Business context and reporting period
Jewett-Cameron Trading Company Ltd. filed this unaudited Form 10-Q for the quarter ended May 31, 2021, the third quarter of fiscal 2021. The company sells specialty metal and wood products, including fencing and pet products, and processes and sells agricultural seed. Results are seasonal, with the third and fourth fiscal quarters typically busiest. All amounts below are in U.S. dollars.
Key financial metrics
| Metric | Three months ended May 31, 2021 | Three months ended May 31, 2020 | Nine months ended May 31, 2021 | Nine months ended May 31, 2020 |
|---|---|---|---|---|
| Sales | $21.62 million | $16.24 million | $42.40 million | $30.92 million |
| Gross profit | $5.58 million | $4.31 million | $11.16 million | $8.36 million |
| Gross margin | 25.8% | 26.5% | 26.3% | 27.0% |
| Income from operations | $2.64 million | $1.91 million | $3.20 million | $1.74 million |
| Net income | $2.41 million | $1.40 million | $2.85 million | $1.22 million |
| Diluted earnings per share | $0.69 | $0.40 | $0.82 | $0.33 |
| Operating cash flow | Not separately presented | Not separately presented | $(1.61) million | $(2.99) million |
At May 31, 2021, cash was $2.17 million, accounts receivable $11.05 million, inventory $7.77 million, and working capital $18.50 million. Total assets were $27.38 million and total liabilities were $5.11 million. Debt consisted of $996,010 drawn on the bank line of credit; PPP notes had been forgiven, leaving no notes payable. Capital expenditures were $1.02 million for the nine-month period.
Material changes versus the prior comparable period
- Quarterly sales rose 33%; nine-month sales rose 37%. Growth was led by lawn, garden, pet and other products, while seed sales also increased substantially. Industrial wood sales declined 4% for the nine-month period.
- Net income increased, but included a one-time $687,387 gain from forgiveness of the company’s two PPP loans. Without that gain, reported earnings would have been lower.
- Gross margin declined by 0.7 percentage points for the quarter and 0.7 points for the nine-month period, reflecting higher shipping and logistics costs and a greater mix of lower-margin lumber.
- Nine-month operating expenses increased $1.33 million, including higher employee costs as the company added personnel.
- Operating cash use improved year over year but remained negative. Receivables increased $4.78 million from August 31, 2020, while cash declined $1.63 million; the company attributed working-capital pressure to seasonal sales, slower customer collections, and supply delays.
Outlook, commentary, risks and unusual items
- Management reported historically high demand for several core products and said sales momentum continued in the quarter. It described product delays and supply-chain constraints as temporary and expected conditions to begin easing in the fourth quarter as shipments arrived. No specific revenue or earnings guidance was provided.
- China shipping delays, scarce containers, port congestion and U.S. trucking shortages constrained sales and raised costs. The company said these issues increased its backlog and required it to draw on its credit line. It also noted that some popular items were unavailable during the quarter.
- Management said it had adequate working capital for the remainder of fiscal 2021. The $3 million line of credit was increased to $5 million effective June 15, 2021. At May 31, the company had drawn $996,010; availability was $2,003,990 under the then-existing $3 million facility. The filing later states $4,003,990 available under the increased facility.
- COVID-19 remains a source of uncertainty, including potential workforce disruption, weaker demand and further supply-chain interruptions. The company also faces 25% U.S. tariffs on certain Chinese-made products, customer and supplier concentration, and dependence on key retail customers. Its top ten customers represented 82% of nine-month sales; two customers represented 59% of receivables at May 31.
- Other items include the $687,387 PPP forgiveness gain, a $250,000 inventory obsolescence allowance (up from $65,000 at August 31, 2020), and increased investment in facilities, equipment, personnel and its ERP system.
- Legal matters include a product-liability action relating to an alleged kennel escape, with the insurer covering the company’s defense costs; an arbitration and related distributor dispute, whose counterclaim was rejected by Illinois courts; and a potential web-accessibility claim. Outcomes of the remaining matters were described as uncertain.
Important facts for investors to verify
- How much of sales growth and current demand can be sustained after pandemic-related demand patterns and seasonal effects change.
- Whether shipping, port and trucking constraints ease as management expects, and the impact on product availability, backlog and margins.
- Receivables collection, inventory quality and cash conversion, including the larger inventory allowance and increased prepaid inventory purchases.
- Use and availability of the expanded credit facility, its financial covenants and the effect of changing the LIBOR-based rate.
- Underlying earnings excluding the one-time PPP forgiveness gain, and the continuing effects of freight costs, tariffs and lower-margin product mix.
- Developments in the disclosed legal matters and any financial exposure beyond the insured defense costs.