Table of Contents
Prospectus | Filed Pursuant to Rule 424(b)(3) |
all outstanding unregistered 8.625% Senior Notes due 2013
(€102,000,000 aggregate principal amount outstanding)
(€102,000,000 aggregate principal amount)
which have been registered under the Securities Act of 1933
($350,000,000 aggregate principal amount outstanding)
($350,000,000 aggregate principal amount)
which have been registered under the Securities Act of 1933
• | Expires 11:59 p.m., New York City time on July 7, 2006, unless extended. | |
• | Not conditional upon any minimum principal amount of outstanding unregistered 8.875% Senior Notes due 2016 (the “old Dollar Notes”) and unregistered 8.625% Senior Notes due 2013 (the “old Euro Notes”, and together with the old Dollar Notes, the “old notes”) being tendered for exchange. | |
• | All outstanding old notes that are validly tendered and not validly withdrawn will be exchanged. | |
• | Tenders of outstanding old notes may be withdrawn any time prior to 11:59 p.m., New York City time on the date of the expiration of the exchange offer. | |
• | The exchange of old notes will generally not be a taxable exchange for U.S. federal income tax purposes. | |
• | We will not receive any proceeds from the exchange offer. |
• | The terms of the exchange notes to be issued in the exchange offer for old Dollar Notes (the “Dollar Exchange Notes”) are substantially similar to the old Dollar Notes and the terms of the exchange notes to be issued in the exchange offer for the old Euro Notes (the “Euro Exchange Notes”, and together with the Dollar Exchange Notes, the “exchange notes”) are substantially similar to the old Euro Notes, except, in each case, for transfer restrictions and registration rights relating to the old notes. |
• | We intend to list the Euro Exchange Notes on the Luxembourg Stock Exchange and have the Euro Exchange Notes traded on the Euro MTF Market. | |
• | There is currently no public market for the Dollar Exchange Notes and the existing market for the Euro Exchange Notes is limited and we do not intend to apply for listing or quotation of the exchange notes on any U.S. securities exchange or for quotation through an automated dealer quotation system. |
Page | ||||
ii | ||||
iii | ||||
1 | ||||
10 | ||||
22 | ||||
30 | ||||
31 | ||||
32 | ||||
34 | ||||
80 | ||||
94 | ||||
107 | ||||
111 | ||||
112 | ||||
117 | ||||
154 | ||||
156 | ||||
194 | ||||
196 | ||||
202 | ||||
207 | ||||
207 | ||||
207 | ||||
208 | ||||
F-1 |
Table of Contents
1155 Battery Street
San Francisco, California 94111
Attention: Treasurer
Telephone:(415) 501-3869 or(415) 501-6000
ii
Table of Contents
• | changing domestic and international retail environments; | |
• | changes in the level of consumer spending or preferences in apparel; | |
• | mergers and acquisitions involving our top customers and resulting door closures, inventory productivity initiatives and changes in merchandising strategies and buying practices; | |
• | expansion of private label activities by our customers; | |
• | our dependence on key distribution channels, customers and suppliers; | |
• | price, innovation and other competitive pressures in the apparel industry and on our key customers; | |
• | our ability to increase our appeal to younger consumers and women; | |
• | changing fashion trends; | |
• | our ability to revitalize our Dockers® brand and our European business; | |
• | our ability to expand controlled distribution of our products including successfully opening and operating our own retail stores; | |
• | ourgo-to-market executional performance; | |
• | the impact of ongoing and potential future restructuring and financing activities and our ability to remain in compliance with our financial covenants; | |
• | ongoing litigation matters and disputes and regulatory developments; | |
• | the effectiveness of our internal controls; | |
• | the investment performance of our defined benefit pension plans; | |
• | our ability to utilize our tax credits and net operating loss carryforwards; | |
• | changes in credit ratings; |
iii
Table of Contents
• | our ability to attract and retain qualified employees and changes in employee compensation and benefit plans; | |
• | changes in foreign currency exchange rates; | |
• | changes in trade laws including the elimination of quotas under the WTO Agreement on textiles and clothing; and | |
• | political or financial instability in countries where our products are manufactured. |
iv
Table of Contents
• | We derive nearly half of our net revenues and over half of our operating income from our businesses outside the United States. | |
• | Our products are sold through more than 55,000 retail locations in over 110 countries, including over 65 company-operated stores in 10 countries. |
1
Table of Contents
• | We have over 5,000 trademark registrations and pending applications in approximately 180 countries. | |
• | We have regional headquarters located in San Francisco, Brussels and Singapore, product designers located primarily in Belgium, Hong Kong, Japan, Korea and the United States, and a global sourcing headquarters in Singapore. | |
• | Approximately 65% of our employees are located in over 35 countries outside the United States. |
• | The term of the facility has been extended through September 23, 2011. | |
• | The maximum availability under the facility has been reduced from $650.0 million to $550.0 million. | |
• | The interest rate payable in respect of both base rate loans and LIBOR rate loans has been modified by amending the margin above the base rate or the LIBOR rate (as applicable) which is payable. The margin above the base rate that is payable in respect of base rate loans has changed from a fixed margin of 0.50% to a floating margin based on availability under the facility that will not exceed 0.50%. The margin above LIBOR that is payable in respect of LIBOR rate loans has been reduced from a fixed margin of 2.75% to a floating margin (which will not exceed 2.00%) based on availability under the facility. | |
• | We are required to maintain a reserve against availability or deposit cash or certain investment securities in secured accounts with the administrative agent in the amount of $75.0 million at all times. A failure to do so will result in a block on availability under the facility but will not result in a default. | |
• | For any period during which availability under the facility is at least $25.0 million, the debt, liens, investments, dispositions, restricted payments and debt prepayment covenants will be either fully or partially suspended. We are currently in a covenant suspension period. | |
• | Our debt, liens, investments, dispositions, restricted payments and debt prepayment covenants have been modified to grant us greater flexibility. | |
• | We are no longer subject at any time to any financial maintenance covenants. | |
• | The facility is no longer secured by the capital stock of any of our foreign subsidiaries. |
2
Table of Contents
Registration Rights Agreement | In connection with the issuance of the $350.0 million of old Dollar Notes and €100.0 million of old Euro Notes on March 17, 2006, we entered into registration rights agreements with the initial purchasers with respect to each series of old notes in which we agreed, among other things, to complete an exchange offer. The remaining €2.0 million of old Euro Notes we issued in March 2005 will also be entitled to the benefits of the registration rights agreement we entered into in March 2006 with the initial purchasers of the €100.0 million of old Euro Notes. | |
You may exchange your old notes for the applicable exchange notes, which have substantially similar terms to your old notes. The exchange offer satisfies your rights and our obligations under the registration rights agreements. After the exchange offer is over, you will not be entitled to any exchange or registration rights with respect to your old notes. | ||
The Exchange Offer | We are offering to exchange: | |
• up to €102.0 million of old Euro Notes for up to €102.0 million of Euro Exchange Notes; and | ||
• up to $350.0 million aggregate principal amount of old Dollar Notes for up to $350.0 million aggregate principal amount of Dollar Exchange Notes. | ||
You may exchange old Dollar Notes only in a minimum denomination of $10,000 and integral multiples of $1,000 principal amount thereafter and old Euro Notes only in integral multiples of €50,000 principal amount. | ||
Purpose and Effect | The purpose of the exchange offer is to give you the opportunity to exchange your old notes for exchange notes that have been registered under the Securities Act. We are subject to the informational requirements of the Exchange Act and file reports and other information with the SEC to which each holder of old notes, if any are outstanding after the exchange offer, and exchange notes will have access. | |
Resale | Except as indicated in this prospectus, we believe that the exchange notes may be offered for resale, resold and otherwise transferred without compliance with the registration and prospectus delivery requirements of the Securities Act provided that: | |
• you are acquiring the exchange notes in the ordinary course of your business; | ||
• you are not participating, do not intend to participate and have no arrangement or understanding with any person to participate in the distribution of the exchange notes; |
3
Table of Contents
• you are not a broker-dealer who purchased the old notes directly from us for resale pursuant to Rule 144A or any other available exemption under the Securities Act; and | ||
• you are not our “affiliate,” as defined in Rule 405 under the Securities Act. | ||
Our belief is based on existing interpretations of the Securities Act by the staff of the SEC set forth in several no-action letters to third parties. We do not intend to seek a no-action letter, and there is no assurance that the staff of the SEC would make a similar determination with respect to the exchange notes. If this interpretation is inapplicable, and you transfer any exchange notes without delivering a prospectus meeting the requirements of the Securities Act or without an exemption from such requirements, you may incur liability under the Securities Act. We do not assume, or indemnify holders against, such liability. | ||
Each broker-dealer that is issued exchange notes for its own account in exchange for old notes that were acquired by the broker-dealer as a result of market-making activities or other trading activities must acknowledge that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of the exchange notes. To the extent described in “Plan of Distribution”, a broker-dealer may use this prospectus for an offer to resell, resale or other retransfer of the exchange notes. |
Expiration of the Exchange Offer; Withdrawal of Tender | The exchange offer will expire at 11:59 p.m., New York City time, on July 7, 2006, or a later date and time to which we may extend it. We do not currently intend to extend the expiration of the exchange offer. You may withdraw your tender of old notes pursuant to the exchange offer at any time before expiration of the exchange offer. Any old notes not accepted for exchange for any reason will be returned without expense to you promptly after the expiration or termination of the exchange offer. |
Conditions to the Exchange Offer | We will not be required to accept old notes for exchange: | |
• if the exchange offer would be unlawful or would violate any interpretation of the SEC staff; or | ||
• if any legal action has been instituted or threatened that would impair our ability to proceed with the exchange offer. | ||
The exchange offer is not conditioned on any minimum aggregate principal amount of old notes being tendered. Please read “The Exchange Offer — Conditions” for more information about the conditions to the exchange offer. | ||
Procedures for Tendering Old Notes | We have forwarded to you, along with this prospectus, a letter of transmittal relating to this exchange offer. Because all of the old notes are held in book-entry accounts maintained by the exchange agent at DTC, Euroclear or Clearstream, Luxembourg, a holder need not submit a letter of transmittal. However, all holders who exchange their old notes for exchange notes in accordance with the procedures outlined below will be deemed to have acknowledged receipt of, and |
4
Table of Contents
agreed to be bound by, and to have made all of the representations and warranties contained in the letter of transmittal. |
Holders of old Dollar Notes may hold their notes either directly through DTC or indirectly through Euroclear or Clearstream, Luxembourg who in turn hold via DTC. Similarly, holders of old Euro Notes may hold their notes either directly through Euroclear or Clearstream, Luxembourg or indirectly through DTC who in turn holds via Euroclear and Clearstream, Luxembourg. |
To tender in the exchange offer, a holder must comply with the following procedures, as applicable: |
• Holders of old notes through DTC: If you wish to exchange your old notes and either you or your registered holder hold your old notes (either old Dollar Notes or old Euro Notes) in book-entry form directly through DTC, you must submit an instruction and follow the procedures for book-entry transfer as provided under “ — Book-Entry Transfer”. |
• Holders of old notes through Euroclear or Clearstream, Luxembourg: If you wish to exchange your old notes and either you or your registered holder hold your old notes (either old Dollar Notes or old Euro Notes) in book-entry form directly through Euroclear or Clearstream, Luxembourg, you should be aware that pursuant to their internal guidelines, Euroclear and Clearstream, Luxembourg will automatically exchange your old notes for exchange notes.If you do not wish to participate in the exchange offer, you must instruct Euroclear or Clearstream, Luxembourg, as the case may be, to “Take No Action”; otherwise your old notes will automatically be tendered in the exchange offer, and you will be deemed to have agreed to be bound by the terms of the letter of transmittal. |
Only a registered holder of record of old notes may tender old notes in the exchange offer. If you are a beneficial owner of old notes that are registered in the name of a broker, dealer, commercial bank, trust company or other nominee, you may request your respective broker, dealer, commercial bank, trust company or other nominee to effect the above transactions for you. Alternatively, if you are a beneficial owner and you wish to act on your own behalf in connection with the exchange offer, you must either make appropriate arrangements to register ownership of the old notes in your name or obtain a properly completed bond power from the registered holder. |
By signing or agreeing to be bound by the letter of transmittal, you will represent to us that, among other things: | ||
• any exchange notes that you receive will be acquired in the ordinary course of your business; | ||
• you have no arrangement or understanding with any person to participate in the distribution of the old notes or the exchange notes; | ||
• you are not our affiliate; | ||
• if you are not a broker-dealer, you are not engaged in and do not intend to engage in the distribution of the exchange notes; and |
5
Table of Contents
• if you are a broker-dealer that will receive exchange notes for your own account in exchange for old notes that you acquired as a result of market-making activities or other trading activities, you will deliver a prospectus in connection with any resale of such exchange notes. |
Effect on Holders of Old Notes | If you are a holder of old notes and you do not tender your old notes in the exchange offer, you will continue to hold your old notes and will be entitled to all the rights and subject to all the limitations applicable to the old notes in the indentures. | |
The trading market for old notes could be adversely affected if some but not all of the old notes are tendered and accepted in the exchange offer. | ||
Consequences of Failure to Exchange | All untendered old notes will remain subject to the restrictions on transfer provided for in the old notes and in the indentures. Generally, the old notes that are not exchanged for exchange notes pursuant to the exchange offer will remain restricted securities and may not be offered or sold unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. Other than in connection with the exchange offer, we do not currently anticipate that we will register the old notes under the Securities Act. | |
Important Federal Income Tax Considerations | The exchange of old notes for exchange notes in the exchange offer will generally not be a taxable exchange for U.S. federal income tax purposes. See the caption “Important U.S. Federal Income Tax Considerations” for a more detailed description of the tax consequences of the exchange. | |
Use of Proceeds | We will not receive any cash proceeds from the issuance of exchange notes pursuant to the exchange offer. | |
Exchange Agent | Citibank, N.A. is the exchange agent for the exchange offer. The address and telephone number of the exchange agent are set forth under the caption “The Exchange Offer — Exchange Agent”. |
6
Table of Contents
Issuer | Levi Strauss & Co., a Delaware corporation. | |
Securities Offered | €102.0 million aggregate principal amount of 8.625% Euro Exchange Notes due 2013 and registered under the Securities Act. | |
$350.0 million aggregate principal amount of 8.875% Dollar Exchange Notes due 2016 and registered under the Securities Act. | ||
Maturity | For the Euro Exchange Notes: April 1, 2013. | |
For the Dollar Exchange Notes: April 1, 2016. | ||
Interest Payment Dates | For the Euro Exchange Notes offered by this prospectus: Semi-annually on April 1 and October 1 of each year, commencing on October 1, 2006. | |
For the Dollar Exchange Notes: Semi-annually on April 1 and October 1 of each year, commencing on October 1, 2006. | ||
Ranking | The exchange notes will be senior unsecured unsubordinated obligations of Levi Strauss & Co. and will rank equally with all of Levi Strauss & Co.’s other existing and future senior unsecured and unsubordinated debt. As of February 26, 2006, after giving effect to (i) the issuance of $350.0 million of our Dollar Notes and €100.0 million of our Euro Notes in March 2006 and (ii) our prepayment of our senior secured term loan in March 2006, we would have had approximately $2.3 billion of debt, of which $7.3 million would have been secured, the majority of such secured debt being capital leases. That secured debt will have priority over the exchange notes with respect to the assets securing such debt. Holders of the exchange notes will be creditors of Levi Strauss & Co. and not of our subsidiaries. As a result, all the existing and future liabilities of our subsidiaries, including any claims of trade creditors, will be effectively senior to the exchange notes. As of February 26, 2006, the liabilities of our subsidiaries were approximately $485.0 million. For more information on the ranking of the exchange notes, see “Description of Euro Exchange Notes — Ranking” and “Description of Dollar Exchange Notes — Ranking”. | |
Optional Redemption | For the Euro Exchange Notes: We may redeem the Euro Notes (including Euro Notes previously issued in 2005), in whole or in part, at any time on or after April 1, 2009, at the redemption prices specified under “Description of Euro Exchange Notes — Optional Redemption”, plus accrued and unpaid interest to the date of redemption, after giving the required notice under the indenture governing the Euro Notes. In addition, at any time and from time to time prior to April 1, 2008, we may also redeem up to 35% of the aggregate principal amount of our Euro Notes (including Euro Notes previously issued in 2005) with the net cash proceeds from certain equity offerings at a redemption price of 108.625% of the principal amount plus accrued and unpaid interest, if any, to the date of redemption. |
7
Table of Contents
For the Dollar Exchange Notes: We may redeem the Dollar Notes, in whole or in part, prior to April 1, 2011, at a price equal to 100% of the principal amount plus accrued and unpaid interest and a “make-whole” premium. Thereafter, we may redeem all or any portion of the Dollar Notes, at any time or from time to time, at the redemption prices specified under “Description of Dollar Exchange Notes — Optional Redemption”, plus accrued and unpaid interest to the date of redemption, after giving the required notice under the indenture governing the Dollar Notes. In addition, at any time and from time to time prior to April 1, 2009, we may also redeem up to 35% of the aggregate principal amount of the Dollar Notes with the net cash proceeds from certain equity offerings at a redemption price of 108.875% of the principal amount plus accrued and unpaid interest, if any, to the date of redemption. | ||
Change in Control | If we experience a change in control, we will be required to make an offer to repurchase the exchange notes at a price equal to 101% of the principal amount plus accrued and unpaid interest, if any, to the date of repurchase. For more detailed information, see “Description of Euro Exchange Notes — Repurchase at the Option of Holders Upon a Change of Control” and “Description of Dollar Exchange Notes — Repurchase at the Option of Holders Upon a Change of Control”. | |
Restrictive Covenants | The Euro Notes indenture and the Dollar Notes indenture contain covenants that limit our ability and the ability of our restricted subsidiaries (as defined in “Description of Euro Exchange Notes” and “Description of Dollar Exchange Notes”, respectively) to, among other things: | |
• incur additional debt; | ||
• pay dividends or make other restricted payments; | ||
• consummate specified asset sales; | ||
• enter into transactions with affiliates; | ||
• incur liens; | ||
• impose restrictions on the ability of a subsidiary to pay dividends or make payments to us and our restricted subsidiaries; | ||
• merge or consolidate with any other person; or | ||
• sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of our assets or the assets of our restricted subsidiaries. | ||
If a series of exchange notes receives and maintains an investment grade rating by both Standard and Poor’s Ratings Service and Moody’s Investors Service and we and our restricted subsidiaries are and remain in compliance with the indenture governing such series of exchange notes, we and our restricted subsidiaries will not be required to comply with particular covenants contained in the applicable indenture. For more detailed information on covenants contained in the indentures, see “Description of Euro Exchange Notes — Material Covenants” and “Description of Dollar Exchange Notes — Material Covenants.” |
8
Table of Contents
Listing; Absence of Established Market forthe Exchange Notes | We will apply to list the Euro Exchange Notes on the Luxembourg Stock Exchange in accordance with the rules of the Luxembourg Stock Exchange and have the Euro Exchange Notes traded on the Euro MTF Market. The Euro Exchange Notes offered hereby are expected to be eligible for trading on the Luxembourg Stock Exchange on a fungible basis with the registered outstanding Euro Notes. | |
The Dollar Exchange Notes will constitute a new class of securities with currently no established trading market. For more detailed information, see “Plan of Distribution”. |
9
Table of Contents
• | make it more difficult for us to satisfy our financial obligations, including those relating to the exchange notes, our yen denominated eurobond, our 7.00% senior unsecured notes due 2006 (the “2006 Notes”), our senior secured revolving credit facility, our 12.25% senior unsecured notes due 2012 (the “2012 Notes”), our senior unsecured floating rate notes due 2012 (the “Floating Rate Notes”), our registered outstanding Euro Notes, and our 9.75% senior unsecured notes due 2015 (the “2015 Notes”); | |
• | require us to dedicate a substantial portion of any cash flow from operations to the payment of interest and principal due under our debt, including the exchange notes, which will reduce funds available for other business purposes, and result in us having lower net income than we would otherwise have had; | |
• | increase our vulnerability to general adverse economic and industry conditions; | |
• | limit our flexibility in planning for or reacting to changes in our business and industry; | |
• | place us at a competitive disadvantage compared to some of our competitors that have less debt; and | |
• | limit our ability to obtain additional financing required to fund working capital and capital expenditures and for other general corporate purposes. |
10
Table of Contents
11
Table of Contents
12
Table of Contents
• | require us to introduce lower-priced products or provide new or enhanced products at the same prices; | |
• | require us to reduce wholesale prices on existing products; | |
• | result in reduced gross margins across our product lines; | |
• | increase retailer demands for allowances, incentives and other forms of economic support; and | |
• | increase pressure on us to further reduce our production costs and our operating expenses. |
13
Table of Contents
• | These customers maintain substantial private label offerings and seek to differentiate the brands and products they offer from those of their competitors. | |
• | Other channels, including vertically integrated specialty stores, mass channel retailers and multi-brand specialty stores, account for a large portion of jeanswear and casual wear sales and have placed substantial competitive pressure generally on the chain and department store channels. | |
• | Consumer shopping patterns have moved toward both ends of the pricing spectrum (premium and value) and away from basic products at mid-tier price points. These products historically have represented a substantial portion of our sales in chain and department store channels. |
14
Table of Contents
15
Table of Contents
16
Table of Contents
• | currency fluctuations; | |
• | changes in tariffs and taxes; | |
• | restrictions on repatriating foreign profits back to the United States; | |
• | less protective foreign laws relating to intellectual property; and | |
• | political and economic instability. |
17
Table of Contents
18
Table of Contents
19
Table of Contents
20
Table of Contents
21
Table of Contents
