Business context and reporting period
Jewett-Cameron Trading Company Ltd. filed this unaudited Form 10-Q for the quarter ended February 28, 2021, covering the second quarter and first six months of fiscal 2021. Figures are in U.S. dollars. The company sells specialty metal, wood and lawn, garden and pet products, and processes and sells agricultural seed, primarily in the United States. Industrial Tools and Clamps had been discontinued in fiscal 2020.
Financial performance and position
| Metric | Three months ended Feb. 28, 2021 | Six months ended Feb. 28, 2021 |
|---|---|---|
| Sales | $10.46 million, up 37% | $20.78 million, up 42% |
| Gross profit / margin | $2.61 million / 24.9% | $5.57 million / 26.8% |
| Operating income (loss) | $(63,162) | $560,621 |
| Net income (loss) | $(53,164), or $(0.02) per share | $435,363, or $0.12 per share |
- Gross margin was lower year over year in both periods, principally because lower-margin wood products made up a larger share of sales. Operating expenses increased, especially wages and employee benefits, as the company added staff for sales, marketing and new product initiatives.
- Six-month operating cash flow was $(389,833), versus $(1.76) million used in the prior-year period. Cash declined $909,303 from August 31, 2020 to $2.89 million. Investing cash outflow was $519,470, primarily property and equipment purchases; financing cash flow was zero.
- At February 28, 2021, working capital was $16.61 million. Current assets were $19.82 million and current liabilities $3.22 million. Inventory was $10.04 million, including a $250,000 obsolescence allowance, up from $65,000 at August 31, 2020.
- Total liabilities were $3.38 million, including $680,707 of PPP notes payable. The company had no bank-line borrowings and reported the full $3 million line of credit available; it was in compliance with the line’s covenants.
Material changes versus the prior comparable period
- Growth was led by Lawn, Garden, Pet and Other: six-month sales rose 40% to $17.82 million, with segment income before taxes of $487,741 versus a loss of $282,702. Seed sales increased 77% to $1.71 million. Industrial wood sales fell 15% to $1.25 million, with a segment loss of $36,464.
- Second-quarter sales rose 37%, but the company still recorded a net loss; the prior-year quarter also had a net loss. For the six-month period, results improved from a $180,884 net loss to net income of $435,363.
- Accounts receivable decreased to $5.09 million from $6.27 million at fiscal year-end, while inventory increased $837,400. Cash used in operations improved year over year but remained negative.
- The prior-year six-month period included a $3.87 million share repurchase; no shares were repurchased in the current six-month period. The company issued 7,999 shares under its restricted share plan.
Outlook, commentary, risks and contingencies
- Management said rebranding, new products, expanded distribution and e-commerce channels were supporting sales, and planned further product launches and channel development. It cautioned that first-half results are not necessarily indicative of the full fiscal year; sales are typically strongest in the third and fourth quarters.
- COVID-19-related shipping-container shortages, port delays and higher freight costs were creating uncertain delivery timing and costs for China-manufactured products. Management warned these issues could affect margins, sales and planned product launches. U.S. tariffs on certain Chinese products had returned to 25% in September 2020 after a temporary reduction.
- Management planned to liquidate obsolete inventory beginning in the third quarter. The ERP system went live in February 2021; facility renovations and a new product-development center were also underway.
- The company said it expected to apply for forgiveness of its $680,707 PPP loans, whose proceeds it said were used for qualifying employee payroll expenses. Forgiveness was not assured; if not forgiven, repayment obligations remain.
- Risks include seasonality, customer and supplier concentration, reliance on imported products, shipping disruption, tariffs, competition, possible COVID-19 impacts and cybersecurity. The top ten customers represented 75% of six-month sales; one customer represented 45% of accounts receivable at period-end.
- Contingencies include a Pennsylvania product-liability action involving an alleged kennel escape, for which the insurer was providing a defense, and a dispute with a former distributor involving arbitration and a counterclaim. Outcomes were described as speculative.
- Management stated that available working capital, retained earnings and the credit line were adequate for the remainder of fiscal 2021.
Important facts for investors to verify
- Whether PPP loan forgiveness is obtained, and the resulting accounting and repayment requirements.
- Whether freight constraints, port delays and tariffs affect product availability, launch timing and gross margins.
- Inventory quality and the planned disposition of the $250,000 allowance-related obsolete inventory.
- Customer concentration and collections, including the customer comprising 45% of receivables.
- Developments in the product-liability case and distributor arbitration/counterclaim.
- How second-half seasonality and the company’s expanded staffing, marketing and capital investments translate into operating cash flow and profitability.