Jerash Holdings (US), Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2018. The company manufactures customized apparel, principally outerwear, in Jordan for brand-name retailers. Amounts below are in U.S. dollars.
Financial performance
| Metric | Three months ended September 30, 2018 | Year-over-year change | Six months ended September 30, 2018 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $33.46 million | Up 21% | $51.83 million | Up 6% |
| Gross profit / margin | $8.35 million / 25% | Up 16%; margin down from 26% | $13.01 million / 25% | Up 8%; margin unchanged |
| SG&A | $2.29 million | Up 57% | $7.48 million | Up 160% |
| Operating income | $6.06 million | Up 5% | $5.53 million | Down 40% |
| Net income | $4.59 million | Down 20% | $3.70 million | Down 60% |
| Basic / diluted EPS | $0.41 / $0.40 | Compared with $0.60 / $0.60 | $0.33 / $0.33 | Compared with $0.96 / $0.96 |
- Six-month operating cash flow was $8.86 million, compared with $1.71 million a year earlier. Investing used $0.72 million, primarily for property and equipment. Financing provided $10.10 million, including $8.93 million of net IPO proceeds and increased bank borrowings.
- At September 30, cash was $26.78 million and restricted cash was $3.68 million. Current assets were $52.35 million versus current liabilities of $7.51 million; reported working capital was $44.8 million and the current ratio approximately 7.0. Total assets were $58.89 million, total liabilities $9.10 million, and total equity $49.79 million.
- Credit-facility borrowings totaled $2.15 million, up from $0.98 million at March 31, 2018. Borrowings are generally due within 120 days or on demand. Facilities are supported by guarantees, including personal guarantees, and $3.0 million of cash collateral; restricted cash also secures customs clearance.
Material changes and management commentary
- Management attributed quarterly revenue growth partly to about $2.5 million of shipments delayed from June into early July by the Eid al-Fitr holiday and Aqaba port backlog, as well as increased orders from a major U.S. customer and local Jordanian sales. Six-month U.S. sales decreased about 1%, while Jordan and other-country sales increased.
- VF Corporation accounted for 78.4% of quarterly revenue and 82.9% of six-month revenue; substantially all products sold to VF are under The North Face brand. The two largest customers represented 67% and 24% of receivables at September 30.
- Six-month SG&A included $3.40 million of stock-based compensation, chiefly from 989,500 options granted and immediately vested in April. Higher marketing, Hong Kong support, banking, legal, professional, and public-company compliance costs also contributed. The company had 11.325 million common shares outstanding at September 30, versus 9.895 million at March 31, following its May IPO.
- Quarterly gross margin declined to 25% from 26%, which management attributed to a lower proportion of higher-margin export orders. For the six-month period, gross margin remained 25%.
- Income-tax expense was $1.46 million for the quarter and $1.83 million for the six months, versus none in the comparable 2017 periods. Management attributed the increase mainly to GILTI tax and a $0.49 million adjustment to its transition-tax estimate. Total transition tax was revised to $1.892 million, payable over eight years.
Liquidity, outlook, risks, and unusual items
- Management said cash on hand and expected operating cash flow should meet working-capital needs for the next 12 months. It projected approximately $3.1 million of capital expenditures in fiscal 2019 and 2020 to expand capacity. Two new sewing workshops were under construction; expected completion was by the end of calendar 2018 and mid-2019, respectively.
- On November 1, 2018, the board approved an annual dividend of $0.20 per share, payable quarterly; the first payment was scheduled for November 27, 2018 to holders of record November 19.
- Customer concentration is significant, and management warns that losing major customers or suppliers could adversely affect results and cash flows. Operations are concentrated in Jordan, exposing the company to political, economic, legal, regulatory, and currency risks. A substantial portion of cash was held in Hong Kong and Jordan; Jordan deposits were not covered by deposit insurance, and Hong Kong deposit insurance is subject to limits.
- Jordan’s export income-tax exemption was extended through December 31, 2018; the company may apply for a further extension. The exemption generated estimated six-month tax savings of $1.36 million.
- The company reported no material legal proceedings and management did not expect ordinary-course claims to have a material adverse effect. Non-cancelable operating-lease commitments totaled $442,275. Management concluded disclosure controls were effective; the filing did not include management’s internal-control assessment because of the transition period for newly public companies.
- Revenue-recognition adoption (ASC 606) had no material effect. The filing provides no formal revenue or earnings guidance.
Important facts for investors to verify
- Whether the delayed shipments and reported sales growth represent durable demand, and how customer concentration—particularly VF Corporation—affects future orders.
- Collection of the $15.69 million accounts-receivable balance, which rose from $5.25 million at fiscal year-end, and the adequacy of the company’s decision not to record an allowance.
- The sustainability of margins and earnings after excluding the unusually large stock-compensation charge, while considering ongoing compensation expense and dilution from options and warrants.
- The final GILTI and transition-tax liability, payment timing, and any further tax-estimate changes; the filing notes that final tax liabilities could differ materially from provisional estimates.
- Use of IPO proceeds, delivery against the planned capacity investments, and the effect of the newly declared dividend on cash available for operations and expansion.
- Renewal and terms of HSBC facilities, which are reviewable and include demand repayment provisions, personal guarantees, and cash collateral.