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LEVI STRAUSS & CO - Quarter Report: 2012 February (Form 10-Q)

Form 10-Q
Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

(Mark One)

  þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended February 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  ¨    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):

 

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 — 37,345,985 shares outstanding on April 5, 2012

 

 

 


Table of Contents

LEVI STRAUSS & CO. AND SUBSIDIARIES

INDEX TO FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED FEBRUARY 26, 2012

 

        Page
Number
 
PART I — FINANCIAL INFORMATION  

Item 1.

  Consolidated Financial Statements (unaudited):  
 

  Consolidated Balance Sheets as of February 26, 2012, and November 27, 2011

    3   
 

  Consolidated Statements of Income for the Three Months Ended February 26, 2012, and February 27, 2011

    4   
 

  Consolidated Statements of Cash Flows for the Three Months Ended February 26, 2012, and February 27, 2011

    5   
 

  Notes to Consolidated Financial Statements

    6   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations     15   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk     23   

Item 4.

  Controls and Procedures     23   
PART II — OTHER INFORMATION  

Item 1.

  Legal Proceedings     25   

Item 1A.

  Risk Factors     25   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds     26   

Item 3.

  Defaults Upon Senior Securities     26   

Item 4.

  Mine Safety Disclosures     26   

Item 5.

  Other Information     26   

Item 6.

  Exhibits     27   

SIGNATURE

    28   


Table of Contents

PART I — FINANCIAL INFORMATION

 

Item 1. CONSOLIDATED FINANCIAL STATEMENTS

LEVI STRAUSS & CO. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

     (Unaudited)
February 26,
2012
    November 27,
2011
 
     (Dollars in thousands)  
ASSETS     
    

Current Assets:

    

Cash and cash equivalents

   $ 238,320     $ 204,542  

Trade receivables, net of allowance for doubtful accounts of $25,324 and $22,684

     533,364       654,903  

Inventories:

    

Raw materials

     7,422       7,086  

Work-in-process

     7,725       9,833  

Finished goods

     625,530       594,483  
  

 

 

   

 

 

 

Total inventories

     640,677       611,402  

Deferred tax assets, net

     99,162       99,544  

Other current assets

     173,317       172,830  
  

 

 

   

 

 

 

Total current assets

     1,684,840       1,743,221  

Property, plant and equipment, net of accumulated depreciation of $764,227 and $731,859

     485,849       502,388  

Goodwill

     241,297       240,970  

Other intangible assets, net

     69,328       71,818  

Non-current deferred tax assets, net

     610,445       613,161  

Other non-current assets

     118,759       107,997  
  

 

 

   

 

 

 

Total assets

   $ 3,210,518     $ 3,279,555  
  

 

 

   

 

 

 
LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS’ DEFICIT     
    

Current Liabilities:

    

Short-term debt

   $ 114,075     $ 154,747  

Current maturities of capital leases

     1,355       1,714  

Accounts payable

     214,520       204,897  

Other accrued liabilities

     216,535       256,316  

Accrued salaries, wages and employee benefits

     171,766       235,530  

Accrued interest payable

     36,775       9,679  

Accrued income taxes

     18,073       9,378  
  

 

 

   

 

 

 

Total current liabilities

     773,099       872,261  

Long-term debt

     1,814,258       1,817,625  

Long-term capital leases

     1,906       1,999  

Postretirement medical benefits

     137,025       140,108  

Pension liability

     395,722       427,422  

Long-term employee related benefits

     81,223       75,520  

Long-term income tax liabilities

     43,126       42,991  

Other long-term liabilities

     54,444       51,458  
  

 

 

   

 

 

 

Total liabilities

     3,300,803       3,429,384  
  

 

 

   

 

 

 

Commitments and contingencies

    

Temporary equity

     6,205       7,002  
  

 

 

   

 

 

 

Stockholders’ Deficit:

    

Levi Strauss & Co. stockholders’ deficit
Common stock — $.01 par value; 270,000,000 shares authorized; 37,354,021 shares and 37,354,021 shares issued and outstanding

     374       374  

Additional paid-in capital

     31,262       29,266  

Retained earnings

     199,523       150,770  

Accumulated other comprehensive loss

     (336,156     (346,002
  

 

 

   

 

 

 

Total Levi Strauss & Co. stockholders’ deficit

     (104,997     (165,592

Noncontrolling interest

     8,507       8,761  
  

 

 

   

 

 

 

Total stockholders’ deficit

     (96,490     (156,831
  

 

 

   

 

 

 

Total liabilities, temporary equity and stockholders’ deficit

   $ 3,210,518     $ 3,279,555  
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Table of Contents

LEVI STRAUSS & CO. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

 

     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.

