Jerash Holdings (US), Inc. — Form 10-Q Summary
Business context and period. Jerash manufactures and exports customized sportswear and outerwear, primarily from Jordan, and also sells personal protective equipment. This unaudited report covers the quarter and six months ended September 30, 2022, the second quarter and first half of fiscal 2023; comparisons are with the same fiscal 2022 periods.
Key financial results
| Metric | Three months ended September 30, 2022 | Six months ended September 30, 2022 |
|---|---|---|
| Revenue | $37.83 million, down 17% | $71.26 million, down 6% |
| Gross profit / margin | $6.92 million / 18%, versus 22% | $13.54 million / 19%, versus 21% |
| Operating income | $2.61 million, versus $5.61 million | $4.92 million, versus $7.96 million |
| Net income | $1.79 million, down 60%; diluted EPS $0.14 | $3.51 million, down 45%; diluted EPS $0.28 |
| Operating cash flow | Not separately reported for the quarter | $9.64 million, versus $10.22 million |
Liquidity and balance sheet. At September 30, cash was $23.01 million and restricted cash was $1.44 million. Current assets were $68.66 million and current liabilities $21.14 million, for a 3.2 current ratio and $47.5 million of working capital. The ratio was 4.9 at March 31, 2022. Total liabilities were $22.38 million and equity $70.99 million. Credit-facility borrowings were $1.11 million; operating lease liabilities totaled $1.18 million.
Cash flow and investment. First-half investing cash outflow was $10.45 million, including $7.68 million for property and equipment and $2.64 million for construction. Financing cash outflow was $0.99 million, including $1.24 million of dividends and $0.55 million of share repurchases, partly offset by net short-term loan proceeds. Cash and restricted cash declined $2.13 million to $24.45 million.
Material changes versus the prior comparable period
- Lower sales to two major U.S. customers drove the revenue and earnings declines. U.S. revenue fell 21% for the quarter and 10% for the half-year.
- Gross margin contracted as domestic orders, which management says generally carry lower margins, made up a greater share of sales. U.S. inflation and higher reported inventory levels were also cited in connection with weaker export demand.
- First-half operating expenses rose about 11%, attributed mainly to added headcount following the MK Garments acquisition and travel costs associated with workforce expansion; the group workforce exceeded 5,600.
- Inventory increased to $36.43 million from $28.26 million at March 31, largely finished goods and raw materials. Management said substantially all inventory related to unfulfilled orders, with no inventory valuation reserve recorded.
- Property, plant and equipment, net, increased to $20.82 million from $10.93 million, reflecting investment and acquisitions. Ever Winland and Kawkab Venus were acquired in August 2022 and accounted for as asset acquisitions.
Outlook, risks and notable items
- Management expects cash on hand and operating cash generation to meet working-capital needs for the next 12 months and considers resources sufficient to continue as a going concern in fiscal 2023. It reported no significant COVID-19 impact in the period, while noting that renewed restrictions could adversely affect operations.
- Management projected approximately $16 million of capital expenditures in fiscal 2023 and $0.5 million in fiscal 2024, principally for capacity expansion. The dormitory and factory expansion projects were expected to be ready for use in fiscal 2023. No quantified revenue or earnings guidance was provided.
- Customer concentration remains significant: VF Corporation represented 64% of quarterly revenue and 65% of first-half revenue; New Balance represented 10% and 16%, respectively. A large portion of VF sales is under The North Face brand.
- Other risks include dependence on U.S. demand and import policy, customer and supplier concentration, Jordan political/economic conditions, foreign-exchange exposure, and cash deposits at banks in Jordan that are not protected by deposit insurance. Higher Jordanian tax rates and valuation allowances contributed to higher effective tax rates: 28.4% for the quarter and 26.6% for the half-year.
- The company repurchased 104,826 shares for $547,713 under a $3.0 million program authorized through March 31, 2023. It paid two $0.05-per-share dividends during the half-year and announced another $0.05 dividend in November 2022.
- The $5 million DBS Hong Kong facility had $1.11 million outstanding at quarter-end and is guaranteed by the parent. A separate $3 million Standard Chartered facility was cancelled in June 2022. Management reported no material legal proceedings or expected material litigation liabilities. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether major U.S. customers’ orders and shipment schedules recover, and the extent of ongoing reliance on VF Corporation and New Balance.
- Whether elevated inventory converts to shipments and cash collection as expected, and whether margin pressure from domestic orders persists.
- Progress, remaining costs, timing and expected returns of the dormitory and factory expansion, and whether fiscal 2023 capital spending remains near the projected $16 million.
- Cash generation and liquidity after investment, dividends and repurchases; utilization, pricing and repayment terms of the DBS facility.
- Exposure to Jordanian tax changes, foreign-exchange movements, customer/supplier concentration and uninsured bank deposits.