Jewett-Cameron Trading Company Ltd. — Q1 FY2020 Form 10-Q
Reporting period: Three months ended November 30, 2019. Unaudited consolidated financial statements, prepared under U.S. GAAP; amounts are in U.S. dollars. The company sells specialty wood and metal products, industrial wood products, and agricultural seeds, primarily in the United States. It decided to close its MSI industrial-tools division effective September 1, 2019.
Financial results and liquidity
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Sales | $7.055 million | $9.066 million |
| Gross profit / margin | $2.048 million / 29.0% | $2.309 million / 25.5% |
| Operating income (loss), as reported | $(10,874) | $479,009 |
| Income before taxes | $741 | $496,160 |
| Net income (loss) | $(6,621) | $349,694 |
| Basic and diluted EPS | $(0.00) | $0.08 |
| Cash from operations | $(654,311) | $223,733 |
- Operating expenses increased 12.5% to $2.059 million, including higher wages and benefits ($1.362 million versus $1.223 million) and SG&A ($649,010 versus $556,148). Management cited added personnel and training for a new ERP system.
- Cash was $8.969 million at November 30, down $683,061 from August 31. Working capital was $17.760 million, essentially unchanged from $17.762 million.
- Inventory rose $902,321 to $7.280 million as customers delayed purchases; accounts receivable declined $671,926 to $2.164 million. The company reported DSO of 28 days versus 37 days a year earlier and inventory turnover of 124 days versus 140.
- Total assets were $21.896 million and total liabilities $1.472 million. No line-of-credit borrowings were outstanding; the $3.0 million facility was fully available, and the company said it was compliant with its covenants. The facility is secured by receivables and inventory.
- Operating cash use reflected inventory and prepaid-expense increases and lower payables/accruals, partly offset by collections of receivables. Investing cash use was $28,750; there were no financing cash flows in the quarter.
Changes versus prior-year quarter
- Sales fell $2.011 million, or 22%, while gross profit declined 11%; gross margin improved by 3.5 percentage points, which management attributed to product mix, including relatively higher metal-product and lower wood-product sales.
- Sales declined in lawn, garden, pet and other products (20%), industrial wood products (29%), seed processing and sales (31%), and industrial tools (18%). The first three segments’ reported pretax results also weakened except seeds, whose pretax income increased to $49,703 from $10,433.
- Management said several major accounts postponed usual first-quarter orders into later in the quarter or the second quarter. A poor 2019 planting season reduced demand for clover seed. MSI recorded a larger inventory obsolescence allowance and reported a $107,217 segment loss versus a $3,737 loss.
- Three customers represented 58% of accounts receivable at quarter-end; the top ten customers accounted for 74% of quarterly sales. Two suppliers each represented more than 10% of purchases, with combined purchases of $3.531 million.
Outlook, risks and unusual items
- Management said results are seasonal, with the first two fiscal quarters historically slower than the final two, and cautioned that the quarter is not necessarily indicative of full-year results. It provided no numerical revenue or earnings guidance.
- Some Chinese-imported metal products were reclassified and became exempt from the 25% tariffs; some products remain subject to tariffs. Management said the reclassification should help competitiveness. Tariff and trade-policy changes remain a risk to costs and margins.
- The company is liquidating MSI inventory and expects additional costs from the division’s liquidation and closure in Q2 FY2020. The remaining MSI inventory included a $125,000 obsolescence allowance at November 30, compared with $85,000 at August 31.
- Management described initiatives to promote the Jewett-Cameron brand, expand retail and e-commerce channels, develop products, and add sales and business-development personnel. It highlighted the patented LIFETIME POST product and said it may consider complementary product acquisitions.
- Subsequent to quarter-end, the company privately repurchased and cancelled 490,120 shares from two large shareholders, including an officer and director, for $3.867 million at $7.89 per share. Shares outstanding were reported as 3,481,162 on January 14, 2020, versus 3,971,282 issued at quarter-end. The transaction used a substantial portion of cash and should be considered in assessing post-quarter liquidity.
- A Pennsylvania product-liability action alleges injuries after a dog escaped from a kennel product. The case was in its early stages, its outcome was described as speculative, and the insurer was covering the company’s defense costs and legal fees.
- Other stated risks include customer and supplier concentration, low trading volume in the stock, product demand and delivery disruptions, cybersecurity, and interest-rate and foreign-currency exposure.
Important facts for investors to verify
- Whether delayed major-customer orders were received in Q2 and whether the sales decline persisted.
- The extent and timing of tariff exemptions, and their realized effect on product costs, pricing, and gross margins.
- MSI’s remaining liquidation and closure costs, inventory recoveries, and any further write-downs.
- Cash, working capital, and liquidity after the $3.867 million post-quarter share repurchase; confirm share count and any subsequent repurchases.
- Customer and supplier concentration, including the exposure to the customers responsible for 58% of receivables and 74% of sales.
- Developments in the Pennsylvania litigation and the scope of insurance coverage.