 

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Table of Contents

LEVI STRAUSS & CO. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     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.

 

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Table of Contents

LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE QUARTERLY PERIOD ENDED FEBRUARY 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.™ and Denizen® 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 27, 2011, included in the Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission (“SEC”) on February 7, 2012.

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 26, 2012, may not be indicative of the results to be expected for any other interim period or the year ending November 25, 2012.

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 2012 and 2011 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.

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 2011 Annual Report on Form 10-K.

 

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Table of Contents

LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

FOR THE QUARTERLY PERIOD ENDED FEBRUARY 26, 2012

 

NOTE 2:    FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table presents the Company’s financial instruments that are carried at fair value:

 

     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’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 accrued interest — and estimated fair value of the Company’s financial instruments that are carried at adjusted historical cost:

 

     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.

 

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Table of Contents

LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

FOR THE QUARTERLY PERIOD ENDED FEBRUARY 26, 2012

 

NOTE 3:    DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

As of February 26, 2012, the Company had forward foreign exchange contracts to buy $763.3 million and to sell $425.1 million against various foreign currencies. These contracts are at various exchange rates and expire at various dates through November 2012.

The table below provides data about the carrying values of derivative instruments and non-derivative instruments:

 

     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.

 

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Table of Contents

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 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    
 

 

 

   

 

 

     

The table below provides data about the amount of gains and losses related to derivatives not designated as hedging instruments included in “Other income (expense), net” in the Company’s consolidated statements of income:

 

    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
 

 

 

   

 

 

 

 

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

FOR THE QUARTERLY PERIOD ENDED FEBRUARY 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 months ended February 26, 2012, was 6.99% as compared to 6.84% in the same period of 2011.

 

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

FOR THE QUARTERLY PERIOD ENDED FEBRUARY 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  
     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 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 2011 Annual Report on Form 10-K related to legal proceedings.

 

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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, 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  
     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  
  

 

 

   

 

 

 

The following is a summary of the components of “Accumulated other comprehensive loss,” net of related income taxes:

 

     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
  

 

 

   

 

 

 

 

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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  
     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) Losses on forward foreign exchange contracts primarily resulted from unfavorable currency fluctuations relative to negotiated contract rates.

 

(2) Foreign currency transaction gains in 2012 were primarily due to the appreciation of various foreign currencies against the U.S. Dollar.

NOTE 9:    INCOME TAXES

The effective income tax rate was 32.3% for the three months ended February 26, 2012, compared to 32.5% for the same period ended February 27, 2011. Income tax expense was $23.5 million for the three months ended February 26, 2012, compared to the $18.9 million for the same period ended February 27, 2011. The increase in income tax expense was primarily attributed to higher income before income taxes.

As of February 26, 2012, the Company’s total gross amount of unrecognized tax benefits was $145.7 million, of which $90.2 million would impact the effective tax rate, if recognized. As of November 27, 2011, the Company’s total gross amount of unrecognized tax benefits was $143.4 million, of which $87.9 million would have impacted the effective tax rate, if recognized.

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. The Company donated $0.3 million to the Levi Strauss Foundation in each of the three-month periods ended February 26, 2012, and February 27, 2011.

NOTE 11:    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. On February 16, 2012, the Company announced organizational changes appointing Anne Rohosy to lead the Company’s commercial operations for the Americas and Europe, and formalizing Aaron Boey’s leadership of commercial operations for Asia Pacific. Both Ms. Rohosy and Mr. Boey report directly to the Company’s chief operating decision maker.

 

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

FOR THE QUARTERLY PERIOD ENDED FEBRUARY 26, 2012

 

Business segment information for the Company is as follows:

 

     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  
  

 

 

   

 

 

 

 

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Table of Contents
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 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. Our company-operated and online stores generated approximately 21% of our net revenues in the three-month period of 2012, as compared to the same period in 2011, when our company-operated and online stores generated 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 our Signature and Denizen® brands primarily through mass channel retailers in the Americas and through franchised stores in Asia Pacific.