• | file and cause to become effective a registration statement with respect to an offer to exchange the old notes (including €2.0 million of unregistered old Euro Notes issued in March 2005) for the exchange notes; or | |
• | in certain circumstances file and cause to become effective a shelf registration statement with respect to the resale of the old notes. |
22
Table of Contents
• | will be registered under the Securities Act; and | |
• | will not bear legends restricting their transfer. |
23
Table of Contents
• | the exchange notes to be received will not be tradeable by the holder, without restriction under the Securities Act and the Exchange Act and without material restrictions under the blue sky or securities laws of substantially all of the states of the United States; | |
• | the exchange offer, or the making of any exchange by a holder of old notes, would violate applicable law or any applicable interpretation of the staff of the SEC; or | |
• | any action or proceeding has been instituted or threatened in any court or by or before any governmental agency with respect to the exchange offer that would reasonably be expected to impair our ability to proceed with the exchange offer. |
• | the representations described under the caption “— Resale of Exchange Notes”; and | |
• | any other representations that may be reasonably necessary under applicable SEC rules, regulations or interpretations to make available to us an appropriate form for registration of the exchange notes under the Securities Act. |
24
Table of Contents
• | Holders of old notes through DTC: If you wish to exchange your old notes and either you or your registered holder hold your old notes (either old Dollar Notes or old Euro Notes) in book-entry form directly through DTC, you must submit an instruction and follow the procedures for book-entry transfer as provided under “ — Book-Entry Transfer”. |
• | Holders of old notes through Euroclear or Clearstream, Luxembourg: If you wish to exchange your old notes and either you or your registered holder hold your old notes (either old Dollar Notes or old Euro Notes) in book-entry form directly through Euroclear or Clearstream, Luxembourg, you should be aware that pursuant to their internal guidelines, Euroclear and Clearstream, Luxembourg will automatically exchange your old notes for exchange notes.If you do not wish to participate in the exchange offer, you must instruct Euroclear or Clearstream, Luxembourg, as the case may be, to “Take No Action”; otherwise your old notes will automatically be tendered in the exchange offer, and you will be deemed to have agreed to be bound by the terms of the letter of transmittal. |
25
Table of Contents
• | by a registered holder who has not completed the box entitled “Special Registration Instructions” or “Special Delivery Instructions” on the letter of transmittal; or | |
• | for the account of an eligible institution. |
26
Table of Contents
• | any exchange notes that the holder receives will be acquired in the ordinary course of its business; | |
• | the holder has no arrangement or understanding with any person or entity to participate in the distribution of the exchange notes; | |
• | if the holder is not a broker-dealer, that it is not engaged in and does not intend to engage in the distribution of the exchange notes; | |
• | if the holder is a broker-dealer that will receive exchange notes for its own account in exchange for old notes that were acquired as a result of market-making activities or other trading activities, that it will deliver a prospectus, as required by law, in connection with any resale of those exchange notes (see the caption “Plan of Distribution”); and | |
• | the holder is not an “affiliate” of ours, as defined in Rule 405 of the Securities Act. |
• | The exchange agent must receive a written notice of withdrawal, which may be by telegram, telex, facsimile transmission or letter, at one of the addresses set forth below under the caption “— Exchange Agent”; or | |
• | the exchange agent must receive a computer-generated notice of withdrawal transmitted by DTC, Euroclear or Clearstream, Luxembourg, on behalf of the holder in accordance with the standard operating procedures of DTC or Euroclear or Clearstream, Luxembourg. |
• | specify the name of the person who tendered the old notes to be withdrawn; | |
• | identify the old notes to be withdrawn, including the certificate number or numbers and principal amount of the old notes to be withdrawn; | |
• | be signed by the person who tendered the old notes in the same manner as the original signature on the letter of transmittal, including any required signature guarantees; and | |
• | specify the name in which the old notes are to be re-registered, if different from that of the withdrawing holder. |
27
Table of Contents
• | SEC registration fees; | |
• | fees and expenses of the exchange agent and trustee; | |
• | our accounting and legal fees; and | |
• | our printing and mailing costs. |
• | certificates representing old notes for principal amounts not tendered or accepted for exchange are to be delivered to, or are to be issued in the name of, any person other than the registered holder of old notes tendered; | |
• | exchange notes are to be delivered to, or issued in the name of, any person other than the registered holder of the old notes; |
28
Table of Contents
• | tendered old notes are registered in the name of any person other than the person signing the letter of transmittal; or | |
• | a transfer tax is imposed for any reason other than the exchange of old notes under the exchange offer. |
29
Table of Contents
30
Table of Contents
As of February 26, 2006 | ||||||||
Actual | As Adjusted | |||||||
(Dollars in thousands) | ||||||||
Cash and cash equivalents | $ | 281,433 | $ | 232,009 | (1) | |||
Total debt (including current portion): | ||||||||
Senior secured term loan due 2009 | $ | 488,750 | $ | — | (1) | |||
Senior secured revolving credit facility due 2011 | — | (2) | — | (3) | ||||
Notes payable, at various rates | 111 | 111 | ||||||
Short-term borrowings | 10,104 | 10,104 | ||||||
7.00% senior unsecured notes due 2006: | ||||||||
Principal | 77,857 | 77,857 | ||||||
Unamortized discount | (54 | )(4) | (54 | )(4) | ||||
12.25% senior unsecured notes due 2012 | 571,993 | 571,993 | ||||||
Floating rate senior unsecured notes due 2012 | 380,000 | 380,000 | ||||||
8.625% Euro denominated senior unsecured notes due 2013 | 178,575 | (5) | 304,265 | (6) | ||||
4.25% Yen denominated unsecured Eurobond due 2016 | 171,453 | 171,453 | ||||||
9.75% senior unsecured notes due 2015 | 450,000 | 450,000 | ||||||
8.875% senior unsecured notes due 2016 | — | 350,000 | ||||||
Total debt, excluding capital leases | $ | 2,328,789 | $ | 2,315,729 | ||||
Total stockholders’ deficit | (1,166,898 | ) | (1,187,730 | )(7) | ||||
Total capitalization | $ | 1,161,891 | $ | 1,127,999 | ||||
(1) | Represents the application of all of the $475.7 million gross proceeds from the issuance of $350.0 million aggregate principal amount of our Dollar Notes and €100.0 million aggregate principal amount of our Euro Notes in March 2006, plus cash on hand of $49.4 million, to (a) prepay all outstanding amounts under our senior secured term loan, including principal of $488.8 million as of February 26, 2006, (b) pay accrued and unpaid interest of $7.5 million through the prepayment date of March 17, 2006, (c) pay premiums of $16.9 million in connection with prepayment of the term loan, and (d) pay the fees and expenses for the March 2006 offering of $12.0 million. | |
(2) | Consists of a revolving credit facility with a floating rate of interest that matures on September 23, 2011. See “Description of Other Indebtedness — Senior Secured Revolving Credit Facility”. As of February 26, 2006, we would have had approximately $220.7 million of additional borrowing capacity under the facility, after giving effect to (i) our utilization of credit-related instruments such as documentary and standby letters of credit and (ii) our reserving $77.9 million of availability. See note (3) below. | |
(3) | In 1996, we issued $450.0 million in aggregate principal amount of 2006 Notes. In January 2005, pursuant to a tender offer, we repurchased $372.1 million in aggregate principal amount of these notes. Our revolving credit facility contained a covenant that required us, as a condition to prepaying our senior secured term loan, to fully repay, redeem, repurchase, or defease the remaining $77.9 million aggregate principal amount of our 2006 Notes, or alternatively, by reserving cash or availability under the revolving credit facility sufficient to repay the 2006 Notes so long as we still had at least $150.0 million of borrowing availability under the revolving credit facility. See “Description of Other Indebtedness — Senior Secured Revolving Credit Facility”. We complied with this covenant by reserving borrowing availability of $77.9 million in accordance with the requirements of the revolving credit facility. | |
(4) | Reflects the remaining unamortized discount on the remaining $77.9 million of 2006 Notes. | |
(5) | Reflects previous issuance of €150.0 million of Euro Notes (based on a USD/Euro exchange rate of 1.1905 to 1 as of February 26, 2006). | |
(6) | Reflects previous issuance of €150.0 million of Euro Notes in March 2005 (based on a USD/Euro exchange rate of 1.1905 to 1 as of February 26, 2006) and €100.0 million of Euro Notes in March 2006 at 103.5% (based on a USD/Euro exchange rate of 1.2144 to 1 as of March 17, 2006). We will amortize the original issuance premium of $4.3 million (based on a USD/Euro exchange rate of 1.2144 to 1 as of March 17, 2006) on the Euro Notes issued in March 2006 over the life of the notes. | |
(7) | Reflects the after-tax effect of (a) premiums, fees, and interest expense (which has not been accrued) paid in connection with the prepayment of the term loan of $11.8 million, and (b) the write-off of unamortized debt issuance costs associated with the term loan of $9.0 million. |
31
Table of Contents
Three Months Ended | Year Ended | |||||||||||||||||||||||||||
February 26, | February 27, | November 27, | November 28, | November 30, | November 24, | November 25, | ||||||||||||||||||||||
2006 | 2005 | 2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||
Statements of Operations Data: | ||||||||||||||||||||||||||||
Net sales | $ | 940,191 | $ | 1,005,872 | $ | 4,125,155 | $ | 4,072,455 | $ | 4,090,730 | $ | 4,145,866 | $ | 4,276,025 | ||||||||||||||
Licensing revenue(1) | 19,767 | 13,399 | 73,879 | 57,117 | 43,973 | 37,214 | 35,829 | |||||||||||||||||||||
Net revenues(1) | 959,958 | 1,019,271 | 4,199,034 | 4,129,572 | 4,134,703 | 4,183,080 | 4,311,854 | |||||||||||||||||||||
Cost of goods sold | 502,522 | 519,287 | 2,236,963 | 2,288,406 | 2,516,521 | 2,456,191 | 2,492,275 | |||||||||||||||||||||
Gross profit | 457,436 | 499,984 | 1,962,071 | 1,841,166 | 1,618,182 | 1,726,889 | 1,819,579 | |||||||||||||||||||||
Selling, general and administrative expenses | 285,099 | 314,648 | 1,364,407 | 1,350,020 | 1,218,509 | 1,358,889 | 1,383,656 | |||||||||||||||||||||
Gain on disposal of assets | (1,243 | ) | (1,362 | ) | (5,750 | ) | (3,576 | ) | (2,685 | ) | (1,600 | ) | (1,620 | ) | ||||||||||||||
Other operating income(1) | (244 | ) | (298 | ) | (2,479 | ) | — | — | — | — | ||||||||||||||||||
Restructuring charges, net of reversals(2) | 3,187 | 3,190 | 16,633 | 133,623 | 89,009 | 115,455 | (4,853 | ) | ||||||||||||||||||||
Operating income | 170,637 | 183,806 | 589,260 | 361,099 | 313,349 | 254,145 | 442,396 | |||||||||||||||||||||
Interest expense | 66,297 | 68,330 | 263,650 | 260,124 | 254,265 | 186,493 | 219,956 | |||||||||||||||||||||
Loss on early extinguishment of debt(3) | 7 | 23,006 | 66,066 | — | 39,353 | — | 10,816 | |||||||||||||||||||||
Other (income) expense, net | (1,148 | ) | (3,959 | ) | (23,057 | ) | 5,450 | 51,023 | 41,065 | (11,024 | ) | |||||||||||||||||
Income (loss) before income taxes(4) | 105,481 | 96,429 | 282,601 | 95,525 | (31,292 | ) | 26,587 | 222,648 | ||||||||||||||||||||
Income tax expense(4) | 51,667 | 49,110 | 126,654 | 65,135 | 318,025 | 19,248 | 128,986 | |||||||||||||||||||||
Net income (loss) | $ | 53,814 | $ | 47,319 | $ | 155,947 | $ | 30,390 | $ | (349,317 | ) | $ | 7,339 | $ | 93,662 | |||||||||||||
Statements of Cash Flow Data: | ||||||||||||||||||||||||||||
Cash flows from operating activities | $ | 54,384 | $ | (80,596 | ) | $ | (43,777 | ) | $ | 199,896 | $ | (190,650 | ) | $ | 200,729 | $ | 189,039 | |||||||||||
Cash flows from investing activities | (8,994 | ) | (4,724 | ) | (34,657 | ) | (12,930 | ) | (84,484 | ) | (59,353 | ) | (17,230 | ) | ||||||||||||||
Cash flows from financing activities | (5,494 | ) | 8,517 | 23,072 | (32,120 | ) | 349,096 | (143,558 | ) | (186,416 | ) |
32
Table of Contents
Three Months Ended | Year Ended | |||||||||||||||||||||||||||
February 26, | February 27, | November 27, | November 28, | November 30, | November 24, | November 25, | ||||||||||||||||||||||
2006 | 2005 | 2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||
Balance Sheet Data (at period end): | ||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 281,433 | $ | 223,139 | $ | 239,584 | $ | 299,596 | $ | 143,445 | $ | 64,446 | $ | 65,060 | ||||||||||||||
Working capital | 707,921 | 756,034 | 657,374 | 609,072 | 778,311 | 582,918 | 683,090 | |||||||||||||||||||||
Total assets | 2,739,852 | 2,809,755 | 2,813,648 | 2,886,002 | 2,923,267 | 3,000,888 | 2,951,266 | |||||||||||||||||||||
Total debt, excluding capital leases | 2,328,789 | 2,342,372 | 2,326,699 | 2,323,888 | 2,316,429 | 1,846,977 | 1,958,433 | |||||||||||||||||||||
Total capital leases | 5,260 | 7,037 | 5,587 | 7,441 | — | — | — | |||||||||||||||||||||
Stockholders’ deficit(5) | (1,166,898 | ) | (1,322,588 | ) | (1,222,085 | ) | (1,370,924 | ) | (1,393,172 | ) | (1,028,329 | ) | (951,278 | ) | ||||||||||||||
Other Financial Data: | ||||||||||||||||||||||||||||
Depreciation and amortization | $ | 16,330 | $ | 15,181 | $ | 59,423 | $ | 62,606 | $ | 64,176 | $ | 70,354 | $ | 80,619 | ||||||||||||||
Capital expenditures | 9,740 | 4,668 | 41,868 | 16,299 | 68,608 | 59,088 | 22,541 | |||||||||||||||||||||
Ratio of earnings to fixed charges(6) | 2.5 | x | 2.3 | x | 2.0 | x | 1.3 | x | — | 1.1 | x | 1.9 | x | |||||||||||||||
Deficit of earnings to fixed charges(7) | — | — | — | — | $ | 29,747 | — | — |
(1) | Commencing with the three months ended February 26, 2006, royalties earned from the use of our trademarks in connection with the manufacturing, advertising, distribution and sale of products by third-party licensees have been classified as “Licensing revenue”. In prior periods such amounts were included in “Other operating income.” These prior year amounts have been reclassified to conform to the current presentation. We made the change in presentation primarily because of the increased contribution of licensing arrangements to our consolidated operating income, and we have identified potential expansion of the licensing programs as one of our key business strategies. Licensing revenues are earned and recognized as products are sold by licensees based on royalty rates as set forth in the licensing agreements. Costs relating to our licensing business are included in “Selling, general and administrative expense.” Such costs are insignificant. For more information about this change in presentation, see Note 1 to our unaudited consolidated financial statements for the three months ended February 26, 2006 included herein. | |
(2) | We reduced overhead expenses and eliminated excess manufacturing capacity through extensive restructuring initiatives executed since 1997, including closing 45 of our owned and operated production and finishing facilities worldwide and reducing the number of our employees worldwide by approximately 26,000. Due to lower than anticipated costs, we reversed reserve balances relating to these activities of $0.7 million, $1.5 million, $6.3 million, $8.5 million, $15.4 million, $26.6 million, $27.2 million for the three month periods ended February 26, 2006 and February 27, 2005 and in fiscal years 2005, 2004, 2003, 2002 and 2001, respectively. For more information about our restructuring initiatives, see Note 3 to our audited consolidated financial statements and Note 2 to our unaudited consolidated financial statements. | |
(3) | For the three months ended February 27, 2005 and the fiscal years 2005, 2003 and 2001, we recorded a loss on early extinguishment of debt of $23.0 million, $66.1 million, $39.4 million and $10.8 million, respectively, as a result of our debt refinancing activities during those periods. For more information, see Note 1 to our audited consolidated financial statements and our unaudited consolidated financial statements. | |
(4) | In January 2004, we revised the forecast we used in valuing our net deferred tax assets for 2003. Based on this revised long-term forecast, we increased our valuation allowance against deferred tax assets by $282.4 million for 2003. For more information about our deferred taxes, see Note 4 to our audited consolidated financial statements. | |
(5) | Stockholders’ deficit primarily resulted from a 1996 recapitalization transaction in which our stockholders created new long-term governance arrangements for us, including the voting trust and stockholders’ agreement. Funding for cash payments in the recapitalization was provided in part by cash on hand and in part from approximately $3.3 billion in borrowings under bank credit facilities. | |
(6) | For the purpose of computing the ratio of earnings to fixed charges, earnings are defined as income from continuing operations before income taxes, plus fixed charges and minority interest in consolidated subsidiaries. Fixed charges are defined as the sum of interest on all indebtedness, amortization of debt issuance costs and that portion of rental expense which we believe to be representative of an interest factor. | |
(7) | The deficit of earnings to fixed charges represents the amount of earnings that would be required to increase the ratio of earnings to fixed charges to 1.0 in those cases where earnings are less than the total fixed charges. |
33
Table of Contents
AND RESULTS OF OPERATIONS
• | Apparel markets are mature in developed markets such as the United States, western Europe and Japan due in part to demographic shifts and the existence of appealing alternative discretionary purchases. | |
• | Brand proliferation is increasing around the world as barriers to entry fall and companies compete with brands targeted for specific consumer and retail segments. | |
• | There is a shift in the United States in purchasing and negotiating power from suppliers to retailers as retailers consolidate due to mergers and acquisitions, and build their own competitive private label offerings. | |
• | Consumer shopping patterns in many markets have moved toward both ends of the pricing spectrum (premium and value), while at the same time a shift has occurred in distribution toward channels in which our brands have not traditionally had a strong presence, such as vertically integrated specialty stores and mass channel retailers. | |
• | There is an increased availability of quality, global low-cost sourcing, which can have an adverse impact on pricing, barriers to entry and relative competitive advantage. |
• | strengthening our management team, rationalizing and revamping our core product lines and improving our speed to market and responsiveness to trends and consumer preferences; | |
• | improving the economics for our Levi’s® and Dockers® retailers, launching our Levi Strauss Signature® brand in mass channel retailers in North America, Europe and Asia, accelerating our growth in Asia, expanding our network of dedicated Levi’s® Stores and increasing our licensing activities; and |
34
Table of Contents
• | enhancing our global sourcing and product innovation capabilities and reducing our cost of goods and operating expenses by increasing our outsourced contract production and streamlining our organization. |
• | Our consolidated net revenues for the first three months of 2006 were $960.0 million, a decrease of 5.8% compared to the same period in 2005, and a decrease of approximately 4.0% on a constant currency basis. Net revenues include our net sales and revenues from our licensing arrangements. | |
• | Our consolidated net sales for the first three months of 2006 were $940.2 million, a decrease of 6.5% compared to the same period in 2005, and a decrease of approximately 4% on a constant currency basis. Our net sales decrease for the period was driven primarily by decreased net sales in our Europe region and our U.S. Levi Strauss Signature® brand and the translation impact of foreign currencies. These decreases were partially offset by increased net sales in our U.S. Dockers® brand and our Asia Pacific business. | |
• | Our consolidated licensing revenues for the first three months of 2006 were $19.8 million, an increase of 47.5% compared to the same period in 2005. The increase was primarily driven by an increase in the number |
35
Table of Contents
of licensing arrangements and an increase in guaranteed minimum royalties under existing licensing arrangements. |
• | Our gross profit decreased 8.5% for the first three months of 2006, as compared to the same period in 2005, and our gross margin decreased 1.4 percentage points for the quarter. Our gross profit decrease was primarily driven by lower net revenues and gross margin in our Europe region and the translation impact of weaker foreign currencies, partially offset by net revenue growth in our Asia Pacific region. | |
• | We had operating income of $170.6 million for the first three months of 2006, compared to operating income of $183.8 million for the same period of 2005. The decrease was primarily driven by lower gross profit, partially offset by lower selling, general and administrative expenses. Our operating margin for the first three months of 2006 was 17.8% compared to 18.0% for the same period in 2005. | |
• | We had net income of $53.8 million for the three months ended February 26, 2006, compared to net income of $47.3 million for the same period in 2005. The increase was primarily due to the $23.0 million loss on early extinguishment of debt incurred in the first three months of 2005 and lower interest expense for the first three months of 2006, partially offset by lower operating income and higher income tax expense. |
• | continuing softness in demand for our core Levi’s® products in Europe and changes we are implementing in our business there, including the realignment of our European retail network to better reflect our premium positioning of our Levi’s® brand; | |
• | the potential impact of retailer consolidations in the United States, including store closings, strategic shifts and changes in bargaining power; | |
• | Wal-Mart’s increased emphasis on private label products; and | |
• | the unpredictability of foreign currency exchange rates. |
• | Our consolidated net revenues for 2005 were $4.2 billion, an increase of 1.7% compared to 2004, and an increase of approximately 0.1% on a constant currency basis. Our net revenue increase for the year was primarily driven by increased net revenues in our Asia Pacific business, our U.S. Levi Strauss Signature® brand and our Mexico business. These increases were partially offset by decreased net revenues in our Europe region. | |
• | Our gross profit increased 6.6% for 2005, as compared to 2004 and our gross margin increased 2.1 percentage points for the year. Our gross profit improvement was primarily driven by net revenue growth in our Asia Pacific region, improved profitability of our Levi’s® brand in our international businesses, including Europe, Asia Pacific, Canada and Mexico, the favorable translation impact of foreign currencies, improved management of returns, allowances and product transition costs, particularly in our U.S. Dockers® business and lower sourcing costs. | |
• | We had operating income of $589.3 million for 2005, compared to operating income of $361.1 million in 2004. The increase was primarily driven by increased gross profit, lower restructuring charges, net of reversals. The increase was partially offset by increased selling, general and administrative expenses primarily resulting from our increased investment in advertising and promotions. | |
• | We had net income of $155.9 million in 2005, compared to net income of $30.4 million in 2004. The increase was due primarily to higher operating income and lower foreign exchange management contract losses, partially offset by the loss on early extinguishment of debt related to our refinancing activities, slightly higher interest expense and higher income tax expense. |
36
Table of Contents
Three Months Ended | ||||||||||||||||||||||||
February 26, | February 27, | |||||||||||||||||||||||
Three Months Ended | 2006 | 2005 | ||||||||||||||||||||||
February 26, | February 27, | $ Increase | % Increase | % of Net | % of Net | |||||||||||||||||||
2006 | 2005 | (Decrease) | (Decrease) | Revenues | Revenues | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Net sales | $ | 940,191 | $ | 1,005,872 | $ | (65,681 | ) | (6.5 | )% | 97.9 | % | 98.7 | % | |||||||||||
Licensing revenue | 19,767 | 13,399 | 6,368 | 47.5 | % | 2.1 | % | 1.3 | % | |||||||||||||||
Net revenues | 959,958 | 1,019,271 | (59,313 | ) | (5.8 | )% | 100.0 | % | 100.0 | % | ||||||||||||||
Cost of goods sold | 502,522 | 519,287 | (16,765 | ) | (3.2 | )% | 52.3 | % | 50.9 | % | ||||||||||||||
Gross profit | 457,436 | 499,984 | (42,548 | ) | (8.5 | )% | 47.7 | % | 49.1 | % | ||||||||||||||
Selling, general and administrative expenses | 285,099 | 314,648 | (29,549 | ) | (9.4 | )% | 29.7 | % | 30.9 | % | ||||||||||||||
Gain on disposal of assets | (1,243 | ) | (1,362 | ) | (119 | ) | (8.7 | )% | (0.1 | )% | (0.1 | )% | ||||||||||||
Other operating income | (244 | ) | (298 | ) | (54 | ) | (18.1 | )% | 0.0 | % | 0.0 | % | ||||||||||||
Restructuring charges, net of reversals | 3,187 | 3,190 | (3 | ) | (0.1 | )% | 0.3 | % | 0.3 | % | ||||||||||||||
Operating income | 170,637 | 183,806 | (13,169 | ) | (7.2 | )% | 17.8 | % | 18.0 | % | ||||||||||||||
Interest expense | 66,297 | 68,330 | (2,033 | ) | (3.0 | )% | 6.9 | % | 6.7 | % | ||||||||||||||
Loss on early extinguishment of debt | 7 | 23,006 | (22,999 | ) | (100.0 | )% | 0.0 | % | 2.3 | % | ||||||||||||||
Other income, net | (1,148 | ) | (3,959 | ) | (2,811 | ) | (71.0 | )% | (0.1 | )% | (0.4 | )% | ||||||||||||
