Attached files
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EX-32 - EX-32 - LEVI STRAUSS & CO | f55493exv32.htm |
EX-31.2 - EX-31.2 - LEVI STRAUSS & CO | f55493exv31w2.htm |
EX-31.1 - EX-31.1 - LEVI STRAUSS & CO | f55493exv31w1.htm |
Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
(Mark One) | ||
þ
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the Quarterly Period Ended February 28, 2010 | ||
or
|
||
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number:
002-90139
LEVI STRAUSS &
CO.
(Exact Name of Registrant as
Specified in Its Charter)
Delaware (State or Other Jurisdiction of Incorporation or Organization) |
94-0905160 (I.R.S. Employer Identification No.) |
1155 Battery Street, San Francisco, California 94111
(Address of Principal Executive
Offices) (Zip Code)
(415) 501-6000
(Registrants telephone number, including area code)
None
(Former Name, Former Address and Former Fiscal Year, if
Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes o No þ
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
|
Accelerated filer o |
Non-accelerated filer þ (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The Company is privately held. Nearly all of its common equity
is owned by descendants of the family of the Companys
founder, Levi Strauss, and their relatives. There is no trading
in the common equity and therefore an aggregate market value
based on sales or bid and asked prices is not determinable.
Indicate the number of shares outstanding of each of the
issuers classes of common stock, as of the latest
practicable date.
Common Stock $.01 par value 37,302,432 shares
outstanding on April 8, 2010
LEVI
STRAUSS & CO. AND SUBSIDIARIES
INDEX TO
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 2010
2
Table of Contents
PART I
FINANCIAL INFORMATION
Item 1. | CONSOLIDATED FINANCIAL STATEMENTS |
LEVI
STRAUSS & CO. AND SUBSIDIARIES
(Unaudited) |
||||||||
February 28, |
November 29, |
|||||||
2010 | 2009 | |||||||
(Dollars in thousands) | ||||||||
ASSETS
|
||||||||
Current Assets:
|
||||||||
Cash and cash equivalents
|
$ | 315,369 | $ | 270,804 | ||||
Restricted cash
|
3,401 | 3,684 | ||||||
Trade receivables, net of allowance for doubtful accounts of
$21,667 and $22,523
|
455,457 | 552,252 | ||||||
Inventories:
|
||||||||
Raw materials
|
6,146 | 6,818 | ||||||
Work-in-process
|
9,297 | 10,908 | ||||||
Finished goods
|
440,950 | 433,546 | ||||||
Total inventories
|
456,393 | 451,272 | ||||||
Deferred tax assets, net
|
134,477 | 135,508 | ||||||
Other current assets
|
103,276 | 92,344 | ||||||
Total current assets
|
1,468,373 | 1,505,864 | ||||||
Property, plant and equipment, net of accumulated depreciation
of $659,462 and $664,891
|
421,941 | 430,070 | ||||||
Goodwill
|
239,707 | 241,768 | ||||||
Other intangible assets, net
|
97,020 | 103,198 | ||||||
Non-current deferred tax assets, net
|
587,500 | 601,526 | ||||||
Other assets
|
106,876 | 106,955 | ||||||
Total assets
|
$ | 2,921,417 | $ | 2,989,381 | ||||
LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS DEFICIT | ||||||||
Current Liabilities:
|
||||||||
Short-term borrowings
|
$ | 27,759 | $ | 18,749 | ||||
Current maturities of long-term debt
|
| | ||||||
Current maturities of capital leases
|
1,649 | 1,852 | ||||||
Accounts payable
|
198,059 | 198,220 | ||||||
Other accrued liabilities
|
211,851 | 271,019 | ||||||
Accrued salaries, wages and employee benefits
|
155,461 | 195,434 | ||||||
Accrued interest payable
|
34,431 | 28,709 | ||||||
Accrued income taxes
|
29,069 | 12,993 | ||||||
Total current liabilities
|
658,279 | 726,976 | ||||||
Long-term debt
|
1,793,434 | 1,834,151 | ||||||
Long-term capital leases
|
4,638 | 5,513 | ||||||
Postretirement medical benefits
|
154,566 | 156,834 | ||||||
Pension liability
|
378,453 | 382,503 | ||||||
Long-term employee related benefits
|
91,885 | 97,508 | ||||||
Long-term income tax liabilities
|
57,689 | 55,862 | ||||||
Other long-term liabilities
|
44,202 | 43,480 | ||||||
Total liabilities
|
3,183,146 | 3,302,827 | ||||||
Commitments and contingencies (Note 7)
|
||||||||
Temporary equity
|
3,726 | 1,938 | ||||||
Stockholders Deficit:
|
||||||||
Levi Strauss & Co. stockholders deficit
|
||||||||
Common stock $.01 par value;
270,000,000 shares authorized; 37,300,215 shares and
37,284,741 shares issued and outstanding
|
373 | 373 | ||||||
Additional paid-in capital
|
39,331 | 39,532 | ||||||
Accumulated deficit
|
(66,803 | ) | (123,157 | ) | ||||
Accumulated other comprehensive loss
|
(254,998 | ) | (249,867 | ) | ||||
Total Levi Strauss & Co. stockholders deficit
|
(282,097 | ) | (333,119 | ) | ||||
Noncontrolling interest
|
16,642 | 17,735 | ||||||
Total stockholders deficit
|
(265,455 | ) | (315,384 | ) | ||||
Total liabilities, temporary equity and stockholders
deficit
|
$ | 2,921,417 | $ | 2,989,381 | ||||
The accompanying notes are an integral part of these
consolidated financial statements.
3
Table of Contents
Three Months Ended | ||||||||
February 28, |
March 1, |
|||||||
2010 | 2009 | |||||||
(Dollars in thousands) (Unaudited) | ||||||||
Net sales
|
$ | 1,016,007 | $ | 931,254 | ||||
Licensing revenue
|
19,199 | 20,210 | ||||||
Net revenues
|
1,035,206 | 951,464 | ||||||
Cost of goods sold
|
502,278 | 506,343 | ||||||
Gross profit
|
532,928 | 445,121 | ||||||
Selling, general and administrative expenses
|
425,677 | 339,081 | ||||||
Operating income
|
107,251 | 106,040 | ||||||
Interest expense
|
(34,173 | ) | (34,690 | ) | ||||
Other income, net
|
12,463 | 2,989 | ||||||
Income before income taxes
|
85,541 | 74,339 | ||||||
Income tax expense
|
29,672 | 26,349 | ||||||
Net income
|
55,869 | 47,990 | ||||||
Net loss attributable to noncontrolling interest
|
485 | 79 | ||||||
Net income attributable to Levi Strauss & Co.
|
$ | 56,354 | $ | 48,069 | ||||
The accompanying notes are an integral part of these
consolidated financial statements.
