UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ | ||
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended February 26, 2012
or
¨ | ||
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number:002-90139
LEVI STRAUSS & CO.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE | 94-0905160 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
1155 Battery Street, San Francisco, California 94111
(Address of Principal Executive Offices) (Zip Code)
(415) 501-6000
(Registrant’s telephone number, including area code)
None
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o¨ No þ
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation 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 þ 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” inRule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | Accelerated filer | Non-accelerated filer þ | Smaller reporting company | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined inRule 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 Company’s 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 issuer’s classes of common stock, as of the latest practicable date.
Common Stock $.01 par value — 37,354,02137,345,985 shares outstanding on October 6, 2011
FOR THE QUARTERLY PERIOD ENDED AUGUST 28, 2011FEBRUARY 26, 2012
2
Item 1. | CONSOLIDATED FINANCIAL STATEMENTS |
CONSOLIDATED BALANCE SHEETS Current Assets: Cash and cash equivalents Trade receivables, net of allowance for doubtful accounts of $25,324 and $22,684 Inventories: Raw materials Work-in-process Finished goods Total inventories Deferred tax assets, net Other current assets Total current assets Property, plant and equipment, net of accumulated depreciation of $764,227 and $731,859 Goodwill Other intangible assets, net Non-current deferred tax assets, net Other non-current assets Total assets Current Liabilities: Short-term debt Current maturities of capital leases Accounts payable Other accrued liabilities Accrued salaries, wages and employee benefits Accrued interest payable Accrued income taxes Total current liabilities Long-term debt Long-term capital leases Postretirement medical benefits Pension liability Long-term employee related benefits Long-term income tax liabilities Other long-term liabilities Total liabilities Commitments and contingencies Temporary equity Stockholders’ Deficit: Levi Strauss & Co. stockholders’ deficit Additional paid-in capital Retained earnings Accumulated other comprehensive loss Total Levi Strauss & Co. stockholders’ deficit Noncontrolling interest Total stockholders’ deficit Total liabilities, temporary equity and stockholders’ deficit The accompanying notes are an integral part of these consolidated financial statements. (Unaudited) August 28, November 28, 2011 2010 (Dollars in thousands) Current Assets: Cash and cash equivalents $ 230,844 $ 269,726 Restricted cash 7,432 4,028 Trade receivables, net of allowance for doubtful accounts of $22,778 and $24,617 539,042 553,385 Inventories: Raw materials 7,960 6,770 Work-in-process 13,421 9,405 Finished goods 709,253 563,728 Total inventories 730,634 579,903 Deferred tax assets, net 143,466 137,892 Other current assets 140,546 106,198 Total current assets 1,791,964 1,651,132 Property, plant and equipment, net of accumulated depreciation of $729,843 and $683,258 507,933 488,603 Goodwill 243,680 241,472 Other intangible assets, net 76,015 84,652 Non-current deferred tax assets, net 558,881 559,053 Other assets 109,285 110,337 $ 3,287,758 $ 3,135,249 LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS’ DEFICIT Current Liabilities: Short-term debt $ 129,010 $ 46,418 Current maturities of long-term debt — — Current maturities of capital leases 1,740 1,777 Accounts payable 248,806 212,935 Other accrued liabilities 233,871 275,443 Accrued salaries, wages and employee benefits 192,553 196,152 Accrued interest payable 37,319 9,685 Accrued income taxes 18,333 17,115 Total current liabilities 861,632 759,525 Long-term debt 1,856,237 1,816,728 Long-term capital leases 2,795 3,578 Postretirement medical benefits 139,410 147,065 Pension liability 326,344 400,584 Long-term employee related benefits 94,441 102,764 Long-term income tax liabilities 48,659 50,552 Other long-term liabilities 54,250 54,281 Total liabilities 3,383,768 3,335,077 Commitments and contingencies Temporary equity 10,720 8,973 Stockholders’ Deficit: Levi Strauss & Co. stockholders’ deficit Common stock — $.01 par value; 270,000,000 shares authorized; 37,346,643 shares and 37,322,358 shares issued and outstanding 373 373 Additional paid-in capital 24,857 18,840 Retained earnings 106,894 33,346 Accumulated other comprehensive loss (247,555 ) (272,168 ) Total Levi Strauss & Co. stockholders’ deficit (115,431 ) (219,609 ) Noncontrolling interest 8,701 10,808 Total stockholders’ deficit (106,730 ) (208,801 ) $ 3,287,758 $ 3,135,249 (Unaudited)
February 26,
2012 November 27,
2011 (Dollars in thousands) ASSETS $ 238,320 $ 204,542 533,364 654,903 7,422 7,086 7,725 9,833 625,530 594,483 640,677 611,402 99,162 99,544 173,317 172,830 1,684,840 1,743,221 485,849 502,388 241,297 240,970 69,328 71,818 610,445 613,161 118,759 107,997 $ 3,210,518 $ 3,279,555 LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS’ DEFICIT $ 114,075 $ 154,747 1,355 1,714 214,520 204,897 216,535 256,316 171,766 235,530 36,775 9,679 18,073 9,378 773,099 872,261 1,814,258 1,817,625 1,906 1,999 137,025 140,108 395,722 427,422 81,223 75,520 43,126 42,991 54,444 51,458 3,300,803 3,429,384 6,205 7,002
Common stock — $.01 par value; 270,000,000 shares authorized; 37,354,021 shares and 37,354,021 shares issued and outstanding 374 374 31,262 29,266 199,523 150,770 (336,156 ) (346,002 ) (104,997 ) (165,592 ) 8,507 8,761 (96,490 ) (156,831 ) $ 3,210,518 $ 3,279,555 3
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended | Nine Months Ended | |||||||||||||||
August 28, | August 29, | August 28, | August 29, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
(Unaudited) | ||||||||||||||||
Net sales | $ | 1,183,890 | $ | 1,090,448 | $ | 3,358,175 | $ | 3,064,414 | ||||||||
Licensing revenue | 20,127 | 18,557 | 59,457 | 56,326 | ||||||||||||
Net revenues | 1,204,017 | 1,109,005 | 3,417,632 | 3,120,740 | ||||||||||||
Cost of goods sold | 634,573 | 565,393 | 1,749,525 | 1,544,779 | ||||||||||||
Gross profit | 569,444 | 543,612 | 1,668,107 | 1,575,961 | ||||||||||||
Selling, general and administrative expenses | 488,545 | 457,309 | 1,423,358 | 1,313,185 | ||||||||||||
Operating income | 80,899 | 86,303 | 244,749 | 262,776 | ||||||||||||
Interest expense | (30,208 | ) | (31,734 | ) | (98,589 | ) | (100,347 | ) | ||||||||
Loss on early extinguishment of debt | — | — | — | (16,587 | ) | |||||||||||
Other income (expense), net | (5,779 | ) | (7,695 | ) | (12,744 | ) | 11,462 | |||||||||
Income before income taxes | 44,912 | 46,874 | 133,416 | 157,304 | ||||||||||||
Income tax expense | 13,612 | 20,252 | 42,437 | 93,203 | ||||||||||||
Net income | 31,300 | 26,622 | 90,979 | 64,101 | ||||||||||||
Net loss attributable to noncontrolling interest | 893 | 1,556 | 2,860 | 6,050 | ||||||||||||
Net income attributable to Levi Strauss & Co. | $ | 32,193 | $ | 28,178 | $ | 93,839 | $ | 70,151 | ||||||||
Three Months Ended | ||||||||
February 26, 2012 | February 27, 2011 | |||||||
(Dollars in thousands) | ||||||||
(Unaudited) | ||||||||
Net revenues | $ | 1,164,961 | $ | 1,120,693 | ||||
Cost of goods sold | 616,167 | 562,726 | ||||||
|
|
|
| |||||
Gross profit | 548,794 | 557,967 | ||||||
Selling, general and administrative expenses | 438,583 | 459,093 | ||||||
|
|
|
| |||||
Operating income | 110,211 | 98,874 | ||||||
Interest expense | (38,573 | ) | (34,866 | ) | ||||
Other income (expense), net | 1,172 | (5,959 | ) | |||||
|
|
|
| |||||
Income before income taxes | 72,810 | 58,049 | ||||||
Income tax expense | 23,513 | 18,881 | ||||||
|
|
|
| |||||
Net income | 49,297 | 39,168 | ||||||
Net (income) loss attributable to noncontrolling interest | (79 | ) | 1,507 | |||||
|
|
|
| |||||
Net income attributable to Levi Strauss & Co. | $ | 49,218 | $ | 40,675 | ||||
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended | ||||||||
August 28, | August 29, | |||||||
2011 | 2010 | |||||||
(Dollars in thousands) (Unaudited) | ||||||||
Cash Flows from Operating Activities: | ||||||||
Net income | $ | 90,979 | $ | 64,101 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 87,420 | 77,983 | ||||||
Asset impairments | 2,957 | 2,307 | ||||||
Gain on disposal of property, plant and equipment | — | (100 | ) | |||||
Unrealized foreign exchange losses (gains) | 11,262 | (15,789 | ) | |||||
Realized loss on settlement of forward foreign exchange contracts not designated for hedge accounting | 8,252 | 8,412 | ||||||
Employee benefit plans’ amortization from accumulated other comprehensive loss | (4,555 | ) | 2,557 | |||||
Employee benefit plans’ curtailment loss, net | 1,629 | 100 | ||||||
Noncash gain on extinguishment of debt, net of write-off of unamortized debt issuance costs | — | (13,647 | ) | |||||
Amortization of deferred debt issuance costs | 3,241 | 3,293 | ||||||
Stock-based compensation | 7,741 | 4,419 | ||||||
Allowance for doubtful accounts | 4,957 | 6,428 | ||||||
Change in operating assets and liabilities: | ||||||||
Trade receivables | 22,260 | 16,871 | ||||||
Inventories | (115,169 | ) | (134,592 | ) | ||||
Other current assets | (28,823 | ) | (6,930 | ) | ||||
Other non-current assets | 1,124 | (17,320 | ) | |||||
Accounts payable and other accrued liabilities | 1,309 | 55,700 | ||||||
Income tax liabilities | (3,554 | ) | 63,760 | |||||
Accrued salaries, wages and employee benefits and long-term employee related benefits | (73,019 | ) | (40,820 | ) | ||||
Other long-term liabilities | (994 | ) | 19,113 | |||||
Other, net | 270 | (17 | ) | |||||
Net cash provided by operating activities | 17,287 | 95,829 | ||||||
Cash Flows from Investing Activities: | ||||||||
Purchases of property, plant and equipment | (106,010 | ) | (107,874 | ) | ||||
Proceeds from sale of property, plant and equipment | 158 | 1,375 | ||||||
Payments on settlement of forward foreign exchange contracts not designated for hedge accounting | (8,252 | ) | (8,412 | ) | ||||
Acquisitions, net of cash acquired | — | (12,242 | ) | |||||
Other | (500 | ) | (114 | ) | ||||
Net cash used for investing activities | (114,604 | ) | (127,267 | ) | ||||
Cash Flows from Financing Activities: | ||||||||
Proceeds from issuance of long-term debt | — | 909,390 | ||||||
Repayments of long-term debt and capital leases | (1,470 | ) | (865,527 | ) | ||||
Proceeds from senior revolving credit facility | 70,000 | — | ||||||
Short-term borrowings, net | 6,926 | 19,176 | ||||||
Debt issuance costs | — | (17,512 | ) | |||||
Restricted cash | (2,866 | ) | (248 | ) | ||||
Repurchase of common stock | (245 | ) | — | |||||
Dividend to stockholders | (20,023 | ) | (20,013 | ) | ||||
Net cash provided by financing activities | 52,322 | 25,266 | ||||||
Effect of exchange rate changes on cash and cash equivalents | 6,113 | (3,434 | ) | |||||
Net decrease in cash and cash equivalents | (38,882 | ) | (9,606 | ) | ||||
Beginning cash and cash equivalents | 269,726 | 270,804 | ||||||
Ending cash and cash equivalents | $ | 230,844 | $ | 261,198 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 69,124 | $ | 87,097 | ||||
Income taxes | 43,697 | 34,980 |
Three Months Ended | ||||||||
February 26, 2012 | February 27, 2011 | |||||||
(Dollars in thousands) | ||||||||
(Unaudited) | ||||||||
Cash Flows from Operating Activities: | ||||||||
Net income | $ | 49,297 | $ | 39,168 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 31,218 | 28,390 | ||||||
Asset impairments | 58 | 596 | ||||||
Gain on disposal of property, plant and equipment | (88 | ) | (59 | ) | ||||
Unrealized foreign exchange (gains) losses | (1,639 | ) | 6,650 | |||||
Realized loss on settlement of forward foreign exchange contracts not designated for hedge accounting | 3,485 | 5,723 | ||||||
