JEWETT CAMERON TRADING CO LTD quarterly report, Q1 FY2021

Business context and reporting period

Jewett-Cameron Trading Company Ltd. filed this unaudited Form 10-Q for its fiscal first quarter ended November 30, 2020, with comparative results for the three months ended November 30, 2019. The company distributes and manufactures specialty products, principally through its lawn, garden and pet, industrial wood, and seed businesses. All amounts are in U.S. dollars.

Financial performance and position

Operating expenses increased 14% to $2.339 million, chiefly reflecting higher wages and employee benefits. Cash from operations included a $2.027 million reduction in receivables; inventory increased $223,013. Capital spending was $184,247, and cash rose $2.039 million to $5.840 million.

At November 30, 2020, total assets were $23.450 million and working capital was $17.056 million, compared with $23.278 million and $16.815 million, respectively, at August 31, 2020. Current liabilities were $3.292 million. Notes payable totaled $680,707, including $415,988 current; there was no bank-line borrowing. The $3.0 million revolving credit line was fully available, and the company reported compliance with its covenants.

Material changes versus the prior period

• Lawn, garden, pet and other sales increased 60% to $8.930 million, the main driver of consolidated growth. Segment income before tax was $520,208 versus a $77,696 loss.
• Industrial wood sales fell 8% to $724,752; the segment reported a $15,224 loss, similar to the prior-year loss.
• Seed sales increased 26% to $661,896, while segment income before tax was approximately unchanged at $49,490.
• The industrial tools and clamps business had been wound up in fiscal 2020; the prior-year quarter included $168,221 of liquidation sales and a $107,217 segment loss.
• Receivables declined from $6.274 million at August 31 to $4.247 million; inventory rose from $9.198 million to $9.421 million. Management reported days sales outstanding of 37 days and inventory turnover of 115 days, versus 37 and 124 days, respectively, in the prior-year quarter.

Outlook, risks and unusual items

Management said first-quarter sales and gross profit improved, citing demand for fencing and pet products, new customer commitments, and branding and e-commerce initiatives. It expects further progress in fiscal 2021 but said the outlook remains uncertain because of COVID-19. Management noted that the first two fiscal quarters are historically slower than the final two.

COVID-19 has affected product mix, manufacturing and shipping timing, and operating protocols. A workplace outbreak could require a facility shutdown and cause delayed or lost sales. The company reported no workplace transmission to date. Tariffs on certain China-made products returned to 25% in September 2020 after a temporary exemption expired. Management also cited supplier and customer concentration: its top ten customers represented 75% of quarterly sales, and two customers represented 55% of receivables. Two suppliers accounted for at least 10% of purchases each.

The company received $680,707 in Paycheck Protection Program loans at 1% interest. Management said proceeds were used for qualifying payroll expenses and intended to seek forgiveness, but forgiveness is not assured. The company is investing in facilities and equipment, including an ERP implementation planned for fiscal Q2 and warehouse and creative-center renovations.

A Pennsylvania product-liability lawsuit alleges injuries after a dog escaped from a company kennel product. The matter is at an early stage and its outcome is uncertain; the insurer is providing a defense and covering legal fees and costs. Subsequent to quarter-end, the company issued 7,999 restricted shares to officers, directors and employees at a deemed price of $8.80 per share, a stated total cost of $70,391.

Important facts for investors to verify

• Whether the PPP loans qualify for forgiveness, and the timing and amount of any forgiveness.
• Whether elevated fencing and pet demand and the reported customer commitments persist, given seasonality and COVID-related uncertainty.
• Effects of restored tariffs, overseas manufacturing and shipping conditions, and supplier concentration on product costs and availability.
• Exposure to customer concentration and receivables collectability, including the two customers comprising 55% of receivables.
• Developments in the Pennsylvania product-liability case and whether any costs beyond insured defense expenses arise.
• Execution, costs and potential operational disruption from the ERP implementation and facility renovation projects.