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EX-32 - EX-32 - LEVI STRAUSS & CO | f57018exv32.htm |
EX-31.2 - EX-31.2 - LEVI STRAUSS & CO | f57018exv31w2.htm |
EX-10.1 - EX-10.1 - LEVI STRAUSS & CO | f57018exv10w1.htm |
EX-31.1 - EX-31.1 - LEVI STRAUSS & CO | f57018exv31w1.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 August 29, 2010 | ||
or
|
||
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number:
002-90139
LEVI STRAUSS &
CO.
(Exact Name of Registrant as
Specified in Its Charter)
Delaware (State or Other Jurisdiction of Incorporation or Organization) |
94-0905160 (I.R.S. Employer Identification No.) |
1155 Battery Street, San Francisco, California 94111
(Address of Principal Executive
Offices) (Zip Code)
(415) 501-6000
(Registrants Telephone Number, Including Area Code)
None
(Former Name, Former Address and Former Fiscal Year, if
Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
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, or a non-accelerated
filer or a smaller reporting company. See definition 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
37,322,358 shares outstanding on October 7, 2010
LEVI
STRAUSS & CO. AND SUBSIDIARIES
INDEX TO
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED AUGUST 29, 2010
2
Table of Contents
PART I
FINANCIAL INFORMATION
Item 1. | CONSOLIDATED FINANCIAL STATEMENTS |
LEVI
STRAUSS & CO. AND SUBSIDIARIES
(Unaudited) |
||||||||
August 29, |
November 29, |
|||||||
2010 | 2009 | |||||||
(Dollars in thousands) | ||||||||
ASSETS
|
||||||||
Current Assets:
|
||||||||
Cash and cash equivalents
|
$ | 261,198 | $ | 270,804 | ||||
Restricted cash
|
3,400 | 3,684 | ||||||
Trade receivables, net of allowance for doubtful accounts of
$22,849 and $22,523
|
506,299 | 552,252 | ||||||
Inventories:
|
||||||||
Raw materials
|
5,836 | 6,818 | ||||||
Work-in-process
|
8,256 | 10,908 | ||||||
Finished goods
|
551,437 | 433,546 | ||||||
Total inventories
|
565,529 | 451,272 | ||||||
Deferred tax assets, net
|
127,943 | 135,508 | ||||||
Other current assets
|
95,605 | 92,344 | ||||||
Total current assets
|
1,559,974 | 1,505,864 | ||||||
Property, plant and equipment, net of accumulated depreciation
of $674,169 and $664,891
|
459,384 | 430,070 | ||||||
Goodwill
|
239,958 | 241,768 | ||||||
Other intangible assets, net
|
87,691 | 103,198 | ||||||
Non-current deferred tax assets, net
|
563,516 | 601,526 | ||||||
Other assets
|
112,897 | 106,955 | ||||||
Total assets
|
$ | 3,023,420 | $ | 2,989,381 | ||||
LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS DEFICIT | ||||||||
Current Liabilities:
|
||||||||
Short-term borrowings
|
$ | 37,844 | $ | 18,749 | ||||
Current maturities of long-term debt
|
| | ||||||
Current maturities of capital leases
|
1,618 | 1,852 | ||||||
Accounts payable
|
244,775 | 198,220 | ||||||
Other accrued liabilities
|
233,100 | 271,019 | ||||||
Accrued salaries, wages and employee benefits
|
163,912 | 195,434 | ||||||
Accrued interest payable
|
37,366 | 28,709 | ||||||
Accrued income taxes
|
42,218 | 12,993 | ||||||
Total current liabilities
|
760,833 | 726,976 | ||||||
Long-term debt
|
1,796,265 | 1,834,151 | ||||||
Long-term capital leases
|
3,612 | 5,513 | ||||||
Postretirement medical benefits
|
149,608 | 156,834 | ||||||
Pension liability
|
360,912 | 382,503 | ||||||
Long-term employee related benefits
|
101,897 | 97,508 | ||||||
Long-term income tax liabilities
|
59,099 | 55,862 | ||||||
Other long-term liabilities
|
56,043 | 43,480 | ||||||
Total liabilities
|
3,288,269 | 3,302,827 | ||||||
Commitments and contingencies (Note 7)
|
||||||||
Temporary equity
|
4,692 | 1,938 | ||||||
Stockholders Deficit:
|
||||||||
Levi Strauss & Co. stockholders deficit
|
||||||||
Common stock $.01 par value;
270,000,000 shares authorized; 37,324,575 shares and
37,284,741 shares issued and outstanding
|
373 | 373 | ||||||
Additional paid-in capital
|
21,184 | 39,532 | ||||||
Accumulated deficit
|
(53,006 | ) | (123,157 | ) | ||||
Accumulated other comprehensive loss
|
(249,755 | ) | (249,867 | ) | ||||
Total Levi Strauss & Co. stockholders deficit
|
(281,204 | ) | (333,119 | ) | ||||
Noncontrolling interest
|
11,663 | 17,735 | ||||||
Total stockholders deficit
|
(269,541 | ) | (315,384 | ) | ||||
Total liabilities, temporary equity and stockholders
deficit
|
$ | 3,023,420 | $ | 2,989,381 | ||||
The accompanying notes are an integral part of these
consolidated financial statements.
3
Table of Contents
Three Months Ended | Nine Months Ended | |||||||||||||||
August 29, |
August 30, |
August 29, |
August 30, |
|||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(Dollars in thousands) |
||||||||||||||||
(Unaudited) | ||||||||||||||||
Net sales
|
$ | 1,090,448 | $ | 1,021,829 | $ | 3,064,414 | $ | 2,839,602 | ||||||||
Licensing revenue
|
18,557 | 18,571 | 56,326 | 56,780 | ||||||||||||
Net revenues
|
1,109,005 | 1,040,400 | 3,120,740 | 2,896,382 | ||||||||||||
Cost of goods sold
|
565,393 | 545,985 | 1,544,779 | 1,541,469 | ||||||||||||
Gross profit
|
543,612 | 494,415 | 1,575,961 | 1,354,913 | ||||||||||||
Selling, general and administrative expenses
|
457,309 | 396,041 | 1,313,185 | 1,094,390 | ||||||||||||
Operating income
|
86,303 | 98,374 | 262,776 | 260,523 | ||||||||||||
Interest expense
|
(31,734 | ) | (37,931 | ) | (100,347 | ) | (112,648 | ) | ||||||||
Loss on early extinguishment of debt
|
| | (16,587 | ) | | |||||||||||
Other income (expense), net
|
(7,695 | ) | (6,696 | ) | 11,462 | (23,967 | ) | |||||||||
Income before income taxes
|
46,874 | 53,747 | 157,304 | 123,908 | ||||||||||||
Income tax expense
|
20,252 | 13,347 | 93,203 | 39,430 | ||||||||||||
Net income
|
26,622 | 40,400 | 64,101 | 84,478 | ||||||||||||
Net loss attributable to noncontrolling interest
|
1,556 | 303 | 6,050 | 166 | ||||||||||||
Net income attributable to Levi Strauss & Co.
|
$ | 28,178 | $ | 40,703 | $ | 70,151 | $ | 84,644 | ||||||||
The accompanying notes are an integral part of these
consolidated financial statements.
4
Table of Contents
Nine Months Ended | ||||||||
August 29, |
August 30, |
|||||||
2010 | 2009 | |||||||
(Dollars in thousands) (Unaudited) | ||||||||
Cash Flows from Operating Activities:
|
||||||||
Net income
|
$ | 64,101 | $ | 84,478 | ||||
Adjustments to reconcile net income to net cash provided by
operating activities:
|
||||||||
Depreciation and amortization
|
77,983 | 58,379 | ||||||
Asset impairments
|
2,307 | 1,720 | ||||||
(Gain) loss on disposal of property, plant and equipment
|
(100 | ) | 171 | |||||
Unrealized foreign exchange (gains) losses
|
(15,789 | ) | 8,716 | |||||
Realized loss on settlement of forward foreign exchange
contracts not designated for hedge accounting
|
8,412 | 29,776 | ||||||
Employee benefit plans amortization from accumulated other
comprehensive loss
|
2,557 | (14,891 | ) | |||||
Employee benefit plans curtailment loss (gain), net
|
100 | (2,108 | ) | |||||
Noncash gain on extinguishment of debt, net of write-off of
unamortized debt issuance costs
|
(13,647 | ) | | |||||
Amortization of deferred debt issuance costs
|
3,293 | 3,225 | ||||||
Stock-based compensation
|
4,419 | 5,739 | ||||||
Allowance for doubtful accounts
|
6,428 | 6,721 | ||||||
Change in operating assets and liabilities (excluding assets and
liabilities acquired):
|
||||||||
Trade receivables
|
16,871 | 67,088 | ||||||
Inventories
|
(134,592 | ) | 31,345 | |||||
Other current assets
|
(6,930 | ) | (4,265 | ) | ||||
Other non-current assets
|
(17,320 | ) | 7,636 | |||||
Accounts payable and other accrued liabilities
|
55,700 | (82,752 | ) | |||||
Income tax liabilities
|
63,760 | (8,280 | ) | |||||
Accrued salaries, wages and employee benefits
|
(41,324 | ) | (38,172 | ) | ||||
Long-term employee related benefits
|
504 | 23,491 | ||||||
Other long-term liabilities
|
19,113 | (5,071 | ) | |||||
Other, net
|
(17 | ) | 950 | |||||
Net cash provided by operating activities
|
95,829 | 173,896 | ||||||
Cash Flows from Investing Activities:
|
||||||||
Purchases of property, plant and equipment
|
(107,874 | ) | (46,016 | ) | ||||
Proceeds from sale of property, plant and equipment
|
1,375 | 905 | ||||||
Payments on settlement of forward foreign exchange contracts not
designated for hedge accounting
|
(8,412 | ) | (29,776 | ) | ||||
Acquisitions, net of cash acquired
|
(12,242 | ) | (80,921 | ) | ||||
Other
|
(114 | ) | | |||||
Net cash used for investing activities
|
(127,267 | ) | (155,808 | ) | ||||
Cash Flows from Financing Activities:
|
||||||||
Proceeds from issuance of long-term debt
|
909,390 | | ||||||
Repayments of long-term debt and capital leases
|
(865,527 | ) | (54,632 | ) | ||||
Short-term borrowings, net
|
19,176 | 8,224 | ||||||
Debt issuance costs
|
(17,512 | ) | | |||||
Restricted cash
|
(248 | ) | (81 | ) | ||||
Dividends to noncontrolling interest shareholders
|
| (978 | ) | |||||
Dividend to stockholders
|
(20,013 | ) | (20,001 | ) | ||||
Net cash provided by (used for) financing activities
|
25,266 | (67,468 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents
|
(3,434 | ) | 10,304 | |||||
Net decrease in cash and cash equivalents
|
(9,606 | ) | (39,076 | ) | ||||
Beginning cash and cash equivalents
|
270,804 | 210,812 | ||||||
Ending cash and cash equivalents
|
$ | 261,198 | $ | 171,736 | ||||
Supplemental disclosure of cash flow information:
|
||||||||
Cash paid during the period for:
|
||||||||
Interest
|
$ | 87,097 | $ | 92,439 | ||||
Income taxes
|
34,980 | 41,544 |
The accompanying notes are an integral part of these
consolidated financial statements.
