Jerash Holdings (US), Inc. — Form 10-Q Summary
Business context and reporting period
Jerash manufactures and exports customized sportswear and outerwear, primarily from Jordan. This report covers the quarter ended September 30, 2020, the second quarter of fiscal 2021, and the six months then ended. The filing attributes operating disruption and demand uncertainty to COVID-19.
Financial performance and position
| Metric | Quarter ended September 30, 2020 | Six months ended September 30, 2020 |
|---|---|---|
| Revenue | $27.1 million | $45.8 million |
| Gross profit / margin | $5.9 million / 22% | $8.9 million / 20% |
| Operating income | $3.0 million | $4.2 million |
| Net income | $2.6 million | $3.4 million |
| EPS, basic and diluted | $0.23 | $0.30 |
| Operating cash flow | Not provided separately for the quarter | $1.7 million |
For the six-month period, investing cash outflow was $0.3 million and financing cash outflow was $0.2 million, including $1.1 million of dividends and $0.9 million of short-term loan proceeds. Cash and restricted cash totaled $28.1 million at September 30; this included $27.3 million of unrestricted cash and $0.8 million of restricted cash.
Current assets were $62.4 million and current liabilities $11.5 million, yielding a 5.4:1 current ratio and $50.9 million of working capital. Total liabilities were $13.2 million; $0.9 million was outstanding under the HSBC credit facility, due on demand or within 120 days. The company also reported $0.8 million of operating lease liabilities. Total equity was $57.0 million.
Changes versus prior comparable periods
- Quarterly revenue fell 12% from $30.6 million; six-month revenue fell 14% from $53.1 million. Management cited lower shipments to a major U.S. customer.
- Quarterly net income decreased 29% from $3.6 million; six-month net income decreased 34% from $5.1 million.
- Gross margin declined about 2 percentage points year over year, to 22% for the quarter and 20% for the six months. Management attributed the reduction to a higher proportion of lower-margin local orders.
- For the quarter, U.S. sales fell 20%, while Jordan sales rose 110%. For the six months, U.S. sales fell 20%, while Jordan sales rose 117%. Other-market sales also increased from a low base.
- SG&A declined 2% for the quarter and 15% for the six months. Lower travel costs, and lower repair, maintenance and recruitment expenses, contributed.
- Cash increased by $1.2 million in the six months, versus a $3.4 million decrease in the prior-year period. Operating cash flow rose to $1.7 million from $1.4 million, despite lower earnings and a substantial increase in receivables.
Outlook, risks and notable items
- Management said second-quarter sales were over 88% of the prior-year quarter, improving from 83% in fiscal first quarter. It was reconfirming second-half orders and shipment schedules, had begun business with some new customers, and started PPE shipments. These comments are not formal revenue or earnings guidance.
- Management warned prolonged COVID-19 disruption could reduce fiscal 2021 revenue and operating cash flow; reopening, customer demand, order fulfillment and delivery schedules remain uncertain. It said available cash and expected operating cash flow should support working capital for 12 months from filing.
- Customer concentration is significant: VF Corporation accounted for 74% of quarterly and 76% of six-month revenue. One customer represented 78% of receivables at September 30. Management reported $19.9 million in receivables, $12.1 million collected by November 10, and no overdue balances at quarter-end.
- One supplier accounted for 47% of accounts payable at quarter-end; it supplied about 20% of garments in the quarter. Management said it is seeking to diversify suppliers.
- COVID-19 temporarily suspended dormitory construction and prompted temporary reductions in related-party consulting fees from May through August 2020. Management resumed dormitory preparation as orders recovered, while continuing to review production-facility plans. The filing cites approximately $5 million for dormitory construction, but separately projects approximately $3 million of aggregate capital expenditures in fiscal 2021 and 2022; investors may wish to clarify the scope and timing of these estimates.
- The filing reports a $14% Jordanian corporate tax rate plus a 1% social contribution effective January 1, 2020, and a sales-tax exemption extended through February 5, 2021. The six-month effective tax rate increased to 20.6% from 15.3%.
- The board declared two dividends of $0.05 per share during the six months, totaling $1.1 million. A further $0.05-per-share dividend was approved November 2, payable November 23, 2020.
- The company reported no current material legal proceedings and no expected material liability from ordinary-course claims. It noted that adverse outcomes could nevertheless be harmful. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether major-customer orders and collections remain stable, particularly given customer concentration and the large receivable balance.
- Whether the improved sales trend and new-customer/PPE activity translate into sustained orders and acceptable margins.
- How the dormitory and other capital-expenditure estimates reconcile, and whether planned construction will proceed on schedule.
- Availability and renewal terms of HSBC facilities, including the demand nature and short maturity of the outstanding borrowing.
- Exposure to cash held in jurisdictions with limited or no deposit insurance, as described in the filing.