Employee benefit plans’ amortization from accumulated other comprehensive loss | �� | 373 | 793 | |||||
Employee benefit plans’ curtailment gain, net | (773 | ) | (16 | ) | ||||
Amortization of deferred debt issuance costs | 1,110 | 1,058 | ||||||
Stock-based compensation | 1,214 | 1,841 | ||||||
Allowance for doubtful accounts | 2,919 | 3,028 | ||||||
Change in operating assets and liabilities: | ||||||||
Trade receivables | 118,185 | 87,388 | ||||||
Inventories | (29,961 | ) | (43,962 | ) | ||||
Other current assets | (17,713 | ) | 3,313 | |||||
Other non-current assets | (1,744 | ) | (5,350 | ) | ||||
Accounts payable and other accrued liabilities | 26,711 | (11,799 | ) | |||||
Income tax liabilities | 11,764 | 3,799 | ||||||
Accrued salaries, wages and employee benefits and long-term employee related benefits | (90,766 | ) | (74,259 | ) | ||||
Other long-term liabilities | 1,049 | (359 | ) | |||||
Other, net | 94 | 83 | ||||||
|
|
|
| |||||
Net cash provided by operating activities | 104,793 | 46,026 | ||||||
|
|
|
| |||||
Cash Flows from Investing Activities: | ||||||||
Purchases of property, plant and equipment | (17,291 | ) | (40,498 | ) | ||||
Proceeds from sale of property, plant and equipment | 117 | 76 | ||||||
Payments on settlement of forward foreign exchange contracts not designated for hedge accounting | (3,485 | ) | (5,723 | ) | ||||
|
|
|
| |||||
Net cash used for investing activities | (20,659 | ) | (46,145 | ) | ||||
|
|
|
| |||||
Cash Flows from Financing Activities: | ||||||||
Repayments of long-term debt and capital leases | (458 | ) | (456 | ) | ||||
Proceeds from senior revolving credit facility | 50,000 | — | ||||||
Repayments of senior revolving credit facility | (110,000 | ) | — | |||||
Short-term borrowings, net | 7,754 | (2,261 | ) | |||||
Debt issuance costs | (51 | ) | — | |||||
Restricted cash | (305 | ) | 618 | |||||
Repurchase of common stock | (479 | ) | (245 | ) | ||||
Dividend to stockholders | — | (20,023 | ) | |||||
|
|
|
| |||||
Net cash used for financing activities | (53,539 | ) | (22,367 | ) | ||||
|
|
|
| |||||
Effect of exchange rate changes on cash and cash equivalents | 3,183 | 1,873 | ||||||
|
|
|
| |||||
Net increase (decrease) in cash and cash equivalents | 33,778 | (20,613 | ) | |||||
Beginning cash and cash equivalents | 204,542 | 269,726 | ||||||
|
|
|
| |||||
Ending cash and cash equivalents | $ | 238,320 | $ | 249,113 | ||||
|
|
|
| |||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 5,796 | $ | 5,009 | ||||
Income taxes | 4,077 | 11,933 |
The accompanying notes are an integral part of these consolidated financial statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIOD ENDED AUGUST 28, 2011FEBRUARY 26, 2012
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Levi Strauss & Co. (the “Company”) is one of the world’s leading branded apparel companies. The Company designs and markets jeans, casual and dress pants, tops, shorts, skirts, jackets, footwear and related accessories, for men, women and children under the Levi’s®, 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.” GAAP”) for interim financial information. In the opinion of management, all adjustments necessary for a fair statement of the financial position and the results of operations for the periods presented have been included. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended November 28, 2010,27, 2011, included in the Annual Report onForm 10-K filed by the Company with the Securities and Exchange Commission (“SEC”) on February 8, 2011.
The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions have been eliminated. Management believes the disclosures are adequate to make the information presented herein not misleading. Certain prior-year amounts have been reclassified to conform to the current presentation. The results of operations for the three and nine months ended August 28, 2011,February 26, 2012, may not be indicative of the results to be expected for any other interim period or the year ending November 27, 2011.
The Company’s fiscal year ends on the last Sunday of November in each year, although the fiscal years of certain foreign subsidiaries are fixed atend on November 30 due to local statutory requirements. Apart from these subsidiaries, each30. Each quarter of both fiscal years 20112012 and 20102011 consists of 13 weeks. All references to years relate to fiscal years rather than calendar years.
Subsequent events have been evaluated through the issuance date of these financial statements.
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 Company’s 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
There have been no developments to recently issued accounting standards, including the expected dates of adoption and estimated effects on the Company’s consolidated financial statements, from those disclosed in the Company’s 20102011 Annual Report onForm 10-K, except for the following, which have been grouped by their required effective dates for the Company:
710-K.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 28, 2011FEBRUARY 26, 2012
Asia | ||||||||||||||||
Americas | Europe | Pacific | Total | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Balance, November 28, 2010 | $ | 207,427 | $ | 31,603 | $ | 2,442 | $ | 241,472 | ||||||||
Foreign currency fluctuation | (1 | ) | 2,279 | (70 | ) | 2,208 | ||||||||||
Balance, August 28, 2011 | $ | 207,426 | $ | 33,882 | $ | 2,372 | $ | 243,680 | ||||||||
August 28, 2011 | November 28, 2010 | |||||||||||||||||||||||
Gross | Accumulated | Gross | Accumulated | |||||||||||||||||||||
Carrying Value | Amortization | Total | Carrying Value | Amortization | Total | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Unamortized intangible assets: | ||||||||||||||||||||||||
Trademarks | $ | 42,743 | $ | — | $ | 42,743 | $ | 42,743 | $ | — | $ | 42,743 | ||||||||||||
Amortized intangible assets: | ||||||||||||||||||||||||
Acquired contractual rights | 41,944 | (20,881 | ) | 21,063 | 45,712 | (17,765 | ) | 27,947 | ||||||||||||||||
Customer lists | 21,567 | (9,358 | ) | 12,209 | 20,037 | (6,075 | ) | 13,962 | ||||||||||||||||
Total | $ | 106,254 | $ | (30,239 | ) | $ | 76,015 | $ | 108,492 | $ | (23,840 | ) | $ | 84,652 | ||||||||||
8
NOTE 2: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the Company’s financial instruments that are carried at fair value:
August 28, 2011 | November 28, 2010 | |||||||||||||||||||||||
Fair Value Estimated Using | Fair Value Estimated Using | |||||||||||||||||||||||
Leve1 1 | Level 2 | Leve1 | 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 | $ | 18,365 | $ | 18,365 | $ | — | $ | 18,316 | $ | 18,316 | $ | — | ||||||||||||
Forward foreign exchange contracts, net(3) | 7,753 | — | 7,753 | 1,385 | — | 1,385 | ||||||||||||||||||
Total | $ | 26,118 | $ | 18,365 | $ | 7,753 | $ | 19,701 | $ | 18,316 | $ | 1,385 | ||||||||||||
Financial liabilities carried at fair value | ||||||||||||||||||||||||
Forward foreign exchange contracts, net(3) | $ | 4,489 | $ | — | $ | 4,489 | $ | 5,003 | $ | — | $ | 5,003 | ||||||||||||
Total | $ | 4,489 | $ | — | $ | 4,489 | $ | 5,003 | $ | — | $ | 5,003 | ||||||||||||
February 26, 2012 | November 27, 2011 | |||||||||||||||||||||||
Fair Value Estimated Using | Fair Value Estimated Using | |||||||||||||||||||||||
Fair Value | Level 1 Inputs(1) | Level 2 Inputs(2) | Fair Value | Level 1 Inputs(1) | Level 2 Inputs(2) | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Financial assets carried at fair value | ||||||||||||||||||||||||
Rabbi trust assets | $ | 19,443 | $ | 19,443 | $ | — | $ | 18,064 | $ | 18,064 | $ | — | ||||||||||||
Forward foreign exchange contracts, net(3) | 12,262 | — | 12,262 | 25,992 | — | 25,992 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | 31,705 | $ | 19,443 | $ | 12,262 | $ | 44,056 | $ | 18,064 | $ | 25,992 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Financial liabilities carried at fair value | ||||||||||||||||||||||||
Forward foreign exchange contracts, net(3) | $ | 3,090 | $ | — | $ | 3,090 | $ | 5,256 | $ | — | $ | 5,256 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | 3,090 | $ | — | $ | 3,090 | $ | 5,256 | $ | — | $ | 5,256 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Fair values estimated using Level 1 inputs are inputs which consist of quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Rabbi trust assets consist of a diversified portfolio of equity, fixed income and other securities. | |
(2) | Fair values estimated using Level 2 inputs are inputs, other than quoted prices, that are observable for the asset or liability, either directly or indirectly and include among other things, quoted prices for similar assets or liabilities in markets that are active or inactive as well as inputs other than quoted prices that are observable. For forward foreign exchange contracts, inputs include foreign currency exchange and interest rates and, where applicable, credit default swap prices. | |
(3) | The Company’sover-the-counter forward foreign exchange contracts are subject to International Swaps and Derivatives Association, Inc. master agreements. These agreements permit the net-settlement of these contracts on a per-institution basis. |
The following table presents the carrying value — including accrued interest — and estimated fair value of the Company’s financial instruments that are carried at adjusted historical cost:
August 28, 2011 | November 28, 2010 | |||||||||||||||||||
Carrying | Estimated | Carrying | Estimated | |||||||||||||||||
Value | Fair Value(1) | Value | Fair Value(1) | |||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Financial liabilities carried at adjusted historical cost | ||||||||||||||||||||
Senior revolving credit facility | $ | 178,529 | $ | 177,638 | $ | 108,482 | $ | 107,129 | ||||||||||||
Senior term loan due 2014 | 324,665 | 282,553 | 324,423 | 311,476 | ||||||||||||||||
8.875% senior notes due 2016 | 362,770 | 373,270 | 355,004 | 373,379 | ||||||||||||||||
4.25% Yen-denominated Eurobonds due 2016 | 119,304 | 100,765 | 109,429 | 98,063 | ||||||||||||||||
7.75% Euro senior notes due 2018 | 440,971 | 389,210 | 401,982 | 407,993 | ||||||||||||||||
7.625% senior notes due 2020 | 536,564 | 510,314 | 526,557 | 542,307 | ||||||||||||||||
Short-term borrowings | 59,454 | 59,454 | 46,722 | 46,722 | ||||||||||||||||
Total | $ | 2,022,257 | $ | 1,893,204 | $ | 1,872,599 | $ | 1,887,069 | ||||||||||||
February 26, 2012 | November 27, 2011 | |||||||||||||||
Carrying Value | Estimated Fair Value(1) | Carrying Value | Estimated Fair Value(1) | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Financial liabilities carried at adjusted historical cost | ||||||||||||||||
Senior revolving credit facility | $ | 140,145 | $ | 139,795 | $ | 200,267 | $ | 199,767 | ||||||||
Senior term loan due 2014 | 324,741 | 314,208 | 324,663 | 316,562 | ||||||||||||
8.875% senior notes due 2016 | 362,684 | 376,246 | 354,918 | 366,293 | ||||||||||||
4.25% Yen-denominated Eurobonds due 2016 | 115,595 | 101,491 | 118,618 | 102,508 | ||||||||||||
7.75% Euro senior notes due 2018 | 409,914 | 417,937 | 401,495 | 381,478 | ||||||||||||
7.625% senior notes due 2020 | 536,453 | 562,703 | 526,446 | 519,883 | ||||||||||||
Short-term borrowings | 74,861 | 74,861 | 54,975 | 54,975 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 1,964,393 | $ | 1,987,241 | $ | 1,981,382 | $ | 1,941,466 | ||||||||
|
|
|
|
|
|
|
|
(1) | Fair value estimate incorporates mid-market price quotes. |
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 28, 2011FEBRUARY 26, 2012
NOTE 3: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
As of August 28, 2011,February 26, 2012, the Company had forward foreign exchange contracts to buy $551.1$763.3 million and to sell $455.3$425.1 million against various foreign currencies. These contracts are at various exchange rates and expire at various dates through JuneNovember 2012.
