1Q 2013 Form 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
Form 10-Q
(Mark One)
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þ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended February 24, 2013
or
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¨ | | 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)
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| | |
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 ¨ No þ
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See definition of “Large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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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 in Rule 12b-2 of the Act). Yes ¨ 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 — 37,397,437 shares outstanding on April 4, 2013
LEVI STRAUSS & CO. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 24, 2013
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Item 1. | | | |
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Item 2. | | | |
Item 3. | | | |
Item 4. | | | |
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Item 1. | | | |
Item 1A. | | | |
Item 2. | | | |
Item 3. | | | |
Item 4. | | | |
Item 5. | | | |
Item 6. | | | |
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PART I — FINANCIAL INFORMATION
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Item 1. | CONSOLIDATED FINANCIAL STATEMENTS |
LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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| | | | | | | |
| (Unaudited) | | |
| February 24, 2013 | | November 25, 2012 |
| (Dollars in thousands) |
ASSETS |
Current Assets: | | | |
Cash and cash equivalents | $ | 449,596 |
| | $ | 406,134 |
|
Trade receivables, net of allowance for doubtful accounts of $21,939 and $20,738 | 398,990 |
| | 500,672 |
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Inventories: | | | |
Raw materials | 4,677 |
| | 5,312 |
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Work-in-process | 5,788 |
| | 9,558 |
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Finished goods | 561,583 |
| | 503,990 |
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Total inventories | 572,048 |
| | 518,860 |
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Deferred tax assets, net | 114,341 |
| | 116,224 |
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Other current assets | 125,557 |
| | 136,483 |
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Total current assets | 1,660,532 |
| | 1,678,373 |
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Property, plant and equipment, net of accumulated depreciation of $785,626 and $782,766 | 451,027 |
| | 458,807 |
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Goodwill | 240,499 |
| | 239,971 |
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Other intangible assets, net | 57,126 |
| | 59,909 |
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Non-current deferred tax assets, net | 615,075 |
| | 612,916 |
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Other non-current assets | 122,570 |
| | 120,101 |
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Total assets | $ | 3,146,829 |
| | $ | 3,170,077 |
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| | | |
LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS’ DEFICIT |
Current Liabilities: | | | |
Short-term debt | $ | 81,424 |
| | $ | 59,759 |
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Current maturities of capital leases | 1,395 |
| | 1,760 |
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Accounts payable | 246,277 |
| | 225,726 |
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Other accrued liabilities | 219,398 |
| | 263,575 |
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Accrued salaries, wages and employee benefits | 165,126 |
| | 223,850 |
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Accrued interest payable | 30,068 |
| | 5,471 |
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Accrued income taxes | 50,378 |
| | 16,739 |
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Total current liabilities | 794,066 |
| | 796,880 |
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Long-term debt | 1,598,270 |
| | 1,669,452 |
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Long-term capital leases | 210 |
| | 262 |
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Postretirement medical benefits | 138,316 |
| | 140,958 |
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Pension liability | 471,030 |
| | 492,396 |
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Long-term employee related benefits | 63,874 |
| | 62,529 |
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Long-term income tax liabilities | 35,764 |
| | 40,356 |
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Other long-term liabilities | 59,477 |
| | 60,869 |
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Total liabilities | 3,161,007 |
| | 3,263,702 |
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Commitments and contingencies |
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|
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Temporary equity | 10,102 |
| | 7,883 |
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Stockholders’ Deficit: | | | |
Levi Strauss & Co. stockholders’ deficit | | | |
Common stock — $.01 par value; 270,000,000 shares authorized; 37,398,181 shares and 37,392,343 shares issued and outstanding | 374 |
| | 374 |
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Additional paid-in capital | 32,582 |
| | 33,365 |
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Retained earnings | 355,919 |
| | 273,975 |
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Accumulated other comprehensive loss | (417,762 | ) | | (414,635 | ) |
Total Levi Strauss & Co. stockholders’ deficit | (28,887 | ) | | (106,921 | ) |
Noncontrolling interest | 4,607 |
| | 5,413 |
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Total stockholders’ deficit | (24,280 | ) | | (101,508 | ) |
Total liabilities, temporary equity and stockholders’ deficit | $ | 3,146,829 |
| | $ | 3,170,077 |
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The accompanying notes are an integral part of these consolidated financial statements.
LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
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| Three Months Ended |
| February 24, 2013 | | February 26, 2012 |
| (Dollars in thousands) (Unaudited) |
Net revenues | $ | 1,146,678 |
| | $ | 1,164,961 |
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Cost of goods sold | 554,800 |
| | 616,167 |
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Gross profit | 591,878 |
| | 548,794 |
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Selling, general and administrative expenses | 410,423 |
| | 438,583 |
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Operating income | 181,455 |
| | 110,211 |
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Interest expense | (32,157 | ) | | (38,573 | ) |
Loss on early extinguishment of debt | (114 | ) | | — |
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Other income, net | 6,066 |
| | 1,172 |
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Income before income taxes | 155,250 |
| | 72,810 |
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Income tax expense | 48,375 |
| | 23,513 |
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Net income | 106,875 |
| | 49,297 |
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Net loss (income) attributable to noncontrolling interest | 145 |
| | (79 | ) |
Net income attributable to Levi Strauss & Co. | $ | 107,020 |
| | $ | 49,218 |
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The accompanying notes are an integral part of these consolidated financial statements.
LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
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| Three Months Ended |
| February 24, 2013 | | February 26, 2012 |
| (Dollars in thousands) (Unaudited) |
Net income | $ | 106,875 |
| | $ | 49,297 |
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Other comprehensive income (loss), net of related income taxes: | | | |
Pension and postretirement benefits | 3,909 |
| | 296 |
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Net investment hedge (losses) gains | (3,638 | ) | | 525 |
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Foreign currency translation (losses) gains | (3,097 | ) | | 7,424 |
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Unrealized (loss) gain on marketable securities | (962 | ) | | 1,268 |
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Total other comprehensive (loss) income | (3,788 | ) | | 9,513 |
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Comprehensive income | 103,087 |
| | 58,810 |
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Comprehensive loss attributable to noncontrolling interest | (806 | ) | | (254 | ) |
Comprehensive income attributable to Levi Strauss & Co. | $ | 103,893 |
| | $ | 59,064 |
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The accompanying notes are an integral part of these consolidated financial statements.
LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
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| Three Months Ended |
| February 24, 2013 | | February 26, 2012 |
| (Dollars in thousands) (Unaudited) |
Cash Flows from Operating Activities: | | | |
Net income | $ | 106,875 |
| | $ | 49,297 |
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Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 28,368 |
| | 31,218 |
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Asset impairments | 835 |
| | 58 |
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Gain on disposal of property, plant and equipment | (149 | ) | | (88 | ) |
Unrealized foreign exchange gains | (6,189 | ) | | (1,639 | ) |
Realized loss on settlement of forward foreign exchange contracts not designated for hedge accounting | 2,710 |
| | 3,485 |
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Employee benefit plans’ amortization from accumulated other comprehensive loss | 5,767 |
| | 373 |
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Employee benefit plans’ curtailment gain, net | — |
| | (773 | ) |
Noncash loss on extinguishment of debt | 114 |
| | — |
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Amortization of deferred debt issuance costs | 1,066 |
| | 1,110 |
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Stock-based compensation | 1,435 |
| | 1,214 |
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Allowance for doubtful accounts | 2,153 |
| | 2,919 |
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Change in operating assets and liabilities: | | | |
Trade receivables | 97,437 |
| | 118,185 |
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Inventories | (56,050 | ) | | (29,961 | ) |
Other current assets | 12,471 |
| | (17,713 | ) |
Other non-current assets | (6,629 | ) | | (1,744 | ) |
Accounts payable and other accrued liabilities | 2,859 |
| | 26,711 |
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Income tax liabilities | 34,212 |
| | 11,764 |
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Accrued salaries, wages and employee benefits and long-term employee related benefits | (83,244 | ) | | (90,766 | ) |
Other long-term liabilities | (1,093 | ) | | 1,049 |
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Other, net | 106 |
| | 94 |
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Net cash provided by operating activities | 143,054 |
| | 104,793 |
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Cash Flows from Investing Activities: | | | |
Purchases of property, plant and equipment | (20,883 | ) | | (17,291 | ) |
Proceeds from sale of property, plant and equipment | 45 |
| | 117 |
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Payments on settlement of forward foreign exchange contracts not designated for hedge accounting | (2,710 | ) | | (3,485 | ) |
Net cash used for investing activities | (23,548 | ) | | (20,659 | ) |
Cash Flows from Financing Activities: | | | |
Repayments of long-term debt and capital leases | (50,450 | ) | | (458 | ) |
Proceeds from senior revolving credit facility | — |
| | 50,000 |
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Repayments of senior revolving credit facility | — |
| | (110,000 | ) |
Short-term borrowings, net | (347 | ) | | 7,754 |
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Debt issuance costs | — |
| | (51 | ) |
Restricted cash | (127 | ) | | (305 | ) |
Repurchase of common stock | — |
| | (479 | ) |
Dividend to stockholders | (25,076 | ) | | — |
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Net cash used for financing activities | (76,000 | ) | | (53,539 | ) |
Effect of exchange rate changes on cash and cash equivalents | (44 | ) | | 3,183 |
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Net increase in cash and cash equivalents | 43,462 |
| | 33,778 |
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Beginning cash and cash equivalents | 406,134 |
| | 204,542 |
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Ending cash and cash equivalents | $ | 449,596 |
| | $ | 238,320 |
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Supplemental disclosure of cash flow information: | | | |
Cash paid (received) during the period for: | | | |
Interest | $ | 4,580 |
| | $ | 5,796 |
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Income taxes | (15,376 | ) | | 4,077 |
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The accompanying notes are an integral part of these consolidated financial statements.
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 24, 2013
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.™ and Denizen® brands. The Company operates its business through 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 25, 2012, included in the Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission (“SEC”) on February 7, 2013.
The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions have been eliminated. Management believes the disclosures are adequate to make the information presented herein not misleading. The results of operations for the three months ended February 24, 2013, may not be indicative of the results to be expected for any other interim period or the year ending November 24, 2013.
The Company’s fiscal year ends on the last Sunday of November in each year, although the fiscal years of certain foreign subsidiaries end on November 30. Each quarter of both fiscal years 2013 and 2012 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 the 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.
Recently Issued Accounting Standards
There have been no developments to recently issued accounting standards, including the expected dates of adoption and estimated effects on the Company’s consolidated financial statements, from those disclosed in the Company’s 2012 Annual Report on Form 10-K, except for the following:
First Quarter of 2015
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• | In March 2013, the FASB issued Accounting Standards Update No. 2013-05, "Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity," ("ASU 2013-05"). The objective of ASU 2013-05 is to resolve the diversity in practice regarding the release into net income of the cumulative translation adjustment upon derecognition of a subsidiary or group of assets within a foreign entity. The Company does not anticipate that the adoption of this standard will have a material impact on its consolidated financial statements, absent any material transactions involving the derecognition of subsidiaries or groups of assets within a foreign entity. |
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 24, 2013
NOTE 2: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the Company’s financial instruments that are carried at fair value:
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| | | | | | | | | | | | | | | | | | | | | | | |
| February 24, 2013 | | November 25, 2012 |
| | | 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 | $ | 21,557 |
| | $ | 21,557 |
| | $ | — |
| | $ | 20,322 |
| | $ | 20,322 |
| | $ | — |
|
Forward foreign exchange contracts, net(3) | 9,156 |
| | — |
| | 9,156 |
| | 5,792 |
| | — |
| | 5,792 |
|
Total | $ | 30,713 |
| | $ | 21,557 |
| | $ | 9,156 |
| | $ | 26,114 |
| | $ | 20,322 |
| | $ | 5,792 |
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Financial liabilities carried at fair value | | | | | | | | | | | |
Forward foreign exchange contracts, net(3) | $ | 6,416 |
| | $ | — |
| | $ | 6,416 |
| | $ | 3,018 |
| | $ | — |
| | $ | 3,018 |
|
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(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. |
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(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. |
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(3) | The Company’s over-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 related accrued interest – and estimated fair value of the Company’s financial instruments that are carried at adjusted historical cost:
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| February 24, 2013 | | November 25, 2012 |
| Carrying Value | | Estimated Fair Value(1) | | Carrying Value | | Estimated Fair Value(1) |
| (Dollars in thousands) |
Financial liabilities carried at adjusted historical cost | | | | | | | |
Senior term loan due 2014 | $ | 274,936 |
| | $ | 275,622 |
| | $ | 324,890 |
| | $ | 324,484 |
|
4.25% Yen-denominated Eurobonds due 2016 | 43,591 |
| | 42,840 |
| | 48,656 |
| | 47,201 |
|
7.75% Euro senior notes due 2018 | 404,190 |
| | 435,844 |
| | 387,433 |
| | 416,422 |
|
7.625% senior notes due 2020 | 536,120 |
| | 582,714 |
| | 526,223 |
| | 572,161 |
|
6.875% senior notes due 2022 | 393,382 |
| | 425,625 |
| | 386,838 |
| | 404,163 |
|
Short-term borrowings | 56,785 |
| | 56,785 |
| | 59,861 |
| | 59,861 |
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Total | $ | 1,709,004 |
| | $ | 1,819,430 |
| | $ | 1,733,901 |
| | $ | 1,824,292 |
|
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(1) | Fair value estimate incorporates mid-market price quotes. |
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 24, 2013
NOTE 3: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
As of February 24, 2013, the Company had forward foreign exchange contracts to buy $660.0 million and to sell $373.1 million against various foreign currencies. These contracts are at various exchange rates and expire at various dates through July 2014.
