Jerash Holdings (US), Inc. — Q1 Fiscal 2023 Form 10-Q
Reporting period: Three months ended June 30, 2022; comparisons are with the three months ended June 30, 2021 unless noted. Jerash manufactures and exports apparel, principally outerwear, and personal protective equipment, with production operations primarily in Jordan.
Financial performance and position
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Revenue | $33.44 million | $29.89 million |
| Gross profit / margin | $6.62 million / 19.8% | $5.63 million / 18.8% |
| Operating income | $2.22 million | $2.32 million |
| Net income | $1.72 million | $1.93 million |
| Diluted EPS | $0.14 | $0.17 |
| Operating cash flow | $(0.47) million | $(11.46) million |
| Investing cash flow | $(3.38) million | $(1.77) million |
Revenue rose 12%, while gross margin improved about 1 percentage point. Higher operating expenses and taxes more than offset the gross-profit increase: SG&A rose 24% to $4.11 million, including $0.29 million of stock-based compensation, and the effective tax rate increased to 24.5% from 17.7%. Net income declined 11%.
At June 30, 2022, cash was $21.50 million and restricted cash was $1.33 million. Current assets were $69.64 million and current liabilities $14.00 million, for a 5.0-to-1 current ratio and approximately $55.6 million of working capital. Total liabilities were $15.71 million. The company had $1.13 million outstanding on a new facility with a $5 million limit; the SCBHK facility was cancelled in June. Operating lease liabilities totaled $1.46 million. Cash and restricted cash decreased $3.76 million during the quarter.
Material changes and business developments
- Sales growth came from higher export and local sales. U.S. sales were $31.41 million, about 94% of revenue; sales to Jordan and other locations also increased.
- Two customers represented 66% and 23% of quarterly revenue. Outerwear represented 93.4% of revenue. These concentrations leave results exposed to customer demand and order timing.
- Cost of goods sold fell to 80% of revenue from 81%. Management attributed the margin improvement mainly to increased production scale following the MK Garments acquisition and product mix.
- Inventory was $28.97 million, including $14.38 million of finished goods. Advances to suppliers increased to $3.45 million from $1.28 million.
- Investing outflows included $1.81 million for construction and $1.27 million for an Ever Winland acquisition deposit. Property, plant and equipment increased to $12.51 million.
Outlook, risks and unusual items
- Management expects available cash and operating cash generation to support working capital for the next 12 months and states it expects sufficient resources to continue as a going concern in FY2023. It cautions that U.S. and EU recovery and inflation could affect orders, fulfillment and delivery schedules; no revenue or earnings guidance is provided.
- Management projects approximately $16 million of capital expenditures in FY2023 and $0.5 million in FY2024, primarily for capacity expansion. An employee dormitory project is expected to cost $8.2 million and be ready in FY2023.
- The company agreed to acquire Ever Winland for approximately $5.1 million, paid about $1.3 million by quarter-end, and expected completion in Q2 FY2023; approximately $3.8 million remained payable at closing. A separate Kawkab transaction for $2.7 million had $0.5 million paid and $2.2 million due at closing, also expected in Q2 FY2023.
- A share repurchase program of up to $3 million was authorized through March 31, 2023; no shares had been repurchased by June 30. A $0.05-per-share dividend was paid during the quarter, and another $0.05 dividend was declared in August.
- COVID-19 had no significant operational impact in the quarter, according to management, which expected no significant FY2023 impact while noting that renewed restrictions could harm the business. Other risks include Jordan political, economic and currency conditions, customer and supplier concentration, and foreign-bank deposit exposure.
- The filing reports no material legal proceedings and says management does not expect ordinary-course claims to have a material adverse effect. Related-party consulting fees were $150,000 for the quarter. Stock-based compensation increased to $294,822, associated with vesting of 200,000 restricted stock units.
Important facts for investors to verify
- Whether major customers maintain orders and whether the company can reduce dependence on its two largest customers.
- Collection of receivables: $8.5 million of the $11.1 million balance had been received by August 5, 2022; confirm subsequent collections and customer payment terms.
- Inventory conversion and supplier advances, including shipment and sale of the substantial finished-goods balance.
- Funding, closing conditions and timing for the Ever Winland and Kawkab transactions, and execution of the announced capital expenditure program.
- Cash generation, facility usage and borrowing costs as investment spending and dividends continue; assess the effect of the new Jordanian tax rates and customer-invoice early-payment charges.