The table below provides data about the carrying values of derivative instruments and non-derivative instruments designated as net investment hedges:
August 28, 2011 | November 28, 2010 | |||||||||||||||||||||||
Assets | (Liabilities) | Assets | (Liabilities) | |||||||||||||||||||||
Derivative | Derivative | |||||||||||||||||||||||
Carrying | Carrying | Net Carrying | Carrying | Carrying | Net Carrying | |||||||||||||||||||
Value | Value | Value | Value | Value | Value | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Derivatives not designated as hedging | ||||||||||||||||||||||||
instruments | ||||||||||||||||||||||||
Forward foreign exchange contracts(1) | $ | 9,369 | $ | (1,616 | ) | $ | 7,753 | $ | 7,717 | $ | (6,332 | ) | $ | 1,385 | ||||||||||
Forward foreign exchange contracts(2) | 9,147 | (13,636 | ) | (4,489 | ) | 4,266 | (9,269 | ) | (5,003 | ) | ||||||||||||||
Total | $ | 18,516 | $ | (15,252 | ) | $ | 11,983 | $ | (15,601 | ) | ||||||||||||||
Non-derivatives designated as hedging instruments | ||||||||||||||||||||||||
4.25% Yen-denominated Eurobonds due 2016 | $ | — | $ | (50,615 | ) | $ | — | $ | (61,075 | ) | ||||||||||||||
7.75% Euro senior notes due 2018 | — | (431,340 | ) | — | (400,740 | ) | ||||||||||||||||||
Total | $ | — | $ | (481,955 | ) | $ | — | $ | (461,815 | ) | ||||||||||||||
February 26, 2012 | November 27, 2011 | |||||||||||||||||||||||
Assets | (Liabilities) | Assets | (Liabilities) | |||||||||||||||||||||
Carrying Value | Carrying Value | Derivative Net Carrying Value | Carrying Value | Carrying Value | Derivative Net Carrying Value | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Derivatives not designated as hedging instruments | ||||||||||||||||||||||||
Forward foreign exchange contracts(1) | $ | 21,603 | $ | (9,341 | ) | $ | 12,262 | $ | 31,906 | $ | (5,914 | ) | $ | 25,992 | ||||||||||
Forward foreign exchange contracts(2) | 310 | (3,400 | ) | (3,090 | ) | 4,547 | (9,803 | ) | (5,256 | ) | ||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total | $ | 21,913 | $ | (12,741 | ) | $ | 36,453 | $ | (15,717 | ) | ||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Non-derivatives designated as hedging instruments | ||||||||||||||||||||||||
4.25% Yen-denominated Eurobonds due 2016 | $ | — | $ | (44,448 | ) | $ | — | $ | (46,115 | ) | ||||||||||||||
7.75% Euro senior notes due 2018 | — | (401,160 | ) | — | (400,350 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total | $ | — | $ | (445,608 | ) | $ | — | $ | (446,465 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
(1) | Included in “Other current assets” or “Other non-current assets” on the Company’s consolidated balance sheets. | |
(2) | Included in “Other accrued liabilities” on the Company’s consolidated balance sheets. |
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 26, 2012
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 Company’s consolidated balance sheets, and in “Other income (expense), net” in the Company’s 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 28, | November 28, | August 28, | August 29, | August 28, | August 29, | |||||||||||||||||||
2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Forward foreign exchange contracts | $ | 4,637 | $ | 4,637 | $ | — | $ | — | $ | — | $ | — | ||||||||||||
Yen-denominated Eurobonds | (28,316 | ) | (24,377 | ) | (3,161 | ) | (2,818 | ) | (4,707 | ) | 2,732 | |||||||||||||
Euro senior notes | (54,271 | ) | (23,671 | ) | — | — | — | — | ||||||||||||||||
Cumulative income taxes | 30,316 | 17,022 | ||||||||||||||||||||||
Total | $ | (47,634 | ) | $ | (26,389 | ) | ||||||||||||||||||
10
Gain or (Loss) Recognized in AOCI (Effective Portion) | Gain or (Loss) Recognized in Other Income (Expense), net (Ineffective Portion and Amount Excluded from Effectiveness Testing) | |||||||||||||||
As of February 26, 2012 | As of November 27, 2011 | Three Months Ended | ||||||||||||||
February 26, 2012 | February 27, 2011 | |||||||||||||||
(Dollars in thousands) | ||||||||||||||||
Forward foreign exchange contracts | $ | 4,637 | $ | 4,637 | $ | — | $ | — | ||||||||
Yen-denominated Eurobonds | (26,859 | ) | (28,525 | ) | 2,606 | (1,093 | ) | |||||||||
Euro senior notes | (24,091 | ) | (23,281 | ) | — | — | ||||||||||
Cumulative income taxes | 18,145 | 18,476 | ||||||||||||||
|
|
|
| |||||||||||||
Total | $ | (28,168 | ) | $ | (28,693 | ) | ||||||||||
|
|
|
|
Gain or (Loss) | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
August 28, | August 29, | August 28, | August 29, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Forward foreign exchange contracts: | ||||||||||||||||
Realized | $ | (3,389 | ) | $ | (3,072 | ) | $ | (8,252 | ) | $ | (8,412 | ) | ||||
Unrealized | 8,008 | (3,459 | ) | 7,040 | 12,486 | |||||||||||
Total | $ | 4,619 | $ | (6,531 | ) | $ | (1,212 | ) | $ | 4,074 | ||||||
August 28, | November 28, | |||||||
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Long-term debt | ||||||||
Secured: | ||||||||
Senior revolving credit facility | $ | 108,250 | $ | 108,250 | ||||
Unsecured: | ||||||||
Senior term loan due 2014 | 323,939 | 323,676 | ||||||
8.875% senior notes due 2016 | 350,000 | 350,000 | ||||||
4.25% Yen-denominated Eurobonds due 2016 | 117,708 | 109,062 | ||||||
7.75% Euro senior notes due 2018 | 431,340 | 400,740 | ||||||
7.625% senior notes due 2020 | 525,000 | 525,000 | ||||||
Total unsecured | 1,747,987 | 1,708,478 | ||||||
Less: current maturities | — | — | ||||||
Total long-term debt | $ | 1,856,237 | $ | 1,816,728 | ||||
Short-term debt | ||||||||
Secured: | ||||||||
Senior revolving credit facility | $ | 70,000 | $ | — | ||||
Unsecured: | ||||||||
Short-term borrowings | 59,010 | 46,418 | ||||||
Current maturities of long-term debt | — | — | ||||||
Total short-term debt | $ | 129,010 | $ | 46,418 | ||||
Total long-term and short-term debt | $ | 1,985,247 | $ | 1,863,146 | ||||
11
Gain or (Loss) | ||||||||
Three Months Ended | ||||||||
February 26, 2012 | February 27, 2011 | |||||||
(Dollars in thousands) | ||||||||
Forward foreign exchange contracts: | ||||||||
Realized | $ | (3,485 | ) | $ | (5,723 | ) | ||
Unrealized | (11,767 | ) | (2,373 | ) | ||||
|
|
|
| |||||
Total | $ | (15,252 | ) | $ | (8,096 | ) | ||
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 28, 2011FEBRUARY 26, 2012
NOTE 4: DEBT
February 26, 2012 | November 27, 2011 | |||||||
(Dollars in thousands) | ||||||||
Long-term debt | ||||||||
Secured: | ||||||||
Senior revolving credit facility | $ | 100,000 | $ | 100,000 | ||||
Unsecured: | ||||||||
Senior term loan due 2014 | 324,127 | 324,032 | ||||||
8.875% senior notes due 2016 | 350,000 | 350,000 | ||||||
4.25% Yen-denominated Eurobonds due 2016 | 113,971 | 118,243 | ||||||
7.75% Euro senior notes due 2018 | 401,160 | 400,350 | ||||||
7.625% senior notes due 2020 | 525,000 | 525,000 | ||||||
|
|
|
| |||||
Total unsecured | 1,714,258 | 1,717,625 | ||||||
|
|
|
| |||||
Total long-term debt | $ | 1,814,258 | $ | 1,817,625 | ||||
|
|
|
| |||||
Short-term debt | ||||||||
Senior revolving credit facility | $ | 40,000 | $ | 100,000 | ||||
Short-term borrowings | 74,075 | 54,747 | ||||||
|
|
|
| |||||
Total short-term debt | $ | 114,075 | $ | 154,747 | ||||
|
|
|
| |||||
Total long-term and short-term debt | $ | 1,928,333 | $ | 1,972,372 | ||||
|
|
|
|
Senior Revolving Credit Facility
The Company’s unused availability under its senior secured revolving credit facility was $554.6 million at February 26, 2012, as the Company’s total availability of $636.9 million was reduced by $82.3 million of letters of credit and other credit usage allocated under the facility.