Income before income taxes | 105,481 | 96,429 | 9,052 | 9.4 | % | 11.0 | % | 9.5 | % | |||||||||||||||
Income tax expense | 51,667 | 49,110 | 2,557 | 5.2 | % | 5.4 | % | 4.8 | % | |||||||||||||||
Net income | $ | 53,814 | $ | 47,319 | 6,495 | 13.7 | % | 5.6 | % | 4.6 | % | |||||||||||||
Three Months Ended | % Increase (Decrease) | |||||||||||||||||||
February 26, | February 27, | $ Increase | As | Constant | ||||||||||||||||
2006 | 2005 | (Decrease) | Reported | Currency | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
North America | $ | 546,408 | $ | 562,743 | $ | (16,335 | ) | (2.9 | )% | (4.0 | )% | |||||||||
Europe | 240,870 | 297,892 | (57,022 | ) | (19.1 | )% | (12.3 | )% | ||||||||||||
Asia Pacific | 172,680 | 158,636 | 14,044 | 8.9 | % | 11.8 | % | |||||||||||||
Total consolidated net revenues | $ | 959,958 | $ | 1,019,271 | $ | (59,313 | ) | (5.8 | )% | (4.0 | )% | |||||||||
37
Table of Contents
Three Months Ended | %Increase (Decrease) | |||||||||||||||||||
February 26, | February 27, | $ Increase | As | Constant | ||||||||||||||||
2006 | 2005 | (Decrease) | Reported | Currency | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
U.S. Levi’s® brand | $ | 277,116 | $ | 283,680 | $ | (6,564 | ) | (2.3 | )% | N/A | ||||||||||
U.S. Dockers® brand | 158,679 | 151,473 | 7,206 | 4.8 | % | N/A | ||||||||||||||
U.S. Levi Strauss Signature® brand | 70,207 | 87,948 | (17,741 | ) | (20.2 | )% | N/A | |||||||||||||
Canada and Mexico | 40,406 | 39,642 | 764 | 1.9 | % | (4.7 | )% | |||||||||||||
Total North America net revenues | $ | 546,408 | $ | 562,743 | $ | (16,335 | ) | (2.9 | )% | (4.0 | )% | |||||||||
Three Months Ended | ||||||||||||||||
February 26, | February 27, | $ Increase | % Increase | |||||||||||||
2006 | 2005 | (Decrease) | (Decrease) | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
U.S. Levi’s® brand — Net sales | $ | 272,901 | $ | 280,047 | $ | (7,146 | ) | (2.6 | )% | |||||||
U.S. Levi’s® brand — Licensing revenue | 4,215 | 3,633 | 582 | 16.0 | % | |||||||||||
Total U.S. Levi’s® brand net revenues | $ | 277,116 | $ | 283,680 | $ | (6,564 | ) | (2.3 | )% | |||||||
• | lower unit sales volume of our Levi’s® brand shorts and seasonal products; unlike 2005, we will ship a larger portion of our spring/summer products in the second quarter of 2006; | |
• | decreased net sales of our men’s SilverTab® products, primarily resulting from reduced unit sales volume at one of our top retailers; | |
• | lower unit sales volume in our women’s juniors segment, which we attribute to increased competition from private label and fashion brands; and | |
• | the impact of door closures during the 2006 period at two of our top retailers. |
38
Table of Contents
Three Months Ended | ||||||||||||||||
February 26, | February 27, | |||||||||||||||
2006 | 2005 | $ Increase | % Increase | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
U.S. Dockers® brand — Net sales | $ | 152,186 | $ | 147,221 | $ | 4,965 | 3.4 | % | ||||||||
U.S. Dockers® brand — Licensing revenue | 6,493 | 4,252 | 2,241 | 52.7 | % | |||||||||||
Total U.S. Dockers® brand net revenues | $ | 158,679 | $ | 151,473 | $ | 7,206 | 4.8 | % | ||||||||
• | an increase in net sales for our men’s tops, driven by additional retail store fixtures; | |
• | higher unit sales volume for our shorts business as a result of strong demand for the product and, in 2005, certain retailers delayed their purchases of our shorts to the second quarter of 2005 as a result of cool weather; and | |
• | a $2.2 million increase in licensing revenue resulting from guaranteed minimum royalty arrangements with our licensees. |
Three Months Ended | ||||||||||||||||
February 26, | February 27, | $ Increase | % Increase | |||||||||||||
2006 | 2005 | (Decrease) | (Decrease) | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
U.S. Levi Strauss Signature® brand — Net sales | $ | 68,830 | $ | 87,186 | $ | (18,356 | ) | (21.1 | )% | |||||||
U.S. Levi Strauss Signature® brand — Licensing revenue | 1,377 | 762 | 615 | 80.7 | % | |||||||||||
Total U.S. Levi Strauss Signature® brand net revenues | $ | 70,207 | $ | 87,948 | $ | (17,741 | ) | (20.2 | )% | |||||||
• | lower sales to Wal-Mart primarily as a result of Wal-Mart’s decision to allocate more retail space to private label programs in the women’s business; | |
• | continued softness in our men’s core business; and | |
• | lower unit sales volume for our men’s shorts. |
39
Table of Contents
Three Months Ended | % Increase (Decrease) | |||||||||||||||||||
February 26, | February 27, | $ Increase | As | Constant | ||||||||||||||||
2006 | 2005 | (Decrease) | Reported | Currency | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Europe — Net sales | $ | 238,242 | $ | 296,400 | $ | (58,158 | ) | (19.6 | )% | (12.3 | )% | |||||||||
Europe — Licensing revenue | 2,628 | 1,492 | 1,136 | 76.1 | % | N/A | ||||||||||||||
Total Europe net revenues | $ | 240,870 | $ | 297,892 | $ | (57,022 | ) | (19.1 | )% | N/A | ||||||||||
• | a decrease in unit sales volume as a result of continued softness in the demand for our core Levi’s® brand products and for our spring/summer seasonal products throughout Europe; | |
• | a decrease in unit sales volume as a result of our exit from certain retailers, which was driven by our strategy to realign our European retail network to better reflect our premium positioning of the Levi’s® brand; | |
• | changes in foreign currency exchange rates, which reduced net revenues by approximately $22 million. |
Three Months Ended | % Increase | |||||||||||||||||||
February 26, | February 27, | As | Constant | |||||||||||||||||
2006 | 2005 | $ Increase | Reported | Currency | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Asia Pacific — Net sales | $ | 168,161 | $ | 155,660 | $ | 12,501 | 8.0 | % | 11.8 | % | ||||||||||
Asia Pacific — Licensing revenue | 4,519 | 2,976 | 1,543 | 51.8 | % | N/A | ||||||||||||||
Total Asia Pacific net revenues | $ | 172,680 | $ | 158,636 | $ | 14,044 | 8.9 | % | N/A | |||||||||||
• | improved sales mix, with increased sales of super premium and premium Levi’s® brand products and Levi’s® brand winter products; | |
• | the introduction of new fits and finishes in both our Levi’s® men’s and women’s businesses; | |
• | the continued expansion of our retail presence through additional franchised store openings and upgrades of existing stores to more current retail formats; and |
40
Table of Contents
• | $1.5 million increase in licensing revenue, driven primarily by licensing arrangements in Latin America, which is part of our Asia Pacific region. |
• | decreased net sales on a constant currency basis in our Europe region; | |
• | the impact of the 1.4 percentage point decrease in gross margin; | |
• | decreased net sales in our U.S. Levi Strauss Signature® brand; | |
• | decreased net sales on a constant currency basis in our Canada business; and | |
• | the translation impact of foreign currencies. |
• | Our advertising and promotion expense decreased by 28.8% to $48.2 million in the three months ended February 26, 2006, as compared to the same period of 2005. Advertising and promotion expense as a percentage of net revenues was 5.0% in the three months ended February 26, 2006, compared to 6.6% in the same period in 2005. The decrease primarily reflects our decision to shift a portion of our advertising spending in Europe to the second quarter and decreased advertising spending for our U.S. Dockers® and U.S. Levi Strauss Signature® brands. | |
• | We recorded a charge in the three months ended February 27, 2005 related to the establishment of a contingent liability for litigation, which we subsequently reversed in the second quarter of 2005. |
41
Table of Contents
• | Our distribution costs of $49.9 million, or 5.2% of net revenues in the three months ended February 26, 2006, decreased $4.1 million as compared to $54.0 million, or 5.3% of net revenues in the three months ended February 27, 2005. The decrease in distribution costs was primarily driven by the decrease in net sales. Our distribution costs include costs related to receiving and inspection at distribution centers, warehousing, shipping, handling and certain other activities associated with our distribution network. | |
• | We recorded a net reduction to our workers’ compensation liability of approximately $3.5 million during the three months ended February 26, 2006, compared to a net reduction of $1.8 million during the same period in 2005. The net reductions were driven primarily by changes in our estimated future claims payments as a result of more favorable than projected claims development during the periods. |
42
Table of Contents
2006 | 2005 | |||||||||||||||||||||||
Three Months Ended | % of Net | % of Net | ||||||||||||||||||||||
February 26, | February 27, | $ Increase | % Increase | Region | Region | |||||||||||||||||||
2006 | 2005 | (Decrease) | (Decrease) | Revenues | Revenues | |||||||||||||||||||
U.S. Levi’s® brand | $ | 67,371 | $ | 66,902 | $ | 469 | 0.7 | % | 12.3 | % | 11.9 | % | ||||||||||||
U.S. Dockers® brand | 33,206 | 32,127 | 1,079 | 3.4 | % | 6.1 | % | 5.7 | % | |||||||||||||||
U.S. Levi Strauss Signature® brand | 4,149 | 6,193 | (2,044 | ) | (33.0 | )% | 0.8 | % | 1.1 | % | ||||||||||||||
Canada and Mexico (all brands) | 7,735 | 10,605 | (2,870 | ) | (27.1 | )% | 1.4 | % | 1.9 | % | ||||||||||||||
North America (all brands) | 112,461 | 115,827 | (3,366 | ) | (2.9 | )% | 20.6 | % | 20.6 | % | ||||||||||||||
Europe (all brands) | 64,316 | 87,413 | (23,097 | ) | (26.4 | )% | 26.7 | % | 29.3 | % | ||||||||||||||
Asia Pacific (all brands) | 39,046 | 40,651 | (1,605 | ) | (3.9 | )% | 22.6 | % | 25.6 | % | ||||||||||||||
Regional operating income | 215,823 | 243,891 | (28,068 | ) | (11.5 | )% | 22.5 | %* | 23.9 | %* | ||||||||||||||
Corporate: | ||||||||||||||||||||||||
Restructuring charges, net of reversals | 3,187 | 3,190 | (3 | ) | (0.1 | )% | 0.3 | %* | 0.3 | %* | ||||||||||||||
Other corporate expense | 41,999 | 56,895 | (14,896 | ) | (26.2 | )% | 4.4 | %* | 5.6 | %* | ||||||||||||||
Total corporate expense | 45,186 | 60,085 | (14,899 | ) | (24.8 | )% | 4.7 | %* | 5.9 | %* | ||||||||||||||
Total operating income | $ | 170,637 | $ | 183,806 | (13,169 | ) | (7.2 | )% | 17.8 | %* | 18.0 | %* | ||||||||||||
* | Percentage of consolidated net revenues |
• | North America. The decrease in operating income for the three months ended February 26, 2006 was primarily attributable to lower net sales in our U.S. Levi Strauss Signature® and Canada businesses, partially offset by higher net sales in our Mexico business and an increase in licensing revenues. | |
• | Europe. The decrease in operating income for the three months ended February 26, 2006 was primarily attributable to lower net sales and the unfavorable impact of foreign currency translation. Partly offsetting the decrease were lower selling, general and administrative expenses and an increase in licensing revenues. The decreased selling, general and administrative expenses were driven primarily by decreased advertising and promotion expense as a result of a difference in timing between 2006 and 2005 on a major advertising campaign. | |
• | Asia Pacific. The decrease in operating income for the three months ended February 26, 2006 was primarily attributable to our continued investment in growing our Asia Pacific business which resulted in higher selling, general and administrative expenses, and the impact of weaker foreign currencies. These factors were partially offset by an increase in both net sales and licensing revenues during the period. |
43
Table of Contents
Three Months Ended | ||||||||||||||||
February 26, | February 27, | $ Increase | % Increase | |||||||||||||
2006 | 2005 | (Decrease) | (Decrease) | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Annual incentive plans — corporate employees | $ | 3,720 | $ | 6,582 | $ | (2,862 | ) | (43.5 | )% | |||||||
Long-term incentive compensation expense | 8,070 | 5,619 | 2,451 | 43.6 | % | |||||||||||
Corporate staff costs and other expense | 30,209 | 44,694 | (14,485 | ) | (32.4 | )% | ||||||||||
Total other corporate expense | $ | 41,999 | $ | 56,895 | $ | (14,896 | ) | (26.2 | )% | |||||||
• | during the three months ended February 27, 2005, we recorded a charge related to the establishment of a contingent liability for litigation, which we subsequently reversed in the second quarter of 2005; | |
• | net reduction to our workers’ compensation liabilities; | |
• | lower annual incentive compensation plan costs for corporate employees; and | |
• | lower expense related to our post-retirement benefit plans. |
44
Table of Contents
Three Months Ended | ||||||||||||||||
February 26, | February 27, | $ Increase | % Increase | |||||||||||||
2006 | 2005 | (Decrease) | (Decrease) | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Foreign exchange management losses (income) | $ | 3,529 | $ | (2,980 | ) | $ | (6,509 | ) | 218 | % | ||||||
Foreign currency transaction gains | (2,071 | ) | (871 | ) | 1,200 | 138 | % | |||||||||
Interest income | (3,128 | ) | (2,177 | ) | 951 | 44 | % | |||||||||
Minority interest — Levi Strauss Japan K.K | 383 | 1,023 | 640 | (63 | )% | |||||||||||
Minority interest — Levi Strauss Istanbul Konfeksiyon(1) | — | 830 | 830 | (100 | )% | |||||||||||
Other | 139 | 216 | 77 | (36 | )% | |||||||||||
Total other income, net | $ | (1,148 | ) | $ | (3,959 | ) | (2,811 | ) | (71 | )% | ||||||
(1) | On March 31, 2005, we acquired full ownership of our joint venture in Turkey for $3.8 million in cash; subsequent to that date, all income from the entity was attributed to us. |
45
Table of Contents
Year Ended | Year Ended | 2005 | 2004 | |||||||||||||||||||||
November 27, | November 28, | $ Increase | % Increase | % of Net | % of Net | |||||||||||||||||||
2005 | 2004 | (Decrease) | (Decrease) | Revenues | Revenues | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Net sales | $ | 4,125,155 | $ | 4,072,455 | $ | 52,700 | 1.3 | % | 98.2 | % | 98.6 | % | ||||||||||||
Licensing revenue | 73,879 | 57,117 | 16,762 | 29.3 | % | 1.8 | % | 1.4 | % | |||||||||||||||
Net revenues | 4,199,034 | 4,129,572 | 69,462 | 1.7 | % | 100.0 | % | 100.0 | % | |||||||||||||||
Cost of goods sold | 2,236,963 | 2,288,406 | (51,443 | ) | (2.2 | )% | 53.3 | % | 55.4 | % | ||||||||||||||
Gross profit | 1,962,071 | 1,841,166 | 120,905 | 6.6 | % | 46.7 | % | 44.6 | % | |||||||||||||||
Selling, general and administrative expenses | 1,364,407 | 1,350,020 | 14,387 | 1.1 | % | 32.5 | % | 32.7 | % | |||||||||||||||
Gain on disposal of assets | (5,750 | ) | (3,576 | ) | 2,174 | 60.8 | % | 0.1 | % | 0.1 | % | |||||||||||||
Other operating income | (2,479 | ) | — | (2,479 | ) | NA | 0.1 | % | 0.0 | % | ||||||||||||||
Restructuring charges, net of reversals | 16,633 | 133,623 | (116,990 | ) | (87.6 | )% | 0.4 | % | 3.2 | % | ||||||||||||||
Operating income | 589,260 | 361,099 | 228,161 | 63.2 | % | 14.0 | % | 8.7 | % | |||||||||||||||
Interest expense | 263,650 | 260,124 | 3,526 | 1.4 | % | 6.3 | % | 6.3 | % | |||||||||||||||
Loss on early extinguishment of debt | 66,066 | — | 66,066 | NA | 1.6 | % | 0.0 | % | ||||||||||||||||
Other (income) expense, net | (23,057 | ) | 5,450 | (28,507 | ) | 523.1 | % | 0.5 | % | 0.1 | % | |||||||||||||
Income before income taxes | 282,601 | 95,525 | 187,076 | 195.8 | % | 6.7 | % | 2.3 | % | |||||||||||||||
Income tax expense | 126,654 | 65,135 | 61,519 | 94.4 | % | 3.0 | % | 1.6 | % | |||||||||||||||
Net income | $ | 155,947 | $ | 30,390 | $ | 125,557 | 413.2 | % | 3.7 | % | 0.7 | % | ||||||||||||
Year Ended | Year Ended | % Increase (Decrease) | ||||||||||||||||||
November 27, | November 28, | $ Increase | As | Constant | ||||||||||||||||
2005 | 2004 | (Decrease) | Reported | Currency | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
North America | $ | 2,505,388 | $ | 2,466,762 | $ | 38,626 | 1.6 | % | 0.8 | % | ||||||||||
Europe | 990,185 | 1,048,982 | (58,797 | ) | (5.6 | )% | (8.0 | )% | ||||||||||||
Asia Pacific | 703,461 | 613,828 | 89,633 | 14.6 | % | 11.1 | % | |||||||||||||
Total net revenues | $ | 4,199,034 | $ | 4,129,572 | $ | 69,462 | 1.7 | % | 0.1 | % | ||||||||||
46
Table of Contents
Year Ended | Year Ended | % Increase (Decrease) | ||||||||||||||||||
November 27, | November 28, | $ Increase | As | Constant | ||||||||||||||||
2005 | 2004 | (Decrease) | Reported | Currency | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
U.S. Levi’s® brand | $ | 1,264,400 | $ | 1,262,016 | $ | 2,384 | 0.2 | % | NA | |||||||||||
U.S. Dockers® brand | 676,094 | 679,093 | (2,999 | ) | (0.4 | )% | NA | |||||||||||||
U.S. Levi Strauss Signature® brand | 364,633 | 337,043 | 27,590 | 8.2 | % | NA | ||||||||||||||
Canada and Mexico | 200,261 | 188,610 | 11,651 | 6.2 | % | 0.8 | % | |||||||||||||
Total North America net revenues | $ | 2,505,388 | $ | 2,466,762 | $ | 38,626 | 1.6 | % | 0.8 | % | ||||||||||
• | By “categories,” we mean broad product groupings like men’s jeans, women’s tops and men’s jackets. | |
• | The “Net sales — Continuing categories” line shows our net sales for all non-licensed product categories and reflects sales of both continuing products within a category, such as 501® jeans for men, as well as those products that we may have replaced or discontinued as part of our product assortment and rationalization activities. | |
• | The “Net sales — Licensed categories” line shows our net sales attributable to product categories that we marketed and sold ourselves during the relevant period for which we have also entered into licensing agreements as of November 27, 2005. Royalties earned from licensing agreements appear in the “Licensing revenue” line item in our consolidated statements of operations. |
Year Ended | Year Ended | |||||||||||||||||||
November 27, | November 28, | $ Increase | % Increase | |||||||||||||||||
2005 | 2004 | (Decrease) | (Decrease) | |||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
U.S. Levi’s® brand — Net sales — Continuing categories | $ | 1,249,487 | $ | 1,213,831 | $ | 35,656 | 2.9 | % | ||||||||||||
U.S. Levi’s® brand — Net sales — Licensed categories | — | 40,715 | (40,715 | ) | NA | |||||||||||||||
U.S. Levi’s® brand — Licensing revenue | 14,913 | 7,470 | 7,443 | 99.6 | % | |||||||||||||||
Total U.S. Levi’s® brand net revenues | $ | 1,264,400 | $ | 1,262,016 | $ | 2,384 | 0.2 | % | ||||||||||||
47
Table of Contents
Year Ended | Year Ended | |||||||||||||||
November 27, | November 28, | $ Increase | % Increase | |||||||||||||
2005 | 2004 | (Decrease) | (Decrease) | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
U.S. Dockers® brand — Net sales — Continuing categories | $ | 646,625 | $ | 639,361 | $ | 7,264 | 1.1 | % | ||||||||
U.S. Dockers® brand — Net sales — Licensed categories | — | 2,671 | (2,671 | ) | NA | |||||||||||
U.S. Dockers® brand — Net sales — Discontinued Slates pants | — | 7,324 | (7,324 | ) | NA | |||||||||||
U.S. Dockers® brand — Licensing revenue | 29,469 | 29,737 | (268 | ) | (0.9 | )% | ||||||||||
Total U.S. Dockers® brand net revenues | $ | 676,094 | $ | 679,093 | $ | (2,999 | ) | (0.4 | )% | |||||||
48
Table of Contents
Year Ended | Year Ended | |||||||||||||||
November 27, | November 28, | $ Increase | % Increase | |||||||||||||
2005 | 2004 | (Decrease) | (Decrease) | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
U.S. Levi Strauss Signature® brand — Net sales | $ | 361,028 | $ | 336,020 | $ | 25,008 | 7.4% | |||||||||
U.S. Levi Strauss Signature® brand — Licensing revenue | 3,605 | 1,023 | 2,582 | 252.4% | ||||||||||||
Total U.S. Levi Strauss Signature® brand net revenues | $ | 364,633 | $ | 337,043 | $ | 27,590 | 8.2% | |||||||||
Year Ended | Year Ended | % Increase (Decrease) | ||||||||||||||||||
November 27, | November 28, | $ Increase | As | Constant | ||||||||||||||||
2005 | 2004 | (Decrease) | Reported | Currency | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Europe — Net sales | $ | 981,079 | $ | 1,042,125 | $ | (61,046 | ) | (5.9 | )% | (8.0 | )% | |||||||||
Europe — Licensing revenue | 9,106 | 6,857 | 2,249 | 32.8 | % | N/A | ||||||||||||||
Total Europe net revenues | $ | 990,185 | $ | 1,048,982 | $ | (58,797 | ) | (5.6 | )% | N/A | ||||||||||
49
Table of Contents
Year Ended | Year Ended | % Increase (Decrease) | ||||||||||||||||||
November 27, | November 28, | $ Increase | As | Constant | ||||||||||||||||
2005 | 2004 | (Decrease) | Reported | Currency | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Asia Pacific — Net sales | $ | 688,968 | $ | 603,875 | $ | 85,093 | 14.1% | 11.1 | % | |||||||||||
Asia Pacific — Licensing revenue | 14,493 | 9,953 | 4,540 | 45.6% | NA | |||||||||||||||
Total Asia Pacific net revenues | $ | 703,461 | $ | 613,828 | $ | 89,633 | 14.6% | NA | ||||||||||||
• | increased net revenues in our Asia Pacific region; | |
• | more premium positioning of our Levi’s® brand in our Europe region; | |
• | the translation impact of stronger foreign currencies. | |
• | increased net revenues in our Mexico business; | |
• | lower sourcing costs resulting from various cost reduction initiatives, including utilization of low cost sourcing locations and more effective negotiations with suppliers; | |
• | improved management of returns, allowances and product transition costs, particularly in our U.S. Dockers® business; and | |
• | higher average selling prices on our close-out products, resulting from our proactive approach to identifying and managing our slow moving and past season inventory. |
50
Table of Contents
• | Our advertising and promotion expense increased by 10.1% as compared to 2004, to $338.6 million for 2005. Advertising and promotion expense as a percentage of net revenues was 8.1% for 2005, compared to 7.4% for 2004. The increase reflected higher media spending in Europe and Asia Pacific and increased advertising spending for our U.S. Dockers® and U.S. Levi Strauss Signature® brands, consistent with our marketing strategy. Recent marketing efforts have included the continuation of our “A Style for Every Storytm” campaign promoting our U.S. Levi’s® brand, our new “Dress to Livetm” campaign promoting our U.S. Dockers® brand and our “From our Family to Yours” advertising campaign promoting our Levi Strauss Signature® brand. | |
• | The impact of foreign currency translation resulted in an approximately $15.5 million increase in selling, general and administrative expenses for 2005. | |
• | We recorded $71.7 million of expense related to our annual and other short-term incentive compensation plans for 2005, compared to $60.8 million for 2004. The increase is primarily due to the adoption of a new performance sharing plan for non-management employees in 2005. | |
• | We incurred approximately $8.0 million of third-party expenses for 2005 related to our activities regarding Section 404 of the Sarbanes-Oxley Act. These costs were not significant in 2004. |
• | Long-term incentive compensation expense was $31.1 million for 2005 as compared to $45.2 million for 2004. The decrease in our long-term incentive compensation expense relates primarily to the adoption in 2005 of new long-term incentive compensation plans for which the performance measurement periods are either two or three years, depending on the plan, as compared to eighteen months for our 2004 interim plan. | |
• | We recorded net reductions to our workers’ compensation reserves of approximately $14.0 million for 2005, compared to a net expense of $3.2 million for 2004. The net reductions were driven primarily by changes in our estimated future claims payments as a result of more favorable than projected claims development during 2005. | |
• | Our distribution costs were $209.4 million, or 5.0% of net revenues for 2005 as compared to $215.1 million or 5.2% of net revenues for 2004. Distribution costs include costs related to receiving and inspection at distribution centers, warehousing, shipping, handling and certain other activities associated with our distribution network. | |
• | We experienced lower salaries and wages and related expenses due to the impact of reduced headcount resulting from our reorganization initiatives in the United States and Europe and continued cost discipline. |
51
Table of Contents
2005 | 2004 | |||||||||||||||||||||||
Year Ended | Year Ended | % of Net | % of Net | |||||||||||||||||||||
November 27, | November 28, | $ Increase | % Increase | Region | Region | |||||||||||||||||||
2005 | 2004 | (Decrease) | (Decrease) | Revenues | Revenues | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
U.S. Levi’s® brand | $ | 284,525 | $ | 285,122 | $ | (597 | ) | (0.2 | )% | 11.4 | % | 11.6 | % | |||||||||||
U.S. Dockers® brand | 130,852 | 137,368 | (6,516 | ) | (4.7 | )% | 5.2 | % | 5.6 | % | ||||||||||||||
U.S. Levi Strauss Signature® brand | 19,376 | 33,151 | (13,775 | ) | (41.6 | )% | 0.8 | % | 1.3 | % | ||||||||||||||
Canada and Mexico (all brands) | 51,344 | 41,051 | 10,293 | 25.1 | % | 2.0 | % | 1.7 | % | |||||||||||||||
North America (all brands) | 486,097 | 496,692 | (10,595 | ) | (2.1 | )% | 19.4 | % | 20.1 | % | ||||||||||||||
Europe (all brands) | 213,104 | 154,522 | 58,582 | 37.9 | % | 21.5 | % | 14.7 | % | |||||||||||||||
Asia Pacific (all brands) | 144,934 | 120,121 | 24,813 | 20.7 | % | 20.6 | % | 19.6 | % | |||||||||||||||
Regional operating income | 844,135 | 771,335 | 72,800 | 9.4 | % | 20.1 | %* | 18.7 | %* | |||||||||||||||
Corporate: | ||||||||||||||||||||||||
Restructuring charges, net of reversals | 16,633 | 133,623 | (116,990 | ) | (87.6 | )% | 0.4 | %* | 3.2 | %* | ||||||||||||||
Other corporate expense | 238,242 | 276,613 | (38,371 | ) | (13.9 | )% | 5.7 | %* | 6.7 | %* | ||||||||||||||
Total corporate expense | 254,875 | 410,236 | (155,361 | ) | (37.9 | )% | 6.1 | %* | 9.9 | %* | ||||||||||||||
Total operating income | $ | 589,260 | $ | 361,099 | $ | 228,161 | 63.2 | % | 14.0 | %* | 8.7 | %* | ||||||||||||
* | Percentage of consolidated net revenues. |
• | North America. The decrease in operating income for 2005 was primarily attributable to increased selling, general and administrative expenses in our North America region and lower gross profit in our U.S. Levi Strauss Signature® business. Partially offsetting the decline were higher gross profit in our U.S. Dockers® and Mexico businesses and lower returns, allowances and product transition and sourcing costs in the United States. | |
