Attached files
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EX-32 - EX-32 - LEVI STRAUSS & CO | f59546exv32.htm |
EX-31.2 - EX-31.2 - LEVI STRAUSS & CO | f59546exv31w2.htm |
EX-31.1 - EX-31.1 - LEVI STRAUSS & CO | f59546exv31w1.htm |
Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
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 May 29, 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 (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 | 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 July 7, 2011
LEVI
STRAUSS & CO. AND SUBSIDIARIES
INDEX TO
FORM 10-Q
FOR THE
QUARTERLY PERIOD ENDED MAY 29, 2011
2
Table of Contents
PART I
FINANCIAL INFORMATION
Item 1. | CONSOLIDATED FINANCIAL STATEMENTS |
LEVI
STRAUSS & CO. AND SUBSIDIARIES
(Unaudited) |
||||||||
May 29, |
November 28, |
|||||||
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
ASSETS
|
||||||||
Current Assets:
|
||||||||
Cash and cash equivalents
|
$ | 258,491 | $ | 269,726 | ||||
Restricted cash
|
3,737 | 4,028 | ||||||
Trade receivables, net of allowance for doubtful accounts of
$23,401 and $24,617
|
428,521 | 553,385 | ||||||
Inventories:
|
||||||||
Raw materials
|
7,358 | 6,770 | ||||||
Work-in-process
|
12,231 | 9,405 | ||||||
Finished goods
|
618,529 | 563,728 | ||||||
Total inventories
|
638,118 | 579,903 | ||||||
Deferred tax assets, net
|
141,426 | 137,892 | ||||||
Other current assets
|
143,595 | 106,198 | ||||||
Total current assets
|
1,613,888 | 1,651,132 | ||||||
Property, plant and equipment, net of accumulated depreciation
of $722,138 and $683,258
|
509,757 | 488,603 | ||||||
Goodwill
|
243,306 | 241,472 | ||||||
Other intangible assets, net
|
78,998 | 84,652 | ||||||
Non-current deferred tax assets, net
|
552,727 | 559,053 | ||||||
Other assets
|
117,203 | 110,337 | ||||||
Total assets
|
$ | 3,115,879 | $ | 3,135,249 | ||||
LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS DEFICIT | ||||||||
Current Liabilities:
|
||||||||
Short-term borrowings
|
$ | 51,610 | $ | 46,418 | ||||
Current maturities of long-term debt
|
| | ||||||
Current maturities of capital leases
|
1,871 | 1,777 | ||||||
Accounts payable
|
233,716 | 212,935 | ||||||
Other accrued liabilities
|
229,110 | 275,443 | ||||||
Accrued salaries, wages and employee benefits
|
181,740 | 196,152 | ||||||
Accrued interest payable
|
9,571 | 9,685 | ||||||
Accrued income taxes
|
15,024 | 17,115 | ||||||
Total current liabilities
|
722,642 | 759,525 | ||||||
Long-term debt
|
1,843,585 | 1,816,728 | ||||||
Long-term capital leases
|
2,995 | 3,578 | ||||||
Postretirement medical benefits
|
141,253 | 147,065 | ||||||
Pension liability
|
332,475 | 400,584 | ||||||
Long-term employee related benefits
|
97,957 | 102,764 | ||||||
Long-term income tax liabilities
|
47,752 | 50,552 | ||||||
Other long-term liabilities
|
54,278 | 54,281 | ||||||
Total liabilities
|
3,242,937 | 3,335,077 | ||||||
Commitments and contingencies
|
||||||||
Temporary equity
|
8,371 | 8,973 | ||||||
Stockholders Deficit:
|
||||||||
Levi Strauss & Co. stockholders deficit
|
||||||||
Common stock $.01 par value;
270,000,000 shares authorized; 37,324,857 shares and
37,322,358 shares issued and outstanding
|
373 | 373 | ||||||
Additional paid-in capital
|
22,856 | 18,840 | ||||||
Retained earnings
|
74,723 | 33,346 | ||||||
Accumulated other comprehensive loss
|
(242,513 | ) | (272,168 | ) | ||||
Total Levi Strauss & Co. stockholders deficit
|
(144,561 | ) | (219,609 | ) | ||||
Noncontrolling interest
|
9,132 | 10,808 | ||||||
Total stockholders deficit
|
(135,429 | ) | (208,801 | ) | ||||
Total liabilities, temporary equity and stockholders
deficit
|
$ | 3,115,879 | $ | 3,135,249 | ||||
The accompanying notes are an integral part of these
consolidated financial statements.
3
Table of Contents
Three Months Ended | Six Months Ended | |||||||||||||||
May 29, |
May 30, |
May 29, |
May 30, |
|||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(Dollars in thousands) |
||||||||||||||||
(Unaudited) | ||||||||||||||||
Net sales
|
$ | 1,074,400 | $ | 957,959 | $ | 2,174,285 | $ | 1,973,966 | ||||||||
Licensing revenue
|
18,522 | 18,570 | 39,330 | 37,769 | ||||||||||||
Net revenues
|
1,092,922 | 976,529 | 2,213,615 | 2,011,735 | ||||||||||||
Cost of goods sold
|
552,226 | 477,108 | 1,114,952 | 979,386 | ||||||||||||
Gross profit
|
540,696 | 499,421 | 1,098,663 | 1,032,349 | ||||||||||||
Selling, general and administrative expenses
|
475,720 | 430,199 | 934,813 | 855,876 | ||||||||||||
Operating income
|
64,976 | 69,222 | 163,850 | 176,473 | ||||||||||||
Interest expense
|
(33,515 | ) | (34,440 | ) | (68,381 | ) | (68,613 | ) | ||||||||
Loss on early extinguishment of debt
|
| (16,587 | ) | | (16,587 | ) | ||||||||||
Other income (expense), net
|
(1,006 | ) | 6,694 | (6,965 | ) | 19,157 | ||||||||||
Income before income taxes
|
30,455 | 24,889 | 88,504 | 110,430 | ||||||||||||
Income tax expense
|
9,944 | 43,279 | 28,825 | 72,951 | ||||||||||||
Net income (loss)
|
20,511 | (18,390 | ) | 59,679 | 37,479 | |||||||||||
Net loss attributable to noncontrolling interest
|
460 | 4,009 | 1,967 | 4,494 | ||||||||||||
Net income (loss) attributable to Levi Strauss &
Co.
|
$ | 20,971 | $ | (14,381 | ) | $ | 61,646 | $ | 41,973 | |||||||
The accompanying notes are an integral part of these
consolidated financial statements.