Interest Rates on Borrowings
The Company’s weighted-average interest rate on average borrowings outstanding during the three and nine months ended August 28, 2011,February 26, 2012, was 6.74% and 6.81%, respectively,6.99% as compared to 6.74% and 7.27%, respectively,6.84% in the same periodsperiod of 2010.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 28, 2011FEBRUARY 26, 2012
NOTE 5: 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 Company’s defined benefit pension plans and postretirement benefit plans:
Pension Benefits | Postretirement Benefits | |||||||||||||||
Three Months Ended | Three Months Ended | |||||||||||||||
August 28, | August 29, | August 28, | August 29, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Net periodic benefit cost (income): | ||||||||||||||||
Service cost | $ | 2,552 | $ | 1,908 | $ | 119 | $ | 120 | ||||||||
Interest cost | 15,123 | 14,855 | 1,908 | 2,168 | ||||||||||||
Expected return on plan assets | (13,535 | ) | (11,439 | ) | — | — | ||||||||||
Amortization of prior service (benefit) cost(1) | (20 | ) | 111 | (7,236 | ) | (7,392 | ) | |||||||||
Amortization of actuarial loss | 1,939 | 6,665 | 1,256 | 1,402 | ||||||||||||
Curtailment gain | (1,426 | ) | — | — | — | |||||||||||
Net settlement loss | 20 | 117 | — | — | ||||||||||||
Net periodic benefit cost (income) | 4,653 | 12,217 | (3,953 | ) | (3,702 | ) | ||||||||||
Changes in accumulated other comprehensive loss: | ||||||||||||||||
Actuarial loss | 105 | — | — | — | ||||||||||||
Amortization of prior service benefit (cost) | 20 | (111 | ) | 7,236 | 7,392 | |||||||||||
Amortization of actuarial loss | (1,939 | ) | (6,665 | ) | (1,256 | ) | (1,402 | ) | ||||||||
Curtailment loss | (7 | ) | — | — | — | |||||||||||
Net settlement loss | (9 | ) | (39 | ) | — | — | ||||||||||
Total recognized in accumulated other comprehensive loss | (1,830 | ) | (6,815 | ) | 5,980 | 5,990 | ||||||||||
Total recognized in net periodic benefit cost (income) and accumulated other comprehensive loss | $ | 2,823 | $ | 5,402 | $ | 2,027 | $ | 2,288 | ||||||||
13
Pension Benefits | Postretirement Benefits | |||||||||||||||
Nine Months Ended | Nine Months Ended | |||||||||||||||
August 28, | August 29, | August 28, | August 29, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Net periodic benefit cost (income): | ||||||||||||||||
Service cost | $ | 7,739 | $ | 5,822 | $ | 358 | $ | 356 | ||||||||
Interest cost | 45,277 | 44,732 | 5,722 | 6,506 | ||||||||||||
Expected return on plan assets | (39,490 | ) | (34,529 | ) | — | — | ||||||||||
Amortization of prior service cost (benefit)(1) | 65 | 340 | (21,709 | ) | (22,175 | ) | ||||||||||
Amortization of actuarial loss | 12,973 | 19,996 | 3,769 | 4,206 | ||||||||||||
Curtailment loss | 1,629 | 100 | — | — | ||||||||||||
Net settlement loss | 736 | 309 | — | — | ||||||||||||
Net periodic benefit cost (income) | 28,929 | 36,770 | (11,860 | ) | (11,107 | ) | ||||||||||
Changes in accumulated other comprehensive loss: | ||||||||||||||||
Actuarial (gain) loss | (32,310 | ) | 303 | — | — | |||||||||||
Amortization of prior service (cost) benefit | (65 | ) | (340 | ) | 21,709 | 22,175 | ||||||||||
Amortization of actuarial loss | (12,973 | ) | (19,996 | ) | (3,769 | ) | (4,206 | ) | ||||||||
Curtailment loss | (3,078 | ) | (13 | ) | — | — | ||||||||||
Net settlement loss | (347 | ) | (190 | ) | — | — | ||||||||||
Total recognized in accumulated other comprehensive loss | (48,773 | ) | (20,236 | ) | 17,940 | 17,969 | ||||||||||
Total recognized in net periodic benefit cost (income) and accumulated other comprehensive loss | $ | (19,844 | ) | $ | 16,534 | $ | 6,080 | $ | 6,862 | |||||||
Pension Benefits | Postretirement Benefits | |||||||||||||||
Three Months Ended | Three Months Ended | |||||||||||||||
February 26, 2012 | February 27, 2011 | February 26, 2012 | February 27, 2011 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Net periodic benefit cost (income): | ||||||||||||||||
Service cost | $ | 2,247 | $ | 2,583 | $ | 99 | $ | 120 | ||||||||
Interest cost | 14,413 | 15,028 | 1,659 | 1,907 | ||||||||||||
Expected return on plan assets | (13,009 | ) | (12,898 | ) | — | — | ||||||||||
Amortization of prior service (benefit) cost | (20 | ) | 65 | (4,089 | ) | (7,236 | ) | |||||||||
Amortization of actuarial loss | 3,142 | 6,730 | 1,289 | 1,256 | ||||||||||||
Curtailment gain | (773 | ) | (16 | ) | — | — | ||||||||||
Net settlement loss | 107 | 11 | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net periodic benefit cost (income) | 6,107 | 11,503 | (1,042 | ) | (3,953 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Changes in accumulated other comprehensive loss: | ||||||||||||||||
Actuarial gain | (4 | ) | — | — | — | |||||||||||
Amortization of prior service benefit (cost) | 20 | (65 | ) | 4,089 | 7,236 | |||||||||||
Amortization of actuarial loss | (3,142 | ) | (6,730 | ) | (1,289 | ) | (1,256 | ) | ||||||||
Curtailment loss | (1 | ) | — | — | — | |||||||||||
Net settlement (loss) gain | (51 | ) | 22 | — | — | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total recognized in accumulated other comprehensive loss | (3,178 | ) | (6,773 | ) | 2,800 | 5,980 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total recognized in net periodic benefit cost (income) and accumulated other comprehensive loss | $ | 2,929 | $ | 4,730 | $ | 1,758 | $ | 2,027 | ||||||||
|
|
|
|
|
|
|
|
NOTE 6: COMMITMENTS AND CONTINGENCIES
Forward Foreign Exchange Contracts
The Company usesover-the-counter 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 43 for additional information.
14
Litigation. There have been no material developments with respect to the information previously reported in the Company’s 20102011 Annual Report onForm 10-K related to legal proceedings.
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 26, 2012
In the ordinary course of business, the Company has various pending cases involving contractual matters, facility- and employee-related matters, distribution questions, product liability claims, trademark infringement and other matters. The Company does not believe any of these pending legal proceedings will have a material impact on its financial condition, or results of operations or cash flows.
NOTE 7: 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 28, | August 29, | August 28, | August 29, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Net income | $ | 31,300 | $ | 26,622 | $ | 90,979 | $ | 64,101 | ||||||||
Other comprehensive income (loss): | ||||||||||||||||
Pension and postretirement benefits | (2,700 | ) | 560 | 19,150 | 1,583 | |||||||||||
Net investment hedge (losses) gains | (5,785 | ) | (9,673 | ) | (21,245 | ) | 35,170 | |||||||||
Foreign currency translation gains (losses) | 4,943 | 13,054 | 27,833 | (38,554 | ) | |||||||||||
Unrealized (loss) gain on marketable securities | (1,038 | ) | 542 | (371 | ) | 726 | ||||||||||
Total other comprehensive income (loss) | (4,580 | ) | 4,483 | 25,367 | (1,075 | ) | ||||||||||
Comprehensive income | 26,720 | 31,105 | 116,346 | 63,026 | ||||||||||||
Comprehensive loss attributable to noncontrolling interest | (431 | ) | (1,775 | ) | (2,106 | ) | (7,237 | ) | ||||||||
Comprehensive income attributable to Levi Strauss & Co. | $ | 27,151 | $ | 32,880 | $ | 118,452 | $ | 70,263 | ||||||||
15
Three Months Ended | ||||||||
February 26, 2012 | February 27, 2011 | |||||||
(Dollars in thousands) | ||||||||
Net income | $ | 49,297 | $ | 39,168 | ||||
|
|
|
| |||||
Other comprehensive income (loss): | ||||||||
Pension and postretirement benefits | 296 | 515 | ||||||
Net investment hedge gains (losses) | 525 | (8,890 | ) | |||||
Foreign currency translation gains | 7,424 | 8,527 | ||||||
Unrealized gain on marketable securities | 1,268 | 574 | ||||||
|
|
|
| |||||
Total other comprehensive income | 9,513 | 726 | ||||||
|
|
|
| |||||
Comprehensive income | 58,810 | 39,894 | ||||||
Comprehensive loss attributable to noncontrolling interest | (254 | ) | (1,291 | ) | ||||
|
|
|
| |||||
Comprehensive income attributable to Levi Strauss & Co. | $ | 59,064 | $ | 41,185 | ||||
|
|
|
|
August 28, | November 28, | |||||||
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Pension and postretirement benefits | $ | (179,657 | ) | $ | (198,807 | ) | ||
Net investment hedge losses | (47,634 | ) | (26,389 | ) | ||||
Foreign currency translation losses | (9,221 | ) | (37,054 | ) | ||||
Unrealized (loss) gain on marketable securities | (214 | ) | 157 | |||||
Accumulated other comprehensive loss | (236,726 | ) | (262,093 | ) | ||||
Accumulated other comprehensive income attributable to noncontrolling interest | 10,829 | 10,075 | ||||||
Accumulated other comprehensive loss attributable to Levi Strauss & Co. | $ | (247,555 | ) | $ | (272,168 | ) | ||
February 26, 2012 | November 27, 2011 | |||||||
(Dollars in thousands) | ||||||||
Pension and postretirement benefits | $ | (255,388 | ) | $ | (255,684 | ) | ||
Net investment hedge losses | (28,168 | ) | (28,693 | ) | ||||
Foreign currency translation losses | (42,785 | ) | (50,209 | ) | ||||
Unrealized gain (loss) on marketable securities | 721 | (547 | ) | |||||
|
|
|
| |||||
Accumulated other comprehensive loss | (325,620 | ) | (335,133 | ) | ||||
Accumulated other comprehensive income attributable to noncontrolling interest | 10,536 | 10,869 | ||||||
|
|
|
| |||||
Accumulated other comprehensive loss attributable to Levi Strauss & Co. | $ | (336,156 | ) | $ | (346,002 | ) | ||
|
|
|
|
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 26, 2012
NOTE 8: OTHER INCOME (EXPENSE), NET
The following table summarizes significant components of “Other income (expense), net”:
Three Months Ended | Nine Months Ended | |||||||||||||||
August 28, | August 29, | August 28, | August 29, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Foreign exchange management gains (losses)(1) | $ | 4,619 | $ | (6,531 | ) | $ | (1,212 | ) | $ | 4,074 | ||||||
Foreign currency transaction (losses) gains(2) | (10,118 | ) | (1,698 | ) | (13,412 | ) | 6,505 | |||||||||
Interest income | 477 | 438 | 1,296 | 1,730 | ||||||||||||
Other | (757 | ) | 96 | 584 | (847 | ) | ||||||||||
Total other income (expense), net | $ | (5,779 | ) | $ | (7,695 | ) | $ | (12,744 | ) | $ | 11,462 | |||||
Three Months Ended | ||||||||
February 26, 2012 | February 27, 2011 | |||||||
(Dollars in thousands) | ||||||||
Foreign exchange management losses(1) | $ | (15,252 | ) | $ | (8,096 | ) | ||
Foreign currency transaction gains(2) | 15,441 | 942 | ||||||
Interest income | 347 | 415 | ||||||
Other | 636 | 780 | ||||||
|
|
|
| |||||
Total other income (expense), net | $ | 1,172 | $ | (5,959 | ) | |||
|
|
|
|
(1) |
(2) | ||
NOTE 9: INCOME TAXES
The effective income tax rate was 31.8%32.3% for the ninethree months ended August 28, 2011,February 26, 2012, compared to 59.3%32.5% for the same period ended August 29, 2010. The reduction inFebruary 27, 2011. Income tax expense was $23.5 million for the effective tax rate asthree months ended February 26, 2012, compared to the prior year$18.9 million for the same period ended February 27, 2011. The increase in income tax expense was primarily caused by two significant discreteattributed to higher income tax charges recognized in the second quarter of 2010, described below, as well as an increase in 2011 of the proportion of earnings in foreign jurisdictions where the Company is subject to lower tax rates.
