Jewett-Cameron Trading Company Ltd. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended May 31, 2016. Financial statements are unaudited, prepared by management, and expressed in U.S. dollars. The company distributes and manufactures specialty metal, wood, garden and pet products; processes and sells seed; and distributes industrial tools.
Financial performance
| Metric | Three months ended May 31, 2016 | Prior-year quarter | Nine months ended May 31, 2016 | Prior-year nine months |
|---|---|---|---|---|
| Sales | $14.46 million | $13.29 million | $37.59 million | $30.76 million |
| Gross profit | $3.18 million | $2.24 million | $7.59 million | $6.01 million |
| Gross margin | 22.0% | 16.9% | 20.2% | 19.6% |
| Operating income | $1.50 million | $779,340 | $2.73 million | $1.78 million |
| Net income | $908,730 | $461,100 | $1.57 million | $1.07 million |
| Diluted EPS | $0.37 | $0.18 | $0.64 | $0.41 |
| Operating cash flow | $1.44 million | $3.87 million | $2.69 million | $(11,400) |
Quarterly sales increased 9%; nine-month sales increased 22%. Nine-month operating expenses rose to $4.86 million from $4.24 million, including higher wages and benefits. The company made a one-time additional 10% 401(k) contribution for eligible employees; nine-month 401(k) expense was $360,275 versus $186,345. The nine-month income statement includes a $115,990 litigation expense. The company reported no interest expense of significance.
Liquidity, balance sheet and capital allocation
- At May 31, cash was $6.29 million, total assets $21.05 million, and working capital $16.05 million. Working capital increased $944,401 from August 31, 2015.
- Current liabilities were $2.70 million; total liabilities were $2.70 million. There was no bank borrowing. The $3.0 million credit line was fully available, with the company reporting compliance with its covenants.
- Nine-month operating cash flow was $2.69 million, compared with cash used of $11,400 in the prior-year period. Investing activities used $73,920; financing activities used $745,878, entirely for share repurchases. Cash increased $1.87 million over the nine months.
- Inventory declined $1.05 million from August 2015, while receivables rose $694,191. Management reported improved collection and inventory-turnover measures compared with the prior-year periods.
- During the quarter, the company repurchased and cancelled 63,386 shares for $745,878, averaging $11.77 per share. After quarter-end it repurchased another 42,742 shares for $489,274. The CEO also returned 15,000 shares for cancellation without payment.
Material changes, outlook and risks
- Segment performance: Lawn, garden, pet and other sales rose 25% for the nine months, with management citing new-product acceptance, additional smaller and mid-sized customers, and earlier seasonal shipments. Industrial wood sales rose 20%, although marine-industry demand remained weak. Seed sales rose 23%, but the segment recorded an operating loss; drought-reduced supply and declining seed-cleaning services were cited. Industrial tools sales fell 33%, and the segment moved to an operating loss amid increased competition and price reductions.
- Seasonality and outlook: Management said lawn, garden, pet and other results are seasonal, with the first two fiscal quarters typically slower than the final two. No numerical guidance was provided. Management cautioned that results for the reported periods are not necessarily indicative of full-year results.
- Expansion: The company received final permits in May and began construction of a 150-by-80-foot warehouse expansion at its North Plains headquarters, intended to support new product lines.
- Litigation: The long-running Greenwood Forest Products dispute was settled during the quarter ended February 29, 2016. The company paid $200,000; the reported $115,990 litigation expense reflected the payment relative to the reserve balance, net of interest income. The filing says the dispute is fully settled.
- Concentration and operating risks: The top ten customers represented 80% of nine-month sales; one customer accounted for 43% of receivables at May 31. Three suppliers each represented at least 10% of purchases. Other disclosed risks include product demand and competition, vendor shipment delays, limited trading volume in the shares, interest-rate exposure on the credit line, and foreign-currency effects on purchases from China.
- Subsequent events: The company incorporated a new wholly owned Oregon subsidiary on June 2, 2016. The CEO’s 15,000-share return and the additional share repurchase occurred after quarter-end.
Important facts for investors to verify
- Reconcile the prior-year nine-month net income figures: the financial statements show $1,072,447, while MD&A states $1,072,477.
- Assess whether the sales and margin improvement is sustainable, particularly given seasonality and the concentration of sales among a small number of customers.
- Monitor the seed and industrial-tools segments’ losses, persistent marine-market weakness, and the effect of competitive pricing.
- Track warehouse expansion spending, new-product performance, and the company’s continuing share-repurchase activity and cash requirements.
- Review customer receivable concentration, supplier dependence, and the status of the fully settled litigation.