• | Europe. The increase in operating income for 2005 was primarily attributable to sales of a greater proportion of higher-priced products resulting from our more premium positioning of the Levi’s® brand and lower product sourcing costs. Also contributing to the increase was the favorable impact of foreign currencies. Partly offsetting the increase were lower net revenues and increased selling, general and administrative expenses. The increased selling, general and administrative expenses were driven primarily by increased investment in advertising and promotion and the impact of foreign currency translation. |
52
Table of Contents
• | Asia Pacific. The increase in operating income for 2005 was driven by higher sales, a favorable product mix within the super-premium and premium segments and the favorable impact of our sourcing initiatives. Also contributing to the increase was the impact of stronger foreign currencies. These factors were partially offset by continued investment in growing our Asia Pacific business which resulted in higher selling, general and administrative expenses. |
Year Ended | Year Ended | |||||||||||||||
November 27, | November 28, | $ Increase | % Increase | |||||||||||||
2005 | 2004 | (Decrease) | (Decrease) | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Annual incentive plans — corporate employees | $ | 30,818 | $ | 21,303 | $ | 9,515 | 44.7 | % | ||||||||
Long-term incentive compensation expense | 31,106 | 45,171 | (14,065 | ) | (31.1 | )% | ||||||||||
Corporate staff costs and other expense | 176,318 | 210,139 | (33,821 | ) | (16.1 | )% | ||||||||||
Total other corporate expense | $ | 238,242 | $ | 276,613 | $ | (38,371 | ) | (13.9 | )% | |||||||
53
Table of Contents
Year Ended | ||||||||||||||||
November 27, | November 28, | $ Increase | % Increase | |||||||||||||
2005 | 2004 | (Decrease) | (Decrease) | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Foreign exchange management losses | $ | 1,062 | $ | 26,809 | $ | (25,747 | ) | (96 | )% | |||||||
Foreign currency transaction (gains) losses | (14,724 | ) | (15,028 | ) | (304 | ) | (2 | )% | ||||||||
Interest income | (7,965 | ) | (3,933 | ) | 4,032 | 103 | % | |||||||||
Minority interest — Levi Strauss Japan K.K | 1,847 | 709 | 1,138 | 161 | % | |||||||||||
Minority interest — Levi Strauss Istanbul Konfeksiyon(1) | 1,309 | 65 | 1,244 | 1,914 | % | |||||||||||
Other | (4,586 | ) | (3,172 | ) | 1,414 | 45 | % | |||||||||
Total | $ | (23,057 | ) | $ | 5,450 | 28,507 | 523 | % | ||||||||
(1) | On March 31, 2005, we acquired full ownership of our joint venture in Turkey for $3.8 million in cash; subsequent to that date, all income from the joint venture was attributed to us. |
54
Table of Contents
Year Ended | Year Ended | % | 2004 | 2003 | ||||||||||||||||||||
November 28, | November 30, | $ Increase | Increase | % of Net | % of Net | |||||||||||||||||||
2004 | 2003 | (Decrease) | (Decrease) | Revenues | Revenues | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Net sales | $ | 4,072,455 | $ | 4,090,730 | $ | (18,275 | ) | (0.4 | )% | 98.6 | % | 98.9 | % | |||||||||||
Licensing revenue | 57,117 | 43,973 | 13,144 | 29.9 | % | 1.4 | % | 1.1 | % | |||||||||||||||
Net revenues | 4,129,572 | 4,134,703 | (5,131 | ) | (0.1 | )% | 100.0 | % | 100.0 | % | ||||||||||||||
Cost of goods sold | 2,288,406 | 2,516,521 | (228,115 | ) | (9.1 | )% | 55.4 | % | 60.9 | % | ||||||||||||||
Gross profit | 1,841,166 | 1,618,182 | 222,984 | 13.8 | % | 44.6 | % | 39.1 | % | |||||||||||||||
Selling, general and administrative expenses | 1,350,020 | 1,218,509 | 131,511 | 10.8 | % | 32.7 | % | 29.5 | % | |||||||||||||||
Gain on disposal of assets | (3,576 | ) | (2,685 | ) | 891 | 33.2 | % | (0.1 | )% | (0.1 | )% | |||||||||||||
Restructuring charges, net of reversals | 133,623 | 89,009 | 44,614 | 50.1 | % | 3.2 | % | 2.2 | % | |||||||||||||||
Operating income | 361,099 | 313,349 | 47,750 | 15.2 | % | 8.7 | % | 7.6 | % | |||||||||||||||
Interest expense | 260,124 | 254,265 | 5,859 | 2.3 | % | 6.3 | % | 6.1 | % | |||||||||||||||
Loss on early extinguishment of debt | — | 39,353 | (39,353 | ) | NA | 0.0 | % | 1.0 | % | |||||||||||||||
Other expense, net | 5,450 | 51,023 | (45,573 | ) | (89.3 | )% | 0.1 | % | 1.2 | % | ||||||||||||||
Income (loss) before income taxes | 95,525 | (31,292 | ) | 126,817 | 405.3 | % | 2.3 | % | (0.8 | )% | ||||||||||||||
Income tax expense | 65,135 | 318,025 | (252,890 | ) | (79.5 | )% | 1.6 | % | 7.7 | % | ||||||||||||||
Net income (loss) | $ | 30,390 | $ | (349,317 | ) | 379,707 | 108.7 | % | 0.7 | % | (8.4 | )% | ||||||||||||
Year Ended | Year Ended | % Increase (Decrease) | ||||||||||||||||||
November 28, | November 30, | $ Increase | As | Constant | ||||||||||||||||
2004 | 2003 | (Decrease) | Reported | Currency | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
North America | $ | 2,466,762 | $ | 2,620,488 | $ | (153,726 | ) | (5.9 | )% | (6.5 | )% | |||||||||
Europe | 1,048,982 | 998,533 | 50,449 | 5.1 | % | (5.7 | )% | |||||||||||||
Asia Pacific | 613,828 | 515,682 | 98,146 | 19.0 | % | 12.0 | % | |||||||||||||
Total net revenues | $ | 4,129,572 | $ | 4,134,703 | $ | (5,131 | ) | (0.1 | )% | (4.0 | )% | |||||||||
55
Table of Contents
Year Ended | Year Ended | % Increase (Decrease) | ||||||||||||||||||
November 28, | November 30, | $ Increase | As | Constant | ||||||||||||||||
2004 | 2003 | (Decrease) | Reported | Currency | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
U.S. Levi’s® brand | $ | 1,262,016 | $ | 1,383,684 | $ | (121,668 | ) | (8.8 | )% | NA | ||||||||||
U.S. Dockers® brand | 679,093 | 846,903 | (167,810 | ) | (19.8 | )% | NA | |||||||||||||
U.S. Levi Strauss Signature® brand | 337,043 | 216,726 | 120,317 | 55.5 | % | NA | ||||||||||||||
Canada and Mexico | 188,610 | 173,175 | 15,435 | 8.9 | % | 15.6 | % | |||||||||||||
Total North America net revenues | $ | 2,466,762 | $ | 2,620,488 | $ | (153,726 | ) | (5.9 | )% | (6.5 | )% | |||||||||
Year Ended | Year Ended | |||||||||||||||
November 28, | November 30, | $ Increase | % Increase | |||||||||||||
2004 | 2003 | (Decrease) | (Decrease) | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
U.S. Levi’s® brand — Net sales — Continuing categories | $ | 1,213,831 | $ | 1,290,692 | $ | (76,861 | ) | (6.0 | )% | |||||||
U.S. Levi’s® brand — Net sales — Licensed categories | 40,715 | 90,685 | (49,970 | ) | (55.1 | )% | ||||||||||
U.S. Levi’s® brand — Licensing revenue | 7,470 | 2,307 | 5,163 | 223.8 | % | |||||||||||
Total U.S. Levi’s® brand net revenues | $ | 1,262,016 | $ | 1,383,684 | $ | (121,668 | ) | (8.8 | )% | |||||||
• | We took a number of product rationalization actions in line with our strategy to focus the brand on more category competitive jeanswear product assortments in our core channels of distribution and improve our profitability. Those actions included licensing certain non-core products, discontinuing underperforming products and reducing sales to non-core channels. Our exit from products through licensing accounted for approximately $50.0 million of the decline in net sales. Lower sales to warehouse/club and off-price channels accounted for approximately $57.4 million of the decline. | |
• | 2004 contained one fewer sales week, since 2003 had 53 fiscal weeks compared to 52 weeks in 2004. This contributed approximately $21.2 million to the sales decline. | |
• | The impact ofyear-over-year wholesale price reductions which commenced in June 2003 contributed to the decrease. | |
• | Internal operational issues adversely affected our ability to service increased demand for Levi’s® jeans in the third and fourth quarters of 2004. As a result, we were not able to fulfill all of the orders for our products and thereby missed sales. |
56
Table of Contents
Year Ended | Year Ended | |||||||||||||||
November 28, | November 30, | $ Increase | % Increase | |||||||||||||
2004 | 2003 | (Decrease) | (Decrease) | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
U.S. Dockers® brand — Net sales — Continuing categories | $ | 639,361 | $ | 776,461 | $ | (137,100 | ) | (17.7 | )% | |||||||
U.S. Dockers® brand — Net sales — Licensed categories | 2,671 | 12,548 | (9,877 | ) | (78.7 | )% | ||||||||||
U.S. Dockers® brand — Net sales — Discontinued Slates pants | 7,324 | 31,522 | (24,198 | ) | (76.8 | )% | ||||||||||
U.S. Dockers® brand — Licensing revenue | 29,737 | 26,372 | 3,365 | 12.8 | % | |||||||||||
Total U.S. Dockers® brand net revenues | $ | 679,093 | $ | 846,903 | $ | (167,810 | ) | (19.8 | )% | |||||||
• | We engaged in product rationalization efforts, including licensing our women’s tops and boys businesses, which accounted for approximately $9.9 million of the decline in net sales, and exiting our Slates dress pants business, which contributed approximately $24.2 million to the decline. | |
• | We made strategic decisions to maintain a smaller but more profitable shorts business and to reduce sales to the outlet and club channels. | |
• | Our core pants products for both men and women underperformed. We believe this resulted from a trend away from core khaki products to products featuring more style and fashion. | |
• | As a result of improved forecasting and inventory management, we reduced excess inventory, thereby reducing our sales to the off-price channels. | |
• | The one fewer sales week in 2004 contributed approximately $15.8 million to the decline in net sales. | |
• | The impact ofyear-over-year wholesale price reductions (commenced in June 2003), our summer 2004 exploration of the sale of the Dockers® brand, which required a substantial commitment of management time and may have affected retailer perceptions of the business, and lower advertising spending, also contributed to the decrease. |
Year Ended | Year Ended | |||||||||||||||
November 28, | November 30, | $ Increase | % Increase | |||||||||||||
2004 | 2003 | (Decrease) | (Decrease) | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
U.S. Levi Strauss Signature® brand — Net sales | $ | 336,020 | $ | 216,726 | $ | 119,294 | 55.0 | % | ||||||||
U.S. Levi Strauss Signature® brand — Licensing revenue | 1,023 | — | 1,023 | NA | ||||||||||||
Total U.S. Levi Strauss Signature® brand net revenues | $ | 337,043 | $ | 216,726 | $ | 120,317 | 55.5 | % | ||||||||
57
Table of Contents
• | Our products were offered in approximately 3,000 Wal-Mart stores for the full twelve months of 2004 as compared to seven months in 2003, the year in which we launched the brand. | |
• | We launched the brand into approximately 1,200 Target stores in the first quarter of 2004, into Meijer, ShopKo and Pamida stores in the second quarter, and into approximately 225 Kmart stores in the fourth quarter. | |
• | We introduced a new pricing strategy, which differentiates core products from fashion basics, to drive consumer awareness of thevalue-for-price of our products. | |
• | We continued to introduce new products with new fits and finishes. We saw growth primarily in the men’s, young men’s and misses segments. | |
• | We continued driving awareness of our Levi Strauss Signature® brand through our NASCAR marketing agreement, presence and publicity efforts, on-line selling through WalMart.com and Target.com and in-store promotions. | |
• | We expanded our marketing efforts, launching our first print advertising campaign targeted to women, the “What’s a Signature Worth” campaign, which appeared in female focused magazines and on websites such as Yahoo and MSN. | |
• | We recognized $1.0 million of licensing revenues resulting from new licensing arrangements for our Levis Strauss Signature® brand. |
Year Ended | Year Ended | % Increase (Decrease) | ||||||||||||||||||
November 28, | November 30, | $ Increase | As | Constant | ||||||||||||||||
2004 | 2003 | (Decrease) | Reported | Currency | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Europe — Net sales | $ | 1,042,125 | $ | 992,140 | $ | 49,985 | 5.0% | (5.7 | )% | |||||||||||
Europe — Licensing revenue | 6,857 | 6,393 | 464 | 7.3% | N/A | |||||||||||||||
Total Europe net revenues | $ | 1,048,982 | $ | 998,533 | $ | 50,449 | 5.1% | N/A | ||||||||||||
• | repositioning the business with a new brand architecture and premium price positioning; | |
• | upgrading our product offering; and | |
• | executing new advertising that highlights the fit benefits of 501® jeans. |
58
Table of Contents
Year Ended | Year Ended | % Increase (Decrease) | ||||||||||||||||||
November 28, | November 30, | $ Increase | As | Constant | ||||||||||||||||
2004 | 2003 | (Decrease) | Reported | Currency | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Asia Pacific — Net sales | $ | 603,875 | $ | 508,222 | $ | 95,653 | 18.8% | 12.0 | % | |||||||||||
Asia Pacific — Licensing revenue | 9,953 | 7,460 | 2,493 | 33.4% | NA | |||||||||||||||
Total Asia Pacific net revenues | $ | 613,828 | $ | 515,682 | $ | 98,146 | 19.0% | NA | ||||||||||||
• | relatively stable political environments and social conditions across the region; | |
• | innovative product concept launches, such as our Red Looptm products, Levi’s LadyStyletm products and Levi’s 501® jeans with new fits and finishes; | |
• | upgraded retail concepts; and | |
• | targeted promotional events and advertising, such as our Levi’s Red Tabtm jeans campaign. |
• | a favorable mix of more profitable core products in part due to our product rationalization efforts; | |
• | improved management of returns, allowances and product transition costs, particularly in the United States; | |
• | lower sourcing costs resulting from the closure of our remaining North America manufacturing plants and the shifting of production to lower cost sources; | |
• | lower employee benefit expense, resulting from the plant closures and the termination costs incurred in 2003 related to our reorganization initiatives; | |
• | lower inventory markdowns due to product rationalization efforts and improved inventory management; and | |
• | the translation impact of stronger foreign currencies of approximately $73.6 million. |
59
Table of Contents
• | Our advertising expense increased by approximately $20.7 million to $307.6 million, an increase of 7.2% compared to 2003. Advertising expense as a percentage of net revenues was 7.4% compared to 6.9% in 2003. The increase, which occurred in the fourth quarter of 2004, reflected higher media and promotion spending in our businesses worldwide. In 2003, our advertising and promotion expenditures were more heavily concentrated in the first nine months of the year. During 2004, approximately 42% of our total advertising and promotion expenditures occurred in the fourth quarter, compared to approximately 20% in the same period of 2003. | |
• | We recorded annual incentive plan expense of $60.8 million in 2004, compared to $9.1 million in 2003. | |
• | The impact of foreign currency translation resulted in an approximately $51.3 million increase in selling, general and administrative expenses in 2004. | |
• | We had higher selling, general and administrative expenses in our Asia Pacific region to provide infrastructure support to our growing business in that region. |
• | We had lower salaries and wages and related expenses due to the impact of reduced headcount resulting from our reorganization initiatives in the United States and Europe and general cost controls. | |
• | We recognized income of approximately $4.0 million related to our post-retirement medical benefit plans, as compared to expense of approximately $53.4 million for 2003. In addition, we recognized curtailment gains related to our post-retirement benefit plans of approximately $27.4 million as compared to $21.0 million in 2003. These changes result from the impact of our restructuring initiatives and decreased coverage of our post-retirement medical plans for certain employees and retired participants. | |
• | We reversed approximately $16.0 million of workers compensation reserves in 2004 as a result of changes in estimates due primarily to the decrease in actual claims experience during the year. |
60
Table of Contents
• | In 2004, we closed our two owned and operated manufacturing plants in Spain, which resulted in the displacement of approximately 450 employees. We recorded in 2004 charges of approximately $27.3 million related to severance and other restructuring costs for this initiative. | |
• | In 2004, we closed our owned and operated manufacturing plant in Adelaide, South Australia, which resulted in the displacement of approximately 90 employees. We recorded in 2004 charges of approximately $2.6 million related to severance and other restructuring costs for this initiative. | |
• | In 2004, we indefinitely suspended the installation of a worldwide enterprise resource planning system in order to reduce costs and prioritize work and resource use. We recorded a charge of approximately $42.7 million, net of reversals, during 2004 related to this initiative. The charge was comprised of approximately $2.7 million related to the displacement of approximately 40 employees, $6.7 million for other restructuring costs, primarily non-cancelable project contractual commitments, and $33.4 million for the write-off of capitalized project costs. | |
• | During 2004, we commenced reorganization actions in our Dockers® business in Europe. In November 2004, the president of the Dockers® business in Europe, along with the leaders of the marketing and merchandising functions, left employment with us. As of November 28, 2004, we recorded a charge of approximately $1.5 million primarily related to severance and related benefits resulting from the termination of these executives. For more information, see Note 3 to our audited consolidated financial statements. | |
• | In 2003, we made organizational changes in our U.S. business intended to reduce the time it takes from initial product concept to placement on the retailer’s shelf and to reduce costs. In 2004, we further reduced resources associated with our corporate support functions by eliminating staff, not filling certain open positions and outsourcing most of the transaction activities in our U.S. human resources function. We recorded in 2004 charges of approximately $34.9 million, net of reversals, related to severance, benefits and other restructuring costs for this initiative. | |
• | In 2003, we decided to close our remaining manufacturing and finishing operations in the United States and Canada. During 2004, we recorded charges of approximately $12.9 million, net of reversals, related to severance and other restructuring costs for this initiative. | |
• | In 2003, we made organizational changes in our European business intended to consolidate and streamline operations in our Brussels headquarters. In 2004, we commenced additional reorganization actions to further streamline our European operations. In 2004, we recorded charges of $18.0 million for additional severance and benefits and legal fees associated with severance negotiations, and reversals of $2.6 million associated with lower than anticipated severance and employee benefits. |
61
Table of Contents
2004 | 2003 | |||||||||||||||||||||||
Year Ended | Year Ended | % | % of Net | % of Net | ||||||||||||||||||||
November 28, | November 30, | $ Increase | Increase | Region | Region | |||||||||||||||||||
2004 | 2003 | (Decrease) | (Decrease) | Revenues | Revenues | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
U.S. Levi’s® brand | $ | 285,122 | $ | 184,847 | $ | 100,275 | 54.2 | % | 11.6 | % | 7.1 | % | ||||||||||||
U.S. Dockers® brand | 137,368 | 140,363 | (2,995 | ) | (2.1 | )% | 5.6 | % | 5.4 | % | ||||||||||||||
U.S. Levi Strauss Signature® brand | 33,151 | 21,990 | 11,161 | 50.8 | % | 1.3 | % | 0.8 | % | |||||||||||||||
Canada and Mexico (all brands) | 41,051 | 31,298 | 9,753 | 31.2 | % | 1.7 | % | 1.2 | % | |||||||||||||||
North America (all brands) | 496,692 | 378,498 | 118,194 | 31.2 | % | 20.1 | % | 14.4 | % | |||||||||||||||
Europe (all brands) | 154,522 | 94,650 | 59,872 | 63.3 | % | 14.7 | % | 9.5 | % | |||||||||||||||
Asia Pacific (all brands) | 120,121 | 86,930 | 33,191 | 38.2 | % | 19.6 | % | 16.9 | % | |||||||||||||||
Regional operating income | 771,335 | 560,078 | 211,257 | 37.7 | % | 18.7 | %* | 13.5 | %* | |||||||||||||||
Corporate: | ||||||||||||||||||||||||
Restructuring charges, net of reversals | 133,623 | 89,009 | 44,614 | 50.1 | % | 3.2 | %* | 2.2 | %* | |||||||||||||||
Other corporate expense | 276,613 | 157,720 | 118,893 | 75.4 | % | 6.7 | %* | 3.8 | %* | |||||||||||||||
Total corporate expense | 410,236 | 246,729 | 163,507 | 66.3 | % | 9.9 | %* | 6.0 | %* | |||||||||||||||
Total operating income | $ | 361,099 | $ | 313,349 | $ | 47,750 | 15.2 | % | 8.7 | %* | 7.6 | %* | ||||||||||||
* | Percentage of consolidated net revenues. |
• | North America. The increase in operating income was primarily attributable to our product rationalization efforts, lower returns, allowances and price discounts in the United States, lower sales of marked-down obsolete and excess products, and lower inventory markdowns. It was also due to lower sourcing costs resulting from the closure of our remaining North America manufacturing plants and the shifting of contractor production to lower cost countries, and lower selling, general and administrative expenses. Our businesses in Canada and Mexico also reported increases in operating income on higher net revenues. The operating income increase in North America was partially offset by lower sales volume in our U.S. Dockers® brand. | |
• | Europe. The increase in operating income was primarily attributable to a greater proportion of higher priced products and lower sourcing costs resulting from our strategic decision to reposition the Levi’s® brand and through various cost reduction initiatives, including utilization of lower cost sourcing locations and more effective negotiations with suppliers, and lower selling, general and administrative expenses. Also contributing to the increase was the impact of stronger foreign currencies. Partially offsetting these factors were lower sales volumes in our Levi’s® and Dockers® brands. | |
• | Asia Pacific. The increase in operating income was driven by higher sales volume, favorable product mix within the super premium and premium segments, and stronger margins resulting from sourcing initiatives. Also contributing to the increase was the impact of stronger foreign currencies. The region incurred |
62
Table of Contents
increased selling, general and administrative expenses to drive sales growth, but these expenses decreased as a percentage of revenue. |
Year Ended | Year Ended | |||||||||||||||
November 28, | November 30, | $ Increase | % Increase | |||||||||||||
2004 | 2003 | (Decrease) | (Decrease) | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Annual incentive compensation plan — corporate employees | $ | 21,303 | $ | 751 | $ | 20,552 | NM | |||||||||
Long-term incentive compensation expense (reversal) | 45,171 | (138,842 | ) | 184,013 | 132.5 | % | ||||||||||
Post-retirement medical benefit plan curtailment gain | (27,426 | ) | (21,021 | ) | 6,405 | 30.5 | % | |||||||||
Corporate staff costs and other expense | 237,565 | 316,832 | (79,267 | ) | (25.0 | )% | ||||||||||
Total other corporate expense | $ | 276,613 | $ | 157,720 | $ | 118,893 | 75.4 | % | ||||||||
63
Table of Contents
Year Ended | Year Ended | |||||||||||||||
November 28, | November 30, | $ Increase | % Increase | |||||||||||||
2004 | 2003 | (Decrease) | (Decrease) | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Foreign exchange management contracts losses | $ | 26,809 | $ | 84,803 | $ | (57,994 | ) | (68.4 | )% | |||||||
Foreign currency transaction gains | (15,028 | ) | (20,960 | ) | (5,932 | ) | (28.3 | )% | ||||||||
Interest income | (3,933 | ) | (4,470 | ) | (537 | ) | (12.0 | )% | ||||||||
Minority interest — Levi Strauss Japan K.K | 709 | 2,270 | (1,561 | ) | (68.8 | )% | ||||||||||
Minority interest — Levi Strauss Istanbul Konfeksiyon | 65 | (725 | ) | 790 | 109.0 | % | ||||||||||
Other | (3,172 | ) | (9,895 | ) | (6,723 | ) | (67.9 | )% | ||||||||
Total | $ | 5,450 | $ | 51,023 | $ | (45,573 | ) | (89.3 | )% | |||||||
64
Table of Contents
Valuation | Valuation | |||||||||||||||
Allowance at | Allowance at | |||||||||||||||
November 28, | Current Year | Current Year | November 27, | |||||||||||||
2004 | Additions | (Reductions) | 2005 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Foreign tax credits on unremitted foreign earnings | $ | 147,035 | $ | — | $ | (1,529 | ) | $ | 145,506 | |||||||
Foreign net operating loss carryforwards and other foreign deferred tax assets | 152,786 | — | (63,157 | ) | 89,629 | |||||||||||
U.S. state net operating loss carryforward | 36,343 | 2,254 | — | 38,597 | ||||||||||||
Foreign tax credit carryforwards | 50,519 | — | (20,978 | ) | 29,541 | |||||||||||
Total | $ | 386,683 | $ | 2,254 | $ | (85,664 | ) | $ | 303,273 | |||||||
• | In June 2005, we reached an agreement regarding the examination of our consolidated U.S. federal income tax returns for the years 1986 — 1989. As a result of this agreement, the examination of our income tax returns for those periods is closed and we reduced our contingent tax liabilities by approximately $4.2 million during the three months ended May 29, 2005. | |
• | In August 2005, we completed settlement discussions relating to our consolidated U.S. federal income tax returns for the years 1990 — 1999. As a result of this settlement agreement, the examination of our income tax returns for those periods is closed and we reduced income tax expense by approximately $4.1 million |
65
Table of Contents
during the three months ended August 28, 2005. This $4.1 million reduction in income tax expense reflects a net decrease in our federal income tax expense of approximately $6.5 million and an increase to our state income tax expense, net of federal tax benefits, of approximately $2.4 million. The net decrease to our federal income tax expense of $6.5 million relates primarily to a decrease in our liability associated with our unremitted foreign earnings of approximately $12.3 million, partially offset by $5.8 million of additional net federal income tax expense relating to an increase in taxes payable and changes in other tax attributes. |
66
Table of Contents
Paid in Three | Projected for | |||||||||||||||
Months Ended | Remaining Nine | Total | Projected for Three | |||||||||||||
February 26, | Months of | Projected for | Months Ending | |||||||||||||
Selected Cash Requirements | 2006 | Fiscal 2006 | Fiscal 2006 | February 25, 2007 | ||||||||||||
(Dollars in millions) | ||||||||||||||||
Restructuring activities(1) | $ | 4 | $ | 14 | $ | 18 | $ | 2 | ||||||||
Interest(2) | 80 | 148 | 228 | 68 | ||||||||||||
Federal, foreign and state taxes (net of refunds)(3) | 16 | 51 | 67 | 19 | ||||||||||||