16
NOTE 10: 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 months ended August 28, 2011, theThe Company donated $0.3 million and $1.0 million, respectively, to the Levi Strauss Foundation as compared to $0.4 million and $1.0 million, respectively, for the same prior-year periods.
NOTE 11: BUSINESS SEGMENT INFORMATION
The Company manages its business according to three regional segments, the Americas, Europe and Asia Pacific, underPacific. The Company considers its chief executive officer to be the leadership of senior executives who report to theCompany’s chief operating decision maker: the Company’s chief executive officer.maker. The Company’s 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.
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 28, 2011FEBRUARY 26, 2012
Business segment information for the Company is as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
August 28, | August 29, | August 28, | August 29, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Net revenues: | ||||||||||||||||
Americas | $ | 717,586 | $ | 673,443 | $ | 1,908,846 | $ | 1,776,654 | ||||||||
Europe | 275,127 | 259,097 | 867,839 | 805,350 | ||||||||||||
Asia Pacific | 211,304 | 176,465 | 640,947 | 538,736 | ||||||||||||
Total net revenues | $ | 1,204,017 | $ | 1,109,005 | $ | 3,417,632 | $ | 3,120,740 | ||||||||
Operating income: | ||||||||||||||||
Americas | $ | 111,485 | $ | 102,934 | $ | 269,118 | $ | 263,914 | ||||||||
Europe | 31,316 | 34,401 | 140,129 | 132,384 | ||||||||||||
Asia Pacific | 26,450 | 15,340 | 89,242 | 62,889 | ||||||||||||
Regional operating income | 169,251 | 152,675 | 498,489 | 459,187 | ||||||||||||
Corporate expenses | 88,352 | 66,372 | 253,740 | 196,411 | ||||||||||||
Total operating income | 80,899 | 86,303 | 244,749 | 262,776 | ||||||||||||
Interest expense | (30,208 | ) | (31,734 | ) | (98,589 | ) | (100,347 | ) | ||||||||
Loss on early extinguishment of debt | — | — | — | (16,587 | ) | |||||||||||
Other income (expense), net | (5,779 | ) | (7,695 | ) | (12,744 | ) | 11,462 | |||||||||
Income before income taxes | $ | 44,912 | $ | 46,874 | $ | 133,416 | $ | 157,304 | ||||||||
Three Months Ended | ||||||||
February 26, 2012 | February 27, 2011 | |||||||
(Dollars in thousands) | ||||||||
Net revenues: | ||||||||
Americas | $ | 647,294 | $ | 592,186 | ||||
Europe | 289,452 | 311,604 | ||||||
Asia Pacific | 228,215 | 216,903 | ||||||
|
|
|
| |||||
Total net revenues | $ | 1,164,961 | $ | 1,120,693 | ||||
|
|
|
| |||||
Operating income: | ||||||||
Americas | $ | 79,636 | $ | 75,033 | ||||
Europe | 52,073 | 71,291 | ||||||
Asia Pacific | 41,160 | 37,363 | ||||||
|
|
|
| |||||
Regional operating income | 172,869 | 183,687 | ||||||
Corporate expenses | 62,658 | 84,813 | ||||||
|
|
|
| |||||
Total operating income | 110,211 | 98,874 | ||||||
Interest expense | (38,573 | ) | (34,866 | ) | ||||
Other income (expense), net | 1,172 | (5,959 | ) | |||||
|
|
|
| |||||
Income before income taxes | $ | 72,810 | $ | 58,049 | ||||
|
|
|
|
18
Item 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS |
Overview
We design, market and marketsell — directly or through third parties and licensees — products that include jeans, casual and dress pants, tops, shorts, skirts, jackets, footwear and related accessories for men, women and children under our Levi’s®, Dockers®, Signature by Levi Strauss & Co.tm™ (“Signature”) and Denizentm® brands around the world. We also license our trademarks in many countries throughout the world for a wide array of products, including accessories, pants, tops, footwear and other products.
Our business is operated through three geographic regions: Americas, Europe and Asia Pacific. Our products are sold in approximately 55,000 retail locations in more than 110 countries. We support our brands through a global infrastructure, developing, sourcing and marketing our products around the world. We distribute our Levi’s® and Dockers® products primarily through chain retailers and department stores in the United States and primarily through department stores, specialty retailers and nearly 1,800 franchised and other brand-dedicated stores outside of the United States. We also distribute our Levi’s® and Dockers® products through 492 company-operated stores located in 32 countries, including the United States, and through the online stores we operate,operate. Our company-operated and 499 company-operated stores located in 31 countries, including the United States. Theseonline stores generated approximately 18%21% of our net revenues in the nine-monththree-month period of 2011,2012, as compared to the same period in 2010,2011, when our company-operated and online stores generated 15%18% of our net revenues. In addition, we distribute our Levi’s® and Dockers® products through online stores operated by certain of our key wholesale customers and other third parties. We distribute products under theour Signature brandand Denizen® brands primarily through mass channel retailers in the United StatesAmericas and Canada andthrough franchised stores in Asia Pacific. We currently distribute our Denizen
tm products through franchised stores in Asia Pacific and certain wholesale channels in the United States and Mexico.
Trends Affecting Our Business
During the thirdfirst quarter of 2011,2012, we remained focused on our key long-term strategies: build upongrow our leadership position in the jean and khaki categoriesglobal brands through product innovation and marketing innovation,consumer focus, enhance relationships with wholesale customers and expand our dedicated store networkretail channels to drive sales growth, capitalize on our global footprint to maximize opportunities in targeted growth markets, and continuously increase our productivity.
Economic challenges continue to impact most markets around the world, continuedincluding having an increasingly adverse effect on the traditional growth markets in our Asia Pacific region. Margins remained pressured by cotton costs during the quarter, and we expect this to feel the impact of ongoing economic challenges. We expect continued cotton and other input cost pressures for the balance of 2011 and at leastcontinue through the first half of 2012.
Our response to these conditions has included product price increases and enhanced support of our supply chain partners to maintain product availability. The conditions within our industry, combined with the challenging consumer environment, may impact our margins, working capital, and sales volumes.
Our Third Quarter 2011 Results
• | Net revenues. Consolidated net revenues increased by | ||
• | Operating | ||
• | Cash flows. Cash flows provided by operating activities were |
19
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 atend on November 30 due to local statutory requirements. Apart from these subsidiaries, each30. Each quarter of fiscal years 20112012 and 20102011 consisted of 13 weeks.
Segments. We manage our business according to three regional segments: the Americas, Europe and Asia Pacific. In the first quarter of 2011, accountability for certain information technology, human resources, advertising and promotion, and marketing staff costs of a global nature, that in prior years were captured in our geographic regions, was centralized under corporate management in conjunction with our key strategy of driving productivity. Beginning in 2011, these costs have been classified as corporate expenses. These costs were not significant to any of our regional segments individually in any of the periods presented herein, and accordingly business segment information for prior years has not been revised.
Classification. Our classification of certain significant revenues and expenses reflects the following:
Net revenues 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. Net revenues also includes royalties earned from the use of our trademarks by third-party licensees in connection with the manufacturing, advertising and distribution of trademarked products.
Cost of goods sold is primarily comprised of product costs, labor and related overhead, sourcing costs, inbound freight, internal transfers, and the cost of operating our remaining manufacturing facilities, including the related depreciation expense.
Selling costs include, among other things, all occupancy costs and depreciation associated with our company-operated stores and commission payments associated with our company-operated shop-in-shops.
We reflect substantially all distribution costs in selling, general and administrative expenses, including costs related to receiving and inspection at distribution centers, warehousing, shipping to our customers, handling, and certain other activities associated with our distribution network.
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 Company’s internal planning process for the current year. We routinely evaluate our financial performance on a constant-currency basis in order to facilitateperiod-to-period comparisons without regard to the impact of changing foreign currency exchange rates.