The table below provides data about the carrying values of derivative instruments and non-derivative instruments:
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| | | | | | | | | | | | | | | | | | | | | | | |
| February 24, 2013 | | November 25, 2012 |
| Assets | | (Liabilities) | | Derivative Net Carrying Value | | Assets | | (Liabilities) | | Derivative Net Carrying Value |
| Carrying Value | | Carrying Value | | | Carrying Value | | Carrying Value | |
| (Dollars in thousands) |
Derivatives not designated as hedging instruments | | | | | | | | | | | |
Forward foreign exchange contracts(1) | $ | 11,639 |
| | $ | (2,483 | ) | | $ | 9,156 |
| | $ | 7,131 |
| | $ | (1,339 | ) | | $ | 5,792 |
|
Forward foreign exchange contracts(2) | 2,554 |
| | (8,970 | ) | | (6,416 | ) | | 5,183 |
| | (8,201 | ) | | (3,018 | ) |
Total | $ | 14,193 |
| | $ | (11,453 | ) | | | | $ | 12,314 |
| | $ | (9,540 | ) | | |
Non-derivatives designated as hedging instruments | | | | | | | | | | | |
4.25% Yen-denominated Eurobonds due 2016 | $ | — |
| | $ | (24,919 | ) | | | | $ | — |
| | $ | (28,135 | ) | | |
7.75% Euro senior notes due 2018 | — |
| | (395,670 | ) | | | | — |
| | (386,520 | ) | | |
Total | $ | — |
| | $ | (420,589 | ) | | | | $ | — |
| | $ | (414,655 | ) | | |
_____________
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(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. |
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, net” in the Company’s consolidated statements of income:
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| | | | | | | | | | | | | | | |
| Gain or (Loss) Recognized in AOCI (Effective Portion) | | Gain or (Loss) Recognized in Other Income, net (Ineffective Portion and Amount Excluded from Effectiveness Testing) |
| As of | | As of | | Three Months Ended |
February 24, 2013 | November 25, 2012 | February 24, 2013 | | February 26, 2012 |
| (Dollars in thousands) |
Forward foreign exchange contracts | $ | 4,637 |
| | $ | 4,637 |
| |
|
| |
|
|
4.25% Yen-denominated Eurobonds due 2016 | (23,070 | ) | | (26,285 | ) | | $ | 2,328 |
| | $ | 2,606 |
|
7.75% Euro senior notes due 2018 | (18,601 | ) | | (9,451 | ) | | — |
| | — |
|
Cumulative income taxes | 14,543 |
| | 12,246 |
| | | | |
Total | $ | (22,491 | ) | | $ | (18,853 | ) | | | | |
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 24, 2013
The table below provides data about the amount of gains and losses related to derivatives not designated as hedging instruments included in “Other income, net” in the Company’s consolidated statements of income:
|
| | | | | | | |
| Gain or (Loss) |
| Three Months Ended |
| February 24, 2013 | | February 26, 2012 |
| (Dollars in thousands) |
Forward foreign exchange contracts: | | | |
Realized | $ | (2,710 | ) | | $ | (3,485 | ) |
Unrealized | (109 | ) | | (11,767 | ) |
Total | $ | (2,819 | ) | | $ | (15,252 | ) |
NOTE 4: DEBT
|
| | | | | | | | | |
| | February 24, 2013 | | November 25, 2012 | |
| | (Dollars in thousands) | |
| | | |
| Long-term debt | | | | |
| Unsecured: | | | | |
| Senior term loan due 2014 | $ | 249,636 |
| | $ | 324,424 |
| |
| 4.25% Yen-denominated Eurobonds due 2016 | 42,964 |
| | 48,508 |
| |
| 7.75% Euro senior notes due 2018 | 395,670 |
| | 386,520 |
| |
| 7.625% senior notes due 2020 | 525,000 |
| | 525,000 |
| |
| 6.875% senior notes due 2022 | 385,000 |
| | 385,000 |
| |
| Total unsecured | 1,598,270 |
| | 1,669,452 |
| |
| Total long-term debt | $ | 1,598,270 |
| | $ | 1,669,452 |
| |
| Short-term debt | | | | |
| Senior term loan due 2014 | $ | 24,964 |
| | $ | — |
| |
| Short-term borrowings | 56,460 |
| | 59,759 |
| |
| Total short-term debt | $ | 81,424 |
| | $ | 59,759 |
| |
| Total long-term and short-term debt | $ | 1,679,694 |
| | $ | 1,729,211 |
| |
Senior Term Loan due 2014
During the three months ended February 24, 2013, the Company prepaid $50.0 million of the Senior Term Loan due 2014. After the quarter-end, the Company prepaid another $25.0 million bringing the aggregate year-to-date prepayment amount to $75.0 million. Subsequently, the remaining balance of the Senior Term Loan due 2014 was repaid in full with the proceeds of the notes issued on March 14, 2013, and cash on hand. See “Subsequent Event – Additional Issuance of Senior Notes due 2022” below.
