Jewett-Cameron Trading Company Ltd. - 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended May 31, 2011, and the nine-month period ended on the same date. Jewett-Cameron Trading Company Ltd. operates through four segments: Industrial wood products (Greenwood), Lawn/garden/pet products (JCLC), Seed processing (JCSC), and Industrial tools (MSI). The company is a smaller reporting company incorporated in British Columbia with principal offices in Oregon.
Key Financial Metrics
| Metric | 9 Months Ended May 31, 2011 | 9 Months Ended May 31, 2010 |
|---|---|---|
| Sales | $30,858,396 | $27,537,794 |
| Gross Profit | $6,001,802 | $6,252,187 |
| Gross Margin | 19.4% | 22.7% |
| Net Income | $254,938 | $1,074,069 |
| Diluted EPS | $0.12 | $0.45 |
| Cash and Equivalents | $5,632,276 | $8,710,314 (Aug 31, 2010) |
| Working Capital | $14,376,202 | $17,336,242 (Aug 31, 2010) |
| Debt | $0 (Line of credit unused) | $0 |
Liquidity: The company maintains a $5,000,000 line of credit with $4,650,000 available. Cash decreased by approximately $3.1 million during the period, primarily due to share repurchases and litigation reserves.
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 12% year-over-year to $30.9 million, driven by a 20.8% increase in the Lawn, garden, pet segment. However, the Industrial wood segment declined 6.5% due to weak demand from boat manufacturers.
- Margin Compression: Gross margin decreased from 22.7% to 19.4% due to higher raw material and transportation costs.
- Profitability Decline: Net income dropped significantly to $254,938 from $1.07 million. This decline is primarily attributable to a $962,137 litigation reserve and $424,344 in related interest expense recorded in the current period.
- Share Repurchases: The company repurchased and cancelled 392,980 shares for $3,361,970 during the nine-month period, reducing the share count from 2,311,937 to 1,918,957.
Outlook, Risks, and Contingencies
- Legal Contingency: The Oregon Court of Appeals reversed a previous judgment in favor of the company in the case Greenwood Products, Inc. et al v. Greenwood Forest Products, Inc. et al. The company recorded a liability of $1,611,533 (including interest) and is appealing to the Oregon Supreme Court.
- Market Risks: Demand for industrial wood products remains weak due to the downturn in the boat manufacturing industry. The seed segment faces weak demand due to lower new home construction rates.
- Concentration Risk: Two customers accounted for 50% of accounts receivable as of May 31, 2011. The top ten customers represented 56% of total sales for the nine-month period.
- Management Commentary: Management notes that operating results are seasonal, with the first two quarters typically slower. They are actively seeking new customer relationships to offset weakness in the marine industry.
Investor Verification Checklist
- Verify the status and potential outcome of the appeal to the Oregon Supreme Court regarding the $1.6 million litigation liability.
- Monitor the recovery of the boat manufacturing industry, which impacts the Industrial wood segment's profitability.
- Assess the impact of rising raw material and transportation costs on future gross margins.
- Review the concentration of sales and receivables among the top ten customers and top two receivable holders.
- Confirm the company's continued compliance with the financial covenants of its $5 million line of credit.