Jewett-Cameron Trading Company Ltd. — Q3 FY2024 Form 10-Q
Business and period: The filing covers the quarter and nine months ended May 31, 2024. The company sells lawn, garden, pet and fencing products; industrial wood products; and seed products, primarily in the United States. Seed subsidiary JCSC ended active operations in December 2023 and is preparing to wind up. Financial statements are unaudited and presented in U.S. dollars.
Financial performance
| Metric | Three months ended May 31, 2024 | Nine months ended May 31, 2024 |
|---|---|---|
| Sales | $15.90 million, down 16% year over year | $33.93 million, down 14% |
| Gross profit / margin | $2.95 million / 18.6% (23.3% prior year) | $6.97 million / 20.5% (23.2% prior year) |
| Operating income (loss) | $55,595 | $(1.46) million |
| Net income (loss) / diluted EPS | $154,862 / $0.04 | $912,257 / $0.26 |
Prior-year comparison: Q3 FY2023 sales were $18.95 million, operating income $1.25 million and net income $734,951 ($0.21 per diluted share). For the prior-year nine-month period, sales were $39.67 million, operating income $34,136 and net loss $310,847 ($(0.09) per diluted share). The current nine-month net income includes a one-time $2.45 million arbitration settlement recorded as other income; absent that item, reported operating performance was a loss.
Cash flow and balance sheet: Nine-month operating cash flow was $2.23 million, compared with $1.55 million a year earlier. Cash increased to $1.05 million from $83,696 at August 31, 2023. Inventory fell to $13.47 million from $18.34 million, while accounts receivable rose to $7.41 million from $5.63 million. Working capital was $20.05 million and management reported a 7.11 current ratio. Total liabilities were $3.29 million; bank indebtedness was zero at May 31, versus $1.26 million at fiscal year-end. The company reported $25.04 million of stockholders’ equity.
Changes, outlook and risks
- Sales declines reflected cautious consumer spending, weak home-improvement and pet markets, poor weather in western U.S. markets, reduced cedar availability and the closure of seed operations. Greenwood sales rose 49% for the nine months, while JCC sales fell 14%.
- Margins were pressured by higher ocean freight costs, clearance of older high-cost lumber and a one-time $110,293 loss on liquidation of remaining European pet inventory. Management also cited delayed or cancelled shipments, product shortages and missed sales/backorders.
- Management expects supply-chain disruption and elevated freight costs to weigh on sales and margins in Q4 FY2024 and into FY2025. Temporary product price increases may also reduce customer orders. The company is expanding in-store fencing displays, adding customers and qualifying suppliers outside China to diversify sourcing and mitigate tariffs.
- The former $5 million U.S. Bank line expired June 30, 2024. A subsequent Northrim receivables/inventory-backed facility runs to June 30, 2025, with purchases capped at $6 million and inventory funding capped at $4 million. Its rate is prime plus 4.75%, with an 11% floor. No amount was drawn when reported. Management expected liquidity to cover working-capital needs for the remainder of FY2024.
- Risks include dependence on major customers (the largest represented 39% and the top ten 95% of nine-month sales), supplier and shipping concentration, China tariffs, inflation, consumer demand, credit availability, and cybersecurity. Two customers represented 77% of accounts receivable at May 31, 2024. Management reported compliance with bank covenants at that date and effective disclosure controls.
- The company is marketing JCSC equipment and property for disposal; potential rezoning or urban-growth-boundary changes could affect the property’s value, but no sale or outcome is assured. Management stated there were no other material active or pending legal proceedings known to it.
Investor items to verify
- How much of nine-month net income is attributable to the $2.45 million settlement, and what are normalized earnings and cash generation?
- Whether Northrim facility availability and borrowing costs remain adequate as the prior bank line has expired.
- Whether freight delays, higher shipping costs, tariffs and cedar shortages continue to affect inventory, sales and gross margin.
- Customer concentration, especially the largest customer’s 39% share of nine-month sales and the 77% accounts-receivable concentration among two customers.
- Progress and proceeds from disposal of JCSC assets and the Hillsboro property, and the timing and cost of completing the subsidiary wind-up.