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 24, 2013
Subsequent Event – Additional Issuance of Senior Notes due 2022
Additional Senior Notes due 2022. On March 14, 2013, the Company issued an additional $140.0 million in 6.875% senior notes due 2022 (the “Additional Senior Notes due 2022”) to qualified institutional buyers in compliance with the Securities Act of 1933, as amended (the “Securities Act”). The Additional Senior Notes due 2022 are treated as a single series with the $385.0 million aggregate principal amount of 6.875% senior notes due 2022 the Company issued in May 2012 (the “Existing Senior Notes due 2022”) and have substantially the same terms as those of the Existing Senior Notes due 2022, except that the Additional Senior Notes due 2022 are subject to a registration rights agreement and until they are registered and exchanged for registered notes, the Additional Senior Notes due 2022 will not be fungible with the Existing Senior Notes due 2022.
Pursuant to the registration rights agreement, the Company is required to conduct an exchange offer in order to allow holders of the Additional Senior Notes due 2022 to exchange their notes for exchange notes in the same principal amount and with substantially identical terms, except that the exchange notes will be registered under the Securities Act.
The Additional Senior Notes due 2022, the Existing Senior Notes due 2022, and the exchange notes will be treated as a single class for all purposes under the indenture governing the Company's Existing Senior Notes due 2022, including without limitation, the covenants, events of default, asset sale, change of control, covenant suspension and other terms. The Additional Senior Notes due 2022 were offered at a premium of $11.2 million, which will be amortized to interest expense over the term of the notes. Costs of approximately $2.6 million associated with the issuance of the notes, representing underwriting fees and other expenses, will also be amortized to interest expense over the term of the notes.
Use of Proceeds. The Company used the net proceeds from the offering, together with cash on hand, to prepay in full its Senior Term Loan due 2014.
Senior Revolving Credit Facility
The Company’s unused availability under its senior secured revolving credit facility was $573.7 million at February 24, 2013, as the Company’s total availability of $656.0 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 months ended February 24, 2013, was 6.91% as compared to 6.99% in the same period of 2012.
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 24, 2013
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 |
| February 24, 2013 | | February 26, 2012 | | February 24, 2013 | | February 26, 2012 |
| (Dollars in thousands) |
Net periodic benefit cost (income): | | | | | | | |
Service cost | $ | 2,281 |
| | $ | 2,247 |
| | $ | 94 |
| | $ | 99 |
|
Interest cost | 13,066 |
| | 14,413 |
| | 1,239 |
| | 1,659 |
|
Expected return on plan assets | (14,014 | ) | | (13,009 | ) | | — |
| | — |
|
Amortization of prior service benefit | (20 | ) | | (20 | ) | | (122 | ) | | (4,089 | ) |
Amortization of actuarial loss | 4,218 |
| | 3,142 |
| | 1,691 |
| | 1,289 |
|
Curtailment gain | — |
| | (773 | ) | | — |
| | — |
|
Net settlement loss | 45 |
| | 107 |
| | — |
| | — |
|
Net periodic benefit cost (income) | 5,576 |
| | 6,107 |
| | 2,902 |
| | (1,042 | ) |
Changes in accumulated other comprehensive loss: | | | | | | | |
Actuarial gain | — |
| | (4 | ) | | — |
| | — |
|
Amortization of prior service benefit | 20 |
| | 20 |
| | 122 |
| | 4,089 |
|
Amortization of actuarial loss | (4,218 | ) | | (3,142 | ) | | (1,691 | ) | | (1,289 | ) |
Curtailment loss | (440 | ) | | (1 | ) | | — |
| | — |
|
Net settlement loss | — |
| | (51 | ) | | — |
| | — |
|
Total recognized in accumulated other comprehensive loss | (4,638 | ) | | (3,178 | ) | | (1,569 | ) | | 2,800 |
|
Total recognized in net periodic benefit cost (income) and accumulated other comprehensive loss | $ | 938 |
| | $ | 2,929 |
| | $ | 1,333 |
| | $ | 1,758 |
|
NOTE 6: COMMITMENTS AND CONTINGENCIES
Forward Foreign Exchange Contracts
The Company uses over-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 3 for additional information.
Other Contingencies
Litigation. There have been no material developments with respect to the information previously reported in the Company’s 2012 Annual Report on Form 10-K related to legal proceedings.
In the ordinary course of business, the Company has various pending cases involving contractual matters, facility- and employee-related matters, distribution matters, 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, results of operations or cash flows.
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 24, 2013
NOTE 7: DIVIDEND PAYMENT
The Company paid a cash dividend of $25.1 million in the first quarter of 2013. The Company does not have an established annual dividend policy. The Company will continue to review its ability to pay cash dividends at least annually, and dividends may be declared at the discretion of the Company's Board of Directors depending upon, among other factors, the income tax impact to the dividend recipients, the Company's financial condition and compliance with the terms of the Company's debt agreements.
NOTE 8: ACCUMULATED OTHER COMPREHENSIVE LOSS
The following is a summary of the components of “Accumulated other comprehensive loss,” net of related income taxes:
|
| | | | | | | | | |
| | February 24, 2013 | | November 25, 2012 | |
| | (Dollars in thousands) | |
| Pension and postretirement benefits | $ | (327,052 | ) | | $ | (330,961 | ) | |
| Net investment hedge losses | (22,491 | ) | | (18,853 | ) | |
| Foreign currency translation losses | (58,520 | ) | | (55,423 | ) | |
| Unrealized gain on marketable securities | 52 |
| | 1,014 |
| |
| Accumulated other comprehensive loss | (408,011 | ) | | (404,223 | ) | |
| Accumulated other comprehensive income attributable to noncontrolling interest | 9,751 |
| | 10,412 |
| |
| Accumulated other comprehensive loss attributable to Levi Strauss & Co. | $ | (417,762 | ) | | $ | (414,635 | ) | |
NOTE 9: OTHER INCOME, NET
The following table summarizes significant components of “Other income, net”:
|
| | | | | | | | | |
| | Three Months Ended | |
| | February 24, 2013 | | February 26, 2012 | |
| | (Dollars in thousands) | |
| Foreign exchange management losses | $ | (2,819 | ) | | $ | (15,252 | ) | |
| Foreign currency transaction gains | 4,398 |
| | 15,441 |
| |
| Interest income | 391 |
| | 347 |
| |
| Investment income | 2,805 |
| | 127 |
| |
| Other | 1,291 |
| | 509 |
| |
| Total other income, net | $ | 6,066 |
| | $ | 1,172 |
| |
NOTE 10: INCOME TAXES
The effective income tax rate was 31.2% for the three months ended February 24, 2013, compared to 32.3% for the same period ended February 26, 2012. The decrease in the effective tax rate in 2013 is primarily a result of a favorable change in the projected mix of earnings in jurisdictions with lower effective tax rates.
