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EVK > SEC Filings for EVK > Form 10-K/A on 12-Mar-2013All Recent SEC Filings

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Form 10-K/A for EVER-GLORY INTERNATIONAL GROUP, INC.


12-Mar-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations for the year ended December 31, 2011 should be read in conjunction with the Financial Statements and corresponding notes included in this annual Report on Form 10-K. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations, and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors and Special Note Regarding Forward-Looking Statements in this report. We use words such as "anticipate," "estimate," "plan," "project," "continuing," "ongoing," "expect," "believe," "intend," "may," "will," "should," "could," "target", "forecast" and similar expressions to identify forward-looking statements.

Overview

Our Business

We are a leading apparel supply-chain manager and retailer in China. We are listed on the NYSE Amex under the symbol of "EVK".

We classify our businesses into two segments: Wholesale and Retail. Our wholesale business consists of wholesale-channel sales made principally to famous brands, and department stores located throughout Europe, the U.S., Japan and the People's Republic of China ("PRC"). We focus on well-known, middle-to-high grade casual wear, sportswear, and outerwear brands. Our retail business consists of retail-channel sales directly to consumers through retail stores located throughout the PRC.

Although we have our own manufacturing facilities, we currently outsource most of the manufacturing to our long-term contractors as part of our overall business strategy. We believe outsourcing allows us to maximize our production capacity and maintain flexibility while reducing capital expenditures and the costs of keeping skilled workers on production lines during low season. We oversee our long-term contractors with our advanced management solutions and inspect products manufactured by them to ensure that they meet our high quality control standards and timely delivery.

Wholesale Business

We conduct our original design manufacturing ("ODM") operations through four wholly-owned subsidiaries which are located in the Nanjing Jiangning Economic and Technological Development Zone and Shang Fang Town in the Jiangning District in Nanjing, China: Ever-Glory International Group Apparel Inc. ("Ever-Glory Apparel"), Goldenway Nanjing Garments Company Limited ("Goldenway"), Nanjing New-Tailun Garments Company Limited ("New Tailun"), Nanjing Catch-Luck Garments Co., Ltd. ("Catch-Luck"), and one wholly-owned subsidiary incorporated in Samoa, Ever-Glory International Group (HK) Ltd. ("Ever-Glory HK").

Retail Business

We conduct our retail operations through Shanghai LA GO GO Fashion Company Limited ("LA GO GO"), a wholly-owned subsidiary of Ever-Glory Apparel.


Business Objectives

Wholesale Business

We believe the enduring strength of our wholesale business is mainly due to our consistent emphasis on innovative and distinctive product designs that stand for exceptional styling and quality.

The primary business objective for our wholesale segment is to expand our portfolio into higher-class brands, expand our customer base and improve our profit. We believe that our growth opportunities and continued investment initiatives include:

o Expand our global sourcing network

o Expand our overseas low-cost manufacturing base (outside of mainland China);

o Focus on high value-added products and continue our strategy to produce mid to high end apparel

o Continue to emphasize product design and technology utilization.

o Seek strategic acquisitions of international distributors that could enhance global sales and our distribution network; and

Maintain stable revenue increases in the markets while shifting focus to higher margin wholesale markets such as mainland China.

Retail Business

The business objective for our retail segment is to establish a leading brand of women's apparel and to build a nationwide retail network in China. As of December 31, 2011, we had 467 stores (including store-in-stores) which included 210 stores were opened and 36 stores were closed in 2011. We expect to open an additional 80-100 stores in 2012. We believe that our growth opportunities and continued investment initiatives include:


o Build the LA GO GO brand to be recognized as a major player in the mid-end women's apparel market in China;

o Expand the LA GO GO retail network throughout China;

o Improve the LA GO GO retail stores' efficiency and increase same-store sales

o Continue to launch LA GO GO flagship stores in Tier-1 Cities and increase penetration and coverage in Tier-2 and Tier-3 Cities

o Become a multi-brand operator by seeking opportunities for long-term cooperation with reputable international brands and by facilitating international brands entry into the Chinese market.

