Jewett-Cameron Trading pany .(JCTCF) - 2019 Q2 - Quarterly Report

Part I – Financial Information Item 1. Financial Statements This section presents the unaudited consolidated financial statements, including balance sheets, statements of operations, stockholders' equity, and cash flows, along with comprehensive notes detailing accounting policies, segment information, and other financial disclosures for the periods ended February 28, 2019, and August 31, 2018 Consolidated Balance Sheets Total assets and liabilities decreased from August 2018 to February 2019, primarily due to lower cash and accounts receivable, partially offset by increased inventory | Metric | Feb 28, 2019 | Aug 31, 2018 | Change | | :-------------------------- | :----------- | :----------- | :----- | | Cash and cash equivalents | $3,706,604 | $6,097,463 | -$2,390,859 | | Accounts receivable, net | $3,197,120 | $4,152,492 | -$955,372 | | Inventory, net | $11,705,607 | $9,803,197 | +$1,902,410 | | Total current assets | $19,485,476 | $20,518,713 | -$1,033,237 | | Total assets | $22,278,746 | $23,627,563 | -$1,348,817 | | Total current liabilities | $1,313,431 | $2,172,299 | -$858,868 | | Total liabilities | $1,393,317 | $2,254,152 | -$860,835 | | Total stockholders' equity | $20,885,429 | $21,373,411 | -$487,982 | Consolidated Statements of Operations Sales and net income significantly declined for both three-month and six-month periods, despite improved gross profit margins | Metric | 3 Months Ended Feb 28, 2019 | 3 Months Ended Feb 28, 2018 | Change (YoY) | 6 Months Ended Feb 28, 2019 | 6 Months Ended Feb 28, 2018 | Change (YoY) | | :-------------------------------- | :-------------------------- | :-------------------------- | :----------- | :-------------------------- | :-------------------------- | :----------- | | Sales | $7,857,175 | $13,341,338 | -41.1% | $16,923,275 | $22,755,308 | -25.6% | | Gross Profit | $1,761,288 | $2,635,806 | -33.1% | $4,070,374 | $4,822,554 | -15.6% | | Gross Margin | 22.4% | 19.8% | +2.6 pp | 24.0% | 21.2% | +2.8 pp | | Income from operations | $57,625 | $720,244 | -92.0% | $536,634 | $1,290,546 | -58.4% | | Net income | $119,629 | $508,298 | -76.5% | $469,323 | $830,731 | -43.5% | | Basic earnings per common share | $0.03 | $0.11 | -72.7% | $0.11 | $0.19 | -42.1% | Consolidated Statements of Stockholders' Equity Stockholders' equity decreased due to share repurchases and cancellations, offsetting net income for the period | Metric | Feb 28, 2019 | Aug 31, 2018 | Change | | :-------------------------------- | :----------- | :----------- | :----- | | Number of Shares | 4,210,538 | 4,314,659 | -104,121 | | Capital Stock Amount | $993,344 | $1,017,908 | -$24,564 | | Retained Earnings | $19,291,281 | $19,754,699 | -$463,418 | | Total Stockholders' Equity | $20,885,429 | $21,373,411 | -$487,982 | - The company repurchased and cancelled 104,121 common shares during the six months ended February 28, 2019, at a total cost of $957,305, decreasing retained earnings by $932,741[18][70][71] Consolidated Statements of Cash Flows Net cash decreased due to operating and financing activities, partially offset by investing activities | Metric | 6 Months Ended Feb 28, 2019 | 6 Months Ended Feb 28, 2018 | Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :----- | | Net income | $469,323 | $830,731 | -$361,408 | | Net cash used in operating activities | ($1,758,228) | ($3,056,486) | +$1,298,258 | | Net cash provided by (used in) investing activities | $324,674 | ($65,041) | +$389,715 | | Net cash used in financing activities | ($957,305) | $0 | -$957,305 | | Net decrease in cash | ($2,390,859) | ($3,121,527) | +$730,668 | | Cash, end of period | $3,706,604 | $2,790,723 | +$915,881 | - Cash used in operating activities decreased significantly year-over-year, primarily due to a decrease in accounts receivable and a smaller increase in inventory compared to the prior year[19] Notes to the Consolidated Financial Statements These notes detail operations, accounting policies, segment performance, and other financial disclosures, including recent pronouncements 1. NATURE OF OPERATIONS Jewett-Cameron Trading Company Ltd. is a holding company operating through subsidiaries in North Plains, Oregon, involved in manufacturing and distribution of specialty metal products, wholesale wood products, industrial wood products, agricultural