Levi Strauss & Co. — Form 10-K Summary
Reporting period: Fiscal year ended November 25, 2012; filed February 7, 2013. The request metadata says “2011 Q4,” but this filing reports fiscal 2012 and comparative fiscal 2011 results. Fiscal quarters were 13 weeks.
Business context
Levi Strauss designs, markets and sells apparel globally under Levi’s, Dockers, Signature and Denizen brands. It operates through the Americas, Europe and Asia Pacific segments; sells in more than 110 countries; and derives about half of revenue outside the United States. The company is privately held, and its common stock is not publicly traded.
Key financial metrics
| Metric | FY2012 | FY2011 | Change |
|---|---|---|---|
| Net revenues | $4.610 billion | $4.762 billion | (3.2%) |
| Gross profit / margin | $2.199 billion / 47.7% | $2.292 billion / 48.1% | Margin down 0.4 percentage points |
| Operating income / margin | $334.0 million / 7.2% | $336.4 million / 7.1% | Income down 0.7% |
| Net income attributable to Levi Strauss | $143.9 million | $138.0 million | Up 4.3% |
| Operating cash flow | $531.0 million | $1.8 million | Increased substantially |
| Cash and cash equivalents | $406.1 million | $204.5 million | Up $201.6 million |
| Total debt, excluding capital leases | $1.729 billion | $1.972 billion | Down $243.2 million |
| Working capital | $881.5 million | $871.0 million | Up $10.5 million |
Operating cash flow improved mainly because of lower inventory purchases and costs, reduced inventory levels and lower vendor payments. Capital expenditures were $83.9 million, compared with $130.6 million in FY2011. Cash used in financing was $250.9 million, largely reflecting debt repayments.
At year-end, the company had $533.8 million of unused availability under its revolving credit facility and reported total liquidity of $939.9 million, including cash. Total liabilities were $3.264 billion, and stockholders’ deficit was $101.5 million.
Material changes versus prior period
- Revenue declined 3.2% as reported and 0.4% on a constant-currency basis. Americas revenue grew 1.2%; Europe fell 6.0% as reported but rose 1.9% in constant currency; Asia Pacific fell 13.1% as reported and 10.9% in constant currency.
- Gross margin declined from 48.1% to 47.7%. Management cited adverse currency effects and an approximately $32 million impact from phasing out Denizen in Asia Pacific; lower cotton costs, retail mix and reduced lower-margin wholesale sales partly offset these pressures.
- SG&A decreased 4.6%, primarily due to lower advertising and promotion expense and currency benefits. FY2012 included an $18.8 million impairment charge tied to the planned Japan distribution-center closure and outsourcing.
- Americas operating income rose 9.6%, while Europe declined 2.2% and Asia Pacific declined 38.1%. Currency reduced consolidated operating income by approximately $47 million.
- Debt refinancing in 2012 included issuing $385 million of 6.875% notes due 2022, redeeming $350 million of notes due 2016, and repurchasing part of the yen-denominated bonds. The transactions generated an $8.2 million loss on early extinguishment of debt.
Outlook, commentary, risks and unusual items
- Management described weak consumer spending, challenging retail conditions, continued wholesale-channel consolidation, competition from specialty retailers and e-commerce, and economic weakness in Southern Europe and parts of Asia. It emphasized profitable core businesses, brand expansion, dedicated retail, and cost and supply-chain efficiency.
- The company stated it expected adequate liquidity for the next 12 months. Its estimates for selected FY2013 cash uses totaled $362 million, including $120 million capital expenditures, $124 million interest, and $33 million pension contributions; these are estimates, not earnings guidance. No specific revenue or earnings guidance is provided.
- FY2012 income tax expense included a $27.0 million net tax benefit related to a California tax-refund agreement, partly offset by a $9.1 million deferred-tax-asset write-off and other tax effects. The agreement subsequently resulted in a $29.0 million cash refund. A separate $5.8 million fourth-quarter correction increased tax expense and reduced net income; the company said it was not material to previously issued financial statements.
- Principal risks include high leverage and debt-service demands, variable-rate borrowing exposure, foreign-exchange volatility, cotton and other input-cost fluctuations, reliance on contract manufacturers and key wholesale customers, fashion and inventory risk, and pension and postretirement obligations. Pension and postretirement liabilities are sensitive to discount rates and other actuarial assumptions.
- Year-end debt covenants were reported as satisfied. The company said pending ordinary-course legal proceedings were not expected to materially affect its financial condition, results or cash flows.
- Fiscal fourth-quarter 2012 revenue was $1.297 billion versus $1.344 billion in Q4 2011; operating income was $91.4 million versus $91.6 million, and net income attributable to Levi Strauss was $53.0 million versus $44.1 million.
Important facts for investors to verify
- Confirm the intended period: this is a FY2012 10-K, not a filing for fiscal 2011 Q4.
- Review the sustainability of the cash-flow increase, particularly working-capital movements, inventory reductions and customer collections.
- Assess debt maturities, refinancing terms and covenant restrictions, including the $324.4 million term-loan maturity in 2014 and substantial debt due thereafter.
- Evaluate the performance and recovery prospects of Asia Pacific and the effects of the Denizen phase-out and Japan distribution restructuring.
- Check the recurring earnings and cash-tax implications of the California tax settlement and other tax adjustments.
- Consider the company’s private ownership and transfer restrictions: common shares have no public trading market or established liquidity mechanism.