20
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 28, | August 29, | August 28, | August 29, | |||||||||||||||||||||||||||||||||||||
% | 2011 | 2010 | % | 2011 | 2010 | |||||||||||||||||||||||||||||||||||
August 28, | August 29, | Increase | % of Net | % of Net | August 28, | August 29, | Increase | % of Net | % of Net | |||||||||||||||||||||||||||||||
2011 | 2010 | (Decrease) | Revenues | Revenues | 2011 | 2010 | (Decrease) | Revenues | Revenues | |||||||||||||||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||||||||||||||||||
Net sales | $ | 1,183.9 | $ | 1,090.4 | 8.6 | % | 98.3 | % | 98.3 | % | $ | 3,358.2 | $ | 3,064.4 | 9.6 | % | 98.3 | % | 98.2 | % | ||||||||||||||||||||
Licensing revenue | 20.1 | 18.6 | 8.5 | % | 1.7 | % | 1.7 | % | 59.4 | 56.3 | 5.6 | % | 1.7 | % | 1.8 | % | ||||||||||||||||||||||||
Net revenues | 1,204.0 | 1,109.0 | 8.6 | % | 100.0 | % | 100.0 | % | 3,417.6 | 3,120.7 | 9.5 | % | 100.0 | % | 100.0 | % | ||||||||||||||||||||||||
Cost of goods sold | 634.6 | 565.4 | 12.2 | % | 52.7 | % | 51.0 | % | 1,749.5 | 1,544.7 | 13.3 | % | 51.2 | % | 49.5 | % | ||||||||||||||||||||||||
Gross profit | 569.4 | 543.6 | 4.8 | % | 47.3 | % | 49.0 | % | 1,668.1 | 1,576.0 | 5.8 | % | 48.8 | % | 50.5 | % | ||||||||||||||||||||||||
Selling, general and administrative expenses | 488.5 | 457.3 | 6.8 | % | 40.6 | % | 41.2 | % | 1,423.4 | 1,313.2 | 8.4 | % | 41.6 | % | 42.1 | % | ||||||||||||||||||||||||
Operating income | 80.9 | 86.3 | (6.3 | )% | 6.7 | % | 7.8 | % | 244.7 | 262.8 | (6.9 | )% | 7.2 | % | 8.4 | % | ||||||||||||||||||||||||
Interest expense | (30.2 | ) | (31.7 | ) | (4.8 | )% | (2.5 | )% | (2.9 | )% | (98.6 | ) | (100.3 | ) | (1.8 | )% | (2.9 | )% | (3.2 | )% | ||||||||||||||||||||
Loss on early extinguishment of debt | — | — | — | — | — | — | (16.6 | ) | (100.0 | )% | — | (0.5 | )% | |||||||||||||||||||||||||||
Other income (expense), net | (5.8 | ) | (7.7 | ) | (24.9 | )% | (0.5 | )% | (0.7 | )% | (12.7 | ) | 11.4 | (211.2 | )% | (0.4 | )% | 0.4 | % | |||||||||||||||||||||
Income before income taxes | 44.9 | 46.9 | (4.2 | )% | 3.7 | % | 4.2 | % | 133.4 | 157.3 | (15.2 | )% | 3.9 | % | 5.0 | % | ||||||||||||||||||||||||
Income tax expense | 13.6 | 20.3 | (32.8 | )% | 1.1 | % | 1.8 | % | 42.4 | 93.2 | (54.5 | )% | 1.2 | % | 3.0 | % | ||||||||||||||||||||||||
Net income | 31.3 | 26.6 | 17.6 | % | 2.6 | % | 2.4 | % | 91.0 | 64.1 | 41.9 | % | 2.7 | % | 2.1 | % | ||||||||||||||||||||||||
Net loss attributable to noncontrolling interest | 0.9 | 1.6 | (42.6 | )% | 0.1 | % | 0.1 | % | 2.8 | 6.1 | (52.7 | )% | 0.1 | % | 0.2 | % | ||||||||||||||||||||||||
Net income attributable to Levi Strauss & Co. | $ | 32.2 | $ | 28.2 | 14.2 | % | 2.7 | % | 2.5 | % | $ | 93.8 | $ | 70.2 | 33.8 | % | 2.7 | % | 2.2 | % | ||||||||||||||||||||
Three Months Ended | ||||||||||||||||||||
February 26, 2012 | February 27, 2011 | % Increase (Decrease) | February 26, 2012 % of Net Revenues | February 27, 2011 % of Net Revenues | ||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||
Net revenues | $ | 1,165.0 | $ | 1,120.7 | 4.0 | % | 100.0 | % | 100.0 | % | ||||||||||
Cost of goods sold | 616.2 | 562.7 | 9.5 | % | 52.9 | % | 50.2 | % | ||||||||||||
|
|
|
| |||||||||||||||||
Gross profit | 548.8 | 558.0 | (1.6 | )% | 47.1 | % | 49.8 | % | ||||||||||||
Selling, general and administrative expenses | 438.6 | 459.1 | (4.5 | )% | 37.6 | % | 41.0 | % | ||||||||||||
|
|
|
| |||||||||||||||||
Operating income | 110.2 | 98.9 | 11.5 | % | 9.5 | % | 8.8 | % | ||||||||||||
Interest expense | (38.6 | ) | (34.9 | ) | 10.6 | % | (3.3 | )% | (3.1 | )% | ||||||||||
Other income (expense), net | 1.2 | (6.0 | ) | (119.7 | )% | 0.1 | % | (0.5 | )% | |||||||||||
|
|
|
| |||||||||||||||||
Income before income taxes | 72.8 | 58.0 | 25.4 | % | 6.2 | % | 5.2 | % | ||||||||||||
Income tax expense | 23.5 | 18.8 | 24.5 | % | 2.0 | % | 1.7 | % | ||||||||||||
|
|
|
| |||||||||||||||||
Net income | 49.3 | 39.2 | 25.9 | % | 4.2 | % | 3.5 | % | ||||||||||||
Net (income) loss attributable to noncontrolling interest | (0.1 | ) | 1.5 | (105.2 | )% | — | 0.1 | % | ||||||||||||
|
|
|
| |||||||||||||||||
Net income attributable to Levi Strauss & Co. | $ | 49.2 | $ | 40.7 | 21.0 | % | 4.2 | % | 3.6 | % | ||||||||||
|
|
|
|
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 28, | August 29, | As | Constant | August 28, | August 29, | As | Constant | |||||||||||||||||||||||||
2011 | 2010 | Reported | Currency | 2011 | 2010 | Reported | Currency | |||||||||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||||||||||
Net revenues: | ||||||||||||||||||||||||||||||||
Americas | $ | 717.6 | $ | 673.4 | 6.6 | % | 5.7 | % | $ | 1,908.9 | $ | 1,776.6 | 7.4 | % | 6.7 | % | ||||||||||||||||
Europe | 275.1 | 259.1 | 6.2 | % | (4.1 | )% | 867.8 | 805.4 | 7.8 | % | 3.7 | % | ||||||||||||||||||||
Asia Pacific | 211.3 | 176.5 | 19.7 | % | 11.3 | % | 640.9 | 538.7 | 19.0 | % | 11.9 | % | ||||||||||||||||||||
Total net revenues | $ | 1,204.0 | $ | 1,109.0 | 8.6 | % | 4.2 | % | $ | 3,417.6 | $ | 3,120.7 | 9.5 | % | 6.8 | % | ||||||||||||||||
Three Months Ended | ||||||||||||||||
% Increase (Decrease) | ||||||||||||||||
February 26, 2012 | February 27, 2011 | As Reported | Constant Currency | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Net revenues: | ||||||||||||||||
Americas | $ | 647.3 | $ | 592.2 | 9.3 | % | 10.1 | % | ||||||||
Europe | 289.5 | 311.6 | (7.1 | )% | (3.2 | )% | ||||||||||
Asia Pacific | 228.2 | 216.9 | 5.2 | % | 5.1 | % | ||||||||||
|
|
|
| |||||||||||||
Total net revenues | $ | 1,165.0 | $ | 1,120.7 | 4.0 | % | 5.4 | % | ||||||||
|
|
|
|
Total net revenues increased on both reported and constant-currency bases for the three- and nine-month periodsthree-month period ended August 28, 2011,February 26, 2012, as compared to the same prior-year periods. Reported amounts were affected favorably by changes in foreign currency exchange rates across all regions.
21
The region’s increased net revenues primarily reflected a higher volume of Levi’s® brand sales, in our retail stores, most prominently in our outlets, andmainly due to the U.S. launch of our Denizentm brand products. Levi’s® brand sales in our wholesale channels increased, however the benefit of price increases we have implemented, were substantiallypartially offset by related volume declines. Both periodsdeclines in certain wholesale customers. Higher revenues also reflected continued declinesan increased proportion of netpremium-priced Levi’s® brand products and increased sales fromof our U.S. DockersDenizen® brand.
Europe. Net revenues in Europe increased on a reported basis but decreased on aboth reported and constant-currency basisbases for the three-month period, with currency affecting net revenues favorablyunfavorably by approximately $27$12 million. For
Net revenues in the nine-month period, net revenues increased on both reportedregion decreased primarily due to a lower volume of sales to franchisee stores and constant-currency bases, with currency affecting net revenues favorably by approximately $32 million.
Asia Pacific. Net revenues in Asia Pacific increased on both reported and constant-currency bases for the three- and nine-month periods,three-month period, with currency affectinghaving little effect on net revenues favorably by approximately $14 million and $36 million, respectively.
The net revenues increase in both periods was primarily from our Levi’s® brand, reflecting the price increases we have implemented, partially offset by volume declines, and a higher proportion of premium-priced products in the mix. Revenues also increased through the continued expansion of our brand-dedicated retail network in China and India as well as other of our emerging markets, partially offset by the continued decline of net revenues in Japan. Sales of our Denizentm brand products were partially offset by corresponding declines in Signature brand sales as we transition the brand in the region.
Gross profit
The following table shows consolidated gross profit and gross margin for the periods indicated and the changes in these items from period to period:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
% | % | |||||||||||||||||||||||
August 28, | August 29, | Increase | August 28, | August 29, | Increase | |||||||||||||||||||
2011 | 2010 | (Decrease) | 2011 | 2010 | (Decrease) | |||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||
Net revenues | $ | 1,204.0 | $ | 1,109.0 | 8.6 | % | $ | 3,417.6 | $ | 3,120.7 | 9.5 | % | ||||||||||||
Cost of goods sold | 634.6 | 565.4 | 12.2 | % | 1,749.5 | 1,544.7 | 13.3 | % | ||||||||||||||||
Gross profit | $ | 569.4 | $ | 543.6 | 4.8 | % | $ | 1,668.1 | $ | 1,576.0 | 5.8 | % | ||||||||||||
Gross margin | 47.3 | % | 49.0 | % | 48.8 | % | 50.5 | % |
Three Months Ended | ||||||||||||
February 26, 2012 | February 27, 2011 | % Increase (Decrease) | ||||||||||
(Dollars in millions) | ||||||||||||
Net revenues | $ | 1,165.0 | $ | 1,120.7 | 4.0 | % | ||||||
Cost of goods sold | 616.2 | 562.7 | 9.5 | % | ||||||||
|
|
|
| |||||||||
Gross profit | $ | 548.8 | $ | 558.0 | (1.6 | )% | ||||||
|
|
|
| |||||||||
Gross margin | 47.1 | % | 49.8 | % |
As compared to the same prior-year periods,period, the gross profit increasedecrease for the three- and nine-month periodsthree-month period ended August 28, 2011,February 26, 2012, primarily resulted from a decline in our gross margin, partially offset by the increase in our net revenues and favorable currency impact ofrevenues. Currency affected gross profit unfavorably by approximately $30 million and $52 million, respectively, partially offset by a decline$14 million. The decrease in our gross margin. The gross margin decrease was primarily due to an increase in sales discounts, in both our Levi’s® and Dockers® brands, to drive sales and manage inventory, and the higher cost of cotton, which our price increases did not fully cover. The gross margin decreasedecline was partially offset by a decline in sales to lower-margin channels and the increased revenue contribution from our company-operated retail network, which generally has a higher gross margin than our wholesale business.