4
Table of Contents
Three Months Ended | ||||||||
February 28, |
March 1, |
|||||||
2010 | 2009 | |||||||
(Dollars in thousands) | ||||||||
(Unaudited) | ||||||||
Cash Flows from Operating Activities:
|
||||||||
Net income
|
$ | 55,869 | $ | 47,990 | ||||
Adjustments to reconcile net income to net cash provided by
operating activities:
|
||||||||
Depreciation and amortization
|
25,524 | 17,799 | ||||||
Asset impairments
|
580 | 80 | ||||||
Gain on disposal of property, plant and equipment
|
(121 | ) | (29 | ) | ||||
Unrealized foreign exchange (gains) losses
|
(12,677 | ) | 604 | |||||
Realized loss (gain) on settlement of forward foreign exchange
contracts not designated for hedge accounting
|
2,364 | (3,390 | ) | |||||
Employee benefit plans amortization from accumulated other
comprehensive loss
|
944 | (4,891 | ) | |||||
Employee benefit plans curtailment loss (gain), net
|
100 | (1,808 | ) | |||||
Amortization of deferred debt issuance costs
|
1,144 | 1,053 | ||||||
Stock-based compensation
|
1,586 | 1,524 | ||||||
Allowance for doubtful accounts
|
1,306 | 2,058 | ||||||
Change in operating assets and liabilities (excluding assets and
liabilities acquired):
|
||||||||
Trade receivables
|
78,826 | 82,096 | ||||||
Inventories
|
(20,683 | ) | (22,476 | ) | ||||
Other current assets
|
(11,326 | ) | (2,776 | ) | ||||
Other non-current assets
|
(6,103 | ) | (1,280 | ) | ||||
Accounts payable and other accrued liabilities
|
(18,224 | ) | (70,532 | ) | ||||
Income tax liabilities
|
15,591 | 14,946 | ||||||
Accrued salaries, wages and employee benefits
|
(38,560 | ) | (49,103 | ) | ||||
Long-term employee related benefits
|
(3,772 | ) | (1,571 | ) | ||||
Other long-term liabilities
|
3,220 | (1,172 | ) | |||||
Other, net
|
(61 | ) | 537 | |||||
Net cash provided by operating activities
|
75,527 | 9,659 | ||||||
Cash Flows from Investing Activities:
|
||||||||
Purchases of property, plant and equipment
|
(36,365 | ) | (14,687 | ) | ||||
Proceeds from sale of property, plant and equipment
|
914 | 99 | ||||||
(Payments) proceeds on settlement of forward foreign exchange
contracts not designated for hedge accounting
|
(2,364 | ) | 3,390 | |||||
Acquisitions, net of cash acquired
|
| (3,479 | ) | |||||
Other
|
(114 | ) | | |||||
Net cash used for investing activities
|
(37,929 | ) | (14,677 | ) | ||||
Cash Flows from Financing Activities:
|
||||||||
Repayments of long-term debt and capital leases
|
(454 | ) | (18,195 | ) | ||||
Short-term borrowings, net
|
8,884 | 1,711 | ||||||
Restricted cash
|
(32 | ) | (385 | ) | ||||
Dividends to noncontrolling interest shareholders
|
| (694 | ) | |||||
Net cash provided by (used for) financing activities
|
8,398 | (17,563 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents
|
(1,431 | ) | (2,138 | ) | ||||
Net increase (decrease) in cash and cash equivalents
|
44,565 | (24,719 | ) | |||||
Beginning cash and cash equivalents
|
270,804 | 210,812 | ||||||
Ending cash and cash equivalents
|
$ | 315,369 | $ | 186,093 | ||||
Supplemental disclosure of cash flow information:
|
||||||||
Cash paid during the period for:
|
||||||||
Interest
|
$ | 26,283 | $ | 27,550 | ||||
Income taxes
|
16,500 | 9,538 |
The accompanying notes are an integral part of these
consolidated financial statements.
5
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 2010
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 2010
NOTE 1: | SIGNIFICANT ACCOUNTING POLICIES |
Nature of
Operations
Levi Strauss & Co. (the Company) is one of
the worlds leading branded apparel companies. The Company
designs and markets jeans, casual and dress pants, tops,
jackets, footwear and related accessories, for men, women and
children under the
Levis®,
Dockers®
and Signature by Levi Strauss &
Co.tm
brands. The Company markets its products in three geographic
regions: Americas, Europe and Asia Pacific.
Basis of
Presentation and Principles of Consolidation
The unaudited consolidated financial statements of the Company
and its wholly-owned and majority-owned foreign and domestic
subsidiaries are prepared in conformity with generally accepted
accounting principles in the United States (U.S.)
for interim financial information. In the opinion of management,
all adjustments necessary for a fair statement of the financial
position and the results of operations for the periods presented
have been included. These unaudited consolidated financial
statements should be read in conjunction with the audited
consolidated financial statements of the Company for the year
ended November 29, 2009, included in the Annual Report on
Form 10-K
filed by the Company with the Securities and Exchange Commission
(SEC) on February 9, 2010.
The unaudited consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant
intercompany transactions have been eliminated. Management
believes the disclosures are adequate to make the information
presented herein not misleading. The results of operations for
the three months ended February 28, 2010, may not be
indicative of the results to be expected for any other interim
period or the year ending November 28, 2010.
The Companys fiscal year ends on the last Sunday of
November in each year, although the fiscal years of certain
foreign subsidiaries are fixed at November 30 due to local
statutory requirements. Apart from these subsidiaries, each
quarter of both fiscal years 2010 and 2009 consists of
13 weeks. All references to years relate to fiscal years
rather than calendar years.
Subsequent events have been evaluated through the date these
financial statements were issued.
In 2010, the Company became subject to disclosure provisions
which require that amounts attributable to noncontrolling
interests (formerly referred to as minority
interests) be clearly identified and presented separately
from the Companys interests in the consolidated financial
statements. Accordingly, prior-year amounts relating to the
16.4% noncontrolling interest in Levi Strauss Japan K.K., the
Companys Japanese affiliate, have been reclassified to
conform to the new presentation.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial
statements and the related notes to consolidated financial
statements. Estimates are based upon historical factors, current
circumstances and the experience and judgment of the
Companys management. Management evaluates its estimates
and assumptions on an ongoing basis and may employ outside
experts to assist in its evaluations. Changes in such estimates,
based on more accurate future information, or different
assumptions or conditions, may affect amounts reported in future
periods.
6
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (continued)
FOR THE
QUARTERLY PERIOD ENDED FEBRUARY 28, 2010
Recently
Issued Accounting Standards
There have been no developments to recently issued accounting
standards, including the expected dates of adoption and
estimated effects on the Companys consolidated financial
statements, from those disclosed in the Companys 2009
Annual Report on
Form 10-K.
NOTE 2: | GOODWILL AND OTHER INTANGIBLE ASSETS |
The changes in the carrying amount of goodwill by business
segment for the three months ended February 28, 2010, were
as follows:
Asia |
||||||||||||||||
Americas | Europe | Pacific | Total | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Balance, November 29, 2009
|
$ | 207,423 | $ | 32,080 | $ | 2,265 | $ | 241,768 | ||||||||
Additions
|
| 765 | | 765 | ||||||||||||
Foreign currency fluctuation
|
2 | (2,772 | ) | (56 | ) | (2,826 | ) | |||||||||
Balance, February 28, 2010
|
$ | 207,425 | $ | 30,073 | $ | 2,209 | $ | 239,707 | ||||||||
Other intangible assets, net, were as follows:
February 28, 2010 | November 29, 2009 | |||||||||||||||||||||||
Gross |
Accumulated |
Gross |
Accumulated |
|||||||||||||||||||||
Carrying Value | Amortization | Total | Carrying Value | Amortization | Total | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Unamortized intangible assets:
|
||||||||||||||||||||||||
Trademarks
|
$ | 42,743 | $ | | $ | 42,743 | $ | 42,743 | $ | | $ | 42,743 | ||||||||||||
Amortized intangible assets:
|
||||||||||||||||||||||||
Acquired contractual rights
|
45,964 | (8,872 | ) | 37,092 | 46,529 | (6,019 | ) | 40,510 | ||||||||||||||||
Customer lists
|
20,366 | (3,181 | ) | 17,185 | 22,340 | (2,395 | ) | 19,945 | ||||||||||||||||
$ | 109,073 | $ | (12,053 | ) | $ | 97,020 | $ | 111,612 | $ | (8,414 | ) | $ | 103,198 | |||||||||||
The estimated useful lives of the Companys amortized
intangible assets range from two to eight years. For the three
months ended February 28, 2010, amortization of these
intangible assets was $3.9 million, and is included in
Selling, general and administrative expenses in the
Companys consolidated statements of income. There have
been no material changes to the estimated amortization of these
intangible assets for the next five fiscal years from those
disclosed in the Companys 2009 Annual Report on
Form 10-K.