NOTE 11: RELATED PARTIES
Robert D. Haas, a director and Chairman Emeritus of the Company, is the President of the Levi Strauss Foundation, which is not a consolidated entity of the Company. During the three-month period ended February 24, 2013, the Company donated $3.1 million to the Levi Strauss Foundation as compared to $0.3 million for the same prior-year period.
LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 24, 2013
NOTE 12: BUSINESS SEGMENT INFORMATION
The Company manages its business according to three regional segments, the Americas, Europe and Asia Pacific. The Company considers its chief executive officer to be the Company’s chief operating decision 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.
Business segment information for the Company is as follows:
|
| | | | | | | | | |
| | Three Months Ended | |
| | February 24, 2013 | | February 26, 2012 | |
| | (Dollars in thousands) | |
| Net revenues: | | | | |
| Americas | $ | 647,127 |
| | $ | 647,294 |
| |
| Europe | 296,587 |
| | 289,452 |
| |
| Asia Pacific | 202,964 |
| | 228,215 |
| |
| Total net revenues | $ | 1,146,678 |
| | $ | 1,164,961 |
| |
| Operating income: | | | | |
| Americas | $ | 132,463 |
| | $ | 79,636 |
| |
| Europe | 62,926 |
| | 52,073 |
| |
| Asia Pacific | 48,965 |
| | 41,160 |
| |
| Regional operating income | 244,354 |
| | 172,869 |
| |
| Corporate expenses | 62,899 |
| | 62,658 |
| |
| Total operating income | 181,455 |
| | 110,211 |
| |
| Interest expense | (32,157 | ) | | (38,573 | ) | |
| Loss on early extinguishment of debt | (114 | ) | | — |
| |
| Other income, net | 6,066 |
| | 1,172 |
| |
| Income before income taxes | $ | 155,250 |
| | $ | 72,810 |
| |
|
| |
Item 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Overview
We design, market and sell – 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.™ (“Signature”) and Denizen® brands around the world.
Our business is operated through three geographic regions: Americas, Europe and Asia Pacific. Our products are sold in approximately 50,000 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 505 company-operated stores located in 32 countries, including the United States, and through the online stores we operate. Our company-operated and online stores generated approximately 24% of our net revenues in the three-month period of 2013, as compared to 21% in the same period in 2012. 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 our Signature and Denizen® brands primarily through mass channel retailers in the Americas.
Our Europe and Asia Pacific businesses, collectively, contributed approximately 44% of our net revenues and 46% of our regional operating income in the three-month period in 2013. Sales of Levi’s® brand products represented approximately 86% of our total net sales in the three-month period in 2013.
Trends Affecting Our Business
Our key long-term objectives are to strengthen our brands globally in order to deliver sustainable profitable growth, generate strong cash flow and reduce our debt. Critical strategies to achieve these objectives include driving our profitable core business; expanding the reach of our global brands in product categories, consumer segments and geographic markets; elevating the performance of our retail channel; and leveraging our global scale to develop a competitive cost structure.
During the first quarter of 2013, economic challenges and uncertainty continued to impact retail performance in many markets around the world, including key markets in Asia Pacific and the southern markets of Europe. Generally, the mix of our business is shifting towards our global company-operated retail network, which continues to perform well, particularly in our outlets. Input costs for cotton in the products we sold during the quarter declined, and we expect this trend will continue at least through the first half of 2013. As compared to 2012, we expect an increase in our full-year advertising and promotion expense, and that our full-year gross margins will be closer to 50%.
Our First Quarter 2013 Results
| |
• | Net revenues. Consolidated net revenues declined by 2% on both reported and constant-currency bases compared to the first quarter of 2012, reflecting the conditions in Asia Pacific and the licensing of our Levi's® brand boys business. |
| |
• | Operating income. Consolidated operating income increased by 65% compared to the first quarter of 2012 and operating margin improved to 16%, reflecting a higher gross margin and lower SG&A. Gross margin increased primarily due to the lower cost of cotton, while SG&A declined primarily due to a shift in the timing of our advertising and promotion campaigns. |
| |
• | Cash flows. Cash flows provided by operating activities were $143 million for the three-month period in 2013 as compared to $105 million for the same period in 2012, primarily reflecting a tax refund from State of California and lower funding of our pension plans. |
Financial Information Presentation
Fiscal year. Our fiscal year ends on the last Sunday of November in each year, although the fiscal years of certain foreign subsidiaries end on November 30. Each quarter of fiscal years 2013 and 2012 consisted of 13 weeks.
Segments. We manage our business according to three regional segments: the Americas, Europe and Asia Pacific.
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 commissions 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 facilitate period-to-period comparisons without regard to the impact of changing foreign currency exchange rates.