4
Table of Contents
Six Months Ended | ||||||||
May 29, |
May 30, |
|||||||
2011 | 2010 | |||||||
(Dollars in thousands) |
||||||||
(Unaudited) | ||||||||
Cash Flows from Operating Activities:
|
||||||||
Net income
|
$ | 59,679 | $ | 37,479 | ||||
Adjustments to reconcile net income to net cash provided by
operating activities:
|
||||||||
Depreciation and amortization
|
57,495 | 51,650 | ||||||
Asset impairments
|
2,382 | 1,166 | ||||||
(Gain) loss on disposal of property, plant and equipment
|
(76 | ) | 51 | |||||
Unrealized foreign exchange losses (gains)
|
9,300 | (19,376 | ) | |||||
Realized loss on settlement of forward foreign exchange
contracts not designated for hedge accounting
|
4,863 | 5,340 | ||||||
Employee benefit plans amortization from accumulated other
comprehensive loss
|
(503 | ) | 1,732 | |||||
Employee benefit plans curtailment loss, net
|
3,055 | 100 | ||||||
Noncash gain on extinguishment of debt, net of write-off of
unamortized debt issuance costs
|
| (13,647 | ) | |||||
Amortization of deferred debt issuance costs
|
2,138 | 2,284 | ||||||
Stock-based compensation
|
3,414 | 2,875 | ||||||
Allowance for doubtful accounts
|
1,354 | 3,564 | ||||||
Change in operating assets and liabilities:
|
||||||||
Trade receivables
|
134,540 | 129,489 | ||||||
Inventories
|
(42,491 | ) | (47,382 | ) | ||||
Other current assets
|
(38,850 | ) | (11,301 | ) | ||||
Other non-current assets
|
1,603 | (16,851 | ) | |||||
Accounts payable and other accrued liabilities
|
(38,238 | ) | (30,251 | ) | ||||
Income tax liabilities
|
(4,386 | ) | 56,525 | |||||
Accrued salaries, wages and employee benefits and long-term
employee related benefits
|
(69,003 | ) | (25,379 | ) | ||||
Other long-term liabilities
|
(1,018 | ) | 18,510 | |||||
Other, net
|
171 | (159 | ) | |||||
Net cash provided by operating activities
|
85,429 | 146,419 | ||||||
Cash Flows from Investing Activities:
|
||||||||
Purchases of property, plant and equipment
|
(75,713 | ) | (78,187 | ) | ||||
Proceeds from sale of property, plant and equipment
|
135 | 1,323 | ||||||
Payments on settlement of forward foreign exchange contracts not
designated for hedge accounting
|
(4,863 | ) | (5,340 | ) | ||||
Acquisitions, net of cash acquired
|
| (12,242 | ) | |||||
Other
|
(500 | ) | (114 | ) | ||||
Net cash used for investing activities
|
(80,941 | ) | (94,560 | ) | ||||
Cash Flows from Financing Activities:
|
||||||||
Proceeds from issuance of long-term debt
|
| 909,390 | ||||||
Repayments of long-term debt and capital leases
|
(953 | ) | (865,076 | ) | ||||
Short-term borrowings, net
|
527 | 21,798 | ||||||
Debt issuance costs
|
| (16,931 | ) | |||||
Restricted cash
|
571 | (257 | ) | |||||
Repurchase of common stock
|
(245 | ) | | |||||
Dividend to stockholders
|
(20,023 | ) | (20,013 | ) | ||||
Net cash (used for) provided by financing activities
|
(20,123 | ) | 28,911 | |||||
Effect of exchange rate changes on cash and cash equivalents
|
4,400 | 1,493 | ||||||
Net (decrease) increase in cash and cash equivalents
|
(11,235 | ) | 82,263 | |||||
Beginning cash and cash equivalents
|
269,726 | 270,804 | ||||||
Ending cash and cash equivalents
|
$ | 258,491 | $ | 353,067 | ||||
Supplemental disclosure of cash flow information:
|
||||||||
Cash paid during the period for:
|
||||||||
Interest
|
$ | 64,651 | $ | 82,453 | ||||
Income taxes
|
30,467 | 26,317 |
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 MAY 29, 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 and six months ended
May 29, 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.
In the second quarter of 2011, the Company identified that
certain of its leases contained embedded foreign currency
derivatives that had not been accounted for in prior periods.
The Company determined that the effect of not accounting for
these embedded derivatives in its previously issued financial
statements was not material, and, as the impact on the 2011
full-year financial statements is also not expected to be
material, recorded a correcting entry in the second quarter of
2011. The correction had the effect of increasing the fair value
of the Companys derivative net assets and of recognizing
other income. The correction had no effect on operating income
or cash flows, and increased income before income taxes and net
income in the second quarter of 2011 by $6.5 million and
$4.7 million, respectively.
Subsequent events have been evaluated through the issuance date
of these financial statements.
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 MAY 29, 2011
Pension
and Postretirement Benefits
The Company has several non-contributory defined benefit
retirement plans covering eligible employees. The Company also
provides certain health care benefits for U.S. employees
who meet age, participation and length of service requirements
at retirement. In addition, the Company sponsors other
retirement or post-employment plans for its foreign employees in
accordance with local government programs and requirements. The
Company retains the right to amend, curtail or discontinue any
aspect of the plans, subject to local regulations.
The Company recognizes either an asset or a liability for any
plans funded status in its consolidated balance sheets.
The Company measures changes in funded status using actuarial
models which utilize an attribution approach that generally
spreads individual events either over the estimated service
lives of the remaining employees in the plan, or, for plans
where participants will not earn additional benefits by
rendering future service which, beginning in the
second quarter of 2011, includes the Companys
U.S. plans over the plan participants
estimated remaining lives. The Companys policy is to fund
its retirement plans based upon actuarial recommendations and in
accordance with applicable laws, income tax regulations and
credit agreements. Net pension and postretirement benefit income
or expense is generally determined using assumptions which
include expected long-term rates of return on plan assets,
discount rates, compensation rate increases (where applicable)
and medical trend rates. The Company considers several factors
including actual historical rates, expected rates and external
data to determine the assumptions used in the actuarial models.
Pension benefits are primarily paid through trusts funded by the
Company. The Company pays postretirement benefits to the
healthcare service providers on behalf of the plans
participants.
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,
except for the following, which have been grouped by their
required effective dates for the Company:
Second
Quarter of 2012
| In May 2011, the FASB issued Accounting Standards Update No. 2011-04, Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, (ASU 2011-04). ASU 2011-04 changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to ensure consistency between U.S. GAAP and IFRS. ASU 2011-04 also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This new guidance is to be applied prospectively. The Company anticipates that the adoption of this standard will not materially expand its consolidated financial statement footnote disclosures. |
First
Quarter of 2013
| In June 2011, the FASB issued Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, (ASU 2011-05). ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in equity. ASU 2011-05 requires that all nonowner changes in stockholders equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. This new guidance is to be applied retrospectively. The Company anticipates that the adoption of this standard may materially change the presentation of its consolidated financial statements. |
7
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 29, 2011
NOTE 2: | GOODWILL AND OTHER INTANGIBLE ASSETS |
The changes in the carrying amount of goodwill by business
segment for the six months ended May 29, 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
|
4 | 1,804 | 26 | 1,834 | ||||||||||||
Balance, May 29, 2011
|
$ | 207,431 | $ | 33,407 | $ | 2,468 | $ | 243,306 | ||||||||
Other intangible assets, net, were as follows:
May 29, 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
|
41,851 | (18,531 | ) | 23,320 | 45,712 | (17,765 | ) | 27,947 | ||||||||||||||||
Customer lists
|
21,216 | (8,281 | ) | 12,935 | 20,037 | (6,075 | ) | 13,962 | ||||||||||||||||
Total
|
$ | 105,810 | $ | (26,812 | ) | $ | 78,998 | $ | 108,492 | $ | (23,840 | ) | $ | 84,652 | ||||||||||
For the three and six months ended May 29, 2011,
amortization of these intangible assets was $3.0 million
and $6.0 million, respectively, compared to
$3.7 million and $7.6 million, respectively, in the
same periods of 2010.
