Jewett-Cameron Trading Company Ltd. — Form 10-Q
Reporting period: Third quarter and nine months ended May 31, 2014 (fiscal 2014). Unaudited consolidated financial statements, prepared by management under U.S. GAAP; amounts are U.S. dollars.
Business context
The company sells specialty metal and wood products, industrial wood products, agricultural seed products and industrial tools through four reportable segments. Effective September 1, 2013, it reorganized subsidiaries and reporting classifications. Results are seasonal, with management noting that the first two fiscal quarters are generally slower than the final two.
Financial performance
| Metric | Three months ended May 31, 2014 | Nine months ended May 31, 2014 |
|---|---|---|
| Sales | $15.34 million; up 2% year over year | $33.07 million; down 14.3% |
| Gross profit / margin | $2.95 million / 19.2%, versus 20.1% | $6.56 million / 19.8%, versus 19.3% |
| Operating income | $1.55 million, versus $1.69 million | $2.51 million, versus $3.44 million |
| Net income | $936,329, versus $1.02 million | $1.51 million, versus $2.29 million |
| Basic and diluted EPS | $0.33, versus $0.32 | $0.50, versus $0.73 |
| Operating cash flow | $1.68 million, versus $3.39 million | $(174,856), versus $148,054 |
Quarterly EPS benefited from fewer shares outstanding following buybacks. Nine-month prior-year results included a $353,852 gain on land sale; the current period recorded only $4,109 in gains on property sales. Interest expense was nil in the current nine-month period.
Liquidity, capital and balance sheet
- At May 31, 2014, cash was $4.24 million, current assets $18.07 million, current liabilities $2.21 million, and working capital $15.85 million. Working capital was down $2.18 million from August 31, 2013.
- Total liabilities were $2.26 million; the company had no bank borrowings. Its U.S. Bank credit line was reduced from $5 million to $1 million in March 2014, was undrawn at period end, and carried an interest rate of 1.90%; the company reported covenant compliance.
- Nine-month operating cash flow was negative $174,856. Investing activities used $89,474, and financing activities used $3.80 million, primarily for repurchases. Cash declined $4.07 million from August 31, 2013.
- The company repurchased and cancelled 385,258 shares during the nine months for $3.80 million. A new plan effective April 14, 2014 authorized repurchases of up to 300,000 shares through November 14, 2014; 71,765 had been repurchased under it by July 14, 2014. Shares outstanding on that date were 2,749,678.
- Receivables rose to $4.92 million and inventory fell to $7.25 million from August 31, 2013. Management reported slower year-over-year collection and inventory turnover measures for the nine-month period.
Material changes and management commentary
- In the quarter, growth at Jewett-Cameron Company (JCC) offset declines elsewhere: JCC sales rose 15% to $13.54 million, partly reflecting delayed orders shipped from the prior quarter. Its operating income declined amid higher raw-material costs and stronger competition.
- For the nine months, JCC sales fell 5% and operating income fell 23%; management cited competition, higher input costs, and sales-development spending and incentives.
- Greenwood’s nine-month sales fell 25%, with management attributing continued weakness to marine customers’ excess inventory and a weak boat-manufacturing market. The company sold excess marine-related inventory in February and did not anticipate a significant near-term recovery.
- Seed segment sales fell 51% for the nine months, attributed to the departure of a lead salesperson, reduced seed-cleaning service demand, and growers shifting acreage to higher-margin food crops. Industrial tools sales fell 34% as the company wound down certain lower-margin programs.
- Management provided no specific earnings or revenue guidance and cautioned that interim results are not necessarily indicative of the fiscal year.
Risks, contingencies and unusual items
- Litigation: In July 2014, after the reporting date, an Oregon Court of Appeals ruling reversed a judgment favorable to the company’s subsidiary and allowed a new trial. The company was assessing its options; it disclosed potential exposure of $1.8 million. The May 31 balance sheet included a $124,121 litigation reserve. The ultimate outcome and financial impact remain uncertain.
- Concentration: The top ten customers represented 77% of nine-month sales. Three customers accounted for 66% of receivables at May 31. Two suppliers each represented more than 10% of nine-month purchases.
- Other risks: Competition, customer demand, supplier delivery delays, reliance on major customers, limited trading volume, and exposure to interest-rate and foreign-currency movements. Management said it did not expect interest-rate changes to have a material adverse effect.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter. It had identified no material weaknesses in its prior internal-control assessment.
Important facts for investors to verify
- Developments and potential financial effects of the Greenwood Forest Products litigation, including whether the $1.8 million potential exposure changes.
- Whether JCC can sustain sales and margins amid competition and higher raw-material costs, and whether Greenwood’s marine-market demand improves.
- Working-capital trends, particularly receivables, inventory turnover, and the return to positive operating cash flow.
- Subsequent share repurchases, remaining authorization, and the effect of buybacks on cash and per-share results.
- Customer and supplier concentration and continued access to the $1 million credit line.