5
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIOD ENDED AUGUST 29, 2010
FOR THE QUARTERLY PERIOD ENDED AUGUST 29, 2010
NOTE 1: | SIGNIFICANT ACCOUNTING POLICIES |
Nature of
Operations
Levi Strauss & Co. (the Company) is one of
the worlds leading branded apparel companies. The Company
designs and markets jeans, casual and dress pants, tops,
jackets, footwear and related accessories, for men, women and
children under the
Levis®,
Dockers®,
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 29, 2009, included in the Annual Report on
Form 10-K
filed by the Company with the Securities and Exchange Commission
(SEC) on February 9, 2010.
The unaudited consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant
intercompany transactions have been eliminated. Management
believes the disclosures are adequate to make the information
presented herein not misleading. The results of operations for
the three and nine months ended August 29, 2010, may not be
indicative of the results to be expected for any other interim
period or the year ending November 28, 2010.
The Companys fiscal year ends on the last Sunday of
November in each year, although the fiscal years of certain
foreign subsidiaries are fixed at November 30 due to local
statutory requirements. Apart from these subsidiaries, each
quarter of both fiscal years 2010 and 2009 consists of
13 weeks. All references to years relate to fiscal years
rather than calendar years.
Subsequent events have been evaluated through the date these
financial statements were issued.
In 2010, the Company became subject to disclosure provisions
which require that amounts attributable to noncontrolling
interests (formerly referred to as minority
interests) be clearly identified and presented separately
from the Companys interests in the consolidated financial
statements. Accordingly, prior-year amounts relating to the
16.4% noncontrolling interest in Levi Strauss Japan K.K., the
Companys Japanese affiliate, have been reclassified to
conform to the new presentation.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial
statements and the related notes to consolidated financial
statements. Estimates are based upon historical factors, current
circumstances and the experience and judgment of the
Companys management. Management evaluates its estimates
and assumptions on an ongoing basis and may employ outside
experts to assist in its evaluations. Changes in such estimates,
based on more accurate future information, or different
assumptions or conditions, may affect amounts reported in future
periods.
6
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (continued)
FOR THE
QUARTERLY PERIOD ENDED AUGUST 29, 2010
Recently
Issued Accounting Standards
There have been no developments to recently issued accounting
standards, including the expected dates of adoption and
estimated effects on the Companys consolidated financial
statements, from those disclosed in the Companys 2009
Annual Report on
Form 10-K.
NOTE 2: | GOODWILL AND OTHER INTANGIBLE ASSETS |
The changes in the carrying amount of goodwill by business
segment for the nine months ended August 29, 2010, were as
follows:
Asia |
||||||||||||||||
Americas | Europe | Pacific | Total | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Balance, November 29, 2009
|
$ | 207,423 | $ | 32,080 | $ | 2,265 | $ | 241,768 | ||||||||
Additions
|
| 2,115 | | 2,115 | ||||||||||||
Foreign currency fluctuation
|
| (4,009 | ) | 84 | (3,925 | ) | ||||||||||
Balance, August 29, 2010
|
$ | 207,423 | $ | 30,186 | $ | 2,349 | $ | 239,958 | ||||||||
Other intangible assets, net, were as follows:
August 29, 2010 | November 29, 2009 | |||||||||||||||||||||||
Gross |
Accumulated |
Gross |
Accumulated |
|||||||||||||||||||||
Carrying Value | Amortization | Total | Carrying Value | Amortization | Total | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Unamortized intangible assets:
|
||||||||||||||||||||||||
Trademarks
|
$ | 42,743 | $ | | $ | 42,743 | $ | 42,743 | $ | | $ | 42,743 | ||||||||||||
Amortized intangible assets:
|
||||||||||||||||||||||||
Acquired contractual rights
|
45,370 | (14,647 | ) | 30,723 | 46,529 | (6,019 | ) | 40,510 | ||||||||||||||||
Customer lists
|
19,073 | (4,848 | ) | 14,225 | 22,340 | (2,395 | ) | 19,945 | ||||||||||||||||
$ | 107,186 | $ | (19,495 | ) | $ | 87,691 | $ | 111,612 | $ | (8,414 | ) | $ | 103,198 | |||||||||||
For the three and nine months ended August 29, 2010,
amortization of these intangible assets was $3.6 million
and $11.2 million, respectively, compared to
$2.9 million and $3.1 million in the same periods of
2009. Amortization is included in Selling, general and
administrative expenses in the Companys consolidated
statements of income. There have been no material changes to the
estimated amortization of these intangible assets for the next
five fiscal years from the amounts disclosed in the
Companys 2009 Annual Report on
Form 10-K.
7
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (continued)
FOR THE
QUARTERLY PERIOD ENDED AUGUST 29, 2010
NOTE 3: | FAIR VALUE OF FINANCIAL INSTRUMENTS |
The following table presents the Companys financial
instruments that are carried at fair value:
August 29, 2010 | November 29, 2009 | |||||||||||||||||||||||
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
|
$ | 16,967 | $ | 16,967 | $ | | $ | 16,855 | $ | 16,855 | $ | | ||||||||||||
Forward foreign exchange contracts,
net(3)
|
2,066 | | 2,066 | 721 | | 721 | ||||||||||||||||||
Total financial assets carried at fair value
|
$ | 19,033 | $ | 16,967 | $ | 2,066 | $ | 17,576 | $ | 16,855 | $ | 721 | ||||||||||||
Financial liabilities carried at fair value
|
||||||||||||||||||||||||
Forward foreign exchange contracts,
net(3)
|
$ | 3,378 | $ | | $ | 3,378 | $ | 14,519 | $ | | $ | 14,519 | ||||||||||||
Interest rate swap, net
|
| | | 1,451 | | 1,451 | ||||||||||||||||||
Total financial liabilities carried at fair value
|
$ | 3,378 | $ | | $ | 3,378 | $ | 15,970 | $ | | $ | 15,970 | ||||||||||||
(1) | Fair values estimated using Level 1 inputs are inputs which consist of quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Rabbi trust assets consist of a diversified portfolio of equity, fixed income and other securities. | |
(2) | Fair values estimated using Level 2 inputs are inputs, other than quoted prices, that are observable for the asset or liability, either directly or indirectly and include among other things, quoted prices for similar assets or liabilities in markets that are active or inactive as well as inputs other than quoted prices that are observable. For forward foreign exchange contracts, inputs include foreign currency exchange and interest rates and credit default swap prices. For the interest rate swap, for which the Companys fair value estimate incorporates discounted future cash flows using a forward curve mid-market pricing convention, inputs include LIBOR forward rates and credit default swap prices. | |
(3) | The Companys forward foreign exchange contracts are subject to International Swaps and Derivatives Association, Inc. (ISDA) master agreements. These agreements are signed between the Company and each respective financial institution, and permit the net-settlement of forward foreign exchange contracts on a per institution basis. |
8
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (continued)
FOR THE
QUARTERLY PERIOD ENDED AUGUST 29, 2010
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:
August 29, 2010 | November 29, 2009 | |||||||||||||||
Carrying |
Estimated |
Carrying |
Estimated |
|||||||||||||
Value | Fair Value(1) | Value | Fair Value(1) | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Financial liabilities carried at adjusted historical cost
|
||||||||||||||||
Senior revolving credit facility
|
$ | 108,498 | $ | 106,874 | $ | 108,489 | $ | 103,618 | ||||||||
8.625% Euro senior notes due
2013(2)
|
| | 379,935 | 379,935 | ||||||||||||
Senior term loan due 2014
|
323,659 | 299,389 | 323,497 | 291,163 | ||||||||||||
9.75% senior notes due
2015(2)
|
| | 462,704 | 485,572 | ||||||||||||
8.875% senior notes due 2016
|
362,856 | 382,106 | 355,120 | 366,495 | ||||||||||||
4.25% Yen-denominated Eurobonds due
2016(2)
|
109,402 | 95,636 | 232,494 | 197,448 | ||||||||||||
7.75% Euro senior notes due
2018(2)
|
390,741 | 382,635 | | | ||||||||||||
7.625% senior notes due
2020(2)
|
537,677 | 545,552 | | | ||||||||||||
Short-term borrowings
|
38,223 | 38,223 | 19,027 | 19,027 | ||||||||||||
Total financial liabilities carried at adjusted historical cost
|
$ | 1,871,056 | $ | 1,850,415 | $ | 1,881,266 | $ | 1,843,258 | ||||||||
(1) | Fair value estimate incorporates mid-market price quotes. | |
(2) | Reflect the Companys refinancing activities during the second quarter of 2010. Please see Note 5 for additional information. |
NOTE 4: | DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES |
There have been no material changes in the Companys use of
derivative instruments or the way the Company accounts for such
instruments and related hedged items from the information
disclosed in the Companys 2009 Annual Report on
Form 10-K.
