Jewett-Cameron Trading Company Ltd. — Form 10-Q Summary
Business context and period. This unaudited, management-prepared filing covers the second quarter and six months ended February 28, 2013, compared with the periods ended February 29, 2012. The company distributes and manufactures specialty metal, wood, seed, and industrial tool products, primarily in the United States. Fiscal year ends August 31.
Financial performance
| Metric | Three months ended Feb. 28, 2013 | Six months ended Feb. 28, 2013 | Comparable 2012 period |
|---|---|---|---|
| Sales | $14.23 million | $23.52 million | $11.75 million / $18.99 million |
| Gross profit; gross margin | $2.44 million; 17.1% | $4.43 million; 18.8% | $2.09 million; 17.8% / $3.56 million; 18.7% |
| Operating income | $979,059 | $1.75 million | $672,436 / $835,371 |
| Net income | $790,631 | $1.27 million | $1.29 million / $1.35 million |
| Basic and diluted EPS | $0.50 | $0.81 | $0.71 / $0.73 |
| Operating cash flow | $(3.30) million | $(3.24) million | $1.19 million / $273,050 |
- Balance sheet and liquidity: At February 28, cash was $4.34 million, current assets $19.01 million, current liabilities $2.62 million, and working capital $16.40 million. Total assets were $21.41 million and total liabilities $2.67 million. No line-of-credit borrowings or other bank indebtedness were outstanding; the company had a $5.0 million undrawn credit line and reported covenant compliance.
- Cash flow and working capital: Six-month cash fell $2.97 million to $4.34 million. The principal operating cash uses included a $4.20 million increase in receivables and a $1.04 million increase in prepaid expenses, partly offset by lower inventory. Management attributed the receivables increase to seasonal sales and timing of collections. Receivables and inventory together represented 68% of current assets.
- Debt and capital: The company reported no debt outstanding. The revolving line bears interest at one-month LIBOR plus 200 basis points; the filing states that rate was 2.20% at period end. It repurchased and cancelled 407 shares for $4,884 during the six months.
Changes versus the prior comparable periods
- Sales rose 21% in the quarter and 24% over six months. Growth was led by lawn, garden, pet and other products (six-month sales up 37%); seed sales also increased. Industrial tools sales declined 12% over six months, while industrial wood sales rose 10% for the half but fell 23% in the quarter.
- Six-month gross margin increased slightly to 18.8% from 18.7%; quarterly gross margin decreased to 17.1% from 17.8%. Six-month operating expenses declined $42,894, mainly from lower selling, general and administrative expenses.
- Quarterly net income declined from $1.29 million to $791,000 despite higher sales and operating income. The comparison is affected by unusual items: 2013 included a $353,852 land-sale gain, while 2012 included a $1.44 million litigation-reserve reversal. For the six-month periods, net income decreased about 6%, while EPS rose from $0.73 to $0.81, reflecting fewer weighted-average shares.
- Cash from operations shifted from positive to negative in both comparisons, principally reflecting the receivables and prepaid-expense increases.
Outlook, commentary, risks and unusual items
- No quantified earnings or revenue guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results and noted that JCLC’s business is typically stronger in the second half of the fiscal year.
- Management cited stronger JCLC sales, attributing them to sales efforts, customer relationships, expanded pet-product lines, and increased consumer spending on home and backyard projects. The marine market remained weak; management said it did not foresee a recovery until boat manufacturers reduce excess inventory.
- MSI deliberately reduced lower-margin product programs; sales declined but operating income improved. Management said seed demand remained relatively weak, despite improved wholesale prices and reduced surpluses.
- The company sold approximately 1.64 acres to the Oregon Department of Transportation for $410,000, recognizing a $353,852 gain. The Greenwood litigation reserve remained $157,570; the company recorded $13,249 of litigation-related interest income in the six-month period. The filing describes the prior favorable state supreme court decision as returning the case to the Oregon Court of Appeals for further consideration.
- Key risks include customer concentration (top ten customers generated 65% of six-month sales; three customers represented 60% of receivables), supplier concentration, weak end markets, product-delivery delays, and limited trading liquidity. The company also cited possible shareholder dilution from future stock issuance, interest-rate exposure on its undrawn line, and some foreign-currency exposure through sales and contract manufacturing.
- Management reported disclosure controls as effective and no material changes in internal control over financial reporting during the quarter. No material impairment, derivative positions, or other material pending legal proceedings were reported in the provided text.
Important facts for investors to verify
- Whether the increase in receivables and the longer collection period—56 days for the six months versus 38 days a year earlier—resulted in timely subsequent collections.
- How much of reported profit reflects recurring operating performance versus the land-sale gain and prior-year litigation reversal.
- Progress in the Greenwood litigation following the appellate proceedings, and whether the recorded reserve remains adequate.
- Whether sales growth and margins persist, given seasonality, the weak marine market, and customer and supplier concentration.
- The company’s ongoing compliance with credit-line covenants and its ability to maintain liquidity while funding seasonal working-capital needs.