8
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 29, 2011
NOTE 3: | FAIR VALUE OF FINANCIAL INSTRUMENTS |
The following table presents the Companys financial
instruments that are carried at fair value:
May 29, 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
|
$ | 19,978 | $ | 19,978 | $ | | $ | 18,316 | $ | 18,316 | $ | | ||||||||||||
Forward foreign exchange contracts,
net(3)
|
7,499 | | 7,499 | 1,385 | | 1,385 | ||||||||||||||||||
Total
|
$ | 27,477 | $ | 19,978 | $ | 7,499 | $ | 19,701 | $ | 18,316 | $ | 1,385 | ||||||||||||
Financial liabilities carried at fair value
|
||||||||||||||||||||||||
Forward foreign exchange contracts,
net(3)
|
$ | 12,100 | $ | | $ | 12,100 | $ | 5,003 | $ | | $ | 5,003 | ||||||||||||
Total
|
$ | 12,100 | $ | | $ | 12,100 | $ | 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, where applicable, credit default swap prices. | |
(3) | The Companys forward foreign exchange contracts are subject to International Swaps and Derivatives Association, Inc. master agreements. These agreements permit the net-settlement of these 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:
May 29, 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
|
$ | 108,486 | $ | 107,404 | $ | 108,482 | $ | 107,129 | ||||||||
Senior term loan due 2014
|
323,920 | 314,204 | 324,423 | 311,476 | ||||||||||||
8.875% senior notes due 2016
|
355,091 | 371,278 | 355,004 | 373,379 | ||||||||||||
4.25% Yen-denominated Eurobonds due 2016
|
112,546 | 110,864 | 109,429 | 98,063 | ||||||||||||
7.75% Euro senior notes due 2018
|
425,710 | 421,467 | 401,982 | 407,993 | ||||||||||||
7.625% senior notes due 2020
|
526,668 | 533,231 | 526,557 | 542,307 | ||||||||||||
Short-term borrowings
|
52,076 | 52,076 | 46,722 | 46,722 | ||||||||||||
Total
|
$ | 1,904,497 | $ | 1,910,524 | $ | 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 MAY 29, 2011
NOTE 4: | DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES |
As of May 29, 2011, the Company had forward foreign
exchange contracts to buy $461.6 million and to sell
$622.6 million against various foreign currencies. These
contracts are at various exchange rates and expire at various
dates through May 2012.
The table below provides data about the carrying values of
derivative instruments and non-derivative instruments designated
as net investment hedges:
May 29, 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)
|
$ | 9,666 | $ | (2,167 | ) | $ | 7,499 | $ | 7,717 | $ | (6,332 | ) | $ | 1,385 | ||||||||||
Forward foreign exchange
contracts(2)
|
10,568 | (22,668 | ) | (12,100 | ) | 4,266 | (9,269 | ) | (5,003 | ) | ||||||||||||||
Total
|
$ | 20,234 | $ | (24,835 | ) | $ | 11,983 | $ | (15,601 | ) | ||||||||||||||
Non-derivatives designated as hedging instruments
|
||||||||||||||||||||||||
4.25% Yen-denominated Eurobonds due 2016
|
$ | | $ | (50,473 | ) | $ | | $ | (61,075 | ) | ||||||||||||||
7.75% Euro senior notes due 2018
|
| (424,320 | ) | | (400,740 | ) | ||||||||||||||||||
Total
|
$ | | $ | (474,793 | ) | $ | | $ | (461,815 | ) | ||||||||||||||
(1) | Included in Other current assets or Other 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 operations:
Gain or (Loss) |
Gain or (Loss) Recognized in Other |
|||||||||||||||||||||||
Recognized in AOCI |
Income (Expense), net (Ineffective |
|||||||||||||||||||||||
(Effective Portion) |
Portion and Amount Excluded from |
|||||||||||||||||||||||
As of |
As of |
Effectiveness Testing) | ||||||||||||||||||||||
May 29, |
November 28, |
Three Months Ended | Six Months Ended | |||||||||||||||||||||
2011 | 2010 | May 29, 2011 | May 30, 2010 | May 29, 2011 | May 30, 2010 | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Forward foreign exchange contracts
|
$ | 4,637 | $ | 4,637 | $ | | $ | | $ | | $ | | ||||||||||||
4.25% Yen-denominated Eurobonds due 2016
|
(25,931 | ) | (24,377 | ) | (453 | ) | 825 | (1,546 | ) | 5,550 | ||||||||||||||
7.75% Euro senior notes due 2018
|
(47,251 | ) | (23,671 | ) | | | | | ||||||||||||||||
Cumulative income taxes
|
26,696 | 17,022 | ||||||||||||||||||||||
Total
|
$ | (41,849 | ) | $ | (26,389 | ) | ||||||||||||||||||
10
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 29, 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 operations:
Gain or (Loss) During | ||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
May 29, |
May 30, |
May 29, |
May 30, |
|||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Forward foreign exchange contracts:
|
||||||||||||||||
Realized
|
$ | 860 | $ | (2,976 | ) | $ | (4,863 | ) | $ | (5,340 | ) | |||||
Unrealized
|
1,405 | 8,598 | (968 | ) | 15,945 | |||||||||||
Total
|
$ | 2,265 | $ | 5,622 | $ | (5,831 | ) | $ | 10,605 | |||||||
NOTE 5: | DEBT |
May 29, |
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
|
323,853 | 323,676 | ||||||
8.875% senior notes due 2016
|
350,000 | 350,000 | ||||||
4.25% Yen-denominated Eurobonds due 2016
|
112,162 | 109,062 | ||||||
7.75% Euro senior notes due 2018
|
424,320 | 400,740 | ||||||
7.625% senior notes due 2020
|
525,000 | 525,000 | ||||||
Total unsecured
|
1,735,335 | 1,708,478 | ||||||
Less: current maturities
|
| | ||||||
Total long-term debt
|
$ | 1,843,585 | $ | 1,816,728 | ||||
Short-term debt
|
||||||||
Short-term borrowings
|
$ | 51,610 | $ | 46,418 | ||||
Current maturities of long-term debt
|
| | ||||||
Total short-term debt
|
$ | 51,610 | $ | 46,418 | ||||
Total long-term and short-term debt
|
$ | 1,895,195 | $ | 1,863,146 | ||||
Short-term
Credit Lines and Standby Letters of Credit
As of May 29, 2011, the Companys total availability
of $378.0 million under its senior secured revolving credit
facility was reduced by $83.5 million of letters of credit
and other credit usage under the facility, yielding a net
availability of $294.5 million.