As of August 29, 2010, the Company had forward foreign
exchange contracts to buy $83.5 million and to sell
$206.7 million against various foreign currencies. These
contracts are at various exchange rates and expire at various
dates through October 2011.
9
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (continued)
FOR THE
QUARTERLY PERIOD ENDED AUGUST 29, 2010
The table below provides data about the carrying values of
derivative instruments and non-derivative instruments designated
as net investment hedges:
August 29, 2010 | November 29, 2009 | |||||||||||||||||||||||
Assets | (Liabilities) | Assets | (Liabilities) | |||||||||||||||||||||
Derivative |
Derivative |
|||||||||||||||||||||||
Carrying |
Carrying |
Net Carrying |
Carrying |
Carrying |
Net Carrying |
|||||||||||||||||||
Value | Value | Value | Value | Value | Value | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Derivatives not designated as hedging instruments
|
||||||||||||||||||||||||
Forward foreign exchange
contracts(1)
|
$ | 2,774 | $ | (708 | ) | $ | 2,066 | $ | 1,189 | $ | (468 | ) | $ | 721 | ||||||||||
Forward foreign exchange
contracts(2)
|
968 | (4,346 | ) | (3,378 | ) | 5,675 | (20,194 | ) | (14,519 | ) | ||||||||||||||
Interest rate
contracts(2)
|
| | | | (1,451 | ) | (1,451 | ) | ||||||||||||||||
Total derivatives not designated as hedging instruments
|
$ | 3,742 | $ | (5,054 | ) | $ | 6,864 | $ | (22,113 | ) | ||||||||||||||
Non-derivatives designated as hedging
instruments(3)
|
||||||||||||||||||||||||
Euro senior notes
|
$ | | $ | (381,450 | ) | $ | | $ | (374,641 | ) | ||||||||||||||
Yen-denominated
Eurobonds(4)
|
| (69,105 | ) | | (92,684 | ) | ||||||||||||||||||
Total non-derivatives designated as hedging instruments
|
$ | | $ | (450,555 | ) | $ | | $ | (467,325 | ) | ||||||||||||||
(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. | |
(3) | Amounts at August 29, 2010, reflect the Companys refinancing activities during the second quarter of 2010. Please see Note 5 for additional information. | |
(4) | Represents the portion of the Yen-denominated Eurobonds that have been designated as a net investment hedge. |
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 or (Loss) Recognized in Other |
||||||||||||||||||||||||
Gain or (Loss) |
Income (Expense), net (Ineffective |
|||||||||||||||||||||||
Recognized in AOCI |
Portion and Amount Excluded from |
|||||||||||||||||||||||
(Effective Portion) | Effectiveness Testing) | |||||||||||||||||||||||
As of |
As of |
Three Months Ended | Nine Months Ended | |||||||||||||||||||||
August 29, 2010 | November 29, 2009 | August 29, 2010 | August 30, 2009 | August 29, 2010 | August 30, 2009 | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Forward foreign exchange contracts
|
$ | 4,637 | $ | 4,637 | $ | | $ | | $ | | $ | | ||||||||||||
Euro senior
notes(1)
|
(4,381 | ) | (61,570 | ) | | | | | ||||||||||||||||
Yen-denominated
Eurobonds(1)
|
(23,983 | ) | (23,621 | ) | (2,818 | ) | (3,160 | ) | 2,732 | (1,742 | ) | |||||||||||||
Cumulative income taxes
|
9,580 | 31,237 | ||||||||||||||||||||||
Total
|
$ | (14,147 | ) | $ | (49,317 | ) | ||||||||||||||||||
(1) | Amounts at August 29, 2010, reflect the Companys refinancing activities during the second quarter of 2010. Please see Note 5 for additional information. |
10
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (continued)
FOR THE
QUARTERLY PERIOD ENDED AUGUST 29, 2010
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 | Nine Months Ended | |||||||||||||||
August 29, |
August 30, |
August 29, |
August 30, |
|||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Forward foreign exchange contracts:
|
||||||||||||||||
Realized
|
$ | (3,072 | ) | $ | (11,629 | ) | $ | (8,412 | ) | $ | (29,776 | ) | ||||
Unrealized
|
(3,459 | ) | (255 | ) | 12,486 | (28,858 | ) | |||||||||
Total
|
$ | (6,531 | ) | $ | (11,884 | ) | $ | 4,074 | $ | (58,634 | ) | |||||
NOTE 5: | DEBT |
August 29, |
November 29, |
|||||||
2010 | 2009 | |||||||
(Dollars in thousands) | ||||||||
Long-term debt
|
||||||||
Secured:
|
||||||||
Senior revolving credit facility
|
$ | 108,250 | $ | 108,250 | ||||
Total secured
|
108,250 | 108,250 | ||||||
Unsecured:
|
||||||||
8.625% Euro senior notes due 2013
|
| 374,641 | ||||||
Senior term loan due 2014
|
323,589 | 323,340 | ||||||
9.75% senior notes due 2015
|
| 446,210 | ||||||
8.875% senior notes due 2016
|
350,000 | 350,000 | ||||||
4.25% Yen-denominated Eurobonds due 2016
|
107,976 | 231,710 | ||||||
7.75% Euro senior notes due 2018
|
381,450 | | ||||||
7.625% senior notes due 2020
|
525,000 | | ||||||
Total unsecured
|
1,688,015 | 1,725,901 | ||||||
Less: current maturities
|
| | ||||||
Total long-term debt
|
$ | 1,796,265 | $ | 1,834,151 | ||||
Short-term debt
|
||||||||
Short-term borrowings
|
$ | 37,844 | $ | 18,749 | ||||
Current maturities of long-term debt
|
| | ||||||
Total short-term debt
|
$ | 37,844 | $ | 18,749 | ||||
Total long-term and short-term debt
|
$ | 1,834,109 | $ | 1,852,900 | ||||
11
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (continued)
FOR THE
QUARTERLY PERIOD ENDED AUGUST 29, 2010
Issuance
of Euro Senior Notes due 2018 and Senior Notes due 2020 and
Tender, Redemption and Partial Repurchase of Euro Notes due
2013, Senior Notes due 2015, and Yen-denominated Eurobonds due
2016
Euro Notes due 2018 and Senior Notes due
2020. On May 6, 2010, the Company issued
300.0 million in aggregate principal amount of 7.75%
Euro senior notes due 2018 (the 2018 Euro Notes) and
$525.0 million in aggregate principal amount of
7.625% senior notes due 2020 (the 2020 Senior
Notes) to qualified institutional buyers. The notes are
unsecured obligations that rank equally with all of the
Companys other existing and future unsecured and
unsubordinated debt. The 2018 Euro Notes mature on May 15,
2018, and the 2020 Senior Notes mature on May 15, 2020.
Interest on the notes is payable semi-annually in arrears on May
15 and November 15, commencing on November 15, 2010.
The Company may redeem some or all of the 2018 Euro Notes prior
to May 15, 2014, and some or all of the 2020 Senior Notes
prior to May 15, 2015, each at a price equal to 100% of the
principal amount plus accrued and unpaid interest and a
make-whole premium; after these dates, the Company
may redeem all or any portion of the notes, at once or over
time, at redemption prices specified in the indenture governing
the notes, after giving the required notice under the indenture.
In addition, at any time prior to May 15, 2013, the Company
may redeem up to a maximum of 35% of the original aggregate
principal amount of each series of notes with the proceeds of
one or more public equity offerings at a redemption price of
107.750% and 107.625% of the principal amount of the 2018 Euro
Notes and 2020 Senior Notes, respectively, plus accrued and
unpaid interest, if any, to the date of redemption. Costs of
approximately $17.5 million associated with the issuance of
the notes, representing underwriting fees and other expenses,
will be amortized to interest expense over the term of the notes.
Other Covenants. The indenture governing both
notes contains covenants that limit, among other things, the
Companys and certain of the Companys
subsidiaries ability to (1) incur additional debt,
(2) make certain restricted payments, (3) consummate
specified asset sales, (4) enter into transactions with
affiliates, (5) incur liens, (6) impose restrictions
on the ability of its subsidiaries to pay dividends or make
payments to the Company and its restricted subsidiaries,
(7) enter into sale and leaseback transactions,
(8) merge or consolidate with another person, and
(9) dispose of all or substantially all of the
Companys assets. The indenture provides for customary
events of default (subject in certain cases to customary grace
and cure periods), which include nonpayment, breach of covenants
in the indenture, payment defaults or acceleration of other
indebtedness, a failure to pay certain judgments and certain
events of bankruptcy and insolvency. Generally, if an event of
default occurs, the trustee under the indenture or holders of at
least 25% in principal amount of the then outstanding notes may
declare all notes to be due and payable immediately. Upon the
occurrence of a change in control (as defined in the indenture),
each holder of notes may require the Company to repurchase all
or a portion of the notes in cash at a price equal to 101% of
the principal amount of notes to be repurchased, plus accrued
and unpaid interest, if any, thereon to the date of purchase. In
accordance with a registration rights agreement, the Company
conducted an exchange offer to allow holders to exchange the
notes for new notes in the same principal amount and with
substantially identical terms, except that the new notes were
registered under the Securities Act of 1933.
Use of Proceeds and Loss on Early Extinguishment of
Debt. On April 22, 2010, the Company
commenced a cash tender offer for the outstanding principal
amount of its Euro Notes due 2013 and its Senior Notes due 2015.
The tender offer expired May 19, 2010, and the Company
redeemed all remaining notes that were not tendered in the offer
on May 25, 2010. The Company purchased all of the
outstanding Euro Notes due 2013 and its Senior Notes due 2015
pursuant to the tender offer and subsequent redemption.
