Jewett-Cameron Trading Company Ltd. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended May 31, 2018. The unaudited consolidated statements are management-prepared and presented 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 | Three months ended May 31, 2018 | Year-over-year change | Nine months ended May 31, 2018 | Year-over-year change |
|---|---|---|---|---|
| Sales | $19.93 million | +19% | $42.69 million | +17% |
| Gross profit | $3.99 million | +5% | $8.81 million | +6% |
| Gross margin | 20.0% | Down from 22.8% | 20.6% | Down from 22.7% |
| Operating income | $2.01 million | Down from $2.02 million | $3.30 million | Down from $3.36 million |
| Net income | $1.39 million | Up from $1.21 million | $2.22 million | Up from $2.00 million |
| Basic and diluted EPS | $0.31 | Up from $0.26 | $0.50 | Up from $0.44 |
All share and per-share figures reflect the May 28, 2018 two-for-one stock split. Lower-margin lumber and wood-product sales grew strongly and weighed on gross margin. Lower federal tax expense following the Tax Cuts and Jobs Act helped lift net income despite slightly lower operating income.
Cash flow, balance sheet, and liquidity
- Nine-month operating cash flow was $437,188, versus $717,031 a year earlier. The main working-capital use was a $3.53 million increase in accounts receivable, partly offset by a $1.09 million inventory decrease and higher payables and accrued liabilities.
- Cash increased by $338,751 to $6.25 million. Investing cash outflow was $98,437, including $99,437 of property and equipment purchases.
- At May 31, 2018, total assets were $25.05 million; current assets were $21.95 million; and working capital was $18.89 million. Accounts receivable rose to $7.09 million from $3.57 million at August 31, 2017, while inventory declined to $7.71 million from $8.81 million.
- Total liabilities were $3.11 million, comprising $3.05 million of current liabilities and $52,779 of deferred tax liability. No bank debt was outstanding; the full $3.0 million credit line was available and the company reported covenant compliance.
Material changes and management commentary
- The Lawn, garden, pet and other segment drove growth: nine-month sales rose 26% to $37.51 million, mainly from new customers and specialty lumber, particularly cedar fencing. Segment income before tax increased 3% to $2.56 million.
- Seed segment sales fell 33% to $1.91 million, with clover-seed demand affected by poor Midwest planting weather. Industrial tools sales fell 40% to $753,000 amid increased competition and the absence of a large prior-year customer order. Industrial wood sales fell 12% to $2.51 million, though its pretax loss narrowed.
- A voluntary safety recall of a specific JCC product sold to one retail customer reduced sales and income. The company recalled sold units and withdrew remaining units; management did not expect significant additional recall costs.
- Two expired patents were written off through amortization during the period. Separately, the company received a new U.S. patent for its updated Adjust-A-Gate system, extending protection by 15 years.
- Following the period, the company began a share repurchase plan authorizing purchases of up to 250,000 shares. As reported in the filing, 12,200 shares had been repurchased for $97,454 at an average $7.9888 per share.
Outlook, risks, and contingencies
- The filing provides no specific financial guidance. Management cautions that interim results are not necessarily indicative of full-year results and notes that operations are seasonal, with JCC generally stronger in the final two fiscal quarters.
- Proposed U.S. tariffs on certain China-origin products could affect the company’s imported metal products. Potential duties of up to 25% remained subject to review and negotiation; timing and likelihood were uncertain, and management was assessing possible effects.
- Customer and supplier concentration is material: the top ten customers represented 87% of nine-month sales; two customers accounted for 53% of accounts receivable. Three suppliers each represented at least 10% of purchases during the period.
- Other disclosed risks include competition, product demand, vendor delivery delays, dependence on major retail customers, potential dilution from future equity issuance, limited share trading volume, and interest-rate and foreign-currency exposure. The company reported no material pending legal proceedings and no material weakness in internal controls.
- Management expects no material impact from adoption of the new revenue-recognition standard, planned for September 1, 2018. The filing does not provide a quantified assessment of the possible tariff impact.
Key facts for investors to verify
- Whether accounts receivable growth converts to cash and whether customer collection days continue to rise.
- Whether sales growth can be sustained without further gross-margin pressure from lower-margin lumber products.
- The final scope, timing, and cost impact of potential China-related tariffs.
- Whether seed and industrial-tools segment performance improves, and whether the recall produces any further costs or claims.
- The pace and financial effect of share repurchases, and the company’s continuing exposure to concentrated customers and suppliers.