Jewett-Cameron Trading Company Ltd. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended May 31, 2019. Unaudited consolidated statements are in U.S. dollars. The company distributes and manufactures specialty metal, wood, garden and pet products, and also operates seed-processing and industrial-tools businesses. Results are seasonal; management cautions that interim results may not indicate full-year performance.
Financial performance
| Metric | Three months ended May 31, 2019 | Year-over-year | Nine months ended May 31, 2019 | Year-over-year |
|---|---|---|---|---|
| Sales | $16.69 million | Down 16% | $33.62 million | Down 21% |
| Gross profit / margin | $3.64 million / 21.8% | Margin up from 20.0% | $7.71 million / 22.9% | Margin up from 20.6% |
| Operating income | $1.51 million | Down from $2.01 million | $2.04 million | Down from $3.30 million |
| Net income | $1.10 million; $0.27 per diluted share | Down from $1.39 million; $0.31 per share | $1.57 million; $0.36 per diluted share | Down from $2.22 million; $0.50 per share |
For the nine-month period, operating expenses rose to $5.66 million from $5.51 million. Higher selling and marketing spending and labor costs were partly offset by lower depreciation and amortization. A $105,366 gain on sale of property helped nine-month pretax income; the comparable 2018 period included a $27,022 loss on sale of property.
Cash, liquidity and capital
- At May 31, 2019, cash was $3.44 million, down from $6.10 million at August 31, 2018. Working capital was $17.61 million, versus $18.35 million.
- Operating cash flow was negative $316,585 for the nine months, compared with positive $437,188 a year earlier. The principal working-capital use was a $2.97 million increase in accounts receivable; inventory decreased by $1.17 million.
- Investing activities provided $318,965, including proceeds from property sales; capital expenditures were $8,112. Financing activities used $2.66 million for common-share repurchases. Cash declined by $2.66 million over the period.
- Total assets were $22.46 million and total liabilities were $2.18 million. There was no bank borrowing at period-end; the company had the full $3.0 million U.S. Bank credit line available and reported compliance with its covenants. The line is secured by accounts receivable and inventory.
- Accounts receivable increased to $7.13 million from $4.15 million, while inventory declined to $8.63 million from $9.80 million. The filing reports nine-month DSO of 58 days versus 45 and inventory turnover of 97 days versus 67.
Material changes and management commentary
- Lower sales chiefly reflected reduced lawn, garden and pet product sales, including weaker specialty-lumber comparisons after prior-year storm-related demand, retailer inventory accumulated ahead of tariffs, and unusually cold, wet weather delaying seasonal purchases. JCC, the largest segment, had nine-month sales down 24% and operating income down 49%.
- U.S. tariffs on certain Chinese-made goods increased from 10% to 25% on May 10, 2019. Management said pre-tariff inventory supported margins, and it has pursued price increases and supplier/customer discussions to mitigate tariff effects. Inability to pass on costs or reduced demand could hurt sales and gross margins.
- Greenwood’s nine-month sales rose 19%, and it moved from an operating loss to operating income, aided by expanded customers and more direct sales. Seed sales and industrial-tools sales fell; both segments reported nine-month operating losses.
- Management is reviewing the seed and industrial-tools businesses, including possible repositioning, repurposing or sale of assets; the review could result in further write-offs or adjustments. It is also emphasizing expansion in lawn, garden and pet products and international sales, and has hired a Chief Revenue Officer and begun implementing inventory and distribution software.
- The company introduced its LIFETIME POST fencing product, with shipments underway. It sold the non-core Manning property for $324,674, recognizing a gain of approximately $105,365.
- The company repurchased and cancelled 299,263 shares during the nine months for $2.66 million. After quarter-end, it repurchased another 36,300 shares for $308,137. The current plan was scheduled to run through August 31, 2019.
Risks, contingencies and unusual items
- Customer concentration is significant: the top ten customers represented 77% of nine-month sales; two customers represented 66% of receivables at May 31. Two suppliers each represented at least 10% of purchases during the period.
- Risks include tariff and foreign-policy changes, weather-driven demand, competition, supplier and delivery disruptions, customer concentration, cyber threats and limited trading volume in the company’s shares. Management notes potential foreign-exchange exposure as international sales grow.
- A Pennsylvania product-liability action alleges injuries after a dog escaped from a company kennel product. The case was in an early stage; the company intends to defend it, and its insurer was providing a defense. Management said available insurance appeared sufficient at the time of filing.
- The Chairman and co-founder died on May 9, 2019. The company appointed Michael Nasser to the Board and approved CEO Charles Hopewell as Chairman.
- No formal numerical earnings or revenue guidance is provided. Management described the outdoor season as delayed and said markets were beginning to adjust to tariffs and higher end prices.
Important facts for investors to verify
- Whether seasonal demand recovered and tariff-related costs could be passed through without weakening volumes or margins.
- Whether receivable collection and inventory turnover improved, given their deterioration and the negative operating cash flow.
- Outcomes of the strategic review of the seed and industrial-tools segments, including potential asset sales, impairments or other charges.
- Customer and supplier concentration, and the status, insurance coverage and potential exposure of the Pennsylvania product-liability case.
- Share-repurchase activity and remaining liquidity needs, particularly after the substantial repurchases and post-quarter purchases.