On May 21, 2010, the Company also repurchased
¥10,883,500,000 in principal amount tendered of the
Yen-denominated Eurobonds due 2016 for total consideration of
$100.0 million including accrued interest.
The tender offer, redemption, and partial repurchase described
above, as well as underwriting fees associated with the new
issuance, were funded with the proceeds from the issuance of the
2018 Euro Notes and the 2020 Senior Notes. The Company recorded
a loss of $16.6 million on early extinguishment of debt,
comprised of tender
12
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (continued)
FOR THE
QUARTERLY PERIOD ENDED AUGUST 29, 2010
premiums of approximately $30.2 million and the write-off
of approximately $7.6 million of unamortized debt issuance
costs, net of applicable premium, offset by a gain of
approximately $21.2 million related to the partial
repurchase of Yen-denominated Eurobonds at a discount to their
par value.
Short-term
Credit Lines and Standby Letters of Credit
As of August 29, 2010, the Companys total
availability of $359.3 million under its senior secured
revolving credit facility was reduced by $75.9 million of
letters of credit and other credit usage under the facility,
yielding a net availability of $283.4 million.
Interest
Rates on Borrowings
The Companys weighted-average interest rate on average
borrowings outstanding during the three and nine months ended
August 29, 2010, was 6.74% and 7.27%, respectively,
compared to 7.47% and 7.49% in the same periods of 2009.
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 | |||||||||||||||
August 29, |
August 30, |
August 29, |
August 30, |
|||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Net periodic benefit cost (income):
|
||||||||||||||||
Service cost
|
$ | 1,908 | $ | 1,343 | $ | 120 | $ | 107 | ||||||||
Interest cost
|
14,855 | 15,505 | 2,168 | 2,761 | ||||||||||||
Expected return on plan assets
|
(11,439 | ) | (10,637 | ) | | | ||||||||||
Amortization of prior service cost
(benefit)(1)
|
111 | 198 | (7,392 | ) | (9,926 | ) | ||||||||||
Amortization of actuarial
loss(2)
|
6,665 | 4,292 | 1,402 | 434 | ||||||||||||
Curtailment gain
|
| | | (80 | ) | |||||||||||
Net settlement loss
|
117 | 14 | | | ||||||||||||
Net periodic benefit cost (income)
|
12,217 | 10,715 | (3,702 | ) | (6,704 | ) | ||||||||||
Changes in accumulated other comprehensive loss:
|
||||||||||||||||
Amortization of prior service (cost) benefit
|
(111 | ) | (198 | ) | 7,392 | 9,926 | ||||||||||
Amortization of actuarial loss
|
(6,665 | ) | (4,292 | ) | (1,402 | ) | (434 | ) | ||||||||
Curtailment gain
|
| | | 80 | ||||||||||||
Net settlement loss
|
(39 | ) | | | | |||||||||||
Total recognized in accumulated other comprehensive loss
|
(6,815 | ) | (4,490 | ) | 5,990 | 9,572 | ||||||||||
Total recognized in net periodic benefit cost (income) and
accumulated other comprehensive loss
|
$ | 5,402 | $ | 6,225 | $ | 2,288 | $ | 2,868 | ||||||||
13
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (continued)
FOR THE
QUARTERLY PERIOD ENDED AUGUST 29, 2010
Pension Benefits | Postretirement Benefits | |||||||||||||||||||
Nine Months Ended | Nine Months Ended | |||||||||||||||||||
August 29, |
August 30, |
August 29, |
August 30, |
|||||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Net periodic benefit cost (income):
|
||||||||||||||||||||
Service cost
|
$ | 5,822 | $ | 3,874 | $ | 356 | $ | 321 | ||||||||||||
Interest cost
|
44,732 | 46,156 | 6,506 | 8,282 | ||||||||||||||||
Expected return on plan assets
|
(34,529 | ) | (31,684 | ) | | | ||||||||||||||
Amortization of prior service cost
(benefit)(1)
|
340 | 595 | (22,175 | ) | (29,775 | ) | ||||||||||||||
Amortization of actuarial
loss(2)
|
19,996 | 12,873 | 4,206 | 1,301 | ||||||||||||||||
Curtailment loss (gain)
|
100 | (59 | ) | | (2,049 | ) | ||||||||||||||
Net settlement loss
|
309 | 129 | | | ||||||||||||||||
Net periodic benefit cost (income)
|
36,770 | 31,884 | (11,107 | ) | (21,920 | ) | ||||||||||||||
Changes in accumulated other comprehensive loss:
|
||||||||||||||||||||
Actuarial loss
|
303 | | | | ||||||||||||||||
Amortization of prior service (cost) benefit
|
(340 | ) | (595 | ) | 22,175 | 29,775 | ||||||||||||||
Amortization of actuarial loss
|
(19,996 | ) | (12,873 | ) | (4,206 | ) | (1,301 | ) | ||||||||||||
Curtailment (loss) gain
|
(13 | ) | 27 | | 2,049 | |||||||||||||||
Net settlement loss
|
(190 | ) | (115 | ) | | | ||||||||||||||
Total recognized in accumulated other comprehensive loss
|
(20,236 | ) | (13,556 | ) | 17,969 | 30,523 | ||||||||||||||
Total recognized in net periodic benefit cost (income) and
accumulated other comprehensive loss
|
$ | 16,534 | $ | 18,328 | $ | 6,862 | $ | 8,603 | ||||||||||||
(1) | Amortization of prior service benefit recognized during each period with respect to the Companys postretirement benefit plans relates primarily to the favorable impact of plan amendments in February 2004 and August 2003. For the three and nine months ended August 29, 2010, as compared to the same prior-year periods, Amortization of prior service benefit declined in relation to the expected service lives of the employees affected by these plan changes. | |
(2) | For the three and nine months ended August 29, 2010, as compared to the same prior-year periods, the increase in Amortization of actuarial loss resulted from the impact of the changes in discount rate assumptions for the pension and postretirement benefit plans as of November 29, 2009. |
NOTE 7: | COMMITMENTS AND CONTINGENCIES |
Forward
Foreign Exchange Contracts
The Company uses derivative instruments to manage its exposure
to foreign currencies. The Company is exposed to credit loss in
the event of nonperformance by the counterparties to the forward
foreign exchange 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.
14
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (continued)
FOR THE
QUARTERLY PERIOD ENDED AUGUST 29, 2010
Other
Contingencies
Litigation. There have been no material
developments in the Companys litigation matters since it
filed its 2009 Annual Report on
Form 10-K.
In the ordinary course of business, the Company has various
pending cases involving contractual matters, employee-related
matters, distribution questions, product liability claims,
trademark infringement and other matters. The Company does not
believe there are any of these pending legal proceedings that
will have a material impact on its financial condition or
results of operations or cash flows.
NOTE 8: | DIVIDEND PAYMENT |
The Company paid cash dividends of $20 million in the
second quarters of 2010 and 2009. 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. The dividend payment resulted in a
decrease to Additional paid-in capital as the
Company is in an accumulated deficit position.
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 | Nine Months Ended | |||||||||||||||
August 29, |
August 30, |
August 29, |
August 30, |
|||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Net income
|
$ | 26,622 | $ | 40,400 | $ | 64,101 | $ | 84,478 | ||||||||
Other comprehensive income (loss):
|
||||||||||||||||
Pension and postretirement benefits
|
560 | (3,722 | ) | 1,583 | (12,300 | ) | ||||||||||
Net investment hedge (losses) gains
|
(9,673 | ) | (6,435 | ) | 35,170 | (23,248 | ) | |||||||||
Foreign currency translation gains (losses)
|
13,054 | 3,215 | (38,554 | ) | 4,611 | |||||||||||
Unrealized gain on marketable securities
|
542 | 990 | 726 | 1,584 | ||||||||||||
Total other comprehensive income (loss)
|
4,483 | (5,952 | ) | (1,075 | ) | (29,353 | ) | |||||||||
Comprehensive income
|
31,105 | 34,448 | 63,026 | 55,125 | ||||||||||||
Comprehensive loss attributable to noncontrolling interest
|
(1,775 | ) | (1,037 | ) | (7,237 | ) | (1,100 | ) | ||||||||
Comprehensive income attributable to Levi Strauss &
Co.
|
$ | 32,880 | $ | 35,485 | $ | 70,263 | $ | 56,225 | ||||||||
15
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (continued)
FOR THE
QUARTERLY PERIOD ENDED AUGUST 29, 2010
The following is a summary of the components of
Accumulated other comprehensive loss, net of related
income taxes:
August 29, |
November 29, |
|||||||
2010 | 2009 | |||||||
(Dollars in thousands) | ||||||||
Pension and postretirement benefits
|
$ | (175,297 | ) | $ | (176,880 | ) | ||
Net investment hedge losses
|
(14,147 | ) | (49,317 | ) | ||||
Foreign currency translation losses
|
(50,204 | ) | (11,650 | ) | ||||
Unrealized loss on marketable securities
|
(1,349 | ) | (2,075 | ) | ||||
Accumulated other comprehensive loss
|
(240,997 | ) | (239,922 | ) | ||||
Accumulated other comprehensive income attributable to
noncontrolling interest
|
8,758 | 9,945 | ||||||
Accumulated other comprehensive loss attributable to Levi
Strauss & Co.