seeds, and pneumatic air tools - The Company operates through wholly-owned subsidiaries: JC USA Inc. (holding company, administrative services), Jewett-Cameron Company (JCC - specialty metal products, wholesale wood products), Greenwood Products, Inc. (industrial wood products), MSI-PRO Co. (pneumatic air tools, industrial clamps), and Jewett-Cameron Seed Company (JCSC - agricultural seeds)[21][22][23][24] 2. SIGNIFICANT ACCOUNTING POLICIES This section details the company's significant accounting policies under U.S. GAAP, including recent pronouncement adoptions with no material impact - The company adopted ASU No. 2014-09 (Revenue from Contracts with Customers) and ASU No. 2016-18 (Restricted Cash) effective September 1, 2018, with no material impact on financial statements[56][59] - The company is currently evaluating the impact of ASU No. 2016-13 (Credit Losses on Financial Instruments), effective for fiscal years beginning after December 31, 2019[58] 3. INVENTORY Total inventory increased to $11,705,607 as of February 28, 2019, from $9,803,197 as of August 31, 2018, primarily driven by an increase in wood and metal products | Inventory Type | Feb 28, 2019 | Aug 31, 2018 | Change | | :-------------------------- | :----------- | :----------- | :----- | | Wood products and metal products | $11,190,812 | $9,189,772 | +$2,001,040 | | Industrial tools | $370,328 | $378,163 | -$7,835 | | Agricultural seed products | $144,467 | $235,262 | -$90,795 | | Total Inventory | $11,705,607 | $9,803,197 | +$1,902,410 | 4. PROPERTY, PLANT AND EQUIPMENT Net book value of property, plant, and equipment decreased to $2,789,951 as of February 28, 2019, from $3,105,260 as of August 31, 2018, mainly due to accumulated depreciation and the sale of land | Asset Type | Feb 28, 2019 | Aug 31, 2018 | | :-------------------------- | :----------- | :----------- | | Office equipment | $473,702 | $473,702 | | Warehouse equipment | $1,245,137 | $1,313,714 | | Buildings | $4,072,741 | $4,090,527 | | Land | $559,065 | $761,924 | | Accumulated depreciation | ($3,560,694) | ($3,534,607) | | Net book value | $2,789,951 | $3,105,260 | 5. INTANGIBLE ASSETS Net book value of intangible assets, primarily trademarks and trade names, remained low at $3,319 as of February 28, 2019, following the write-off of expired patents in the prior fiscal year | Asset Type | Feb 28, 2019 | Aug 31, 2018 | | :-------------------------- | :----------- | :----------- | | Trademarks, trade names and other | $43,655 | $43,655 | | Accumulated amortization | ($40,336) | ($40,065) | | Net book value | $3,319 | $3,590 | - During the year ended August 31, 2018, the company wrote off $43,635 in capitalized costs due to two patents expiring[63] 6. DEFERRED INCOME TAXES The deferred income tax liability slightly decreased to $79,886 as of February 28, 2019, from $81,853 as of August 31, 2018, reflecting temporary differences between financial and tax reporting | Metric | Feb 28, 2019 | Aug 31, 2018 | | :-------------------------- | :----------- | :----------- | | Deferred income tax liability | $79,886 | $81,853 | 7. BANK INDEBTEDNESS The company had no bank indebtedness under its $3,000,000 line of credit as of February 28, 2019, or August 31, 2018, indicating ample liquidity from this source - The company has a $3,000,000 line of credit with U.S. Bank, with no outstanding balance as of February 28, 2019, and August 31, 2018[65] 8. CAPITAL STOCK The company's common stock is authorized for 21,567,564 shares, with 4,210,538 shares issued as of February 28, 2019. A two-for-one stock split was effective May 29, 2018, retroactively adjusted in financial statements. No dividends have been declared since incorporation - A two-for-one stock split of common stock was effective May 29, 2018, retroactively adjusting share and per share data[25][68] 9. CANCELLATION OF CAPITAL STOCK The company continued its share repurchase program, buying back 104,121 shares during the six months ended February 28, 2019, at an average price of $9.19 per share, reducing retained earnings | Period | Shares Repurchased | Total Cost | Average Price per Share | Decrease to Retained Earnings | | :-------------------------------- | :----------------- | :--------- | :---------------------- | :---------------------------- | | Q2 Fiscal 2019 (Feb 28, 2019) | 8,450 | $63,929 | $7.57 | $61,936 | | Q1 Fiscal 