Seasonality of Business

Our business is affected by seasonal trends, with higher levels of wholesale sales in our third and fourth quarters and higher retail sales in our first and fourth quarters. These trends primarily result from the timing of seasonal wholesale shipments and holiday periods in the retail segment.

Collection Policy

Wholesale business

For our new customers, we generally require orders placed to be backed by letters of credit. For our long-term and established customers with good payment track records, we generally provide payment terms between 30 to 120 days following delivery of finished goods.

Retail business

For store-in-store shops, we generally receive payments from the stores between 60 to 90 days following the date of the register receipt. For our own flagship stores, we receive payments at the same time as the register receipt.

Global Economic Uncertainty

Our business is dependent on consumer demand for our products. We believe that the significant uncertainty in the global economy and a slowdown in the United States and Europe economies have increased our clients' sensitivity to the cost of our products. We have experienced continued pricing pressure. If the global economic environment continues to be weak, these worsening economic conditions could have a negative impact on our sales growth and operating margins in our wholesale segment in 2012.


In addition, economic conditions in the United States and in foreign markets in which we operate could substantially affect our sales and profitability and our cash position and collection of accounts receivable. Global credit and capital markets have experienced unprecedented volatility and disruption. Business credit and liquidity have tightened in much of the world. Some of our suppliers and customers may face credit issues and could experience cash flow problems and other financial hardships. These factors currently have not had an impact on the timeliness of receivable collections from our customers. We cannot predict at this time how this situation will develop and whether accounts receivable may need to be allowed for or written off in the coming quarters.

Despite the various risks and uncertainties associated with the current global economy, we believe our core strengths will continue to allow us to execute our strategy for long-term sustainable growth in revenue, net income and operating cash flow.

Summary of Critical Accounting Policies

We have identified critical accounting policies that, as a result of judgments, uncertainties, uniqueness and complexities of the underlying accounting standards and operation involved could result in material changes to our financial position or results of operations under different conditions or using different assumptions.

Revenue Recognition

We recognize wholesale revenue from product sales, net of value-added taxes, upon delivery for local sales and upon shipment of the products for export sales, at such time title passes to the customer provided however that (i) there are no uncertainties regarding customer acceptance (ii) persuasive evidence of an arrangement exists (iii) the sales price is fixed and determinable, and (iv) collectability is deemed probable. We recognize wholesale revenue from manufacturing fees charged to buyers for the assembly of garments from materials provided by the buyers upon completion of the manufacturing process and shipment of the products for export sales, provided that (i)there are no uncertainties regarding customer acceptance (ii) persuasive evidence of an arrangement exists
(iii) the sales price is fixed and determinable, and (iv) collectability is deemed probable. Retail sales are recorded at the time of register receipt.

Estimates and Assumptions

In preparing our consolidated financial statements, we use estimates and assumptions that affect the reported amounts and disclosures. Our estimates are often based on complex judgments, probabilities and assumptions that we believe to be reasonable, but that are inherently uncertain and unpredictable. We are also subject to other risks and uncertainties that may cause actual results to differ from estimated amounts. Significant estimates in 2011 and 2010 include the assumptions used to value warrants and the estimates of the allowance for deferred tax assets.


Recently Issued Accounting Pronouncements

In May 2011, the FASB issued updated accounting guidance related to fair value measurements and disclosures that result in common fair value measurements and disclosures between GAAP and International Financial Reporting Standards. This guidance includes amendments that clarify the intent about the application of existing fair value measurements and disclosures, while other amendments change a principle or requirement for fair value measurements or disclosures. This guidance is effective for interim and annual periods beginning after December 15, 2011. The Company does not believe the adoption of this guidance will have a material impact on its consolidated financial statements.

In June 2011, the FASB issued guidance to amend the presentation of comprehensive income to allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. This guidance is effective for interim and annual periods beginning after December 15, 2011, and is to be applied retrospectively. The Company does not believe the adoption of this guidance will have a material impact on its consolidated financial statements.