11
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 29, 2011
Interest
Rates on Borrowings
The Companys weighted-average interest rate on average
borrowings outstanding was 6.84% during both the three and six
months ended May 29, 2011, as compared to 7.40% and 7.33%,
respectively, in each of the same periods of 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 loss for the
Companys defined benefit pension plans and postretirement
benefit plans:
Pension Benefits | Postretirement Benefits | |||||||||||||||
Three Months Ended | Three Months Ended | |||||||||||||||
May 29, |
May 30, |
May 29, |
May 30, |
|||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Net periodic benefit cost (income):
|
||||||||||||||||
Service cost
|
$ | 2,604 | $ | 1,927 | $ | 119 | $ | 118 | ||||||||
Interest cost
|
15,126 | 14,888 | 1,907 | 2,169 | ||||||||||||
Expected return on plan assets
|
(13,057 | ) | (11,522 | ) | | | ||||||||||
Amortization of prior service cost
(benefit)(1)
|
20 | 111 | (7,237 | ) | (7,391 | ) | ||||||||||
Amortization of actuarial loss
|
4,304 | 6,666 | 1,257 | 1,402 | ||||||||||||
Curtailment
loss(2)
|
3,071 | | | | ||||||||||||
Net settlement loss
|
705 | 20 | | | ||||||||||||
Net periodic benefit cost (income)
|
12,773 | 12,090 | (3,954 | ) | (3,702 | ) | ||||||||||
Changes in accumulated other comprehensive loss:
|
||||||||||||||||
Actuarial (gain)
loss(2)
|
(32,415 | ) | 179 | | | |||||||||||
Amortization of prior service (cost) benefit
|
(20 | ) | (111 | ) | 7,237 | 7,391 | ||||||||||
Amortization of actuarial loss
|
(4,304 | ) | (6,666 | ) | (1,257 | ) | (1,402 | ) | ||||||||
Curtailment
loss(2)
|
(3,071 | ) | | | | |||||||||||
Net settlement loss
|
(360 | ) | | | | |||||||||||
Total recognized in accumulated other comprehensive loss
|
(40,170 | ) | (6,598 | ) | 5,980 | 5,989 | ||||||||||
Total recognized in net periodic benefit cost (income) and
accumulated other comprehensive loss
|
$ | (27,397 | ) | $ | 5,492 | $ | 2,026 | $ | 2,287 | |||||||
12
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 29, 2011
Pension Benefits | Postretirement Benefits | |||||||||||||||
Six Months Ended | Six Months Ended | |||||||||||||||
May 29, |
May 30, |
May 29, |
May 30, |
|||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Net periodic benefit cost (income):
|
||||||||||||||||
Service cost
|
$ | 5,187 | $ | 3,914 | $ | 239 | $ | 236 | ||||||||
Interest cost
|
30,154 | 29,877 | 3,814 | 4,338 | ||||||||||||
Expected return on plan assets
|
(25,955 | ) | (23,090 | ) | | | ||||||||||
Amortization of prior service cost
(benefit)(1)
|
85 | 229 | (14,473 | ) | (14,783 | ) | ||||||||||
Amortization of actuarial loss
|
11,034 | 13,331 | 2,513 | 2,804 | ||||||||||||
Curtailment
loss(2)
|
3,055 | 100 | | | ||||||||||||
Net settlement loss
|
716 | 192 | | | ||||||||||||
Net periodic benefit cost (income)
|
24,276 | 24,553 | (7,907 | ) | (7,405 | ) | ||||||||||
Changes in accumulated other comprehensive loss:
|
||||||||||||||||
Actuarial (gain)
loss(2)
|
(32,415 | ) | 303 | | | |||||||||||
Amortization of prior service (cost) benefit
|
(85 | ) | (229 | ) | 14,473 | 14,783 | ||||||||||
Amortization of actuarial loss
|
(11,034 | ) | (13,331 | ) | (2,513 | ) | (2,804 | ) | ||||||||
Curtailment
loss(2)
|
(3,071 | ) | (13 | ) | | | ||||||||||
Net settlement loss
|
(338 | ) | (151 | ) | | | ||||||||||
Total recognized in accumulated other comprehensive loss
|
(46,943 | ) | (13,421 | ) | 11,960 | 11,979 | ||||||||||
Total recognized in net periodic benefit cost (income) and
accumulated other comprehensive loss
|
$ | (22,667 | ) | $ | 11,132 | $ | 4,053 | $ | 4,574 | |||||||
(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. | |
(2) | On April 15, 2011, participants in the Companys U.S. pension plans ceased earning benefits. This event triggered a remeasurement of the U.S. pension plans resulting in a $32.0 million change in the plans funded status and a $2.9 million curtailment loss attributable to the accelerated recognition of prior service cost. |
The estimated net loss for the Companys defined benefit
pension plans that will be amortized from Accumulated
other comprehensive loss into net periodic benefit cost in
2011 is expected to be approximately $15.0 million. The
assumptions used in the April 2011 remeasurement were not
materially different from those disclosed in our 2010 Annual
Report on
Form 10-K.
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.
13
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 29, 2011
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 | Six Months Ended | |||||||||||||||
May 29, |
May 30, |
May 29, |
May 30, |
|||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Net income (loss)
|
$ | 20,511 | $ | (18,390 | ) | $ | 59,679 | $ | 37,479 | |||||||
Other comprehensive income (loss):
|
||||||||||||||||
Pension and postretirement benefits
|
21,335 | 3,254 | 21,850 | 1,023 | ||||||||||||
Net investment hedge (losses) gains
|
(6,570 | ) | 22,612 | (15,460 | ) | 44,843 | ||||||||||
Foreign currency translation gains (losses)
|
14,363 | (25,853 | ) | 22,890 | (51,608 | ) | ||||||||||
Unrealized gain on marketable securities
|
93 | 167 | 667 | 184 | ||||||||||||
Total other comprehensive income (loss)
|
29,221 | 180 | 29,947 | (5,558 | ) | |||||||||||
Comprehensive income (loss)
|
49,732 | (18,210 | ) | 89,626 | 31,921 | |||||||||||
Comprehensive loss attributable to noncontrolling interest
|
(384 | ) | (4,370 | ) | (1,675 | ) | (5,462 | ) | ||||||||
Comprehensive income (loss) attributable to Levi
Strauss & Co.
