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JCTCF > SEC Filings for JCTCF > Form 10-Q on 15-Apr-2013All Recent SEC Filings

Show all filings for JEWETT CAMERON TRADING CO LTD | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for JEWETT CAMERON TRADING CO LTD


15-Apr-2013

Quarterly Report

Management's Discussion and Analysis of Financial Condition and Results of Operations.

These unaudited consolidated financial statements are those of the Company and its wholly owned subsidiaries. In the opinion of management, the accompanying Consolidated Financial Statements of Jewett-Cameron Trading Company Ltd., contain all adjustments, consisting only of normal recurring adjustments, necessary to fairly state its financial position as of February 28, 2013 and August 31, 2012 and its results of operations and cash flows for the six month periods ended February 28, 2013 and February 29, 2012 in accordance with U.S. GAAP. Operating results for the three and six month periods ended February 28, 2013 are not necessarily indicative of the results that may be experienced for the full fiscal year ending August 31, 2013.

The Company's operations are classified into four reportable segments, which were determined based on the nature of the products offered along with the markets being served. The segments are as follows:

Industrial wood products

Lawn, garden, pet and other

Seed processing and sales

Industrial tools

The industrial wood products segment reflects the business conducted by Greenwood Products, Inc. (Greenwood), a wholly owned subsidiary of Jewett-Cameron Lumber Corporation (JCLC). Greenwood is a processor and distributor of industrial wood products. A major product category is treated plywood that is sold to boat manufacturers and the transportation industry.

The lawn, garden, pet and other segment reflects the business of Jewett-Cameron Lumber Corporation, which is a manufacturer and distributor of specialty metal products and a wholesaler of wood products. Wood products include fencing and landscape timbers, while metal products include dog kennels, proprietary gate support systems, perimeter fencing, and greenhouses. JCLC uses contract manufacturers to make the specialty metal products. Some of the products that JCLC distributes flow through the Company's distribution center located in North Plains, Oregon, and some are shipped direct to the customer from the manufacturer. Primary customers are home centers and other retailers.

The seed processing and sales segment reflects the business of Jewett-Cameron Seed Company (JCSC), a wholly owned subsidiary of JCLC. JCSC processes and distributes agricultural seed. Most of this segment's sales come from selling seed to distributors with a lesser amount of sales derived from cleaning seed.

The industrial tools segment reflects the business of MSI-PRO (MSI), a wholly owned subsidiary of JCLC. MSI imports and distributes products including pneumatic air tools, industrial clamps, and saw blades; that are primarily sold to retailers that in turn sell to contractors and end users. Some of these products carry the Avenger Products brand label.

RESULTS OF OPERATIONS

Three Months Ended February 28, 2013 and February 29, 2012

For the three months ended February 28, 2013, sales increased $2,476,027 to $14,227,824 from $11,751,797 for the three months ended February 29, 2012. This represents a increase of 21%.

Sales at Greenwood were $1,711,057 for the three months ended February 28, 2013 compared to sales of $2,219,421 for the three months ended February 29, 2012, which was a decline of 23%. The boat manufacturing industry remains very weak, which has resulted in lower demand for Greenwood's industrial wood products. Operating loss before taxes at Greenwood was $52,219 for the three months ended February 28, 2013 compared to an operating loss of $18,858 for the three months ended February 29, 2012.

Sales at JCLC were $10,232,004 for the three months ended February 28, 2013 compared to sales of $7,375,821 for the three months ended February 29, 2012. This represents an increase of $2,856,183, or 39%. Operating income for the current quarter was $941,076, which was an increase of $281,774, or 43% compared to operating income of $659,302, in the prior year's quarter. The higher operating income was in line with the increase in sales. The operating results of JCLC are historically seasonal with the first two quarters of the fiscal year being slower than the final two quarters of the fiscal year.

Sales at JCSC were $1,690,366 for the three months ended February 28, 2013, which was an increase of $116,942, or 7%, compared to sales of $1,573,424 for the three months ended February 29, 2012. Operating income at JCSC for the current quarter was $74,521, an increase of $43,451 from the operating income of $31,070 recorded by JCSC in the prior year's quarter.

