Attached files
file | filename |
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EX-31.1 - EX-31.1 - LEVI STRAUSS & CO | f58855exv31w1.htm |
EX-31.2 - EX-31.2 - LEVI STRAUSS & CO | f58855exv31w2.htm |
EX-32 - EX-32 - LEVI STRAUSS & CO | f58855exv32.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 27, 2011 | ||
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 | 94-0905160 | |
(State or Other Jurisdiction
of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
1155
Battery Street, San Francisco, California 94111
(Address of Principal Executive Offices) (Zip Code)
(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 | Smaller reporting company o |
(Do not check if a smaller reporting company)
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
37,324,857 shares outstanding on April 7, 2011
LEVI
STRAUSS & CO. AND SUBSIDIARIES
INDEX TO
FORM 10-Q
FOR THE
QUARTERLY PERIOD ENDED FEBRUARY 27, 2011
2
Table of Contents
Item 1. | CONSOLIDATED FINANCIAL STATEMENTS |
LEVI
STRAUSS & CO. AND SUBSIDIARIES
(Unaudited) |
||||||||
February 27, |
November 28, |
|||||||
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
ASSETS
|
||||||||
Current Assets:
|
||||||||
Cash and cash equivalents
|
$ | 249,113 | $ | 269,726 | ||||
Restricted cash
|
3,563 | 4,028 | ||||||
Trade receivables, net of allowance for doubtful accounts of
$27,826 and $24,617
|
463,836 | 553,385 | ||||||
Inventories:
|
||||||||
Raw materials
|
5,691 | 6,770 | ||||||
Work-in-process
|
9,666 | 9,405 | ||||||
Finished goods
|
608,960 | 563,728 | ||||||
Total inventories
|
624,317 | 579,903 | ||||||
Deferred tax assets, net
|
141,088 | 137,892 | ||||||
Other current assets
|
102,652 | 106,198 | ||||||
Total current assets
|
1,584,569 | 1,651,132 | ||||||
Property, plant and equipment, net of accumulated depreciation
of $699,906 and $683,258
|
497,345 | 488,603 | ||||||
Goodwill
|
242,482 | 241,472 | ||||||
Other intangible assets, net
|
81,894 | 84,652 | ||||||
Non-current deferred tax assets, net
|
561,792 | 559,053 | ||||||
Other assets
|
114,516 | 110,337 | ||||||
Total assets
|
$ | 3,082,598 | $ | 3,135,249 | ||||
LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS DEFICIT | ||||||||
Current Liabilities:
|
||||||||
Short-term borrowings
|
$ | 43,375 | $ | 46,418 | ||||
Current maturities of long-term debt
|
| | ||||||
Current maturities of capital leases
|
1,828 | 1,777 | ||||||
Accounts payable
|
203,472 | 212,935 | ||||||
Other accrued liabilities
|
240,324 | 275,443 | ||||||
Accrued salaries, wages and employee benefits
|
168,090 | 196,152 | ||||||
Accrued interest payable
|
36,440 | 9,685 | ||||||
Accrued income taxes
|
22,299 | 17,115 | ||||||
Total current liabilities
|
715,828 | 759,525 | ||||||
Long-term debt
|
1,832,324 | 1,816,728 | ||||||
Long-term capital leases
|
3,315 | 3,578 | ||||||
Postretirement medical benefits
|
144,332 | 147,065 | ||||||
Pension liability
|
367,169 | 400,584 | ||||||
Long-term employee related benefits
|
94,093 | 102,764 | ||||||
Long-term income tax liabilities
|
50,313 | 50,552 | ||||||
Other long-term liabilities
|
53,587 | 54,281 | ||||||
Total liabilities
|
3,260,961 | 3,335,077 | ||||||
Commitments and contingencies
|
||||||||
Temporary equity
|
9,911 | 8,973 | ||||||
Stockholders Deficit:
|
||||||||
Levi Strauss & Co. stockholders deficit
|
||||||||
Common stock $.01 par value;
270,000,000 shares authorized; 37,318,279 shares and
37,322,358 shares issued and outstanding
|
373 | 373 | ||||||
Additional paid-in capital
|
19,737 | 18,840 | ||||||
Retained earnings
|
53,757 | 33,346 | ||||||
Accumulated other comprehensive loss
|
(271,658 | ) | (272,168 | ) | ||||
Total Levi Strauss & Co. stockholders deficit
|
(197,791 | ) | (219,609 | ) | ||||
Noncontrolling interest
|
9,517 | 10,808 | ||||||
Total stockholders deficit
|
(188,274 | ) | (208,801 | ) | ||||
Total liabilities, temporary equity and stockholders
deficit
|
$ | 3,082,598 | $ | 3,135,249 | ||||
The accompanying notes are an integral part of these
consolidated financial statements.
3
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
Three Months Ended | ||||||||
February 27, |
February 28, |
|||||||
2011 | 2010 | |||||||
(Dollars in thousands) (Unaudited) | ||||||||
Net sales
|
$ | 1,099,885 | $ | 1,016,007 | ||||
Licensing revenue
|
20,808 | 19,199 | ||||||
Net revenues
|
1,120,693 | 1,035,206 | ||||||
Cost of goods sold
|
562,726 | 502,278 | ||||||
Gross profit
|
557,967 | 532,928 | ||||||
Selling, general and administrative expenses
|
459,093 | 425,677 | ||||||
Operating income
|
98,874 | 107,251 | ||||||
Interest expense
|
(34,866 | ) | (34,173 | ) | ||||
Other income (expense), net
|
(5,959 | ) | 12,463 | |||||
Income before income taxes
|
58,049 | 85,541 | ||||||
Income tax expense
|
18,881 | 29,672 | ||||||
Net income
|
39,168 | 55,869 | ||||||
Net loss attributable to noncontrolling interest
|
1,507 | 485 | ||||||
Net income attributable to Levi Strauss & Co.
|
$ | 40,675 | $ | 56,354 | ||||
The accompanying notes are an integral part of these
consolidated financial statements.
