Jewett-Cameron Trading Company Ltd. — Form 10-Q
Reporting period: Quarter and nine months ended May 31, 2023. All amounts are U.S. dollars. The company sells lawn, garden and pet products; industrial wood products; and agricultural seed products, primarily in the United States. Statements are unaudited and prepared by management.
Financial performance
| Metric | Three months ended May 31, 2023 | Three months ended May 31, 2022 | Nine months ended May 31, 2023 | Nine months ended May 31, 2022 |
|---|---|---|---|---|
| Sales | $18.95 million | $20.92 million | $39.67 million | $47.90 million |
| Gross profit / margin | $4.41 million / 23.3% | $5.35 million / 25.6% | $9.19 million / 23.2% | $11.24 million / 23.5% |
| Operating income (loss) | $1.25 million | $2.02 million | $34,136 | $2.25 million |
| Net income (loss) | $734,951 | $1.49 million | ($310,847) | $1.37 million |
| Basic and diluted EPS | $0.21 | $0.43 | ($0.09) | $0.39 |
For the nine months, operating cash flow was $1.55 million, compared with cash used of $4.04 million in the prior-year period. Investing used $318,185, principally for property and equipment and intangible assets; financing provided $1.00 million from net line-of-credit borrowings. Cash increased by $2.23 million to $2.72 million.
At May 31, 2023, current assets were $31.65 million and current liabilities $13.11 million, giving working capital of $18.54 million. Inventory was $20.53 million; accounts receivable was $7.53 million. Bank debt was $8.00 million, up from $7.00 million at August 31, 2022. Total assets were $36.92 million and stockholders’ equity $23.81 million.
Changes and operating context
- Nine-month sales fell 17% year over year. The lawn, garden, pet and other segment declined 18%; seed sales declined 23%. Industrial wood sales increased 14%.
- Third-quarter sales fell 9%, with gross margin down 2.3 percentage points. Management attributed weaker seasonal outdoor-product demand to unusually cold, wet weather extending into April, delayed retailer orders, inflation and changing consumer spending. Higher-cost inventory from supply-chain disruptions continued to pressure margins.
- Nine-month operating results deteriorated to a small operating profit from $2.25 million in the prior year; net results shifted to a loss. Management cited lower JCC sales, higher professional fees including arbitration costs, and interest expense of $354,000 versus $99,000 a year earlier.
- Inventory was down modestly from August 2022; management said it had fallen $2.5 million from the prior quarter and $4.0 million from its January peak. Nine-month inventory turnover slowed to 184 days from 126 days.
Outlook, risks and unusual items
- Seed business closure: The company decided to close Jewett-Cameron Seed Company effective August 31, 2023, with full facility closure expected by year-end 2023. No new seed was being accepted for processing. The future disposition of its 11.7 acres and 105,000 square feet of buildings had not been determined.
- Management outlook: Management expected sufficient liquidity for the remainder of fiscal 2023 and anticipated that pet-product relaunches and resolution of retailer issues could support recovery. A full launch of MyEcoWorld sustainable bags was expected in fiscal Q4. These are forward-looking expectations, not guarantees.
- Credit facility: The U.S. Bank line was temporarily increased to $12 million through August 31, 2023. At quarter-end, $8 million was drawn and $4 million available; after quarter-end, the company repaid $1 million, leaving $7 million drawn and $5 million available. The May 31 rate was 6.65%, based on one-month SOFR plus 157 basis points. The company reported compliance with financial covenants and was exploring, but had not secured, a restructuring of borrowing arrangements.
- Concentration and supply risks: The top ten customers generated 87% of nine-month sales; two customers accounted for 66% of receivables. Three suppliers together represented $17.83 million of purchases. Tariffs on certain Chinese imports, supplier delays, interest-rate increases, and customer concentration could affect costs, sales and liquidity.
- Arbitration: The company won its claims against a former distributor and sought damages and legal costs. The amount of any award remained uncertain; a damages hearing was scheduled for August 2023.
- Other legal matters: A $300,000 California settlement concerning environmental marketing of dog-waste bags was paid in 2022. A Pennsylvania product-liability case was settled within insurance limits in fiscal 2022, with no additional company costs reported.
- The company reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether seasonal sales recover and margins improve as higher-cost inventory is sold through.
- Progress, costs and asset disposition associated with the JCSC closure.
- Credit-line availability after the temporary increase expires, compliance with covenants, and any new borrowing agreement.
- Inventory aging and turnover, and the degree to which the slower movement reflects excess stock or weak demand.
- Outcome and amount, if any, of the former-distributor arbitration award.
- Exposure to key customers and suppliers, China-related tariffs, and changing consumer demand.