Jewett-Cameron Trading Company Ltd. — FY2017 Form 10-K
Reporting period: Fiscal year ended August 31, 2017; comparative period is fiscal 2016. The filing is an annual report, although the request metadata refers to 2017 Q4. Financial amounts are in U.S. dollars. The consolidated financial statements received an unqualified audit opinion.
Business context
The company operates four segments: lawn, garden, pet and other products (JCC); industrial wood products (Greenwood); seed processing and sales (JCSC); and industrial tools and clamps (MSI). JCC is the largest segment, serving home centers and other retailers. Operations are primarily in the United States.
Financial performance and liquidity
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Sales | $47.70 million | $48.11 million | Down 1% |
| Gross profit | $11.08 million | $9.74 million | Up 14% |
| Gross margin | 23.2% | 20.2% | Up 3.0 percentage points |
| Operating income | $4.44 million | $3.62 million | Up 23% |
| Income before taxes | $4.47 million | $3.52 million | Up 27% |
| Net income | $2.73 million | $2.13 million | Up 28% |
| Basic and diluted EPS | $1.20 | $0.87 | Up 38% |
| Cash from operations | $2.39 million | $3.15 million | Down 24% |
| Capital expenditures | $474,359 | $926,445 | Down 49% |
Gross-margin improvement reflected a more favorable sales mix. Operating expenses increased $520,086 to $6.64 million, mainly due to higher wages and benefits and added warehouse-related selling, general and administrative costs. Income taxes were $1.74 million versus $1.39 million. Net margin was approximately 5.7%, compared with 4.4% in FY2016.
Cash at year-end was $5.91 million, up $1.39 million. Working capital was $16.44 million, and the current ratio was 7.7. Total liabilities were $2.46 million; there was no borrowing on the $3 million bank line of credit, which was fully available and subject to financial covenants. Inventory increased $739,000; accounts receivable increased $223,000. DSO rose to 27 days from 25, and inventory turnover lengthened to 84 days from 78.
The company repurchased and cancelled 41,800 shares for $526,941 during FY2017; weighted-average shares fell to 2,272,522 from 2,435,650. It paid no dividends and said it did not anticipate doing so in the foreseeable future.
Segment performance and period comparisons
- JCC: Sales were essentially flat at $39.27 million; operating income increased 9% to $3.55 million. Metal products rose to 76% of segment sales from 67%, while wood products declined as a share. Management cited stronger higher-margin product mix and development of e-commerce and international channels.
- Greenwood: Sales fell 19% to $3.80 million, and operating loss widened to $175,504 from $8,898. Management attributed weaker first-half results to delayed customer orders, with a rebound in the second half.
- JCSC: Sales increased 6% to $3.11 million; operating loss narrowed to $23,809 from $193,208. Management cited improved grass-seed demand and better cleaning and sales operations.
- MSI: Sales increased 27% to $1.51 million, and the segment returned to operating income of $85,501 from a $100,986 loss. Management pointed to e-commerce sales and distributor relationships.
- Fourth quarter: Sales were $11.06 million versus $10.52 million, and net income was $726,000 versus $552,000. The filing does not provide a clear explanation specific to the fourth-quarter change.
Outlook, risks and unusual matters
No quantified revenue or earnings guidance is provided. Management said current working capital, retained earnings and available credit should be adequate for the coming fiscal year. The home-improvement business is seasonal, with higher sales generally from February through August; inventory builds ahead of the season.
- Customer concentration is substantial: the top ten customers generated 79% of FY2017 sales, and the largest customer accounted for 32%. Three customers represented 66% of year-end receivables.
- Two suppliers each represented more than 10% of FY2017 purchases. The company also depends on vendors and contract manufacturers, including manufacturers in China, creating potential supply and foreign-currency exposure.
- Demand is exposed to competition, economic conditions, product preferences and customer order timing. Greenwood’s markets are particularly sensitive to U.S. economic downturns.
- The company settled its Greenwood Forest Products litigation in FY2016 with a $200,000 cash payment; FY2016 included a $115,990 litigation expense. No active material litigation was reported.
- NASDAQ notified the company in August 2017 that its two-member independent audit committee did not meet listing requirements. A cure period extended to the earlier of the next annual meeting or July 24, 2018, subject to the stated conditions; the company planned to seek shareholder authorization to add a director.
- Management concluded disclosure controls and internal control over financial reporting were effective at August 31, 2017, and reported no material weaknesses. The auditor did not provide an internal-control attestation.
Important facts for investors to verify
- Whether JCC’s improved margins and new sales channels continue, given its dominant contribution to revenue and customer concentration.
- Whether Greenwood’s order recovery persists and its operating losses narrow.
- How the higher inventory balance and slower inventory turnover affect cash generation and potential obsolescence.
- Whether the company restored NASDAQ audit committee compliance by the applicable deadline.
- The effects of share repurchases on per-share results and remaining cash available for operations or expansion.