2019 (Nov 30, 2018) | 95,671 | $893,376 | $9.34 | $870,805 | | Total 6 Months Fiscal 2019 | 104,121 | $957,305 | $9.19 | $932,741 | 10. STOCK OPTIONS The company has a stock option program for directors and employees, allowing grants up to 10% of outstanding common shares, but had no stock options outstanding as of February 28, 2019, or August 31, 2018 - No stock options were outstanding as of February 28, 2019, or August 31, 2018[76] 11. PENSION AND PROFIT-SHARING PLANS The company offers a 401(k) plan for employees with at least six months of service, including discretionary and matching contributions. Compensation expense for the plan decreased to $153,561 for the six months ended February 28, 2019, from $166,369 in the prior year | Metric | 6 Months Ended Feb 28, 2019 | 6 Months Ended Feb 28, 2018 | Change | | :-------------------------- | :-------------------------- | :-------------------------- | :----- | | 401(k) compensation expense | $153,561 | $166,369 | -$12,808 | 12. SEGMENT INFORMATION The company operates four principal reportable segments: Industrial wood products, Lawn, garden, pet and other, Seed processing and sales, and Industrial tools and clamps. Sales decreased across most segments for the six months ended February 28, 2019, with Lawn, garden, pet and other experiencing the largest decline, while Industrial wood products saw an increase | Segment | 2019 | 2018 | Change (YoY) | | :-------------------------- | :----------- | :----------- | :----------- | | Industrial wood products | $1,962,817 | $1,515,375 | +29.5% | | Lawn, garden, pet and other | $13,452,656 | $19,323,517 | -30.4% | | Seed processing and sales | $1,089,480 | $1,393,443 | -21.8% | | Industrial tools and clamps | $418,322 | $522,973 | -20.1% | | Total Sales | $16,923,275 | $22,755,308 | -25.6% | | Segment | 2019 | 2018 | Change | | :-------------------------- | :----------- | :----------- | :----- | | Industrial wood products | $26,487 | ($47,183) | +$73,670 | | Lawn, garden, pet and other | $14,092 | $849,782 | -$835,690 | | Seed processing and sales | ($60,794) | $90,495 | -$151,289 | | Industrial tools and clamps | ($19,361) | ($3,778) | -$15,583 | | Corporate and administrative | $707,910 | $382,691 | +$325,219 | | Total Income before taxes | $668,334 | $1,272,007 | -$603,673 | - One customer accounted for sales of $8,054,610 (47.6% of total sales) for the six months ended February 28, 2019, compared to $14,152,519 (62.2% of total sales) in the prior year[82] 13. CONCENTRATIONS The company faces credit risk due to a concentration of accounts receivable among a small number of U.S. customers (two customers accounted for 49% of total accounts receivable as of Feb 28, 2019). It also has volume of business concentration with three suppliers accounting for 10% or greater of total purchases - Two customers accounted for 49% of total accounts receivable as of February 28, 2019 (down from three customers accounting for 71% at Feb 28, 2018)[84] - Three suppliers each accounted for 10% or greater of total purchases for the six months ended February 28, 2019, with aggregate purchases of $9,260,530[85] 14. SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS Cash paid for income taxes significantly decreased to $395,500 for the six months ended February 28, 2019, from $924,444 in the prior year, with no cash paid for interest in either period | Metric | 2019 | 2018 | Change | | :-------------------------- | :----------- | :----------- | :----- | | Interest | $0 | $0 | $0 | | Income taxes | $395,500 | $924,444 | -$528,944 | 15. SUBSEQUENT EVENTS Subsequent to the reporting period, the company repurchased an additional 180,950 common shares at a total cost of $1,587,777, averaging $8.77 per share, under its share repurchase plan - From February 28, 2019, through April 11, 2019, the company repurchased an additional 180,950 common shares for $1,587,777, at an average price of $8.77 per share[88][128] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses decreased sales and net income due to external factors, outlining mitigation strategies and a solid financial position Overview and Business Segments The company operates through four segments, with new U.S. tariffs on Chinese imports impacting metal products and potentially affecting sales and margins - The company's metal products, manufactured in China, are subject to