|
$ | 50,116 | $ | (13,840 | ) | $ | 91,301 | $ | 37,383 | |||||||
14
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 29, 2011
The following is a summary of the components of
Accumulated other comprehensive loss, net of related
income taxes:
May 29, |
November 28, |
|||||||
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Pension and postretirement benefits
|
$ | (176,957 | ) | $ | (198,807 | ) | ||
Net investment hedge losses
|
(41,849 | ) | (26,389 | ) | ||||
Foreign currency translation losses
|
(14,164 | ) | (37,054 | ) | ||||
Unrealized gain on marketable securities
|
824 | 157 | ||||||
Accumulated other comprehensive loss
|
(232,146 | ) | (262,093 | ) | ||||
Accumulated other comprehensive income attributable to
noncontrolling interest
|
10,367 | 10,075 | ||||||
Accumulated other comprehensive loss attributable to Levi
Strauss & Co.
|
$ | (242,513 | ) | $ | (272,168 | ) | ||
NOTE 10: | OTHER INCOME (EXPENSE), NET |
The following table summarizes significant components of
Other income (expense), net:
Three Months Ended | Six Months Ended | |||||||||||||||
May 29, |
May 30, |
May 29, |
May 30, |
|||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Foreign exchange management gains
(losses)(1)
|
$ | 2,265 | $ | 5,622 | $ | (5,831 | ) | $ | 10,605 | |||||||
Foreign currency transaction (losses)
gains(2)
|
(4,236 | ) | 1,027 | (3,294 | ) | 8,203 | ||||||||||
Interest income
|
404 | 700 | 819 | 1,292 | ||||||||||||
Other
|
561 | (655 | ) | 1,341 | (943 | ) | ||||||||||
Total other income (expense), net
|
$ | (1,006 | ) | $ | 6,694 | $ | (6,965 | ) | $ | 19,157 | ||||||
(1) | In 2011, the Company recorded losses on its forward foreign exchange contracts in both the three- and six-month periods, primarily due to the depreciation of the U.S. Dollar against various foreign currencies, most notably the Swedish Krona and the Australian Dollar. For the three- and six-month periods, these losses were offset fully and partially, respectively, by the correction recorded for embedded foreign currency derivatives in certain of the Companys leases. Please see Note 1 for additional information. Gains in 2010 were primarily due to the appreciation of the U.S. Dollar against the Euro, the Japanese Yen and the Australian Dollar. | |
(2) | Foreign currency transaction losses in 2011 were primarily due to the depreciation of the U.S. Dollar against the Euro. Foreign currency transaction gains in 2010 were primarily due to the appreciation of the U.S. Dollar against the Euro and the Japanese Yen. |
NOTE 11: | INCOME TAXES |
The effective income tax rate was 32.6% for the six months ended
May 29, 2011, compared to 66.1% for the same period ended
May 30, 2010. The reduction in the effective tax rate was
primarily driven by two significant discrete income tax charges
recognized in the second quarter of 2010, as described below.
During the second quarter of 2010, the Company recorded a
discrete tax expense of $14.2 million to recognize a
valuation allowance to fully offset the amount of deferred tax
assets in Japan and another discrete tax expense of
$14.0 million to recognize the reduction in deferred tax
assets as a result of the enactment of the Patient Protection
and Affordable Care Act (the Health Care Act).
15
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 29, 2011
As of May 29, 2011, the Companys total gross amount
of unrecognized tax benefits was $147.9 million, of which
$89.3 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.
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- and
six-month periods ended May 29, 2011, the Company donated
$0.4 million and $0.7 million, respectively, to the
Levi Strauss Foundation as compared to $0.3 million and
$0.5 million, respectively, for the same prior-year periods.
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.
16
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 29, 2011
Business segment information for the Company is as follows:
Three Months Ended | Six Months Ended | |||||||||||||||
May 29, |
May 30, |
May 29, |
May 30, |
|||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Net revenues:
|
||||||||||||||||
Americas
|
$ | 599,074 | $ | 557,962 | $ | 1,191,260 | $ | 1,103,211 | ||||||||
Europe
|
281,108 | 240,130 | 592,712 | 546,253 | ||||||||||||
Asia Pacific
|
212,740 | 178,437 | 429,643 | 362,271 | ||||||||||||
Total net revenues
|
$ | 1,092,922 | $ | 976,529 | $ | 2,213,615 | $ | 2,011,735 | ||||||||
Operating income:
|
||||||||||||||||
Americas
|
$ | 82,600 | $ | 84,917 | $ | 157,633 | $ | 160,980 | ||||||||
Europe
|
37,522 | 31,598 | 108,813 | 97,983 | ||||||||||||
Asia Pacific
|
25,429 | 16,896 | 62,792 | 47,549 | ||||||||||||
Regional operating income
|
145,551 | 133,411 | 329,238 | 306,512 | ||||||||||||
Corporate expenses
|
80,575 | 64,189 | 165,388 | 130,039 | ||||||||||||
Total operating income
|
64,976 | 69,222 | 163,850 | 176,473 | ||||||||||||
Interest expense
|
(33,515 | ) | (34,440 | ) | (68,381 | ) | (68,613 | ) | ||||||||
Loss on early extinguishment of debt
|
| (16,587 | ) | | (16,587 | ) | ||||||||||
Other income (expense), net
|
(1,006 | ) | 6,694 | (6,965 | ) | 19,157 | ||||||||||
Income before income taxes
|
$ | 30,455 | $ | 24,889 | $ | 88,504 | $ | 110,430 | ||||||||
NOTE 14: | SUBSEQUENT EVENT |
On June 16, 2011, the Company announced that effective
September 1, 2011, R. John Anderson will cease to be the
Companys President and Chief Executive Officer and will be
succeeded by Charles V. Bergh. Mr. Bergh entered into an
employment agreement with the Company on June 9, 2011, and
on June 16, 2011, Mr. Anderson entered into a
Transition Services, Separation Agreement and Release of All
Claims with the Company. Mr. Anderson will continue to
serve in his current position until September 1, 2011.
Charges associated with the separation agreement will be
recorded in the Companys third quarter financial
statements.
17
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
498 company-operated stores located in 31 countries,
including the United States. These stores generated
approximately 18% of our net revenues in the first half of 2011,
as compared to the first half of 2010, when company-operated
stores generated 16% of our net revenues. 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 46% of our net revenues and 52% of our
regional operating income in the six-month period in 2011. Sales
of
Levis®
brand products represented approximately 83% of our total net
sales in the six-month period in 2011.
Trends
Affecting Our Business
During the second quarter of 2011, 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.
Most markets around the world continued to feel the lingering
impact of the challenged economy during the quarter. 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.
Our
Second Quarter 2011 Results
Our second 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 12% compared to the second quarter of 2010, an increase of 8% on a constant-currency basis, 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 and Europe. | |
| Operating income. Our operating income and operating margin declined compared to the second quarter of 2010, as the benefits from the increase in our net revenues were offset primarily by a lower gross margin, reflecting higher sales discounts and the higher cost of cotton, and our continued investment in retail expansion. |
18
Table of Contents
| Cash flows. Cash flows provided by operating activities were $85 million for the six-month period in 2011 as compared to $146 million for the same period in 2010, primarily reflecting our inventory build and a contribution to our pension plans in 2011. |
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.
