Jerash Holdings (US), Inc. annual report, FY2020

Jerash Holdings (US), Inc. — FY2020 Form 10-K

Business context and reporting period. The filing covers the fiscal year ended March 31, 2020; it reports annual results, not standalone 2019 fourth-quarter results. Jerash manufactures customized sport and outerwear in Jordan, with annual capacity of about 8.0 million pieces and approximately 4,100 employees. VF Corporation is its largest customer, and substantially all VF sales are for The North Face.

Key financial results

Metric	FY2020	FY2019	Change
Revenue	$93.0 million	$85.0 million	Up 9%
Gross profit	$18.0 million	$18.8 million	Down 4%
Gross margin	19%	22%	Down 3 percentage points
Net income	$6.5 million	$5.1 million	Up 27%
Basic / diluted EPS	$0.57 / $0.57	$0.46 / $0.45	Higher
Cash from operating activities	$6.9 million	$9.8 million	Down

Cost of goods sold rose 13% to $75.0 million, faster than revenue. Management attributed margin pressure mainly to ramp-up costs at the Paramount facility and Al-Hasa workshop, and fixed overhead during the March 18–31 shutdown.
Total operating expenses were $10.3 million versus $12.4 million, primarily reflecting stock-based compensation falling to $0.3 million from $3.6 million. Excluding stock-based compensation, selling, general and administrative expenses increased to $10.0 million from $8.8 million.
Cash and cash equivalents were $26.1 million, with restricted cash of $0.8 million. Current assets were $59.0 million and current liabilities $10.9 million; working capital was $48.1 million and the current ratio was 5.4:1, down from 7.3:1 a year earlier.
Bank facilities had stated aggregate limits of about $26 million; outstanding borrowings were $235, compared with $648,711 at March 31, 2019. Total liabilities were $12.7 million, including $0.9 million of operating lease liabilities and $1.2 million of non-current income tax payable.
Cash used in investing was $4.9 million, mainly for facility and equipment investment; cash used in financing was $2.9 million, including $2.3 million of dividends. Capital expenditures were approximately $4.7 million.

Material changes and developments

Revenue growth reflected expanded business with major customers, higher-value products such as jackets, and new customers. U.S. sales increased 27% to $89.1 million and accounted for 96% of revenue, versus 83% in FY2019.
VF Corporation represented 77.2% of revenue, down from 79.4%; Dynamic Design Enterprise represented 10.7%. The company has no long-term customer contracts or minimum-purchase commitments.
The Paramount acquisition and the new Al-Hasa workshop increased capacity from 6.5 million to about 8.0 million pieces. The Al-Hasa workshop began operating in November 2019.
Jordan’s Development Zone tax rate rose from 10% plus a 1% social contribution in 2019 to 14% plus 1% from January 1, 2020. The sales-tax exemption on purchases was extended through February 5, 2021.
The board declared dividends totaling $0.20 per share for FY2020, versus $0.10 per share in FY2019.

Outlook, risks and contingencies

COVID-19: Jordan’s shutdown interrupted production from March 18 through March 31, 2020. Orders of approximately $1.6 million scheduled for shipment by fiscal year-end were deferred and shipped in FY2021. Main facilities restarted April 4 under restrictions, the Al-Hasa workshop restarted April 26, and local employees returned June 1. Management reported production at full capacity from June 1, but expected a short-term decline in FY2021 and could not estimate the longer-term financial impact.
At March 31, accounts receivable were $5.3 million and inventory was $22.6 million; management said $5.1 million of receivables had been collected by June 24. Some customers sought longer payment terms, while VF offered to accelerate settlement of part of its April and May shipments.
Management said cash and operating resources should be sufficient for working capital needs over the next 12 months. Construction plans for dormitory and production facilities were put on hold amid COVID-19 uncertainty; projected capital expenditures were about $1.2 million in each of FY2021 and FY2022.
Key risks include reliance on VF and a concentrated customer base, order volatility and seasonality, Jordan-based production and political or regulatory risks, changing trade or tax incentives, foreign-exchange exposure, and COVID-related disruption. The HSBC facilities are secured and subject to lender review; the factoring facility’s stated term had expired, although the company said it could continue using it while negotiating an extension.
The company disclosed a potential JOD250,000 (approximately $353,000) payment if it breaches conditions for the Al-Hasa government-supported workshop project. It reported no material current legal proceedings. Related-party arrangements include consulting agreements of $300,000 per year each with entities connected to the CEO and a stockholder.
The independent auditor issued an unqualified opinion on the financial statements. Management assessed internal control over financial reporting as effective; the auditor did not attest to that assessment.

Important facts for investors to verify

Whether FY2021 orders, shipments, collections and customer payment terms recovered as expected after the shutdown, and whether the expected short-term decline was realized.
Whether customer concentration—especially VF Corporation—and the absence of long-term contracts or minimum purchase commitments changed.
Whether gross margins improved as Paramount and Al-Hasa operations ramped, and how much of FY2020 earnings growth depended on lower stock-based compensation.
Whether the HSBC factoring facility was renewed on acceptable terms, and whether actual liquidity remained consistent with management’s 12-month assessment.
Whether the Jordanian sales-tax exemption was extended beyond February 5, 2021, and the continuing effect of higher corporate tax rates.
Whether postponed construction resumed, and whether the company met the employment conditions attached to government-supported facilities.