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JCTCF > SEC Filings for JCTCF > Form 10-Q on 11-Jul-2013All Recent SEC Filings

Show all filings for JEWETT CAMERON TRADING CO LTD

Form 10-Q for JEWETT CAMERON TRADING CO LTD


11-Jul-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 May 31, 2013 and August 31, 2012 and its results of operations and cash flows for the nine month periods May 31, 2013 and 2012 in accordance with U.S. GAAP. Operating results for the three and nine month periods ended May 31, 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 May 31, 2013 and May 31, 2012

For the three months ended May 31, 2013, sales totaled $15,051,509, a decrease of $1,061,926 compared to sales of $16,113,435 for the three months ended May 31, 2012. The decrease is primarily due to lower sales at JCSC and MSI.

Sales at Greenwood were $1,862,740 for the three months ended May 31, 2013 compared to sales of $1,992,944 for the three months ended May 31, 2012, which was a decrease of $130,204 or 6.5%. The boat manufacturing industry remains very weak, which has resulted in lower demand for Greenwood's industrial wood products. Operating loss at Greenwood was ($20,795) for the three months ended May 31, 2013, which was an improvement of $7,952 from the loss of ($28,747) recorded in the same period a year ago.

Sales at JCLC for the three months ended May 31, 2013 were $11,737,628 compared to sales of $11,923,892 for the three months ended May 31, 2012. This represents a decrease of $186,264, or 1.6%. Operating income was $1,721,414, which was an increase of $242,224 compared to operating income of $1,479,190 in the year-ago quarter. The higher operating income is primarily due to an increasing shift towards e-commerce sales of our metal products through our customer's online websites, which results in lower costs and higher margins.

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Sales at JCSC were $692,239 for the three months ended May 31, 2013 compared to sales of $1,192,099 for the three months ended May 31, 2012. This represents a decrease of $499,860, or 42%. Product seed sales decreased primarily due to the departure of our lead salesman during the quarter. Seed cleaning service revenue has decreased due to an overall reduction in grass seed acres, combined with a consolidation of growers who clean in-house. Operating loss for the current quarter was ($49,638) compared to operating income of $3,290 in the year-ago quarter. The decline in operating income was directly attributable to the lower level of sales in the current quarter.

Sales at MSI were $758,903 for the three months ended May 31, 2013 compared to sales of $1,004,499 for the three months ended May 31, 2012 which was a decrease of $245,596, or 24%. Operating income was $54,411 compared to operating income of $106,358 in the quarter ended May 31, 2012. The decline in operating income was in line with the lower level of sales.

Gross margin for the three month period ended May 31, 2013 was 20.1% compared to 17.4% for the three months ended May 31, 2012. The increase was largely due to a more favorable product mix in the current quarter, and an increasing shift towards e-commerce sales of our metal products through our customer's online websites.

Operating expenses for the three month period ended May 31, 2013 increased by $92,686 to $1,343,614 compared to $1,250,928 for the three month period ended May 31, 2012. Selling, General and Administrative Expenses increased by $138,244 to $372,191 compared to $233,947. Wages and Employee Benefits declined to $904,688 from $955,702 recorded in the year ago period. Depreciation and Amortization rose to 66,735 from $61,279.

Income tax expense for the three month period ended May 31, 2013 was $674,678 compared to $625,600 for the three month period ended May 31, 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 three month period ended May 31, 2013 was $1,018,564, or $0.32 per share, compared to net income of $937,090, or $0.29 per share, for the three month period ended May 31, 2012, after adjustment for the 2 for 1 stock split effective May 2, 2013. The increase in earnings per share was due to the higher net income as well as a reduction in the weighted average number of common shares outstanding as a result of the repurchase and cancellation of common shares by the Company.

Nine Months Ended May 31, 2013 and May 31, 2012

For the nine months ended May 31, 2013, sales increased by $3,469,896, or 9.9%, to $38,575,738 from $35,105,842 for the nine months ended May 31, 2012. The increase primarily reflects higher sales at JCLC.

Sales at Greenwood were $5,935,268 for the nine months ended May 31, 2013 compared to sales of $5,700,139 for the nine months ended May 31, 2012. This is an increase of $235,129, or 4%. 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 20% of Greenwood's total sales for the nine months ended May 31, 2013, 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 loss at Greenwood was ($10,469) for the current nine month period compared to an operating loss of ($131,191) for the nine months ended May 31, 2012.

Sales at JCLC were $26,742,571 for the nine months ended May 31, 2013 compared to sales of $22,874,080 for the nine months ended May 31, 2012. This represents an increase of $3,868,491, or 17%. 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 increased to $3,217,884 from $2,310,720 for the nine months ended May 31, 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.

