Jewett-Cameron Trading Company Ltd. — FY2022 Form 10-K
Reporting period: Fiscal year ended August 31, 2022. The filing is an annual report; it also presents fourth-quarter results. Amounts are U.S. dollars unless noted.
Business context
The company sells pet, fencing and other products; industrial wood products; and processed agricultural seed. Pet, Fencing and Other is the dominant segment, accounting for about 92% of FY2022 sales. Most business is conducted in the United States. The company relies on third-party manufacturers, including suppliers in China, and its home-improvement sales are seasonal.
Financial results and liquidity
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Sales | $62.90 million | $57.50 million | +9% |
| Gross profit | $13.79 million | $14.15 million | −2% |
| Gross margin | 21.9% | 24.6% | −2.7 percentage points |
| Operating income | $1.97 million | $3.74 million | −47% |
| Income before taxes | $1.58 million | $4.42 million | −64% |
| Net income | $1.16 million | $3.45 million | −66% |
| Diluted EPS | $0.33 | $0.99 | −67% |
| Operating cash flow | −$3.44 million | −$4.42 million | Less cash used |
| Capital expenditures | $1.26 million | $1.19 million | +$0.07 million |
At August 31, 2022, cash was $0.48 million, inventory $20.63 million (net of an $0.80 million allowance), accounts receivable $7.19 million, and total assets $34.52 million. Working capital was $19.21 million, compared with $19.07 million a year earlier. The $10 million bank line had $7.0 million drawn and $3.0 million available at year-end; the company subsequently drew another $0.6 million, leaving $2.4 million available as of October 28, 2022. Borrowings are secured by receivables and inventory, and the company reported compliance with its covenants. The line’s rate was one-month SOFR plus 157 basis points, or approximately 3.86% at year-end.
Operating cash use principally reflected a $6.24 million increase in inventory. Inventory turnover rose to 130 days from 99 days; receivables collection improved to 42 days from 45 days. Cash declined by $0.70 million year over year. The company reported sufficient liquidity for FY2023 based on its working-capital position and credit facility.
Material changes and segment performance
- Sales growth was mainly at JCC, whose sales rose to $57.92 million from $51.73 million. Its operating income fell to $1.26 million from $4.05 million as input, energy, freight and logistics costs increased and an inventory allowance was recorded.
- Greenwood sales were $2.63 million, nearly flat year over year; it moved from a $0.14 million operating loss to $0.02 million operating income.
- Seed segment sales declined 26% to $2.36 million, and its operating loss widened to $0.52 million. Management cited lower seed-cleaning demand after poor growing conditions, shipping delays to China, and higher maintenance costs.
- Cost of sales rose 13%, faster than sales, reflecting higher raw-material, energy, transportation and freight expenses. Fourth-quarter container shipping costs from China were over 60% above the prior-year quarter, according to management.
- Operating expenses increased to $11.82 million from $10.41 million, including higher selling, general and administrative costs, wages and benefits, and depreciation.
- FY2022 included an $0.80 million inventory allowance, substantially associated with European inventory and obsolete goods; a $0.30 million settlement payment concerning dog-waste-bag marketing; and a $0.064 million deferred-tax reserve recovery. FY2021 included a $0.687 million gain from forgiveness of PPP loans.
Fourth-quarter sales were $15.00 million versus $15.11 million in the prior-year quarter. The company recorded a fourth-quarter net loss of $0.21 million, compared with net income of $0.62 million a year earlier.
Outlook, risks and other notable items
Management expects margins to remain pressured in FY2023: product costs and inflation may continue to rise, price increases may lag costs, and inventory is carried at historically high costs. It expected to order less inventory in the first half of FY2023 as existing stock is sold and receivables collected. Its stated priorities include growing core gates and kennels and newer products, strengthening North American retail and online channels, improving fulfillment efficiency, and seeking alternative sources of supply.
The company paused efforts to expand European sales after finding its distributor-led approach unprofitable and plans to liquidate European inventory during FY2023. Management cited the strong U.S. dollar, the war in Ukraine and potential energy shortages as factors weighing on the market. Ocean freight costs had eased from peaks, but supply-chain and logistics issues and tariffs on certain Chinese goods remained concerns.
Key risks include substantial customer concentration (the top ten customers generated 84% of FY2022 sales and the largest customer 28%), supplier concentration, tariffs and foreign-policy changes, delivery delays, inflation and consumer-demand weakness, interest-rate exposure, cybersecurity threats, and limited trading liquidity. The company said it had no material weaknesses in internal controls; management assessed disclosure controls and internal control over financial reporting as effective. The independent auditor issued an unqualified opinion on the financial statements and identified revenue from the Pet, Fencing and Other segment as a critical audit matter.
Legal matters included the finalized $0.30 million California settlement, with no admission of guilt; a product-liability case settled within insurance limits with no additional company cost; and arbitration initiated against a former distributor, with outcome described as uncertain. The company does not anticipate paying dividends in the foreseeable future.
Important facts for investors to verify
- Whether sales and margins recover as shipping, input costs and customer inventory conditions change, and whether management can pass cost increases through to customers.
- Inventory quality, sell-through and cash conversion, including the adequacy of the $0.80 million allowance and the planned reduction in purchasing.
- Credit-facility availability, covenant compliance, borrowing costs and repayment capacity; reconcile the $3.0 million year-end availability with the subsequent $0.6 million draw and $2.4 million availability reported for October 28.
- Exposure to the largest customers and suppliers, and progress on alternative sourcing and tariff mitigation.
- Execution of the European inventory liquidation and the financial outcome of the former-distributor arbitration.