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Sales at MSI for the three months ended February 28, 2013 were $594,397, which was an increase of $11,267, or 2%, compared to sales of $583,130 for the three months ended February 29, 2012. Operating income at MSI for the current quarter was $34,563, which was an increase of 23% from the operating income of $28,155 for the quarter ended February 29, 2012.

Gross margin for the three months ended February 28, 2013 was 17.1% compared to 17.8% for the three months ended February 29, 2012.

Operating expenses increased by $41,744 to $1,460,609 from $1,418,865 for the three month period ended February 29, 2012. Selling, General and Administrative Expenses increased by $7,566 from $460,595 to $468,161. Wages and Employee Benefits increased by $34,273 to $928,246 from $893,973. Depreciation and Amortization decreased by $95 to $64,202 from $64,297.

For the three months ended February 28, 2013, the Company recorded a gain on the sale of property, plant and equipment of $353,852. The one-time gain is a result of the sale by the Company of approximately 1.64 acres of land with a cost basis of $56,148 to the Oregon Department of Transportation for proceeds of $410,000. For the three months ended February 29, 2012, the Company recorded the reversal of Litigation Reserves of $1,443,629 and Interest Expense of $16,023 due to the favorable decision for the Company from the Oregon Supreme Court in the Company's lawsuit filed in relation to the acquisition of inventory by Greenwood Products. These reversals were treated as a one-time gain and contributed to the Company's higher income tax expense and net income for the quarter.

Income tax expense for the three month period ended February 28, 2013 was $548,485 compared to $844,494 for the three month period ended February 29, 2012. The Company estimates income tax expense for the quarter based on combined federal and state rates that are currently in effect.

Net income for the quarter ended February 28, 2013 was $790,631, or $0.50 per basic and diluted share, compared to net income of $1,287,774, or $0.71 per basic and diluted share, for the quarter ended February 29, 2012. The net income per share in both periods was positively affected by one-time gains, including the sale of property in the current quarter and the reversal of the litigation reserve in the year-ago quarter. The per share income was also positively affected by the lower average number of common shares outstanding in the current quarter due to the Company's repurchases of common shares.

Six Months Ended February 28, 2013 and February 29, 2012

For the six months ended February 29, 2013, sales increased by $4,531,822, or 24%, to $23,524,229 from sales of $18,992,407 recorded in the six month period ended February 29, 2012. The increase is primarily due to higher sales at JCLC.

Sales at Greenwood were $4,072,527 for the six months ended February 28, 2013 compared to sales of $3,707,195 for the six months ended February 29, 2012. This represents an increase of $365,332, or 10%. The increase in sales was due to successful sales efforts obtaining international export orders for our specialty plywood. The marine market, however, remains very weak. Sales to boat manufacturers represented approximately 17% of Greenwood's total sales for the year ended August 31, 2012, and demand from these kinds of customers has been severely affected by the uncertain economic environment. Boat manufacturers continue to work down excess inventory accumulated over the past several years, and until such point, we do not foresee an industry recovery. We continue to develop a readiness to participate when the market rebounds. Operating income at Greenwood was $10,326 for the current six month period compared to an operating loss of $102,444 for the six months ended February 29, 2012.

Sales at JCLC were $15,004,943 for the six months ended February 28, 2013, which was an increase of $4,054,755, or 37%, from sales of $10,950,188 for the six months ended February 29, 2012. The higher sales were due to several factors.
The Company's older products have increased their market share with existing customers due to our sales efforts and the Company being recognized as a reliable and valued supplier. Also, the weakened economy has resulted in many consumers employing a "staycation" approach which has produced increased spending on home and backyard projects, including their pets. Therefore, many of our customers have expanded their pet product lines, including adding the Company's newer pet containment products. Operating income before income taxes was $1,496,471 compared to $831,530 for the six months ended February 29, 2012. Overall, the operating results of JCLC are seasonal with the first two quarters of the fiscal year being much slower than the final two quarters of the fiscal year.