4
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
Three Months Ended | ||||||||
February 27, |
February 28, |
|||||||
2011 | 2010 | |||||||
(Dollars in thousands) (Unaudited) | ||||||||
Cash Flows from Operating Activities:
|
||||||||
Net income
|
$ | 39,168 | $ | 55,869 | ||||
Adjustments to reconcile net income to net cash provided by
operating activities:
|
||||||||
Depreciation and amortization
|
28,390 | 25,524 | ||||||
Asset impairments
|
596 | 580 | ||||||
Gain on disposal of property, plant and equipment
|
(59 | ) | (121 | ) | ||||
Unrealized foreign exchange losses (gains)
|
6,650 | (12,677 | ) | |||||
Realized loss on settlement of forward foreign exchange
contracts not designated for hedge accounting
|
5,723 | 2,364 | ||||||
Employee benefit plans amortization from accumulated other
comprehensive loss
|
793 | 944 | ||||||
Employee benefit plans curtailment (gain) loss, net
|
(16 | ) | 100 | |||||
Amortization of deferred debt issuance costs
|
1,058 | 1,144 | ||||||
Stock-based compensation
|
1,841 | 1,586 | ||||||
Allowance for doubtful accounts
|
3,028 | 1,306 | ||||||
Change in operating assets and liabilities:
|
||||||||
Trade receivables
|
87,388 | 78,826 | ||||||
Inventories
|
(43,962 | ) | (20,683 | ) | ||||
Other current assets
|
3,313 | (11,326 | ) | |||||
Other non-current assets
|
(5,350 | ) | (6,103 | ) | ||||
Accounts payable and other accrued liabilities
|
(11,799 | ) | (18,224 | ) | ||||
Income tax liabilities
|
3,799 | 15,591 | ||||||
Accrued salaries, wages and employee benefits and long-term
employee related benefits
|
(74,259 | ) | (42,332 | ) | ||||
Other long-term liabilities
|
(359 | ) | 3,220 | |||||
Other, net
|
83 | (61 | ) | |||||
Net cash provided by operating activities
|
46,026 | 75,527 | ||||||
Cash Flows from Investing Activities:
|
||||||||
Purchases of property, plant and equipment
|
(40,498 | ) | (36,365 | ) | ||||
Proceeds from sale of property, plant and equipment
|
76 | 914 | ||||||
Payments on settlement of forward foreign exchange contracts not
designated for hedge accounting
|
(5,723 | ) | (2,364 | ) | ||||
Other
|
| (114 | ) | |||||
Net cash used for investing activities
|
(46,145 | ) | (37,929 | ) | ||||
Cash Flows from Financing Activities:
|
||||||||
Repayments of long-term debt and capital leases
|
(456 | ) | (454 | ) | ||||
Short-term borrowings, net
|
(2,261 | ) | 8,884 | |||||
Restricted cash
|
618 | (32 | ) | |||||
Repurchase of common stock
|
(245 | ) | | |||||
Dividend to stockholders
|
(20,023 | ) | | |||||
Net cash (used for) provided by financing activities
|
(22,367 | ) | 8,398 | |||||
Effect of exchange rate changes on cash and cash equivalents
|
1,873 | (1,431 | ) | |||||
Net (decrease) increase in cash and cash equivalents
|
(20,613 | ) | 44,565 | |||||
Beginning cash and cash equivalents
|
269,726 | 270,804 | ||||||
Ending cash and cash equivalents
|
$ | 249,113 | $ | 315,369 | ||||
Supplemental disclosure of cash flow information:
|
||||||||
Cash paid during the period for:
|
||||||||
Interest
|
$ | 5,009 | $ | 26,283 | ||||
Income taxes
|
11,933 | 16,500 |
The accompanying notes are an integral part of these
consolidated financial statements.
5
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 27, 2011
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, skirts,
jackets, footwear and related accessories, for men, women and
children under the
Levis®,
Dockers®,
Signature by Levi Strauss &
Co.tm
and
Denizentm
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 28, 2010, included in the Annual Report on
Form 10-K
filed by the Company with the Securities and Exchange Commission
(SEC) on February 8, 2011.
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. Certain prior-year amounts have
been reclassified to conform to the current presentation. The
results of operations for the three months ended
February 27, 2011, may not be indicative of the results to
be expected for any other interim period or the year ending
November 27, 2011.
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 2011 and 2010 consists of
13 weeks. All references to years relate to fiscal years
rather than calendar years.
Subsequent events have been evaluated through the issuance date
of these financial statements. The recent earthquake, tsunami
and related events in Japan, which occurred subsequent to the
Companys first fiscal quarter, did not have an immediate
material impact to the Companys assets or obligations.
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.
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 2010
Annual Report on
Form 10-K.
6
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (continued)
FOR THE
QUARTERLY PERIOD ENDED FEBRUARY 27, 2011
NOTE 2: | GOODWILL AND OTHER INTANGIBLE ASSETS |
The changes in the carrying amount of goodwill by business
segment for the three months ended February 27, 2011, were
as follows:
Asia |
||||||||||||||||
Americas | Europe | Pacific | Total | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Balance, November 28, 2010
|
$ | 207,427 | $ | 31,603 | $ | 2,442 | $ | 241,472 | ||||||||
Foreign currency fluctuation
|
1 | 1,016 | (7 | ) | 1,010 | |||||||||||
Balance, February 27, 2011
|
$ | 207,428 | $ | 32,619 | $ | 2,435 | $ | 242,482 | ||||||||
Other intangible assets, net, were as follows:
February 27, 2011 | November 28, 2010 | |||||||||||||||||||||||
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
|
45,947 | (20,318 | ) | 25,629 | 45,712 | (17,765 | ) | 27,947 | ||||||||||||||||
Customer lists
|
20,699 | (7,177 | ) | 13,522 | 20,037 | (6,075 | ) | 13,962 | ||||||||||||||||
Total
|
$ | 109,389 | $ | (27,495 | ) | $ | 81,894 | $ | 108,492 | $ | (23,840 | ) | $ | 84,652 | ||||||||||
For the three months ended February 27, 2011, amortization
of these intangible assets was $3.0 million, compared to
$3.9 million in the same period of 2010.
