Jewett-Cameron Trading Company Ltd. — Form 10-Q Summary
Business and period: The company manufactures and distributes specialty metal and wood products, industrial wood products, agricultural seed, and industrial tools. This unaudited report covers the fiscal third quarter and nine months ended May 31, 2013; amounts are in U.S. dollars.
Financial performance
| Metric | Three months ended May 31, 2013 | Three months ended May 31, 2012 | Nine months ended May 31, 2013 | Nine months ended May 31, 2012 |
|---|---|---|---|---|
| Sales | $15.05 million | $16.11 million | $38.58 million | $35.11 million |
| Gross profit | $3.03 million | $2.81 million | $7.46 million | $6.36 million |
| Gross margin | 20.1% | 17.4% | 19.3% | 18.1% |
| Income from operations | $1.69 million | $1.56 million | $3.44 million | $2.39 million |
| Net income | $1.02 million | $937,090 | $2.29 million | $2.29 million |
| Basic and diluted EPS | $0.32 | $0.29 | $0.73 | $0.65 |
| Operating cash flow | $3.39 million | $716,926 | $148,054 | $989,976 |
Balance sheet and liquidity
- At May 31, 2013, cash was $7.68 million, current assets were $19.21 million, and current liabilities were $1.78 million. Working capital was $17.43 million, up $2.50 million from August 31, 2012.
- Total liabilities were $1.83 million; the company had no bank borrowings. It had an undrawn $5 million line of credit and reported compliance with its covenants.
- Nine-month operating cash flow was low relative to net income, with cash uses including higher receivables and prepaid expenses, partly offset by lower inventory. Cash nevertheless increased $369,491 from fiscal year-end.
Comparative changes and management commentary
- Quarterly sales fell 6.6%, primarily because of lower seed and industrial-tools sales. Net income increased about 9% as gross margin improved, reflecting product mix and more e-commerce sales of metal products. Management said e-commerce sales had lower costs and higher margins.
- Nine-month sales rose 9.9%, mainly from the lawn, garden, pet and other segment. Segment sales increased 17% at JCLC; industrial wood sales grew 4%, while seed and industrial-tools sales declined 6% and 18%, respectively.
- Management cited a weak marine/boat-manufacturing market and continued excess inventory at boat manufacturers. Seed results faced weaker demand and fewer grass-seed acres; quarterly seed sales also suffered from the departure of the lead salesperson.
- Quarterly operating expenses increased to $1.34 million from $1.25 million, including higher selling, general and administrative expense. Nine-month operating expenses were slightly higher year over year.
- Nine-month pretax income was broadly flat despite improved operating income: 2013 included a $353,852 gain on sale of land, while 2012 included a $1,443,629 litigation-reserve reversal and related interest income. These unusual items complicate the year-over-year earnings comparison.
Outlook, risks and other notable items
- The filing provides no formal financial guidance. Management cautioned that interim results are not necessarily indicative of the full fiscal year and noted that JCLC sales are seasonal, with the first two fiscal quarters typically slower than the final two.
- Key risks include dependence on major customers and suppliers, demand and economic conditions in home improvement, marine and agricultural markets, product-delivery delays, and limited trading liquidity. The top ten customers represented 67% of nine-month sales; two customers accounted for 64% of receivables.
- A $150,837 litigation reserve remained at May 31, 2013. The company reported no other known material active or pending legal proceedings. It also recognized a $353,852 gain from selling approximately 1.64 acres of land to the State of Oregon.
- After quarter-end, the company began a share repurchase plan on June 3, 2013, authorizing purchases for cancellation of up to 400,000 shares through August 16, 2013. The company also effected a two-for-one stock split on May 2, 2013; share and per-share figures were retroactively adjusted.
Important facts for investors to verify
- Whether the planned repurchase of up to 400,000 shares was completed, and its effect on cash and shares outstanding.
- Whether the improved gross margins and JCLC growth continued, particularly as quarterly sales declined and results remain seasonal.
- Whether customer concentration, receivable collection, and the unusually low nine-month operating cash flow present ongoing liquidity or credit risks.
- The status and potential outcome of the remaining litigation reserve and any further developments in the Greenwood dispute.
- The sustainability of earnings excluding the land-sale gain and comparing against the prior-year litigation-reserve reversal.