Levi Strauss & Co. Announces Third-Quarter 2012 Financial Results

Levi Strauss & Co.Announces Third-Quarter 2012 Financial Results

Net Revenue Decline Reflects Global Environment and Strategic Actions

Company Reports Significantly Improved Cash Flow and Lower Net Debt


SAN FRANCISCO--(BUSINESS WIRE)-- Levi Strauss & Co. (LS&Co.) today announced financial results for the third quarter ended August 26, 2012, and filed its third-quarter 2012 results on Form 10-Q with the Securities and Exchange Commission.

Three Months Ended

($ millions)

August 26,
2012

August 28,
2011

Net revenues

$1,101

$1,204

Net income

$28

$32

Third quarter 2012 net revenues declined 9 percent on a reported basis and 4 percent on a constant currency basis. These results reflect the ongoing global economic challenges and actions the company took to drive improvements in its future performance, including the decisions to license the Levi's® brand boys business in the Americas and phase out the Denizen® brand in Asia. Despite the notable revenue decline, net income dropped only $4 million, reflecting an improved operating margin.

"While the third quarter was impacted by the continuing difficult global macro-economic environment, we are very focused on what we can control: our product innovation and marketing programs, the key strategic choices we make and addressing our underlying cost structure," said Chip Bergh, president and chief executive officer of Levi Strauss & Co. "Our goal is to prioritize efforts behind our core business to drive sustainable, profitable growth and drive shareholder value. During the third quarter, we began to execute several initiatives against our goals, including exiting the Denizen® brand from Asia and licensing the U.S. Levi's® boys business."

Third Quarter 2012 Financial Highlights

  • Gross profit in the third quarter declined to $521 million compared with $569 million for the same period in 2011, reflecting unfavorable impacts of $45 million of currency effects and $25 million associated with the company's decision to phase out its Denizen® brand in Asia. Third quarter gross margin of 47.3 percent was flat to prior year. Excluding the currency and Denizen® impacts, gross margin improved, reflecting increased sales from the company's retail stores, a decline in sales to lower-margin channels and lower cotton costs.

  • Selling, general and administrative (SG&A) expenses for the third quarter declined to $434 million from $489 million in the same period of 2011, inclusive of favorable currency effects of $22 million. The decline in SG&A was primarily driven by a reduction in advertising activities in some markets and a difference in timing of campaigns; organization and distribution expenses also declined during the quarter. Partially offsetting these declines, the company recorded a $19 million impairment charge on its owned distribution center in Japan due to a decision to outsource to a third-party in that market.

  • Operating income for the third quarter was $87 million compared with $81 million for the same period of 2011, reflecting the lower SG&A.

Regional Overview

Regional net revenues for the quarter were as follows:

% Increase (Decrease)

Net Revenues ($ millions)

August 26,
2012

August 28,
2011

As Reported

Constant
Currency

Americas

$679

$718

(5)%

(4)%

Europe

$266

$275

(3)%

12%

Asia Pacific

$156

$211

(26)%

(21)%

  • Net revenues in the Americas included higher sales from company's Levi's® brand retail stores, but declined overall primarily reflecting the company's decision to license the Levi's® brand boys business.

  • In Europe, economic challenges continue in most markets. The year-over-year constant-currency trend reflects the order fulfillment issues tied to the July 2011 implementation of an enterprise resource planning system in the region. Net revenues from company-operated retail grew, reflecting price increases and an expanded network of stores.

  • Revenues declined in Asia Pacific on both a reported and constant currency basis, reflecting a decline in wholesale revenues, including franchisee revenues, due to the economic slowdown in the region, particularly in India. Additionally, the company's decision to phase out the Denizen® brand in Asia further reduced revenues.

Cash Flow and Balance Sheet

As of August 26, 2012, cash and cash equivalents were approximately $315 million, and $478 million was available under the company's revolving credit facility. Cash provided by operating activities during the nine-month period in 2012 was $416 million, compared with $17 million for the same period in 2011, reflecting the company's lower purchases and lower cost of inventory, as well as lower operating expenses. Net debt was $1.4 billion as compared to $1.8 billion at the end of 2011.

Investor Conference Call

The company's third-quarter 2012 investor conference call will be available through a live audio Webcast at www.levistrauss.com/Financials/EarningsWebcasts.aspx today, October 9, 2012, at 1 p.m. Pacific/4 p.m. Eastern. Participants may dial-into the call in listen-only mode as well at 800-891-4735 or 973-200-3066 internationally ID - 33420397. A replay is available on the website the same day and will be archived for one month. In addition, a telephone replay also is available through October 15, 2012, at 800-585-8367; I.D. No.33420397.

Forward Looking Statement

This news release contains, in addition to historical information, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.We have based these forward-looking statements on our current assumptions, expectations and projections about future events.We use words like "believe," "will," "so we can," "when," "anticipate," "intend," "estimate," "expect," "project" and similar expressions to identify forward-looking statements, although not all forward-looking statements contain these words.These forward-looking statements are necessarily estimates reflecting the best judgment of our senior management and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements.Investors should consider the information contained in our filings with the U.S.Securities and Exchange Commission (the "SEC"), including our Annual Report on Form 10-K for the fiscal year ended 2011, especially in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors" sections.Other unknown or unpredictable factors also could have material adverse effects on our future results, performance or achievements.In light of these risks, uncertainties, assumptions and factors, the forward-looking events discussed in this news release may not occur.You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date stated, or if no date is stated, as of the date of this news release.We are not under any obligation and do not intend to make publicly available any update or other revisions to any of the forward-looking statements contained in this news release to reflect circumstances existing after the date of this news release or to reflect the occurrence of future events even if experience or future events make it clear that any expected results expressed or implied by those forward-looking statements will not be realized.