7
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (continued)
FOR THE
QUARTERLY PERIOD ENDED FEBRUARY 27, 2011
NOTE 3: | FAIR VALUE OF FINANCIAL INSTRUMENTS |
The following table presents the Companys financial
instruments that are carried at fair value:
February 27, 2011 | November 28, 2010 | |||||||||||||||||||||||
Fair Value Estimated Using | Fair Value Estimated Using | |||||||||||||||||||||||
Level 1 |
Level 2 |
Level 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
|
$ | 19,493 | $ | 19,493 | $ | | $ | 18,316 | $ | 18,316 | $ | | ||||||||||||
Forward foreign exchange contracts,
net(3)
|
588 | | 588 | 1,385 | | 1,385 | ||||||||||||||||||
Total
|
$ | 20,081 | $ | 19,493 | $ | 588 | $ | 19,701 | $ | 18,316 | $ | 1,385 | ||||||||||||
Financial liabilities carried at fair value
|
||||||||||||||||||||||||
Forward foreign exchange contracts,
net(3)
|
$ | 6,471 | $ | | $ | 6,471 | $ | 5,003 | $ | | $ | 5,003 | ||||||||||||
Total
|
$ | 6,471 | $ | | $ | 6,471 | $ | 5,003 | $ | | $ | 5,003 | ||||||||||||
(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. | |
(3) | The Companys forward foreign exchange contracts are subject to International Swaps and Derivatives Association, Inc. 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. |
8
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (continued)
FOR THE
QUARTERLY PERIOD ENDED FEBRUARY 27, 2011
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 27, 2011 | November 28, 2010 | |||||||||||||||
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
|
$ | 108,474 | $ | 107,121 | $ | 108,482 | $ | 107,129 | ||||||||
Senior term loan due 2014
|
324,398 | 320,351 | 324,423 | 311,476 | ||||||||||||
8.875% senior notes due 2016
|
362,770 | 379,833 | 355,004 | 373,379 | ||||||||||||
4.25% Yen-denominated Eurobonds due 2016
|
112,875 | 103,298 | 109,429 | 98,063 | ||||||||||||
7.75% Euro senior notes due 2018
|
422,993 | 440,587 | 401,982 | 407,993 | ||||||||||||
7.625% senior notes due 2020
|
536,565 | 556,252 | 526,557 | 542,307 | ||||||||||||
Short-term borrowings
|
43,717 | 43,717 | 46,722 | 46,722 | ||||||||||||
Total
|
$ | 1,911,792 | $ | 1,951,159 | $ | 1,872,599 | $ | 1,887,069 | ||||||||
(1) | Fair value estimate incorporates mid-market price quotes. |
9
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (continued)
FOR THE
QUARTERLY PERIOD ENDED FEBRUARY 27, 2011
NOTE 4: | DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES |
As of February 27, 2011, the Company had forward foreign
exchange contracts to buy $715.4 million and to sell
$426.3 million against various foreign currencies. These
contracts are at various exchange rates and expire at various
dates through April 2012.
The table below provides data about the carrying values of
derivative instruments and non-derivative instruments designated
as net investment hedges:
February 27, 2011 | November 28, 2010 | |||||||||||||||||||||||
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)
|
$ | 1,468 | $ | (880 | ) | $ | 588 | $ | 7,717 | $ | (6,332 | ) | $ | 1,385 | ||||||||||
Forward foreign exchange
contracts(2)
|
8,216 | (14,687 | ) | (6,471 | ) | 4,266 | (9,269 | ) | (5,003 | ) | ||||||||||||||
Total
|
$ | 9,684 | $ | (15,567 | ) | $ | 11,983 | $ | (15,601 | ) | ||||||||||||||
Non-derivatives designated as hedging instruments
|
||||||||||||||||||||||||
4.25% Yen-denominated Eurobonds due 2016
|
$ | | $ | (57,897 | ) | $ | | $ | (61,075 | ) | ||||||||||||||
7.75% Euro senior notes due 2018
|
| (413,970 | ) | | (400,740 | ) | ||||||||||||||||||
Total
|
$ | | $ | (471,867 | ) | $ | | $ | (461,815 | ) | ||||||||||||||
(1) | Included in Other current assets on the Companys consolidated balance sheets. | |
(2) | Included in Other accrued liabilities on the Companys consolidated balance sheets. |
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 loss
(AOCI) on the Companys consolidated balance
sheets, and in Other income (expense), net in the
Companys consolidated statements of income:
Gain (Loss) Recognized in Other |
||||||||||||||||
Gain (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 27, 2011 | November 28, 2010 | February 27, 2011 | February 28, 2010 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Forward foreign exchange contracts
|
$ | 4,637 | $ | 4,637 | $ | | $ | | ||||||||
4.25% Yen-denominated Eurobonds due 2016
|
(25,562 | ) | (24,377 | ) | (1,093 | ) | 4,725 | |||||||||
7.75% Euro senior notes due 2018
|
(36,901 | ) | (23,671 | ) | | | ||||||||||
Cumulative income taxes
|
22,547 | 17,022 | ||||||||||||||
Total
|
$ | (35,279 | ) | $ | (26,389 | ) | ||||||||||
10
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (continued)
FOR THE
QUARTERLY PERIOD ENDED FEBRUARY 27, 2011
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 27, |
February 28, |
|||||||
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Forward foreign exchange contracts:
|
||||||||
Realized
|
$ | (5,723 | ) | $ | (2,364 | ) | ||
Unrealized
|
(2,373 | ) | 7,347 | |||||
Total
|
$ | (8,096 | ) | $ | 4,983 | |||
NOTE 5: | DEBT |
February 27, |
November 28, |
|||||||
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Long-term debt
|
||||||||
Secured:
|
||||||||
Senior revolving credit facility
|
$ | 108,250 | $ | 108,250 | ||||
Total secured
|
108,250 | 108,250 | ||||||
Unsecured:
|
||||||||
Senior term loan due 2014
|
323,764 | 323,676 | ||||||
8.875% senior notes due 2016
|
350,000 | 350,000 | ||||||
4.25% Yen-denominated Eurobonds due 2016
|
111,340 | 109,062 | ||||||
7.75% Euro senior notes due 2018
|
413,970 | 400,740 | ||||||
7.625% senior notes due 2020
|
525,000 | 525,000 | ||||||
Total unsecured
|
1,724,074 | 1,708,478 | ||||||
Less: current maturities
|
| | ||||||
Total long-term debt
|
$ | 1,832,324 | $ | 1,816,728 | ||||
Short-term debt
|
||||||||
Short-term borrowings
|
$ | 43,375 | $ | 46,418 | ||||
Current maturities of long-term debt
|
| | ||||||
Total short-term debt
|
$ | 43,375 | $ | 46,418 | ||||
Total long-term and short-term debt
|
$ | 1,875,699 | $ | 1,863,146 | ||||
Short-term
Credit Lines and Standby Letters of Credit
As of February 27, 2011, the Companys total
availability of $376.4 million under its senior secured
revolving credit facility was reduced by $78.2 million of
letters of credit and other credit usage under the facility,
yielding a net availability of $298.2 million.