Prior years’ income tax liabilities, net(4) | 2 | 14 | 16 | 4 | ||||||||||||
Post-retirement health benefit plans | 5 | 23 | 28 | 5 | ||||||||||||
Capital expenditures | 10 | 51 | 61 | 10 | ||||||||||||
Pension plans | 6 | 41 | 47 | 3 | ||||||||||||
Total selected cash requirements | $ | 123 | $ | 342 | $ | 465 | $ | 111 | ||||||||
(1) | Amounts do not include the impact from a closure of our Little Rock, Arkansas distribution center, which is not anticipated to have a material adverse impact on our results of operations or liquidity. See Note 13 to our unaudited consolidated financial statements included herein for more information about our intent to close the Little Rock facility. | |
(2) | Amounts reflect our March 2006 prepayment of our senior secured term loan using the net proceeds of the issuance of our old Euro Notes and our old Dollar Notes and cash on hand. The interest rates on these notes are lower than rates under the senior secured term loan. See Note 5 to our unaudited consolidated financial statements included herein for more information. | |
(3) | Amounts relate primarily to estimated payments with respect to 2006 income taxes. | |
(4) | Our projection for cash tax payments for prior years’ income tax liabilities primarily reflects payments to state and foreign tax authorities. |
Payments Due or Projected by Period | ||||||||||||||||||||||||||||
Total | 2006 | 2007 | 2008 | 2009 | 2010 | Thereafter | ||||||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||||||
Contractual and Long-term Liabilities: | ||||||||||||||||||||||||||||
Long-term debt obligations(1) | $ | 2,311 | $ | 90 | $ | — | $ | — | $ | — | $ | — | $ | 2,221 | ||||||||||||||
Capital lease obligations(2) | 6 | 2 | 2 | 1 | 1 | — | — | |||||||||||||||||||||
Operating leases(3) | 426 | 74 | 69 | 63 | 57 | 53 | 110 | |||||||||||||||||||||
Purchase obligations(4) | 305 | 240 | 24 | 18 | 10 | 10 | 3 | |||||||||||||||||||||
Post-retirement obligations(5) | 488 | 28 | 28 | 26 | 24 | 22 | 360 | |||||||||||||||||||||
Pension obligations(6) | 243 | 47 | 64 | 12 | 14 | 13 | 93 | |||||||||||||||||||||
Long-term employee related benefits(7) | 194 | 38 | 55 | 36 | 26 | 26 | 13 | |||||||||||||||||||||
Other long-term liabilities(8) | 42 | 1 | 3 | 6 | 6 | 6 | 20 | |||||||||||||||||||||
Total | $ | 4,015 | $ | 520 | $ | 245 | $ | 162 | $ | 138 | $ | 130 | $ | 2,820 | ||||||||||||||
(1) | Gives effect to (i) our issuance of $350.0 million of our Dollar Notes and €100.0 million of our Euro Notes in March 2006 and (ii) our prepayment of our senior secured term loan in March 2006. | |
(2) | Capital lease obligations are primarily comprised of a logistics services agreement in Europe with a third-party that includes a capital lease for machinery and equipment. For more information, see Note 7 to our audited consolidated financial statements included herein. |
67
Table of Contents
(3) | We lease a number of manufacturing, distribution, office and retail facilities around the world. For more information, see “Business — Properties.” | |
(4) | Amounts reflect estimated commitments of $162 million for inventory purchases, $13 million for capital expenditures and $130 million for information technology and other professional services. We do not have any material long-term raw materials supply agreements. We typically conduct business with our raw material suppliers, garment manufacturing and finishing contractors on anorder-by-order basis. Most arrangements are cancelable without a significant penalty and with short notice (usually 30 to 90 days). Our projected cash requirements for 2006 capital expenditures primarily reflects estimates related to spending on the enterprise resource planning system project in Asia Pacific. | |
(5) | We maintain two plans that provide post-retirement benefits, principally health care, to qualified U.S. retirees and their qualified dependents. The plans are contributory and contain certain cost-sharing features, such as deductibles and coinsurance. Our policy is to fund post-retirement benefits as claims and premiums are paid. The amounts presented in the table represent an estimate of our projected contributions to the plans based on information provided by our plans’ actuaries. These expected payments are not in addition to the post-retirement benefit plans expense recorded for the applicable year and are based on estimates and subject to change. For more information, see Note 12 to our audited consolidated financial statements included herein. | |
(6) | We have numerous noncontributory pension plans covering substantially all of our employees. The amounts presented in the table represent an estimate of our projected contributions to the plans based on information provided by our plans’ actuaries. These estimated payments are based on assumptions and existing facts and circumstances, and are subject to change. They do not include any pension expense for future periods. For more information, see Note 12 to our audited consolidated financial statements included herein. | |
(7) | Long-term employee-related benefits relate to workers’ compensation, deferred compensation arrangements and the non-current portion of liabilities for long-term incentive plans. We estimated these payments based on prior experience and forecasted activity for these items. For more information, see Note 15 to our audited consolidated financial statements included herein. | |
(8) | Primarily comprised of rent accruals resulting from accounting for rental expense on a straight-line basis over the lease term. |
Three Months Ended | Year Ended | |||||||||||||||||||
February 26, | February 27, | November 27, | November 28, | November 30, | ||||||||||||||||
2006 | 2005 | 2005 | 2004 | 2003 | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Cash provided by (used for) operating activities | $ | 54,384 | $ | (80,596 | ) | $ | (43,777 | ) | $ | 199,896 | $ | (190,650 | ) | |||||||
Cash used for investing activities | (8,994 | ) | (4,724 | ) | (34,657 | ) | (12,930 | ) | (84,484 | ) | ||||||||||
Cash (used for) provided by financing activities | (5,494 | ) | 8,517 | 23,072 | (32,120 | ) | 349,096 | |||||||||||||
Cash and cash equivalents | 281,433 | 223,139 | 239,584 | 299,596 | 143,445 |
• | During the three months ended February 26, 2006, trade accounts receivable decreased by $113.0 million compared to $68.1 million in the same period in 2005. Our receivable balance is typically lower at the end of our first quarter as compared to the prior year-end balance since the fourth quarter of our fiscal year is generally our strongest selling period. The reduction in accounts receivable was higher for the three months |
68
Table of Contents
ended February 26, 2006 compared to the same period in the prior year primarily as a result of the decrease in our net sales for the 2006 period as compared to the 2005 period. |
• | During the three months ended February 26, 2006, our inventory levels decreased $10.5 million compared to an increase of $52.0 million for the same period in 2005. The 2006 period decrease resulted primarily from a decrease in raw materials andwork-in-process as a result of our shift to package program sourcing and away from self-manufacturing and cut-make-trim arrangements with contractors. The increase in inventory for the three months ended February 27, 2005 resulted primarily from inventory management actions taken by all business units to avoid inventory shortages and maintain consistent order flow. | |
• | During the three months ended February 26, 2006, accrued salary, wages and benefits decreased $56.3 million as compared to a decrease of $67.1 million for the same period in 2005. Both decreases were primarily attributable to the payments of approximately $58.0 million and $81.0 million in the three months ended February 26, 2006 and February 27, 2005, respectively, under our annual and long-term incentive plans. These decreases were partially offset by incentive compensation accruals of approximately $19.6 million and $21.3 million, respectively, for the 2006 and 2005 periods. | |
• | Payments related to our restructuring activities for the three months ended February 26, 2006 were $4.2 million compared to $18.8 million for the same period in 2005. The decrease in restructuring payments was primarily driven by the wind down of activities relating to our 2004 and 2003 restructuring initiatives in the United States and Europe. |
• | During 2005, our cash paid for income taxes was $197.3 million as compared to $83.0 million for 2004. The increase principally related to cash payments related to our settlements with the Internal Revenue Service to close our1986-1999 open tax years. |
69
Table of Contents
• | During 2005, accrued salary, wages and benefits decreased $13.0 million as compared to an increase of $113.2 million during 2004. The decrease in 2005 was primarily attributable to the payment of approximately $111.6 million under our annual and long-term incentive plans, compared to approximately $10.0 million in 2004. The decrease was partially offset by incentive compensation accruals during 2005 of approximately $94.3 million. | |
• | During 2005, our accounts payable and accrued liabilities decreased by $38.4 million compared to a $105.1 million increase in 2004. The decrease in 2005 was primarily due to reduced inventory balances and shorter payment cycles driven by our increased use of package sourcing and the related shorter payment terms for our contract manufacturers. The 2004 increase is due in part to higher operating expenses in the fourth quarter of 2004, as compared to 2003. | |
• | During 2005, our inventory levels decreased $3.1 million compared to a decrease of $100.9 million in 2004. Consistent inventory levels in 2005 are primarily due to our shift away from self-manufacturing and cut-make-trim arrangements with contractors to outsourced package manufacturing. The decrease in inventory for 2004 resulted primarily from production shortfalls by our third-party contract manufacturers and our effort to reduce excess and obsolete inventory. |
• | Gross profit increased by $223.0 million in 2004 compared to 2003. | |
• | We paid out $83.0 million in income tax payments during 2004 as compared to $167.3 million for 2003. | |
• | During 2004, cash inflow provided by the decrease in inventories was $100.9 million, due primarily to improved working capital management including our product rationalization efforts and our shift away from self-manufacturing and cut-make-trim arrangements with contractors to outsourced package manufacturing. The inventory reduction in North America was partially offset by higher inventories in Asia Pacific and Europe, reflecting higher volume in the case of Asia Pacific and the impact of foreign currency translation. |
70
Table of Contents
During 2003, cash outflows from the increase of inventories were $77.1 million, due primarily to the increase in Levi Strauss Signature® inventories prior to our launch of the brand into Wal-Mart stores in 2003. |
• | During 2004, we paid out approximately $10.0 million under our annual incentive plan and made no payments under the long-term incentive plan. During 2003, we paid out approximately $100.0 million under the annual and long-term incentive plans. |
71
Table of Contents
Principal Payments as of | ||||
Fiscal Year | February 26, 2006 | |||
(Dollars in thousands) | ||||
2006 (remaining nine months) | $ | 87,908 | ||
2007 | — | |||
2008 | — | |||
2009 | — | |||
2010 | — | |||
Thereafter | 2,227,822 | |||
Total | $ | 2,315,730 | ||
72
Table of Contents
73
Table of Contents
As of November 27, 2005 | ||||||||||||
Average Forward | ||||||||||||
Currency | Exchange Rate | Notional Amount | Fair Value | |||||||||
(Dollars in thousands except average | ||||||||||||
forward exchange rates) | ||||||||||||
Australian Dollar | 0.74 | $ | 19,643 | $ | 4 | |||||||
Canadian Dollar | 1.18 | 1,637 | 33 | |||||||||
Swiss Franc | 1.31 | (19,887 | ) | (212 | ) | |||||||
Danish Krona | 6.36 | 30,581 | (139 | ) | ||||||||
Euro | 1.17 | (160,353 | ) | 645 | ||||||||
British Pound | 1.71 | 75,623 | (300 | ) | ||||||||
Hungarian Forint | 213.69 | (8,490 | ) | (19 | ) | |||||||
Japanese Yen | 117.68 | (39,091 | ) | (237 | ) | |||||||
Korean Won | 1,041.67 | 1,497 | 6 | |||||||||
Mexican Peso | 10.71 | 22,081 | (211 | ) | ||||||||
Norwegian Krona | 6.63 | 15,640 | 135 | |||||||||
New Zealand Dollar | 0.68 | (5,536 | ) | 89 | ||||||||
Polish Zloty | 3.37 | (215 | ) | (29 | ) | |||||||
Swedish Krona | 8.12 | 63,061 | (596 | ) | ||||||||
Singapore Dollar | 1.69 | (24,312 | ) | — | ||||||||
Taiwan Dollar | 33.42 | 11,790 | (10 | ) | ||||||||
South African Rand | 6.61 | 3,720 | (33 | ) | ||||||||
Total | $ | (12,611 | ) | $ | (874 | ) | ||||||
As of November 27, 2005 | ||||||||||||
Currency | Average Strike Rate | Notional Amount | Fair Value | |||||||||
(Dollars in thousands except average strike rates) | ||||||||||||
Canadian Dollar | 1.20 | $ | 63,000 | $ | (379 | ) | ||||||
Japanese Yen | 112.00 | 8,300 | 1,629 | |||||||||
Total | $ | 71,300 | $ | 1,250 | ||||||||
74
Table of Contents
Fiscal Year Ended | ||||||||||||||||||||||||||||||||
Fair Value | ||||||||||||||||||||||||||||||||
2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2005 | |||||||||||||||||||||||||
(Dollars in thousands unless otherwise stated) | ||||||||||||||||||||||||||||||||
Debt Instruments | ||||||||||||||||||||||||||||||||
Fixed Rate (US$) | $ | 1,299,357 | $ | 1,219,000 | $ | 1,217,000 | $ | 1,215,000 | $ | 1,025,000 | $ | 1,025,000 | $ | 1,025,000 | $ | 1,432,580 | ||||||||||||||||
Average Interest Rate | 10.73 | % | 10.97 | % | 10.97 | % | 10.97 | % | 11.15 | % | 11.15 | % | 11.15 | % | ||||||||||||||||||
Fixed Rate (Yen 20 billion) | 167,588 | 167,588 | 167,588 | 167,588 | 167,588 | 167,588 | 167,588 | 161,416 | ||||||||||||||||||||||||
Average Interest Rate | 4.25 | % | 4.25 | % | 4.25 | % | 4.25 | % | 4.25 | % | 4.25 | % | 4.25 | % | ||||||||||||||||||
Fixed Rate (Euro 150 million) | 176,280 | 176,280 | 176,280 | 176,280 | 176,280 | 176,280 | 176,280 | 179,176 | ||||||||||||||||||||||||
Average Interest Rate | 8.63 | % | 8.63 | % | 8.63 | % | 8.63 | % | 8.63 | % | 8.63 | % | 8.63 | % | ||||||||||||||||||
Variable Rate (US$) | 674,750 | 671,000 | 668,000 | 665,000 | 380,000 | 380,000 | 380,000 | 696,337 | ||||||||||||||||||||||||
Average Interest Rate(1) | 8.95 | % | 8.94 | % | 8.94 | % | 8.93 | % | 8.03 | % | 8.03 | % | 8.03 | % | ||||||||||||||||||
Total Principal (face amount of our debt instruments) | $ | 2,317,975 | $ | 2,233,868 | $ | 2,228,868 | $ | 2,223,868 | $ | 1,748,868 | $ | 1,748,868 | $ | 1,748,868 | $ | 2,469,509 |
(1) | Assumes no change in short-term interest rates. |
75
Table of Contents
76
Table of Contents
77
Table of Contents
• | product returns and customer claims, which we use in recognizing revenue; | |
• | expected selling prices for our products, which we use in valuing our inventory; | |
• | future business performance on both a consolidated basis and in particular countries, which we use in recording incentive compensation expense and valuing our deferred tax assets; | |
• | employee benefit, facility exit, contract termination and other costs associated with facility closures and organizational changes, which we use in determining restructuring expenses; and | |
• | employee demographics and turnover, discount rates, global capital market performance and health care costs, which we use in accounting for our benefits and workers compensation programs. |
• | We realized a tax benefit of approximately $62.4 million from reversing valuation allowances against our foreign tax credits, state net operating loss carryforwards, foreign net operating loss carryforwards, and other foreign deferred tax assets. This resulted from utilization of approximately $51.0 million of these assets primarily to offset operating income generated during the year and a change in our assessment regarding the future realization of approximately $11.4 million of gross deferred tax assets in existence at year-end. | |
• | We reduced our self insurance reserves for workers compensation claims by approximately $21.0 million based on changes in our estimated future claims payments as a result of more favorable than projected actual claims development during the current year. | |
• | We reversed approximately $6.3 million in restructuring charges, primarily due to changes in estimates resulting from lower than anticipated severance and employee benefits related to our restructuring initiatives in the United States and Europe. |
78
Table of Contents
79
Table of Contents
80
Table of Contents
• | We derive nearly half of our net revenues and over half of our operating income from our businesses outside the United States. | |
• | Our products are sold through more than 55,000 retail locations in over 110 countries, including over 65 company-operated stores in 10 countries. | |
• | We have over 5,000 trademark registrations and pending applications in approximately 180 countries. | |
• | We have regional headquarters located in San Francisco, Brussels and Singapore, product designers located primarily in Belgium, Hong Kong, Japan, Korea and the United States, and a global sourcing headquarters in Singapore. | |
• | Approximately 65% of our employees are located in over 35 countries outside the United States. |
• | Innovate and lead from the core. Our brands and their global consumer appeal are at the core of our business. We draw upon our brand equity and our design and marketing expertise to bring to market a broad range of innovative, trend-right, compelling and quality products targeted for specific consumer and retail segments. We seek to offer market-leading styles, fabrics, fits and finishes across our product lines and are increasing our emphasis on trend and style-driven premium products to augment and build on our traditional strength in high-quality basic jeans and casual pants products. We believe we can capitalize on the consumer recognition of our brands by continuing to extend them to segments that offer attractive and relevant opportunities for profitable growth. Those opportunities include increasing our participation in the more premium segments of the market, growing our women’s businesses across our three brands, and driving our business with men under 25 years of age. In addition, we continue to extend the reach of our brands by expanding our licensing programs and building our businesses in emerging markets. | |
• | Promote strong retail relationships. We want our brands to be essential to our retail customers. We seek to build consumer appeal and demand for our brands through compelling marketing executed through a broad mix of advertising vehicles. We focus on generating competitive economics and engaging in collaborative assortment, demand and marketing planning to drive mutual commercial success with our retail customers. We believe we can strengthen our retail relationships by drawing more fully on our knowledge of consumer and retail segmentation to develop differentiated product assortments, retail presentations and marketing programs for different channels. We recognize that our department store, chain store and mass channel retailers have many choices, including their own private label programs. Our goal is to ensure that we are essential to our customers’ success by using our brands and our strengths in product development and marketing to drive consumer traffic and demand to their stores. | |
• | Sell where people shop. Our multi-channel distribution strategy is centered on making relevant Levi Strauss & Co. products accessible to consumers where they shop. Our Levi’s® and Dockers® products have broad distribution and substantial presence in department stores and specialty and independent stores worldwide and in chain stores in the United States. To reach value-oriented consumers who shop in the mass channel, we are focused on growing our Levi Strauss Signature® business in mass channel retailers through introducing new products, fully penetrating our existing mass retailers, expanding to new accounts in existing markets and launching the brand in new countries in Europe and Asia. To reach younger and other consumers who shop in specialty stores, we are expanding our Levi’s® Stores network around the world, including by opening more company-operated stores. We believe our Levi’s® Stores represent an attractive opportunity to establish incremental distribution and sales for the Levi’s® brand, enhance brand presentation to consumers, increase our retail expertise by enabling us to connect directly with consumers, and improve our effectiveness as a marketing and merchandising resource to our wholesale customers. |
81
Table of Contents
• | Achieve operational excellence. We emphasize operational execution, cost effectiveness and working capital management across our businesses. We intend to continue refining ourgo-to-market processes and to derive greater benefit from our global sourcing organization. We are also investing in key information technology improvements including an SAP enterprise resource planning system in Asia, which we also plan to implement in North America and Europe in the coming years. We see continued opportunities to improve productivity and working capital efficiency, including improved management of payables and inventory through more effective supply and demand planning. |
• | We are committed to product quality. | |
• | We offer diverse product lines and assortments targeted for specific consumer segments and retail channels, taking advantage of our ability to design, source and distribute both large replenishment programs and targeted niche product lines. | |
• | We seek to achieve and maintain market leadership, bring newness to the marketplace and resist category commoditization by continually introducing innovative products and updating our continuing products with new fits, fabrics, finishes and features. | |
• | We have approximately 200 designers and merchandisers across our three regions, each dedicated to one of our brands. We use global trend scouts and trend forums to identify emerging trends with potentially strong consumer appeal and a global innovation group to develop commercially-viable style and technical innovations across our brands. We work to take ideas developed first in one market and quickly adapt and commercialize them for other markets. | |
• | We continually work to refine ourgo-to-market process to increase our responsiveness to trends, changes in consumer preferences and other market developments and to improve our speed to market. | |
• | We have a global sourcing organization that works closely with our designers, merchandisers and suppliers to drive cost-effective product construction and sourcing, market responsiveness and consistent product quality. |
82
Table of Contents
• | Levi’s®Red Tabtm Products. These products are the foundation of the brand. They encompass a wide range of jeans and jeanswear offered in a variety of fits, fabrics, finishes and styles intended to appeal to a broad spectrum of consumers. The line is anchored by the flagship 501® button-fly jean, the best-selling five-pocket jean in history. The line also incorporates a full range of jeanswear fits and styles designed specifically for women. Levi’s® Red Tabtm products include both our core/entry offering of classic and updated fits in basic fabrics and finishes as well as our trend offering in better fabrics and more advanced finishes. | |
• | Premium Products. We offer a variety of premium men’s and women’s products around the world. In the United States, to further differentiate our offer for consumers who seek more innovative and premium products, we are introducing our Levi’s Redtm and Capital Etm products, and we market our SilverTab® line. In Europe and Asia, we offer an expanded range of high-end products that reflects our premium positioning in international markets. Our Levi’s® Engineered Jeans are a reinvention of the traditional jean designed for leading-edge consumers. The Levi’s Bluetm line in Europe and Levi’s® Red Looptm line in Asia are clean, modern interpretations of jeanswear, while in Asia we also offer Levi’s® LadyStyletm products for women seeking more feminine fits and finishes. Our Levi’s® Vintage Clothing line, offered in all of our regions, showcases our most premium products, offering detailed replicas of our historical products dating back to the 19th century. |
• | Dockers® Classics. This line includes a broad range of stylish cotton and cotton blend casual and dress casual pants that are at the heart of the brand for both men and women. We complement these products with a variety of tops and seasonal pants, shorts and skirts in a range of fits, fabrics, colors, styles and performance features. | |
• | Dockers® Premium. This line includes a range of pants, tops and other products constructed from finer fabrics with updated details in a range of finishes, fits, styles and colors. In the United States, for example, our Dockers Never-Irontm Cotton Khaki is a 100% cotton pant that comes out of the dryer with the appearance of a dry-cleaned product and that combines style, upgraded fabric with a luxurious feel and performance innovation. We also are developing a new line, Dockers® Collection, that will include our most premium products. We expect to introduce Dockers® Collection products in the United States in fall 2006. |
83
Table of Contents
• | core denim jeans, casual pants, tops and jackets in a variety of fits, fabrics and finishes; | |
• | trend-right products that offer enhanced fabric and finish combinations and updated styling details each season; and | |
• | the Authentics line, which offers premium and advanced style, fabric and finish combinations. |
• | Levi’s®Brand. We license the Levi’s® trademark for products complementary to our core jeanswear line, including men’s and women’s tops, sweaters, jackets, outerwear, loungewear, footwear, hosiery, belts, bags, headwear and kidswear products. | |
• | Dockers®Brand. We work with our licensees to develop and market complementary products under the Dockers® brand, including men’s and women’s footwear, hosiery, belts, accessories, outerwear, eyewear, men’s sweaters and golf apparel, men’s dress shirts, kidswear, loungewear and sleepwear, luggage and home bedding products. | |
• | Levi Strauss Signature®Brand. We work with our licensees to develop and market complementary products under the Levi Strauss Signature® brand, including belts and other leather accessories, kidswear, men’s and women’s tops and outerwear. |