Our Europe and Asia Pacific businesses, collectively, contributed approximately 44% of our net revenues and 54% of our regional operating income in the three-month period in 2012. Sales of Levi’s® brand products represented approximately 84% of our total net sales in the three-month period in 2012.

Trends Affecting Our Business

During the first quarter of 2012, we remained focused on our key long-term strategies: grow our global brands through product innovation and consumer focus, enhance relationships with wholesale customers and expand our dedicated retail channels to drive sales growth, capitalize on our global footprint to maximize opportunities in targeted growth markets, and continuously increase our productivity while refining our operating model and organizational structure.

Economic challenges continue to impact most markets around the world, including 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 continue through the first half of 2012.

Our First Quarter 2012 Results

Our first quarter 2012 results reflect net revenue growth and increased cash flows from operations.

 

   

Net revenues. Consolidated net revenues increased by 4% compared to the first quarter of 2011, and increased 5% on a constant-currency basis. Increased net revenues were primarily associated with our Levi’s® brand, due to the price increases we have implemented, and through the improved performance and expansion of our store network globally.

 

   

Operating income. Consolidated operating income increased by 11% and operating margin increased seventy basis-points compared to the first quarter of 2011. Gross margin declined due to the higher cost of cotton, which our price increases did not fully cover, but the decline was more than offset by lower advertising and promotion expenses and the increase in our net revenues.

 

   

Cash flows. Cash flows provided by operating activities were $104.8 million for the three-month period in 2012 as compared to $46 million for the same period in 2011, primarily reflecting higher trade receivable collections.

 

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Table of Contents

Financial Information Presentation

Fiscal year.    Our fiscal year ends on the last Sunday of November in each year, although the fiscal years of certain foreign subsidiaries end on November 30. Each quarter of fiscal years 2012 and 2011 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 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 facilitate period-to-period comparisons without regard to the impact of changing foreign currency exchange rates.

 

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Table of Contents

Results of Operations for Three Months Ended February 26, 2012, as Compared to Same Period in 2011

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 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  
                   % 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-month period ended February 26, 2012, as compared to the same prior-year period.

Americas.    On both reported and constant-currency bases, net revenues in our Americas region increased for the three-month period, with currency affecting net revenues unfavorably by approximately $4 million.

The region’s increased net revenues primarily reflected higher Levi’s® brand sales, mainly due to the price increases we have implemented, partially offset by related volume declines in certain wholesale customers. Higher revenues also reflected an increased proportion of premium-priced Levi’s® brand products and increased sales of our Denizen® and Signature brand products.

 

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Table of Contents

Europe.    Net revenues in Europe decreased on both reported and constant-currency bases for the three-month period, with currency affecting net revenues unfavorably by approximately $12 million.

Net revenues in the region decreased primarily due to a lower volume of sales to franchisee stores and to our traditional wholesale channels, reflecting the ongoing depressed retail environment, most notably in southern Europe. Net revenues of our company-operated retail network grew, reflecting improved performance of our stores.

Asia Pacific.    Net revenues in Asia Pacific increased on both reported and constant-currency bases for the three-month period, with currency having little effect on net revenues during the quarter.

The net revenues increase 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 the region.

Gross profit

The following table shows consolidated gross profit and gross margin for the periods indicated and the changes in these items from period to period:

 

     Three Months Ended  
     February 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 period, the gross profit decrease for the three-month period ended February 26, 2012, primarily resulted from a decline in our gross margin, partially offset by the increase in our net revenues. Currency affected gross profit unfavorably by approximately $14 million. The decrease in our gross margin was primarily due to the higher cost of cotton, which our price increases did not fully cover. The margin decline 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.

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 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
  

 

 

    

 

 

        

 

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Currency contributed approximately $4 million of the decrease in SG&A for the three-month period ended February 26, 2012, 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 ten more company-operated stores at the end of the first quarter of 2012 than we did at the end of the first quarter of 2011.

Advertising and promotion.    The decrease in advertising and promotion expenses primarily reflected a difference in timing of advertising campaigns as well as a reduction of our advertising activities in some markets.

Administration.    Administration expenses decreased primarily due to a decline in incentive compensation expense related to lower 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 includes distribution, information resources, and marketing organization costs.

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 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 unfavorably affected total operating income by approximately $10 million for the three-month period.

Regional operating income.

 

   

Americas.    The increase in operating income primarily reflected higher constant-currency net revenues in the region. Operating margin was flat as compared to the same prior-year period as a decline in the region’s gross margin was offset by lower SG&A.