Sales at JCSC for the six months ended February 28, 2013 were $3,501,010, which was an increase of $240,426, or 7%, compared to sales of $3,260,584 for the six months ended February 29, 2012. Higher cereal and livestock feed prices have caused a shift by some growers from grass seed to grains, which have begun to have a positive effect on surpluses and wholesale prices. However, demand remains relatively weak, primarily from the new home construction and golf course industry in North America. Operating income for the current six month period was $192,302 compared to operating income of $139,288 for the six months ended February 29, 2012.

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Sales at MSI were $945,748 for the six months ended February 28, 2013, which was a decrease of $128,741, or 12%, compared to sales of $1,074,489 for the six months ended February 29, 2012. The Company has wound down certain sales programs of its lower margin products and has concentrated on selling more profitable products. This sales shift resulted in higher operating income of $75,363 for the current six month period compared to operating income of $21,474 for the six month period ended February 29, 2012.

Gross margin for the six month period ended February 28, 2013 was 18.8% compared to 18.7% for the six months ended February 29, 2012.

Operating expenses declined slightly by $42,894 to $2,679,231 in the six month period ended February 28, 2013 from $2,722,125 in the six month period ended February 29, 2012. Selling, General and Administrative Expenses declined by $84,962 to $803,982 from $888,944. Wages and Employee Benefits rose by $45,867 to $1,753,553 from $1,707,686. Depreciation and Amortization decreased by $3,799 to $121,696 from $125,495.

Other items in the current six month period ended February 28, 2013 included the gain on sale of property, plant and equipment of $353,852 from the sale of approximately 1.64 acres of land to the State of Oregon. In the six months ended February 29, 2012, the Company recorded the reversal of Litigation Reserves of $1,443,629 due to the favorable decision for the Company from the Oregon Supreme Court in the Company's lawsuit filed in relation to the acquisition of inventory by Greenwood Products.

Income tax expense in the current six month period was $856,834 compared to $927,193 in the six months ended February 29, 2012. The Company estimates income tax expense for the quarter based on combined federal and state rates that are currently in effect.

Net income for the six months ended February 28, 2013 was $1,271,377, or $0.81 per basic and diluted share, compared to net income of $1,351,807, or $0.73 per basic and diluted share, for the six months ended February 29, 2012. The net income per share in both periods was positively affected by one-time gains, including the sale of property in the current six month period and the reversal of the litigation reserve in the year-ago six month period. The per share income was also positively affected by the lower average number of common shares outstanding in the current period due to the Company's repurchases of common shares.

LIQUIDITY AND CAPITAL RESOURCES

As of February 28, 2013, the Company had working capital of $16,395,275 compared to working capital of $14,930,305 as of August 31, 2012, an increase of $1,464,970. The largest differences in individual components in working capital during the period were a $2,966,800 decrease in cash due to an increase in prepaid expenses and decrease in accounts payable; a $4,202,382 increase in accounts receivable due to the seasonal cycle of sales to customers and the related timing of cash receipts; a decrease of $1,393,096 in inventory and an increase of $1,041,955 in prepaid expenses, which is largely related to down payments for future inventory purchases; and a decrease of $20,000 in note receivable as the remaining balance of the note was repaid during the period. Accounts payable declined by $244,691 due to the seasonal cycle of payments to inventory suppliers; Accrued liabilities fell by $51,434. Accrued income taxes declined by $37,203 due to the timing of estimated tax payments, and litigation reserve declined by $13,249 as differences in interest rates resulted in a reduction in the amount reserved.

As of February 28, 2013, accounts receivable and inventory represented 68% of current assets and 61% of total assets. For the three months ended February 28, 2013, the accounts receivable collection period, or DSO, was 46 compared to 31 for the three months ended February 29, 2012. For the six month period ended February 28, 2013, the DSO was 56 compared to 38 from the six months ended February 29, 2012. Inventory turnover for the three months ended February 28, 2013 was 44 days compared to 71 days for the three months ended February 29, 2012. For the six months ended February 28, 2013, inventory turnover was 61 days compared to 73 days for the six months ended February 29, 2012.

External sources of liquidity include a line of credit from U.S. Bank of $5,000,000 of which the Company had not borrowed against at February 28, 2013. Borrowing under the line of credit is secured by an assignment of accounts receivable and inventory. The interest rate is calculated solely on the one month LIBOR rate plus 200 basis points. As of February 28, 2013, the one month LIBOR rate plus 200 basis points was 2.20% (0.20% + 2.00%). The line of credit has certain financial covenants. The Company is in compliance with these covenants.