Results of Operations for Three Months Ended February 24, 2013, as Compared to Same Period in 2012
The following table summarizes, for the periods indicated, our consolidated statements of income, the changes in these items from period to period and these items expressed as a percentage of net revenues:
|
| | | | | | | | | | | | | | | | |
| Three Months Ended |
| February 24, 2013 | | February 26, 2012 | | % Increase (Decrease) | | February 24, 2013 | | February 26, 2012 |
| | | % of Net Revenues | | % of Net Revenues |
| (Dollars in millions) |
Net revenues | $ | 1,146.7 |
| | $ | 1,165.0 |
| | (1.6 | )% | | 100.0 | % | | 100.0 | % |
Cost of goods sold | 554.8 |
| | 616.2 |
| | (10.0 | )% | | 48.4 | % | | 52.9 | % |
Gross profit | 591.9 |
| | 548.8 |
| | 7.9 | % | | 51.6 | % | | 47.1 | % |
Selling, general and administrative expenses | 410.4 |
| | 438.6 |
| | (6.4 | )% | | 35.8 | % | | 37.6 | % |
Operating income | 181.5 |
| | 110.2 |
| | 64.6 | % | | 15.8 | % | | 9.5 | % |
Interest expense | (32.2 | ) | | (38.6 | ) | | (16.6 | )% | | (2.8 | )% | | (3.3 | )% |
Loss on early extinguishment of debt | (0.1 | ) | | — |
| | — |
| | — |
| | — |
|
Other income, net | 6.1 |
| | 1.2 |
| | 417.6 | % | | 0.5 | % | | 0.1 | % |
Income before income taxes | 155.3 |
| | 72.8 |
| | 113.2 | % | | 13.5 | % | | 6.2 | % |
Income tax expense | 48.4 |
| | 23.5 |
| | 105.7 | % | | 4.2 | % | | 2.0 | % |
Net income | 106.9 |
| | 49.3 |
| | 116.8 | % | | 9.3 | % | | 4.2 | % |
Net loss (income) attributable to noncontrolling interest | 0.1 |
| | (0.1 | ) | | (283.5 | )% | | — |
| | — |
|
Net income attributable to Levi Strauss & Co. | $ | 107.0 |
| | $ | 49.2 |
| | 117.4 | % | | 9.3 | % | | 4.2 | % |
Net revenues
The following table presents net revenues by reporting segment for the periods indicated and the changes in net revenues by reporting segment on both reported and constant-currency bases from period to period.
|
| | | | | | | | | | | | | |
| Three Months Ended |
| | | | | % Increase (Decrease) |
| February 24, 2013 | | February 26, 2012 | | As Reported | | Constant Currency |
| (Dollars in millions) |
Net revenues: | | | | | | | |
Americas | $ | 647.1 |
| | $ | 647.3 |
| | — |
| | (0.2 | )% |
Europe | 296.6 |
| | 289.5 |
| | 2.5 | % | | 0.8 | % |
Asia Pacific | 203.0 |
| | 228.2 |
| | (11.1 | )% | | (9.8 | )% |
Total net revenues | $ | 1,146.7 |
| | $ | 1,165.0 |
| | (1.6 | )% | | (1.9 | )% |
Total net revenues decreased on both reported and constant-currency bases for the three-month period ended February 24, 2013, as compared to the same prior year period.
Americas. For the three-month period, net revenues in our Americas region were flat on reported and constant-currency bases, with currency affecting net revenues favorably by approximately $1 million.
Increased volumes in our retail stores, mainly at outlet and online stores, were offset by a decline in wholesale net revenues, reflecting lower sales of women's products and our decision to license the Levi's® brand boys business beginning in the third quarter of 2012.
Europe. Net revenues in Europe increased on both reported and constant-currency bases, with currency affecting net revenues favorably by approximately $5 million.
Net revenue growth reflecting improved performance and expansion of our company-operated retail network was offset by lower sales in our traditional wholesale channels, most notably in southern Europe.
Asia Pacific. Net revenues in Asia Pacific declined on both reported and constant-currency bases for the three-month period, with currency affecting net revenues unfavorably by approximately $3 million.
The net revenues decline reflected lower Levi's® brand sales at wholesale and retail, due to challenging conditions in most markets in the region during the first quarter.
Gross profit
The following table shows consolidated gross profit and gross margin for the periods indicated and the changes in these items from period to period:
|
| | | | | | | | | | |
| Three Months Ended |
| February 24, 2013 | | February 26, 2012 | | % Increase (Decrease) |
| (Dollars in millions) |
Net revenues | $ | 1,146.7 |
| | $ | 1,165.0 |
| | (1.6 | )% |
Cost of goods sold | 554.8 |
| | 616.2 |
| | (10.0 | )% |
Gross profit | $ | 591.9 |
| | $ | 548.8 |
| | 7.9 | % |
Gross margin | 51.6 | % | | 47.1 | % | | |
Gross margin primarily improved due to the benefit of the lower cost of cotton. Increased revenue contribution from our company-operated retail network and our decision in the third quarter of 2012 to license the Levi's® brand boys business in the Americas and to phase out the Denizen® brand in Asia Pacific also helped gross margin. Currency affected gross profit favorably by approximately $11 million.
Selling, general and administrative expenses
The following table shows our selling, general and administrative expenses (“SG&A”) for the periods indicated, the changes in these items from period to period and these items expressed as a percentage of net revenues:
|
| | | | | | | | | | | | | | | | |
| Three Months Ended |
| February 24, 2013 | | February 26, 2012 | | % Increase (Decrease) | | February 24, 2013 | | February 26, 2012 |
| | | % of Net Revenues | | % of Net Revenues |
| (Dollars in millions) |
Selling | $ | 178.7 |
| | $ | 176.8 |
| | 1.1 | % | | 15.6 | % | | 15.2 | % |
Advertising and promotion | 32.8 |
| | 45.9 |
| | (28.5 | )% | | 2.9 | % | | 3.9 | % |
Administration | 87.5 |
| | 95.3 |
| | (8.1 | )% | | 7.6 | % | | 8.2 | % |
Other | 111.4 |
| | 120.6 |
| | (7.7 | )% | | 9.7 | % | | 10.4 | % |
Total SG&A | $ | 410.4 |
| | $ | 438.6 |
| | (6.4 | )% | | 35.8 | % | | 37.6 | % |
Currency had no significant impact on the decline in SG&A for the three-month period ended February 24, 2013, as compared to the same prior-year period.
Selling. Selling expenses reflect costs such as rents and headcount associated with the support and continued expansion of our company-operated store network. We had 13 more company-operated stores at the end of the first quarter of 2013 than we did at the end of the first quarter of 2012.
Advertising and promotion. The decline in advertising and promotion expenses primarily reflected a difference in the timing of our campaigns.
Administration. The decline in administration expenses was primarily due to lower severance expenses.
Other. Other SG&A includes distribution, information resources, and marketing organization costs, all of which declined during the quarter as we continue to manage our spending.