11
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (continued)
FOR THE
QUARTERLY PERIOD ENDED FEBRUARY 27, 2011
Interest
Rates on Borrowings
The Companys weighted-average interest rate on average
borrowings outstanding during the three months ended
February 27, 2011, and February 28, 2010, was 6.84%
and 7.25%, respectively.
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 loss for the
Companys defined benefit pension plans and postretirement
benefit plans:
Pension Benefits | Postretirement Benefits | |||||||||||||||
Three Months Ended | Three Months Ended | |||||||||||||||
February 27, |
February 28, |
February 27, |
February 28, |
|||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Net periodic benefit cost (income):
|
||||||||||||||||
Service cost
|
$ | 2,583 | $ | 1,987 | $ | 120 | $ | 118 | ||||||||
Interest cost
|
15,028 | 14,989 | 1,907 | 2,169 | ||||||||||||
Expected return on plan assets
|
(12,898 | ) | (11,568 | ) | | | ||||||||||
Amortization of prior service cost
(benefit)(1)
|
65 | 118 | (7,236 | ) | (7,392 | ) | ||||||||||
Amortization of actuarial loss
|
6,730 | 6,665 | 1,256 | 1,402 | ||||||||||||
Curtailment (gain) loss
|
(16 | ) | 100 | | | |||||||||||
Net settlement loss
|
11 | 172 | | | ||||||||||||
Net periodic benefit cost (income)
|
11,503 | 12,463 | (3,953 | ) | (3,703 | ) | ||||||||||
Changes in accumulated other comprehensive loss:
|
||||||||||||||||
Actuarial loss
|
| 124 | | | ||||||||||||
Amortization of prior service (cost) benefit
|
(65 | ) | (118 | ) | 7,236 | 7,392 | ||||||||||
Amortization of actuarial loss
|
(6,730 | ) | (6,665 | ) | (1,256 | ) | (1,402 | ) | ||||||||
Curtailment loss
|
| (13 | ) | | | |||||||||||
Net settlement gain (loss)
|
22 | (151 | ) | | | |||||||||||
Total recognized in accumulated other comprehensive loss
|
(6,773 | ) | (6,823 | ) | 5,980 | 5,990 | ||||||||||
Total recognized in net periodic benefit cost (income) and
accumulated other comprehensive loss
|
$ | 4,730 | $ | 5,640 | $ | 2,027 | $ | 2,287 | ||||||||
(1) | Postretirement benefits amortization of prior service benefit recognized during each period relates primarily to the favorable impact of the February 2004 and August 2003 plan amendments. |
As of February 27, 2011, based on changes in discount rates
and the updated valuation of the Companys pension assets,
as well as its current evaluation of alternative methods
available for measuring the funding obligation, the
Companys expected required contribution amount in 2011 is
estimated to be in the range of $60 million to
$80 million. The Company made a contribution of
$40 million during the first quarter of 2011 towards this
anticipated requirement.
12
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (continued)
FOR THE
QUARTERLY PERIOD ENDED FEBRUARY 27, 2011
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 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 2010 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: | DIVIDEND PAYMENT |
The Company paid a cash dividend of $20 million in the
first quarter of 2011. The Company does not have an annual
dividend policy. The Company will continue to review its ability
to pay cash dividends at least annually, and dividends may be
declared at the discretion of the Companys Board of
Directors depending upon, among other factors, the tax impact to
the dividend recipients, the Companys financial condition
and compliance with the terms of its debt agreements.
NOTE 9: | 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 27, |
February 28, |
|||||||
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Net income
|
$ | 39,168 | $ | 55,869 | ||||
Other comprehensive income (loss):
|
||||||||
Pension and postretirement benefits
|
515 | (2,231 | ) | |||||
Net investment hedge (losses) gains
|
(8,890 | ) | 22,231 | |||||
Foreign currency translation gains (losses)
|
8,527 | (25,755 | ) | |||||
Unrealized gain on marketable securities
|
574 | 17 | ||||||
Total other comprehensive income (loss)
|
726 | (5,738 | ) | |||||
Comprehensive income
|
39,894 | 50,131 | ||||||
Comprehensive loss attributable to noncontrolling interest
|
(1,291 | ) | (1,092 | ) | ||||
Comprehensive income attributable to Levi Strauss &
Co.