7
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (continued)
FOR THE
QUARTERLY PERIOD ENDED FEBRUARY 28, 2010
NOTE 3: | FAIR VALUE OF FINANCIAL INSTRUMENTS |
The following table presents the Companys financial
instruments that are carried at fair value:
February 28, 2010 | November 29, 2009 | |||||||||||||||||||||||
Fair Value Estimated Using | Fair Value Estimated Using | |||||||||||||||||||||||
Leve1 1 |
Level 2 |
Leve1 1 |
Level 2 |
|||||||||||||||||||||
Fair Value | Inputs(1) | Inputs(2) | Fair Value | Inputs(1) | Inputs(2) | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Financial assets carried at fair value
|
||||||||||||||||||||||||
Rabbi trust assets
|
$ | 16,994 | $ | 16,994 | $ | | $ | 16,855 | $ | 16,855 | $ | | ||||||||||||
Forward foreign exchange contracts,
net(3)
|
468 | | 468 | 721 | | 721 | ||||||||||||||||||
Total financial assets carried at fair value
|
$ | 17,462 | $ | 16,994 | $ | 468 | $ | 17,576 | $ | 16,855 | $ | 721 | ||||||||||||
Financial liabilities carried at fair value
|
||||||||||||||||||||||||
Forward foreign exchange contracts,
net(3)
|
$ | 6,919 | $ | | $ | 6,919 | $ | 14,519 | $ | | $ | 14,519 | ||||||||||||
Interest rate swap, net
|
751 | | 751 | 1,451 | | 1,451 | ||||||||||||||||||
Total financial liabilities carried at fair value
|
$ | 7,670 | $ | | $ | 7,670 | $ | 15,970 | $ | | $ | 15,970 | ||||||||||||
(1) | Fair values estimated using Level 1 inputs are inputs which consist of quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Rabbi trust assets consist of a diversified portfolio of equity, fixed income and other securities. | |
(2) | Fair values estimated using Level 2 inputs are inputs, other than quoted prices, that are observable for the asset or liability, either directly or indirectly and include among other things, quoted prices for similar assets or liabilities in markets that are active or inactive as well as inputs other than quoted prices that are observable. For forward foreign exchange contracts, inputs include foreign currency exchange and interest rates and credit default swap prices. For the interest rate swap, for which the Companys fair value estimate incorporates discounted future cash flows using a forward curve mid-market pricing convention, inputs include LIBOR forward rates and credit default swap prices. | |
(3) | The Companys forward foreign exchange contracts are subject to International Swaps and Derivatives Association, Inc. (ISDA) master agreements. These agreements are signed between the Company and each respective financial institution, and permit the net-settlement of forward foreign exchange contracts on a per institution basis. |
The following table presents the carrying value
including accrued interest and estimated fair value
of the Companys financial instruments that are carried at
adjusted historical cost:
February 28, 2010 | November 29, 2009 | |||||||||||||||
Carrying |
Estimated |
Carrying |
Estimated |
|||||||||||||
Value | Fair Value(1) | Value | Fair Value(1) | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Financial liabilities carried at adjusted historical cost
|
||||||||||||||||
Senior revolving credit facility
|
$ | 108,275 | $ | 104,486 | $ | 108,489 | $ | 103,618 | ||||||||
U.S. dollar notes
|
814,355 | 844,453 | 817,824 | 852,067 | ||||||||||||
Euro senior notes
|
354,541 | 359,665 | 379,935 | 379,935 | ||||||||||||
Senior term loan
|
323,511 | 300,063 | 323,497 | 291,163 | ||||||||||||
Yen-denominated Eurobonds
|
227,074 | 197,399 | 232,494 | 197,448 | ||||||||||||
Short-term and other borrowings
|
28,298 | 28,298 | 19,027 | 19,027 | ||||||||||||
Total financial liabilities carried at adjusted historical cost
|
$ | 1,856,054 | $ | 1,834,364 | $ | 1,881,266 | $ | 1,843,258 | ||||||||
(1) | Fair value estimate incorporates mid-market price quotes. |
8
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (continued)
FOR THE
QUARTERLY PERIOD ENDED FEBRUARY 28, 2010
NOTE 4: | DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES |
As of February 28, 2010, the Company had forward foreign
exchange contracts to buy $372.7 million and to sell
$121.6 million against various foreign currencies. These
contracts are at various exchange rates and expire at various
dates through December 2010.
The table below provides data about the carrying values of
derivative instruments and non-derivative instruments designated
as net investment hedges:
February 28, 2010 | November 29, 2009 | |||||||||||||||||||||||
Assets | (Liabilities) | Assets | (Liabilities) | |||||||||||||||||||||
Derivative |
Derivative |
|||||||||||||||||||||||
Carrying |
Carrying |
Net Carrying |
Carrying |
Carrying |
Net Carrying |
|||||||||||||||||||
Value | Value | Value | Value | Value | Value | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Derivatives not designated as hedging instruments
|
||||||||||||||||||||||||
Forward foreign exchange
contracts(1)
|
$ | 686 | $ | (218 | ) | $ | 468 | $ | 1,189 | $ | (468 | ) | $ | 721 | ||||||||||
Forward foreign exchange
contracts(2)
|
1,860 | (8,779 | ) | (6,919 | ) | 5,675 | (20,194 | ) | (14,519 | ) | ||||||||||||||
Interest rate
contracts(2)
|
| (751 | ) | (751 | ) | | (1,451 | ) | (1,451 | ) | ||||||||||||||
Total derivatives not designated as hedging instruments
|
$ | 2,546 | $ | (9,748 | ) | $ | 6,864 | $ | (22,113 | ) | ||||||||||||||
Non-derivatives designated as hedging instruments
|
||||||||||||||||||||||||
Euro senior notes
|
$ | | $ | (341,589 | ) | $ | | $ | (374,641 | ) | ||||||||||||||
Yen-denominated
Eurobonds(3)
|
| (87,346 | ) | | (92,684 | ) | ||||||||||||||||||
Total non-derivatives designated as hedging instruments
|
$ | | $ | (428,935 | ) | $ | | $ | (467,325 | ) | ||||||||||||||
(1) | Included in Other current assets on the Companys consolidated balance sheets. | |
(2) | Included in Other accrued liabilities on the Companys consolidated balance sheets. | |
(3) | Represents the portion of the Yen-denominated Eurobonds that have been designated as a net investment hedge. |
9
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (continued)
FOR THE
QUARTERLY PERIOD ENDED FEBRUARY 28, 2010
The table below provides data about the amount of gains and
losses related to derivative instruments and non-derivative
instruments designated as net investment hedges included in
Accumulated other comprehensive income (loss)
(AOCI) on the Companys consolidated balance
sheets, and in Other income (expense), net in the
Companys consolidated statements of income:
Gain or (Loss) Recognized in Other |
||||||||||||||||
Gain or (Loss) |
Income (Expense), net (Ineffective |
|||||||||||||||
Recognized in AOCI |
Portion and Amount Excluded from |
|||||||||||||||
(Effective Portion) | Effectiveness Testing) | |||||||||||||||
As of |
As of |
Three Months Ended | ||||||||||||||
February 28, 2010 | November 29, 2009 | February 28, 2010 | March 1, 2009 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Forward foreign exchange contracts
|
$ | 4,637 | $ | 4,637 | $ | | $ | | ||||||||
Euro senior notes
|
(28,670 | ) | (61,570 | ) | | | ||||||||||
Yen-denominated Eurobonds
|
(20,600 | ) | (23,621 | ) | 4,725 | 2,557 | ||||||||||
Cumulative income taxes
|
17,547 | 31,237 | ||||||||||||||
Total
|
$ | (27,086 | ) | $ | (49,317 | ) | ||||||||||
The table below provides data about the amount of gains and
losses related to derivatives not designated as hedging
instruments included in Other income (expense), net
in the Companys consolidated statements of income:
Gain or (Loss) During |
||||||||
Three Months Ended | ||||||||
February 28, |
March 1, |
|||||||
2010 | 2009 | |||||||
(Dollars in thousands) | ||||||||
Forward foreign exchange contracts:
|
||||||||
Realized
|
$ | (2,364 | ) | $ | 3,390 | |||
Unrealized
|
7,347 | 969 | ||||||
Total
|
$ | 4,983 | $ | 4,359 | ||||
10
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (continued)
FOR THE
QUARTERLY PERIOD ENDED FEBRUARY 28, 2010
NOTE 5: | DEBT |
February 28, |
November 29, |
|||||||
2010 | 2009 | |||||||
(Dollars in thousands) | ||||||||
Long-term debt
|
||||||||
Secured:
|
||||||||
Senior revolving credit facility
|
$ | 108,250 | $ | 108,250 | ||||
Total secured
|
108,250 | 108,250 | ||||||
Unsecured:
|
||||||||
8.625% Euro senior notes due 2013
|
341,589 | 374,641 | ||||||
Senior term loan due 2014
|
323,421 | 323,340 | ||||||
9.75% senior notes due 2015
|
446,210 | 446,210 | ||||||
8.875% senior notes due 2016
|
350,000 | 350,000 | ||||||
4.25% Yen-denominated Eurobonds due 2016
|
223,964 | 231,710 | ||||||
Total unsecured
|
1,685,184 | 1,725,901 | ||||||
Less: current maturities
|
| | ||||||
Total long-term debt
|
$ | 1,793,434 | $ | 1,834,151 | ||||
Short-term debt
|
||||||||
Short-term borrowings
|
$ | 27,759 | $ | 18,749 | ||||
Current maturities of long-term debt
|
| | ||||||
Total short-term debt
|
$ | 27,759 | $ | 18,749 | ||||
Total long-term and short-term debt
|
$ | 1,821,193 | $ | 1,852,900 | ||||
Short-term
Credit Lines and Standby Letters of Credit
As of February 28, 2010, the Companys total
availability of $273.6 million under its senior secured
revolving credit facility was reduced by $80.2 million of
letters of credit and other credit usage under the facility,
yielding a net availability of $193.4 million. Included in
the $80.2 million of letters of credit on February 28,
2010, were $13.5 million of other credit usage and
$66.7 million of stand-by letters of credit with various
international banks, of which $28.6 million serve as
guarantees by the creditor banks to cover U.S. workers
compensation claims and customs bonds. The Company pays fees on
the standby letters of credit, and borrowings against the
letters of credit are subject to interest at various rates.
