Jewett-Cameron Trading Company Ltd. — Form 10-Q
Reporting period: Fiscal quarter and six months ended February 28, 2023; filed April 13, 2023. Unaudited financial statements are in U.S. dollars. The company sells lawn, garden, pet and fencing products, industrial wood products, and agricultural seed, primarily in the United States. Management notes that the first half of its fiscal year is historically slower than the second half.
Financial performance
| Metric | Three months ended Feb. 28, 2023 | Prior-year quarter | Six months ended Feb. 28, 2023 | Prior-year six months |
|---|---|---|---|---|
| Sales | $8.14 million | $14.06 million | $20.72 million | $26.98 million |
| Gross profit | $1.92 million | $3.42 million | $4.78 million | $5.89 million |
| Gross margin | 23.6% | 24.4% | 23.1% | 21.8% |
| Operating income (loss) | $(1.21) million | $0.70 million | $(1.22) million | $0.23 million |
| Net income (loss) | $(0.97) million | $0.27 million | $(1.05) million | $(0.12) million |
| Basic and diluted EPS | $(0.28) | $0.08 | $(0.30) | $(0.03) |
- Revenue and margins: Sales declined 42% in the quarter and 23% in the six-month period. Six-month gross margin improved year over year as raw-material and freight costs moderated; quarterly margin slipped year over year due to higher costs.
- Expenses and interest: Six-month operating expenses rose to $6.00 million from $5.66 million, including higher professional and legal fees. Six-month interest expense increased to $201,082 from $50,896, reflecting higher borrowing and rates.
- Cash flow: Operating activities used $1.41 million in the first six months, versus $5.88 million used in the prior-year period. Investing activities used $301,681, while financing provided $1.50 million from increased bank borrowing. Cash declined by $216,074 to $268,389.
- Balance sheet and liquidity: At February 28, 2023, current assets were $28.61 million, current liabilities $10.90 million, and working capital $17.71 million. Bank indebtedness was $8.50 million under a $10 million line of credit; subsequent to quarter-end, the company drew another $1 million, leaving $500,000 available. The borrowing rate was 6.12% at period-end. Inventory was $23.08 million, up $2.45 million since August 31, 2022. Accounts receivable and inventory represented 96% of current assets.
Material changes and operating drivers
- Management attributed the sales decline mainly to unusually cold, wet winter weather delaying customers’ spring orders, particularly from hardware and big-box retailers. A new fencing sales arrangement also shifted recognition of some major-customer sales into the third quarter.
- The lawn, garden, pet and other segment’s six-month sales fell 22% and its pre-tax loss widened to $1.57 million from $0.57 million. Industrial wood sales fell 16%; seed sales fell 45%, reflecting weaker transit demand, weather, and lower seed prices and demand.
- Management said orders had begun arriving and shipping in the third quarter, but delayed seasonal demand could reduce total sales because the spring and summer selling period is shorter. A customer issue limiting some pet-product sales was resolved, and a supplier was addressing a manufacturing issue affecting another product.
- The company plans to launch MyEcoWorld sustainable bags in the third quarter and expects the product line to contribute over time. It also relaunched STAY Series kennels. These are management expectations, not quantified guidance.
Outlook, risks and contingencies
- Management expects seasonal sales to improve cash flow and working capital in the second half and believes liquidity will be sufficient for the remainder of fiscal 2023. It also expects difficult economic conditions to continue and says near-term sales may be constrained by cautious consumer spending. No specific revenue or earnings forecast is provided.
- Risks include elevated inventory and limited remaining line availability; rising interest rates; tariffs on some China-sourced products; supplier and shipping disruptions; and customer concentration. The top ten customers represented 86% of six-month sales, and two customers represented 67% of accounts receivable at period-end.
- The company is discussing a possible increase or restructuring of its credit facility with its lender, but no agreement has been reached. It reported compliance with existing line covenants.
- An arbitrator ruled in the company’s favor in its dispute with a former distributor; the monetary award, including requested damages and costs, remains uncertain. The company incurred sizeable related legal fees. Prior matters included a $300,000 settlement over dog-waste-bag labeling, paid in 2022, and an insured product-liability case settled within policy limits.
- Management cited moderating input and freight costs but cautioned that its ability to pass cost increases to customers is limited and margins may remain under pressure. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether delayed spring orders and the new fencing agreement translate into third- and fourth-quarter sales, and whether the shortened selling season limits recovery.
- Inventory levels, turnover, and cash conversion as seasonal orders ship and the company targets lower inventory by fiscal year-end.
- Availability and terms of borrowing after the subsequent $1 million draw, including the outcome of lender discussions and compliance with covenants.
- Progress on improving segment profitability, especially in lawn, garden, pet and other products, and the effect of legal fees and higher interest expense.
- Timing and amount of any recovery from the former-distributor arbitration, and commercial traction for MyEcoWorld bags and relaunched kennel products.