Operating income
The following table shows operating income by reporting segment and corporate expenses for the periods indicated, the changes in these items from period to period and these items expressed as a percentage of net revenues:
|
| | | | | | | | | | | | | | | | | |
| Three Months Ended | |
| February 24, 2013 | | February 26, 2012 | | % Increase (Decrease) | | February 24, 2013 | | February 26, 2012 | |
| | | % of Net Revenues | | % of Net Revenues | |
| (Dollars in millions) | |
Operating income: | | | | | | | | | | |
Americas | $ | 132.5 |
| | $ | 79.6 |
| | 66.3 | % | | 20.5 | % | | 12.3 | % | |
Europe | 62.9 |
| | 52.1 |
| | 20.8 | % | | 21.2 | % | | 18.0 | % | |
Asia Pacific | 49.0 |
| | 41.2 |
| | 19.0 | % | | 24.1 | % | | 18.0 | % | |
Total regional operating income | 244.4 |
| | 172.9 |
| | 41.4 | % | | 21.3 | % | * | 14.8 | % | * |
Corporate expenses | 62.9 |
| | 62.7 |
| | 0.4 | % | | 5.5 | % | * | 5.4 | % | * |
Total operating income | $ | 181.5 |
| | $ | 110.2 |
| | 64.6 | % | | 15.8 | % | * | 9.5 | % | * |
Operating margin | 15.8 | % | | 9.5 | % | | | | | | | |
______________
* Percentage of consolidated net revenues
Currency favorably affected total operating income by approximately $11 million for the three-month period ended February 24, 2013.
Regional operating income.
| |
• | Americas. The increase in operating income and operating margin primarily reflected the region's higher gross margin. |
| |
• | Europe. The increase in operating income and operating margin primarily reflected the region's lower SG&A and improved gross margin, as well as the favorable impact of currency. |
| |
• | Asia Pacific. The increase in operating income and operating margin was primarily driven by our decision to phase out the Denizen® brand in the region as well as the region's lower SG&A. |
Corporate. Corporate expenses are selling, general and administrative expenses that are not attributed to any of our regional operating segments. As compared to the same prior-year period, lower severance expenses in the three-month period ended February 24, 2013, were offset by higher postretirement benefit plan costs, as the favorable impact of past plan amendments had substantially been fully recognized by the end of fiscal 2012.
Interest expense
Interest expense decreased to $32.2 million for the three-month period ended February 24, 2013, from $38.6 million for the same period in 2012. The decrease in interest expense was due to lower debt balances as a result of our debt refinancing activities during the second quarter of 2012, and lower interest expense on our deferred compensation plans.
The weighted-average interest rate on average borrowings outstanding for the three-month period ended February 24, 2013, was 6.91% as compared to 6.99% for the same period in 2012.
Income tax expense
Our effective income tax rate was 31.2% for the three months ended February 24, 2013, compared to 32.3% for the same period ended February 26, 2012. The decrease in our effective tax rate in 2013 is primarily a result of a favorable change in the projected mix of earnings in jurisdictions with lower effective 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 a senior secured revolving credit facility. The facility is an asset-based facility, in which the borrowing availability is primarily based on the value of our U.S. Levi’s® trademarks and the levels of accounts receivable and inventory in the United States and Canada. The maximum availability under the facility is $850 million, of which $800 million is available to us for revolving loans in U.S. Dollars and $50 million is available to us for revolving loans either in U.S. Dollars or Canadian Dollars.
As of February 24, 2013, we had no borrowings under the facility, and unused availability under the facility was $573.7 million, as our total availability of $656.0 million, based on collateral levels as defined by the agreement, was reduced by $82.3 million of other credit-related instruments.
As of February 24, 2013, we had cash and cash equivalents totaling approximately $449.6 million, resulting in a total liquidity position (unused availability and cash and cash equivalents) in excess of $1.0 billion.
Subsequent to the end of the first quarter, on March 14, 2013, we issued an additional $140.0 million in 6.875% senior notes due 2022 (the “Additional Senior Notes due 2022”) to qualified institutional buyers in compliance with the Securities Act of 1933, as amended. These notes have the same terms and are part of the same series as the $385.0 million aggregate principal amount of 6.875% senior notes due 2022 (the “Existing Senior Notes due 2022”). See Note 4 to our unaudited consolidated financial statements included in this report for more information.
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 2013 from those disclosed in our 2012 Annual Report on Form 10-K.
During the three months ended February 24, 2013, we prepaid $50.0 million of the Senior Term Loan due 2014; subsequent to the end of the quarter, we prepaid another $25.0 million for an aggregate prepayment amount of $75.0 million. We then used the proceeds from the March 14, 2013, issuance of the Additional Senior Notes due 2022, together with cash on hand, to prepay the remaining outstanding amount of the Senior Term Loan due 2014. See Note 4 to our unaudited consolidated financial statements included in this report for more information.
Cash flows
The following table summarizes, for the periods indicated, selected items in our consolidated statements of cash flows:
|
| | | | | | | | | |
| | Three Months Ended | |
| | February 24, 2013 | | February 26, 2012 | |
| | (Dollars in millions) | |
| Cash provided by operating activities | $ | 143.1 |
| | $ | 104.8 |
| |
| Cash used for investing activities | (23.5 | ) | | (20.7 | ) | |
| Cash used for financing activities | (76.0 | ) | | (53.5 | ) | |
| Cash and cash equivalents | 449.6 |
| | 238.3 |
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Cash flows from operating activities
Cash provided by operating activities was $143.1 million for the three-month period in 2013, as compared to $104.8 million for the same period in 2012. Cash provided by operating activities increased compared to the prior year due to a tax refund received from the State of California and lower funding of our pension plans. Lower cash received from customers, reflecting our lower beginning accounts receivable balance, was offset by less cash used for inventory, reflecting the lower cost of cotton.
Cash flows from investing activities
Cash used for investing activities was $23.5 million for the three-month period in 2013, as compared to $20.7 million for the same period in 2012. The increase in cash used for investing activities as compared to the prior year primarily reflects higher information technology spend.
Cash flows from financing activities
Cash used for financing activities was $76.0 million for the three-month period in 2013, as compared to $53.5 million for the same period in 2012. The increase in cash used in 2013 primarily related to the timing of our dividend payments to stockholders of $25.1 million as well as the $50.0 million prepayment of our Senior Term Loan due 2014 in the quarter.