Interest
Rates on Borrowings
The Companys weighted-average interest rate on average
borrowings outstanding during the three months ended
February 28, 2010, and March 1, 2009, was 7.25% and
7.52%, respectively.
11
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (continued)
FOR THE
QUARTERLY PERIOD ENDED FEBRUARY 28, 2010
NOTE 6: | EMPLOYEE BENEFIT PLANS |
The following table summarizes the components of net periodic
benefit cost (income) and the changes recognized in accumulated
other comprehensive income (loss) for the Companys defined
benefit pension plans and postretirement benefit plans:
Pension Benefits | Postretirement Benefits | |||||||||||||||
Three Months Ended | Three Months Ended | |||||||||||||||
February 28, |
March 1, |
February 28, |
March 1, |
|||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Net periodic benefit cost (income):
|
||||||||||||||||
Service cost
|
$ | 1,987 | $ | 1,269 | $ | 118 | $ | 107 | ||||||||
Interest cost
|
14,989 | 15,317 | 2,169 | 2,761 | ||||||||||||
Expected return on plan assets
|
(11,568 | ) | (10,522 | ) | | | ||||||||||
Amortization of prior service cost
(benefit)(1)
|
118 | 198 | (7,392 | ) | (9,925 | ) | ||||||||||
Amortization of actuarial
loss(2)
|
6,665 | 4,287 | 1,402 | 434 | ||||||||||||
Curtailment loss (gain)
|
100 | (27 | ) | | (1,781 | ) | ||||||||||
Net settlement loss
|
172 | 115 | | | ||||||||||||
Net periodic benefit cost (income)
|
12,463 | 10,637 | (3,703 | ) | (8,404 | ) | ||||||||||
Changes in accumulated other comprehensive income (loss):
|
||||||||||||||||
Actuarial loss
|
124 | | | | ||||||||||||
Amortization of prior service (cost) benefit
|
(118 | ) | (198 | ) | 7,392 | 9,925 | ||||||||||
Amortization of actuarial loss
|
(6,665 | ) | (4,287 | ) | (1,402 | ) | (434 | ) | ||||||||
Curtailment (loss) gain
|
(13 | ) | 27 | | 1,781 | |||||||||||
Net settlement loss
|
(151 | ) | (115 | ) | | | ||||||||||
Total recognized in accumulated other comprehensive income (loss)
|
(6,823 | ) | (4,573 | ) | 5,990 | 11,272 | ||||||||||
Total recognized in net periodic benefit cost (income) and
accumulated other comprehensive income (loss)
|
$ | 5,640 | $ | 6,064 | $ | 2,287 | $ | 2,868 | ||||||||
(1) | Amortization of prior service benefit recognized during each period with respect to the Companys postretirement benefit plans relates primarily to the favorable impact of plan amendments in February 2004 and August 2003. For the three months ended February 28, 2010, as compared to the same prior-year period, Amortization of prior service cost (benefit) declined in relation to the expected service lives of the employees affected by these plan changes. | |
(2) | For the three months ended February 28, 2010, as compared to the same prior-year period, the higher Amortization of actuarial loss resulted from the impact of the changes in the discount rate assumptions for the pension and postretirement benefit plans as of November 29, 2009. |
NOTE 7: | COMMITMENTS AND CONTINGENCIES |
Forward
Foreign Exchange Contracts
The Company uses derivative instruments to manage its exposure
to foreign currencies. The Company is exposed to credit loss in
the event of nonperformance by the counterparties to the forward
foreign exchange
12
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (continued)
FOR THE
QUARTERLY PERIOD ENDED FEBRUARY 28, 2010
contracts. However, the Company believes that its exposures are
appropriately diversified across counterparties and that these
counterparties are creditworthy financial institutions. Please
see Note 4 for additional information.
Other
Contingencies
Litigation. There have been no material
developments in the Companys litigation matters since it
filed its 2009 Annual Report on
Form 10-K.
In the ordinary course of business, the Company has various
pending cases involving contractual matters, employee-related
matters, distribution questions, product liability claims,
trademark infringement and other matters. The Company does not
believe there are any of these pending legal proceedings that
will have a material impact on its financial condition or
results of operations or cash flows.
NOTE 8: | COMPREHENSIVE INCOME (LOSS) |
The following is a summary of the components of total
comprehensive income (loss), net of related income taxes:
Three Months Ended | ||||||||
February 28, |
March 1, |
|||||||
2010 | 2009 | |||||||
(Dollars in thousands) | ||||||||
Net income
|
$ | 55,869 | $ | 47,990 | ||||
Other comprehensive income (loss):
|
||||||||
Pension and postretirement benefits
|
(2,231 | ) | (4,786 | ) | ||||
Net investment hedge gains
|
22,231 | 4,042 | ||||||
Foreign currency translation losses
|
(25,755 | ) | (14,346 | ) | ||||
Unrealized gain (loss) on marketable securities
|
17 | (879 | ) | |||||
Total other comprehensive loss
|
(5,738 | ) | (15,969 | ) | ||||
Comprehensive income
|
50,131 | 32,021 | ||||||
Comprehensive loss attributable to noncontrolling interest
|
(1,092 | ) | (440 | ) | ||||
Comprehensive income attributable to Levi Strauss &
Co.
|
$ | 51,223 | $ | 32,461 | ||||
The following is a summary of the components of
Accumulated other comprehensive loss, net of related
income taxes:
February 28, |
November 29, |
|||||||
2010 | 2009 | |||||||
(Dollars in thousands) | ||||||||
Pension and postretirement benefits
|
$ | (179,111 | ) | $ | (176,880 | ) | ||
Net investment hedge losses
|
(27,086 | ) | (49,317 | ) | ||||
Foreign currency translation losses
|
(37,405 | ) | (11,650 | ) | ||||
Unrealized loss on marketable securities
|
(2,058 | ) | (2,075 | ) | ||||
Accumulated other comprehensive loss
|
(245,660 | ) | (239,922 | ) | ||||
Accumulated other comprehensive income attributable to
noncontrolling interest
|
9,338 | 9,945 | ||||||
Accumulated other comprehensive loss attributable to Levi
Strauss & Co.
|
$ | (254,998 | ) | $ | (249,867 | ) | ||
13
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (continued)
FOR THE
QUARTERLY PERIOD ENDED FEBRUARY 28, 2010
NOTE 9: | OTHER INCOME, NET |
The following table summarizes significant components of
Other income, net:
Three Months Ended | ||||||||
February 28, |
March 1, |
|||||||
2010 | 2009 | |||||||
(Dollars in thousands) | ||||||||
Foreign exchange management gains
|
$ | 4,983 | $ | 4,359 | ||||
Foreign currency transaction gains
(losses)(1)
|
7,176 | (1,899 | ) | |||||
Interest income
|
592 | 599 | ||||||
Other
|
(288 | ) | (70 | ) | ||||
Total other income, net
|
$ | 12,463 | $ | 2,989 | ||||
(1) | Foreign currency transaction gains in 2010 were primarily driven by the strengthening of the U.S. Dollar against the Japanese Yen and the Euro. |
NOTE 10: | INCOME TAXES |
The effective income tax rate was 34.7% for the three months
ended February 28, 2010, compared to 35.4% for the same
period ended March 1, 2009.
