Jewett-Cameron Trading Company Ltd. — Q3 FY2020 Form 10-Q
Reporting period: Three and nine months ended May 31, 2020. Financial statements are unaudited and presented in U.S. dollars. The company sells specialty metal, wood, garden and pet products, industrial wood products, and agricultural seed, primarily in the United States. It decided to exit its industrial tools business effective September 1, 2019; remaining inventory was liquidated by the end of the quarter.
Financial performance
| Metric | Three months ended May 31 | Nine months ended May 31 |
|---|---|---|
| Sales | $16.24 million, down 3% from $16.69 million | $30.92 million, down 8% from $33.62 million |
| Gross profit / margin | $4.31 million; 26.5%, versus $3.64 million; 21.8% | $8.36 million; 27.0%, versus $7.71 million; 22.9% |
| Operating income | $1.91 million, versus $1.51 million | $1.74 million, versus $2.04 million |
| Net income | $1.40 million, versus $1.10 million; diluted EPS $0.40 versus $0.27 | $1.22 million, versus $1.57 million; diluted EPS $0.33 versus $0.36 |
| Cash from operations | Not separately provided for the quarter | $(2.99) million, versus $(0.32) million |
Quarterly profit improved despite lower sales, reflecting stronger margins and demand in JCC’s fencing and pet-product categories. For the nine-month period, higher gross margin did not offset lower sales, increased operating expenses, and a smaller gain on asset sales than in the prior year. Nine-month selling, general and administrative expense was $2.12 million versus $1.72 million; wages and benefits were $4.34 million versus $3.80 million.
Financial position and liquidity
- At May 31, cash was $3.27 million, down from $9.65 million at August 31, 2019. Working capital was $15.11 million, down from $17.76 million.
- Accounts receivable increased to $6.88 million from $2.84 million; inventory increased to $6.79 million from $6.38 million. Management attributed the receivables increase mainly to seasonal sales and collection timing. Operating cash use also reflected increases in receivables, inventory, prepaid expenses, and notes receivable.
- Total liabilities were $3.95 million, including $680,707 of PPP loans: $302,536 current and $378,171 long term. The unsecured loans bear 1% interest, with payments scheduled to begin December 4, 2020. Forgiveness was not assured.
- No balance was drawn on the $3.0 million bank line of credit; the full amount was available, and the company reported compliance with its covenants. Total assets were $21.73 million and stockholders’ equity was $17.78 million.
- Financing cash outflow included $3.87 million used to repurchase and cancel 490,120 shares at $7.89 per share. Shares outstanding fell from 3,971,282 at August 31, 2019 to 3,481,162 at May 31, 2020.
Material changes, outlook, and risks
- COVID-19 reduced some brick-and-mortar customer purchases and disrupted industrial demand, but stay-at-home activity and online shopping supported stronger fencing and pet-product sales from March. Greenwood’s quarterly sales fell 53%; seed sales fell 43%. Management said fourth-quarter and FY2021 outlook remained uncertain and provided no numerical guidance.
- Management reported retaining its workforce and implementing workplace safety protocols. It warned that an employee infection or changes to Oregon restrictions could force a temporary facility shutdown, delaying shipments and reducing revenue. Supplier and customer disruptions were also possible.
- The company cited seasonality, with the first two fiscal quarters historically slower than the final two. Chinese import tariffs remain applicable to some products; certain products received tariff exemptions, but those exemptions may change.
- Customer concentration is material: the top ten customers represented 77% of nine-month sales, and two customers accounted for 56% of receivables at May 31. Two suppliers each represented at least 10% of purchases during the nine-month period.
- A Pennsylvania product-liability action alleges injuries after a dog escaped from a company kennel. The matter is at an early stage; the insurer is providing a defense and covering legal fees and costs. Management said the outcome is speculative.
- The $562,713 of notes receivable related to taxes paid on behalf of the private share sellers was fully repaid after quarter-end. The company was evaluating whether to modify its PPP loans under the June 2020 law changes.
Key facts for investors to verify
- Whether the company obtains PPP loan forgiveness, or elects to modify the loan terms, and the resulting repayment obligations.
- Whether elevated receivables and prepaid inventory commitments convert into cash as expected, given the nine-month operating cash outflow.
- How COVID-19, supplier availability, tariffs, and customer demand affect fourth-quarter and FY2021 sales and margins.
- Whether the Pennsylvania litigation or the company’s significant customer and supplier concentrations lead to material financial or operating effects.