|
$ | 41,185 | $ | 51,223 | ||||
13
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (continued)
FOR THE
QUARTERLY PERIOD ENDED FEBRUARY 27, 2011
The following is a summary of the components of
Accumulated other comprehensive loss, net of related
income taxes:
February 27, |
November 28, |
|||||||
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Pension and postretirement benefits
|
$ | (198,292 | ) | $ | (198,807 | ) | ||
Net investment hedge losses
|
(35,279 | ) | (26,389 | ) | ||||
Foreign currency translation losses
|
(28,527 | ) | (37,054 | ) | ||||
Unrealized gain on marketable securities
|
731 | 157 | ||||||
Accumulated other comprehensive loss
|
(261,367 | ) | (262,093 | ) | ||||
Accumulated other comprehensive income attributable to
noncontrolling interest
|
10,291 | 10,075 | ||||||
Accumulated other comprehensive loss attributable to Levi
Strauss & Co.
|
$ | (271,658 | ) | $ | (272,168 | ) | ||
NOTE 10: | OTHER INCOME (EXPENSE), NET |
The following table summarizes significant components of
Other income (expense), net:
Three Months Ended | ||||||||
February 27, |
February 28, |
|||||||
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Foreign exchange management (losses)
gains(1)
|
$ | (8,096 | ) | $ | 4,983 | |||
Foreign currency transaction
gains(2)
|
942 | 7,176 | ||||||
Interest income
|
415 | 592 | ||||||
Other
|
780 | (288 | ) | |||||
Total other income (expense), net
|
$ | (5,959 | ) | $ | 12,463 | |||
(1) | Foreign exchange management losses in 2011 were primarily due to the depreciation of the U.S. Dollar against the Swedish Krona and the Japanese Yen. Gains in 2010 were primarily due to the appreciation of the U.S. Dollar against various currencies. | |
(2) | Foreign currency transaction gains in 2010 were primarily due to the appreciation of the U.S. Dollar against the Japanese Yen and the Euro. |
NOTE 11: | INCOME TAXES |
The effective income tax rate was 32.5% for the three months
ended February 27, 2011, compared to 34.7% for the same
period ended February 28, 2010. The reduction in the
effective tax rate was primarily due to an increase in the
amount of expected earnings from foreign operations subject to
tax rates lower than the U.S. statutory rate.
As of February 27, 2011, the Companys total gross
amount of unrecognized tax benefits was $152.0 million, of
which $89.1 million would impact the effective tax rate, if
recognized. As of November 28, 2010, the Companys
total gross amount of unrecognized tax benefits was
$150.7 million, of which $87.2 million would have
impacted the effective tax rate, if recognized.
14
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (continued)
FOR THE
QUARTERLY PERIOD ENDED FEBRUARY 27, 2011
NOTE 12: | 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 27, 2011, and February 28,
2010, the Company donated $0.3 million and
$0.2 million, respectively, to the Levi Strauss Foundation.
NOTE 13: | 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 2011, accountability for certain
information technology, human resources, advertising and
promotion, 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 2011, 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.
Business segment information for the Company is as follows:
Three Months Ended | ||||||||
February 27, |
February 28, |
|||||||
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Net revenues:
|
||||||||
Americas
|
$ | 592,186 | $ | 545,249 | ||||
Europe
|
311,604 | 306,123 | ||||||
Asia Pacific
|
216,903 | 183,834 | ||||||
Total net revenues
|
$ | 1,120,693 | $ | 1,035,206 | ||||
Operating income:
|
||||||||
Americas
|
$ | 75,033 | $ | 76,063 | ||||
Europe
|
71,291 | 66,385 | ||||||
Asia Pacific
|
37,363 | 30,653 | ||||||
Regional operating income
|
183,687 | 173,101 | ||||||
Corporate expenses
|
84,813 | 65,850 | ||||||
Total operating income
|
98,874 | 107,251 | ||||||
Interest expense
|
(34,866 | ) | (34,173 | ) | ||||
Other income (expense), net
|
(5,959 | ) | 12,463 | |||||
Income before income taxes
|
$ | 58,049 | $ | 85,541 | ||||
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,
skirts, jackets, footwear and related accessories for men, women
and children under our
Levis®,
Dockers®,
Signature by Levi Strauss &
Co.tm
(Signature) and
Denizentm
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 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, developing, 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 nearly 1,800 franchised and other
brand-dedicated stores outside of the United States. We also
distribute our
Levis®
and
Dockers®
products through our online stores operated by us, and
482 company-operated stores located in 31 countries,
including the United States. These stores generated
approximately 18% of our net revenues in the three-month period
in 2011, as compared to 16% for the same period in 2010. In
addition, we distribute our
Levis®
and
Dockers®
products through online stores operated by certain of our key
wholesale customers and other third parties. We distribute
products under the Signature brand primarily through mass
channel retailers in the United States and Canada and franchised
stores in Asia Pacific. We currently distribute our
Denizentm
products through franchised stores in Asia Pacific, and starting
in the second half of 2011, will distribute them through certain
wholesale channels in the United States and Mexico.
Our Europe and Asia Pacific businesses, collectively,
contributed approximately 47% of our net revenues and 59% of our
regional operating income in the three-month period in 2011.
Sales of
Levis®
brand products represented approximately 85% of our total net
sales in the three-month period in 2011.
Trends
Affecting Our Business
Our business and industry continued to feel the lingering impact
of the challenged economy around the world during the first
quarter of 2011. During the quarter, we remained focused on our
key long-term 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,
capitalize on our global footprint, and increase our
productivity. We expect that the impact of increasing prices and
tightened supply of raw materials, such as cotton, will
contribute to ongoing pricing pressure throughout the supply
chain during 2011 and thereafter. Our response to these
conditions may include additional product price increases or
enhanced support of our supply chain partners to maintain a
sufficient flow of product. The conditions within our industry
and our response to them may impact our margins, working
capital, and sales volumes. Additionally, our results of
operations will be adversely affected by a slowdown in the
Japanese economy caused by the impact of the recent earthquake,
tsunami and related events in Japan, which occurred subsequent
to our first fiscal quarter and did not have an immediate
material impact to our assets or obligations.
