Levi Strauss & Co. — Form 10-Q Summary
Period: The filing covers the third quarter and first nine months of fiscal 2012, ended August 26, 2012, with comparisons to the periods ended August 28, 2011. The request metadata says “2011 Q3,” but the filing itself is for 2012 Q3. Amounts below are in U.S. dollars; financial figures are rounded to millions unless stated otherwise.
Business context and results
Levi Strauss designs and sells apparel under the Levi’s, Dockers, Signature and Denizen brands through wholesale, franchise, company-operated and online channels. It reports three regions: Americas, Europe and Asia Pacific. Company-operated and online stores generated about 21% of nine-month revenue, compared with 18% a year earlier.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $1,100.9 | $1,204.0 | $3,313.0 | $3,417.6 |
| Gross profit | $520.7 | $569.4 | $1,550.2 | $1,668.1 |
| Gross margin | 47.3% | 47.3% | 46.8% | 48.8% |
| Operating income | $86.8 | $80.9 | $242.6 | $244.7 |
| Operating margin | 7.9% | 6.7% | 7.3% | 7.2% |
| Net income attributable to Levi Strauss & Co. | $28.4 | $32.2 | $90.8 | $93.8 |
Financial position, cash flow and debt
- Nine-month operating cash flow was $415.8 million, versus $17.3 million in 2011. Management attributed the increase mainly to lower vendor payments, lower inventory-related cash use and higher customer receipts.
- Investing cash use was $50.2 million, compared with $114.6 million. Financing cash use was $248.2 million, versus $52.3 million of cash provided in 2011, principally reflecting revolving-facility repayments. Cash ended at $314.8 million, up from $204.5 million at fiscal year-end 2011.
- At August 26, total short- and long-term debt was $1,724.8 million; cash less debt was approximately negative $1.41 billion. The company reported $477.9 million of unused revolving-facility availability and total liquidity of $792.7 million, including cash. It said it was in compliance with debt covenants.
- Debt refinancing included issuing $385 million of 6.875% senior notes due 2022 and retiring all $350 million of 2016 senior notes, plus partially repurchasing yen-denominated 2016 Eurobonds. The nine-month results include an $8.2 million net loss on early debt extinguishment. Total stockholders’ deficit was $82.1 million; pension liability was $387.1 million.
Changes and management commentary
- Q3 revenue fell 8.6% reported and 3.7% on a constant-currency basis; nine-month revenue fell 3.1% reported but rose 0.2% on a constant-currency basis.
- Asia Pacific was the main regional weakness: Q3 revenue declined 26.3% reported and operating income was a $4.7 million loss, compared with $26.5 million income a year earlier. Management cited economic weakness, especially in India, and the phase-out of Denizen in the region.
- Q3 Americas revenue fell 5.4% reported; Europe fell 3.3% reported but increased 11.5% in constant currency. For the nine months, Americas revenue increased 1.2% reported, while Europe and Asia Pacific declined 6.7% and 10.7%, respectively.
- Q3 operating income increased despite lower revenue, with SG&A down 11.2%, including reduced advertising and promotion spending and favorable currency effects. Nine-month operating income was nearly flat; gross margin declined 2.0 percentage points, partly reflecting currency and Denizen-related support and inventory markdowns.
- Management cited ongoing economic uncertainty, particularly in Asia Pacific and southern Europe, and said structural and operating-model changes could adversely affect results in the remainder of fiscal 2012. It expected lower cotton input costs to continue into the rest of 2012 and 2013. The filing provides no specific earnings or revenue guidance; management said liquidity should be adequate for the next 12 months.
Risks, contingencies and unusual items
- A $18.8 million impairment charge followed the decision to outsource Japan distribution and close the company-owned distribution center. Denizen was also being phased out in Asia Pacific.
- Foreign-exchange volatility affected results; Q3 included $15.4 million of losses on foreign-exchange management activities. The company had forward contracts to buy $659.3 million and sell $359.9 million against various currencies, expiring through October 2013.
- The nine-month effective tax rate was 36.2%, up from 31.8%, primarily because earnings were concentrated more in higher-tax jurisdictions. Gross unrecognized tax benefits were $145.8 million.
- After quarter-end, the company reached a California tax-refund agreement expected to provide about $29 million cash in Q4 2012 or Q1 2013 and a roughly $25 million net tax benefit in Q4; unrecognized tax benefits are expected to decline by $82.6 million.
- Management did not expect ordinary-course litigation to materially affect financial condition, results or cash flow. No material changes to reported risk factors or market-risk exposures were disclosed.
Important facts for investors to verify
- Confirm that the intended period is fiscal Q3 2012, not 2011 Q3, as indicated by the filing’s reporting dates.
- Assess whether the unusually strong operating cash flow is sustainable, given the working-capital movements described by management.
- Track Asia Pacific sales and profitability, the effects of the Denizen phase-out and Japan distribution restructuring, and whether reduced marketing spending affects demand.
- Review debt maturities, interest costs, covenant terms and the company’s ability to maintain liquidity and reduce leverage.
- Confirm the timing and realized tax and cash benefits from the California refund agreement; these are expected subsequent-period items, not Q3 results.