19
Table of Contents
Results
of Operations for Three and Six Months Ended May 29, 2011,
as Compared to Same Periods in 2010
The following table summarizes, for the periods indicated, our
consolidated statements of operations, the changes in these
items from period to period and these items expressed as a
percentage of net revenues:
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||||||||||
May 29, |
May 30, |
May 29, |
May 30, |
|||||||||||||||||||||||||||||||||||||
% |
2011 |
2010 |
% |
2011 |
2010 |
|||||||||||||||||||||||||||||||||||
May 29, |
May 30, |
Increase |
% of Net |
% of Net |
May 29, |
May 30, |
Increase |
% of Net |
% of Net |
|||||||||||||||||||||||||||||||
2011 | 2010 | (Decrease) | Revenues | Revenues | 2011 | 2010 | (Decrease) | Revenues | Revenues | |||||||||||||||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||||||||||||||||||
Net sales
|
$ | 1,074.4 | $ | 958.0 | 12.2 | % | 98.3 | % | 98.1 | % | $ | 2,174.3 | $ | 1,974.0 | 10.1 | % | 98.2 | % | 98.1 | % | ||||||||||||||||||||
Licensing revenue
|
18.5 | 18.5 | (0.3 | )% | 1.7 | % | 1.9 | % | 39.3 | 37.7 | 4.1 | % | 1.8 | % | 1.9 | % | ||||||||||||||||||||||||
Net revenues
|
1,092.9 | 976.5 | 11.9 | % | 100.0 | % | 100.0 | % | 2,213.6 | 2,011.7 | 10.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||||||||||||
Cost of goods sold
|
552.2 | 477.1 | 15.7 | % | 50.5 | % | 48.9 | % | 1,114.9 | 979.3 | 13.8 | % | 50.4 | % | 48.7 | % | ||||||||||||||||||||||||
Gross profit
|
540.7 | 499.4 | 8.3 | % | 49.5 | % | 51.1 | % | 1,098.7 | 1,032.4 | 6.4 | % | 49.6 | % | 51.3 | % | ||||||||||||||||||||||||
Selling, general and administrative expenses
|
475.7 | 430.2 | 10.6 | % | 43.5 | % | 44.1 | % | 934.8 | 855.9 | 9.2 | % | 42.2 | % | 42.5 | % | ||||||||||||||||||||||||
Operating income
|
65.0 | 69.2 | (6.1 | )% | 5.9 | % | 7.1 | % | 163.9 | 176.5 | (7.2 | )% | 7.4 | % | 8.8 | % | ||||||||||||||||||||||||
Interest expense
|
(33.5 | ) | (34.4 | ) | (2.7 | )% | (3.1 | )% | (3.5 | )% | (68.4 | ) | (68.6 | ) | (0.3 | )% | (3.1 | )% | (3.4 | )% | ||||||||||||||||||||
Loss on early extinguishment of debt
|
| (16.6 | ) | (100.0 | )% | | (1.7 | )% | | (16.6 | ) | (100.0 | )% | | (0.8 | )% | ||||||||||||||||||||||||
Other income (expense), net
|
(1.0 | ) | 6.7 | (115.0 | )% | (0.1 | )% | 0.7 | % | (7.0 | ) | 19.2 | (136.4 | )% | (0.3 | )% | 1.0 | % | ||||||||||||||||||||||
Income before income taxes
|
30.5 | 24.9 | 22.4 | % | 2.8 | % | 2.5 | % | 88.5 | 110.5 | (19.9 | )% | 4.0 | % | 5.5 | % | ||||||||||||||||||||||||
Income tax expense
|
10.0 | 43.3 | (77.0 | )% | 0.9 | % | 4.4 | % | 28.8 | 73.0 | (60.5 | )% | 1.3 | % | 3.6 | % | ||||||||||||||||||||||||
Net income (loss)
|
20.5 | (18.4 | ) | 211.5 | % | 1.9 | % | (1.9 | )% | 59.7 | 37.5 | 59.2 | % | 2.7 | % | 1.9 | % | |||||||||||||||||||||||
Net loss attributable to noncontrolling interest
|
0.5 | 4.0 | 88.5 | % | | 0.4 | % | 1.9 | 4.5 | (56.2 | )% | 0.1 | % | 0.2 | % | |||||||||||||||||||||||||
Net income (loss) attributable to Levi Strauss &
Co.
|
$ | 21.0 | $ | (14.4 | ) | 245.8 | % | 1.9 | % | (1.5 | )% | $ | 61.6 | $ | 42.0 | 46.9 | % | 2.8 | % | 2.1 | % | |||||||||||||||||||
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 | Six Months Ended | |||||||||||||||||||||||||||||||
% Increase (Decrease) | % Increase (Decrease) | |||||||||||||||||||||||||||||||
May 29, |
May 30, |
As |
Constant |
May 29, |
May 30, |
As |
Constant |
|||||||||||||||||||||||||
2011 | 2010 | Reported | Currency | 2011 | 2010 | Reported | Currency | |||||||||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||||||||||
Net revenues:
|
||||||||||||||||||||||||||||||||
Americas
|
$ | 599.1 | $ | 558.0 | 7.4 | % | 6.6 | % | $ | 1,191.3 | $ | 1,103.2 | 8.0 | % | 7.3 | % | ||||||||||||||||
Europe
|
281.1 | 240.1 | 17.1 | % | 9.4 | % | 592.7 | 546.2 | 8.5 | % | 7.7 | % | ||||||||||||||||||||
Asia Pacific
|
212.7 | 178.4 | 19.2 | % | 11.9 | % | 429.6 | 362.3 | 18.6 | % | 12.2 | % | ||||||||||||||||||||
Total net revenues
|
$ | 1,092.9 | $ | 976.5 | 11.9 | % | 8.3 | % | $ | 2,213.6 | $ | 2,011.7 | 10.0 | % | 8.3 | % | ||||||||||||||||
Total net revenues increased on both reported and
constant-currency bases for the three- and six-month periods
ended May 29, 2011, as compared to the same prior-year
periods. 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- and six-month periods, with currency
affecting net revenues favorably by approximately
$5 million and $8 million, respectively.
20
Table of Contents
For both periods, the regions increased net revenues were
driven by the
Levis®
brand, reflecting a higher volume of sales in our retail stores
and at wholesale. Higher net revenues in the region also
reflected the price increases we have implemented. The improved
Levis®
brand performance was partially offset by declines in the
three-month period of net sales from our
U.S. Dockers®
brand.
Europe. Net revenues in Europe
increased on both reported and constant-currency bases for the
three- and six-month periods, with currency affecting net
revenues favorably by approximately $18 million and
$5 million, respectively.
The increase in the regions net revenues was driven by the
expansion and improved performance of our company-operated
retail network throughout the region and higher sales in our
traditional wholesale channels. Growth primarily reflected the
success of our
Levis®
brand womens products.
Asia Pacific. Net revenues in Asia
Pacific increased on both reported and constant-currency bases
for the three- and six-month periods, with currency affecting
net revenues favorably by approximately $13 million and
$22 million, respectively.