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The Company has been utilizing its cash position by repurchasing common shares under 10b5-1 plans in order to increase shareholder value. During the first six months of fiscal 2013 ended February 28, 2013, the Company repurchased and cancelled 407 common shares at a total cost of $4,884, which represents an average price of $12.00 per share.

Business Risks

This quarterly report includes "forward-looking statements" as that term is defined in Section 21E of the Securities Exchange Act of 1934. Forward-looking statements can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," "seeks," "approximately," "intends," "plans," "estimates," "anticipates," or "hopeful," or the negative of those terms or other comparable terminology, or by discussions of strategy, plans or intentions. For example, this section contains numerous forward-looking statements. All forward-looking statements in this report are made based on management's current expectations and estimates, which involve risks and uncertainties, including those described in the following paragraphs.

Risks Related to Our Common Stock

We may decide to acquire assets or enter into business combinations, which could be paid for, either wholly or partially with our common stock and if we decide to do this our current shareholders would experience dilution in their percentage of ownership.

Our Articles of Incorporation give our Board of Directors the right to enter into any contract without the approval of our shareholders. Therefore, our management could decide to make an investment (buy shares, loan money, etc.) without shareholder approval. If we acquire an asset or enter into a business combination, this could include exchanging a large amount of our common stock, which could dilute the ownership interest of present stockholders.

Future stock distributions could be structured in such a way as to be 1) diluting to our current shareholders or 2) could cause a change in control to new investors.

If we raise additional funds by selling more of our stock, the new stock may have rights, preferences or privileges senior to those of the rights of our existing stock. If common stock is issued in return for additional funds, the price per share could be lower than that paid by our current stockholders. The result of this would be a lessening of each present stockholder's relative percentage interest in our company.

Our shareholders could experience significant dilution if we issue our authorized 10,000,000 preferred shares.

The Company's common shares currently trade within the NASDAQ Capital Market in the United States. The common shares also formerly traded on the Toronto Stock Exchange ("TSX") in Canada until the Company voluntarily delisted from the TSX on October 11, 2012. The average daily trading volume of our common stock on NASDAQ was 3,896 shares for the six months ended February 28, 2013. With this limited trading volume, investors could find it difficult to purchase or sell our common stock.

Risks Related to Our Business

We could experience a decrease in the demand for our products resulting in lower sales volumes, which would give us less capital with which to operate.

In the past we have at times experienced decreasing products sales with certain customers. The reasons for this can be generally attributed to factors such as competition, wood products prices, and interest rates. If economic conditions deteriorate or if consumer preferences change, we could experience a significant decrease in profitability.

If our top customers were lost and could not be replaced.

For the six months ended February 28, 2013, our top ten customers represented 65% of our total sales. We would experience a significant decrease in sales and profitability and would have to cut back our operations, if these customers were lost and could not be replaced. Our top ten customers are in the U.S., Canada and Mexico and are primarily in the home improvement, marine, and agricultural industries.

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We could experience delays in the delivery of our products to our customers causing us to lose business.

We purchase our products from other vendors and a delay in shipment from these vendors to us could cause significant delays in our delivery to our customers.
This could result in a decrease in sales orders to us and we would experience a loss in profitability.

We could lose our credit agreement and could result in our not being able to pay our creditors.

We have a line of credit with U.S. Bank in the amount of $5,000,000 of which $5,000,000 is available. We are currently in compliance with the requirements of our existing line of credit. If we lost this credit it could become impossible to pay some of our creditors on a timely basis.

If we fail to maintain an effective system of internal controls, we may not be able to detect fraud or report our financial results accurately, which could harm our business and we could be subject to regulatory scrutiny.

We have completed a management assessment of internal controls as prescribed by
Section 404 of the Sarbanes-Oxley Act, which we were required to do in connection with our year ended August 31, 2012. Based on this process we did not identify any material weaknesses. Although we believe our internal controls are operating effectively, we cannot guarantee that in the future we will not identify any material weaknesses in connection with this ongoing process.

Item 3.

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