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Sales at JCSC were $4,193,249 for the nine months ended May 31, 2013 compared to sales of $4,452,635 for the nine months ended May 31, 2012, which was a decrease of $259,386, or 6%. Higher cereal and livestock feed prices prevalent in the last several years 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 nine month period was $142,663, which was a slight increase from operating income of $142,578 recorded in the prior year's nine month period.

Sales at MSI were $1,704,651 for the nine months ended May 31, 2013 compared to sales of $2,078,988 for the nine months ended May 31, 2012 which was a decrease of $374,337 or 18%. The Company has wound down certain sales programs of its lower margin products and has concentrated on selling its more profitable products. Although sales declined by 18%, operating income rose to $129,774 from $127,832 for the nine month period ended May 31, 2012.

Gross margin for the nine month period ended May 31, 2013 was 19.3% compared to 18.1% for the nine months ended May 31, 2012.

Operating expenses for the current nine month period rose slightly to $4,022,844 compared to expenses of $3,973,053 for the nine months ended May 31, 2012. Selling and Administrative expenses increased to $1,176,173 from $1,122,892. Wages and Employee Benefits were largely unchanged at $2,658,240 for the nine months ended May 31, 2013 compared to $2,663,388 for the nine months ended May 31, 2012. Depreciation and Amortization rose slightly to $188,431 from $186,773 recorded in the prior nine month period.

Other items in the current nine month period ended May 31, 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 nine months ended May 31, 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. Including the other items, income before income taxes totaled $3,821,453 compared to $3,841,690 for the nine months ended May 31, 2012. Income tax expense for the current nine months was $1,531,512 compared to $1,552,793 for the nine months ended May 31, 2012. The Company estimates income tax expense for the period based on combined federal and state rates that are currently in effect.

Net income for the nine month period ended May 31, 2013 was $2,289,941, or $0.73 per share, compared to net income of $2,288,897, or $0.65 per share, for the nine month period ended May 31, 2012, after adjustment for the 2 for 1 stock split effective May 2, 2013. The increase in earnings per share for the current nine months was positively affected due to a reduction in the weighted average number of common shares outstanding as a result of the repurchase and cancellation of common shares by the Company.

LIQUIDITY AND CAPITAL RESOURCES

As of May 31, 2013, the Company had working capital of $17,428,279 compared to working capital of $14,930,305 as of August 31, 2012, an increase of $2,497,974. The largest differences in individual components in working capital during the period were a $369,491 increase in cash; a $1,727,858 increase in accounts receivable due to the seasonal cycle of sales to customers and the related timing of cash receipts; a decrease of $2,410,477 in inventory as the Company typically carries lower inventory in the third quarter due to the seasonal timing of its sales; a decrease of $5,000 in note receivable as the balance of $20,000 on one note was repaid and a new note of $15,000 was subsequently issued; an increase of $1,501,480 in prepaid expenses which is largely related to down payments for future inventory purchases; an increase of $125,868 in prepaid income taxes. Accounts payable declined by $1,166,234 due to the timing of payments to suppliers; accrued liabilities rose slightly by $34,665; accrued income taxes fell by $37,203 due to the timing of estimated tax payments; and litigation reserve declined by $19,982 as differences in interest rates resulted in a reduction in the amount reserved.

As of May 31, 2013, accounts receivable and inventory represented 49% of current assets and 44% of total assets. For the three months ended May 31, 2013, the accounts receivable collection period, or DSO, was 29 compared to 30 for the three months ended May 31, 2012. For the nine month period ended May 31, 2013, the DSO was 34 compared to 40 for the nine months ended May 31, 2012. Inventory turnover for the three months ended May 31, 2013 was 40 days compared to 40 days for the three months ended May 31, 2012. For the nine months ended May 31, 2013, inventory turnover was 52 days compared to 52 days for the nine months ended May 31, 2012.

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External sources of liquidity include a line of credit from U.S. Bank of $5,000,000 of which the Company had no borrowing against at May 31, 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 May 31, 2013, the one month LIBOR rate plus 200 basis points was 2.19% (0.19% + 2.00%). The line of credit has certain financial covenants. The Company is in compliance with these covenants.

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 nine months of fiscal 2013 ended May 31, 2013, the Company repurchased and cancelled 814 common shares at a total cost of $4,884, which represents an average price of $6.00 per share after adjusting for the 2-for-1 stock split effective May 2, 2013. Subsequent to the nine month period ended May 31, 2013, the Company commenced a new share repurchase plan to purchase for cancellation up to 400,000 common shares, which represents approximately 13% of the approximately 3.1 million common shares outstanding. The repurchase plan commenced on June 3, 2013 and will remain in place until August 16, 2013 but may be limited or terminated at any time without prior notice.

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 7,126 shares (after adjusting for the 2 for 1 stock split) for the nine months ended May 31, 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.

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

For the nine months ended May 31, 2013, our top ten customers represented 67% 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.

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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