Business context and reporting period
Jewett-Cameron Trading Co. Ltd. (NASDAQ: JCTCF) filed this unaudited Form 10-Q for the first quarter of fiscal 2022, the three months ended November 30, 2021. The company sells lawn, garden and pet products; industrial wood products; and agricultural seed products, primarily in the United States. Results are in U.S. dollars. Management notes that the first two fiscal quarters are historically slower for its JCC business.
Financial results
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Sales | $12.92 million | $10.32 million |
| Gross profit / margin | $2.46 million / 19.1% | $2.96 million / 28.7% |
| Operating income (loss) | $(467,181) | $623,783 |
| Income (loss) before tax | $(484,457) | $626,783 |
| Net income (loss) | $(391,141) | $488,527 |
| Diluted EPS | $(0.11) | $0.14 |
| Operating cash flow | $(1.36) million | $2.22 million |
| Capital expenditures | $590,375 | $184,247 |
Sales increased 25% year over year, while cost of sales rose 42%; gross profit fell 17%. Higher raw-material and shipping costs compressed margins, and operating expenses rose to $2.93 million from $2.34 million, including higher wages, benefits and SG&A. Interest expense was $20,276, compared with none in the prior-year quarter.
By segment, lawn, garden, pet and other sales increased 33% to $11.85 million, but the segment recorded a $699,697 pretax loss versus $520,208 income. Industrial wood sales declined 26% to $534,112; the segment earned $69,950 versus a prior-year loss. Seed sales declined to $537,729 from $661,896, and the segment recorded a $101,350 loss versus $49,490 income.
Financial position and liquidity
At November 30, 2021, cash was $1.24 million; current assets were $26.89 million; current liabilities were $8.68 million; and working capital was $18.21 million, down from $19.07 million at August 31, 2021. Inventory rose $2.83 million to $17.22 million, while accounts receivable declined $1.28 million to $5.81 million. The company reported total assets of $31.33 million and stockholders’ equity of $22.52 million.
Bank borrowings increased to $5.0 million from $3.0 million under a $10 million revolving line of credit, secured by accounts receivable and inventory. The stated November 30 rate was 1.83% (one-month LIBOR plus 175 basis points); the company reported compliance with financial covenants. Subsequent to quarter-end, it drew another $1 million, leaving $4 million available. Operating cash use mainly reflected the $2.83 million inventory build; the company also spent $590,375 on property and equipment. No long-term debt balance is shown at quarter-end; the prior PPP loans had been forgiven in fiscal 2021.
Changes, outlook and risks
- Supply chain and inflation: Management cited China production interruptions, extended and costly ocean shipping, U.S. logistics constraints, higher material costs and tariffs on certain Chinese products. Product delays affected sales availability and postponed planned launches. Increased pre-holiday orders raised inventory and borrowing needs.
- Outlook: Management said the remainder of fiscal 2022 remains uncertain. Higher selling prices had been implemented entering Q2 and are expected to ease margin pressure, but price increases may lag further cost increases. Elevated inventory and continued shipping, supply and inflation pressures may weigh on margins. No specific financial guidance was provided.
- Liquidity: Management expects the available credit line and anticipated receivable collections to meet fiscal 2022 working-capital needs, while also noting that additional working capital may be required.
- Other risks: The company identifies customer and supplier concentration, dependence on third-party manufacturers and key retail customers, COVID-19 disruption, tariffs, interest-rate exposure, and cyber and internal-control risks. Three customers represented 72% of accounts receivable; the top ten customers accounted for 75% of quarterly sales. Two suppliers together accounted for $7.56 million of purchases.
- Contingencies and changes: The company is defending a Pennsylvania product-liability lawsuit; its insurer is covering defense costs. It has initiated arbitration against a former distributor, scheduled to begin in August 2022. California district attorneys raised possible liability related to environmental labeling of plant-based dog-waste bags; the company revised marketing statements, and potential penalties are not estimable. Chad Summers became CEO and Mitch Van Domelen CFO on January 1, 2022; Charles Hopewell remains board chair and a director.
Important facts for investors to verify
- Whether higher customer pricing offsets continuing freight, raw-material and tariff-related costs, and whether gross margins recover.
- Whether the enlarged inventory converts into sales without excess, obsolescence or further working-capital strain.
- Available borrowing capacity and covenant compliance after the post-quarter $1 million draw.
- Progress on product launches and recovery in the seed and industrial wood segments.
- Developments and possible financial exposure from the product-liability lawsuit, distributor arbitration and California labeling inquiry.