The net revenues increase in both periods 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 partially 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 | Six Months Ended | |||||||||||||||||||||||
% |
% |
|||||||||||||||||||||||
May 29, |
May 30, |
Increase |
May 29, |
May 30, |
Increase |
|||||||||||||||||||
2011 | 2010 | (Decrease) | 2011 | 2010 | (Decrease) | |||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||
Net revenues
|
$ | 1,092.9 | $ | 976.5 | 11.9 | % | $ | 2,213.6 | $ | 2,011.7 | 10.0 | % | ||||||||||||
Cost of goods sold
|
552.2 | 477.1 | 15.7 | % | 1,114.9 | 979.3 | 13.8 | % | ||||||||||||||||
Gross profit
|
$ | 540.7 | $ | 499.4 | 8.3 | % | $ | 1,098.7 | $ | 1,032.4 | 6.4 | % | ||||||||||||
Gross margin
|
49.5 | % | 51.1 | % | 49.6 | % | 51.3 | % |
As compared to the same prior-year periods, the gross profit
increase for the three- and six-month periods ended May 29,
2011, was driven by the increase in our net revenues and
favorable currency impact of approximately $20 million and
$22 million, respectively, partially offset by a decline in
our gross margin. The gross margin decrease was primarily due to
an increase in sales discounts, in both our
Levis®
and
Dockers®
brands, to drive sales and manage inventory, and the higher cost
of cotton. These factors were partially offset by the increased
revenue contribution from our company-operated retail network,
which generally has a higher gross margin than our wholesale
business, and our price increases.
21
Table of Contents
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 | Six Months Ended | |||||||||||||||||||||||||||||||||||||||
May 29, |
May 30, |
May 29, |
May 30, |
|||||||||||||||||||||||||||||||||||||
% |
2011 |
2010 |
% |
2011 |
2010 |
|||||||||||||||||||||||||||||||||||
May 29, |
May 30, |
Increase |
% of Net |
% of Net |
May 29, |
May 30, |
Increase |
% of Net |
% of Net |
|||||||||||||||||||||||||||||||
2011 | 2010 | (Decrease) | Revenues | Revenues | 2011 | 2010 | (Decrease) | Revenues | Revenues | |||||||||||||||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||||||||||||||||||
Selling
|
$ | 174.1 | $ | 147.7 | 17.8 | % | 15.9 | % | 15.1 | % | $ | 349.3 | $ | 304.0 | 14.9 | % | 15.8 | % | 15.1 | % | ||||||||||||||||||||
Advertising and promotion
|
72.2 | 71.1 | 1.5 | % | 6.6 | % | 7.3 | % | 134.4 | 129.6 | 3.7 | % | 6.1 | % | 6.4 | % | ||||||||||||||||||||||||
Administration
|
103.3 | 98.6 | 4.8 | % | 9.5 | % | 10.1 | % | 207.3 | 193.4 | 7.2 | % | 9.4 | % | 9.6 | % | ||||||||||||||||||||||||
Other
|
126.1 | 112.8 | 11.9 | % | 11.5 | % | 11.5 | % | 243.8 | 228.9 | 6.5 | % | 11.0 | % | 11.4 | % | ||||||||||||||||||||||||
Total SG&A
|
$ | 475.7 | $ | 430.2 | 10.6 | % | 43.5 | % | 44.1 | % | $ | 934.8 | $ | 855.9 | 9.2 | % | 42.2 | % | 42.5 | % | ||||||||||||||||||||
Currency drove approximately $16 million and
$15 million of the increase in SG&A expenses for the
three- and six-month periods ended May 29, 2011,
respectively, as compared to the same prior-year periods.
Selling. In both periods, currency
drove approximately $7 million of the increase. Higher
selling expenses across all business segments primarily
reflected additional costs, such as rents and increased
headcount, associated with the continued expansion of our
company-operated store network. We had 45 more company-operated
stores at the end of the second quarter of 2011 than we did at
the end of the second quarter of 2010.
Advertising and promotion. For both
periods, the increase in advertising and promotion expenses was
attributable to the effects of currency. Expenses in both
periods in 2011 and 2010 included campaign spend in support of
our
U.S. Levis®
and
U.S. Dockers®
brands and, with respect to expenses in 2011, our
recently-launched
Denizentm
brand.
Administration. Higher administration
expenses in both periods included increased spending on various
corporate initiatives, and with respect to the six-month period,
an increase in incentive compensation expense related to higher
projected funding.
Other. Other SG&A expenses include
distribution, information resources, and marketing organization
costs. These costs increased primarily due to an increase in
severance costs for headcount reductions as well as increased
marketing project costs related to our strategic initiatives.
22
Table of Contents
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 | Six Months Ended | |||||||||||||||||||||||||||||||||||||||
May 29, |
May 30, |
May 29, |
May 30, |
|||||||||||||||||||||||||||||||||||||
% |
2011 |
2010 |
% |
2011 |
2010 |
|||||||||||||||||||||||||||||||||||
May 29, |
May 30, |
Increase |
% of Net |
% of Net |
May 29, |
May 30, |
Increase |
% of Net |
% of Net |
|||||||||||||||||||||||||||||||
2011 | 2010 | (Decrease) | Revenues | Revenues | 2011 | 2010 | (Decrease) | Revenues | Revenues | |||||||||||||||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||||||||||||||||||
Operating income:
|
||||||||||||||||||||||||||||||||||||||||
Americas
|
$ | 82.6 | $ | 84.9 | (2.7 | )% | 13.8 | % | 15.2 | % | $ | 157.6 | $ | 161.0 | (2.1 | )% | 13.2 | % | 14.6 | % | ||||||||||||||||||||
Europe
|
37.5 | 31.6 | 18.7 | % | 13.3 | % | 13.2 | % | 108.8 | 98.0 | 11.1 | % | 18.4 | % | 17.9 | % | ||||||||||||||||||||||||
Asia Pacific
|
25.5 | 16.9 | 50.5 | % | 12.0 | % | 9.5 | % | 62.8 | 47.5 | 32.1 | % | 14.6 | % | 13.1 | % | ||||||||||||||||||||||||
Total regional operating income
|
145.6 | 133.4 | 9.1 | % | 13.3 | %* | 13.7 | %* | 329.2 | 306.5 | 7.4 | % | 14.9 | %* | 15.2 | %* | ||||||||||||||||||||||||
Corporate expenses
|
80.6 | 64.2 | 25.5 | % | 7.4 | %* | 6.6 | %* | 165.3 | 130.0 | 27.2 | % | 7.5 | %* | 6.5 | %* | ||||||||||||||||||||||||
Total operating income
|
$ | 65.0 | $ | 69.2 | (6.1 | )% | 5.9 | %* | 7.1 | %* | $ | 163.9 | $ | 176.5 | (7.2 | )% | 7.4 | %* | 8.8 | %* | ||||||||||||||||||||
Operating margin
|
5.9 | % | 7.1 | % | 7.4 | % | 8.8 | % |
* | Percentage of consolidated net revenues |
Currency favorably affected total operating income by
approximately $4 million and $7 million for the three-
and six-month periods, respectively.