In September 2011, the FASB issued new guidance on testing goodwill for impairment. This guidance gives companies the option to perform a qualitative assessment to first assess whether the fair value of a reporting unit is less than its carrying amount. If an entity determines it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. This guidance is effective for fiscal years beginning after December 15, 2011. The Company does not believe the adoption of this guidance will have a material impact on its consolidated financial statements.

Results of Operations

The following table summarizes our results of operations for the years ended December 31, 2011 and 2010. The table and the discussion below should be read in conjunction with the consolidated financial statements and the notes thereto appearing elsewhere in this report.


                                           Year Ended December 31
                                   2011                          2010
                                  (in U.S. Dollars, except for percentages)
Sales                     $ 215,779,014       100.0 %   $ 134,145,710       100.0 %
Gross Profit                 44,544,115        20.6        26,158,368        19.5
Operating Expenses           32,490,543        15.1        19,542,449        14.6
Income From Operations       12,053,572         5.6         6,615,919         4.9
Other Expenses (Income)         366,323         0.2        (1,227,073 )      (0.9 )
Income Tax Expense            2,040,246         0.9         1,134,214         0.8
Net Income                $   9,647,003         4.5 %   $   6,708,778         5.0 %

Revenue

The following table sets forth a breakdown of our total sales, by region, for
the years ended December 31, 2011 and 2010.

                                                                                                        Growth in 2011
                                                     % of total                         % of total      compared with
                                      2011             sales             2010             sales              2010
Wholesales business
The People's Republic of China    $  61,908,224             28.7 %   $  27,880,145             20.8 %            122.1 %
UK and Other Europe countries        27,161,916             12.6        26,260,437             19.6                3.4
Germany                              31,232,561             14.5        21,784,300             16.2               43.4
United States                        21,687,984             10.1        16,745,746             12.5               29.5
Japan                                20,245,785              9.4        12,174,922              9.1               66.3
Total Wholesales business           162,236,470             75.2       104,845,550             78.2               54.7
Retail business                      53,542,544             24.8        29,300,160             21.8               82.7
 Total sales                      $ 215,779,014            100.0 %   $ 134,145,710            100.0 %             60.9 %

Total sales for the year ended December 31, 2011 were $215.8 million, an increase of 60.9% from the year ended December 31, 2010. This increase was primarily attributable to increased sales in our retail business as well as our wholesale business expansion.


Sales generated from our wholesale business contributed $162.2 million or 75.2% of our total sales for the year ended December 31, 2011, compared to $104.8 million or 78.2% for the year ended December 31, 2010. This increase was primarily attributable to increased sales in the PRC, Germany, the United Kingdom and other European Countries and the United States. The increased sales in the wholesale segment was primarily due to the following factors:(i) the progressive adjustment of our wholesale client and product portfolio which resulted in an increase of orders in the wholesale segment; (ii) in response to the global economic uncertainty, in mid 2010 we adjusted our sales strategy to develop more wholesale customers in China. (iii) expansion of our outsourcing base to Vietnam and Cambodia starting from the third quarter of 2010, which significantly increased our production capacity to process more orders;

Sales generated from our retail business contributed $53.5 million or 24.8% of our total sales for the year ended December 31, 2011, an increase of 82.7% compared to $29.3 million or 21.8% for the year ended December 31, 2010. This increase was primarily due to the increase of same store sales and new stores opened. We had 467 LA GO GO stores as of December 31, 2011, compared to 293 LA GO GO stores at December 31, 2010. In 2011 we opened 210 new LA GO GO stores.

Costs and Expenses

Cost of Sales and Gross Margin

Cost of goods sold includes the direct raw material cost, direct labor cost, manufacturing overheads including depreciation of production equipment and rent for retail stores, consistent with the revenue earned. Cost of goods sold excludes warehousing costs, which historically have not been significant.

The following table sets forth the components of our cost of sales and gross profit both in amounts and as a percentage of total sales for the years ended December 31, 2011 and 2010.