84
Table of Contents
85
Table of Contents
86
Table of Contents
• | We require all third-party contractors who manufacture or finish products for us to comply with our code of conduct relating to supplier working conditions and employment practices. We also require our licensees to ensure that their manufacturers comply with our requirements. | |
• | Our code of conduct covers employment practices such as wages and benefits, working hours, health and safety, working age and discriminatory practices, environmental matters such as wastewater treatment, and ethical and legal conduct. |
87
Table of Contents
• | We regularly assess manufacturing and finishing facilities through periodicon-site facility inspections and improvement activities, including use of independent monitors to supplement our internal staff, and we integrate monitoring results into our sourcing decisions. | |
• | We disclose the names and locations of our contract manufacturers to encourage collaboration among apparel companies in factory monitoring and improvement. |
• | maintaining favorable brand recognition through strong and effective marketing; | |
• | developing products with relevant fits, finishes, fabrics, style and performance features; | |
• | anticipating and responding to changing consumer demands in a timely manner; | |
• | ensuring sufficient retail distribution, visibility and availability and ensuring effective presentation of products at retail; | |
• | providing compelling value in our products for the price; and | |
• | generating competitive economics for our retail customers. |
• | VF Corporation, a competitor in multiple channels through its Wrangler, Rustler, and Lee brands of jeanswear, along with its Riders, Brittania, Chic, Gitano, Nautica, Earl and Hero by Wrangler brands; | |
• | vertically integrated specialty stores, including Gap Inc., Abercrombie & Fitch, American Eagle Outfitters Inc. and J. Crew; | |
• | retailer private or exclusive labels, including Wal-Mart Stores, Inc.’s Faded Glory brand, Target Corporation’s Mossimo and Cherokee brands, Kmart Corporation’s Route 66 brand, J.C. Penney’s Arizona and St. John’s Bay brands, Kohl’s Corporation’s Sonoma, Urban Pipeline and So... brands, Sears, Roebuck & Co.’s Canyon River Blues and Land’s End brands and Federated Department Stores’ I.N.C., Alfani and Charter Club brands; | |
• | fashion-forward premium jeanswear brands including Diesel, Lucky, 7 for All Mankind, Joe’s Jeans, Citizens of Humanity and Paper Denim & Cloth brands, and younger consumer brands such as L.E.I., MUDD and FUBU; | |
• | branded apparel marketers, including Liz Claiborne, Inc., Jones Apparel Group, Inc., Polo Ralph Lauren, Perry Ellis International, and Haggar Corp.; and | |
• | athletic wear marketers such as Nike, Inc. and Adidas. |
88
Table of Contents
• | In 1991, we developed a comprehensive supplier code of conduct targeted toward ensuring that individuals making our products anywhere in the world would do so in safe and healthy working conditions and be |
89
Table of Contents
treated with dignity and respect. We believe our code of conduct was the first of its kind for a multinational apparel company. |
• | Our commitment to equal opportunity and diversity predated the U.S. civil rights movement and federally mandated desegregation by two decades. We opened integrated factories in California in the 1940s. In 1960, we integrated our newly opened plants in the American South. | |
• | In 1992, we extended full medical benefits to domestic partners of employees, a practice now followed by many corporations and public agencies. We believe we were the largest U.S. company at the time to provide these benefits. | |
• | We participate in public advocacy relating to trade policy. We believe that worker rights protections and enforcement measures should be an integral part of all bilateral, regional or multilateral trade negotiations in an environment of increasing globalization. We believe we were the first multinational apparel company to publicly advocate this position. | |
• | The Levi Strauss Foundation, a charitable foundation supported by us, focuses its grant making on alleviating poverty for women and youth in countries through three interrelated strategies: preventing the spread of HIV/AIDS, specifically in communities with extreme need, scarce resources and where LS&CO. has a business presence; helping young women and young people build, own and have access to financial and social assets; and strengthening workers’ rights and improving working and living conditions in communities where our products are manufactured. | |
• | We support and encourage employee community involvement through volunteer activities, paid time off and grants by the Levi Strauss Foundation to nonprofit organizations we assist through our community activities. | |
• | The Red Tab Foundation, a non-profit organization created and largely funded by our employees, offers services and financial assistance to our employees and retirees who, due to emergency or other unexpected circumstances, may be unable to afford life’s basic necessities. |
90
Table of Contents
Location | Primary Use | Leased/Owned | ||||
North America | ||||||
Little Rock, AR | Distribution | Owned | (1) | |||
Hebron, KY | Distribution | Owned | ||||
Canton, MS | Distribution | Owned | ||||
Henderson, NV | Distribution | Owned | ||||
Westlake, TX | Data Center | Leased | ||||
Etobicoke, Canada | Distribution | Owned | ||||
Naucalpan, Mexico | Distribution | Leased | ||||
Europe | ||||||
Heusenstamm, Germany | Distribution | Owned | ||||
Kiskunhalas, Hungary | Manufacturing and Finishing | Owned | ||||
Milan, Italy | Distribution | Leased | ||||
Plock, Poland | Manufacturing and Finishing | Leased | ||||
Warsaw, Poland | Distribution | Leased | ||||
Northhampton, U.K | Distribution | Owned | ||||
Sabadell, Spain | Distribution | Leased | ||||
Helsingborg, Sweden | Distribution | Owned | ||||
Asia Pacific | ||||||
Adelaide, Australia | Distribution | Owned | (2) | |||
Cape Town, South Africa | Manufacturing, Finishing and Distribution | Leased | ||||
Corlu, Turkey | Manufacturing, Finishing and Distribution | Owned | ||||
Hiratsuka Kanagawa, Japan | Distribution | Owned | (3) | |||
Karawang, Indonesia | Finishing | Leased | ||||
Makati, Philippines | Manufacturing | Leased |
(1) | In March 2006, the Company announced its intent to close this distribution center before the end of fiscal 2006. See Note 13 to our unaudited consolidated financial statements included herein. | |
(2) | This facility was sold on December 5, 2005 and is being leased by us for an initial period of two years. See Note 3 to our audited consolidated financial statements, included herein, for further information. | |
(3) | Owned by our 84% owned subsidiary. |
91
Table of Contents
92
Table of Contents
93
Table of Contents
Name | Age | Position | ||||
Robert D. Haas | 63 | Director, Chairman of the Board of Directors | ||||
Philip A. Marineau | 59 | Director, President and Chief Executive Officer | ||||
Angela Glover Blackwell(1)(2) | 60 | Director | ||||
Robert E. Friedman(2) | 56 | Director | ||||
James C. Gaither(3)(4) | 68 | Director | ||||
Peter A. Georgescu(1)(2)(4) | 66 | Director | ||||
Miriam L. Haas(2)(5) | 59 | Director | ||||
Peter E. Haas, Jr.(5) | 58 | Director | ||||
Walter J. Haas(2) | 56 | Director | ||||
F. Warren Hellman(3)(4)(5) | 71 | Director | ||||
Patricia A. House(2)(3) | 51 | Director | ||||
Leon J. Level(1)(5)(6) | 64 | Director | ||||
Patricia Salas Pineda(1)(4) | 54 | Director | ||||
T. Gary Rogers(3)(5) | 63 | Director | ||||
G. Craig Sullivan(7) | 65 | Director | ||||
R. John Anderson | 54 | Senior Vice President and President, Levi Strauss Asia Pacific and Global Sourcing | ||||
David G. Bergen | 50 | Senior Vice President and Chief Information Officer | ||||
John Goodman | 41 | President and Commercial General Manager, Dockers® Brand, United States | ||||
Robert L. Hanson | 42 | President and Commercial General Manager, Levi’s® Brand, United States and U.S. Supply Chain Services | ||||
Hilary K. Krane(8) | 41 | Senior Vice President and General Counsel | ||||
Scott A. LaPorta | 43 | President and Commercial General Manager, Levi Strauss Signature® Brand, United States | ||||
Paul Mason(9) | 45 | Senior Vice President and President, Levi Strauss Europe | ||||
Fred D. Paulenich | 41 | Senior Vice President, Worldwide Human Resources | ||||
Hans Ploos van Amstel | 40 | Senior Vice President and Chief Financial Officer | ||||
Lawrence W. Ruff | 49 | Senior Vice President, Strategy and Worldwide Marketing |
(1) | Member, Audit Committee. | |
(2) | Member, Corporate Citizenship Committee. | |
(3) | Member, Human Resources Committee. | |
(4) | Member, Nominating and Corporate Governance Committee. | |
(5) | Member, Finance Committee. | |
(6) | Mr. Level was elected to the board effective April 1, 2005. | |
(7) | Mr. Sullivan retired from the board effective January 1, 2006. | |
(8) | Ms. Krane joined us on January 23, 2006. | |
(9) | Mr. Mason left us at the end of February 2006. |
94
Table of Contents
95
Table of Contents
96
Table of Contents
97
Table of Contents
• | Audit. Our audit committee provides assistance to the board in the board’s oversight of the integrity of our financial statements, financial reporting processes, internal controls systems and compliance with legal requirements. The committee meets with our management regularly to discuss our critical accounting policies, internal controls and financial reporting process and our financial reports to the public. The committee also meets with our independent registered public accounting firm and with our financial personnel and internal auditors regarding these matters. The committee also examines the independence and performance of our internal auditors and our independent registered public accounting firm. The committee has sole and direct authority to engage, appoint, evaluate and replace our independent auditor. Both our independent registered public accounting firm and our internal auditors regularly meet privately with this committee and have unrestricted access to the committee. The audit committee held six meetings during 2005. |
• | Members: Mr. Level (Chair), Ms. Blackwell, Mr. Georgescu and Ms. Pineda. |
• | Human Resources. Our human resources committee provides assistance to the board in the board’s oversight of our compensation, benefits and human resources programs and of senior management performance, composition and compensation. The committee reviews our compensation objectives and performance against those objectives, reviews market conditions and practices and our strategy and processes for making compensation decisions, reviews the performance of our chairman and chief executive officer and approves the annual and long term compensation for our chairman, chief executive officer and executive officers, including our long term incentive compensation plans. The committee also reviews our succession planning, diversity, director compensation and benefit plans. |
• | Members: Ms. House (Chair), Mr. Gaither, Mr. Hellman and Mr. Rogers. |
• | Nominating and Governance. Our nominating and governance committee is responsible for identifying qualified candidates for our board of directors and making recommendations regarding the size and composition of the board. In addition, the committee is responsible for overseeing our corporate governance matters and reporting and making recommendations to the board concerning corporate governance matters. |
• | Members: Mr. Gaither (Chair), Mr. Georgescu, Mr. Hellman and Ms. Pineda. |
• | Finance. Our finance committee provides assistance to the board in the board’s oversight of our financial condition and management, financing strategies and execution and relationships with stockholders, creditors and other members of the financial community. |
• | Members: Mr. Rogers (Chair), Ms. Haas, Mr. P.E. Haas, Jr., Mr. Hellman and Mr. Level. |
• | Corporate Citizenship. Our corporate citizenship committee provides assistance to the board in the board’s oversight of our values and corporate citizenship as demonstrated through our policies, practices and interactions with stockholders, employees, suppliers, customers, consumers, communities, governmental authorities and others having a relationship with us. |
• | Members: Mr. Georgescu (Chair), Ms. Blackwell, Mr. Friedman, Ms. Haas, Mr. W.J. Haas and Ms. House. |
98
Table of Contents
Annual Compensation | Long Term Compensation | |||||||||||||||
Name | Retainer | Meeting Fees(1) | Other | LTIP Awards(2) | ||||||||||||
Angela Glover Blackwell | $ | 55,000 | $ | 12,000 | $ | — | 750 units | |||||||||
Robert E. Friedman | 45,000 | 9,000 | — | 750 units | ||||||||||||
James C. Gaither | 65,000 | 15,000 | — | 750 units | ||||||||||||
Peter A. Georgescu | 45,000 | 16,000 | — | 750 units | ||||||||||||
Miriam L. Haas | 45,000 | 11,000 | — | 750 units | ||||||||||||
Peter E. Haas Jr. | 45,000 | 13,000 | — | 750 units | ||||||||||||
Robert D. Haas(3) | 83,333 | 2,000 | 10,180 | 1,667 units | ||||||||||||
Walter J. Haas | 45,000 | 11,000 | — | 750 units | ||||||||||||
F. Warren Hellman | 55,000 | 13,000 | — | 750 units | ||||||||||||
Patricia A. House | 45,000 | 15,000 | — | 750 units | ||||||||||||
Leon J. Level(4) | 33,750 | 10,000 | — | 750 units | ||||||||||||
Patricia Salas Pineda | 65,000 | 14,000 | — | 750 units | ||||||||||||
T. Gary Rogers | 45,000 | 16,000 | — | 750 units | ||||||||||||
G. Craig Sullivan | 45,000 | 17,000 | — | 750 units |
(1) | Meeting fees are based on $1,000 per meeting day attended. | |
(2) | Reflects the stock appreciation rights (referred to as units) under the Senior Executive Long Term Incentive Plan. These awards have a target value of $45,000 and will be settled at the end of a three-year performance period if the recipient is still serving as a non-employee director. | |
(3) | The retainer amount reflects a prorated portion of Mr. Haas’ annual retainer fee. Other compensation reflects a prorated car allowance. The retainer arrangement took effect in August 2005. | |
(4) | The retainer amount reflects a prorated portion of Mr. Level’s annual retainer fee. The retainer arrangement took effect in April 2005. |
99
Table of Contents
• | accounting practices and financial communications; | |
• | conflicts of interest; | |
• | confidentiality; | |
• | corporate opportunities; | |
• | insider trading; and | |
• | compliance with laws. |
100
Table of Contents
Annual Compensation | Long Term | |||||||||||||||||||||||
All Other Annual | Compensation | All Other | ||||||||||||||||||||||
Name/Principal Position | Year | Salary | Bonus(1) | Compensation(2) | LTIP Payouts(3) | Compensation(4) | ||||||||||||||||||
Philip A. Marineau | 2005 | $ | 1,200,000 | $ | 2,163,150 | $ | — | $ | 2,894,000 | $ | 818,961 | |||||||||||||
President and Chief | 2004 | 1,107,692 | 2,940,300 | — | 2,241,000 | 602,686 | ||||||||||||||||||
Executive Officer | 2003 | 1,246,154 | — | — | — | 348,640 | ||||||||||||||||||
R. John Anderson | 2005 | 743,930 | 1,667,930 | 287,088 | 960,000 | 71,451 | ||||||||||||||||||
Senior Vice President and | 2004 | 758,785 | 711,392 | 274,275 | 1,020,000 | 68,724 | ||||||||||||||||||
President, Levi Strauss, Asia | 2003 | 447,463 | 696,150 | 282,717 | — | 46,643 | ||||||||||||||||||
Pacific and Global Sourcing(5) | ||||||||||||||||||||||||
Paul Mason | 2005 | 1,071,909 | 982,388 | 76,977 | 252,000 | — | ||||||||||||||||||
Senior Vice President and | 2004 | 929,103 | 1,255,539 | 53,580 | — | 1,563,675 | ||||||||||||||||||
President, Levi Strauss Europe | 2003 | — | — | — | — | — | ||||||||||||||||||
Robert L. Hanson | 2005 | 644,269 | 915,915 | — | 252,000 | 92,670 | ||||||||||||||||||
President and Commercial General | 2004 | 512,211 | 796,331 | — | 1,150,000 | 285,904 | ||||||||||||||||||
Manager, Levi’s® Brand, United | 2003 | 471,923 | — | — | — | — | ||||||||||||||||||
States and U.S Supply Chain Services | ||||||||||||||||||||||||
Hans Ploos van Amstel | 2005 | 438,221 | 703,828 | 1,071,867 | 266,000 | 517,828 | ||||||||||||||||||
Senior Vice President and | 2004 | 368,315 | 428,817 | — | 105,000 | 112,185 | ||||||||||||||||||
Chief Financial Officer | 2003 | 181,244 | 90,007 | — | — | 98,424 |
(1) | Our Annual Incentive Plan provides for annual bonuses if we meet pre-established performance targets. The Annual Incentive Plan is intended to reward for achievement of our business objectives during the year. Payment amounts are based on business unit and corporate financial results against the performance targets. The final amount of bonus earned by each participant depends upon the performance and job level of the individual. | |
(2) | Mr. Anderson is an Australian citizen whose employment with us is based in Singapore. He is considered a global assignee. Our approach for global assignee employees is to ensure that individuals working abroad are compensated as they would be if they were based in their home country by offsetting expenses related to a global assignment. This approach covers all areas that are affected by the assignment, including salary, cost of living, taxes, housing, benefits, savings, schooling and other miscellaneous expenses. Mr. Anderson is paid in Australian dollars; for purposes of the table, these amounts are converted into U.S. dollars using the exchange rate for the last month of the year. For Mr. Anderson, the 2005 amount reflects $276,051 due to his global assignment and $11,037 for a company-provided car. The 2004 amount reflects $261,776 due to his global assignment and $12,499 for a company-provided car. The 2003 amount shown reflects $271,249 due to his global assignment and $11,468 for a company-provided car. | |
Mr. Mason joined us in February 2004. He is a United Kingdom citizen whose employment with us is based in Brussels, Belgium. He commutes from his home in the United Kingdom. We provide Mr. Mason with an apartment in Brussels. Mr. Mason is paid in British pounds; for purposes of the table, these amounts are converted into U.S. dollars using the exchange rate for the last month of the year. For Mr. Mason, the 2005 amount reflects $35,535 paid for a company-provided apartment and $41,442 for a company-provided car. The 2004 amount reflects $38,552 paid for a company-provided apartment and $15,028 for a company-provided car. Mr. Mason is not treated as a global assignee. Mr. Mason resigned from his position as Senior Vice President and President, Levi Strauss Europe, effective February 28, 2006. In connection with his resignation and as contemplated by his employment agreement, Mr. Mason will receive no additional payment as a result of his departure. | ||
Mr. Ploos van Amstel relocated to the United States from Belgium in March 2005. He is paid in U.S. dollars. For 2005, the amount includes $977,733 in relocation expenses grossed up for taxes and $65,972 for non-taxable relocation expenses. | ||
(3) | For 2005, this column reflects the first payment earned under our Management Incentive Plan and the final payment under the interim long-term incentive plan. | |
For 2004, this column reflects the first and second payments earned under our interim long-term incentive plan. | ||
For 2003, this column reflects the payments earned under the 2000 grant of our Leadership Shares Plan, our prior long-term incentive plan. These payments relate to the first four years of performance under the five-year measurement period, which was from 2000 through 2003. We did not make any payments under the Leadership Shares Plan in respect of the second or third installments of the 2000 grant. We did not make any further payments in respect of any outstanding awards, and do not expect to do so for any of the remaining performance measurement periods. For more information about our long term incentive plans, see “Executive Compensation — Long Term Incentive Compensation Plans.” | ||
(4) | Beginning in 2005, our Executive Deferred Compensation Plan provides that we will match certain employee deferrals to the plan. Under the plan, we match deferrals in an amount in excess of the contribution limit under our Employee Savings and Investment Plan (which is our |
101
Table of Contents
401(k) plan), up to 10% of eligible pay. For Messrs. Marineau, Hanson and Ploos van Amstel, amounts shown in 2005 reflect these matching contributions. | ||
For Messrs. Marineau and Hanson the amounts shown in 2004 and 2003 include contributions we made on their behalf under our Capital Accumulation Plan. The Capital Accumulation Plan was a non-qualified, defined contribution savings plan that permitted eligible employees to contribute up to 10% of their pay, on an after-tax basis, to an individual retail brokerage account established in the employee’s name. Matching contributions under this plan were dependent on business performance. We terminated the Capital Accumulation Plan in November 2004 and replaced it with our Executive Deferred Compensation Plan. | ||
For Mr. Marineau, the 2005 amount shown reflects payments made as part of the 401(k) excess match of $295,148 and $523,813 in above-market interest attributable to amounts he deferred under our Executive Deferred Compensation Plan. The 2004 amount shown reflects a Capital Accumulation Plan contribution of $115,000 and $487,686 in above-market interest attributable to amounts he deferred under our executive deferred compensation plan. The 2003 amount shown reflects $348,640 in above-market interest attributable to amounts he deferred under our Executive Deferred Compensation Plan. | ||
For Mr. Anderson, the 2005 amount shown reflects $71,451 in above-market interest attributable to amounts he deferred under our Executive Deferred Compensation Plan. The 2004 amount shown reflects $68,724 in above-market interest attributable to amounts he deferred under our executive deferred compensation plan. The 2003 amount shown reflects $46,643 of above-market interest attributable to amounts he deferred under our Executive Deferred Compensation Plan. | ||
For Mr. Mason, the 2004 amount shown reflects a special one-time bonus of $1,563,675, paid in lieu of a 2004 long term incentive grant as provided under his employment agreement. For more information, please see “Employment Agreements.” | ||
The above-market interest amounts for Messrs. Marineau and Anderson stated above, reflect updates to amounts previously reported as the formula used to determine interest paid under our executive deferred compensation plan became determinable in 2005. Above-market interest amounts previously reported assumed payment at a guaranteed minimum rate. | ||
For Mr. Hanson, the 2005 amount shown reflects payments made as part of the 401(k) excess match of $92,670. The 2004 amount shown reflects a special retention bonus of $125,000, a special performance bonus of $125,000 and a Capital Accumulation Plan contribution of $35,904. | ||
For Mr. Ploos van Amstel, the 2005 amount shown reflects a 401(k) excess match of $6,873, a $300,000 hiring bonus, a $200,000 special bonus and an insurance premium payment of $10,955. The 2004 amount shown reflects a special bonus of $21,830, a sign-on bonus of $64,900 and an insurance premium payment of $25,455. The 2003 amount shown reflects a sign-on bonus of $79,060, a special bonus of $2,237 and an insurance premium payment of $17,127. | ||
(5) | From 2000 to 2004, we tracked Mr. Anderson’s salary in U.S. dollars and increased it according to U.S. market practices. However, due to substantial exchange rate fluctuations that have occurred over the last several years, his salary growth as expressed in Australian dollars (AUD) was not consistent with the rate of increases awarded to him. As a result, beginning in 2004, we track and pay his salary in Australian dollars. Under this methodology, in March 2004, we adjusted his AUD salary amount to AUD 987,600 to properly reflect the same rate of salary increases we had applied to his salary, as paid in U.S. dollars, since 2000. For purposes of the table, we convert his salary into U.S. dollars using the exchange rate for the last month of the year. |
102
Table of Contents
Number of | Performance or | Estimated Future Payouts | ||||||||||||||||||
Shares, Units | Other Period Until | Under Non-Stock Price-Based Plans | ||||||||||||||||||
or Other | Maturation | Threshold | Target | Maximum | ||||||||||||||||
Name | Rights (#) | or Payout | ($ or #) | ($ or #) | ($ or #) | |||||||||||||||
Philip A. Marineau | 83,334 | (1) | Three years | $ | — | $ | 5,000,000 | (2) | None | (3) | ||||||||||
— | Two years | — | 4,000,000 | $ | 6,600,000 | (4) | ||||||||||||||
R. John Anderson | 16,667 | (1) | Three years | — | 1,000,000 | (2) | None | (3) | ||||||||||||
— | Two years | — | 800,000 | $ | 1,320,000 | (4) | ||||||||||||||
Paul Mason | 15,000 | (1) | Three years | — | 900,000 | (2) | None | (3)(5) | ||||||||||||
— | Two years | — | 720,000 | $ | 1,188,000 | (4)(5) | ||||||||||||||
Robert L. Hanson | 15,000 | (1) | Three years | — | 900,000 | (2) | None | (3) | ||||||||||||
— | Two years | — | 720,000 | $ | 1,188,000 | (4) | ||||||||||||||
Hans Ploos van Amstel | 11,667 | (1) | Three years | — | 700,000 | (2) | None | (3) | ||||||||||||
— | Two years | — | 560,000 | $ | 924,000 | (4) |
(1) | Award was made under our Senior Executive Long Term Incentive Plan. | |
(2) | Target amount was used to determine the number of stock appreciation rights granted. | |
(3) | Payout is based on appreciation of stock appreciation rights. | |
(4) | Cash-based award was made under our 2005 Management Incentive Plan. | |
(5) | As a result of Mr. Mason’s resignation at the end of February 2006, he is no longer be eligible for future payouts under the plan. |
103
Table of Contents
Final Average Covered | Years of Service | |||||||||||||||||||||||||||
Compensation | 5 | 10 | 15 | 20 | 25 | 30 | 35 | |||||||||||||||||||||
$ 400,000 | $ | 40,000 | $ | 80,000 | $ | 120,000 | $ | 160,000 | $ | 200,000 | $ | 205,000 | $ | 210,000 | ||||||||||||||
600,000 | 60,000 | 120,000 | 180,000 | 240,000 | 300,000 | 307,500 | 315,000 | |||||||||||||||||||||
800,000 | 80,000 | 160,000 | 240,000 | 320,000 | 400,000 | 410,000 | 420,000 | |||||||||||||||||||||
1,000,000 | 100,000 | 200,000 | 300,000 | 400,000 | 500,000 | 512,500 | 525,000 | |||||||||||||||||||||
1,200,000 | 120,000 | 240,000 | 360,000 | 480,000 | 600,000 | 615,000 | 630,000 | |||||||||||||||||||||
1,400,000 | 140,000 | 280,000 | 420,000 | 560,000 | 700,000 | 717,500 | 735,000 | |||||||||||||||||||||