Indebtedness
The borrower of substantially all of our debt is Levi Strauss & Co., the parent and U.S. operating company. Of our total debt of $1.7 billion as of February 24, 2013, we had fixed-rate debt of approximately $1.4 billion (84% of total debt) and variable-rate debt of approximately $0.3 billion (16% of total debt). Subsequent to our refinancing actions in March 2013, our required aggregate debt principal payments on our unsecured long-term debt are $43.0 million in 2016, $395.7 million in 2018, and the remaining $1.1 billion in years after 2018. Short-term borrowings totaling $56.5 million as of February 24, 2013, are 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. Currently, 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 2012 Annual Report on Form 10-K.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the related notes. There have been no significant changes to our critical accounting policies from those disclosed in our 2012 Annual Report on Form 10-K.
Recently Issued Accounting Standards
See Note 1 to our unaudited consolidated financial statements included in this report for recently issued accounting standards, including the expected dates of adoption and estimated effects on our consolidated financial statements.
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this report, including (without limitation) statements under “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 prospects and/or statements preceded by, followed by or that include the words “believe”, “anticipate”, “intend”, “estimate”, “expect”, “project”, “could”, “plans”, “seeks” and similar expressions. These forward-looking statements speak only as of the date stated and we do not undertake any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, even if experience or future events make it clear that any expected results expressed or implied by these forward-looking statements will not be realized. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these expectations may not prove to be correct or we may not achieve the financial results, savings or other benefits anticipated in the forward-looking statements. These forward-looking statements are necessarily estimates reflecting the best judgment of our senior management and involve a number of risks and uncertainties, some of which may be beyond our control. These risks and uncertainties, including those disclosed under “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended November 25, 2012, and our other filings with the Securities and Exchange Commission, could cause actual results to differ materially from those suggested by the forward-looking statements and include, without limitation:
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• | changes in the level of consumer spending for apparel in view of general economic and environmental conditions and pricing trends, and our ability to plan for and respond to the impact of those changes; |
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• | 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; |
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• | our ability to mitigate the variability of costs related to manufacturing, sourcing, and raw materials supply and to manage consumer response to such mitigating actions; |
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• | our effectiveness in increasing productivity and efficiency in our operations and our ability to implement organizational changes intended to optimize operations without business disruption or mitigation to such disruptions; |
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• | our and our wholesale customers’ decisions to modify strategies and adjust product mix, and our ability to manage any resulting product transition costs; |
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• | 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; |
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• | our ability to respond to price, innovation and other competitive pressures in the apparel industry, on our key customers and in our key markets; |
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• | our ability to increase the number of dedicated stores for our products, including through opening and profitably operating company-operated stores; |
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• | consequences of foreign currency exchange rate fluctuations; |
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• | the impact of the variables that affect the net periodic benefit cost and future funding requirements of our postretirement benefits and pension plans; |
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• | our dependence on key distribution channels, customers and suppliers; |
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• | our ability to utilize our tax credits and net operating loss carryforwards; |
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• | ongoing or future litigation matters and disputes and regulatory developments; |
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• | changes in or application of trade and tax laws; and |
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• | 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.
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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 2012 Annual Report on Form 10-K.
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Item 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934) that are designed to provide reasonable assurance that information required to be disclosed in the reports 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, and 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 24, 2013. Based on that evaluation, our chief executive officer and our chief financial officer concluded that as of February 24, 2013, 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. There were no changes to our internal control over financial reporting during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
Litigation. There have been no material developments with respect to the information previously reported in our 2012 Annual Report on Form 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 matters, 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, results of operations or cash flows.
There have been no material changes in our risk factors from those disclosed in our 2012 Annual Report on Form 10-K.
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Item 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
On December 26, 2012, the Company issued 1,476 restricted stock units (“RSUs”) to members of the Board of Directors in connection with the dividend equivalent provisions of our 2006 Equity Incentive Plan. Also, on February 6, 2013, our board approved the award of stock appreciation rights (“SARs”) representing an aggregate of 1,189,388 shares of our common stock to certain of our executives. All of these awards were made under our 2006 Equity Incentive Plan.
SARs are granted with an exercise price equal to the fair market value of the common stock, as determined under the 2006 Equity Incentive Plan, on the date of grant. The SARs granted on February 6, 2013, were granted in three groups and are identical except as described below:
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• | 594,695 of the SARs, referred to as the service-vested SARs, were granted with the following vesting schedule: 25% percent of the SAR grant vests on February 5, 2014, with the remaining 75% balance vesting at a rate of 75%/36 months (2.08% per month) commencing February 6, 2014, and ending January 6, 2017; |
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• | 396,463 of the SARs, referred to as the base-performance SARs, will vest in full at the end of three years if the Company achieves certain operating income and net revenue growth over fiscal years 2013, 2014 and 2015, with the performance to be determined by the board on or before March 1, 2016; |
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• | 198,230 of the SARs, referred to as the stretch-performance SARs, have the same vesting term and conditions as the base-performance SARs but also require as a condition to vesting that the Company's common stock have a fair market value of not less than Fifty Dollars ($50) per share at the time of the board's performance determination. |
Upon the exercise of any 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.
We are a privately-held corporation; there is no public trading of our common stock. As of April 4, 2013, we had 37,397,437 shares outstanding.
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Item 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
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Item 4. | MINE SAFETY DISCLOSURES |
None.
None.
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31.1 | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. |
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31.2 | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. |
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32 | | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith. |
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101.INS | | XBRL Instance Document. Furnished herewith. |
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101.SCH | | XBRL Taxonomy Extension Schema Document. Furnished herewith. |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. Furnished herewith. |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. Furnished herewith. |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase Document. Furnished herewith. |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. Furnished herewith. |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | | |
Date: | April 9, 2013 | | LEVI STRAUSS & Co. |
| | | (Registrant) |
| | | |
| | | |
| | By: | /s/ HEIDI L. MANES |
| | | Heidi L. Manes Vice President and Controller (Principal Accounting Officer) |
EXHIBIT INDEX
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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. |
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32 | | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith. |
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101.INS | | XBRL Instance Document. Furnished herewith. |
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101.SCH | | XBRL Taxonomy Extension Schema Document. Furnished herewith. |
| | |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. Furnished herewith. |
| | |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. Furnished herewith. |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase Document. Furnished herewith. |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. Furnished herewith. |