new U.S. tariffs ranging from 10% to 25% effective September 24, 2018, which could negatively affect sales and gross margins if costs cannot be passed through or demand decreases[94][96][97] Results of Operations The company experienced significant sales declines across most segments for both the three-month and six-month periods, primarily due to adverse weather, reduced demand for specialty lumber (post-storm), and market uncertainty from tariffs. Despite this, gross margins improved due to product mix shifts Three Months Ended February 28, 2019 and February 28, 2018 Sales decreased by 41% due to adverse weather and reduced demand, despite an improvement in gross margin - Total sales decreased by $5,484,163 (41%) to $7,857,175 for the three months ended February 28, 2019, compared to $13,341,338 in the prior year[99] - JCC sales decreased by 43% ($4,879,544) due to unseasonably cold/wet weather delaying outdoor product purchases and higher cedar fencing sales in the prior year not being duplicated[100] - JCSC sales decreased by 64% ($592,297) due to persistent wet weather in the Midwest and Southeast impacting clover seed planting and increasing end-user inventories[102] - Gross margin improved to 22.4% from 19.8% year-over-year, primarily due to a product mix shift away from lower-margin wood products[105] - Net income for the quarter was $119,629 ($0.03 EPS), down from $508,298 ($0.11 EPS) in the prior year[107] Six Months Ended February 28, 2019 and February 28, 2018 Total sales decreased by 26% due to lower lumber sales, reduced metal product demand, and adverse weather, though gross margin improved - Total sales decreased by $5,832,033 (26%) to $16,923,275 for the six months ended February 28, 2019, compared to $22,755,308 in the prior year[108] - JCC sales decreased by 30% ($5,870,861) due to lower specialty lumber sales, retailers selling through pre-tariff metal product inventories, and adverse weather delaying spring/summer product purchases[109] - Greenwood sales increased by 30% ($447,443) to $1,962,818, driven by management's focus on in-demand products and direct sales to end users, improving segment margins[110] - Gross margin improved to 24.0% from 21.2% year-over-year, primarily due to a higher proportion of metal product sales, which have better margins than specialty lumber[114] - Net income for the six months was $469,323 ($0.11 EPS), down from $830,731 ($0.19 EPS) in the prior year[117] Liquidity and Capital Resources The company maintains strong working capital, utilizing cash for inventory and share repurchases, while managing assets and expanding products | Metric | Feb 28, 2019 | Aug 31, 2018 | Change | | :-------------------------- | :----------- | :----------- | :----- | | Working capital | $18,172,045 | $18,346,414 | -$174,369 | | Cash | $3,706,604 | $6,097,463 | -$2,390,859 | | Inventory | $11,705,607 | $9,803,197 | +$1,902,410 | | Accounts receivable | $3,197,120 | $4,152,492 | -$955,372 | - The company sold its Manning property for $324,674, realizing a gain of $105,365, and believes its remaining real estate holds significant value ($6,804,940 market value vs $2,364,368 book value)[119][116] - The company debuted a new patented steel fence post, LIFETIME POST™, designed to complement its Adjust-A-Gate™ products, strengthening its position in the fencing market[120] - Inventory turnover for the six months ended February 28, 2019, increased to 151 days from 91 days in the prior year, while DSO improved to 34 days from 48 days[122][123] - The company has a $3,000,000 line of credit with U.S. Bank, fully available as of February 28, 2019, and is in compliance with all covenants[124] - The company authorized a new share repurchase plan on February 7, 2019, to purchase up to 250,000 common shares, following the completion of a prior 250,000 share repurchase plan in October 2018[126][127] Business Risks The company faces risks including potential dilution, decreased product demand, customer loss, supply chain delays, tariffs, and cybersecurity threats Risks Related to Our Common Stock Shareholders face potential dilution from future stock distributions or preferred share issuance, and limited trading volume may hinder transactions - Future stock distributions or acquisitions paid with common stock could dilute current shareholders' ownership or cause a change in control[131][132] - The