Business context and reporting period
Jewett-Cameron Trading Company Ltd. filed this unaudited Form 10-Q for the quarter and six months ended February 28, 2019, its fiscal second quarter and first half of fiscal 2019. The company distributes and manufactures specialty metal and wood products, industrial tools, and agricultural seed, primarily through U.S. operations. Financial statements are prepared in U.S. dollars.
Financial performance and position
| Metric | Three months ended Feb. 28, 2019 | Six months ended Feb. 28, 2019 |
|---|---|---|
| Sales | $7.86 million, down 41% year over year | $16.92 million, down 26% |
| Gross profit / margin | $1.76 million / 22.4% (19.8% prior year) | $4.07 million / 24.0% (21.2% prior year) |
| Operating income | $57,625 | $536,634 |
| Net income / diluted EPS | $119,629 / $0.03 ($508,298 / $0.11 prior year) | $469,323 / $0.11 ($830,731 / $0.19 prior year) |
| Operating cash flow | Not provided separately for the quarter | $(1.76) million ($(3.06) million prior year) |
At February 28, 2019, cash was $3.71 million, working capital was $18.17 million, and total assets were $22.28 million. Inventory was $11.71 million, up from $9.80 million at August 31, 2018. Total liabilities were $1.39 million; the company had no bank borrowing and had the full $3.0 million credit line available. The line’s stated rate was 4.23%, and the company reported compliance with its covenants.
Changes versus the prior comparable period
- Quarterly sales fell $5.48 million, and six-month sales fell $5.83 million. Lower lawn, garden and pet product sales were the main driver, reflecting delayed retailer orders, weather, and the absence of prior-year storm-related cedar-fencing demand.
- Net income declined in both periods despite higher gross-margin percentages. In the quarter, operating income fell to $57,625 from $720,244; for six months, it fell to $536,634 from $1.29 million.
- Six-month segment results weakened most notably in lawn, garden, pet and other: sales were $13.45 million versus $19.32 million, and pretax income was $14,092 versus $849,782. Industrial wood products improved to $26,487 pretax income from a $47,183 loss; seed and industrial tools reported pretax losses.
- Cash declined $2.39 million from fiscal year-end. Operating cash use improved year over year but remained substantial, with inventory growth a major use of cash.
Outlook, risks and unusual items
- Management said weather, retailer inventory, and uncertainty around China tariffs pressured results. Tariffs of 10% to 25% applied to some China-sourced products; planned increases to 25% were suspended during trade negotiations. The company was pursuing supplier and customer actions and selective price increases to mitigate costs.
- Management reported early signs of recovery in the early third quarter and expected results to stabilize as weather improved and tariff-market uncertainty eased. The filing provides no numerical earnings or revenue guidance and cautions that first-half results may not indicate full-year performance.
- Inventory positioning and share repurchases were funded from cash reserves. Inventory turnover was 151 days for the six-month period, compared with 91 days a year earlier.
- The sale of the Manning property generated $324,674 cash proceeds and a reported $105,365 gain. The company repurchased and cancelled 104,121 shares for $957,305 during the six months. After period-end, it repurchased another 180,950 shares for $1.59 million.
- Key exposures include customer concentration (top ten customers represented 74% of six-month sales), supplier concentration, tariff and sourcing costs, competition, weather-related demand, and limited trading liquidity in the company’s shares. A product-liability lawsuit concerning an alleged kennel-related injury was in early stages; the insurer was providing a defense, and management said coverage appeared sufficient.
Important facts for investors to verify
- Whether demand and retailer replenishment recovered after the unusually cold and wet winter, particularly in the lawn, garden and pet segment.
- Whether the company can pass tariff-related cost increases through without reducing demand or gross margins.
- Inventory levels, aging and sell-through, given the increase in inventory and slower turnover.
- Cash generation and liquidity after operating cash use and continued share repurchases.
- Progress in the industrial tools business review and any resulting write-offs or adjustments.
- Developments in the Pennsylvania product-liability case and the extent of insurance coverage.