As of February 28, 2010, the Companys total gross
amount of unrecognized tax benefits was $163.2 million, of
which $92.9 million would impact the effective tax rate, if
recognized. As of November 29, 2009, the Companys
total gross amount of unrecognized tax benefits was
$160.5 million, of which $92.0 million would have
impacted the effective tax rate, if recognized.
NOTE 11: | RELATED PARTIES |
Robert D. Haas, a director and Chairman Emeritus of the Company,
is the President of the Levi Strauss Foundation, which is not a
consolidated entity of the Company. During the three-month
periods ended February 28, 2010, and March 1, 2009,
the Company donated $0.2 million and $0.2 million,
respectively, to the Levi Strauss Foundation.
NOTE 12: | BUSINESS SEGMENT INFORMATION |
The Company manages its business according to three regional
segments: the Americas, Europe and Asia Pacific. Each regional
segment is managed by a senior executive who reports directly to
the chief operating decision maker: the Companys chief
executive officer. The Companys management, including the
chief operating decision maker, manages business operations,
evaluates performance and allocates resources based on the
regional segments net revenues and operating income.
In the first quarter of 2010, accountability for information
technology and marketing staff costs of a global nature, that in
prior years were captured in the Companys geographic
regions, was centralized under corporate management in
conjunction with the Companys key strategy of driving
productivity. Beginning in 2010, these costs have been
classified as corporate expenses. These costs were not
significant to any of the Companys regional segments
individually in any of the periods presented herein, and
accordingly business segment information for prior years has not
been revised.
14
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (continued)
FOR THE
QUARTERLY PERIOD ENDED FEBRUARY 28, 2010
Business segment information for the Company is as follows:
Three Months Ended | ||||||||
February 28, |
March 1, |
|||||||
2010 | 2009 | |||||||
(Dollars in thousands) | ||||||||
Net revenues:
|
||||||||
Americas
|
$ | 545,249 | $ | 503,862 | ||||
Europe
|
306,123 | 267,336 | ||||||
Asia Pacific
|
183,834 | 180,266 | ||||||
Total net revenues
|
$ | 1,035,206 | $ | 951,464 | ||||
Operating income:
|
||||||||
Americas
|
$ | 76,063 | $ | 54,215 | ||||
Europe
|
66,385 | 58,284 | ||||||
Asia Pacific
|
30,653 | 31,734 | ||||||
Regional operating income
|
173,101 | 144,233 | ||||||
Corporate expenses
|
65,850 | 38,193 | ||||||
Total operating income
|
107,251 | 106,040 | ||||||
Interest expense
|
(34,173 | ) | (34,690 | ) | ||||
Other income, net
|
12,463 | 2,989 | ||||||
Income before income taxes
|
$ | 85,541 | $ | 74,339 | ||||
NOTE 13: | SUBSEQUENT EVENT |
The Patient Protection and Affordable Care Act (H.R.
3590) signed into law on March 23, 2010 (the
Act), includes a provision eliminating the tax
deductibility of retiree health care costs, to the extent of
federal subsidies received by plan sponsors that provide retiree
prescription drug benefits equivalent to Medicare Part D
coverage. Although the provisions of this Act do not take effect
immediately, the Company is required to recognize the full
accounting impact in its financial statements in the period in
which the Act is signed. As a result, the Company expects to
record a discrete charge to income tax expense in the second
quarter of 2010. The Company estimates this charge to be
approximately $14 million.
15
Table of Contents
Item 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Overview
We design and market jeans, casual and dress pants, tops,
jackets, footwear and related accessories for men, women and
children under our
Levis®,
Dockers®
and Signature by Levi Strauss &
Co.tm
(Signature) brands around the world. We also license
our trademarks in many countries throughout the world for a wide
array of products, including accessories, pants, tops, footwear,
home and other products.
Our business is operated through three geographic regions:
Americas, Europe and Asia Pacific. Our products are sold in
approximately 55,000 retail locations in more than 110
countries. We support our brands through a global
infrastructure, both sourcing and marketing our products around
the world. We distribute our
Levis®
and
Dockers®
products primarily through chain retailers and department stores
in the United States and primarily through department stores,
specialty retailers and franchised stores outside of the United
States. We also distribute our
Levis®
and
Dockers®
products through our online stores, and
426 company-operated stores located in 26 countries,
including the United States. These stores generated
approximately 16% of our net revenues in the first quarter of
2010. We distribute products under the Signature brand primarily
through mass channel retailers in the United States and Canada
and mass and other value-oriented retailers and franchised
stores in Asia Pacific.
We derived 47% of our net revenues and 56% of our regional
operating income from our Europe and Asia Pacific businesses in
the first quarter of 2010. Sales of
Levis®
brand products represented approximately 84% of our total net
sales in the first quarter of 2010.
Trends
affecting our business
During the first quarter of 2010, difficult economic conditions
persisted around the world. Concerns remain about high
unemployment and the prospects for sustained economic recovery
from the global economic downturn, and consumer spending which
continues to be weak in many markets, especially in southern
Europe and Japan. Our wholesale customers continue to manage
their businesses with leaner inventories, and we remain
committed to managing our inventories commensurate with the
needs of our customers and the retail environment.
At the same time we remained focused on our key strategies:
build upon our leadership position in the jean and khaki
categories through product and marketing innovation, enhance
relationships with wholesale customers and expand our dedicated
store network to drive sales growth, maximize opportunities in
targeted growth markets around the globe, and continuously
increase our productivity.
Our
First Quarter 2010 Results
In the midst of this difficult economic environment, our first
quarter 2010 results reflect net revenue growth in all our
regions, the effects of the strategic investments we have made
in 2009 and 2010 in line with our long-term objectives, and our
inventory management initiatives.
| Net revenues. Our consolidated net revenues increased by 9% compared to the first quarter of 2009, an increase of 4% on a constant-currency basis. Increased net revenues were driven by our acquisitions in 2009 and continued growth in revenues associated with our Levis® brand in the Americas, while declines continued in the wholesale channel in certain markets. | |
| Operating income. Our operating income was stable and operating margin declined slightly compared to the first quarter of 2009, as a higher gross margin, the favorable impact of currency, and the increase in our constant-currency net revenues were offset by investments in the continued expansion of our dedicated store network and advertising in support of our brands, as well as an increase in corporate expenses. | |
| Cash flows. Cash flows provided by operating activities were $76 million for the three-month period in 2010 as compared to $10 million for the same period in 2009, reflecting our operating results and our focus on inventory management. |
16
Table of Contents
Financial
Information Presentation
Fiscal year. Our fiscal year ends on the last
Sunday of November in each year, although the fiscal years of
certain foreign subsidiaries are fixed at November 30 due to
local statutory requirements. Apart from these subsidiaries,
each quarter of fiscal years 2010 and 2009 consisted of
13 weeks.
Segments. We manage our business according to
three regional segments: the Americas, Europe and Asia Pacific.
In the first quarter of 2010, accountability for information
technology and marketing staff costs of a global nature, that in
prior years were captured in our geographic regions, was
centralized under corporate management in conjunction with our
key strategy of driving productivity. Beginning in 2010, these
costs have been classified as corporate expenses. These costs
were not significant to any of our regional segments
individually in any of the periods presented herein, and
accordingly business segment information for prior years has not
been revised.
Classification. Our classification of certain
significant revenues and expenses reflects the following:
| Net sales is primarily comprised of sales of products to wholesale customers, including franchised stores, and direct sales to consumers at our company-operated and online stores and at our company-operated shop-in-shops located within department stores. It includes discounts, allowances for estimated returns and incentives. | |
| Licensing revenue consists of royalties earned from the use of our trademarks by third-party licensees in connection with the manufacturing, advertising and distribution of trademarked products. | |
| Cost of goods sold is primarily comprised of product costs, labor and related overhead, sourcing costs, inbound freight, internal transfers, and the cost of operating our remaining manufacturing facilities, including the related depreciation expense. | |
| Selling costs include, among other things, all occupancy costs associated with our company-operated stores and our company-operated shop-in-shops. | |
| We reflect substantially all distribution costs in selling, general and administrative expenses, including costs related to receiving and inspection at distribution centers, warehousing, shipping to our customers, handling, and certain other activities associated with our distribution network. |
Constant currency. Constant-currency
comparisons are based on translating local currency amounts in
both periods at the foreign exchange rates used in the
Companys internal planning process for the current year.
We routinely evaluate our financial performance on a
constant-currency basis in order to facilitate
period-to-period
comparisons without regard to the impact of changing foreign
currency exchange rates.
