Jewett-Cameron Trading Company Ltd. — Q3 FY2012 Form 10-Q
Reporting period: Quarter and nine months ended May 31, 2012; fiscal year ends August 31. The unaudited consolidated statements were prepared by management under U.S. GAAP. 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, 2012 | Prior-year quarter | Nine months ended May 31, 2012 | Prior-year nine months |
|---|---|---|---|---|
| Sales | $16.11 million | $12.91 million | $35.11 million | $30.86 million |
| Gross profit | $2.81 million | $2.43 million | $6.36 million | $6.00 million |
| Gross margin | 17.4% | 18.8% | 18.1% | 19.4% |
| Operating income | $1.56 million | $1.04 million | $2.39 million | $1.87 million |
| Net income | $937,090 | $604,324 | $2.29 million | $254,938 |
| EPS, basic and diluted | $0.59 | $0.30 | $1.29 | $0.12 |
| Operating cash flow | Not separately presented for the quarter | $989,976 | $339,604 |
Quarterly sales rose 24.8% and net income rose 55.1%. Nine-month sales increased 13.8%. Nine-month earnings benefited materially from a one-time litigation gain: the income statement reports $1.44 million, following a favorable Oregon Supreme Court decision. Prior-year earnings included litigation charges. Thus, the reported year-over-year net income comparison is not a like-for-like measure of ongoing performance. Higher raw-material and transportation costs pressured gross margins in both comparison periods.
Liquidity, balance sheet, and capital allocation
- At May 31, cash and cash equivalents were $4.64 million, down from $6.77 million at August 31, 2011. Working capital was $14.32 million, versus $14.97 million.
- Current assets totaled $16.58 million and current liabilities $2.26 million. The company reported no bank borrowings; its $5.0 million U.S. Bank credit line was fully available, and the company said it complied with covenants.
- Nine-month operating cash flow was $990,000. Investing activities used $49,256, while financing activities used $3.08 million, principally for share repurchases. Cash declined by $2.13 million over the period.
- The company repurchased and cancelled 340,486 shares for $3.08 million during the nine months. Shares outstanding were 1,567,971 as of July 11, 2012. No dividends had been declared since incorporation.
- Accounts receivable rose $1.28 million and inventory fell $817,143 during the nine months. The company cited higher sales; prepaid expenses also increased $859,629.
Operating trends, outlook, and risks
- Lawn, garden, pet and other: Nine-month sales rose 18% to $22.87 million, supported by customer demand for home, backyard, and pet products and new-product shipments. Management cited continued raw-material and transportation cost pressure. Operations are seasonal, with the first two fiscal quarters typically slower.
- Industrial wood: Nine-month sales declined 6% to $5.70 million, and the segment remained loss-making. Weak boat-manufacturing demand and customers’ excess inventory remained headwinds; management was pursuing alternative uses and customer relationships.
- Seed: Nine-month sales increased 12% to $4.45 million, but pretax income declined. Management described overall demand as relatively weak.
- Industrial tools: Nine-month sales increased 42% to $2.08 million, and pretax income improved.
- No quantitative earnings or revenue guidance was provided. Management cautioned that interim results are not necessarily indicative of the full fiscal year.
- Risks include customer and supplier concentration, changing demand and economic conditions, delivery delays, input and freight costs, interest-rate exposure, and limited trading liquidity. The top ten customers accounted for 64% of nine-month sales; two customers represented 62% of receivables at May 31.
Contingencies and subsequent events
- The Greenwood Forest Products litigation remained subject to further consideration by the Oregon Court of Appeals after a partially favorable Oregon Supreme Court decision. The company reversed litigation reserves and accrued interest in fiscal Q2; the filing describes a $1.44 million litigation gain in the nine-month income statement. The filing’s litigation narrative and financial statement amounts are not fully reconciled in the provided text.
- On June 1, 2012, the company acquired land and fixed assets in Manning, Oregon, for $250,000 cash and was negotiating an operating lease with an outside party.
- After quarter-end, the board said it was evaluating whether to end the company’s Toronto Stock Exchange listing. It had also completed and terminated its then-current share repurchase plan and was considering another plan.
- The ESOP was terminated effective June 30, 2012, subject to IRS approval; remaining plan assets were to be distributed to participants after approval.
Important facts for investors to verify
- Reconcile the litigation gain, reserve reversal, accrued interest, and remaining liability, and track the remanded court proceedings.
- Assess whether sales growth can be sustained while raw-material and transportation costs constrain margins.
- Monitor customer concentration, receivables collection, and the company’s dependence on key customers and suppliers.
- Review the cash impact and rationale of past and any future share repurchases, the Manning property transaction, and any potential TSX listing change.
- Confirm the timing and conditions of IRS approval and distributions related to the ESOP termination.