Our
First Quarter 2011 Results
Our first quarter 2011 results reflect net revenue growth and
the effects of the strategic investments we have made in line
with our long-term strategies.
| Net revenues. Our consolidated net revenues increased by 8% on both reported and constant-currency bases compared to the first quarter of 2010, reflecting growth in each of our geographic regions. Increased net revenues were primarily associated with our Levis® brand, through the expansion and performance of our dedicated store network globally and growth in wholesale revenues in the Americas, partially offset by continued declines in the wholesale channel in certain other markets. | |
| Operating income. Our operating income and operating margin declined compared to the first quarter of 2010, as the benefits from the increase in our net revenues were offset primarily by a lower gross margin, reflecting higher sales allowances and discounts, and our continued investment in retail expansion. |
16
Table of Contents
| Cash flows. Cash flows provided by operating activities were $46 million for the three-month period in 2011 as compared to $76 million for the same period in 2010, reflecting our inventory build and a contribution to our pension plans. |
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 2011 and 2010
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 2011, accountability for
certain information technology, human resources, advertising and
promotion, 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 2011, 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 and depreciation associated with our company-operated stores and commission payments associated with 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. |
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.
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 27, 2011, as
Compared to Same Period in 2010
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 27, |
February 28, |
|||||||||||||||||||
% |
2011 |
2010 |
||||||||||||||||||
February 27, |
February 28, |
Increase |
% of Net |
% of Net |
||||||||||||||||
2011 | 2010 | (Decrease) | Revenues | Revenues | ||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||
Net sales
|
$ | 1,099.9 | $ | 1,016.0 | 8.3 | % | 98.1 | % | 98.1 | % | ||||||||||
Licensing revenue
|
20.8 | 19.2 | 8.4 | % | 1.9 | % | 1.9 | % | ||||||||||||
Net revenues
|
1,120.7 | 1,035.2 | 8.3 | % | 100.0 | % | 100.0 | % | ||||||||||||
Cost of goods sold
|
562.7 | 502.3 | 12.0 | % | 50.2 | % | 48.5 | % | ||||||||||||
Gross profit
|
558.0 | 532.9 | 4.7 | % | 49.8 | % | 51.5 | % | ||||||||||||
Selling, general and administrative expenses
|
459.1 | 425.6 | 7.9 | % | 41.0 | % | 41.1 | % | ||||||||||||
Operating income
|
98.9 | 107.3 | (7.8 | )% | 8.8 | % | 10.4 | % | ||||||||||||
Interest expense
|
(34.9 | ) | (34.2 | ) | 2.0 | % | (3.1 | )% | (3.3 | )% | ||||||||||
Other income (expense), net
|
(6.0 | ) | 12.4 | (147.8 | )% | (0.5 | )% | 1.2 | % | |||||||||||
Income before income taxes
|
58.0 | 85.5 | (32.1 | )% | 5.2 | % | 8.3 | % | ||||||||||||
Income tax expense
|
18.8 | 29.6 | (36.4 | )% | 1.7 | % | 2.9 | % | ||||||||||||
Net income
|
39.2 | 55.9 | (29.9 | )% | 3.5 | % | 5.4 | % | ||||||||||||
Net loss attributable to noncontrolling interest
|
1.5 | 0.5 | 210.7 | % | 0.1 | % | | |||||||||||||
Net income attributable to Levi Strauss & Co.
|
$ | 40.7 | $ | 56.4 | (27.8 | )% | 3.6 | % | 5.4 | % | ||||||||||
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 27, |
February 28, |
As |
Constant |
|||||||||||||
2011 | 2010 | Reported | Currency | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Net revenues:
|
||||||||||||||||
Americas
|
$ | 592.2 | $ | 545.3 | 8.6 | % | 8.0 | % | ||||||||
Europe
|
311.6 | 306.1 | 1.8 | % | 6.2 | % | ||||||||||
Asia Pacific
|
216.9 | 183.8 | 18.0 | % | 12.5 | % | ||||||||||
Total net revenues
|
$ | 1,120.7 | $ | 1,035.2 | 8.3 | % | 8.3 | % | ||||||||
Total net revenues increased on both reported and
constant-currency bases for the three-month period ended
February 27, 2011, as compared to the same prior-year
period.
Americas. On both reported and
constant-currency bases, net revenues in our Americas region
increased for the three-month period, with currency affecting
net revenues favorably by approximately $3 million.
The regions increased net revenues were driven by the
Levis®
brand, reflecting a higher volume of sales in our dedicated
retail stores and at wholesale. Sales from our online stores
also increased.
18
Table of Contents
Europe. Net revenues in Europe
increased on both reported and constant-currency bases, with
currency affecting net revenues unfavorably by approximately
$13 million.
Despite the regions ongoing depressed economic
environment, our net revenues increased, driven by the expansion
and improved performance of our company-operated retail network
throughout the region, and higher sales to franchised stores.
Growth primarily reflected the success of our
Levis®
brand new womens products. Sales increases were partially
offset by lower traditional wholesale revenues in certain
markets.
Asia Pacific. Net revenues in Asia
Pacific increased on both reported and constant-currency bases,
with currency affecting net revenues favorably by approximately
$9 million.
The net revenues increase was primarily from our
Levis®
brand, driven by the continued expansion of our brand-dedicated
retail network in China and India as well as other of our
emerging markets, offset by the continued decline of net
revenues in Japan. Sales of our
Denizentm
brand products were offset by corresponding declines in
Signature brand sales as we transition the brand in the region.
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 27, |
February 28, |
Increase |
||||||||||
2011 | 2010 | (Decrease) | ||||||||||
(Dollars in millions) | ||||||||||||
Net revenues
|
$ | 1,120.7 | $ | 1,035.2 | 8.3 | % | ||||||
Cost of goods sold
|
562.7 | 502.3 | 12.0 | % | ||||||||
Gross profit
|
$ | 558.0 | $ | 532.9 | 4.7 | % | ||||||
Gross margin
|
49.8 | % | 51.5 | % |
As compared to the same prior-year period, the gross profit
increase was driven by the increase in our net revenues, and was
partially offset by a decline in our gross margin. The effect of
currency on gross profit was insignificant. The gross margin
decrease was primarily due to an increase in sales allowances
and discounts, in both our
Levis®
and
Dockers®
brands, to drive sales and manage inventory; in addition, we
marked down excess and obsolete inventory in selected markets.