17
Table of Contents
Results
of Operations for Three Months Ended February 28, 2010, as
Compared to Same Period in 2009
The following table summarizes, for the periods indicated, our
consolidated statements of income, the changes in these items
from period to period and these items expressed as a percentage
of net revenues:
Three Months Ended | ||||||||||||||||||||
February 28, |
March 1, |
|||||||||||||||||||
% |
2010 |
2009 |
||||||||||||||||||
February 28, |
March 1, |
Increase |
% of Net |
% of Net |
||||||||||||||||
2010 | 2009 | (Decrease) | Revenues | Revenues | ||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||
Net sales
|
$ | 1,016.0 | $ | 931.2 | 9.1 | % | 98.1 | % | 97.9 | % | ||||||||||
Licensing revenue
|
19.2 | 20.2 | (5.0 | )% | 1.9 | % | 2.1 | % | ||||||||||||
Net revenues
|
1,035.2 | 951.4 | 8.8 | % | 100.0 | % | 100.0 | % | ||||||||||||
Cost of goods sold
|
502.3 | 506.3 | (0.8 | )% | 48.5 | % | 53.2 | % | ||||||||||||
Gross profit
|
532.9 | 445.1 | 19.7 | % | 51.5 | % | 46.8 | % | ||||||||||||
Selling, general and administrative expenses
|
425.6 | 339.1 | 25.5 | % | 41.1 | % | 35.6 | % | ||||||||||||
Operating income
|
107.3 | 106.0 | 1.1 | % | 10.4 | % | 11.1 | % | ||||||||||||
Interest expense
|
(34.2 | ) | (34.7 | ) | (1.5 | )% | (3.3 | )% | (3.6 | )% | ||||||||||
Other income, net
|
12.4 | 3.0 | 317.0 | % | 1.2 | % | 0.3 | % | ||||||||||||
Income before income taxes
|
85.5 | 74.3 | 15.1 | % | 8.3 | % | 7.8 | % | ||||||||||||
Income tax expense
|
29.6 | 26.3 | 12.6 | % | 2.9 | % | 2.8 | % | ||||||||||||
Net income
|
55.9 | 48.0 | 16.4 | % | 5.4 | % | 5.0 | % | ||||||||||||
Net loss attributable to noncontrolling interest
|
0.5 | 0.1 | 513.9 | % | | | ||||||||||||||
Net income attributable to Levi
Strauss & Co.
|
$ | 56.4 | $ | 48.1 | 17.2 | % | 5.4 | % | 5.1 | % | ||||||||||
Net
revenues
The following table presents net revenues by reporting segment
for the periods indicated and the changes in net revenues by
reporting segment on both reported and constant-currency bases
from period to period:
Three Months Ended | ||||||||||||||||
% Increase (Decrease) | ||||||||||||||||
February 28, |
March 1, |
As |
Constant |
|||||||||||||
2010 | 2009 | Reported | Currency | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Net revenues:
|
||||||||||||||||
Americas
|
$ | 545.3 | $ | 503.8 | 8.2 | % | 7.0 | % | ||||||||
Europe
|
306.1 | 267.3 | 14.5 | % | 6.0 | % | ||||||||||
Asia Pacific
|
183.8 | 180.3 | 2.0 | % | (4.6 | )% | ||||||||||
Total net revenues
|
$ | 1,035.2 | $ | 951.4 | 8.8 | % | 4.4 | % | ||||||||
Total net revenues increased on both reported and
constant-currency bases for the three-month period ended
February 28, 2010, as compared to the same prior-year
period. Reported amounts were affected favorably by changes in
foreign currency exchange rates across all regions.
Americas. On both reported and
constant-currency bases, net revenues in our Americas region
increased for the three-month period. Currency affected net
revenues favorably by approximately $6 million.
18
Table of Contents
An increase in net revenues for the
Levis®
brand was driven by the additional outlet stores we acquired in
July 2009, as well as strong performance of our mens,
Juniors and boys products in the wholesale channel.
Continued declines in our Signature and
U.S. Dockers®
brands partially offset the improved
Levis®
brand performance.
Europe. Net revenues in Europe
increased on both reported and constant-currency bases. Currency
affected net revenues favorably by approximately
$21 million.
The regions net revenues increase was driven by the impact
of our 2009 footwear acquisition and our expanding
company-operated retail network throughout the region. This
increase was partially offset by continued sales declines in our
traditional wholesale channels reflecting the regions
ongoing depressed retail environment, most notably in southern
Europe.
Asia Pacific. Net revenues in Asia
Pacific increased on a reported basis, but decreased on a
constant-currency basis, for the three-month period. Currency
affected net revenues favorably by approximately
$12 million.
Net revenues in the region decreased primarily due to lower
sales in Japan. This decline was partially offset primarily by
stronger Chinese New Year sales and the continued expansion of
our brand-dedicated retail network in China and India.
Gross
profit
The following table shows consolidated gross profit and gross
margin for the periods indicated and the changes in these items
from period to period:
Three Months Ended | ||||||||||||
% |
||||||||||||
February 28, |
March 1, |
Increase |
||||||||||
2010 | 2009 | (Decrease) | ||||||||||
(Dollars in millions) | ||||||||||||
Net revenues
|
$ | 1,035.2 | $ | 951.4 | 8.8 | % | ||||||
Cost of goods sold
|
502.3 | 506.3 | (0.8 | )% | ||||||||
Gross profit
|
$ | 532.9 | $ | 445.1 | 19.7 | % | ||||||
Gross margin
|
51.5 | % | 46.8 | % |
As compared to the same prior-year period, the gross profit
increase for the three-month period ended February 28,
2010, was driven by improved gross margins in each of our
regions, the increase in our constant-currency net revenues, and
a favorable currency impact of approximately $29 million.
The improvement in our gross margin reflected the increased
contribution from our company-operated retail network, which
generally has a higher gross margin than our wholesale business,
lower inventory markdown activity and the strong performance of
the
Levis®
brand.
Our gross margins may not be comparable to those of other
companies in our industry since some companies may include costs
related to their distribution network and occupancy costs
associated with company-operated stores in cost of goods sold.
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Selling,
general and administrative expenses
The following table shows our selling, general and
administrative (SG&A) expenses for the periods
indicated, the changes in these items from period to period and
these items expressed as a percentage of net revenues:
Three Months Ended | ||||||||||||||||||||
February 28, |
March 1, |
|||||||||||||||||||
% |
2010 |
2009 |
||||||||||||||||||
February 28, |
March 1, |
Increase |
% of Net |
% of Net |
||||||||||||||||
2010 | 2009 | (Decrease) | Revenues | Revenues | ||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||
Selling
|
$ | 156.3 | $ | 105.9 | 47.6 | % | 15.1 | % | 11.1 | % | ||||||||||
Advertising and promotion
|
58.4 | 38.2 | 53.1 | % | 5.6 | % | 4.0 | % | ||||||||||||
Administration
|
94.8 | 85.1 | 11.5 | % | 9.2 | % | 8.9 | % | ||||||||||||
Other
|
116.1 | 109.9 | 5.7 | % | 11.2 | % | 11.6 | % | ||||||||||||
Total SG&A
|
$ | 425.6 | $ | 339.1 | 25.5 | % | 41.1 | % | 35.6 | % | ||||||||||
Currency drove approximately $14 million of the increase in
SG&A expenses for the three-month period ended
February 28, 2010, as compared to the same prior-year
period.
Selling. Selling expenses increased
across all business segments, primarily reflecting 134
additional company-operated stores as well as an unfavorable
currency impact of approximately $6 million.
Advertising and promotion. Advertising
and promotion expenses increased for the three-month period in
all three of our regions, most significantly in the Americas,
primarily due to an increase in campaign spend in support of our
Levis®
and
U.S. Dockers®
brands.
Administration. Administration expenses
include corporate expenses and other administrative charges. The
increase was driven by higher costs associated with our pension
and postretirement benefit plans and an unfavorable currency
impact of approximately $3 million.
Other. Other SG&A expenses include
distribution, information resources, and marketing organization
costs. These costs increased primarily due to the effects of
currency.