                                                  For the Year Ended December 31,                      Growth(Decrease)
                                               2011                            2010                             in 2011
                                             (in U.S. dollars, except for percentages)              compared with 2010
Wholesale Sales                     $ 162,236,470         100.0 %   $ 104,845,550         100.0 %                  54.7 %
                    Raw Materials      79,383,219          48.9        49,361,480          47.1                    60.8
                            Labor       4,030,556           2.5         3,972,187           3.8                     1.5
      Outsourced Production Costs      51,995,950          32.0        34,958,995          33.3                    48.7
               Other and Overhead         551,687           0.3           456,197           0.4                    20.9
Total Cost of Sales for Wholesale     135,961,412          83.8        88,748,859          84.6                    53.2
Gross Profit for Wholesale             26,275,058          16.2        16,096,691          15.4                    63.2
Net Sales for Retail                   53,542,544         100.0        29,300,160         100.0                    82.7
                 Production Costs      16,794,347          31.4         8,897,731          30.4                    88.7
                             Rent      18,479,141          34.5        10,340,752          35.3                    78.7
Total Cost of Sales for Retail         35,273,488          65.9        19,238,483          65.7                    83.3
Gross Profit for Retail                18,269,056          34.1        10,061,677          34.3                    81.6
Total Cost of Sales                   171,234,899          79.4       107,987,342          80.5                    58.6
Gross Profit                        $  44,544,115          20.6 %   $  26,158,368          19.5 %                  70.3 %

For our wholesale business raw material costs increased 60.8% to $79.4 million in 2011 from $49.4 million in 2010. As a percent of sales, raw material costs accounted for 48.9% of our total sales in 2011, an increase of 1.8% compared to 2010. The increase was mainly due to increased raw material prices.

For our wholesale business labor costs increased 1.5% to $4.0 million in 2011 from 2010. As a percent of sales, labor costs accounted for 2.5% of our total sales in 2011, a decrease of 1.3% compared to 2010. Our own factories' product capacity is limited and most of the increased orders in 2011 were outsourced.

Outsourced production costs for our wholesale business increased 48.7% to $52.0 million in 2011 from $35.0 million in 2010. As a percent of sales, outsourced production costs were 32.0% of our total sales in 2011, a decrease of 1.3% compared to 2010. This decrease was primarily attributable to: (i) the outsourced manufacturing costs in the PRC decreased because we had available domestic capacity in 2011, compared with limited capacity in 2010, and our Chinese suppliers were willing to lower their prices due to their excess production capacity (ii) outsourced orders of approximately $7.0 million to our related entities in Vietnam and Cambodia, which have lower labor costs compared to orders outsourced to Chinese factories.

Overhead and other expenses for our wholesale business accounted for 0.3% of our total sales in 2011, compared to 0.4% of total sales in 2010.

For our wholesale business gross profit in 2011 was $26.3 million, an increase of 63.2% compared to 2010. Gross margin was 16.2% in 2011, an increase of 0.8% compared to 2010.


For our retail business production costs were $16.8 million in 2011 as compared to $8.9 million in 2010. As a percent of sales, retail production costs accounted for 31.4% of our total sales in 2011, compared to 30.4% of total sales in 2010. The increase was due to we reduced sales prices for increased sales volume.

Rent costs for our retail business were $18.5 million in 2011 compared to $10.3 million in 2010. As a percent of sales, rent costs accounted for 34.5% of our total retail sales in 2011, compared to 35.3% of total retail sales in 2010. Total rent costs increased as a result of the increase in the number of our stores. The decrease in rent costs as a percentage of total retail sales was due to an increase of same store sales in 2011.

Gross profit in our retail business in 2011 was $18.3 million and gross margin was 34.1%. Gross profit in our retail business in 2010 was $10.1 million and gross margin was 34.3%.

Total cost of sales in 2011 was $171.2 million, compared to $108.0 million in 2010, an increase of 58.6%. As a percentage of total sales, cost of sales decreased to 79.4% of total sales in 2011, compared to 80.5% of total sales in 2010. Consequently, gross margin increased to 20.6% in 2011 from 19.5% in 2010.