|
$ | (249,755 | ) | $ | (249,867 | ) | ||
NOTE 10: | OTHER INCOME (EXPENSE), NET |
The following table summarizes significant components of
Other income (expense), net:
Three Months Ended | Nine Months Ended | |||||||||||||||
August 29, |
August 30, |
August 29, |
August 30, |
|||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Foreign exchange management (losses)
gains(1)
|
$ | (6,531 | ) | $ | (11,884 | ) | $ | 4,074 | $ | (58,634 | ) | |||||
Foreign currency transaction (losses)
gains(2)
|
(1,698 | ) | 4,833 | 6,505 | 33,889 | |||||||||||
Interest income
|
438 | 809 | 1,730 | 1,946 | ||||||||||||
Other
|
96 | (454 | ) | (847 | ) | (1,168 | ) | |||||||||
Total other income (expense), net
|
$ | (7,695 | ) | $ | (6,696 | ) | $ | 11,462 | $ | (23,967 | ) | |||||
(1) | Foreign exchange management losses for the three-month period ended August 29, 2010, were primarily driven by the weakening of the U.S. Dollar against the Swedish Krona and the Australian Dollar. Gains for the nine-month period ended August 29, 2010, were primarily driven by the appreciation of the U.S. Dollar against the Euro and the Swedish Krona. Losses in 2009 were primarily driven by the weakening of the U.S. Dollar against the Euro, the Swedish Krona and the Australian Dollar. | |
(2) | Foreign currency transaction gains for the nine-month period ended August 29, 2010, were primarily driven by the appreciation of the U.S. Dollar against the Euro. Gains in 2009 were primarily driven by the appreciation of various foreign currencies against the U.S. Dollar. |
NOTE 11: | INCOME TAXES |
The effective income tax rate was 59.3% for the nine months
ended August 29, 2010, compared to 31.8% for the same
period ended August 30, 2009. Approximately
17.9 percentage points of the 27.5 percentage-point
increase in the effective income tax rate was driven by two
significant discrete income tax charges recognized during the
second quarter of 2010, further described below. The remaining
increase in the effective income tax rate was primarily driven
by the Companys inability to benefit current year losses
in Japan.
The Company recognizes deferred tax assets and liabilities for
the expected future tax consequences of temporary differences
between the financial reporting and tax bases of assets and
liabilities and for operating loss and tax credit carryforwards.
Due primarily to the recent negative financial performance of
its affiliate in Japan, the Company recorded a discrete tax
expense of $14.2 million during the second quarter of 2010
to recognize a
16
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (continued)
FOR THE
QUARTERLY PERIOD ENDED AUGUST 29, 2010
valuation allowance to fully offset the amount of the
affiliates existing deferred tax assets, as the Company
determined it is more likely than not these assets will not be
realized. This discrete charge represents 9.0 percentage
points of the increase in the effective income tax rate for the
nine months ended August 29, 2010.
The tax treatment of Medicare Part D subsidies changed
during the second quarter of 2010 as a result of the enactment
in March 2010 of the Patient Protection and Affordable Care Act
(the Health Care Act). The Health Care Act includes
a provision eliminating, beginning in the Companys tax
year 2014, the tax deductibility of the costs of providing
Medicare
Part D-equivalent
prescription drug benefits to retirees to the extent of the
Federal subsidy received. Accordingly, the Company recorded a
discrete tax charge of $14.0 million to recognize the
reduction in the related deferred tax assets in the period the
legislation was enacted. This discrete charge represents
8.9 percentage points of the increase in the effective
income tax rate for the nine months ended August 29, 2010.
As of August 29, 2010, the Companys total gross
amount of unrecognized tax benefits was $161.3 million, of
which $92.5 million would impact the effective tax rate, if
recognized. As of November 29, 2009, the Companys
total gross amount of unrecognized tax benefits was
$160.5 million, of which $92.0 million would have
impacted the effective tax rate, if recognized.
NOTE 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
nine-month periods ended August 29, 2010, the Company
donated $0.4 million and $1.0 million, respectively,
to the Levi Strauss Foundation as compared to $0.3 million
and $0.8 million, respectively, for the same prior-year
periods.
Stephen C. Neal, a director, is chairman of the law firm Cooley
LLP. The firm provided legal services to the Company during the
nine-month period ended August 29, 2010, for which the
Company paid fees of approximately $0.2 million, as
compared to $0.5 million for the same prior-year period.
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 2010, accountability for information
technology and marketing staff costs of a global nature, that in
prior years were captured in the Companys geographic
regions, was centralized under corporate management in
conjunction with the Companys key strategy of driving
productivity. Beginning in 2010, these costs have been
classified as corporate expenses. These costs were not
significant to any of the Companys regional segments
individually in any of the periods presented herein, and
accordingly business segment information for prior years has not
been revised.
In September 2010, the Company announced its appointment of
three global brand leaders as part of a brand-led organization
aimed at better aligning the Companys brand presentation
and consumer experience around the world. This announcement did
not alter the way in which the Company currently manages
business operations, evaluates performance or allocates
resources; the Company continues to measure business performance
by region.
17
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (continued)
FOR THE
QUARTERLY PERIOD ENDED AUGUST 29, 2010
Business segment information for the Company is as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
August 29, |
August 30, |
August 29, |
August 30, |
|||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Net revenues:
|
||||||||||||||||
Americas
|
$ | 673,443 | $ | 615,906 | $ | 1,776,654 | $ | 1,637,305 | ||||||||
Europe
|
259,097 | 266,047 | 805,350 | 754,476 | ||||||||||||
Asia Pacific
|
176,465 | 158,447 | 538,736 | 504,601 | ||||||||||||
Total net revenues
|
$ | 1,109,005 | $ | 1,040,400 | $ | 3,120,740 | $ | 2,896,382 | ||||||||
Operating income:
|
||||||||||||||||
Americas
|
$ | 102,934 | $ | 96,297 | $ | 263,914 | $ | 218,156 | ||||||||
Europe
|
34,401 | 31,337 | 132,384 | 112,007 | ||||||||||||
Asia Pacific
|
15,340 | 18,944 | 62,889 | 70,054 | ||||||||||||
Regional operating income
|
152,675 | 146,578 | 459,187 | 400,217 | ||||||||||||
Corporate expenses
|
66,372 | 48,204 | 196,411 | 139,694 | ||||||||||||
Total operating income
|
86,303 | 98,374 | 262,776 | 260,523 | ||||||||||||
Interest expense
|
(31,734 | ) | (37,931 | ) | (100,347 | ) | (112,648 | ) | ||||||||
Loss on early extinguishment of debt
|
| | (16,587 | ) | | |||||||||||
Other income (expense), net
|
(7,695 | ) | (6,696 | ) | 11,462 | (23,967 | ) | |||||||||
Income before income taxes
|
$ | 46,874 | $ | 53,747 | $ | 157,304 | $ | 123,908 | ||||||||
18
Table of Contents
Item 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Overview
We design and market jeans, casual and dress pants, tops,
jackets, footwear and related accessories for men, women and
children under our
Levis®,
Dockers®,
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, home and other
products.
Our business is operated through three geographic regions:
Americas, Europe and Asia Pacific. Our products are sold in
approximately 55,000 retail locations in more than 110
countries. We support our brands through a global
infrastructure, both sourcing and marketing our products around
the world. We distribute our
Levis®
and
Dockers®
products primarily through chain retailers and department stores
in the United States and primarily through department stores,
specialty retailers and franchised stores outside of the United
States. We also distribute our
Levis®
and
Dockers®
products through our online stores, and
456 company-operated stores located in 26 countries,
including the United States. These stores generated
approximately 15% of our net revenues in the nine-month period
in 2010, as compared to 11% for the same period in 2009. We
distribute products under the Signature brand primarily through
mass channel retailers in the United States and Canada and mass
and other value-oriented retailers and franchised stores in Asia
Pacific. We currently distribute our
Denizentm
products through franchised stores and dedicated
shop-in-shops
in Asia Pacific.
Our Europe and Asia Pacific businesses, collectively,
contributed approximately 43% of both our net revenues and our
regional operating income in the nine-month period in 2010.
Sales of
Levis®
brand products represented approximately 81% of our total net
sales in the nine-month period in 2010.
Trends
Affecting Our Business
During the third quarter of 2010, difficult economic conditions
persisted around the world. Concerns remain about high
unemployment and the prospects for sustained economic recovery
from the global economic downturn, and consumer spending which
continues to be weak in many markets, especially in Europe and
Japan. We remain committed to managing our inventories
commensurate with the needs of our customers and the retail
environment.
We remained focused on our key strategies: build upon our
leadership position in the jean and khaki categories through
product and marketing innovation, enhance relationships with
wholesale customers and expand our dedicated store network to
drive sales growth, capitalize on our global footprint, and
continuously increase our productivity.
Our
Third Quarter 2010 Results
Our third quarter 2010 results reflect net revenue growth and
the effects of the strategic investments we have made in line
with our long-term objectives.
| Net revenues. Our consolidated net revenues increased by 7% compared to the third quarter of 2009, and increased 8% on a constant-currency basis reflecting growth in each of our geographic regions. Increased net revenues were driven by our acquisitions in 2009, growth in revenues associated with our Levis® brand in the Americas, and the expansion of our dedicated store network globally, partially offset by continued declines in the wholesale channel in certain markets. | |
| Operating income. Our operating income and operating margin declined compared to the third quarter of 2009, as the benefits from a higher gross margin and the increase in our constant-currency net revenues were offset by our continued investment in the expansion of our dedicated store network as well as advertising and promotion expenses to support the growth of our brands. | |
| Cash flows. Cash flows provided by operating activities were $96 million for the nine-month period in 2010 as compared to $174 million for the same period in 2009, reflecting our planned investment in our strategic business initiatives and inventory build. Lower operating cash flows were countered by a decline in required payments on the trademark tranche of our senior secured revolving credit facility. |
19
Table of Contents
Financial
Information Presentation
Fiscal year. Our fiscal year ends on the last
Sunday of November in each year, although the fiscal years of
certain foreign subsidiaries are fixed at November 30 due to
local statutory requirements. Apart from these subsidiaries,
each quarter of fiscal years 2010 and 2009 consisted of
13 weeks.
Segments. We manage our business according to
three regional segments: the Americas, Europe and Asia Pacific.