Operating
income
The following table shows operating income by reporting segment
and corporate expenses for the periods indicated, the changes in
these items from period to period and these items expressed as a
percentage of net revenues:
Three Months Ended | ||||||||||||||||||||
February 28, |
March 1, |
|||||||||||||||||||
% |
2010 |
2009 |
||||||||||||||||||
February 28, |
March 1, |
Increase |
% of |
% of |
||||||||||||||||
2010 | 2009 | (Decrease) | Net Revenues | Net Revenues | ||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||
Operating income:
|
||||||||||||||||||||
Americas
|
$ | 76.1 | $ | 54.2 | 40.3 | % | 14.0 | % | 10.8 | % | ||||||||||
Europe
|
66.4 | 58.3 | 13.9 | % | 21.7 | % | 21.8 | % | ||||||||||||
Asia Pacific
|
30.6 | 31.7 | (3.4 | )% | 16.7 | % | 17.6 | % | ||||||||||||
Total regional operating income
|
173.1 | 144.2 | 20.0 | % | 16.7 | %* | 15.2 | %* | ||||||||||||
Corporate expenses
|
65.8 | 38.2 | 72.4 | % | 6.4 | %* | 4.0 | %* | ||||||||||||
Total operating income
|
$ | 107.3 | $ | 106.0 | 1.1 | % | 10.4 | %* | 11.1 | %* | ||||||||||
Operating margin
|
10.4 | % | 11.1 | % |
* | Percentage of consolidated net revenues |
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Currency favorably affected total operating income by
approximately $15 million for the three-month period.
Regional operating income. The
following describes changes in operating income by segment for
the three-month period ended February 28, 2010, compared to
the same prior-year period:
| Americas. The regions higher operating margin and operating income were primarily driven by the improvement in gross margin, the effects of which were partially offset by the increased selling and advertising expenses in the region. | |
| Europe. The increase in the regions operating income was primarily due to the favorable impact of currency. The regions operating margin was relatively consistent with the prior year as the regions net revenue growth and gross margin improvement were offset by higher expenses, reflecting our company-operated store expansion and 2009 footwear acquisition. | |
| Asia Pacific. The favorable impact of currency to the regions operating income was more than offset by the sales declines in Japan. |
Corporate. Corporate expenses for the
three-month period increased over the same prior-year period
primarily due to increased costs associated with our pension and
postretirement benefit plans, termination fees resulting from
the exit of certain retail locations, and the reclassification
of the information technology and marketing staff costs of a
global nature that were centralized under corporate management
in 2010 in conjunction with our key strategy of driving
productivity. The reclassified costs were not significant to any
of our regional segments individually.
Interest
expense
Interest expense decreased slightly for the three-month period
ended February 28, 2010, as compared to the same period in
2009, reflecting the weighted-average interest rate on average
borrowings outstanding for the first three months of 2010, which
declined to 7.25% as compared to 7.52% for the same prior-year
period.
Other
income, net
For the first quarter of 2010, other income increased
$9.5 million compared to the same period in 2009. The
increase primarily reflects foreign currency transaction gains
driven by the strengthening of the U.S. Dollar against the
Japanese Yen and the Euro.
Income
tax expense
The effective income tax rate was 34.7% and 35.4% for the three
months ended February 28, 2010, and March 1, 2009,
respectively. For the first quarter of 2010, income tax expense
increased $3.3 million compared to the same period in 2009,
primarily due to higher income before taxes.
Liquidity
and Capital Resources
Liquidity
Outlook
We believe we will have adequate liquidity over the next twelve
months to operate our business and to meet our cash requirements.
Cash
sources
We are a privately-held corporation. We have historically relied
primarily on cash flows from operations, borrowings under credit
facilities, issuances of notes and other forms of debt
financing. We regularly explore financing and debt reduction
alternatives, including new credit agreements, unsecured and
secured note issuances, equity financing, equipment and real
estate financing, securitizations and asset sales. Key sources
of cash include earnings from operations and borrowing
availability under our revolving credit facility.
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We are borrowers under an amended and restated senior secured
revolving credit facility. The maximum availability under the
facility is $750 million secured by certain of our domestic
assets and certain U.S. trademarks associated with the
Levis®
brand and other related intellectual property. The facility
includes a $250 million trademark tranche and a
$500 million revolving tranche. The revolving tranche
increases as the trademark tranche is repaid, up to a maximum of
$750 million when the trademark tranche is repaid in full.
Upon repayment of the trademark tranche, the secured interest in
the U.S. trademarks will be released. As of
February 28, 2010, we had borrowings of $108.3 million
under the trademark tranche and no outstanding borrowings under
the revolving tranche. Unused availability under the revolving
tranche was $193.4 million, as our total availability of
$273.6 million, based on collateral levels as defined by
the agreement, was reduced by $80.2 million of other
credit-related instruments such as documentary and standby
letters of credit allocated under the facility.
Under the facility, we are required to meet a fixed charge
coverage ratio as defined in the agreement of 1.0:1.0 when
unused availability is less than $100 million. This
covenant will be discontinued upon the repayment in full and
termination of the trademark tranche described above, at which
time our availability under the facility will be reduced by a
required unfunded availability reserve of $50 million.
As of February 28, 2010, we had cash and cash equivalents
totaling approximately $315.4 million, resulting in a total
liquidity position (unused availability and cash and cash
equivalents) of $508.8 million.
Cash
Uses
Our principal cash requirements include working capital, capital
expenditures, payments of principal and interest on our debt,
payments of taxes, contributions to our pension plans and
payments for postretirement health benefit plans, and, if market
conditions warrant, occasional investments in, or acquisitions
of, business ventures in our line of business. In addition, we
regularly evaluate our ability to pay dividends or repurchase
stock, all consistent with the terms of our debt agreements.
There have been no material changes to our estimated cash
requirements for 2010 from those disclosed in our 2009 Annual
Report on
Form 10-K.
Cash
Flows
The following table summarizes, for the periods indicated,
selected items in our consolidated statements of cash flows:
Three Months Ended | ||||||||
February 28, |
March 1, |
|||||||
2010 | 2009 | |||||||
(Dollars in millions) | ||||||||
Cash provided by operating activities
|
$ | 75.5 | $ | 9.7 | ||||
Cash used for investing activities
|
(37.9 | ) | (14.7 | ) | ||||
Cash provided by (used for) financing activities
|
8.4 | (17.6 | ) | |||||
Cash and cash equivalents
|
315.4 | 186.1 |
Cash
flows from operating activities
Cash provided by operating activities was $75.5 million for
the three-month period in 2010, as compared to $9.7 million
for the same period in 2009. As compared to the prior year, we
collected more cash from customers, consistent with our higher
net revenues, and used less cash to build inventory, reflecting
our disciplined approach to managing inventory in the current
retail environment. These factors were partially offset by
higher payments to vendors, reflecting the increase in our
SG&A expenses.
Cash
flows from investing activities
Cash used for investing activities was $37.9 million for
the three-month period in 2010, as compared to
$14.7 million for the same period in 2009. As compared to
the prior year, the increase in cash used for investing
activities primarily reflects investments made in our
company-operated retail stores and information technology
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Table of Contents
systems associated with our global ERP installation, as well as
costs associated with the remodeling of the Companys
headquarters.
Cash
flows from financing activities
Cash provided by financing activities was $8.4 million for
the three-month period in 2010, compared to cash used of
$17.6 million for the same period in 2009. Cash used in
2009 primarily related to required payments on the trademark
tranche of our senior secured revolving credit facility; no such
payment is required in 2010.
Indebtedness
The borrower of substantially all of our debt is Levi
Strauss & Co., the parent and U.S. operating
company. Our long-term debt agreements contain customary
covenants restricting our activities as well as those of our
subsidiaries. We are in compliance with all of these covenants.
There have been no substantial changes to our required aggregate
debt principal payments for each of the next five years and
thereafter from those disclosed in our 2009 Annual Report on
Form 10-K.
Off-Balance
Sheet Arrangements, Guarantees and Other Contingent
Obligations
There have been no substantial changes to our off-balance sheet
arrangements or contractual commitments from those disclosed in
our 2009 Annual Report on
Form 10-K.
Critical
Accounting Policies and Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles in the United States
requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial
statements and the related notes. There have been no significant
changes to our critical accounting policies from those disclosed
in our 2009 Annual Report on
Form 10-K.
Recently
Issued Accounting Standards
See Note 1 to our unaudited consolidated financial
statements included in this report for recently issued
accounting standards, including the expected dates of adoption
and estimated effects on our consolidated financial statements.
