Jerash Holdings (US), Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2020, the first quarter of fiscal 2021. Comparisons are with the three months ended June 30, 2019. Jerash manufactures and exports customized apparel, primarily outerwear, from facilities in Jordan.
Key financial results
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Revenue | $18.71 million | $22.53 million | Down 17% |
| Gross profit / margin | $3.05 million / 16% | $4.51 million / 20% | Down 32%; margin down 4 percentage points |
| Operating income | $1.16 million | $1.89 million | Down 39% |
| Net income | $814,000 | $1.55 million | Down 47% |
| Basic and diluted EPS | $0.07 | $0.14 | Down $0.07 |
| Net cash used in operations | $7.57 million | $8.40 million | Outflow narrowed |
Net income attributable to common stockholders was $814,000. Selling, general and administrative expense declined 29% to $1.85 million. Income tax expense was $342,000, and the effective tax rate increased to 29.6% from 17.8%.
Balance sheet, liquidity and cash flow
- At June 30, cash was $17.75 million and restricted cash was $786,000. Cash and restricted cash totaled $18.54 million, down from $26.92 million at March 31, 2020.
- Current assets were $57.11 million and current liabilities $8.45 million; the reported current ratio was 6.8:1 and working capital was $48.7 million.
- Accounts receivable rose to $15.87 million from $5.34 million at March 31; inventory declined to $18.08 million from $22.63 million.
- Total liabilities were $10.33 million, including $843,507 of operating lease liabilities. No amounts were outstanding under the HSBC or SCBHK facilities at quarter-end; aggregate banking facility limits were reported as $26 million.
- Operating cash outflow was driven principally by the $10.53 million increase in receivables, partly offset by a $4.56 million inventory reduction. Investing cash outflow was $242,000; financing outflow was $566,000, including the $566,250 dividend.
Material changes and management commentary
- Management attributed lower revenue to order cancellations, reduced order sizes and delayed deliveries during COVID-19, as well as lower prices from newer customers. Approximately $3.1 million of shipments scheduled before quarter-end were deferred to later in fiscal 2021.
- Gross margin contracted as partial facility shutdowns in Jordan in April reduced productivity and lower shipment volume increased fixed cost per unit; newer customers also carried relatively lower margins.
- U.S. sales declined 20% to $17.58 million, while Jordan sales increased 132% to $1.13 million. The United States represented 94% of quarterly revenue.
- VF Corporation accounted for 78% of revenue. Management reported that $12.9 million of June 30 receivables had been collected by August 12; some customers requested 20–60 additional days to pay, while VF accelerated settlement of 50% of shipments in April and May.
- Management said cash on hand and expected operating cash generation should support working-capital needs for the next 12 months and stated it believed resources were sufficient to continue as a going concern. This outlook is subject to uncertainty in customer demand, order fulfillment and collections.
- Construction plans were paused because of COVID-19 and demand uncertainty. Management projected approximately $1.2 million of capital expenditures in each of fiscal 2021 and 2022; a separate planned dormitory and production-facility project was expected to require approximately $5 million.
Outlook, risks and unusual items
- The filing provides no quantified revenue or earnings guidance. Management said the duration and economic effects of COVID-19 disruptions could not be estimated and were dependent in part on reopening in the U.S. and Europe.
- On July 6, 2020, the company formed a Jordan subsidiary to manufacture medical supplies. It had temporary local production approval, was seeking export certifications for the U.S. and Europe, and began receiving local subcontracting orders in July.
- A $0.05-per-share dividend was paid June 2. After quarter-end, the board approved another $0.05-per-share dividend, payable August 24, 2020.
- Customer concentration, especially dependence on VF Corporation, and supplier concentration are material risks. Most long-lived assets are in Jordan, exposing operations to local political, economic, regulatory and currency risks; the company also holds significant cash in Hong Kong and Jordan.
- Management reported no material legal proceedings and did not expect ordinary-course claims to have a material impact. A Jordanian employment-related agreement could require a payment of approximately $353,000 if specified employment requirements are breached.
- Disclosure controls were assessed as effective as of June 30, 2020; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Subsequent collection of the remaining June 30 receivables and any further extensions of customer payment terms.
- Whether deferred orders ship in fiscal 2021, and whether customer demand and production utilization recover enough to improve revenue and gross margins.
- Continued dependence on VF Corporation, which generated 78% of quarterly sales, and the effect of customer and supplier concentration.
- Cash consumption and working-capital trends, including the reason operating cash flow remains negative despite reported profitability.
- Timing and funding of paused construction and projected capital expenditures, and progress on medical-supply approvals and export certifications.
- Availability and renewal terms of banking facilities, and the potential impact of Jordanian tax rates and operating conditions.