About Levi Strauss & Co.

Levi Strauss & Co. is one of the world's largest brand-name apparel companies and a global leader in jeanswear. The company designs and markets jeans, casual wear and related accessories for men, women and children under the Levi's®, Dockers®, Signature by Levi Strauss & Co.™, and Denizen® brands. Its products are sold in more than 110 countries worldwide through a combination of chain retailers, department stores, online sites, and a global footprint of more than 2,300 franchised and company-operated stores. Levi Strauss & Co.'s reported fiscal 2011 net revenues were $4.8 billion. For more information, go to http://levistrauss.com.

LEVI STRAUSS & CO. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

August 26,

November 27,

2012

2011

ASSETS

(Dollars in thousands)

Current Assets:

Cash and cash equivalents

$

314,768

$

204,542

Trade receivables, net of allowance for doubtful accounts of $23,309 and $22,684

438,776

654,903

Inventories:

Raw materials

6,246

7,086

Work-in-process

9,487

9,833

Finished goods

543,911

594,483

Total inventories

559,644

611,402

Deferred tax assets, net

142,972

99,544

Other current assets

120,856

172,830

Total current assets

1,577,016

1,743,221

Property, plant and equipment, net of accumulated depreciation of $766,789 and $731,859

458,227

502,388

Goodwill

239,417

240,970

Other intangible assets, net

62,718

71,818

Non-current deferred tax assets, net

551,560

613,161

Other non-current assets

118,498

107,997

Total assets

$

3,007,436

$

3,279,555

LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS' DEFICIT

Current Liabilities:

Short-term debt

$

62,549

$

154,747

Current maturities of capital leases

532

1,714

Accounts payable

231,332

204,897

Other accrued liabilities

221,510

256,316

Accrued salaries, wages and employee benefits

169,142

235,530

Accrued interest payable

30,055

9,679

Accrued income taxes

14,655

9,378

Total current liabilities

729,775

872,261

Long-term debt

1,662,205

1,817,625

Long-term capital leases

1,694

1,999

Postretirement medical benefits

131,895

140,108

Pension liability

387,077

427,422

Long-term employee related benefits

72,862

75,520

Long-term income tax liabilities

38,132

42,991

Other long-term liabilities

57,886

51,458

Total liabilities

3,081,526

3,429,384

Commitments and contingencies

Temporary equity

7,997

7,002

Stockholders' Deficit:

Levi Strauss & Co. stockholders' deficit

Common stock—$.01 par value; 270,000,000 shares authorized; 37,372,113 shares and 37,354,021 shares issued and outstanding

374

374

Additional paid-in capital

33,098

29,266

Retained earnings

221,046

150,770

Accumulated other comprehensive loss

(342,011

)

(346,002

)

Total Levi Strauss & Co. stockholders' deficit

(87,493

)

(165,592

)

Noncontrolling interest

5,406

8,761

Total stockholders' deficit

(82,087

)

(156,831

)

Total liabilities, temporary equity and stockholders' deficit

$

3,007,436

$

3,279,555

The notes accompanying our consolidated financial statements in our Form 10-Q are an integral part of these consolidated financial statements.

LEVI STRAUSS & CO. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Three Months Ended

Nine Months Ended

August 26,

August 28,

August 26,

August 28,

2012

2011

2012

2011

(Dollars in thousands)

(Unaudited)

Net revenues

$

1,100,856

$

1,204,017

$

3,312,974

$

3,417,632

Cost of goods sold

580,108

634,573

1,762,746

1,749,525

Gross profit

520,748

569,444

1,550,228

1,668,107

Selling, general and administrative expenses

433,961

488,545

1,307,600

1,423,358

Operating income

86,787

80,899

242,628

244,749

Interest expense

(32,160

)

(30,208

)

(103,144

)

(98,589

)

Loss on early extinguishment of debt

-

-

(8,206

)

-

Other income (expense), net

(5,747

)

(5,779

)

6,122

(12,744

)

Income before income taxes

48,880

44,912

137,400

133,416

Income tax expense

23,802

13,612

49,782

42,437

Net income

25,078

31,300

87,618

90,979

Net loss attributable to noncontrolling interest

3,273

893

3,184

2,860

Net income attributable to Levi Strauss & Co.

$

28,351

$

32,193

$

90,802

$

93,839

The notes accompanying our consolidated financial statements in our Form 10-Q are an integral part of these consolidated financial statements.

LEVI STRAUSS & CO. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended

August 26,

August 28,

2012

2011

(Dollars in thousands)

(Unaudited)

Cash Flows from Operating Activities:

Net income

$

87,618

$

90,979

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

91,577

87,420

Asset impairments

19,413

2,957

Gain on disposal of property, plant and equipment

(303

)

-

Unrealized foreign exchange (gains) losses

(14,666

)

11,262

Realized (gain) loss on settlement of forward foreign exchange contracts not designated for hedge accounting

(3,559

)

8,252

Employee benefit plans' amortization from accumulated other comprehensive loss

1,175

(4,555

)

Employee benefit plans' curtailment (gain) loss, net

(1,730

)

1,629

Noncash gain on extinguishment of debt, net of write-off of unamortized debt issuance costs

(3,643

)

-

Amortization of deferred debt issuance costs

3,268

3,241

Stock-based compensation

4,815

7,741

Allowance for doubtful accounts

5,243

4,957

Change in operating assets and liabilities:

Trade receivables

187,520

22,260

Inventories

16,919

(115,169

)

Other current assets

28,056

(28,823

)

Other non-current assets

(3,554

)

1,124

Accounts payable and other accrued liabilities

83,469

1,309

Income tax liabilities

11,287