FORWARD-LOOKING
STATEMENTS
Certain matters discussed in this report, including (without
limitation) statements under Managements Discussion
and Analysis of Financial Condition and Results of
Operations contain forward-looking statements. Although we
believe that, in making any such statements, our expectations
are based on reasonable assumptions, any such statement may be
influenced by factors that could cause actual outcomes and
results to be materially different from those projected.
These forward-looking statements include statements relating to
our anticipated financial performance and business prospects
and/or
statements preceded by, followed by or that include the words
believe, anticipate, intend,
estimate, expect, project,
could, plans, seeks and
similar expressions. These forward-looking statements speak only
as of the date stated and we do not undertake any obligation to
update or revise publicly any forward-looking statements,
whether as a result of new information, future events or
otherwise, even if experience or future events make it clear
that any expected results expressed or implied by these
forward-looking statements will not be realized. Although we
believe that the expectations reflected in these forward-looking
statements are reasonable, these expectations may not prove to
be correct or we may not achieve the financial results, savings
or other benefits anticipated in the forward-looking statements.
These forward-looking statements are necessarily estimates
reflecting the best judgment of our senior management and
involve a number of risks and
23
Table of Contents
uncertainties, some of which may be beyond our control. These
risks and uncertainties, including those disclosed under
Risk Factors in our Annual Report on
Form 10-K
for the fiscal year ended November 29, 2009 and our other
filings with the Securities and Exchange Commission, could cause
actual results to differ materially from those suggested by the
forward-looking statements and include, without limitation:
| changes in the level of consumer spending for apparel in view of general economic conditions, and our ability to plan for and withstand the impact of those changes; | |
| consequences of impacts to the businesses of our wholesale customers caused by factors such as lower consumer spending, general economic conditions, changing consumer preferences and consolidations through mergers and acquisitions; | |
| our ability to increase the number of dedicated stores for our products, including through opening and profitably operating company-operated stores; | |
| our ability to revitalize our Dockers® brand and to introduce our mass-channel offering in new wholesale customers and markets; | |
| our wholesale customers decision to modify their strategies and adjust their product mix; | |
| our effectiveness in increasing productivity and efficiency in our operations; | |
| our ability to implement, stabilize and optimize our ERP system throughout our business without disruption or to mitigate such disruptions; | |
| our ability to gauge and adapt to changing U.S. and international retail environments and fashion trends and changing consumer preferences in product, price-points and shopping experiences; | |
| our ability to withstand the impacts of foreign currency exchange rate fluctuations; | |
| our dependence on key distribution channels, customers and suppliers; | |
| our ability to respond to price, innovation and other competitive pressures in the apparel industry and on our key customers; | |
| our ability to utilize our tax credits and net operating loss carryforwards; | |
| ongoing or future litigation matters and disputes and regulatory developments; | |
| changes in or application of trade and tax laws; and | |
| political, social or economic instability in countries where we do business. |
Our actual results might differ materially from historical
performance or current expectations. We do not undertake any
obligation to update or revise publicly any forward-looking
statements, whether as a result of new information, future
events or otherwise.
Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
There have been no material changes in our primary market risk
exposures or how those exposures are managed from the
information disclosed in our 2009 Annual Report on
Form 10-K.
Item 4T. | CONTROLS AND PROCEDURES |
Evaluation
of Disclosure Controls and Procedures
As of February 28, 2010, we updated our evaluation of the
effectiveness of the design and operation of our disclosure
controls and procedures for purposes of filing reports under the
Securities and Exchange Act of 1934 (the Exchange
Act). This controls evaluation was done under the
supervision and with the participation of
24
Table of Contents
management, including our chief executive officer and our chief
financial officer. Our chief executive officer and our chief
financial officer concluded that at February 28, 2010, our
disclosure controls and procedures (as defined in
Rule 13a-15(e)
and 15d-15(e) under the Exchange Act) are effective to provide
reasonable assurance that information that we are required to
disclose in the reports that we file or submit to the SEC is
recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms. Our
disclosure controls and procedures are designed to provide
reasonable assurance that such information is accumulated and
communicated to our management, including our chief executive
officer and chief financial officer, as appropriate to allow
timely decisions regarding required disclosure.
Changes
in Internal Controls
We maintain a system of internal control over financial
reporting that is designed to provide reasonable assurance that
our books and records accurately reflect our transactions and
that our established policies and procedures are followed. There
were no changes to our internal control over financial reporting
during our last fiscal quarter that have materially affected, or
are reasonably likely to materially affect, our internal control
over financial reporting.
25
Table of Contents
PART II
OTHER INFORMATION
Item 1. | LEGAL PROCEEDINGS |
Litigation. There have been no material
developments in our litigation matters since we filed our 2009
Annual Report on
Form 10-K.
In the ordinary course of business, we have various pending
cases involving contractual matters, employee-related matters,
distribution questions, product liability claims, trademark
infringement and other matters. We do not believe there are any
pending legal proceedings that will have a material impact on
our financial condition or results of operations.
Item 1A. | RISK FACTORS |
There have been no material changes in our risk factors from
those disclosed in our 2009 Annual Report on
Form 10-K.
Item 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
On February 4, 2010, our board approved the award of
restricted stock units (RSUs) representing an
aggregate of 1,142 shares of our common stock to Richard
Kauffman, and the award of stock appreciation rights
(SARs) representing an aggregate of
589,092 shares of our common stock to certain of our
executives. These awards were made under our 2006 Equity
Incentive Plan.
The RSUs were granted as part of the standard annual
compensation provided to our chairman of the board. RSUs are
units, representing beneficial ownership interests,
corresponding in number and value to a specified number of
underlying shares of stock. The RSUs vest in three equal
installments after 13, 24 and 36 months following the grant
date. However, if the recipients continuous service
terminates for reason other than cause after the first vesting
installment, but prior to full vesting, then the remaining
unvested portion of the award becomes fully vested as of the
date of such termination. Recipients of the RSUs have the
opportunity to make deferral elections regarding when shares of
our common stock are to be delivered in settlement of vested
RSUs. If the recipient does not elect to defer the receipt of
common stock, then the RSUs are immediately converted into
shares upon vesting. The RSUs additionally have dividend
equivalent rights, of which dividends paid by the Company
on its common stock are credited by the equivalent addition of
RSUs.
The SARs were granted with an exercise price equal to the fair
market value of the covered shares on the date of grant as
determined by the board. 25% of each SAR grant vests on
February 3, 2011, with the remaining 75% balance vesting on
the first day of each month at a rate of 75%/36 months
(2.08% per month) commencing February 4, 2011, and ending
January 4, 2014, subject to continued service.
Upon the exercise of a SAR, the recipient will receive a share
of common stock in an amount equal to the product of
(i) the excess of the per share fair market value of the
Companys common stock on the date of exercise over the
exercise price, multiplied by (ii) the number of shares of
common stock with respect to which the SAR is exercised.
We will not receive any proceeds from the issuance or vesting of
RSUs or SARs nor upon the exercise of the SARs. The RSUs and
SARs were granted under Section 4(2) of the Securities Act
of 1993, as amended. Section 4(2) generally provides an
exemption from registration for transactions by an issuer not
involving any public offering.
We are a privately-held corporation; there is no public trading
of our common stock. As of April 8, 2010, we had 37,302,432
shares outstanding.
Item 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
26
Table of Contents
Item 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
None.
Item 5. | OTHER INFORMATION |
The Patient Protection and Affordable Care Act (H.R.
3590) signed into law on March 23, 2010 (the
Act), includes a provision eliminating the tax
deductibility of retiree health care costs, to the extent of
federal subsidies received by plan sponsors that provide retiree
prescription drug benefits equivalent to Medicare Part D
coverage. Although the provisions of this Act do not take effect
immediately, we are required to recognize the full accounting
impact in our financial statements in the period in which the
Act is signed. As a result, we expect to record a discrete
charge to income tax expense in the second quarter of 2010. We
estimate this charge to be approximately $14 million.
Item 6. | EXHIBITS |
31 | .1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. | ||
31 | .2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. | ||
32 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith. |
27
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
LEVI STRAUSS & Co
(Registrant)
(Registrant)
By: |
/s/ Heidi
L. Manes
|
Heidi L. Manes
Vice President and Controller
(Principal Accounting Officer)
Date: April 13, 2010
28
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EXHIBITS INDEX
31 | .1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. | ||
31 | .2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. | ||
32 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith. |