Business context and reporting period
Jerash Holdings (US), Inc. filed an annual report for the fiscal year ended March 31, 2021 (fiscal 2021), with fiscal 2020 as the comparable year. The company manufactures and exports sport and outerwear and, beginning in 2020, personal protective equipment (PPE) from facilities in Jordan. It reported approximately 4,350 employees and annual garment capacity of about 12 million pieces, excluding PPE.
Financial performance and position
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $90.2 million | $93.0 million |
| Gross profit / margin | $16.0 million / 18% | $18.0 million / 19% |
| Operating income | $5.4 million | $7.7 million |
| Net income | $4.1 million | $6.5 million |
| Net income per diluted share | $0.37 | $0.57 |
| Operating cash flow | $(1.5) million | $6.9 million |
| Capital expenditures | About $1.0 million | About $4.7 million |
Cash was $21.1 million and restricted cash was $1.7 million at March 31, 2021. Current assets were $64.7 million and current liabilities $14.5 million, yielding a 4.5:1 current ratio and $50.1 million of working capital. Total liabilities were $16.6 million and equity was $56.7 million. Credit-facility borrowings were $612,703, primarily under Standard Chartered Bank Hong Kong; no amount was outstanding under HSBC’s import facility at year-end. The company reported $1.34 million of income-tax expense and a 24.5% effective tax rate. Annual dividends were $0.20 per share.
Material changes versus the prior year
- Revenue fell 3%, while net income declined 36%. Gross margin decreased by one percentage point.
- Management attributed weaker performance to the Jordan shutdown and gradual production restart, limits on overtime, COVID-19 precautions, and a larger share of lower-margin local orders.
- U.S. revenue fell 11% to $79.2 million and represented 88% of sales, compared with 96% in fiscal 2020. Jordan revenue rose to $5.7 million from $3.7 million; sales to other regions were $5.3 million versus $0.2 million.
- VF Corporation remained the largest customer, accounting for 62.1% of revenue versus 77.2% in fiscal 2020. New Balance contributed 12.3%.
- Operating cash flow turned negative, chiefly as accounts receivable increased $6.7 million and inventory increased $2.4 million. Cash and cash equivalents declined from $26.1 million to $21.1 million.
- Jordan’s corporate tax rate applicable to the group increased to 16% plus a 1% social contribution effective January 1, 2021. PPE contributed 1% of fiscal 2021 revenue.
Outlook, risks, contingencies and unusual items
Management said it expects available cash and operating cash generation to support working capital for the next 12 months and that fiscal 2022 results were not expected to be significantly affected by COVID-19, while noting that renewed restrictions could adversely affect operations. It projected approximately $27 million in aggregate capital expenditures for fiscal 2022 and 2023 to expand capacity. Construction of a workforce housing facility began in April 2021, with completion anticipated by mid-2022; a further manufacturing and housing project was planned.
- Customer concentration is a key exposure: sales are made through purchase orders, with no long-term contracts or minimum purchase commitments. VF Corporation’s 62% share of revenue makes changes in its orders, pricing, or brand demand particularly consequential.
- COVID-19 caused temporary shutdowns, production constraints and shipment delays. Management reported $12.0 million of receivables at year-end, of which $11.8 million had been collected by June 12, 2021; approximately $0.2 million was overdue. Inventory was $25.0 million, mostly for orders scheduled to ship in fiscal 2022.
- Operations and substantially all manufacturing are concentrated in Jordan, exposing the company to political, security, labor, regulatory, currency, trade-agreement and business-continuity risks. Most sales are exported to the United States, and the company relies on Jordan-related trade preferences.
- HSBC terminated its invoice discounting/factoring services effective March 30, 2021; the company had no balance under that arrangement at year-end. The separate HSBC import facility had no year-end borrowing, while the SCBHK facility had approximately $0.6 million outstanding.
- The company could owe JOD250,000 (about $353,000) if it breaches specified terms of its government-supported Al-Hasa workshop arrangement. It also disclosed a JOD112,500 (about $159,000) guarantee associated with that project. No material legal proceedings were reported.
- Related-party consulting fees were $280,000 each to entities associated with significant shareholders during fiscal 2021. The filing also describes related-party leases and potential conflicts of interest.
- Management concluded that disclosure controls and internal control over financial reporting were effective as of March 31, 2021. The auditor did not provide an internal-control attestation. The financial-statement audit opinion was unqualified.
Important facts for investors to verify
- Whether VF Corporation’s order volumes and customer concentration continue to decline, and whether new customers can diversify sales without reducing margins.
- Collection of receivables and conversion of the $25.0 million inventory balance into shipments and cash, including whether extended customer payment terms persist.
- Progress on capacity and housing projects, the timing and funding of the projected $27 million capital program, and any effect on liquidity or dividends.
- Availability and terms of replacement or alternative working-capital financing following HSBC’s factoring termination, and repayment terms for the SCBHK borrowing.
- Effects of Jordan’s higher tax rate, COVID-19 developments, trade preferences, and any renewed operating restrictions on costs, margins and cash flow.