company's authorized 10,000,000 preferred shares, if issued, could lead to significant shareholder dilution[133] - The average daily trading volume of common stock on NASDAQ was 4,060 shares for the six months ended February 28, 2019, which could make it difficult for investors to purchase or sell shares[133] Risks Related to Our Business Key business risks include decreased product demand, loss of top customers, supply chain delays, tariffs, credit line loss, and cybersecurity vulnerabilities - A decrease in demand for products due to increased competition, general economic conditions, or changing consumer preferences could significantly decrease profitability[134] - The top ten customers represented 74% of total sales for the six months ended February 28, 2019; losing these customers could significantly decrease sales and profitability[135] - Delays in product delivery from vendors could lead to lost business and decreased sales orders[136] - Governmental actions, such as tariffs on Chinese goods, could increase product costs, reduce margins, and decrease competitiveness, negatively impacting business[137] - The company's information technology systems are susceptible to cyber security breaches and other threats, which could adversely impact operations and financial condition despite security measures[139][140] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company is exposed to interest rate risk on cash and its credit line, and foreign currency risk from international expansion and Chinese purchasing Interest Rate Risk The company's interest income and expense are sensitive to U.S. interest rate changes, affecting cash earnings and its variable rate line of credit - The company's interest income and expense are sensitive to changes in U.S. interest rates, affecting cash earnings and the variable rate on its line of credit (LIBOR + 175 basis points)[142][143] Foreign Currency Risk The company faces foreign exchange risk from limited foreign sales and purchasing from Chinese manufacturers, which may increase with international expansion - The company has limited foreign sales but may experience increased foreign exchange risk with international expansion[144] - Currency exchange rates can influence the company's purchasing costs from contract manufacturers in China[144] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of February 28, 2019, with no material changes in internal control over financial reporting Disclosure Controls and Procedures Management concluded that disclosure controls and procedures were effective as of February 28, 2019, ensuring timely and accurate information disclosure - Management concluded that disclosure controls and procedures were effective as of February 28, 2019, for timely and accurate reporting[145] Changes in Internal Control Over Financial Reporting No material changes in the company's internal control over financial reporting occurred during the most recently completed fiscal quarter - No material changes in internal control over financial reporting occurred during the fiscal quarter ended February 28, 2019[146] Part II – Other Information Item 1. Legal Proceedings The company is a defendant in a product liability civil action in Pennsylvania, with legal fees and costs covered by its liability insurer - The company is a named defendant in a civil action in Pennsylvania seeking compensation for personal injuries based on product liability related to a dog escaping a Jewett-Cameron kennel product[147] - The company's applicable liability insurer is providing defense coverage for legal fees and costs, and the insurance estate appears sufficient to cover the liability exposure[148] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No disclosure required for this item - No disclosure required[150] Item 3. Defaults Upon Senior Securities No disclosure required for this item - No disclosure required[150] Item 4. Mine Safety Disclosures No disclosure required for this item - No disclosure required[150] Item 5. Other Information No disclosure required for this item - No disclosure required[150] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including XBRL instance documents and certifications - The exhibits include XBRL instance documents (101.INS) and certifications from the Chief Executive Officer and Principal Financial Officer (31.1, 32.1)[152][153]