Jerash Holdings (US), Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2019 (the first quarter of fiscal 2020). Comparative results are for the three months ended June 30, 2018. The interim financial statements are unaudited.
Business context
Jerash manufactures customized ready-made outerwear in Jordan, primarily for large brand-name retailers, and exports most of its production to the United States. The company reported one operating segment. VF Corporation accounted for 97% of quarterly revenue; substantially all products sold to VF were under The North Face brand.
Financial performance and liquidity
| Metric | Q1 FY2020 | Q1 FY2019 | Change / context |
|---|---|---|---|
| Revenue | $22.53 million | $18.36 million | Up 23%, primarily from increased U.S. shipments to a major customer and Jordan orders. |
| Gross profit / margin | $4.51 million / 20% | $4.66 million / 25% | Gross profit down about 3%; margin fell 5 percentage points. |
| Operating income (loss) | $1.89 million | $(0.52) million | Prior-year quarter included $3.21 million of stock-based compensation expense. |
| Net income (loss) | $1.55 million | $(0.89) million | Basic and diluted EPS were $0.14, versus $(0.08). |
| Cash from operating activities | $(8.40) million | $(10.11) million | Cash use was mainly affected by a $9.38 million increase in accounts receivable. |
| Cash from investing activities | $(1.37) million | $(0.48) million | Included capital spending and the Paramount equipment acquisition. |
| Cash from / (used in) financing | $(1.15) million | $15.01 million | Current period included debt repayment and a dividend; prior period included IPO proceeds and borrowing. |
At June 30, 2019, cash was $16.12 million and restricted cash was $0.80 million, compared with cash of $27.18 million and restricted cash of $0.65 million at March 31, 2019. Current assets were $54.35 million and current liabilities $7.33 million, a current ratio of approximately 7.4 and working capital of approximately $47.0 million. Total assets were $60.57 million, total liabilities $9.33 million, and total equity $51.25 million.
Credit-facility borrowings were $68,222 at quarter-end, all under HSBC factoring; there were no amounts outstanding under the SCBHK facility. Operating lease liabilities totaled $854,320. The company paid a $0.05-per-share dividend, or $566,250 in total, during the quarter.
Material changes and notable items
- Revenue rose 23% year over year, but cost of goods sold rose 31%, reducing gross margin from 25% to 20%. Management attributed the margin decline to labor and overhead costs as operations began at the newly acquired Paramount facility.
- SG&A increased 33% to $2.62 million, reflecting a cash bonus provision, expanded Hong Kong marketing and support functions, banking and finance costs, and public-company compliance and professional fees.
- On June 18, 2019, Jerash completed the Paramount transaction, acquiring machinery and equipment for $980,000 in cash. Paramount had no operating activity or employees at acquisition; the transaction was accounted for as an asset acquisition.
- Adoption of the new lease standard on April 1, 2019 resulted in recognition of lease assets and liabilities; the filing reports approximately $1.3 million and $0.9 million, respectively, at adoption, with no material earnings or cash-flow impact.
Outlook, risks and contingencies
- Management said cash on hand and cash generated from operations should be sufficient for working-capital needs for the next 12 months from the filing date. No specific revenue or earnings guidance is provided.
- Management projected approximately $15 million of capital expenditures across fiscal 2020 and fiscal 2021 for business and production-capacity expansion. The filing does not clearly specify the allocation between those years.
- The company identified significant customer concentration: one customer represented 97% of revenue and 97% of accounts receivable at June 30, 2019. Two suppliers represented 29% and 13% of raw-material purchases in the quarter. Loss of a major customer or supplier could harm results or cash flows.
- Operations are concentrated in Jordan and are exposed to political, economic, legal, regulatory, and foreign-currency risks. Jordanian corporate tax treatment changed effective January 1, 2019 to 10% plus a 1% social contribution, with the rate scheduled to rise to 14% plus 1% from January 1, 2020. The prior export tax exemption ended December 31, 2018.
- After quarter-end, the company agreed to buy Hong Kong office space and parking from an affiliate associated with its CEO for approximately $8.1 million. A $0.8 million deposit was paid; completion is subject to approval by an independent-director special committee, and the deposit is refundable if conditions are not met by October 31, 2019.
- After quarter-end, the company also purchased approximately three acres in Jordan for a planned employee dormitory for approximately $1.2 million. A $0.5 million deposit was paid and the remaining balance was paid upon transfer of ownership on August 7, 2019.
- A planned 54,000-square-foot workshop is being built with Jordanian government agencies. The company said it does not anticipate significant costs if employment requirements are met; breach of the agreement could require payment of JOD250,000 (approximately $353,000). Management did not expect existing legal claims to have a material adverse impact, and reported no material legal proceedings.
Key facts for investors to verify
- Whether the increased shipments to VF Corporation are sustainable, given the 97% customer concentration.
- Whether Paramount’s start-up costs abate and gross margins recover as the facility ramps up.
- Collection timing and credit quality of the $13.40 million receivable balance, which increased materially during the quarter.
- Funding, timing, and allocation of the planned capital expenditures, alongside the proposed related-party Hong Kong property purchase and its independent-committee approval.
- Effects of Jordan’s changing tax rates and the company’s planned capacity expansion on earnings, cash needs, and operating risks.