Jerash Holdings (US), Inc. — Q3 FY2019 Form 10-Q
Reporting period: Fiscal third quarter and nine months ended December 31, 2018; comparative periods ended December 31, 2017. The unaudited company manufactures customized apparel, primarily outerwear, in Jordan for large brand-name retailers.
Key financial metrics
| Metric | Q3 FY2019 | Q3 FY2018 | Nine months FY2019 | Nine months FY2018 |
|---|---|---|---|---|
| Revenue | $18.68 million | $11.54 million | $70.50 million | $60.44 million |
| Gross profit / margin | $3.20 million / 17% | $3.75 million / 33% | $16.21 million / 23% | $15.82 million / 26% |
| Operating income | $1.03 million | $2.19 million | $6.56 million | $11.39 million |
| Net income | $1.63 million | $2.21 million | $5.33 million | $11.39 million |
| Basic / diluted EPS | $0.14 / $0.14 | $0.23 / $0.23 | $0.48 / $0.47 | $1.18 / $1.18 |
- Cash flow, nine months: Operating cash flow was $11.93 million, investing outflow $1.10 million, and financing inflow $7.40 million. Cash and restricted cash increased $18.20 million.
- Liquidity at December 31, 2018: Cash was $26.71 million and restricted cash $3.68 million. Current assets were $53.90 million versus current liabilities of $7.75 million, a reported current ratio of approximately 6.9x and working capital of $46.1 million.
- Debt and liabilities: $20,915 was outstanding under credit facilities; total liabilities were $9.34 million, including $885,000 of current income tax payable and $1.59 million of noncurrent tax payable.
- Balance sheet: Total assets were $60.19 million and total equity $50.85 million. Accounts receivable increased to $13.14 million from $5.25 million at March 31, 2018; inventory declined to $12.12 million from $20.29 million.
Material changes versus prior periods
- Q3 revenue rose 62%, driven mainly by higher shipments to a major U.S. customer and Jordan orders. Nine-month revenue rose 17%.
- Margins weakened: Q3 gross margin fell to 17% from 33%; nine-month margin fell to 23% from 26%. Management cited lower-margin customer programs and a lower proportion of higher-margin export orders.
- Q3 net income declined 26%. Nine-month net income declined 53%, reflecting higher operating costs, $3.40 million of stock-based compensation, and $1.25 million of income tax expense.
- SG&A increased 40% in Q3 and 118% year to date. Drivers included expanded Hong Kong support and marketing functions, public-company compliance and professional costs, banking and finance costs, and the Q3 Nasdaq bell-ringing event expense of approximately $170,000.
- The May 2018 IPO raised $8.93 million net and increased outstanding shares to 11.325 million from 9.895 million at March 31, 2018. A $0.05-per-share dividend, totaling $566,250, was paid in November.
Outlook, commentary, risks and unusual items
- Management stated that cash on hand and operating cash generation should fund working capital needs for current operations over the next 12 months. No specific revenue or earnings guidance was provided.
- Management projected approximately $3.1 million of capital expenditures for fiscal 2019 and 2020 to expand production capacity. Two Jordan sewing workshops were expected to be completed around mid-2019.
- The company agreed to acquire a Jordan garment manufacturer for $980,000; $380,000 had been paid as a deposit by December 31. The planned facility was expected to add 1.5–1.8 million pieces of annual capacity to approximately 6.5 million, subject to closing and operational execution. The filing also describes milestone payments and related facility and housing arrangements.
- A new Standard Chartered Hong Kong import and pre-shipment facility of up to $3.0 million was activated after quarter-end; no amounts were outstanding under it as of the report date. HSBC facilities were backed by company and personal guarantees and required $3.0 million of cash collateral.
- Jordan’s export tax exemption ended December 31, 2018; the filing says the company’s Jordan entities become subject to a 5% corporate tax rate from January 1, 2019. The Q3 $578,000 tax benefit arose from finalizing the U.S. transition-tax calculation and revising the estimated annual tax rate. The final transition-tax liability was stated as $1.687 million, payable over eight years.
- Customer concentration is significant: VF Corporation represented 81.6% of Q3 revenue and 82.6% of nine-month revenue; two end-customers together accounted for 91% of receivables at December 31. The company also disclosed supplier concentration, Jordan political, economic and currency risks, and concentration of cash deposits, including deposits in Jordanian institutions without deposit insurance.
- The filing reports no material legal proceedings and no material impact from adopting ASC 606. 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.
Important facts for investors to verify
- Whether the lower-margin customer programs and export mix normalize, and whether major-customer concentration changes.
- Collection timing and credit quality for the sharply higher accounts receivable balance; operating cash flow benefited from inventory reduction.
- Actual tax payments and effective tax rate after the Jordan exemption ended, including the transition-tax installments and GILTI exposure.
- Closing, milestone payments, compliance approvals, added investment needs and realized capacity from the planned acquisition; confirm workshop completion and capital spending.
- Availability and terms of credit facilities, restricted-cash requirements, guarantees and customer/supplier concentration.