These factors were partially offset by the impact to our gross
margin of the increased revenue contribution from our
company-operated retail network, which generally has a higher
gross margin than our wholesale business.
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 27, |
February 28, |
|||||||||||||||||||
% |
2011 |
2010 |
||||||||||||||||||
February 27, |
February 28, |
Increase |
% of Net |
% of Net |
||||||||||||||||
2011 | 2010 | (Decrease) | Revenues | Revenues | ||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||
Selling
|
$ | 175.2 | $ | 156.3 | 12.1 | % | 15.6 | % | 15.1 | % | ||||||||||
Advertising and promotion
|
62.2 | 58.4 | 6.4 | % | 5.6 | % | 5.6 | % | ||||||||||||
Administration
|
104.0 | 94.8 | 9.7 | % | 9.3 | % | 9.2 | % | ||||||||||||
Other
|
117.7 | 116.1 | 1.3 | % | 10.5 | % | 11.2 | % | ||||||||||||
Total SG&A expenses
|
$ | 459.1 | $ | 425.6 | 7.9 | % | 41.0 | % | 41.1 | % | ||||||||||
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The effect of currency on our SG&A expenses for the
three-month period ended February 27, 2011, was
insignificant.
Selling. Selling expenses increased
across all business segments, primarily reflecting additional
costs, such as rents and increased headcount, associated with
the continued expansion of our company-operated store network.
We had 56 more company-operated stores at quarter end than we
did at February 28, 2010.
Advertising and promotion. Advertising
and promotion expenses continued to reflect our ongoing strategy
of investment behind our brands. The increase for the
three-month period primarily reflected our expanding presence in
Asia Pacific and our recently-launched
Denizentm
brand.
Administration. The increase in
administration expenses for the three-month period was driven
primarily by an increase in incentive compensation expense
related to higher projected funding.
Other. Other SG&A expenses include
distribution, information resources, and marketing organization
costs, all of which increased slightly as compared to prior year.
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 27, |
February 28, |
|||||||||||||||||||
% |
2011 |
2010 |
||||||||||||||||||
February 27, |
February 28, |
Increase |
% of Net |
% of Net |
||||||||||||||||
2011 | 2010 | (Decrease) | Revenues | Revenues | ||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||
Operating income:
|
||||||||||||||||||||
Americas
|
$ | 75.0 | $ | 76.1 | (1.4 | )% | 12.7 | % | 14.0 | % | ||||||||||
Europe
|
71.3 | 66.4 | 7.4 | % | 22.9 | % | 21.7 | % | ||||||||||||
Asia Pacific
|
37.4 | 30.6 | 21.9 | % | 17.2 | % | 16.7 | % | ||||||||||||
Total regional operating income
|
183.7 | 173.1 | 6.1 | % | 16.4 | %* | 16.7 | %* | ||||||||||||
Corporate expenses
|
84.8 | 65.8 | 28.8 | % | 7.6 | %* | 6.4 | %* | ||||||||||||
Total operating income
|
$ | 98.9 | $ | 107.3 | (7.8 | )% | 8.8 | %* | 10.4 | %* | ||||||||||
Operating margin
|
8.8 | % | 10.4 | % |
* | Percentage of consolidated net revenues |
Currency favorably affected total operating income by
approximately $3 million for the three-month period.
Regional operating income.
| Americas. The decrease in operating margin and operating income primarily reflected the regions decline in gross margin, the effects of which were partially offset by higher net revenues. | |
| Europe. The increase in operating margin and operating income was primarily due to higher net revenues and the favorable impact of currency. | |
| Asia Pacific. The increase in operating margin and operating income primarily reflected the regions improved gross margin and higher net revenues, the effects of which were partially offset primarily by higher expenses related to our company-operated store expansion. |
Corporate. Corporate expenses are
selling, general and administrative expenses that are not
attributed to any of our regional operating segments. Corporate
expenses for the three-month period increased over the same
prior-year period primarily due to the classification of certain
marketing, advertising and promotion, information technology and
human resources costs of a global nature centralized under
corporate management in the first
20
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quarter of 2011; such costs totaled approximately
$7 million in our Americas region and were not significant
to our Europe and Asia Pacific regions; prior period amounts
have not been reclassified. Higher corporate expenses also
reflected an increase in incentive compensation expense related
to higher projected funding.
Interest
expense
Interest expense increased to $34.9 million for the
three-month period ended February 27, 2011, from
$34.2 million for the same period in 2010. A decline in
interest expense driven by lower average borrowing rates,
resulting from our debt refinancing activity that occurred in
the second quarter of 2010, was more than offset primarily by
increased interest expense on our deferred compensation plans.
The weighted-average interest rate on average borrowings
outstanding for the three-month period ended February 27,
2011, was 6.84% as compared to 7.25% for the same period in 2010.
Other
income (expense), net
Other income (expense), net, primarily consists of foreign
exchange management activities and transactions. For the
three-month period ended February 27, 2011, we recorded
expense of $6.0 million compared to income of
$12.4 million for the same prior-year period.
The expense in 2011 reflected losses on foreign exchange
derivatives which economically hedge future cash flow
obligations of our foreign operations. The income in 2010
primarily reflects transaction gains on our foreign currency
denominated balances, including our Yen-denominated Eurobond, as
well as gains on foreign exchange derivatives.
Income
tax expense
Our effective income tax rate was 32.5% for the three months
ended February 27, 2011, compared to 34.7% for the same
period ended February 28, 2010. The reduction in our
effective income tax rate was primarily driven by an increase in
the amount of expected earnings from foreign operations subject
to tax rates lower than the U.S. statutory rate.
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.
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 27, 2011, 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 $298.2 million, as our total availability of
$376.4 million, based on collateral levels as defined by
the agreement, was reduced by $78.2 million of other
credit-related instruments such as documentary and standby
letters of credit allocated under the facility.
