Jerash Holdings (US), Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended March 31, 2018; comparative period is fiscal 2017. The report was filed June 28, 2018. Jerash manufactures and exports knitted sport and outerwear from Jordan; the May 2017 merger was accounted for as a reverse recapitalization, with Global Trend treated as the accounting acquirer.
Financial performance and liquidity
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $69.3 million | $62.0 million | +12% |
| Gross profit | $18.0 million | $15.4 million | +17% |
| Gross margin | 26% | 25% | +1 percentage point |
| SG&A | $6.1 million | $4.7 million | +30% |
| Income before tax | $11.8 million | $10.6 million | +11% |
| Net income | $10.4 million | $10.6 million | −2.3% |
| Operating cash flow | $5.2 million | $7.7 million | Lower |
- Management attributed sales growth and improved gross margin to higher-value product mix, higher selling prices, increased production volume, economies of scale, and improved production efficiency. SG&A rose partly due to a full year of Hong Kong sales and marketing operations and public-company, merger, and financing-related costs.
- Net income included a provisional $1.4 million U.S. transition tax charge under the Tax Cuts and Jobs Act, payable over eight years. Final tax accounting remained under review; possible GILTI effects had not been determined.
- At March 31, 2018, cash was $8.6 million, restricted cash $3.6 million, current assets $36.9 million, current liabilities $7.9 million, and working capital $29.0 million. The current ratio was 4.7:1, versus 2.5:1 a year earlier. Total liabilities were $9.2 million, including $1.4 million of transition-tax payable.
- HSBC credit facilities totaled up to $20 million; $980,195 was drawn at year-end. Borrowings were due within 120 days or on demand, secured by guarantees and restricted deposits, and the facilities were subject to renewal. The filing said the company was negotiating extensions.
- Cash increased by $4.9 million during the year. Operating cash flow fell mainly because accounts payable declined after payments were made earlier; investing cash outflow was $0.5 million and financing cash inflow was $0.3 million.
Material changes and business context
- VF Corporation accounted for approximately 78.8% of FY2018 sales, compared with 47.8% in FY2017 as reported in the customer table; management also described VF as approximately 79% in both years. Substantially all sales to VF are associated with The North Face. The filing reports no long-term customer contracts or minimum purchase commitments.
- The transition from related-party intermediary Ford Glory to direct customer sales continued: sales to Ford Glory fell from $23.4 million in FY2017 to zero in FY2018. Ford Glory continued to support $44.0 million of FY2018 sales during the transition, without additional fees.
- Approximately 88% of FY2018 revenue came from the United States. Outerwear represented approximately 89.5% of revenue; jackets were approximately 48% of shipped pieces. Annual capacity was approximately 6.5 million pieces.
- Operations are concentrated in Jordan, with three factory units and two warehouses. U.S. duty-free access under applicable trade arrangements and an EU duty-free agreement extended to Jerash in December 2017 are stated competitive benefits.
- Jerash reported approximately $0.9 million of FY2018 capital expenditures and projected about $1.7 million in each of FY2019 and FY2020 for capacity enhancement. It expected available cash and operating cash generation to cover working-capital needs for 12 months from the filing date.
Outlook, risks, contingencies, and unusual items
- No formal revenue or earnings guidance was provided. Management described plans to expand sales with existing and new customers, diversify product offerings and reduce reliance on VF; it cautioned that these efforts may not succeed.
- Major risks include customer concentration and lack of purchase commitments; apparel retail cyclicality and seasonality; dependence on Jordanian production facilities; political and security instability; labor, supply-chain, delivery, and quality risks; currency and trade-policy changes; and possible loss or modification of trade preferences.
- The filing disclosed related-party arrangements, including consulting agreements with entities owned by the CEO and a significant stockholder, each at $300,000 annually, beginning January 2018. The company also noted potential conflicts of interest in related-party dealings.
- A 5,000-square-meter Jordan workshop project was expected to be completed by mid-2019. The company agreed to employ at least 500 workers for the first 12 months after completion; noncompliance could trigger a JOD250,000 (about $353,000) payment. A separate 450-square-meter workshop was expected to be completed in 2018.
- No material legal proceedings were reported. The auditor issued an unqualified opinion on the financial statements but did not opine on internal controls. Management judged disclosure controls effective; the filing also describes a previously identified material weakness related to accounting and financial-reporting expertise and planned further control work.
- Subsequent to year-end, the May 2, 2018 IPO issued 1.43 million shares at $7.00 and generated approximately $8.9 million in net proceeds. The company did not pay a FY2018 dividend and said it did not intend to pay dividends in the near future.
Important facts for investors to verify
- Reconcile the filing’s customer concentration disclosures: the customer table shows VF at 78.8% in FY2018 and 47.8% in FY2017, while narrative disclosures describe approximately 79% in both years.
- Confirm HSBC facility renewal status, current borrowings, collateral requirements, and release or continuation of personal guarantees and restricted deposits.
- Track final transition-tax calculations and any GILTI liability, and assess whether the reported provisional charge changes.
- Assess whether customer diversification, new products, and planned capacity investments reduce reliance on VF and translate into sustained cash generation.
- Monitor the Jordan workshop employment commitments, project timelines, and potential contractual penalty, as well as remediation of financial-reporting control weaknesses.