Jerash Holdings (US), Inc. — Q3 FY2022 Form 10-Q
Reporting period: Quarter and nine months ended December 31, 2021. Jerash manufactures and exports customized apparel, principally outerwear, and personal protective equipment, with production primarily in Jordan. Comparisons are with the corresponding prior-year periods unless noted.
Financial performance and position
| Metric | Q3 FY2022 | Nine months FY2022 | Prior-year comparable |
|---|---|---|---|
| Revenue | $36.8 million | $112.4 million | $20.7 million; $66.5 million |
| Gross profit / margin | $6.9 million / 18.8% | $22.6 million / 20.1% | $2.4 million / 11.7%; $11.3 million / 17.1% |
| Net income | $1.7 million | $8.0 million | $0.09 million; $3.5 million |
| EPS, basic / diluted | $0.14 / $0.13 | $0.69 / $0.69 | $0.01 / $0.01; $0.31 / $0.31 |
| Operating cash flow | Not separately presented | $14.6 million | $3.7 million |
- Quarterly revenue grew 78%; nine-month revenue grew 69%. Nine-month net income rose 132%. Management attributed growth chiefly to increased exports to two major U.S. customers and improved gross margins from a higher proportion of export orders.
- For the nine months, SG&A was $11.8 million and stock-based compensation was $0.6 million. Operating income was $10.2 million, versus $4.2 million a year earlier. Quarterly operating income was $2.3 million, versus $48,000.
- Cash and restricted cash totaled $34.4 million at December 31, including $33.1 million unrestricted cash. Current assets were $68.4 million and current liabilities $10.7 million; management reported a 6.4:1 current ratio and $57.7 million of working capital.
- Nine-month investing cash outflow was $7.1 million, including $2.7 million for the MK Garments acquisition, a $0.5 million deposit on a separate factory-property acquisition, and capital investment. Financing cash inflow was $3.9 million, including $6.3 million net proceeds from a share placement, partly offset by $1.8 million of dividends and $0.6 million of loan repayments.
- No borrowings were outstanding under the disclosed $3.0 million Standard Chartered import facility at quarter-end; the company had terminated its HSBC facilities in June 2021. Lease liabilities totaled $1.6 million, including $0.7 million current. Cash interest paid was $148,000 for the nine months, largely associated with customer early-payment financing.
- Dividends were $0.05 per share in each of the first three fiscal quarters, or $0.15 per share for the nine months. A further $0.05 dividend was approved on February 4, 2022.
Material changes and notable items
- Revenue mix became more concentrated: VF Corporation represented 68% of nine-month revenue and New Balance 23%, compared with 62% and 10%, respectively, in the prior-year period. In Q3, the two customers represented 53% and 27% of sales.
- U.S. sales were 95% of nine-month revenue, up from 85%. Jordan sales fell substantially as capacity shifted toward export orders. Outerwear accounted for 92.9% of nine-month revenue.
- Quarterly gross margin increased to about 19% from 12%; nine-month margin rose to about 20% from 17%. Higher labor and migrant-worker costs, acquired-factory headcount, and stock-based compensation contributed to increased operating expenses.
- MK Garments became a subsidiary on October 7, 2021. The $2.8 million purchase price was allocated principally to machinery and equipment ($1.5 million), leasehold improvements ($0.8 million), and goodwill ($0.5 million). The company issued 1.0 million shares in October for approximately $6.3 million net proceeds.
- Receivables declined to $8.1 million from $12.0 million at March 31, 2021; the company said $5.7 million had been collected by February 7, 2022. Inventory was $21.5 million, principally for orders expected to ship in FY2022 and early FY2023.
Outlook, risks and contingencies
- Management said factories were fully booked until July 2022 and operating at or near capacity. It expected cash on hand and operating cash generation to meet working-capital needs for the next 12 months and did not expect COVID-19 to significantly affect FY2022 results, while warning renewed restrictions or disruption to reopening and delivery schedules could adversely affect operations.
- Management projected approximately $21 million of capital expenditures in FY2023 and $14 million in FY2024 for capacity expansion. Dormitory construction was expected to be ready for use in FY2023.
- A separate $2.7 million acquisition of factory land and buildings was pending; $500,000 had been paid by December 31, with $2.2 million due at closing. The company expected closing before the end of March 2022, subject to seller-related health and quarantine circumstances.
- Customer early-payment programs shorten collection timing but incur charges based on LIBOR plus a spread. The company recorded $148,000 of such charges over nine months and $444,000 of customer advances at quarter-end.
- Key risks include concentration in a small number of customers and suppliers, Jordan political/economic and foreign-currency exposure, reliance on U.S. export demand and the U.S.–Jordan trade agreement, and potential COVID-19-related disruption. Two suppliers represented 53% and 22% of garment and raw-material purchases in Q3.
- The company reported no material current legal proceedings and management did not expect ordinary-course claims to have a material adverse impact. A Jordanian workshop arrangement could require a JOD 250,000 payment (about $353,000) if specified employment requirements are breached. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether customer orders, bookings through July 2022, and shipment schedules convert into revenue as planned, particularly given the 91% nine-month sales concentration in VF Corporation and New Balance.
- Customer and supplier concentration, collection performance, and the ongoing cost and terms of customer early-payment financing.
- Integration and contribution of MK Garments, the timing and funding of the pending property acquisition, and progress against projected capital expenditures.
- Whether higher volumes and export mix can sustain gross-margin improvement as labor, freight, tax, and other operating costs change.
- Cash availability across jurisdictions, including restricted cash and the ability of Jordanian subsidiaries to distribute funds, as well as the impact of currency, political, trade-policy, and pandemic risks.