Jewett-Cameron Trading Company Ltd. — Q2 FY2024 Form 10-Q
Reporting period: Three and six months ended February 29, 2024; comparative periods ended February 28, 2023. Unaudited U.S. GAAP financial statements, expressed in U.S. dollars. The company sells lawn, garden and pet products, industrial wood products, and seed products. Seed operations ended during the period.
Financial performance
| Metric | Three months ended Feb. 29, 2024 | Three months ended Feb. 28, 2023 | Six months ended Feb. 29, 2024 | Six months ended Feb. 28, 2023 |
|---|---|---|---|---|
| Sales | $8.23 million | $8.14 million | $18.04 million | $20.72 million |
| Gross profit | $2.06 million | $1.92 million | $4.02 million | $4.78 million |
| Gross margin | 25.1% | 23.6% | 22.3% | 23.1% |
| Operating expenses | $2.79 million | $3.13 million | $5.54 million | $6.00 million |
| Operating income (loss) | ($0.73 million) | ($1.21 million) | ($1.52 million) | ($1.22 million) |
| Net income (loss) | ($0.53 million) | ($0.97 million) | $0.76 million | ($1.05 million) |
| Basic and diluted EPS | ($0.15) | ($0.28) | $0.22 | ($0.30) |
Quarterly sales increased 1% year over year; excluding the closed seed business, management reported an 8% increase. Six-month sales fell 13%, reflecting lower lawn, garden and pet sales, the closure of seed operations, and a prior-year one-time kennel order. Six-month results included $2.45 million of arbitration settlement income and an $89,087 gain on equipment sales; these items helped produce net income despite an operating loss.
Cash provided by operating activities was $2.22 million for the six months, compared with cash used of $1.41 million in the prior-year period. Cash increased by $1.07 million to $1.15 million. The company repaid $1.26 million of bank borrowings during the period and had no bank debt outstanding at February 29, 2024.
At February 29, 2024, total assets were $28.99 million, total liabilities $4.10 million, and stockholders’ equity $24.89 million. Working capital was $20.10 million, versus $18.99 million at August 31, 2023. Inventory was $17.58 million, down from $18.34 million; accounts receivable was $4.68 million, down from $5.63 million.
Business changes and management commentary
- Management attributed improved quarterly gross margin to a better product mix and stabilizing raw-material and shipping costs. Margins for the six-month period remained below the prior year as the company worked through higher-cost inventory and sold some older lumber inventory at reduced margins.
- JCSC ended seed cleaning in August 2023 and ceased seed storage and other operations on December 31, 2023. The company sold its remaining seed inventory and most of the segment’s equipment; remaining equipment was expected to be disposed of shortly.
- Six-month sales at Greenwood, the industrial wood products segment, increased 108% to $1.96 million, with management citing stronger municipal and transit demand. Lawn, garden, pet and other sales declined 15% to $16.01 million.
- Management said pet-product demand remains weak amid cautious discretionary spending and retailer inventory levels. It expects these conditions to broadly persist during FY2024. The company is focusing on core fencing and pet products, new customers in North America, and launching sustainable MyEcoWorld bag products.
- The company received a $2.45 million cash settlement in October 2023 from arbitration with a former distributor. Management said the payment covered substantial legal costs and some losses; the matter is settled.
- Management stated that the first two fiscal-year quarters are historically slower than the last two. Results to date are not necessarily indicative of full-year results. No specific earnings or sales guidance was provided.
Liquidity, risks and contingencies
The company’s $10 million credit line was replaced effective February 29, 2024 with a $5 million facility that expires June 30, 2024. The new terms require a firm credit agreement with a different lender by May 31, 2024. Management was negotiating with potential lenders and expected to meet the requirement, but stated there was no guarantee of replacement credit. It anticipated drawing on the facility to fund seasonal inventory purchases and said it expected sufficient liquidity for the remainder of FY2024, assuming a new agreement is established. The facility’s stated rate was 6.89% as of February 29, 2024; borrowings are secured by receivables and inventory.
- Customer concentration is significant: the largest customer represented 35% of six-month sales, the top ten represented 93%, and two customers accounted for 69% of accounts receivable.
- Three suppliers each accounted for at least 10% of six-month purchases; aggregate purchases from those suppliers were $10.14 million.
- Management cited consumer demand, inflation and cost pass-through, tariffs on certain Chinese imports, supply-chain disruption, customer and supplier concentration, interest-rate exposure, and cybersecurity among business risks.
- The company reported no other material active or pending legal proceedings. Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the company secured the required replacement lending agreement by May 31, 2024, and the terms and availability of credit after the June 30 facility expiry.
- Whether reported six-month profitability is sustainable without the one-time $2.45 million settlement and equipment-sale gain.
- Trends in core-product demand, especially pet products, and the pace of sales growth for fencing, Greenwood products and MyEcoWorld bags.
- Inventory quality and sell-through, gross-margin recovery, and the higher-cost inventory remaining on hand.
- Customer concentration and receivable collection trends; six-month days sales outstanding was 47 versus 37 in the comparable prior-year period.