In the first quarter of 2010, accountability for information
technology and marketing staff costs of a global nature, that in
prior years were captured in our geographic regions, was
centralized under corporate management in conjunction with our
key strategy of driving productivity. Beginning in 2010, these
costs have been classified as corporate expenses. These costs
were not significant to any of our regional segments
individually in any of the periods presented herein, and
accordingly business segment information for prior years has not
been revised. The recent announcement of our brand-led
organization focuses on creating a leadership structure to
enable a consistent product and consumer experience around the
world for each of our brands. We continue to measure our
business performance by region.
Classification. Our classification of certain
significant revenues and expenses reflects the following:
| Net sales is primarily comprised of sales of products to wholesale customers, including franchised stores, and direct sales to consumers at our company-operated and online stores and at our company-operated shop-in-shops located within department stores. It includes discounts, allowances for estimated returns and incentives. | |
| Licensing revenue consists of royalties earned from the use of our trademarks by third-party licensees in connection with the manufacturing, advertising and distribution of trademarked products. | |
| Cost of goods sold is primarily comprised of product costs, labor and related overhead, sourcing costs, inbound freight, internal transfers, and the cost of operating our remaining manufacturing facilities, including the related depreciation expense. | |
| Selling costs include, among other things, all occupancy costs associated with our company-operated stores and our company-operated shop-in-shops. | |
| We reflect substantially all distribution costs in selling, general and administrative expenses, including costs related to receiving and inspection at distribution centers, warehousing, shipping to our customers, handling, and certain other activities associated with our distribution network. |
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.
20
Table of Contents
Results
of Operations for Three and Nine Months Ended August 29,
2010, as Compared to Same Periods in 2009
The following table summarizes, for the periods indicated, our
consolidated statements of income, the changes in these items
from period to period and these items expressed as a percentage
of net revenues:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||||
August 29, |
August 30, |
August 29, |
August 30, |
|||||||||||||||||||||||||||||||||||||
% |
2010 |
2009 |
% |
2010 |
2009 |
|||||||||||||||||||||||||||||||||||
August 29, |
August 30, |
Increase |
% of Net |
% of Net |
August 29, |
August 30, |
Increase |
% of Net |
% of Net |
|||||||||||||||||||||||||||||||
2010 | 2009 | (Decrease) | Revenues | Revenues | 2010 | 2009 | (Decrease) | Revenues | Revenues | |||||||||||||||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||||||||||||||||||
Net sales
|
$ | 1,090.4 | $ | 1,021.8 | 6.7 | % | 98.3 | % | 98.2 | % | $ | 3,064.4 | $ | 2,839.6 | 7.9 | % | 98.2 | % | 98.0 | % | ||||||||||||||||||||
Licensing revenue
|
18.6 | 18.6 | (0.1 | )% | 1.7 | % | 1.8 | % | 56.3 | 56.8 | (0.8 | )% | 1.8 | % | 2.0 | % | ||||||||||||||||||||||||
Net revenues
|
1,109.0 | 1,040.4 | 6.6 | % | 100.0 | % | 100.0 | % | 3,120.7 | 2,896.4 | 7.7 | % | 100.0 | % | 100.0 | % | ||||||||||||||||||||||||
Cost of goods sold
|
565.4 | 546.0 | 3.6 | % | 51.0 | % | 52.5 | % | 1,544.7 | 1,541.5 | 0.2 | % | 49.5 | % | 53.2 | % | ||||||||||||||||||||||||
Gross profit
|
543.6 | 494.4 | 10.0 | % | 49.0 | % | 47.5 | % | 1,576.0 | 1,354.9 | 16.3 | % | 50.5 | % | 46.8 | % | ||||||||||||||||||||||||
Selling, general and administrative expenses
|
457.3 | 396.0 | 15.5 | % | 41.2 | % | 38.1 | % | 1,313.2 | 1,094.4 | 20.0 | % | 42.1 | % | 37.8 | % | ||||||||||||||||||||||||
Operating income
|
86.3 | 98.4 | (12.3 | )% | 7.8 | % | 9.5 | % | 262.8 | 260.5 | 0.9 | % | 8.4 | % | 9.0 | % | ||||||||||||||||||||||||
Interest expense
|
(31.7 | ) | (37.9 | ) | (16.3 | )% | (2.9 | )% | (3.6 | )% | (100.3 | ) | (112.7 | ) | (10.9 | )% | (3.2 | )% | (3.9 | )% | ||||||||||||||||||||
Loss on early extinguishment of debt
|
| | | | | (16.6 | ) | | | (0.5 | )% | | ||||||||||||||||||||||||||||
Other income (expense), net
|
(7.7 | ) | (6.8 | ) | 14.9 | % | (0.7 | )% | (0.6 | )% | 11.4 | (23.9 | ) | (147.8 | )% | 0.4 | % | (0.8 | )% | |||||||||||||||||||||
Income before income taxes
|
46.9 | 53.7 | (12.8 | )% | 4.2 | % | 5.2 | % | 157.3 | 123.9 | 27.0 | % | 5.0 | % | 4.3 | % | ||||||||||||||||||||||||
Income tax expense
|
20.3 | 13.3 | 51.7 | % | 1.8 | % | 1.3 | % | 93.2 | 39.4 | 136.4 | % | 3.0 | % | 1.4 | % | ||||||||||||||||||||||||
Net income
|
26.6 | 40.4 | (34.1 | )% | 2.4 | % | 3.9 | % | 64.1 | 84.5 | (24.1 | )% | 2.1 | % | 2.9 | % | ||||||||||||||||||||||||
Net loss attributable to noncontrolling interest
|
1.6 | 0.3 | 413.5 | % | 0.1 | % | | 6.1 | 0.1 | 3544.6 | % | 0.2 | % | | ||||||||||||||||||||||||||
Net income attributable to Levi Strauss & Co.
|
$ | 28.2 | $ | 40.7 | (30.8 | )% | 2.5 | % | 3.9 | % | $ | 70.2 | $ | 84.6 | (17.1 | )% | 2.2 | % | 2.9 | % | ||||||||||||||||||||
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 | Nine Months Ended | |||||||||||||||||||||||||||||||
% Increase (Decrease) | % Increase (Decrease) | |||||||||||||||||||||||||||||||
August 29, |
August 30, |
As |
Constant |
August 29, |
August 30, |
As |
Constant |
|||||||||||||||||||||||||
2010 | 2009 | Reported | Currency | 2010 | 2009 | Reported | Currency | |||||||||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||||||||||
Net revenues:
|
||||||||||||||||||||||||||||||||
Americas
|
$ | 673.4 | $ | 615.9 | 9.3 | % | 8.8 | % | $ | 1,776.6 | $ | 1,637.3 | 8.5 | % | 7.3 | % | ||||||||||||||||
Europe
|
259.1 | 266.0 | (2.6 | )% | 5.8 | % | 805.4 | 754.5 | 6.7 | % | 6.1 | % | ||||||||||||||||||||
Asia Pacific
|
176.5 | 158.5 | 11.4 | % | 5.4 | % | 538.7 | 504.6 | 6.8 | % | (0.6 | )% | ||||||||||||||||||||
Total net revenues
|
$ | 1,109.0 | $ | 1,040.4 | 6.6 | % | 7.5 | % | $ | 3,120.7 | $ | 2,896.4 | 7.7 | % | 5.6 | % | ||||||||||||||||
Total net revenues increased on both reported and
constant-currency bases for the three- and nine-month periods
ended August 29, 2010, as compared to the same prior-year
period. Changes in foreign currency exchange rates in our
Americas and Asia Pacific regions affected reported amounts
favorably. In Europe, changes in foreign currency exchange rates
were unfavorable for the three-month period, but remained
slightly favorable for the nine-month period.
Americas. On both reported and
constant-currency bases, net revenues in our Americas region
increased for the three- and nine-month periods, with currency
affecting net revenues favorably by approximately
$3 million and $19 million, respectively.
21
Table of Contents
For both periods, an increase in net revenues for the
Levis®
brand was driven by the outlet stores we acquired in July 2009,
as well as strong performance of our mens and boys
products as well as juniors products in the wholesale
channel. The improved
Levis®
brand performance was partially offset by declines in both
periods of net sales from our
U.S. Dockers®
brand, and with respect to the nine-month period, our Signature
brand.
Europe. Net revenues in Europe
decreased on a reported basis but increased on a
constant-currency basis for the three-month period, with
currency affecting net revenues unfavorably by approximately
$22 million. For the nine-month period, net revenues
increased on both reported and constant-currency bases, with
currency affecting net revenues favorably by approximately
$2 million.
The regions constant-currency net revenues increase in
both periods was driven by the impact of our 2009 footwear and
accessories business acquisition and our expanding
company-operated retail network throughout the region, and was
partially offset by continued sales declines in our traditional
wholesale channels reflecting the regions ongoing
depressed economic environment.
Asia Pacific. Net revenues in Asia
Pacific increased on both reported and constant-currency bases
for the three-month period, with currency affecting net revenues
favorably by approximately $9 million. For the nine-month
period, net revenues increased on a reported basis but decreased
on a constant-currency basis, with currency affecting net
revenues favorably by approximately $37 million.
As compared to the same prior-year periods, net revenues
continued to decline in Japan. This decline was offset in both
periods primarily by the continued expansion of our
brand-dedicated retail network in China and India as well as
other of our emerging markets.
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 | Nine Months Ended | |||||||||||||||||||||||
% |
% |
|||||||||||||||||||||||
August 29, |
August 30, |
Increase |
August 29, |
August 30, |
Increase |
|||||||||||||||||||
2010 | 2009 | (Decrease) | 2010 | 2009 | (Decrease) | |||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||
Net revenues
|
$ | 1,109.0 | $ | 1,040.4 | 6.6 | % | $ | 3,120.7 | $ | 2,896.4 | 7.7 | % | ||||||||||||
Cost of goods sold
|
565.4 | 546.0 | 3.6 | % | 1,544.7 | 1,541.5 | 0.2 | % | ||||||||||||||||
Gross profit
|
$ | 543.6 | $ | 494.4 | 10.0 | % | $ | 1,576.0 | $ | 1,354.9 | 16.3 | % | ||||||||||||
Gross margin
|
49.0 | % | 47.5 | % | 50.5 | % | 46.8 | % |
As compared to the same prior-year periods, the gross profit
increase for the three- and nine-month periods ended
August 29, 2010, was driven by improved gross margins in
each of our regions, the increase in our constant-currency net
revenues, and with respect to the nine-month period, a favorable
currency impact of approximately $51 million. The
improvement in our gross margin in both periods reflected the
increased contribution from our company-operated retail network,
which generally has a higher gross margin than our wholesale
business.