22
The following table shows our selling, general and administrative expenses (“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 28, | August 29, | August 28, | August 29, | |||||||||||||||||||||||||||||||||||||
% | 2011 | 2010 | % | 2011 | 2010 | |||||||||||||||||||||||||||||||||||
August 28, | August 29, | Increase | % of Net | % of Net | August 28, | August 29, | Increase | % of Net | % of Net | |||||||||||||||||||||||||||||||
2011 | 2010 | (Decrease) | Revenues | Revenues | 2011 | 2010 | (Decrease) | Revenues | Revenues | |||||||||||||||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||||||||||||||||||
Selling | $ | 176.0 | $ | 154.1 | 14.2 | % | 14.6 | % | 13.9 | % | $ | 525.2 | $ | 458.0 | 14.7 | % | 15.4 | % | 14.7 | % | ||||||||||||||||||||
Advertising and promotion | 78.7 | 93.0 | (15.4 | )% | 6.5 | % | 8.4 | % | 213.2 | 222.6 | (4.3 | )% | 6.2 | % | 7.1 | % | ||||||||||||||||||||||||
Administration | 98.7 | 95.4 | 3.5 | % | 8.2 | % | 8.6 | % | 306.1 | 288.9 | 6.0 | % | 9.0 | % | 9.3 | % | ||||||||||||||||||||||||
Other | 135.1 | 114.8 | 17.7 | % | 11.2 | % | 10.3 | % | 378.9 | 343.7 | 10.2 | % | 11.1 | % | 11.0 | % | ||||||||||||||||||||||||
Total SG&A | $ | 488.5 | $ | 457.3 | 6.8 | % | 40.6 | % | 41.2 | % | $ | 1,423.4 | $ | 1,313.2 | 8.4 | % | 41.6 | % | 42.1 | % | ||||||||||||||||||||
Three Months Ended | ||||||||||||||||||||
February 26, 2012 | February 27, 2011 | % Increase (Decrease) | February 26, 2012 % of Net Revenues | February 27, 2011 % of Net Revenues | ||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||
Selling | $ | 176.8 | $ | 175.2 | 0.9 | % | 15.2 | % | 15.6 | % | ||||||||||
Advertising and promotion | 45.9 | 62.2 | (26.2 | )% | 3.9 | % | 5.6 | % | ||||||||||||
Administration | 95.3 | 104.0 | (8.4 | )% | 8.2 | % | 9.3 | % | ||||||||||||
Other | 120.6 | 117.7 | 2.5 | % | 10.4 | % | 10.5 | % | ||||||||||||
|
|
|
| |||||||||||||||||
Total SG&A | $ | 438.6 | $ | 459.1 | (4.5 | )% | 37.6 | % | 41.0 | % | ||||||||||
|
|
|
|
Currency contributed approximately $21 million and $36$4 million of the increasedecrease in SG&A expenses for the three- and nine-month periodsthree-month period ended August 28, 2011, respectively,February 26, 2012, as compared to the same prior-year periods.
Selling.. Currency contributed approximately $9 million and $16 million of the increase for the three- and nine-month periods, respectively. Higher selling Selling expenses across all business segments primarily reflected additionalreflect costs such as rents and increased headcount associated with the support and continued expansion of our company-operated store network. We had 43ten more company-operated stores at the end of the thirdfirst quarter of 20112012 than we did at the end of the thirdfirst quarter of 2010.
Advertising and promotion.. For both periods, the The decrease in advertising and promotion expenses was attributable toprimarily reflected a difference in timing of advertising campaigns as well as a reduction of our advertising activities in most markets as compared to the prior year.
Administration.. Higher administration Administration expenses in both periods included separation benefits relateddecreased primarily due to the retirement of our former chief executive officer, and with respect to the nine-month period, an increasea decline in incentive compensation expense related to higher projected funding. These costs were partially offset bylower achievement against our internally-set objectives, and a decline in pension expense primarily as a result of changes to the U.S. pension plans in the second quarter of 2011.
Other.. Other SG&A expenses includeincludes distribution, information resources, and marketing organization costs. These costs increased primarily due to our investment in global information technology systems, increased marketing project costs related to our strategic initiatives, and currency, which contributed approximately $5 million and $8 million of the increase for the three- and nine-month periods, respectively.
23
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 28, | August 29, | August 28, | August 29, | |||||||||||||||||||||||||||||||||||||
% | 2011 | 2010 | % | 2011 | 2010 | |||||||||||||||||||||||||||||||||||
August 28, | August 29, | Increase | % of Net | % of Net | August 28, | August 29, | Increase | % of Net | % of Net | |||||||||||||||||||||||||||||||
2011 | 2010 | (Decrease) | Revenues | Revenues | 2011 | 2010 | (Decrease) | Revenues | Revenues | |||||||||||||||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||||||||||||||||||
Operating income: | ||||||||||||||||||||||||||||||||||||||||
Americas | $ | 111.5 | $ | 102.9 | 8.3 | % | 15.5 | % | 15.3 | % | $ | 269.1 | $ | 263.9 | 2.0 | % | 14.1 | % | 14.9 | % | ||||||||||||||||||||
Europe | 31.3 | 34.4 | (9.0 | )% | 11.4 | % | 13.3 | % | 140.1 | 132.4 | 5.9 | % | 16.1 | % | 16.4 | % | ||||||||||||||||||||||||
Asia Pacific | 26.5 | 15.4 | 72.4 | % | 12.5 | % | 8.7 | % | 89.3 | 62.9 | 41.9 | % | 13.9 | % | 11.7 | % | ||||||||||||||||||||||||
Total regional operating income | 169.3 | 152.7 | 10.9 | % | 14.1 | %* | 13.8 | %* | 498.5 | 459.2 | 8.6 | % | 14.6 | %* | 14.7 | %* | ||||||||||||||||||||||||
Corporate expenses | 88.4 | 66.4 | 33.1 | % | 7.3 | %* | 6.0 | %* | 253.8 | 196.4 | 29.2 | % | 7.4 | %* | 6.3 | %* | ||||||||||||||||||||||||
Total operating income | $ | 80.9 | $ | 86.3 | (6.3 | )% | 6.7 | %* | 7.8 | %* | $ | 244.7 | $ | 262.8 | (6.9 | )% | 7.2 | %* | 8.4 | %* | ||||||||||||||||||||
Operating margin | 6.7 | % | 7.8 | % | 7.2 | % | 8.4 | % |
Three Months Ended | ||||||||||||||||||||
February 26, 2012 | February 27, 2011 | % Increase (Decrease) | February 26, 2012 % of Net Revenues | February 27, 2011 % of Net Revenues | ||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||
Operating income: | ||||||||||||||||||||
Americas | $ | 79.6 | $ | 75.0 | 6.1 | % | 12.3 | % | 12.7 | % | ||||||||||
Europe | 52.1 | 71.3 | (27.0 | )% | 18.0 | % | 22.9 | % | ||||||||||||
Asia Pacific | 41.2 | 37.4 | 10.2 | % | 18.0 | % | 17.2 | % | ||||||||||||
|
|
|
| |||||||||||||||||
Total regional operating income | 172.9 | 183.7 | (5.9 | )% | 14.8 | %* | 16.4 | %* | ||||||||||||
Corporate expenses | 62.7 | 84.8 | (26.1 | )% | 5.4 | %* | 7.6 | %* | ||||||||||||
|
|
|
| |||||||||||||||||
Total operating income | $ | 110.2 | $ | 98.9 | 11.5 | % | 9.5 | %* | 8.8 | %* | ||||||||||
|
|
|
| |||||||||||||||||
Operating margin | 9.5 | % | 8.8 | % |
* | Percentage of consolidated net revenues |
Currency favorablyunfavorably affected total operating income by approximately $9 million and $16$10 million for the three- and nine-month periods, respectively.
Regional operating income..
• | Americas. The increase in operating income |
• | Europe. The decrease in operating | ||
• | Asia Pacific. The increases in operating margin and operating income |
Corporate. Corporate expenses are selling, general and administrative expenses that are not attributed to any of our regional operating segments. HigherLower corporate expenses in both periods reflected an increase in our investment in global information technology systems and separation benefits related to the retirement of our former chief executive officer, and with respect to the nine-month period, an increasedecrease in incentive compensation expense related to higher projected funding. Corporate expenses forand the three- and nine-month periods also increased over the same prior-year period due to the classification of certain marketing, advertising and promotion, information technology and human resources costs of a global nature centralized under corporate management beginning in the first quarter of 2011. Such costs totaled approximately $7 million and $20 million, respectively, in our Americas region and were not significant to our Europe and Asia Pacific regions; prior period amounts have not been reclassified. These increases were partially offset by a decline in pension expense primarily as a result of changes to the U.S. pension plans in the second quarter of 2011.
24expense.
Interest expense decreasedincreased to $30.2 million and $98.6$38.6 million for the three- and nine-month periodsthree-month period ended August 28, 2011, respectively,February 26, 2012, from $31.7 million and $100.3$34.9 million for the same periodsperiod in 2010.
The weighted-average interest rate on average borrowings outstanding for the three- and nine-month periodsthree-month period ended August 28, 2011,February 26, 2012, was 6.74% and 6.81%, respectively,6.99% as compared to 6.74% and 7.27%, respectively,6.84% for each of the same periodsperiod in 2010.
Other income (expense), net
Other income (expense), net, primarily consists of foreign exchange management activities and transactions. For the three- and nine-month periodsthree-month period ended August 28, 2011,February 26, 2012, we recorded expenseincome of $5.8$1.2 million and $12.7 million, respectively, as compared to expense of $7.7$6.0 million and income of $11.5 million, respectively, for the same prior-year periods.
Income tax expense
Our effective income tax rate was 31.8%32.3% for the ninethree months ended August 28, 2011,February 26, 2012, compared to 59.3%32.5% for the same period ended August 29, 2010.February 27, 2011. Our income tax expense was $23.5 million for the three months ended February 26, 2012, compared to $18.9 million for the same period ended February 27, 2011. The reductionincrease in our effectiveincome tax rateexpense was primarily caused by two significant discreteattributed to higher income tax charges recognized in the second quarter of 2010, described below, as well as an increase in 2011 of the proportion of our earnings in foreign jurisdictions where we are subject to lower tax rates.
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 that had a maximum availability of $750 million, secured by certain of our domestic assets and certain U.S. trademarks associated with the Levi’s® brand and other related intellectual property. The facility included a $250 million trademark tranche and a $500 million revolving tranche. As of August 28, 2011, we had borrowings of $70.0 million under the revolving tranche, which was the full amount we borrowed during the quarter, and $108.3 million under the trademark tranche. Unused availability under the revolving tranche was $336.7 million at quarter end, as our total availability of $421.0 million, based on collateral levels as defined by the agreement, was reduced by $84.3 million of other credit-related instruments such as documentary and standby letters of credit allocated under the facility.
25
As of February 26, 2012, we borrowed $215had borrowings of $140.0 million and used the proceeds to repay the borrowings outstanding under the previous senior secured revolving credit facility, $40.0 million of which is classified as short-term debt. Unused availability under the facility was $554.6 million, as our total availability of $636.9 million, based on collateral levels as defined by the agreement, was reduced by $82.3 million of other credit-related instruments.
As of February 26, 2012, we then terminated.
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 20112012 from those disclosed in our 20102011 Annual Report onForm 10-K, except for our projected pension plan contributions. Based on changes in discount rates and the updated valuation of our pension assets, as well as our current evaluation of alternative methods available to us for measuring our pension funding obligation, we now expect our required contribution amount in 2011 to be approximately $70 million.
Cash flows
The following table summarizes, for the periods indicated, selected items in our consolidated statements of cash flows:
Nine Months Ended | ||||||||
August 28, | August 29, | |||||||
2011 | 2010 | |||||||
(Dollars in millions) | ||||||||
Cash provided by operating activities | $ | 17.3 | $ | 95.8 | ||||
Cash used for investing activities | (114.6 | ) | (127.3 | ) | ||||
Cash provided by financing activities | 52.3 | 25.3 | ||||||
Cash and cash equivalents | 230.8 | 261.2 |
Three Months Ended | ||||||||
February 26, 2012 | February 27, 2011 | |||||||
(Dollars in millions) | ||||||||
Cash provided by operating activities | $ | 104.8 | $ | 46.0 | ||||
Cash used for investing activities | (20.7 | ) | (46.1 | ) | ||||
Cash used for financing activities | (53.5 | ) | (22.4 | ) | ||||
Cash and cash equivalents | 238.3 | 249.1 |
Cash flows from operating activities
Cash provided by operating activities was $17.3$104.8 million for the nine-monththree-month period in 2011,2012, as compared to $95.8$46.0 million for the same period in 2010.2011. Cash provided by operating activities declinedincreased compared to the prior year due to higher cash used for inventory, our pension plan contribution in the first quarter of 2011, and higher payments to vendors, reflecting the increase in our SG&A expenses. This decline was partially offset by an increase in customer collections, reflecting our higher net revenues, and a decrease in interest paymentsbeginning accounts receivable balance. This was partially offset by higher cash used for inventory as a result of our refinancing activities in May 2010.
