow was negative despite net income, notably reflecting a $1.75 million decrease in accounts payable and accrued liabilities. Investing cash outflow was $53,118, including $57,918 of capital expenditures.
- Accounts receivable declined to $2.24 million and inventory to $8.37 million from August 31 levels. Management reported days sales outstanding of 25 days versus 26 a year earlier, and inventory turnover of 125 days versus 80.
Material changes and segment performance
- Industrial wood products: Sales fell 38% to $1.46 million; the segment reported a pretax loss of $11,424 versus income of $62,545. Management cited weak boat-manufacturer demand and customers continuing to reduce excess inventory.
- Lawn, garden, pet and other: Sales rose 14% to $5.44 million, but segment pretax income declined to $258,917 from $414,204. Management cited competitive pressure, higher raw material costs, introductory pricing, and increased selling costs.
- Seed processing and sales: Sales fell 59% to $740,742; pretax income declined to $73,648 from $109,004. Factors included a lead salesperson’s departure, growers cleaning seed in-house, and reduced grass-seed acreage.
- Industrial tools and clamps: Sales increased 4% to $364,350; pretax income rose to $37,264 from $34,732. Management said it shifted away from some lower-margin products.
- Effective September 1, 2013, the company reorganized subsidiaries and reporting classifications; prior-year segment information was restated for comparability. Management noted that the first two fiscal quarters are seasonally slower for the lawn, garden, pet and other business.
Outlook, risks, and contingencies
- Management said boat-manufacturer demand remained weak and did not foresee an industry recovery until customers work down accumulated inventory; it is seeking alternative uses for industrial wood products and new customer relationships.
- The filing cautions that quarterly results are not necessarily indicative of full-year results. No numerical earnings or revenue guidance is provided.
- Customer and supplier concentration are notable: the top ten customers represented 69% of quarterly sales; two customers accounted for 38% of accounts receivable. Three suppliers each represented more than 10% of purchases.
- Other stated risks include competition, changing demand, supplier delivery delays, reliance on key customers, possible loss of the credit facility, limited trading volume, and potential shareholder dilution from future share issuance.
- A long-running Oregon litigation matter remained reflected in a $137,442 reserve at November 30, 2013. The company recorded $6,661 of interest income related to the judgments during the quarter. The filing says it knows of no other material active or pending legal proceedings. A separate 2013 land sale to the Oregon Department of Transportation generated a $353,852 gain in fiscal 2013, not the current quarter.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. It also reported no material weaknesses identified in its prior-year internal-control assessment.
Important facts for investors to verify
- Whether the sales declines in industrial wood and seed businesses persist, and whether management’s customer-development efforts offset them.
- Whether higher raw material costs and competitive pricing continue to pressure segment earnings despite improved consolidated gross margin.
- The drivers and sustainability of negative operating cash flow, including seasonal working-capital movements and supplier payments.
- The status and possible financial effects of the litigation reserve, and the company’s exposure to concentrated customers and suppliers.
- The MD&A contains an apparent comparative-period wording error in its net-income sentence; the financial statements report net income of $332,579 for 2013 and $480,746 for 2012.