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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 27, 2011, we had cash and cash equivalents
totaling approximately $249.1 million, resulting in a total
liquidity position (unused availability and cash and cash
equivalents) of $547.3 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 2011 from those disclosed in our 2010 Annual
Report on
Form 10-K,
except for our projected pension plan contributions. Based on
changes in discount rates and the updated valuation of our
pension assets, as well as our current evaluation of alternative
methods available to us for measuring our pension funding
obligation, we now expect our required contribution amount in
2011 will be in the range of $60 million to
$80 million. We made a contribution of $40 million
during the first quarter of 2011 towards this anticipated
requirement.
Cash
flows
The following table summarizes, for the periods indicated,
selected items in our consolidated statements of cash flows:
Three Months Ended | ||||||||
February 27, |
February 28, |
|||||||
2011 | 2010 | |||||||
(Dollars in millions) | ||||||||
Cash provided by operating activities
|
$ | 46.0 | $ | 75.5 | ||||
Cash used for investing activities
|
(46.1 | ) | (37.9 | ) | ||||
Cash (used for) provided by financing activities
|
(22.4 | ) | 8.4 | |||||
Cash and cash equivalents
|
249.1 | 315.4 |
Cash
flows from operating activities
Cash provided by operating activities was $46.0 million for
the three-month period in 2011, as compared to
$75.5 million for the same period in 2010. Operating cash
declined compared to the prior year due to higher cash used for
inventory and our pension plan contribution. This decline was
partially offset by an increase in cash collected from
customers, reflecting our higher net revenues.
Cash
flows from investing activities
Cash used for investing activities was $46.1 million for
the three-month period in 2011, as compared to
$37.9 million for the same period in 2010. As compared to
the prior year, the increase in cash used for investing
activities primarily reflects investments made in our
information technology systems associated with the installation
of our global enterprise resource planning system.
Cash
flows from financing activities
Cash used for financing activities was $22.4 million for
the three-month period in 2011, compared to cash provided of
$8.4 million for the same period in 2010. Cash used in 2011
primarily related to our dividend payments to stockholders of
$20.0 million.
22
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Indebtedness
We had fixed-rate debt of approximately $1.5 billion (77%
of total debt) and variable-rate debt of approximately
$0.4 billion (23% of total debt) as of February 27,
2011. 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 2010 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 2010 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 2010 Annual Report on
Form 10-K
except that we no longer consider our accounting policy on
derivative and foreign exchange management activities to be
critical.
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 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 28, 2010, 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:
| consequences of impacts to the businesses of our wholesale customers caused by factors such as lower consumer spending, pricing changes and general economic conditions and changing consumer preferences; | |
| changes in the level of consumer spending for apparel in view of general economic and environmental conditions and pricing trends, and our ability to plan for and respond to the impact of those changes; |
23
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| our ability to mitigate costs related to manufacturing, sourcing, and raw materials supply, such as cotton, and to manage consumer response to such mitigating actions; | |
| consequences of the actions we take to support our supply chain partners as a response to the rising costs of manufacturing, sourcing, and raw materials supply; | |
| our ability to mitigate the impact of a slowdown in the Japanese economy due to the natural disasters and related events in that country; | |
| our ability to grow our Dockers® brand and to expand our Denizentm brand into new markets and channels; | |
| our and our wholesale customers decisions to modify strategies and adjust product mix, and our ability to manage any resulting product transition costs; | |
| 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 respond to price, innovation and other competitive pressures in the apparel industry and on our key customers; | |
| our ability to increase the number of dedicated stores for our products, including through opening and profitably operating company-operated stores; | |
| our effectiveness in increasing productivity and efficiency in our operations; | |
| our ability to implement, stabilize and optimize our enterprise resource planning system throughout our business without disruption or to mitigate such disruptions; | |
| consequences of foreign currency exchange rate fluctuations; | |
| the impact of the variables that effect the net periodic benefit cost and future funding requirements of our postretirement benefits and pension plans; | |
| our dependence on key distribution channels, customers and suppliers; | |
| 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 and 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 2010 Annual Report on
Form 10-K.
Item 4T. | CONTROLS AND PROCEDURES |
Evaluation
of Disclosure Controls and Procedures
As of February 27, 2011, 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 management, including
our chief executive officer and our chief financial officer. Our
chief executive officer and our chief financial officer
concluded that at February 27, 2011, 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,
24
Table of Contents
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
Item 1. | LEGAL PROCEEDINGS |
Litigation. There have been no material
developments in our litigation matters since we filed our 2010
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 2010 Annual Report on
Form 10-K.
Item 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
On February 3, 2011, our board approved the award of
restricted stock units (RSUs) representing an
aggregate of 1,734 shares of our common stock to Fernando
Aguirre, and the award of stock appreciation rights
(SARs) representing an aggregate of
569,370 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 non-employee directors, and
represent a pro-rated grant for the period of time since
Mr. Aguirre joined our 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. Each
recipients initial grant of RSUs, such as the
above-referenced grant to Mr. Aguirre, is subject to a
mandatory deferral feature, by which the RSU will be converted
to a share of common stock six months after discontinuation of
service with the Company for each fully vested RSU held at that
date. For subsequent grants, 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 common stock on the date of grant as
determined by the board. 25% of each SAR grant vests on
February 2, 2012, with the remaining 75% balance vesting at
a rate of 75%/36 months (2.08% per month) commencing
February 3, 2012, and ending January 3, 2015, subject
to continued service.
Upon the exercise of a SAR, the recipient will be entitled to
receive common stock with an aggregate fair market value equal
to 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 the number of SARs 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 7, 2011, we had
37,324,857 shares outstanding.
Item 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
26
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Item 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
None.
Item 5. | OTHER INFORMATION |
None.
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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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)
By: |
/s/ Heidi
L. Manes
|
Heidi L. Manes
Vice President and Controller
(Principal Accounting Officer)
Date: April 12, 2011
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EXHIBIT 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. |