Jewett-Cameron Trading Company Ltd. — Q1 FY2016 10-Q
Reporting period: Three months ended November 30, 2015; unaudited consolidated results, expressed 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 | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Sales | $11.942 million | $7.983 million | Up 49.6% |
| Gross profit | $2.380 million | $1.870 million | Up 27.3% |
| Gross margin | 19.9% | 23.4% | Down 3.5 percentage points |
| Operating income | $885,204 | $529,899 | Up 67.1% |
| Net income | $532,245 | $327,787 | Up 62.4% |
| Basic and diluted EPS | $0.21 | $0.12 | Up $0.09 |
| Cash from operations | $(45,146) | $(1,048,806) | Less cash used |
| Capital expenditures | $10,526 | $1,280 |
Operating expenses were $1.495 million, versus $1.340 million a year earlier. Income tax expense was $361,693, compared with $209,007.
Segments and drivers
- Lawn, garden, pet and other: Sales rose 51% to $8.869 million; segment pretax income increased to $665,399 from $164,755. Management attributed growth to new business, additional small and mid-sized customers, and products introduced in the prior fiscal year.
- Industrial wood products: Sales increased 56% to $1.554 million; pretax income was $37,249 versus $18,067. Management cited new customers and uses, while noting demand remained below historical levels and a significant marine-market recovery was not expected soon.
- Seed processing and sales: Sales increased 73% to $1.221 million, but pretax income declined to $47,195 from $89,245. Management cited drought-reduced 2015 harvest yields and declining seed-cleaning services.
- Industrial tools and clamps: Sales declined 25% to $297,765; the segment recorded a $29,015 pretax loss versus $38,618 income. Management cited increased competition and price reductions that lowered margins.
Financial position and liquidity
At November 30, 2015, cash was $4.361 million, current assets $17.896 million, current liabilities $2.182 million, and working capital $15.714 million. Total assets were $20.285 million and total liabilities $2.229 million. The company had no bank borrowings and had the full $3.0 million revolving credit line available; it reported compliance with the facility’s covenants. Cash decreased $55,672 during the quarter. Operating cash use reflected, among other items, higher receivables and prepaid expenses.
Accounts receivable was $4.320 million, up from $3.688 million at August 31, 2015; inventory was $8.162 million, down from $8.352 million. The receivables collection period was 33 days versus 31 days a year earlier; inventory turnover was 79 days versus 148 days.
Outlook, risks and unusual items
- The filing provides no quantified earnings or revenue guidance. Management cautioned that this quarter’s results are not necessarily indicative of the fiscal year ending August 31, 2016. JCC’s business is seasonal, with its first two fiscal quarters historically slower than the last two.
- Customer concentration is significant: the top ten customers represented 81% of quarterly sales. Two customers accounted for 61% of accounts receivable. Three suppliers each represented more than 10% of purchases.
- A long-running Greenwood Forest Products lawsuit remains in further proceedings after the Oregon Supreme Court reversed the Court of Appeals’ decision in September 2015 and remanded the case. The company reported an $84,010 litigation reserve at quarter-end and recorded $6,661 of litigation-related interest income during the quarter.
- Other disclosed risks include product demand and competition, supplier delivery delays, interest-rate exposure on the variable-rate credit line, foreign-currency effects on some purchases, and limited trading liquidity. Average daily Nasdaq trading volume was 1,306 shares for the quarter.
- No share repurchases were reported in the quarter. The company declared no dividends and had no stock options outstanding. It reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the sharp sales growth and improvement in operating income are sustainable, particularly given lower gross margin and seasonal patterns.
- Customer and supplier concentration, receivable collectability, and inventory quality and turnover.
- Potential financial exposure and timing of resolution in the Greenwood litigation, beyond the recorded reserve.
- Availability and covenant compliance of the $3.0 million credit line, and the company’s ability to convert earnings into operating cash.
- Any subsequent changes to segment demand, drought-related seed supply, competition in tools, or management’s outlook.