Regional
operating
income.
| Americas. For both periods, 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. For both periods, the increase in operating margin and operating income was primarily due to higher net revenues and the favorable impact of currency. | |
| Asia Pacific. For both periods, the increase in operating margin and operating income primarily reflected the regions improved gross margin and higher net revenues as well as the favorable impact of currency. |
Corporate. Corporate expenses are
selling, general and administrative expenses that are not
attributed to any of our regional operating segments. Higher
corporate expenses in both periods included an increase in
severance costs for headcount reductions, increased costs
associated with various corporate initiatives and higher
marketing project costs, and with respect to the six-month
period, increased incentive compensation expense due to higher
projected funding.
Interest
expense
Interest expense decreased to $33.5 million and
$68.4 million for the three- and six-month periods ended
May 29, 2011, respectively, from $34.4 million and
$68.6 million for the same periods 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 partially offset by an increase
in interest expense on our deferred compensation plans.
The weighted-average interest rate on average borrowings
outstanding was 6.84% for both the three- and six-month periods
ended May 29, 2011, as compared to 7.40% and 7.33%,
respectively, for each of the same periods in 2010.
23
Table of Contents
Other
income (expense), net
Other income (expense), net, primarily consists of foreign
exchange management activities and transactions. For the three-
and six-month periods ended May 29, 2011, we recorded
expense of $1.0 million and $7.0 million,
respectively, as compared to income of $6.7 million and
$19.2 million for the same prior-year periods.
The net expense in the three-month period in 2011 reflected
losses on our foreign currency denominated balances, offset
primarily by gains relating to the effect of a correcting entry
to record embedded foreign currency derivatives in certain of
our leases. The expense in the six-month period in 2011
primarily reflected losses on foreign exchange derivatives which
generally economically hedge future cash flow obligations of our
foreign operations. The income in 2010 primarily reflected gains
on foreign exchange derivatives.
Income
tax expense
Our effective income tax rate was 32.6% for the six months ended
May 29, 2011, compared to 66.1% for the same period ended
May 30, 2010. Twenty-six percentage points of the higher
2010 effective tax rate were driven by two significant discrete
income tax charges recognized in the second quarter of 2010, as
described below.
During the second quarter of 2010, we recorded a discrete tax
expense of $14.2 million to recognize a valuation allowance
to fully offset the amount of deferred tax assets in Japan and
another discrete tax expense of $14.0 million to recognize
the reduction in deferred tax assets as a result of the
enactment of the Patient Protection and Affordable Care Act (the
Health Care Act).
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 May 29,
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 $294.5 million, as our total availability of
$378.0 million, based on collateral levels as defined by
the agreement, was reduced by $83.5 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 May 29, 2011, we had cash and cash equivalents
totaling approximately $258.5 million, resulting in a total
liquidity position (unused availability and cash and cash
equivalents) of $553.0 million.
24
Table of Contents
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 to be approximately $70 million.
Cash
flows
The following table summarizes, for the periods indicated,
selected items in our consolidated statements of cash flows:
Six Months Ended | ||||||||
May 29, |
May 30, |
|||||||
2011 | 2010 | |||||||
(Dollars in millions) | ||||||||
Cash provided by operating activities
|
$ | 85.4 | $ | 146.4 | ||||
Cash used for investing activities
|
(80.9 | ) | (94.6 | ) | ||||
Cash (used for) provided by financing activities
|
(20.1 | ) | 28.9 | |||||
Cash and cash equivalents
|
258.5 | 353.1 |
Cash
flows from operating activities
Cash provided by operating activities was $85.4 million for
the six-month period in 2011, as compared to $146.4 million
for the same period in 2010. Cash provided by operating
activities declined compared to the prior year due to higher
cash used for inventory, our pension plan contribution in the
first quarter of 2011, and higher payments to vendors,
reflecting the increase in our SG&A expenses. This decline
was partially offset by an increase in cash collected from
customers, reflecting our higher net revenues, and a decrease in
cash paid for interest related to our refinancing activities in
May 2010.
Cash
flows from investing activities
Cash used for investing activities was $80.9 million for
the six-month period in 2011, as compared to $94.6 million
for the same period in 2010. As compared to the prior year, the
decrease in cash used for investing activities primarily
reflects the 2010 costs associated with the remodeling of the
Companys headquarters, partially offset by investments
made in our information technology systems associated with the
installation of our global enterprise resource planning system
in 2011. Cash used for investing activities in 2010 also
reflected final payment for an acquisition in 2009.
Cash
flows from financing activities
Cash used for financing activities was $20.1 million for
the six-month period in 2011, compared to cash provided of
$28.9 million for the same period in 2010. Cash used in
2011 primarily related to our dividend payment to stockholders
of $20.0 million. Net cash provided in 2010 reflected our
May 2010 refinancing activities.
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 May 29, 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
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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 significant 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 for the following:
| We no longer consider our accounting policy on derivative and foreign exchange management activities to be critical; and | |
| We measure changes in the funded status of our pension and postretirement benefits plans using actuarial models which utilize an attribution approach that generally spreads individual events either over the estimated service lives of the remaining employees in the plan, or, for plans where participants will not earn additional benefits by rendering future service, over the plan participants estimated remaining lives. |
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; |
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| 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; | |
| 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 adjustment to organizational changes including the continued globalization of our brand management and the introduction of a new chief executive officer; | |
| 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.
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Item 4T. | CONTROLS AND PROCEDURES |
Evaluation
of Disclosure Controls and Procedures
As of May 29, 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 May 29, 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, 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.
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PART II
OTHER INFORMATION
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 |
None.
Item 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
Item 4. | REMOVED AND RESERVED |
Item 5. | OTHER INFORMATION |
None.
Item 6. | EXHIBITS |
10 | .1 | Employment Agreement between the Company and Charles V. Bergh, dated June 9, 2011. Incorporated by reference to Exhibit 10.1 to Registrants Current Report on Form 8-K filed with the Commission on June 16, 2011. | ||
10 | .2 | Transition Services, Separation Agreement and Release of All Claims between John Anderson and the Company, dated June 16, 2011. Incorporated by reference to Exhibit 10.2 to Registrants Current Report on Form 8-K filed with the Commission on June 16, 2011. | ||
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. |
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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: July 12, 2011
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EXHIBIT INDEX
10 | .1 | Employment Agreement between the Company and Charles V. Bergh, dated June 9, 2011. Incorporated by reference to Exhibit 10.1 to Registrants Current Report on Form 8-K filed with the Commission on June 16, 2011. | ||
10 | .2 | Transition Services, Separation Agreement and Release of All Claims between John Anderson and the Company, dated June 16, 2011. Incorporated by reference to Exhibit 10.2 to Registrants Current Report on Form 8-K filed with the Commission on June 16, 2011. | ||
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. |