Jewett-Cameron Trading Company Ltd. — Q2 FY2022 Form 10-Q
Reporting period: Three and six months ended February 28, 2022. The unaudited consolidated statements are prepared under U.S. GAAP and reported in U.S. dollars. Jewett-Cameron sells lawn, garden, pet and fencing products; industrial wood products; and agricultural seed products. Results are seasonal, with the first two fiscal quarters historically slower than the second half.
Financial performance
| Metric | Three months ended Feb. 28, 2022 | Three months ended Feb. 28, 2021 | Six months ended Feb. 28, 2022 | Six months ended Feb. 28, 2021 |
|---|---|---|---|---|
| Sales | $14.06 million | $10.46 million | $26.98 million | $20.78 million |
| Gross profit | $3.42 million | $2.61 million | $5.89 million | $5.57 million |
| Gross margin | 24.4% | 25.0% | 21.8% | 26.8% |
| Income (loss) from operations | $696,740 | ($63,162) | $229,559 | $560,621 |
| Net income (loss) | $269,820 | ($53,164) | ($121,322) | $435,363 |
| Basic and diluted EPS | $0.08 | ($0.02) | ($0.03) | $0.12 |
Second-quarter sales rose 34%; six-month sales rose 30%. Cost of sales increased 36% in the quarter and 39% for six months, outpacing sales growth. Management attributed margin pressure to higher raw-material and shipping costs and a greater mix of lower-margin wood products. Second-quarter operating income improved from the prior-year loss, while six-month net results declined to a loss.
Cash flow and investment: Six-month operating cash flow was negative $5.88 million, compared with negative $389,833 in the prior-year period, largely reflecting increased accounts receivable and inventory. Investing cash outflow was $908,401, principally property and equipment purchases. Financing cash inflow was $6.50 million from additional line-of-credit borrowing. Cash fell to $899,055 from $1.18 million.
Financial position and liquidity
- At February 28, 2022, current assets were $31.48 million and current liabilities were $13.24 million; working capital was $18.17 million, down from $19.07 million at August 31, 2021.
- Inventory was $18.63 million, up $4.24 million from fiscal year-end; accounts receivable was $9.14 million, up from $7.09 million. Together, these comprised 88% of current assets.
- Bank indebtedness was $9.50 million, up from $3.00 million, under a $10 million secured line of credit, leaving $500,000 available. The February 28 rate was 1.83%; the rate formula changed from LIBOR to one-month SOFR plus 157 basis points beginning March 1, 2022. The company reported compliance with its financial covenants.
- Total assets were $36.16 million and total liabilities were $13.36 million. No dividends have been declared since incorporation.
Material changes and business developments
- Lawn, garden, pet and other sales increased 36% for the six months, primarily on stronger fencing and pet demand. Industrial wood sales declined 10%, and seed sales declined 3%.
- Management built inventory ahead of the spring and summer selling season and to mitigate supply and shipping disruption. It said cash-flow models anticipated beginning to repay the line of credit in Q3 as orders and receipts progressed.
- Capital expenditures were $908,401, versus $519,470 in the prior-year six-month period. The company completed the fourth phase of facility improvements and plans a warehouse renovation.
- Three customers represented 69% of receivables at February 28. The top ten customers represented 79% of six-month sales. Two suppliers each accounted for at least 10% of purchases, with combined purchases of $14.0 million.
Outlook, risks and contingencies
Management said the outlook for the remainder of fiscal 2022 remained uncertain. Sales trends entering Q3 were encouraging, but supply-chain and shipping constraints could delay inventory and customer fulfillment. Inflation, including raw-material and transportation costs, was expected to continue pressuring margins; selling-price increases may lag cost increases. The company also cited renewed COVID-related disruptions in China, tariffs on certain Chinese goods, and the possibility of increased spot-market container costs. Management stated that current working capital, receivable timing and the credit line were expected to provide sufficient liquidity for the rest of the fiscal year.
- The company recorded a $300,000 accrual for a possible settlement concerning California District Attorneys’ claims that certain dog-waste-bag environmental labeling was misleading. Management said it had modified marketing statements and sought feedback on future packaging and marketing.
- A Pennsylvania product-liability action involving an alleged escape from a kennel product remains pending; the company said the outcome was speculative and its insurer was covering the defense’s legal fees and costs.
- The company initiated arbitration against a former distributor, scheduled to commence in August 2022; the outcome was described as speculative.
- Other identified risks include customer and supplier concentration, product availability and delivery delays, tariffs, credit-line access, interest-rate fluctuations, foreign exchange exposure and cybersecurity. The company reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Q3 sales, inventory receipts and cash collections support management’s expectation of repaying line-of-credit borrowings; the facility had only $500,000 available at period-end.
- Whether the company can pass through continuing product, freight and tariff costs without further gross-margin deterioration.
- Inventory levels, turnover and collectability of receivables, given higher balances and the reported customer concentration.
- The resolution and final financial exposure, if any, from the California matter, Pennsylvania lawsuit and distributor arbitration.
- Execution and economics of planned product launches, sourcing diversification and facility investments.