Cash flows from investing activities
Cash used for investing activities was $114.6$20.7 million for the nine-monththree-month period in 2011,2012, as compared to $127.3$46.1 million for the same period in 2010.2011. The decrease in cash used for investing activities as compared to the prior year primarily reflects the higher information technology costs in 2010 associated with the remodeling of the Company’s headquarters and the final payment for a 2009 acquisition. This was partially offset by an increase in 2011 in information technology costs associated with the installation of our global enterprise resource planning system.
26
Cash provided byused for financing activities was $52.3$53.5 million for the nine-monththree-month period in 2011,2012, as compared to $25.3$22.4 million for the same period in 2010.2011. Net cash providedused in 2012 primarily related to net repayments of our senior revolving credit facility. Cash used in 2011 primarily related to proceedsour dividend payments to stockholders of $70.0 million borrowed under our senior revolving credit facility. Net cash provided in 2010 reflected our May 2010 refinancing activities.
Indebtedness
The borrower of substantially all of our debt is Levi Strauss & Co., the parent and U.S. operating company. RequiredOf our total debt of $1.9 billion as of February 26, 2012, we had fixed-rate debt of approximately $1.4 billion (75% of total debt) and variable-rate debt of approximately $0.5 billion (25% of total debt). There have been no substantial changes to our required aggregate debt principal payments on our August 28, 2011, long-term debt adjusted to reflect the impactfor each of the new credit facility, are $323.9next five years and thereafter from those disclosed in our 2011 Annual Report on Form 10-K. Short-term debt of $40.0 million in 2014 and the remaining $1.5 billion in years after 2015. Our quarter-end balance of $70.0 million of short-term debt borrowed under our senior secured revolving credit facility iswas expected to be repaid over the next twelve months; unsecured short-term borrowings of $59.0$74.1 million areat various foreign subsidiaries were expected to be either paid over the next twelve months or refinanced at the end of their applicable terms.
Our long-term debt agreements contain customary covenants restricting our activities as well as those of our subsidiaries. WeCurrently, we are in compliance with all of these covenants.
Off-Balance Sheet Arrangements, Guarantees and Other Contingent Obligations
There have been no significant changes to our off-balance sheet arrangements or contractual commitments from those disclosed in our 20102011 Annual Report onForm 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 20102011 Annual Report onForm 10-K except for the following:
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 “Management’s 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 prospectsand/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-
27
changes in the level of consumer spending for apparel in view of general economic and environmental conditions and pricing trends, and our ability to plan for and respond to the impact of those changes;
consequences of impacts to the businesses of our wholesale customers caused by factors such as lower consumer spending, pricing changes, general economic conditions and changing consumer preferences;
our ability to mitigate the variability of costs related to manufacturing, sourcing, and raw materials supply, such as cotton, and to manage consumer response to such mitigating actions; consequences of the actions we take to support our supply chain partners as a response to the fluctuating costs of manufacturing, sourcing, and raw materials supply; our and our wholesale customers’ decisions to modify strategies and adjust product mix, and our ability to manage any resulting product transition costs; | ||
28
our ability to gauge and adapt to changing U.S. and international retail environments and fashion trends and changing consumer preferences in product, price-points and shopping experiences;
our ability to respond to price, innovation and other competitive pressures in the apparel industry and on our key customers;
our ability to increase the number of dedicated stores for our products, including through opening and profitably operating company-operated stores;
our effectiveness in increasing productivity and efficiency in our operations;
our ability to implement, stabilize and optimize our enterprise resource planning system throughout our business without disruption or to mitigate such disruptions;
consequences of foreign currency exchange rate fluctuations;
the impact of the variables that affect the net periodic benefit cost and future funding requirements of our postretirement benefits and pension plans;
our dependence on key distribution channels, customers and suppliers;
our ability to utilize our tax credits and net operating loss carryforwards;
ongoing or future litigation matters and disputes and regulatory developments;
changes in or application of trade and tax laws; and
political, social and economic instability in countries where we do business.
Our actual results might differ materially from historical performance or current expectations. We do not undertake any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
There have been no material changes in our primary market risk exposures or how those exposures are managed from the information disclosed in our 20102011 Annual Report onForm 10-K.
Item 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures for purposes of filing reports(as defined in Rule 13a-15(e) and 15d-15(e) 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 concluded1934) that at August 28, 2011, our disclosure controls and procedures (as defined inRule 13a-15(e) and15d-15(e) under the Exchange Act) are effectivedesigned to provide reasonable assurance that information that we are required to disclosebe disclosed in the reports that we file or submit to the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our disclosure controlsforms, 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.
We updated our evaluation, under the supervision and with the participation of management, including our chief executive officer and our chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of February 26, 2012. Based on that evaluation, our chief executive officer and our chief financial officer concluded that as of February 26, 2012, our disclosure controls and procedures were effective at the reasonable assurance level.
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. We have been implementing an enterprise resource planning (“ERP”) system on a staged basis inThere were no changes to our subsidiaries around the world. We began the implementation of the ERP system in Europeinternal control over financial reporting during our last fiscal quarter and this resulted in a changethat have materially affected, or are reasonably likely to materially affect, our system of internal control over financial reporting.
29
Item 1. | LEGAL PROCEEDINGS |
Litigation. There have been no material developments with respect to the information previously reported in our 20102011 Annual Report onForm 10-K related to legal proceedings.
In the ordinary course of business, we have various pending cases involving contractual matters, facility- and employee-related matters, distribution questions, product liability claims, trademark infringement and other matters. We do not believe any of these pending legal proceedings will have a material impact on our financial condition, or results of operations or cash flows.
Item 1A. | RISK FACTORS |
There have been no material changes in our risk factors from those disclosed in our 20102011 Annual Report onForm 10-K.
Item 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
On February 2, 2012, our board approved the award of restricted stock units (“RSUs”) representing an aggregate of 2,604 shares of our common stock to Stephen C. Neal, and the award of stock appreciation rights (“SARs”) representing an aggregate of 1,305,284 shares of our common stock to certain of our executives. These awards were made under our 2006 Equity Incentive Plan.
The RSUs were granted as part of the standard annual compensation provided to our non-employee Chairman of the Board, and represent a pro-rated grant for the period of time since Mr. Neal became 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 recipient’s continuous service terminates for reason other than cause after the first vesting installment, but prior to full vesting, then the remaining unvested portion of the award becomes fully vested as of the date of such termination. Each recipient’s initial grant of RSUs is subject to a mandatory deferral feature, by which the RSU will be converted to a share of common stock six months after discontinuation of service with the Company for each fully vested RSU held at that date. For subsequent grants, such as the one given to Mr. Neal, 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.
SARs are typically granted with an exercise price equal to the fair market value of the common stock on the date of grant as determined by the board. Twenty-five percent of each SAR grant vests on February 1, 2013, with the remaining 75% balance vesting at a rate of 75%/36 months (2.08% per month) commencing February 2, 2013, and ending January 2, 2016, subject to continued service. However, 25% of the shares subject to one of the awards made to Charles V. Bergh on February 2, 2012, in the amount of 436,720 units, vest on September 1, 2012; with the remaining 75% balance vesting in equal monthly installments beginning September 1, 2012, and ending August 1, 2015, in accordance with the terms of his employment agreement.
Upon the exercise of a SAR, the recipient will be entitled to receive common stock with an aggregate fair market value equal to the excess of the per share fair market value of the Company’s common stock on the date of exercise over the exercise price, multiplied by the number of SARs exercised.
We will not receive any proceeds from the issuance or vesting of RSUs or SARs nor upon the exercise of the SARs. The RSUs and SARs were granted under Section 4(2) of the Securities Act of 1933, as amended. Section 4(2) generally provides an exemption from registration for transactions by an issuer not involving any public offering.
In addition to the above-referenced issuances of securities, we also repurchased a total of 14,974 shares of our common stock during the quarter in connection with the exercise of put rights under our 2006 Equity Incentive Plan.
We are a privately-held corporation; there is no public trading of our common stock. As of April 5, 2012, we had 37,345,985 shares outstanding.
Item 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
Item 4. | MINE SAFETY DISCLOSURES |
None.
Item 5. | OTHER INFORMATION |
None.
Item 6. | EXHIBITS |
XBRL Instance Document. Furnished herewith. |
10 | .1 | Employment Agreement between the Company and Charles V. Bergh, dated June 9, 2011. Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report onForm 8-K filed with the Commission on June 16, 2011. | ||
10 | .2 | Transition Services, Separation Agreement and Release of All Claims between John Anderson and the Company, dated June 16, 2011. Incorporated by reference to Exhibit 10.2 to Registrant’s Current Report onForm 8-K filed with the Commission on June 16, 2011. | ||
31 | .1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. | ||
31 | .2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. | ||
32 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith. | |||
101 | .INS | XBRL Instance Document. Furnished herewith. | ||
101 | .SCH | XBRL Taxonomy Extension Schema Document. Furnished herewith. | ||
101 | .CAL | XBRL Taxonomy Extension Calculation Linkbase Document. Furnished herewith. | ||
101 | .LAB | XBRL Taxonomy Extension Label Linkbase Document. Furnished herewith. | ||
101 | .PRE | XBRL Taxonomy Extension Presentation Linkbase Document. Furnished herewith. |
30
Date: April 10, 2012 | LEVI STRAUSS & Co. | |||
(Registrant) | ||||
By: | /s/ HEIDI L. MANES | |||
Heidi L. Manes Vice President and Controller (Principal Accounting Officer) |
oEXHIBIT INDEX.
31.1 | ||
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. | |
101.INS | XBRL Instance Document. Furnished herewith. | |
101.SCH | XBRL Taxonomy Extension Schema Document. Furnished herewith. | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. Furnished herewith. | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document. Furnished herewith. | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. Furnished herewith. |
31
29
10 | .1 | Employment Agreement between the Company and Charles V. Bergh, dated June 9, 2011. Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report onForm 8-K filed with the Commission on June 16, 2011. | ||
10 | .2 | Transition Services, Separation Agreement and Release of All Claims between John Anderson and the Company, dated June 16, 2011. Incorporated by reference to Exhibit 10.2 to Registrant’s Current Report onForm 8-K filed with the Commission on June 16, 2011. | ||
31 | .1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. | ||
31 | .2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. | ||
32 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith. | |||
101 | .INS | XBRL Instance Document. Furnished herewith. | ||
101 | .SCH | XBRL Taxonomy Extension Schema Document. Furnished herewith. | ||
101 | .CAL | XBRL Taxonomy Extension Calculation Linkbase Document. Furnished herewith. | ||
101 | .LAB | XBRL Taxonomy Extension Label Linkbase Document. Furnished herewith. | ||
101 | .PRE | XBRL Taxonomy Extension Presentation Linkbase Document. Furnished herewith. |