 

   

Europe.    The decrease in operating income and operating margin was primarily due to the region’s lower constant-currency net revenues, a lower gross margin, and the unfavorable impact of currency.

 

   

Asia Pacific.    The increases in operating margin and operating income primarily reflected the region’s lower SG&A and higher constant-currency net revenues.

Corporate.    Corporate expenses are selling, general and administrative expenses that are not attributed to any of our regional operating segments. Lower corporate expenses reflected the decrease in incentive compensation expense and the decline in pension expense.

 

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Table of Contents

Interest expense

Interest expense increased to $38.6 million for the three-month period ended February 26, 2012, from $34.9 million for the same period in 2011. The increase in interest expense was due to higher interest expense on our deferred compensation plans, as well as higher average debt balances resulting from increased borrowings under our senior secured revolving credit facility.

The weighted-average interest rate on average borrowings outstanding for the three-month period ended February 26, 2012, was 6.99% as compared to 6.84% for the same period in 2011.

Other income (expense), net

Other income (expense), net, primarily consists of foreign exchange management activities and transactions. For the three-month period ended February 26, 2012, we recorded income of $1.2 million as compared to expense of $6.0 million for the same prior-year period. The expense in 2011 reflected losses on foreign exchange derivatives which generally economically hedge future cash flow obligations of our foreign operations.

Income tax expense

Our effective income tax rate was 32.3% for the three months ended February 26, 2012, compared to 32.5% for the same period ended 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 increase in our income tax expense was primarily attributed to higher income before taxes.

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 26, 2012, we had borrowings of $140.0 million under the 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 had cash and cash equivalents totaling approximately $238.3 million, resulting in a total liquidity position (unused availability and cash and cash equivalents) of $792.9 million.

Cash uses

Our principal cash requirements include working capital, capital expenditures, payments of principal and interest on our debt, payments of taxes, contributions to our pension plans and payments for postretirement health

 

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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 2012 from those disclosed in our 2011 Annual Report on Form 10-K.

Cash flows

The following table summarizes, for the periods indicated, selected items in our consolidated statements of cash flows:

 

     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 $104.8 million for the three-month period in 2012, as compared to $46.0 million for the same period in 2011. Cash provided by operating activities increased compared to the prior year due to an increase in customer collections, reflecting our higher beginning accounts receivable balance. This was partially offset by higher cash used for inventory as a result of higher cotton costs.

Cash flows from investing activities

Cash used for investing activities was $20.7 million for the three-month period in 2012, as compared to $46.1 million for the same period in 2011. The decrease in cash used for investing activities as compared to the prior year primarily reflects the higher information technology costs in 2011 associated with the installation of our global enterprise resource planning system.

Cash flows from financing activities

Cash used for financing activities was $53.5 million for the three-month period in 2012, as compared to $22.4 million for the same period in 2011. Net cash used in 2012 primarily related to net repayments of our senior revolving credit facility. Cash used in 2011 primarily related to our dividend payments to stockholders of $20.0 million.

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 $1.9 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 long-term debt for each of the next five years and thereafter from those disclosed in our 2011 Annual Report on Form 10-K. Short-term debt of $40.0 million borrowed under our senior secured revolving credit facility was expected to be repaid over the next twelve months; short-term borrowings of $74.1 million at 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. Currently, we are in compliance with all of these covenants.

 

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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 2011 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 2011 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 27, 2011, 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:

 

   

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;

 

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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;

 

   

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 2011 Annual Report on Form 10-K.

 

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 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.

 

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Changes in Internal Controls

We maintain a system of internal control over financial reporting that is designed to provide reasonable assurance that our books and records accurately reflect our transactions and that our established policies and procedures are followed. There were no changes to our internal control over financial reporting during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II — OTHER INFORMATION

 

Item 1. LEGAL PROCEEDINGS

Litigation.    There have been no material developments with respect to the information previously reported in our 2011 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 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, 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 2011 Annual Report on Form 10-K.

 

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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.

 

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Item 6. EXHIBITS

 

31.1    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
31.2    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
32    Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith.
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.

 

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: April 10, 2012   LEVI STRAUSS & Co.
  (Registrant)
  By:  

/s/    HEIDI L. MANES

   

Heidi L. Manes

Vice President and Controller

(Principal Accounting Officer)

 

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EXHIBIT INDEX

 

31.1    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
31.2    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
32    Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith.
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.

 

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