We purchase the majority of our raw materials directly from numerous local fabric and accessories suppliers. Some of our customers also furnish us with raw materials so that we can manufacture their products. For our wholesale business, purchases from our five largest suppliers represented approximately 15.8% and 18.2% of raw materials purchases in 2011 and 2010, respectively. No single supplier provided more than 10% of our raw materials purchases in 2011 and 2010. For our retail business, purchases from our five largest suppliers represented approximately 27.1% and 26.4% of raw materials purchases in 2011 and 2010, respectively. No single supplier provided more than 10% of our total purchases in 2011 and 2010. We have not experienced difficulty in obtaining raw materials essential to our business, and we believe we maintain good relationships with our suppliers.

We also purchase finished goods from contract manufacturers. For our wholesale business, purchases from our five largest contract manufacturers represented approximately 40.1% and 39.7% of finished goods purchases in 2011 and 2010, respectively. One contract manufacturer provided approximately 12.7% of our finished goods purchases in 2011. Two contract manufacturers provided approximately 13.8% and 10.3% of our finished goods purchases in 2010. For our retail business, our five largest contract manufacturers represented approximately 24.6% and 35.1% of finished goods purchases in 2011 and 2010, respectively. No single contract manufacturer provided more than 10% of our finished goods purchases in 2011. One contract manufacturer provided 11.6% of our finished goods purchases in 2010. We have not experienced difficulty in obtaining finished products from our contract manufacturers and we believe we maintain good relationships with our contract manufacturers.

Selling, General and Administrative Expenses

Our selling expenses consist primarily of local transportation, unloading charges, product inspection charges, salaries for retail staff and decoration and marketing expenses associated with our retail business.


Our general and administrative expenses include administrative salaries, office expenses, certain depreciation and amortization charges, repairs and maintenance, legal and professional fees, warehousing costs and other expenses that are not directly attributable to our revenues.

Costs of our distribution network that are excluded from cost of sales consist of local transportation and unloading charges, and product inspection charges. Accordingly our gross profit amounts may not be comparable to those of other companies who include these amounts in cost of sales.

                                                    For the Years Ended December 31,
                                                  2011                             2010                 Increase
                                               (in U.S. Dollars, except for percentages)
Gross Profit                          $   44,544,115           20.6 %   $ 26,158,368          19.5 %         70.3 %
Operating Expenses
Selling Expenses                          18,145,937            8.4        9,760,424           7.3           85.9
General and Administrative Expenses       14,344,606            6.6        9,782,025           7.3           46.6
Total Operating Expenses                  32,490,543           15.1       19,542,449          14.6           66.3
Income from Operations                $   12,053,572            5.6 %   $  6,615,919           4.9 %         82.2 %

Selling expenses were $18.1 million in 2011, an increase of 85.9% or $8.4 million compared to 2010. As a percent of sales, Selling expense accounted for 8.4% of our total sales in 2011, an increase of 1.1% compared to 2010. The increase was attributable to an increase in salaries and the number of staff at LA GO GO, as well as the increased decoration and marketing expenses associated with the promotion of LA GO GO.

General and administrative expenses were $14.3 million in 2011, an increase of $4.6 million compared to 2010. As a percent of sales, general and administrative expenses accounted for 6.6% of our total sales in 2011, a decrease of 0.7% compared to 2010. The general and administrative expenses increase was attributable to an increase in payroll for additional management, and design and marketing staff as a result of our business expansion. The decrease in general and administrative expenses as a percentage of total sales was due to an increase in our sales.

Income from Operations

Income from operations increased 82.2% to $12.1 million in 2011 from $6.6 million in 2010. As a percent of sales, income from operations accounted for 5.6% of our total sales in 2011, an increase of 0.7% compared to 2010.

Interest Expense

Interest expense was $1.4 million in 2011, an increase of 295% compared to the same period in 2010. The increase was due to the increased bank loans as a result of our business expansion.


Change in fair value of derivative liability

Change in fair value of derivative liability was the gain of $0.2 million and . . .

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