Jerash Holdings (US), Inc. — Form 10-Q
Reporting period: Third quarter and nine months ended December 31, 2019; the company’s fiscal year ends March 31. Amounts are U.S. dollars. Interim results are unaudited.
Business context
Jerash manufactures customized ready-made outerwear in Jordan for large brand-name retailers and exports primarily to the United States. It reported one operating segment. The company is expanding production capacity and broadening its product and customer base.
Financial performance
| Metric | Three months ended Dec. 31, 2019 | Year-over-year | Nine months ended Dec. 31, 2019 | Year-over-year |
|---|---|---|---|---|
| Revenue | $25.45 million | +36% | $78.59 million | +11% |
| Gross profit / margin | $4.91 million / 19% | $3.20 million / 17% | $16.73 million / 21% | $16.21 million / 23% |
| Operating income | $2.32 million | Up from $1.03 million | $8.40 million | Up from $6.56 million |
| Net income | $2.07 million | Up from $1.63 million | $7.21 million | Up from $5.33 million |
| EPS, basic / diluted | $0.18 / $0.18 | Prior year: $0.14 / $0.14 | $0.64 / $0.63 | Prior year: $0.48 / $0.47 |
- Quarterly gross margin improved as higher sales volume reduced average fixed costs and U.S. shipments generally carried better margins. For the nine-month period, gross margin declined because some new-customer and local orders had lower margins.
- Nine-month SG&A rose 30% to $8.13 million, mainly reflecting increased staffing in Jordan and Hong Kong and a new China office. Stock-based compensation was $0.19 million versus $3.40 million in the prior-year period, which included IPO-related awards.
- Quarterly income tax expense was $0.26 million, versus a $0.58 million benefit a year earlier. Nine-month tax expense was $1.19 million versus $1.25 million; the prior-year period included an approximately $1.8 million one-time U.S. tax transition charge.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $5.98 million, down from $11.93 million. Net income increased, but cash conversion was affected by a $5.98 million increase in receivables and a $4.50 million increase in supplier advances; inventory declined by $6.94 million.
- Investing cash outflow was $3.75 million, primarily for capital investment. Financing cash outflow was $2.31 million, including $1.70 million of dividends and net short-term loan repayments. Cash and restricted cash decreased $0.07 million to $27.77 million; unrestricted cash was $26.97 million.
- At December 31, current assets were $59.34 million and current liabilities $9.23 million, a current ratio of approximately 6.4, compared with 7.3 at March 31. Working capital was $50.2 million. Total equity was $55.97 million.
- Credit-facility borrowings totaled $40,719 at quarter-end, compared with $648,711 at March 31. HSBC facilities have stated limits of $11 million for the import facility and $12 million for factoring; HSBC may review or decline to renew facilities. The separate SCBHK facility had no balance outstanding.
Material changes, outlook and risks
- U.S. sales rose 63% for the quarter and 25% for the nine months; U.S. sales represented 98% and 97% of revenue, respectively. Jordan sales fell as management prioritized export orders it said generally offered better margins.
- Customer concentration remains significant: VF Corporation accounted for 66% of quarterly revenue and 83% of nine-month revenue. One customer represented 92% of receivables at December 31. A single supplier provided 48% of quarterly raw materials. Management warns that loss of major customers or suppliers could adversely affect results and cash flow.
- Capital spending was approximately $3.8 million for the nine months. Management projected approximately $7 million of capital expenditures across fiscal 2020 and fiscal 2021. It planned about $5 million for dormitory and production facilities on recently purchased Jordanian land, with construction expected to start in 2020 and take two to three years. A 54,000-square-foot workshop began operating in November 2019; management expected a separate dormitory project to be operational in early 2020.
- Management said available cash and operating cash generation should support working capital needs for the next 12 months from filing. This is an outlook statement, not a guarantee. The Jordanian corporate tax rate for the company increased to 14% plus a 1% social contribution effective January 1, 2020.
- Other risks include operations and political, economic, legal and currency exposure in Jordan; dependence on U.S. export demand and the Jordan-U.S. duty-free arrangement; and potential collection risk from concentrated, generally unsecured receivables. The company had no material legal proceedings reported and did not expect ordinary-course claims to have a material impact, though it cautioned outcomes could be adverse. A government-agreement breach related to the workshop could require payment of approximately $353,000.
- Related-party matters include consulting fees of $75,000 per quarter to each of two affiliates. A planned related-party office purchase for approximately $8.1 million was terminated after closing conditions were not met, and the deposit was repaid in full. The board declared a further $0.05-per-share dividend after quarter-end, payable February 26, 2020.
- Management concluded disclosure controls were effective as of December 31, 2019 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether customer and supplier concentration, especially VF Corporation’s share of revenue and receivables, changes as new customers are developed.
- Collections of the sharply higher receivables and recoverability and use of the $4.95 million in supplier advances.
- Actual margins and cash flow as export mix, production capacity and new-customer orders evolve.
- Progress, total cost and funding of planned capacity and dormitory projects, and compliance with the workshop employment conditions.
- Renewal and availability terms for HSBC factoring and import facilities, and the impact of the higher Jordanian tax rate.