Jewett-Cameron Trading Company Ltd. — FY2019 Form 10-K
Business context and reporting period. Fiscal year ended August 31, 2019; figures are in U.S. dollars. The company distributes and processes wood products, lawn/garden/pet products, agricultural seed, and industrial tools through four reporting segments. This is an annual report, not a quarterly filing; FY2019’s fourth-quarter results are identified where relevant.
Financial performance
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Revenue | $45.45 million | $53.92 million | Down 16% |
| Gross profit / margin | $9.96 million / 21.9% | $11.60 million / 21.5% | Gross profit down; margin up |
| Operating income | $2.74 million | $4.28 million | Down 36% |
| Net income | $2.10 million | $2.92 million | Down 28% |
| Basic and diluted EPS | $0.50 | $0.66 | Down 24% |
| Cash from operations | $6.31 million | $1.57 million | Up $4.74 million |
| Cash and cash equivalents | $9.65 million | $6.10 million | Up $3.55 million |
| Working capital | $17.76 million | $18.35 million | Down $0.58 million |
Operating cash flow benefited substantially from a $3.43 million inventory reduction and a $1.32 million decrease in accounts receivable. Capital expenditures were $32,732; operating cash flow less capital expenditures was approximately $6.27 million. The company repurchased and cancelled 345,671 shares for $3.06 million. No dividends were declared.
Total liabilities were $1.78 million, consisting primarily of current liabilities; there was no borrowing under the $3 million bank line at year-end, and the full facility was available. The current ratio was 11.3, compared with 9.4. The company reported total assets of $22.21 million and stockholders’ equity of $20.43 million.
Changes and segment results
- Lawn, garden, pet and other (JCC): Revenue fell 18% to $38.51 million; segment income before tax declined to $2.04 million from $3.65 million. This segment remained the principal business.
- Industrial wood products (Greenwood): Revenue rose 12% to $3.91 million; segment income before tax was $71,192 versus $494.
- Seed processing and sales (JCSC): Revenue decreased 2% to $2.23 million; loss before tax widened to $222,191 from $58,438.
- Industrial tools and clamps (MSI): Revenue fell 16% to $792,626; loss before tax widened to $159,914 from $72,417.
Management attributed the overall sales and earnings decline chiefly to unusually wet weather delaying outdoor-product purchases, tariff-related market uncertainty and lower demand. FY2018 also benefited from unusually strong specialty lumber demand related to storm damage. Gross margin edged higher, primarily due to a greater mix of higher-margin metal products, despite tariff pressure.
Outlook, risks and unusual items
- No specific revenue, earnings or margin guidance was provided. Management plans to develop and market new products, expand sales channels and branding, strengthen product-development capabilities, and implement an ERP system.
- After year-end, the company was notified that many imported products would be reclassified and would no longer face the 25% China tariffs; some products remain subject to tariffs. The extent and durability of the benefit are uncertain.
- In September 2019, the board decided to permanently close MSI, liquidate remaining inventory and reassign personnel. Management did not expect closure and liquidation costs to be significant.
- Customer concentration is material: the top ten customers accounted for 77% of sales and the largest customer for 33%. Two customers represented 56% of year-end receivables. Two suppliers together accounted for $17.75 million of purchases.
- A Pennsylvania product-liability action alleges injuries after a dog escaped from a kennel. The case was at an early stage; the company said its insurer was providing a defense, and the outcome could not be predicted.
- The company sold its Manning, Oregon property for $324,675, recording a gain of approximately $105,366. The company also reported the May 2019 death of co-founder and board chair Donald Boone; Charles Hopewell became board chair.
- Weather, competition, customer purchasing patterns, overseas sourcing, tariffs, supplier delivery delays, customer concentration, cybersecurity and limited trading volume are identified risks. Management reported effective disclosure controls and internal control over financial reporting; the auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Whether tariff reclassification and any remaining duties materially change JCC demand, pricing and margins.
- Post-year-end MSI closure costs, inventory liquidation proceeds and the effect of eliminating its operating losses.
- Customer and supplier concentration, including retention of the customer responsible for 33% of FY2019 sales.
- Whether the FY2019 operating cash flow increase is repeatable, given the large working-capital release from lower inventory and receivables.
- Developments and potential exposure in the Pennsylvania product-liability case; the filing does not provide a clear estimated loss amount.
- Execution, costs and expected benefits of the ERP implementation, planned expansion and new-product initiatives; the filing provides no quantified outlook.