1,600,000 | 160,000 | 320,000 | 480,000 | 640,000 | 800,000 | 820,000 | 840,000 | |||||||||||||||||||||
1,800,000 | 180,000 | 360,000 | 540,000 | 720,000 | 900,000 | 922,500 | 945,000 | |||||||||||||||||||||
2,000,000 | 200,000 | 400,000 | 600,000 | 800,000 | 1,000,000 | 1,025,000 | 1,050,000 | |||||||||||||||||||||
2,200,000 | 220,000 | 440,000 | 660,000 | 880,000 | 1,100,000 | 1,127,500 | 1,155,000 | |||||||||||||||||||||
2,400,000 | 240,000 | 480,000 | 720,000 | 960,000 | 1,200,000 | 1,230,000 | 1,260,000 | |||||||||||||||||||||
2,600,000 | 260,000 | 520,000 | 780,000 | 1,040,000 | 1,300,000 | 1,332,500 | 1,365,000 | |||||||||||||||||||||
2,800,000 | 280,000 | 560,000 | 840,000 | 1,120,000 | 1,400,000 | 1,435,000 | 1,470,000 | |||||||||||||||||||||
3,000,000 | 300,000 | 600,000 | 900,000 | 1,200,000 | 1,500,000 | 1,537,500 | 1,575,000 | |||||||||||||||||||||
3,200,000 | 320,000 | 640,000 | 960,000 | 1,280,000 | 1,600,000 | 1,640,000 | 1,680,000 | |||||||||||||||||||||
3,400,000 | 340,000 | 680,000 | 1,020,000 | 1,360,000 | 1,700,000 | 1,742,500 | 1,785,000 |
Annual | ||||||||||||
Final Average Covered | Pension | |||||||||||
Name | Years of Service | Compensation | Benefit | |||||||||
(As of November 27, 2005) | ||||||||||||
Philip A. Marineau(1)(2) | 24 | $ | 2,544,120 | $ | 1,223,436 | |||||||
Robert L. Hanson(1) | 17 | 583,058 | 189,084 |
(1) | We made amendments to our U.S. Home Office Pension Plan (HOPP) in 2004 that affected Mr. Marineau and Mr. Hanson in that their benefits were frozen under the plan. | |
(2) | For Mr. Marineau, the number of years of credited service and covered compensation are based on the terms of his employment agreement. Mr. Marineau’s HOPP benefits were frozen as of November 2004. However, as provided under Mr. Marineau’s employment agreement, he also participates in a supplemental executive retirement plan, which is a non-qualified complementary plan that operates in the same manner as the HOPP. This supplemental plan results in Mr. Marineau receiving the same pension benefits he would have received had the HOPP not been frozen. |
104
Table of Contents
• | If we terminate without cause or if Mr. Marineau terminates for good reason, Mr. Marineau will be entitled to: (i) severance payments equal to three times the sum of his base salary as of the termination date plus his most recent target or, if greater, annual bonus, (ii) amounts accrued or earned under our compensation and benefit plans and (iii) an amount in respect of the Leadership Shares granted in the one-time grant described above. | |
• | If we terminate for cause or if Mr. Marineau terminates for other than good reason, then the agreement will terminate without our having further obligations to Mr. Marineau other than for amounts accrued or earned under our compensation and benefit programs (which does not include unvested Leadership Shares or target bonus amounts not payable as of the date of termination). | |
• | If we terminate for any reason other than cause or if Mr. Marineau terminates for good reason within 12 months after a change in control (as defined in the agreement), Mr. Marineau will be entitled to: (i) severance payments equal to three times the sum of his base salary as of the termination date plus his most recent target or, if greater, annual bonus, (ii) amounts accrued or earned under our compensation and benefit plans, (iii) an amount in respect of the Leadership Shares granted in the one-time grant described above, (iv) full and immediate vesting in all outstanding Leadership Shares; (v) full and immediate vesting in his supplemental pension benefit; and (vi) under specified circumstances, if any amounts paid are treated as parachute payments (as defined in Section 280G(b)(2) of the Internal Revenue Code), an amount equal to the applicable excise tax and any taxes on this reimbursement payment. |
105
Table of Contents
106
Table of Contents
• | Each of our directors and each of our named executive officers; | |
• | Each person known by us to own beneficially more than 5% of our voting trust certificates; and | |
• | All of our directors and officers as a group. |
107
Table of Contents
Percentage of | ||||||||
Number of Voting | Voting Trust | |||||||
Trust Certificates | Certificates | |||||||
Name | Beneficially Owned | Outstanding | ||||||
Peter E. Haas, Jr. | 10,105,820 | (1) | 27.11 | % | ||||
Miriam L. Haas | 6,803,724 | (2) | 18.25 | % | ||||
F. Warren Hellman | 4,541,380 | (3) | 12.18 | % | ||||
Robert D. Haas | 3,955,462 | (4) | 10.61 | % | ||||
Margaret E. Haas | 2,644,278 | (5) | 7.09 | % | ||||
Walter J. Haas | 1,584,357 | (6) | 4.25 | % | ||||
Robert E. Friedman | 1,267,634 | (7) | 3.40 | % | ||||
Angela Glover Blackwell | — | — | ||||||
James C. Gaither | — | — | ||||||
James C. Gaither | — | — | ||||||
Peter A. Georgescu | — | — | ||||||
Patricia A. House | — | — | ||||||
Leon J. Level | — | — | ||||||
Philip A. Marineau | — | — | ||||||
Patricia Salas Pineda | — | — | ||||||
T. Gary Rogers | — | — | ||||||
R. John Anderson | — | — | ||||||
Robert L. Hanson | — | — | ||||||
Paul Mason | — | — | ||||||
Hans Ploos van Amstel | — | — | ||||||
Directors and executive officers as a group (24 persons) | 24,425,459 | 65.52 | % |
(1) | Includes 3,882,360 voting trust certificates held by a trust, of which Mr. Haas is trustee, for the benefit of charitable entities. Includes a total of 1,644,624 voting trust certificates held by Mr. Haas’ wife and by trusts, of which Mr. Haas is trustee, for the benefit of his children. Mr. Haas disclaims beneficial ownership of these voting trust certificates. Includes 61,709 voting trust certificates held by trusts, of which Mr. Haas is trustee, for the benefit of the children of Mr. Haas and of Margaret E. Haas. Mr. Haas disclaims beneficial ownership of these voting trust certificates. Includes 2,657,721 voting trust certificates held by partnerships of which Mr. Haas is managing general partner. | |
(2) | Includes 3,823,795 voting trust certificates held by the estate of Peter E. Haas, Sr., for which Ms. Haas has been appointed co-executor under the will of Peter E. Haas, Sr. | |
(3) | Includes 190,243 voting trust certificates held by a trust, of which Mr. Hellman is co-trustee, for the benefit of the daughter of Robert D. Haas. Mr. Hellman disclaims beneficial ownership of these voting trust certificates. Includes 3,823,795 voting trust certificates held by the estate of Peter E. Haas, Sr., for which Mr. Hellman has been nominated co-executor under the will of Peter E. Haas, Sr. Mr. Hellman disclaims beneficial ownership of these voting trust certificates. | |
(4) | Includes an aggregate of 50,876 voting trust certificates owned by the spouse of Mr. Haas and by a trust, of which Mr. Haas is trustee, for the benefit of their daughter. Mr. Haas disclaims beneficial ownership of these voting trust certificates. Includes 700,000 voting trust certificates held by the Walter A. Haas, Jr. QTIPTrust B-1 of which Mr. Haas is trustee. Includes 9,123 voting trust certificates held by the Walter A. Haas, Jr. QTIP Trust A, of which Mr. Haas is a co-trustee, for the benefit of his mother. Mr. Haas disclaims beneficial ownership of these voting trust certificates. | |
(5) | Includes 1,841 voting trust certificates held by a trust, of which Ms. Haas is trustee, for the benefit of Ms. Haas’ son. Ms. Haas disclaims beneficial ownership of these voting trust certificates. | |
(6) | Includes 170,309 voting trust certificates held by the spouse of Mr. Haas and by trusts, of which Mr. Haas is trustee, for the benefit of Mr. Haas’ children. Mr. Haas disclaims beneficial ownership of these voting trust certificates. Includes 1,400,000 voting trust certificates held by the Walter A. Haas, Jr. QTIPTrust B-3, of which Mr. Haas is trustee. Includes 9,123 voting trust certificates held by the Walter A. Haas, Jr. QTIP Trust A, of which Mr. Haas is a co-trustee, for the benefit of his mother. Mr. Haas disclaims beneficial ownership of these voting trust certificates. |
108
Table of Contents
(7) | Includes 40,000 voting trust certificates held by trusts, of which Mr. Friedman is co-trustee, for the benefit of his children and 195,834 voting trust certificates held by trusts, of which Mr. Friedman is co-trustee, for the benefit of Mr. Friedman’s nieces and nephew. Mr. Friedman disclaims beneficial ownership of these voting trust certificates. Includes 1,010,000 voting trust certificates held by Copper Reservoir, a California limited partnership, for which Mr. Friedman is a general partner. |
109
Table of Contents
• | any breach of the director’s duty of loyalty to us or our stockholders; | |
• | acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; | |
• | unlawful payment of dividends or unlawful stock repurchases or redemptions; or | |
• | any transaction from which the director derived an improper personal benefit. |
110
Table of Contents
111
Table of Contents
112
Table of Contents
113
Table of Contents
114
Table of Contents
115
Table of Contents
116
Table of Contents
• | unsubordinated unsecured obligations of the Company; | |
• | equal in ranking(“pari passu”) with all our existing and future senior debt; and | |
• | senior in right of payment to all our future subordinated debt. |
117
Table of Contents
Redemption Year | Price | |||
2009 | 104.313% | |||
2010 | 102.156% | |||
2011 and thereafter | 100.000% |
118
Table of Contents
119
Table of Contents
• | “— Limitation on Debt”, | |
• | ‘‘— Limitation on Restricted Payments”, | |
• | ‘‘— Limitation on Asset Sales”, | |
• | ‘‘— Limitation on Restrictions on Distributions from Restricted Subsidiaries”, | |
• | clause (x) of the third paragraph (and as referred to in the first paragraph) of “— Designation of Restricted and Unrestricted Subsidiaries”, and | |
• | clause (e) of the first paragraph of “— Merger, Consolidation and Sale of Property” |
120
Table of Contents
121
Table of Contents
122
Table of Contents
123
Table of Contents
124
Table of Contents
125
Table of Contents
126
Table of Contents
127
Table of Contents
128
Table of Contents
129
Table of Contents
130
Table of Contents
• | cure any ambiguity, omission, defect or inconsistency, | |
• | provide for the assumption by a successor corporation of the obligations of the Company under the indenture, |
131
Table of Contents
• | provide for uncertificated notes in addition to or in place of certificated notes (provided that the uncertificated notes are issued in registered form for purposes of Section 163(f) of the Code, or in a manner such that the uncertificated notes are described in Section 163(f)(2)(B) of the Code), | |
• | add Guarantees with respect to the notes, | |
• | secure the notes, to add to the covenants of the Company for the benefit of the holders of the notes or to surrender any right or power conferred upon the Company, | |
• | make any change that does not adversely affect the rights of any holder of the notes, | |
• | comply with any requirement of the SEC in connection with the qualification of the indenture under the Trust Indenture Act, | |
• | provide for the issuance of additional notes in accordance with the indenture. |
132
Table of Contents
133
Table of Contents
134
Table of Contents
135
Table of Contents
136
Table of Contents
137
Table of Contents
138
Table of Contents
139
Table of Contents
140
Table of Contents
141
Table of Contents
142
Table of Contents
143
Table of Contents
144
Table of Contents
145
Table of Contents
146
Table of Contents
147
Table of Contents
148
Table of Contents
149
Table of Contents
150
Table of Contents
151
Table of Contents
152
Table of Contents
153
Table of Contents
154
Table of Contents
155
Table of Contents
• | unsubordinated unsecured obligations of the Company; | |
• | equal in ranking (“pari passu”) with all our existing and future senior debt; and | |
• | senior in right of payment to all our future subordinated debt. |
156
Table of Contents
Redemption Year | Price | |||
2011 | 104.438% | |||
2012 | 102.958% | |||
2013 | 101.479% | |||
2014 and thereafter | 100.000% |
157
Table of Contents
158
Table of Contents
159
Table of Contents
• | “— Limitation on Debt”, | |
• | “— Limitation on Restricted Payments”, | |
• | “— Limitation on Asset Sales”, | |
• | “— Limitation on Restrictions on Distributions from Restricted Subsidiaries”, | |
• | clause (x) of the third paragraph (and as referred to in the first paragraph) of “— Designation of Restricted and Unrestricted Subsidiaries”, and | |
• | clause (e) of the first paragraph of “— Merger, Consolidation and Sale of Property” |
160
Table of Contents
161
Table of Contents
162
Table of Contents
163
Table of Contents
164
Table of Contents
165
Table of Contents
166
Table of Contents
167
Table of Contents
168
Table of Contents
169
Table of Contents
170
Table of Contents
171
Table of Contents
• | cure any ambiguity, omission, defect or inconsistency, | |
• | provide for the assumption by a successor corporation of the obligations of the Company under the indenture, | |
• | provide for uncertificated notes in addition to or in place of certificated notes (provided that the uncertificated notes are issued in registered form for purposes of Section 163(f) of the Code, or in a manner such that the uncertificated notes are described in Section 163(f)(2)(B) of the Code), | |
• | add Guarantees with respect to the notes, | |
• | secure the notes, to add to the covenants of the Company for the benefit of the holders of the notes or to surrender any right or power conferred upon the Company, | |
• | make any change that does not adversely affect the rights of any holder of the notes, | |
• | comply with any requirement of the SEC in connection with the qualification of the indenture under the Trust Indenture Act, |
172
Table of Contents
• | provide for the issuance of additional notes in accordance with the indenture. |
173
Table of Contents
174
Table of Contents
175
Table of Contents
176
Table of Contents
177
Table of Contents
178
Table of Contents
179
Table of Contents
180
Table of Contents
181
Table of Contents
182
Table of Contents
183
Table of Contents
184
Table of Contents
185
Table of Contents
186
Table of Contents
187
Table of Contents
188
Table of Contents
189
Table of Contents
190
Table of Contents
191
Table of Contents
192
Table of Contents
193
Table of Contents
194
Table of Contents
195
Table of Contents
196
Table of Contents
197
Table of Contents
198
Table of Contents
199
Table of Contents
200
Table of Contents
201
Table of Contents
• | a broker-dealer, a dealer in securities, or a trader in securities who elects to apply amark-to-market method of accounting, or a financial institution; | |
• | an S corporation; | |
• | an insurance company; | |
• | a tax-exempt organization; | |
• | a person subject to the alternative minimum tax provisions of the Code; | |
• | a person holding the exchange notes as part of a hedge, straddle, conversion transaction or other risk reduction or constructive sale transaction; | |
• | a nonresident alien or foreign corporation subject to net income basis U.S. federal income tax on income or gain with respect to an exchange note because such income or gain is effectively connected with the conduct of a U.S. trade or business; | |
• | an expatriate of the United States; or | |
• | a U.S. person whose functional currency is not the U.S. dollar. |
• | a citizen or resident of the United States, including an alien individual who is a lawful permanent resident of the United States or who meets the “substantial presence” test under Section 7701(b) of the Code; |
202
Table of Contents
• | a corporation, or other entity taxable as a corporation, created or organized in the United States or under the laws of the United States, any state thereof or the District of Columbia; | |
• | an estate, the income of which is subject to U.S. federal income tax regardless of its source; or | |
• | a trust, if a U.S. court can exercise primary supervision over the administration of the trust and one or more U.S. persons can control all substantial decisions of the trust, or if the trust was in existence on August 20, 1996 and has elected to continue to be treated as a U.S. person. |
• | when you receive it, if you use the cash method of accounting for U.S. federal income tax purposes; or | |
• | when it accrues, if you use the accrual method of accounting for U.S. federal income tax purposes. |
203
Table of Contents
204
Table of Contents
• | you represent that you are the beneficial owner of the exchange notes and not a U.S. person for U.S. federal income tax purposes and you provide your name and address to us or our paying agent on a properly executed IRSForm W-8BEN (or a suitable substitute form) signed under penalties of perjury; | |
• | a securities clearing organization, bank or other financial institution that holds customers’ securities in the ordinary course of its trade or business holds the exchange notes on your behalf, certifies to us or our agent under penalty of perjury that it has received IRSForm W-8BEN (or a suitable substitute form) from you or from another qualifying financial institution intermediary, and provides a copy to us or our agent; or | |
• | you hold your exchange notes through a “qualified intermediary” and the qualified intermediary satisfies the certification and documentation requirements of applicable U.S. Treasury regulations. |
• | you own, actually or constructively, 10% or more of the total combined voting power of all classes of our capital stock entitled to vote; | |
• | you are a controlled foreign corporation with respect to which we are a “related person” within the meaning of Section 864(d)(4) of the Code; or | |
• | you are a bank receiving interest described in Section 881(c)(3)(A) of the Code. |
205
Table of Contents
206
Table of Contents
207
Table of Contents
• | our amended and restated certificate of incorporation and amended and restated by-laws; | |
• | the purchase agreement relating to the Euro Exchange Notes; and | |
• | the indenture relating to Euro Notes (which includes the form of the Euro Exchange Notes). |
Common | ||||||||
CUSIP | Code | ISIN | ||||||
8.625% Euro Notes | — | 021910694 | XS0219106944 |
208
Table of Contents
• | there has been no material adverse change in our financial position since November 27, 2005; and | |
• | we and our subsidiaries have not been involved in any litigation, administrative proceeding or arbitration relating to claims or amounts which are material in the context of the issue of exchange notes, and, so far as we are aware, no such litigation, administrative proceeding or arbitration is pending or threatened. |
• | Levi Strauss International Inc. | |
• | Levi Strauss International | |
• | Levi Strauss & Co. Europe SCA | |
• | Levi Strauss Continental SA | |
• | Levi Strauss Financial Center Corporation | |
• | Levi Strauss International Group Finance Coordination Services SCA | |
• | NF Industries, Inc. | |
• | Levi Strauss (U.K.) Ltd. | |
• | Levi Strauss Nederland B.V. | |
• | Dockers Europe B.V. | |
• | Levi Strauss (Hong Kong) Limited | |
• | Levi’s Only Stores, Inc. | |
• | Levi Strauss Receivables Funding, LLC |
209
Table of Contents
Page | ||
Levi Strauss & Co. and Subsidiaries | ||
Unaudited Consolidated Financial Statements | ||
F-2 | ||
F-3 | ||
F-4 | ||
F-5 | ||
Audited Consolidated Financial Statements | ||
F-23 | ||
F-24 | ||
F-25 | ||
F-26 | ||
F-27 | ||
F-28 |
F-1
Table of Contents
February 26, | November 27, | |||||||
2006 | 2005 | |||||||
(Dollars in thousands) (Unaudited) | ||||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 281,433 | $ | 239,584 | ||||
Restricted cash | 3,650 | 2,957 | ||||||
Trade receivables, net of allowance for doubtful accounts of $26,275 and $26,550 | 517,091 | 626,866 | ||||||
Inventories: | ||||||||
Raw materials | 13,684 | 16,431 | ||||||
Work-in-process | 12,638 | 16,908 | ||||||
Finished goods | 507,385 | 506,902 | ||||||
Total inventories | 533,707 | 540,241 | ||||||
Deferred tax assets, net of valuation allowance of $43,091 and $42,890 | 94,288 | 94,137 | ||||||
Other current assets | 90,024 | 66,902 | ||||||
Total current assets | 1,520,193 | 1,570,687 | ||||||
Property, plant and equipment, net of accumulated depreciation of $489,520 and $471,545 | 375,542 | 380,186 | ||||||
Goodwill | 203,214 | 202,250 | ||||||
Other intangible assets, net of accumulated amortization of $1,219 and $1,081 | 45,627 | 45,715 | ||||||
Non-current deferred tax assets, net of valuation allowance of $261,745 and $260,383 | 498,983 | 499,647 | ||||||
Other assets | 96,293 | 115,163 | ||||||
Total assets | $ | 2,739,852 | $ | 2,813,648 | ||||
LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
Current Liabilities: | ||||||||
Current maturities of long-term debt and short-term borrowings | $ | 92,907 | $ | 95,797 | ||||
Current maturities of capital lease | 1,506 | 1,510 | ||||||
Accounts payable | 191,484 | 235,450 | ||||||
Restructuring liabilities | 13,454 | 14,594 | ||||||
Accrued liabilities | 158,973 | 187,145 | ||||||
Accrued salaries, wages and employee benefits | 239,836 | 277,007 | ||||||
Accrued interest payable | 40,663 | 61,996 | ||||||
Accrued taxes | 73,449 | 39,814 | ||||||
Total current liabilities | 812,272 | 913,313 | ||||||
Long-term debt, less current maturities | 2,235,882 | 2,230,902 | ||||||
Long-term capital lease, less current maturities | 3,754 | 4,077 | ||||||
Postretirement medical benefits | 443,194 | 458,229 | ||||||
Pension liability | 203,105 | 195,939 | ||||||
Long-term employee related benefits | 132,711 | 156,327 | ||||||
Long-term tax liabilities | 19,358 | 17,396 | ||||||
Other long-term liabilities | 40,472 | 41,659 | ||||||
Minority interest | 16,002 | 17,891 | ||||||
Total liabilities | 3,906,750 | 4,035,733 | ||||||
Commitments and contingencies (Note 7) | ||||||||
Stockholders’ deficit: | ||||||||
Common stock — $.01 par value; 270,000,000 shares authorized; 37,278,238 shares issued and outstanding | 373 | 373 | ||||||
Additional paid-in capital | 88,808 | 88,808 | ||||||
Accumulated deficit | (1,144,667 | ) | (1,198,481 | ) | ||||
Accumulated other comprehensive loss | (111,412 | ) | (112,785 | ) | ||||
Stockholders’ deficit | (1,166,898 | ) | (1,222,085 | ) | ||||
Total liabilities and stockholders’ deficit | $ | 2,739,852 | $ | 2,813,648 | ||||
F-2
Table of Contents
Three Months Ended | ||||||||
February 26, | February 27, | |||||||
2006 | 2005 | |||||||
(Dollars in thousands) (Unaudited) | ||||||||
Net sales | $ | 940,191 | $ | 1,005,872 | ||||
Licensing revenue | 19,767 | 13,399 | ||||||
Net revenues | 959,958 | 1,019,271 | ||||||
Cost of goods sold | 502,522 | 519,287 | ||||||
Gross profit | 457,436 | 499,984 | ||||||
Selling, general and administrative expenses | 285,099 | 314,648 | ||||||
Gain on disposal of assets | (1,243 | ) | (1,362 | ) | ||||
Other operating income | (244 | ) | (298 | ) | ||||
Restructuring charges, net of reversals | 3,187 | 3,190 | ||||||
Operating income | 170,637 | 183,806 | ||||||
Interest expense | 66,297 | 68,330 | ||||||
Loss on early extinguishment of debt | 7 | 23,006 | ||||||
Other income, net | (1,148 | ) | (3,959 | ) | ||||
Income before income taxes | 105,481 | 96,429 | ||||||
Income tax expense | 51,667 | 49,110 | ||||||
Net income | $ | 53,814 | $ | 47,319 | ||||
F-3
Table of Contents
Three Months Ended | ||||||||
February 26, | February 27, | |||||||
2006 | 2005 | |||||||
(Dollars in thousands) (Unaudited) | ||||||||
Cash Flows from Operating Activities: | ||||||||
Net income | $ | 53,814 | $ | 47,319 | ||||
Adjustments to reconcile net income to net cash provided by (used for) operating activities: | ||||||||
Depreciation and amortization | 16,330 | 15,181 | ||||||
Gain on disposal of assets | (1,243 | ) | (1,362 | ) | ||||
Unrealized foreign exchange losses (gains) | 650 | (770 | ) | |||||
Write-off of unamortized costs associated with early extinguishment of debt | — | 3,337 | ||||||
Amortization of deferred debt issuance costs | 3,012 | 3,324 | ||||||
Provision for doubtful accounts | 391 | 1,135 | ||||||
Decrease in trade receivables | 112,988 | 68,077 | ||||||
Decrease (increase) in inventories | 10,457 | (51,972 | ) | |||||
Increase in other current assets | (3,791 | ) | (19,634 | ) | ||||
Increase in other non-current assets | (1,332 | ) | (210 | ) | ||||
Decrease in accounts payable and accrued liabilities | (99,697 | ) | (100,329 | ) | ||||
Increase in income tax liabilities | 35,056 | 43,700 | ||||||
Decrease in restructuring liabilities | (896 | ) | (15,611 | ) | ||||
Decrease in accrued salaries, wages and employee benefits | (56,255 | ) | (67,083 | ) | ||||
Decrease in long-term employee related benefits | (13,274 | ) | (4,396 | ) | ||||
Decrease in other long-term liabilities | (1,744 | ) | (452 | ) | ||||
Other, net | (82 | ) | (850 | ) | ||||
Net cash provided by (used for) operating activities | 54,384 | (80,596 | ) | |||||
Cash Flows from Investing Activities: | ||||||||
Purchases of property, plant and equipment | (9,740 | ) | (4,668 | ) | ||||
Proceeds from sale of property, plant and equipment | 1,778 | 2,246 | ||||||
Cash outflow from net investment hedges | — | (2,302 | ) | |||||
Acquisition of U.K. retail stores | (1,032 | ) | — | |||||
Net cash used for investing activities | (8,994 | ) | (4,724 | ) | ||||
Cash Flows from Financing Activities: | ||||||||
Proceeds from issuance of long-term debt | — | 450,000 | ||||||
Repayments of long-term debt | (2,910 | ) | (429,737 | ) | ||||
Net (decrease) increase in short-term borrowings | (1,894 | ) | 1,668 | |||||
Debt issuance costs | (41 | ) | (10,415 | ) | ||||
Increase in restricted cash | (649 | ) | (2,999 | ) | ||||
Net cash (used for) provided by financing activities | (5,494 | ) | 8,517 | |||||
Effect of exchange rate changes on cash | 1,953 | 346 | ||||||
Net increase (decrease) in cash and cash equivalents | 41,849 | (76,457 | ) | |||||
Beginning cash and cash equivalents | 239,584 | 299,596 | ||||||
Ending cash and cash equivalents | $ | 281,433 | $ | 223,139 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 80,496 | $ | 87,775 | ||||
Income taxes | 17,946 | 20,283 | ||||||
Restructuring initiatives | 4,256 | 18,800 |
F-4
Table of Contents
NOTE 1: | SIGNIFICANT ACCOUNTING POLICIES |
F-5
Table of Contents
F-6
Table of Contents
NOTE 2: | RESTRUCTURING LIABILITIES |
Restructuring | Restructuring | |||||||||||||||||||
Liabilities at | Liabilities at | |||||||||||||||||||
November 27, | Restructuring | Restructuring | Restructuring | February 26, | ||||||||||||||||