22
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 | Nine Months Ended | |||||||||||||||||||||||||||||||||||||||
August 29, |
August 30, |
August 29, |
August 30, |
|||||||||||||||||||||||||||||||||||||
% |
2010 |
2009 |
% |
2010 |
2009 |
|||||||||||||||||||||||||||||||||||
August 29, |
August 30, |
Increase |
% of Net |
% of Net |
August 29, |
August 30, |
Increase |
% of Net |
% of Net |
|||||||||||||||||||||||||||||||
2010 | 2009 | (Decrease) | Revenues | Revenues | 2010 | 2009 | (Decrease) | Revenues | Revenues | |||||||||||||||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||||||||||||||||||
Selling
|
$ | 154.1 | $ | 122.2 | 26.0 | % | 13.9 | % | 11.8 | % | $ | 458.0 | $ | 335.5 | 36.5 | % | 14.7 | % | 11.6 | % | ||||||||||||||||||||
Advertising and promotion
|
93.0 | 62.6 | 48.7 | % | 8.4 | % | 6.0 | % | 222.6 | 160.5 | 38.7 | % | 7.1 | % | 5.5 | % | ||||||||||||||||||||||||
Administration
|
95.4 | 102.0 | (6.4 | )% | 8.6 | % | 9.8 | % | 288.9 | 268.6 | 7.5 | % | 9.3 | % | 9.3 | % | ||||||||||||||||||||||||
Other
|
114.8 | 109.2 | 5.1 | % | 10.3 | % | 10.5 | % | 343.7 | 329.8 | 4.2 | % | 11.0 | % | 11.4 | % | ||||||||||||||||||||||||
Total SG&A
|
$ | 457.3 | $ | 396.0 | 15.5 | % | 41.2 | % | 38.1 | % | $ | 1,313.2 | $ | 1,094.4 | 20.0 | % | 42.1 | % | 37.8 | % | ||||||||||||||||||||
Currency affected SG&A expenses favorably by approximately
$6 million for the three-month period ended August 29,
2010, but drove approximately $17 million of the increase
in SG&A expenses for the nine-month period, as compared to
the same prior-year periods.
Selling. Selling expenses increased
across all business segments for both periods, primarily
reflecting the addition of 56 company-operated stores since
August 30, 2009.
Advertising and promotion. Advertising
and promotion expenses increased for the three- and nine-month
periods primarily due to a planned increase in support of our
U.S. Levis®
and
U.S. Dockers®
brands, and with respect to the three-month period, our global
launch of our
Levis®
Curve ID jeans for women.
Administration. The decrease in
administration expenses for the three-month period, driven
primarily by a decline in incentive compensation expense related
to lower achievement against our internally-set objectives, was
partially offset by higher costs related to various corporate
initiatives, including costs associated with executive
separations. The increase for the nine-month period also
reflected these costs, as well as higher costs associated with
our pension and postretirement benefit plans.
Other. Other SG&A expenses include
distribution, information resources, and marketing organization
costs. These costs increased in both periods primarily due to
increased marketing costs.
23
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 | Nine Months Ended | |||||||||||||||||||||||||||||||||||||||
August 29, |
August 30, |
August 29, |
August 30, |
|||||||||||||||||||||||||||||||||||||
% |
2010 |
2009 |
% |
2010 |
2009 |
|||||||||||||||||||||||||||||||||||
August 29, |
August 30, |
Increase |
% of Net |
% of Net |
August 29, |
August 30, |
Increase |
% of Net |
% of Net |
|||||||||||||||||||||||||||||||
2010 | 2009 | (Decrease) | Revenues | Revenues | 2010 | 2009 | (Decrease) | Revenues | Revenues | |||||||||||||||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||||||||||||||||||
Operating income:
|
||||||||||||||||||||||||||||||||||||||||
Americas
|
$ | 102.9 | $ | 96.3 | 6.9 | % | 15.3 | % | 15.6 | % | $ | 263.9 | $ | 218.2 | 21.0 | % | 14.9 | % | 13.3 | % | ||||||||||||||||||||
Europe
|
34.4 | 31.3 | 9.8 | % | 13.3 | % | 11.8 | % | 132.4 | 112.0 | 18.2 | % | 16.4 | % | 14.8 | % | ||||||||||||||||||||||||
Asia Pacific
|
15.4 | 19.0 | (19.0 | )% | 8.7 | % | 12.0 | % | 62.9 | 70.0 | (10.2 | )% | 11.7 | % | 13.9 | % | ||||||||||||||||||||||||
Total regional operating income
|
152.7 | 146.6 | 4.2 | % | 13.8 | %* | 14.1 | %* | 459.2 | 400.2 | 14.7 | % | 14.7 | %* | 13.8 | %* | ||||||||||||||||||||||||
Corporate expenses
|
66.4 | 48.2 | 37.7 | % | 6.0 | %* | 4.6 | %* | 196.4 | 139.7 | 40.6 | % | 6.3 | %* | 4.8 | %* | ||||||||||||||||||||||||
Total operating income
|
$ | 86.3 | $ | 98.4 | (12.3 | )% | 7.8 | %* | 9.5 | %* | $ | 262.8 | $ | 260.5 | 0.9 | % | 8.4 | %* | 9.0 | %* | ||||||||||||||||||||
Operating margin
|
7.8 | % | 9.5 | % | 8.4 | % | 9.0 | % |
* | Percentage of consolidated net revenues |
Currency favorably affected total operating income by
approximately $4 million and $34 million for the
three- and nine-month periods, respectively.
Regional operating income. The
following describes changes in operating income by segment for
the three- and nine-month periods ended August 29, 2010,
compared to the same prior-year periods:
| Americas. For both periods, operating margin and operating income reflected the regions higher constant-currency net revenues and the improvement in gross margin, the effects of which were partially offset by the increased selling and advertising expenses. | |
| Europe. For the nine-month period, the increase in the regions operating income was primarily due to the favorable impact of currency. The regions higher operating margins as compared to prior year for both periods reflected the regions gross margin improvement, partially offset by higher expenses reflecting our company-operated store expansion. | |
| Asia Pacific. For both periods, the favorable impact of currency and the regions improved gross margin to the regions operating income was more than offset by the impact of the net sales declines in Japan. |
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- and nine-month periods increased over
the same prior-year periods primarily due to our various
corporate initiatives, including the related costs of executive
separations, as well as increased costs associated with our
pension and postretirement benefit plans. Corporate expenses
also increased due to the classification of information
technology and marketing staff costs of a global nature that
were centralized under corporate management beginning in 2010;
these costs were not significant to any of our regional segments
individually or to prior periods, and as such, prior period
amounts were not reclassified.
Interest
expense
Interest expense decreased to $31.7 million and
$100.3 million for the three- and nine-month periods ended
August 29, 2010, respectively, from $37.9 million and
$112.7 million for the same periods in 2009. The decrease
in interest expense for both periods was driven by lower average
borrowing rates, primarily resulting from our debt refinancing
activity that occurred in the second quarter of 2010, and lower
interest expense on our deferred compensation plans. For the
nine-month period, the decrease also reflected lower debt levels
in 2010, resulting from our required payments on the trademark
tranche of our senior secured revolving credit facility in 2009.
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The weighted-average interest rate on average borrowings
outstanding for the three- and nine-month periods ended
August 29, 2010, were 6.74% and 7.27%, respectively, as
compared to 7.47% and 7.49%, respectively, for the same
prior-year periods in 2009.
Loss
on early extinguishment of debt
For the nine months ended August 29, 2010, we recorded a
$16.6 million loss on early extinguishment of debt as a
result of our debt refinancing activities during the second
quarter of 2010. The loss was comprised of tender premiums of
approximately $30.2 million and the write-off of
approximately $7.6 million of unamortized debt issuance
costs net of applicable premium, offset by a gain of
approximately $21.2 million related to the partial
repurchase of Yen-denominated Eurobonds due 2016 at a discount
to their par value.
Other
income (expense), net
For the three- and nine-month periods in 2010, we recorded
expense of $7.7 million and income of $11.5 million,
respectively, as compared to expense of $6.8 million and
$23.9 million, respectively, for the same periods in 2009.
The increase for the nine-month period in 2010 primarily
reflects foreign exchange management gains driven by the
appreciation of the U.S. Dollar against the Euro and the
Japanese Yen.
Income
tax expense
The effective income tax rate was 59.3% for the nine months
ended August 29, 2010, compared to 31.8% for the same
period ended August 30, 2009. Approximately
17.9 percentage points of the total increase in the
effective income tax rate was driven by two significant discrete
income tax charges recognized during the second quarter of 2010.
The remaining increase in the effective income tax rate was
primarily due to our inability to benefit current year losses in
Japan.
Due primarily to our recent negative financial performance in
Japan, we recognized an expense of $14.2 million during the
second quarter of 2010 to recognize a valuation allowance to
fully offset the amount of the existing deferred tax assets of
our Japanese affiliate, as we no longer expect to benefit from
those assets. Furthermore, we do not expect to benefit future
losses absent substantial improvement in financial performance.
Additionally, we recognized an expense of $14.0 million in
the second quarter of 2010 due to the enactment in March 2010 of
the Patient Protection and Affordable Care Act, which includes a
provision eliminating, beginning in our tax year 2014, the tax
deductibility of the costs of providing Medicare
Part D-equivalent
prescription drug benefits to retirees to the extent of the
Federal subsidy received.
