Business context and reporting period
Jerash Holdings (US), Inc. filed this unaudited Form 10-Q for the fiscal second quarter and six months ended September 30, 2019 (fiscal 2020). The company manufactures customized outerwear in Jordan, primarily for export to large brand-name retailers. Its results include subsidiaries and a variable-interest entity; it reports one operating segment.
Financial performance and position
| Metric | Three months ended September 30, 2019 | Six months ended September 30, 2019 |
|---|---|---|
| Revenue | $30.6 million | $53.1 million |
| Gross profit / margin | $7.3 million / 23.9% | $11.8 million / 22.2% |
| Operating income | $4.2 million | $6.1 million |
| Net income | $3.6 million | $5.1 million |
| Basic / diluted EPS | $0.32 / $0.31 | $0.45 / $0.45 |
- For the six months, operating cash flow was $1.4 million, investing cash flow was $(3.1) million, and financing cash flow was $(1.8) million. Cash and restricted cash declined $3.4 million to $24.4 million; cash alone was $23.6 million.
- At September 30, current assets were $55.2 million and current liabilities $6.2 million, a current ratio of 8.9. Net working capital was $49.0 million.
- Total liabilities were $8.3 million and total equity $54.5 million. Credit-facility borrowings were $16,049; no amounts were outstanding under the HSBC import facility or the SCBHK facility. Operating lease liabilities totaled $906,394.
- Capital expenditures were $3.1 million for the six months, including land, machinery and equipment. A $1.1325 million dividend was paid during the period.
Material changes versus the prior comparable period
- Second-quarter revenue fell 9% year over year, while six-month revenue rose 3%. Management attributed the quarterly decline largely to shipment timing: more than $3.3 million of orders scheduled for late September shipped in early October; prior-year timing around Eid al-Fitr also affected comparison.
- Gross margin declined to 23.9% from 24.9% in the quarter and to 22.2% from 25.1% for the six months. Management cited the newer customer mix and startup/warm-up costs at the Paramount facility and a satellite factory.
- Quarterly net income declined 22% to $3.6 million. Six-month net income increased 39% to $5.1 million, but the comparison benefited from $3.4 million of stock-based compensation and a $1.8 million tax charge in the prior-year period; current-period stock compensation was $194,000.
- Six-month SG&A increased 36% to $5.5 million, reflecting production-premises repairs and improvements, land and dormitory-related expenses, and expansion of Hong Kong marketing and support functions.
- Accounts receivable rose to $14.3 million from $4.0 million at March 31, 2019, while inventory fell to $13.1 million from $21.1 million. Management linked the receivables increase to shipments not yet collected.
Outlook, management commentary, risks and unusual items
- Management said existing cash and expected operating cash flow should fund working-capital needs for the next 12 months. It projected approximately $7 million of capital expenditures across fiscal 2020 and 2021. The filing does not provide specific revenue or earnings guidance.
- Planned investment includes a dormitory on newly acquired Jordan land, with construction expected to begin in 2020 and cost approximately $5 million; completion is expected over two to three years. A separate 4,800-square-foot dormitory was expected to become operational in November 2019. A 54,000-square-foot workshop was also expected to become operational in November 2019; failure to meet specified employment requirements could trigger a JOD 250,000 (approximately $353,000) payment.
- Revenue remains highly concentrated: VF Corporation represented 86.8% of second-quarter and 90.9% of six-month sales; one customer represented 81% of period-end receivables. Management warned that loss of key customers or suppliers could adversely affect results and cash flows. The business also faces Jordan political, economic, legal and currency risks, plus credit risk from cash deposits and customer receivables.
- Jordan corporate tax was 10% plus a 1% social contribution from January 1, 2019; the rate was scheduled to rise to 14% plus 1% on January 1, 2020. Management attributed lower comparative-period tax expense partly to prior-year one-time Tax Act transition charges. It estimated fiscal 2019 tax savings from the prior export-sales exemption at approximately $1.6 million, or $0.14 per share.
- The company adopted lease accounting Topic 842 on April 1, 2019, recording lease right-of-use assets and liabilities; management said adoption did not materially affect earnings or cash flows. The filing reported effective disclosure controls and no material change in internal control over financial reporting.
- A related-party purchase agreement for Hong Kong office and parking space, priced at approximately $8.1 million, terminated October 31, 2019 because closing conditions were not met; the $0.8 million deposit was repaid November 7 without interest. On October 27, the CEO/chairman assumed principal financial officer and accounting officer duties on an interim basis following the death of the prior CFO.
Important facts for investors to verify
- Whether the delayed September shipments were completed and collected, and whether the elevated receivables converted to cash after quarter-end.
- Customer diversification progress and the continuing dependence on VF Corporation, as well as customer and supplier concentration.
- Whether the new facilities achieve expected utilization and improve gross margins, and whether planned capital spending and dormitory projects remain on schedule and within budget.
- The status, availability and renewal terms of HSBC and SCBHK facilities, including the distinction between facility limits and amounts actually drawn.
- The impact of Jordan’s scheduled tax-rate increase and any future tax charges, and the implications of the CFO transition for financial reporting and oversight.