Business context and reporting period
Jewett-Cameron Trading Company Ltd. filed this unaudited Form 10-Q for the quarter ended February 29, 2020. The company sells specialty metal and wood products, industrial wood products, and agricultural seeds, primarily in the United States. Results are seasonal, with the first two fiscal quarters typically slower than the last two. Figures are in U.S. dollars.
Financial performance and position
- Second quarter: Sales were $7.62 million, down 3% year over year. Gross profit was $2.01 million and gross margin was 26.3%, versus 22.4%. Operating loss was $163,020 and net loss was $174,262, or $0.05 per share, compared with net income of $119,629, or $0.03 per share, a year earlier. Operating expenses rose to $2.17 million from $1.70 million.
- Six months: Sales were $14.68 million, down 13%. Gross profit was $4.05 million, with gross margin of 27.6% versus 24.0%. Operating loss was $173,894 and net loss was $180,884, or $0.05 per share, compared with operating income of $536,634 and net income of $469,323, or $0.11 per share, in the prior-year period. Operating expenses increased to $4.23 million from $3.53 million.
- Cash flow: Six-month operating cash use was $1.76 million, similar to $1.76 million a year earlier. Investing used $152,003, including $152,403 of capital expenditures. Financing used $3.87 million, primarily for share repurchases. Cash declined $5.78 million to $3.88 million.
- Liquidity and debt: Working capital was $13.69 million, down from $17.76 million at August 31, 2019. Current assets were $15.06 million and current liabilities $1.37 million. There was no bank borrowing; the $3.0 million line of credit remained available, and the company reported compliance with its covenants. Total liabilities were $1.46 million.
- Balance sheet: Total assets were $17.84 million, down from $22.21 million at August 31, 2019. Inventory was $7.25 million, up from $6.38 million; accounts receivable was $2.70 million. Stockholders’ equity was $16.38 million.
Changes versus the prior comparable periods
- For six months, sales fell across the main business lines: lawn, garden, pet and other declined 11%; industrial wood products declined 25%; and seed sales declined 11%. The seed segment moved to pretax income of $43,181 from a $60,794 loss, while industrial wood moved to a $45,525 loss from $26,487 income. Lawn, garden, pet and other recorded a $282,702 pretax loss versus $14,092 income.
- Management attributed improved gross margin mainly to a greater mix of higher-margin metal and pet products. Selling, general and administrative costs and wages rose with staffing and sales and marketing initiatives; the company also cited ERP implementation costs.
- The company repurchased and cancelled 490,120 shares for $3.87 million at $7.89 per share, reducing shares outstanding from 3,971,282 to 3,481,162. The private transactions involved two large shareholders, including a company officer and director; they were not part of a publicly announced repurchase program.
- The company decided to close its industrial tools division, MSI, effective September 1, 2019. Remaining inventory was liquidated by February 29, 2020, with closure expected in the third quarter. The filing says MSI was not material enough to require separate discontinued-operations presentation.
Outlook, risks, and unusual items
- COVID-19 disrupted Chinese factory operations and delayed product supply by an initial two to three weeks, pushing some orders from the second into the third quarter. Management said Chinese suppliers had resumed shipments, but the outlook for the third and fourth quarters remained uncertain. The company warned that reduced consumer spending, supplier or shipping delays, workplace restrictions, or facility closures could affect revenue and costs. It reported no employee infections at the time of filing and retained its workforce.
- Management said demand for pet and fencing products in the third quarter had been consistent with historical levels, with some online sales offsetting weaker store traffic. It expected new compostable dog-waste bags to begin generating sales and interest in the third quarter. These are comments, not quantified financial guidance.
- Some Chinese-imported products remained subject to U.S. tariffs, although certain products had been reclassified as exempt. Tariffs could raise costs and pressure margins.
- A Pennsylvania product-liability action alleges injuries after a dog escaped from a company kennel product. The case was in its early stages; the company said its insurer was providing a defense and it intended to contest the claim.
- The company identified customer and supplier concentration risks: its top ten customers represented 74% of six-month sales, and two customers accounted for 57% of receivables. Two suppliers each represented at least 10% of purchases during the period.
- The filing reported a $105,365 gain on sale of property in the prior-year period; the comparable current-period gain was $400. No interest expense was reported for either six-month period.
Important facts for investors to verify
- Whether COVID-related demand, supply-chain disruption, and shipping costs materially affected results after February 29, 2020.
- How the company’s cash balance and working capital evolved after the $3.87 million share repurchase, and whether further repurchases occurred.
- Whether the MSI closure was completed as expected and whether any additional closure costs arose.
- Whether segment losses, higher operating expenses, and weaker industrial wood demand continued into the typically stronger third and fourth quarters.
- Any developments in the Pennsylvania litigation, tariff treatment, or major customer and supplier relationships.