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
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trademark tranche, the secured interest in the
U.S. trademarks will be released. As of August 29,
2010, we had borrowings of $108.3 million under the
trademark tranche and no outstanding borrowings under the
revolving tranche. Unused availability under the revolving
tranche was $283.4 million, as our total availability of
$359.3 million, based on collateral levels as defined by
the agreement, was reduced by $75.9 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 August 29, 2010, we had cash and cash equivalents
totaling approximately $261.2 million, resulting in a total
liquidity position (unused availability and cash and cash
equivalents) of $544.6 million.
Cash
Uses
Our principal cash requirements include working capital, capital
expenditures, payments of principal and interest on our debt,
payments of taxes, contributions to our pension plans and
payments for postretirement health benefit plans, and, if market
conditions warrant, occasional investments in, or acquisitions
of, business ventures in our line of business. In addition, we
regularly evaluate our ability to pay dividends or repurchase
stock, all consistent with the terms of our debt agreements.
There have been no material changes to our estimated cash
requirements for 2010 from those disclosed in our 2009 Annual
Report on
Form 10-K.
Cash
Flows
The following table summarizes, for the periods indicated,
selected items in our consolidated statements of cash flows:
Nine Months Ended | ||||||||
August 29, |
August 30, |
|||||||
2010 | 2009 | |||||||
(Dollars in millions) | ||||||||
Cash provided by operating activities
|
$ | 95.8 | $ | 173.9 | ||||
Cash used for investing activities
|
(127.3 | ) | (155.8 | ) | ||||
Cash provided by (used for) financing activities
|
25.3 | (67.5 | ) | |||||
Cash and cash equivalents
|
261.2 | 171.7 |
Cash
flows from operating activities
Cash provided by operating activities was $95.8 million for
the nine-month period in 2010, as compared to
$173.9 million for the same period in 2009. Operating cash
declined compared to the prior year due to higher payments to
vendors, reflecting our retail expansion and investment in
building our brands, as well as higher cash used for inventory.
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 $127.3 million for
the nine-month period in 2010, as compared to
$155.8 million for the same period in 2009. As compared to
the prior year, the increase in cash used for investing
activities primarily reflects costs associated with the
remodeling of the Companys headquarters as well as
investments made in our company-operated retail stores and
information technology systems associated with the installation
of our global enterprise resource planning system.
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Cash
flows from financing activities
Cash provided by financing activities was $25.3 million for
the nine-month period in 2010, compared to cash used of
$67.5 million for the same period in 2009. Net cash
provided in 2010 reflected our May 2010 refinancing activities.
Cash used in 2009 primarily related to required payments on the
trademark tranche of our senior secured revolving credit
facility; no such payment is required in 2010.
Indebtedness
We had fixed-rate debt of approximately $1.4 billion (76%
of total debt) and variable-rate debt of approximately
$0.4 billion (24% of total debt) as of August 29,
2010. 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.
Our required aggregate debt principal payments, excluding
short-term borrowings, are $108.3 million in 2012,
$323.6 million in 2014 and the remaining $1.4 billion
in years after 2015. Short-term borrowings totaling
$37.8 million as of August 29, 2010, are expected to
be either paid over the next twelve months or refinanced at the
end of their applicable terms.
Off-Balance
Sheet Arrangements, Guarantees and Other Contingent
Obligations
There have been no substantial changes to our off-balance sheet
arrangements or contractual commitments from those disclosed in
our 2009 Annual Report on
Form 10-K.
Critical
Accounting Policies and Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles in the United States
requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial
statements and the related notes. There have been no significant
changes to our critical accounting policies from those disclosed
in our 2009 Annual Report on
Form 10-K.
Recently
Issued Accounting Standards
See Note 1 to our unaudited consolidated financial
statements included in this report for recently issued
accounting standards, including the expected dates of adoption
and estimated effects on our consolidated financial statements.
FORWARD-LOOKING
STATEMENTS
Certain matters discussed in this report, including (without
limitation) statements under Managements Discussion
and Analysis of Financial Condition and Results of
Operations contain forward-looking statements. Although we
believe that, in making any such statements, our expectations
are based on reasonable assumptions, any such statement may be
influenced by factors that could cause actual outcomes and
results to be materially different from those projected.
These forward-looking statements include statements relating to
our anticipated financial performance and business prospects
and/or
statements preceded by, followed by or that include the words
believe, anticipate, intend,
estimate, expect, project,
could, plans, seeks and
similar expressions. These forward-looking statements speak only
as of the date stated and we do not undertake any obligation to
update or revise publicly any forward-looking statements,
whether as a result of new information, future events or
otherwise, even if experience or future events make it clear
that any expected results expressed or implied by these
forward-looking statements will not be realized. Although we
believe that the expectations reflected in these forward-looking
statements are reasonable, these expectations may not prove to
be correct or we may not achieve the financial results, savings
or other benefits anticipated in the forward-looking statements.
These forward-looking statements are necessarily estimates
reflecting the best judgment of our senior management and
involve a number of risks and uncertainties, some of which may
be beyond our control. These risks and uncertainties, including
those disclosed under Risk Factors in our Annual
Report on
Form 10-K
for the fiscal year ended November 29, 2009 and our other
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filings with the Securities and Exchange Commission, could cause
actual results to differ materially from those suggested by the
forward-looking statements and include, without limitation:
| changes in the level of consumer spending for apparel in view of general economic conditions, and our ability to plan for and respond to the impact of those changes; | |
| consequences of impacts to the businesses of our wholesale customers caused by factors such as lower consumer spending, general economic conditions, changing consumer preferences and consolidations through mergers and acquisitions; | |
| our ability to increase the number of dedicated stores for our products, including through opening and profitably operating company-operated stores; | |
| our ability to revitalize our Dockers® brand and to 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 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; | |
| 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; | |
| consequences of foreign currency exchange rate fluctuations; | |
| our dependence on key distribution channels, customers and suppliers; | |
| our ability to respond to price, innovation and other competitive pressures in the apparel industry and on our key customers; | |
| our ability to utilize our tax credits and net operating loss carryforwards; | |
| ongoing or future litigation matters and disputes and regulatory developments; | |
| changes in or application of trade and tax laws; and | |
| political, social or economic instability in countries where we do business. |
Our actual results might differ materially from historical
performance or current expectations. We do not undertake any
obligation to update or revise publicly any forward-looking
statements, whether as a result of new information, future
events or otherwise.
Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
There have been no material changes in our primary market risk
exposures or how those exposures are managed from the
information disclosed in our 2009 Annual Report on
Form 10-K.
Item 4T. | CONTROLS AND PROCEDURES |
Evaluation
of Disclosure Controls and Procedures
As of August 29, 2010, we updated our evaluation of the
effectiveness of the design and operation of our disclosure
controls and procedures for purposes of filing reports under the
Securities and Exchange Act of 1934 (the Exchange
Act). This controls evaluation was done under the
supervision and with the participation of management, including
our chief executive officer and our chief financial officer. Our
chief executive officer and our chief financial officer
concluded that at August 29, 2010, our disclosure controls
and procedures (as defined in
Rule 13a-15(e)
and
15d-15(e)
under the Exchange Act) are effective to provide reasonable
assurance that information that we are required to disclose in
the reports that we file or submit to the SEC is recorded,
processed,
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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.
As a result of the enactment in our third quarter of the
Dodd-Frank Wall Street Reform and Consumer Protection Act,
Exemption for Non-accelerated Filers, and in
accordance with Section 989G of that act, we will not be
required to provide an attestation report of our independent
registered public accounting firm regarding internal control
over financial reporting for the 2010 fiscal year and
thereafter, until such time as we are no longer eligible for the
exemption set forth therein.
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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 2009
Annual Report on
Form 10-K.
In the ordinary course of business, we have various pending
cases involving contractual matters, employee-related matters,
distribution questions, product liability claims, trademark
infringement and other matters. We do not believe there are any
pending legal proceedings that will have a material impact on
our financial condition or results of operations.
Item 1A. | RISK FACTORS |
There have been no material changes in our risk factors from
those disclosed in our 2009 Annual Report on
Form 10-K.
Item 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
On July 15, 2010, our board approved the award of
restricted stock units (RSUs) representing an
aggregate of 25,998 shares of our common stock to our
non-employee board members. These awards were made under our
2006 Equity Incentive Plan.
The RSUs were granted as part of the standard annual
compensation provided to non-employee directors, including the
chairman of the board. RSUs are units, representing beneficial
ownership interests, corresponding in number and value to a
specified number of underlying shares of stock. The RSUs vest in
three equal installments after 13, 24 and 36 months
following the grant date. However, if the recipients
continuous service terminates for reason other than cause after
the first vesting installment, but prior to full vesting, then
the remaining unvested portion of the award becomes fully vested
as of the date of such termination. Recipients of the RSUs have
the opportunity to make deferral elections regarding when shares
of our common stock are to be delivered in settlement of vested
RSUs. If the recipient does not elect to defer the receipt of
common stock, then the RSUs are immediately converted into
shares upon vesting. The RSUs additionally have dividend
equivalent rights, of which dividends paid by the Company
on its common stock are credited by the equivalent addition of
RSUs.
We will not receive any proceeds from the issuance or vesting of
RSUs. The RSUs 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 October 07, 2010, we had
37,322,358 shares outstanding.
Item 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
Item 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
None.
Item 5. | OTHER INFORMATION |
None.
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Item 6. | EXHIBITS |
10 | .1 | Letter Agreement with Armin Broger, dated September 21, 2010. Filed herewith. | ||
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)
By: |
/s/ Heidi
L. Manes
|
Heidi L. Manes
Vice President and Controller
(Principal Accounting Officer)
Date: October 12, 2010
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EXHIBIT INDEX
10 | .1 | Letter Agreement with Armin Broger, dated September 21, 2010. Filed herewith. | ||
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. |