Business Context and Reporting Period
Company: Levi Strauss & Co.
Filing Type: Form 10-K (Annual Report)
Period Ended: November 28, 2004
Overview: A privately held global apparel company marketing jeans and casual clothing under the Levi's, Dockers, and Levi Strauss Signature brands. The company operates in three geographic regions: North America, Europe, and Asia Pacific. The fiscal year consisted of 52 weeks.
Key Financial Metrics
| Metric | 2004 (in millions) | 2003 (in millions) |
|---|---|---|
| Net Sales | $4,072.5 | $4,090.7 |
| Gross Profit | $1,784.0 | $1,574.2 |
| Gross Margin | 43.8% | 38.5% |
| Operating Income | $361.1 | $313.3 |
| Net Income | $30.4 | $(349.3) Loss |
| Operating Cash Flow | $199.9 | $(190.7) Used |
| Total Debt | $2,323.9 | $2,316.4 |
| Cash and Equivalents | $299.6 | $143.4 |
Material Changes vs. Prior Period
- Revenue: Net sales were essentially flat (-0.4%) but decreased 4.0% on a constant currency basis. Declines in North America (U.S. Levi's and Dockers) were offset by growth in Asia Pacific (+18.8%) and the Levi Strauss Signature brand (+74.9%).
- Profitability: Net income turned from a $349.3 million loss in 2003 to a $30.4 million profit in 2004. This improvement was driven by a 13.3% increase in gross profit, lower SG&A expenses, and a significant decrease in income tax expense (due to a large valuation allowance charge in 2003).
- Restructuring: Restructuring charges increased to $133.6 million in 2004 (from $89.0 million in 2003) due to plant closures in Spain and Australia, organizational changes, and the indefinite suspension of a worldwide ERP system.
- Headcount: Total employees decreased 28% to 8,850, reflecting continued streamlining and outsourcing of manufacturing.
Guidance, Outlook, and Risks
- 2005 Priorities: Management plans to strengthen the Levi's brand, revitalize Dockers (stabilizing U.S. and reorganizing Europe), grow the Levi Strauss Signature mass channel business, and reduce costs.
- Debt Refinancing: The company issued $450 million in 9.75% notes due 2015 in December 2004 and used proceeds to repurchase $372 million of 2006 notes. However, as of February 2005, the company had not yet met the refinancing condition for its senior secured term loan regarding the remaining 2006 notes, creating a potential maturity acceleration risk in August 2006.
- Legal Proceedings: The company is defending a putative securities class action regarding bond offerings and a wrongful termination suit alleging tax fraud. Management does not expect these to have a material impact, though outcomes are uncertain.
- Internal Controls: While no material weaknesses were identified in the 2004 audit, the auditor noted three significant deficiencies regarding workers' compensation accruals, retail allowance estimation, and U.K. financial reporting controls.
Investor Verification Checklist
- Debt Covenants: Verify the status of the 2006 note refinancing condition and the potential acceleration of the senior secured term loan maturity to August 2006.
- Tax Liabilities: Review the $28.6 million estimated potential exposure from unresolved IRS examinations for prior years (1990-1994) and the adequacy of current tax reserves.
- Restructuring Costs: Monitor the execution of ongoing restructuring initiatives, particularly the Dockers Europe reorganization, which is expected to incur additional charges in 2005.
- Brand Performance: Assess the success of the Levi Strauss Signature brand expansion in mass channels and the stabilization of the U.S. Dockers brand following product rationalization.
- Internal Controls: Track remediation efforts for the three significant deficiencies identified by the auditor to ensure compliance with Section 404 of the Sarbanes-Oxley Act in 2005.