Jewett-Cameron Trading Company Ltd. — Q3 FY2022 Form 10-Q
Reporting period: Three and nine months ended May 31, 2022. The company sells pet, lawn and garden, fencing, industrial wood, and seed products and services, primarily in the United States. Financial statements are unaudited and presented in U.S. dollars.
Financial performance
| Metric | Three months ended May 31, 2022 | Three months ended May 31, 2021 | Nine months ended May 31, 2022 | Nine months ended May 31, 2021 |
|---|---|---|---|---|
| Sales | $20.92 million | $21.62 million | $47.90 million | $42.40 million |
| Gross profit | $5.35 million | $5.58 million | $11.24 million | $11.16 million |
| Gross margin | 25.6% | 25.8% | 23.5% | 26.3% |
| Operating income | $2.02 million | $2.64 million | $2.25 million | $3.20 million |
| Net income | $1.49 million | $2.41 million | $1.37 million | $2.85 million |
| Basic and diluted EPS | $0.43 | $0.69 | $0.39 | $0.82 |
For the nine-month period, operating cash flow was negative $4.04 million, compared with negative $1.61 million a year earlier. Inventory growth used $5.51 million of cash; capital expenditures were $1.01 million. Financing provided $6.00 million, primarily from additional bank borrowings. Cash at period-end was $2.13 million.
Balance sheet and liquidity
- At May 31, 2022, current assets were $32.56 million and current liabilities were $12.84 million; working capital was $19.72 million.
- Inventory was $19.90 million, up $5.51 million from August 31, 2021, as the company stocked for its busier season and to reduce supply-chain disruption risk. Receivables were $8.27 million.
- Bank indebtedness was $9.00 million under a $10.00 million secured line of credit, up from $3.00 million at August 31, 2021. The rate was one-month SOFR plus 157 basis points, or 2.36% at May 31; the facility has financial covenants, which the company said it was meeting.
- In June 2022, the company repaid $1.00 million, reducing the line balance to $8.00 million and leaving $2.00 million available. Management said expected liquidity was sufficient for remaining fiscal 2022 working-capital needs.
Changes and operating drivers
- Quarterly sales fell 3% year over year; nine-month sales rose about 13% based on the reported figures. Nine-month sales growth was led by lawn, garden, pet and other products, up 16% to $43.98 million. Industrial wood sales declined 10% to $1.69 million and seed sales declined 16% to $2.23 million.
- Margins were pressured by higher raw-material, energy, and shipping costs; management said selling-price increases had not fully caught up with cost inflation. Nine-month operating expenses rose to $8.99 million from $7.96 million, including higher wages and employee benefits.
- Quarterly and nine-month earnings comparisons were affected by a prior-year $687,387 gain from forgiveness of PPP loans. Current nine-month other items also included a $300,000 accrual for the California dog-waste-bag labeling settlement and $98,868 of interest expense.
- Segment results varied: nine-month lawn, garden, pet and other pretax income was $1.50 million versus $3.59 million; industrial wood returned to a small pretax profit of $8,823 from a loss; seed processing recorded a $238,387 pretax loss versus $94,339 income.
Outlook, risks, and contingencies
- Management described the remainder of fiscal 2022 outlook as uncertain. It expected inflation and shipping costs to continue pressuring margins into fiscal 2023, and warned that higher costs could outpace price increases. Lower consumer sentiment could constrain near-term demand.
- The company built inventory ahead of its spring and summer season to improve product availability and avoid further cost increases. It reported that on-site inventory declined from $10.5 million in February to $8.2 million in June as products sold. Supply disruptions in China, shipping constraints, and tariffs on certain Chinese goods remain risks; management was exploring broader sourcing.
- The California dog-waste-bag labeling matter was settled in June 2022 for the already accrued $300,000, payable over four months, with no admission of guilt. The company changed product packaging and marketing materials.
- A Pennsylvania product-liability lawsuit involving an alleged escape from a kennel product remains unresolved; the company said its insurer is covering defense costs and that the outcome is uncertain. The company also initiated arbitration against a former distributor; the outcome is uncertain.
- Customer concentration is significant: the top ten customers represented 83% of nine-month sales, and two customers represented 54% of receivables. Three suppliers each accounted for at least 10% of nine-month purchases. Other cited risks include COVID-related disruptions, interest-rate changes, cybersecurity, and low trading volume in the stock.
Important facts to verify
- The MD&A describes nine-month sales growth as both 11% and 13%; reported sales of $47.90 million versus $42.40 million imply approximately 13% growth. Confirm the intended comparison and presentation.
- Confirm inventory sell-through, cash generation, and the extent to which the $9.00 million line-of-credit balance was reduced after the period-end repayment.
- Track whether selling-price increases keep pace with input and shipping costs, and whether the company maintains its stated liquidity and credit-covenant compliance.
- Monitor the impact of customer and supplier concentration, China-related sourcing and shipping risks, and the unresolved Pennsylvania lawsuit and distributor arbitration.