2005 | Charges | Reductions | Reversals | 2006 | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
2006 Reorganization initiatives(1) | $ | — | $ | 1,828 | $ | (22 | ) | $ | — | $ | 1,806 | |||||||||
2004 Reorganization initiatives(2) | 21,631 | 2,007 | (3,786 | ) | (652 | ) | 19,200 | |||||||||||||
2003/2002 Reorganization initiatives(3) | 1,024 | 6 | (162 | ) | (2 | ) | 866 | |||||||||||||
Total | $ | 22,655 | $ | 3,841 | $ | (3,970 | ) | $ | (654 | ) | $ | 21,872 | ||||||||
Current portion of restructuring liabilities | $ | 14,594 | $ | 13,454 | ||||||||||||||||
Non-current portion of restructuring liabilities | 8,061 | 8,418 | ||||||||||||||||||
Total | $ | 22,655 | $ | 21,872 | ||||||||||||||||
(1) | During the three months ended February 26, 2006, the Company announced that it was consolidating its operations in Norway, Sweden and Denmark into its European headquarters in Brussels, which will result in the displacement of approximately 45 employees. Current period charges represent the estimated statutorily required minimum severance that will be payable to the displaced employees. The Company estimates that it will incur additional restructuring charges of approximately $1.8 million related to this action, principally in the form of additional severance and facility closure costs, which will be recorded when they are incurred. | |
(2) | See below for more information. |
F-7
Table of Contents
(3) | Activity primarily relates to remaining liabilities for severance and related employee benefits resulting from headcount reductions associated with the Company’s plant closures in North America and its 2003 Europe organization changes. In January 2004, the Company closed its sewing and finishing operations in San Antonio, Texas and in March 2004, the Company closed three Canadian facilities, two sewing plants in Edmonton, Alberta and Stoney Creek, Ontario, and a finishing center in Brantford, Ontario. During the fourth quarter of 2003, the Company commenced reorganization actions to consolidate and streamline operations in its European headquarters in Belgium and in various field offices. The remaining severance and related benefit payments are scheduled to be paid out in 2006. The Company expects to incur no significant additional restructuring charges in connection with its 2003 and prior initiatives. |
Restructuring | Restructuring | Cumulative Net | |||||||||||||||||||||||
Liabilities at | Liabilities at | Restructuring | |||||||||||||||||||||||
November 27, | Restructuring | Restructuring | Restructuring | February 26, | Charges | ||||||||||||||||||||
2005 | Charges | Reductions(6) | Reversals(7) | 2006 | to Date(8) | ||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||
2004 Spain Plant Closures(1) | |||||||||||||||||||||||||
Severance and employee benefits | $ | 172 | $ | — | $ | 2 | $ | — | $ | 174 | $ | 26,558 | |||||||||||||
Other restructuring costs | 63 | — | (10 | ) | — | 53 | 1,676 | ||||||||||||||||||
Total | 235 | — | (8 | ) | — | 227 | 28,234 | ||||||||||||||||||
2004 Australia Plant Closure(2) | |||||||||||||||||||||||||
Severance and employee benefits | 101 | — | — | — | 101 | 2,621 | |||||||||||||||||||
2004 U.S. Organizational Changes(3) | |||||||||||||||||||||||||
Severance and employee benefits | 874 | 24 | (314 | ) | (3 | ) | 581 | 11,441 | |||||||||||||||||
Other restructuring costs | 13,506 | 529 | (943 | ) | — | 13,092 | 19,206 | ||||||||||||||||||
Total | 14,380 | 553 | (1,257 | ) | (3 | ) | 13,673 | 30,647 | |||||||||||||||||
2004 Europe Organizational Changes(4) | |||||||||||||||||||||||||
Severance and employee benefits | 3,072 | 1,431 | (1,871 | ) | (27 | ) | 2,605 | 20,563 | |||||||||||||||||
Other restructuring costs | 1,836 | 15 | (453 | ) | (92 | ) | 1,306 | 2,369 | |||||||||||||||||
Total | 4,908 | 1,446 | (2,324 | ) | (119 | ) | 3,911 | 22,932 | |||||||||||||||||
2004 Dockers®Europe Organizational Changes(5) | |||||||||||||||||||||||||
Severance and employee benefits | 227 | 2 | (35 | ) | (2 | ) | 192 | 3,472 | |||||||||||||||||
Other restructuring costs | 1,780 | 6 | (162 | ) | (528 | ) | 1,096 | 3,040 | |||||||||||||||||
Total | 2,007 | 8 | (197 | ) | (530 | ) | 1,288 | $ | 6,512 | ||||||||||||||||
Total | $ | 21,631 | $ | 2,007 | $ | (3,786 | ) | $ | (652 | ) | $ | 19,200 | |||||||||||||
(1) | During the year ended November 28, 2004, the Company closed its two owned and operated manufacturing plants in Spain. Current period activity primarily relates to payments against remaining liabilities for severance and facility closure costs. The Company expects to incur no additional restructuring costs in connection with this action. | |
(2) | During the year ended November 28, 2004, the Company closed its owned and operated manufacturing plant in Adelaide, Australia. In December 2005, the Company sold the manufacturing plant, along with its Adelaide distribution center and business office, for approximately $2.1 million and is leasing back the distribution center and business office for an initial period of two years. The lease agreement contains two renewal options, each for a term of two years. The Company expects to incur no additional restructuring costs in connection with this action. |
F-8
Table of Contents
(3) | During the year ended November 28, 2004, the Company reduced resources associated with the Company’s corporate support functions by eliminating staff, not filling certain open positions and outsourcing most of the transaction activities in the U.S. human resources function. Current period charges primarily represent additional costs associated with remaining lease liabilities. The Company estimates that it will incur future additional restructuring charges of approximately $1.2 million related to this action, principally in the form of additional costs associated with remaining lease liabilities. | |
(4) | During the year ended November 28, 2004, the Company commenced additional reorganization actions in its overall European operations which will result in the displacement of approximately 155 employees, 150 of which had been displaced at February 26, 2006. Current period charges represent additional severance and employee benefits primarily related to headcount reductions at the Company’s information technology center in Europe. The Company estimates that it will incur additional restructuring charges of approximately $0.6 million relating to this action, principally in the form of severance and employee benefits payments, which will be recorded as they become probable and estimable. The sale of the Company’s manufacturing plant in Hungary did not occur during the three months ended February 26, 2006 as previously anticipated. The sales agreement has been terminated, and the Company continues to operate the manufacturing plant. | |
(5) | During the year ended November 27, 2005, the Company transferred and consolidated its Dockers® operations into its European headquarters in Brussels. Current period activity primarily relates to payments against remaining liabilities for severance and facility closure costs. In addition, during the period the Company reduced its remaining estimated lease liability for its facilities in Amsterdam as a result of entering into an agreement to sub-lease a portion of the related property for more favorable terms than were anticipated. The Company expects to incur no additional restructuring costs in connection with this action. | |
(6) | Reductions consist of payments for severance, employee benefits and other restructuring costs, and foreign exchange differences. | |
(7) | Restructuring reversals for the three months ended February 26, 2006 related primarily to the change in the lease liability for the Company’s Dockers® facilities in Amsterdam discussed in (5) above. | |
(8) | Amounts represent cumulative restructuring charges, net of reversals, from the initiative’s inception through February 26, 2006. |
NOTE 3: | GOODWILL AND OTHER INTANGIBLE ASSETS |
Goodwill Acquired | ||||||||||||
Goodwill Balance | During Three Months | Goodwill Balance | ||||||||||
November 27, 2005 | Ended February 26, 2006 | February 26, 2006 | ||||||||||
(Dollars in thousands) | ||||||||||||
U.S. Levi’s® brand | $ | 199,905 | $ | — | $ | 199,905 | ||||||
Europe | 2,345 | 964 | 3,309 | |||||||||
Total | $ | 202,250 | $ | 964 | $ | 203,214 | ||||||
F-9
Table of Contents
February 26, 2006 | November 27, 2005 | |||||||||||||||||||||||
Gross | Accumulated | Gross | Accumulated | |||||||||||||||||||||
Carrying Value | Amortization | Total | Carrying Value | Amortization | Total | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Amortized intangible assets: | ||||||||||||||||||||||||
Other intangible assets | $ | 2,630 | $ | (1,219 | ) | $ | 1,411 | $ | 2,599 | $ | (1,081 | ) | $ | 1,518 | ||||||||||
Unamortized intangible assets: | ||||||||||||||||||||||||
Trademarks and other intangible assets | 44,216 | — | 44,216 | 44,197 | — | 44,197 | ||||||||||||||||||
Total | $ | 46,846 | $ | (1,219 | ) | $ | 45,627 | $ | 46,796 | $ | (1,081 | ) | $ | 45,715 | ||||||||||
NOTE 4: | INCOME TAXES |
Fiscal Year | Fiscal Year | |||||||
2006(1) | 2005(2) | |||||||
Income tax expense at U.S. federal statutory rate | 35.0 | % | 35.0 | % | ||||
State income taxes, net of U.S. federal impact | 0.6 | 0.3 | ||||||
Impact of foreign operations | 12.5 | 15.9 | ||||||
Reassessment of contingent liabilities due to change in estimate | 0.8 | 3.8 | ||||||
Other, including non-deductible expenses | 0.4 | 0.4 | ||||||
49.3 | % | 55.4 | % | |||||
(1) | Estimated annual effective income tax rate for fiscal year 2006. | |
(2) | Projected annual effective income tax rate used for the three months ended February 27, 2005. |
F-10
Table of Contents
F-11
Table of Contents
NOTE 5: | LONG-TERM DEBT |
February 26, | November 27, | |||||||
2006 | 2005 | |||||||
(Dollars in thousands) | ||||||||
Long-term debt | ||||||||
Secured: | ||||||||
Term loan(1) | $ | 488,750 | $ | 491,250 | ||||
Revolving credit facility | — | — | ||||||
Notes payable, at various rates | 111 | 133 | ||||||
Subtotal | 488,861 | 491,383 | ||||||
Unsecured: | ||||||||
Notes(1): | ||||||||
7.00% senior notes due 2006 | 77,803 | 77,782 | ||||||
12.25% senior notes due 2012 | 571,993 | 571,924 | ||||||
Floating rate senior notes due 2012 | 380,000 | 380,000 | ||||||
8.625% Euro senior notes due 2013 | 178,575 | 176,280 | ||||||
9.75% senior notes due 2015 | 450,000 | 450,000 | ||||||
4.25% Yen-denominated Eurobond, due 2016 | 171,453 | 167,588 | ||||||
Subtotal | 1,829,824 | 1,823,574 | ||||||
Current maturities | (82,803 | ) | (84,055 | ) | ||||
Total long-term debt | $ | 2,235,882 | $ | 2,230,902 | ||||
Short-term debt | ||||||||
Short-term borrowings | $ | 10,104 | $ | 11,742 | ||||
Current maturities of long-term debt | 82,803 | 84,055 | ||||||
Total short-term debt | $ | 92,907 | $ | 95,797 | ||||
Total long-term and short-term debt | $ | 2,328,789 | $ | 2,326,699 | ||||
(1) | In March 2006, the Company issued $350.0 million 8.875% senior notes due 2016 and an additional €100 million of 8.625% Euro senior notes due 2013 and subsequently prepaid the term loan. See “Subsequent Event — Issuance of 8.875% senior notes due 2016, Additional Issuance of Euro senior notes due 2013 and Prepayment of Term Loan” below. |
F-12
Table of Contents
F-13
Table of Contents
Principal | ||||
Payments as of | ||||
Fiscal year | February 26, 2006 | |||
(Dollars in thousands) | ||||
2006 (remaining nine months) | $ | 87,908 | ||
2007 | — | |||
2008 | — | |||
2009 | — | |||
2010 | — | |||
Thereafter | 2,227,822 | |||
Total | $ | 2,315,730 | ||
F-14
Table of Contents
F-15
Table of Contents
NOTE 6: | FAIR VALUE OF FINANCIAL INSTRUMENTS |
February 26, 2006 | November 27, 2005 | |||||||||||||||
Carrying | Estimated | Carrying | Estimated | |||||||||||||
Value(1) | Fair Value(1) | Value(2) | Fair Value(2) | |||||||||||||
Assets (Liabilities) | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||
Debt Instruments: | ||||||||||||||||
U.S. dollar notes offerings(3) | $ | (1,506,305 | ) | $ | (1,629,586 | ) | $ | (1,533,000 | ) | $ | (1,618,160 | ) | ||||
Euro notes offering(3) | (184,913 | ) | (192,056 | ) | (178,735 | ) | (179,176 | ) | ||||||||
Yen-denominated Eurobond placement | (173,828 | ) | (168,684 | ) | (168,119 | ) | (161,416 | ) | ||||||||
Term loan(3) | (493,986 | ) | (501,317 | ) | (496,510 | ) | (510,757 | ) | ||||||||
Short-term and other borrowings | (10,420 | ) | (10,420 | ) | (12,330 | ) | (12,330 | ) | ||||||||
Total | $ | (2,369,452 | ) | $ | (2,502,063 | ) | $ | (2,388,694 | ) | $ | (2,481,839 | ) | ||||
Foreign Exchange Contracts: | ||||||||||||||||
Foreign exchange forward contracts | $ | (1,014 | ) | $ | (1,014 | ) | $ | (874 | ) | $ | (874 | ) | ||||
Foreign exchange option contracts | (999 | ) | (999 | ) | 1,250 | 1,250 | ||||||||||
Total | $ | (2,013 | ) | $ | (2,013 | ) | $ | 376 | $ | 376 | ||||||
(1) | Includes accrued interest of $40.7 million. | |
(2) | Includes accrued interest of $62.0 million. | |
(3) | In March 2006, the Company issued $350.0 million 8.875% senior notes due 2016 and an additional €100 million of 8.625% Euro senior notes due 2013 and subsequently prepaid the term loan. See Note 5 for further information. |
F-16
Table of Contents
NOTE 7: | COMMITMENTS AND CONTINGENCIES |
NOTE 8: | DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES |
F-17
Table of Contents
At February 26, 2006 | At November 27, 2005 | |||||||||||||||
Accumulated OCI | Accumulated OCI | |||||||||||||||
Gain (Loss) | Gain (Loss) | |||||||||||||||
Realized | Unrealized | Realized | Unrealized | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Foreign exchange management | ||||||||||||||||
Net investment hedges | ||||||||||||||||
Derivative instruments | $ | 4,637 | $ | — | $ | 4,637 | $ | — | ||||||||
Euro Bond | — | 10,740 | — | 13,035 | ||||||||||||
Yen Bond | — | 1,045 | — | 2,900 | ||||||||||||
Cumulative income taxes | (1,230 | ) | (4,516 | ) | (1,230 | ) | (6,111 | ) | ||||||||
$ | 3,407 | $ | 7,269 | $ | 3,407 | $ | 9,824 | |||||||||
Three Months Ended | ||||||||||||||||
February 26, 2006 | February 27, 2005 | |||||||||||||||
Other (Income) | Other (Income) | |||||||||||||||
Expense, Net | Expense, Net | |||||||||||||||
Realized | Unrealized | Realized | Unrealized | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Foreign exchange management | $ | 1,140 | $ | 2,389 | $ | (3,633 | ) | $ | 653 | |||||||
At February 26, 2006 | At November 27, 2005 | |||||||
Fair Value (Liability) | Fair Value Asset | |||||||
(Dollars in thousands) | ||||||||
Foreign exchange management | $ | (2,013 | ) | $ | 376 | |||
F-18
Table of Contents
NOTE 9: | OTHER INCOME, NET |
Three Months Ended | ||||||||
February 26, | February 27, | |||||||
2006 | 2005 | |||||||
(Dollars in thousands) | ||||||||
Foreign exchange management losses (income) | $ | 3,529 | $ | (2,980 | ) | |||
Foreign currency transaction gains | (2,071 | ) | (871 | ) | ||||
Interest income | (3,128 | ) | (2,177 | ) | ||||
Minority interest — Levi Strauss Japan K.K. | 383 | 1,023 | ||||||
Minority interest — Levi Strauss Istanbul Konfeksiyon(1) | — | 830 | ||||||
Other | 139 | 216 | ||||||
Total | $ | (1,148 | ) | $ | (3,959 | ) | ||
(1) | On March 31, 2005, the Company acquired full ownership of its joint venture in Turkey for $3.8 million in cash; subsequent to that date, all income from that entity was attributed to the Company. |
F-19
Table of Contents
NOTE 10: | EMPLOYEE BENEFIT PLANS |
Pension Benefits | Post-retirement Benefits | |||||||||||||||
Three Months | Three Months | Three Months | Three Months | |||||||||||||
Ended February 26, | Ended February 27, | Ended February 26, | Ended February 27, | |||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Service cost | $ | 1,983 | $ | 2,150 | $ | 207 | $ | 274 | ||||||||
Interest cost | 14,031 | 13,780 | 3,013 | 4,530 | ||||||||||||
Expected return on plan assets | (13,330 | ) | (13,298 | ) | — | — | ||||||||||
Amortization of prior service cost (gain) | 392 | 465 | (14,389 | ) | (14,389 | ) | ||||||||||
Amortization of transition asset | 148 | 108 | — | — | ||||||||||||
Amortization of actuarial loss | 1,975 | 1,261 | 1,671 | 4,533 | ||||||||||||
Net settlement loss(1) | 2,590 | — | — | — | ||||||||||||
Net periodic benefit cost (income) | $ | 7,789 | $ | 4,466 | $ | (9,498 | ) | $ | (5,052 | ) | ||||||
(1) | Primarily consists of a $2.7 million net loss resulting from the settlement of liabilities of certain participants in the Company’s hourly pension plan in Canada as a result of prior plant closures. |
NOTE 11: | COMPREHENSIVE INCOME (LOSS) |
Three Months Ended | ||||||||
February 26, | February 27, | |||||||
2006 | 2005 | |||||||
(Dollars in thousands) | ||||||||
Net income | $ | 53,814 | $ | 47,319 | ||||
Other comprehensive (loss) income: | ||||||||
Net investment hedge (losses) gains | (2,555 | ) | 2,520 | |||||
Foreign currency translation gains (losses) | 2,726 | (1,610 | ) | |||||
Increase in unrealized gain on marketable securities | 414 | 84 | ||||||
Decrease in minimum pension liability | 788 | 24 | ||||||
Total other comprehensive income | 1,373 | 1,018 | ||||||
Total | $ | 55,187 | $ | 48,337 | ||||
F-20
Table of Contents
February 26, | November 27, | |||||||
2006 | 2005 | |||||||
(Dollars in thousands) | ||||||||
Net investment hedge gains | $ | 10,676 | $ | 13,231 | ||||
Foreign currency translation losses | (28,367 | ) | (31,093 | ) | ||||
Unrealized gain on marketable securities | 738 | 324 | ||||||
Additional minimum pension liability | (94,459 | ) | (95,247 | ) | ||||
Accumulated other comprehensive loss, net of income taxes | $ | (111,412 | ) | $ | (112,785 | ) | ||
NOTE 12: | BUSINESS SEGMENT INFORMATION |
Three Months Ended | ||||||||
February 26, | February 27, | |||||||
2006 | 2005 | |||||||
(Dollars in thousands) | ||||||||
Net revenues: | ||||||||
U.S. Levi’s® brand | $ | 277,116 | $ | 283,680 | ||||
U.S. Dockers® brand | 158,679 | 151,473 | ||||||
U.S. Levi Strauss Signature® brand | 70,207 | 87,948 | ||||||
Canada and Mexico | 40,406 | 39,642 | ||||||
Total North America | 546,408 | 562,743 | ||||||
Europe | 240,870 | 297,892 | ||||||
Asia Pacific | 172,680 | 158,636 | ||||||
Consolidated net revenues | $ | 959,958 | $ | 1,019,271 | ||||
F-21
Table of Contents
Three Months Ended | ||||||||
February 26, | February 27, | |||||||
2006 | 2005 | |||||||
(Dollars in thousands) | ||||||||
Operating income: | ||||||||
U.S. Levi’s® brand | $ | 67,371 | $ | 66,902 | ||||
U.S. Dockers® brand | 33,206 | 32,127 | ||||||
U.S. Levi Strauss Signature® brand | 4,149 | 6,193 | ||||||
Canada and Mexico | 7,735 | 10,605 | ||||||
Total North America | 112,461 | 115,827 | ||||||
Europe | 64,316 | 87,413 | ||||||
Asia Pacific | 39,046 | 40,651 | ||||||
Regional operating income | 215,823 | 243,891 | ||||||
Corporate: | ||||||||
Restructuring charges, net of reversals | 3,187 | 3,190 | ||||||
Other corporate expense | 41,999 | 56,895 | ||||||
Total corporate expense | 45,186 | 60,085 | ||||||
Consolidated operating income | 170,637 | 183,806 | ||||||
Interest expense | 66,297 | 68,330 | ||||||
Loss on early extinguishment of debt | 7 | 23,006 | ||||||
Other income, net | (1,148 | ) | (3,959 | ) | ||||
Income before income taxes | $ | 105,481 | $ | 96,429 | ||||
NOTE 13: | SUBSEQUENT EVENTS |
F-22
Table of Contents
F-23
Table of Contents
November 27, | November 28, | |||||||
2005 | 2004 | |||||||
(Dollars in thousands) | ||||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 239,584 | $ | 299,596 | ||||
Restricted cash | 2,957 | 1,885 | ||||||
Trade receivables, net of allowance for doubtful accounts of $26,550 and $29,002 | 626,866 | 619,408 | ||||||
Inventories: | ||||||||
Raw materials | 16,431 | 45,271 | ||||||
Work-in-process | 16,908 | 22,950 | ||||||
Finished goods | 506,902 | 486,633 | ||||||
Total inventories | 540,241 | 554,854 | ||||||
Deferred tax assets, net of valuation allowance of $42,890 and $26,364 | 94,137 | 131,491 | ||||||
Other current assets | 66,902 | 71,870 | ||||||
Total current assets | 1,570,687 | 1,679,104 | ||||||
Property, plant and equipment, net of accumulated depreciation of $471,545 and $486,439 | 380,186 | 416,277 | ||||||
Goodwill | 202,250 | 199,905 | ||||||
Other intangible assets, net of accumulated amortization of $1,081 and $720 | 45,715 | 46,779 | ||||||
Non-current deferred tax assets, net of valuation allowance of $260,383 and $360,319 | 499,647 | 455,303 | ||||||
Other assets | 115,163 | 88,634 | ||||||
Total assets | $ | 2,813,648 | $ | 2,886,002 | ||||
LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
Current Liabilities: | ||||||||
Current maturities of long-term debt and short-term borrowings | $ | 95,797 | $ | 75,165 | ||||
Current maturities of capital lease | 1,510 | 1,587 | ||||||
Accounts payable | 235,450 | 279,406 | ||||||
Restructuring reserves | 14,594 | 41,995 | ||||||
Accrued liabilities | 187,145 | 188,224 | ||||||
Accrued salaries, wages and employee benefits | 277,007 | 293,762 | ||||||
Accrued interest payable | 61,996 | 65,098 | ||||||
Accrued taxes | 39,814 | 124,795 | ||||||
Total current liabilities | 913,313 | 1,070,032 | ||||||
Long-term debt, less current maturities | 2,230,902 | 2,248,723 | ||||||
Long-term capital lease, less current maturities | 4,077 | 5,854 | ||||||
Postretirement medical benefits | 458,229 | 493,110 | ||||||
Pension liability | 195,939 | 217,459 | ||||||
Long-term employee related benefits | 156,327 | 154,495 | ||||||
Long-term tax liabilities | 17,396 | — | ||||||
Other long-term liabilities | 41,659 | 43,205 | ||||||
Minority interests | 17,891 | 24,048 | ||||||
Total liabilities | 4,035,733 | 4,256,926 | ||||||
Commitments and contingencies (Note 9) | ||||||||
Stockholders’ deficit: | ||||||||
Common stock — $.01 par value; 270,000,000 shares authorized; 37,278,238 shares issued and outstanding | 373 | 373 | ||||||
Additional paid-in capital | 88,808 | 88,808 | ||||||
Accumulated deficit | (1,198,481 | ) | (1,354,428 | ) | ||||
Accumulated other comprehensive loss | (112,785 | ) | (105,677 | ) | ||||
Stockholders’ deficit | (1,222,085 | ) | (1,370,924 | ) | ||||
Total liabilities and stockholders’ deficit | $ | 2,813,648 | $ | 2,886,002 | ||||
F-24
Table of Contents
Year Ended | Year Ended | Year Ended | ||||||||||
November 27, | November 28, | November 30, | ||||||||||
2005 | 2004 | 2003 | ||||||||||
(Dollars in thousands) | ||||||||||||
Net sales | $ | 4,125,155 | $ | 4,072,455 | $ | 4,090,730 | ||||||
Licensing revenue | 73,879 | 57,117 | 43,973 | |||||||||
Net revenues | 4,199,034 | 4,129,572 | 4,134,703 | |||||||||
Cost of goods sold | 2,236,963 | 2,288,406 | 2,516,521 | |||||||||
Gross profit | 1,962,071 | 1,841,166 | 1,618,182 | |||||||||
Selling, general and administrative expenses | 1,364,407 | 1,350,020 | 1,218,509 | |||||||||
Gain on disposal of assets | (5,750 | ) | (3,576 | ) | (2,685 | ) | ||||||
Other operating income | (2,479 | ) | — | — | ||||||||
Restructuring charges, net of reversals | 16,633 | 133,623 | 89,009 | |||||||||
Operating income | 589,260 | 361,099 | 313,349 | |||||||||
Interest expense | 263,650 | 260,124 | 254,265 | |||||||||
Loss on early extinguishment of debt | 66,066 | — | 39,353 | |||||||||
Other (income) expense, net | (23,057 | ) | 5,450 | 51,023 | ||||||||
Income (loss) before income taxes | 282,601 | 95,525 | (31,292 | ) | ||||||||
Income tax expense | 126,654 | 65,135 | 318,025 | |||||||||
Net income (loss) | $ | 155,947 | $ | 30,390 | $ | (349,317 | ) | |||||
F-25
Table of Contents
Accumulated | ||||||||||||||||||||
Additional | Other | |||||||||||||||||||
Common | Paid-In | Accumulated | Comprehensive | Stockholders’ | ||||||||||||||||
Stock | Capital | Deficit | Loss | Deficit | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Balance at November 24, 2002 | $ | 373 | $ | 88,808 | $ | (1,035,501 | ) | $ | (82,009 | ) | $ | (1,028,329 | ) | |||||||
Net loss | (349,317 | ) | (349,317 | ) | ||||||||||||||||
Other comprehensive loss, net of tax | (15,526 | ) | (15,526 | ) | ||||||||||||||||
Total comprehensive loss | (364,843 | ) | ||||||||||||||||||
Balance at November 30, 2003 | 373 | 88,808 | (1,384,818 | ) | (97,535 | ) | (1,393,172 | ) | ||||||||||||
Net income | 30,390 | 30,390 | ||||||||||||||||||
Other comprehensive loss, net of tax | (8,142 | ) | (8,142 | ) | ||||||||||||||||
Total comprehensive income | 22,248 | |||||||||||||||||||
Balance at November 28, 2004 | 373 | 88,808 | (1,354,428 | ) | (105,677 | ) | (1,370,924 | ) | ||||||||||||
Net income | 155,947 | 155,947 | ||||||||||||||||||
Other comprehensive loss, net of tax | (7,108 | ) | (7,108 | ) | ||||||||||||||||
Total comprehensive income | 148,839 | |||||||||||||||||||
Balance at November 27, 2005 | $ | 373 | $ | 88,808 | $ | (1,198,481 | ) | $ | (112,785 | ) | $ | (1,222,085 | ) | |||||||
F-26
Table of Contents
Year Ended | Year Ended | Year Ended | ||||||||||
November 27, | November 28, | November 30, | ||||||||||
2005 | 2004 | 2003 | ||||||||||
(Dollars in thousands) | ||||||||||||
Cash Flows from Operating Activities: | ||||||||||||
Net income (loss) | $ | 155,947 | $ | 30,390 | $ | (349,317 | ) | |||||
Adjustments to reconcile net income (loss) to net cash (used for) provided by operating activities: | ||||||||||||
Depreciation and amortization | 59,423 | 62,606 | 64,176 | |||||||||
Non-cash asset write-offs associated with reorganization initiatives | 1,610 | 35,204 | 10,968 | |||||||||
Gain on disposal of assets | (5,750 | ) | (3,576 | ) | (2,685 | ) | ||||||
Unrealized foreign exchange gains | (16,504 | ) | (18,395 | ) | (29,838 | ) | ||||||
Write-off of unamortized costs associated with early extinguishment of debt | 12,473 | — | 32,399 | |||||||||
Amortization of deferred debt issuance costs | 12,504 | 12,676 | 15,728 | |||||||||
Provision for doubtful accounts | 5,215 | 7,892 | 10,720 | |||||||||
Provision for deferred taxes | 1,827 | 28,746 | 188,872 | |||||||||
(Increase) decrease in trade receivables | (22,110 | ) | (100,548 | ) | 105,360 | |||||||
Decrease (increase) in inventories | 3,130 | 100,942 | (77,072 | ) | ||||||||
(Increase) decrease in other current assets | (428 | ) | 37,359 | (13,092 | ) | |||||||
(Increase) decrease in other non-current assets | (24,901 | ) | 289 | (168 | ) | |||||||
(Decrease) increase in accounts payable and accrued liabilities | (38,444 | ) | 105,110 | 50,508 | ||||||||
Decrease in income tax liabilities | (69,804 | ) | (40,597 | ) | (30,037 | ) | ||||||
(Decrease) increase in restructuring reserves | (25,648 | ) | (45,566 | ) | 34,241 | |||||||
(Decrease) increase in accrued salaries, wages and employee benefits | (13,005 | ) | 113,166 | (117,225 | ) | |||||||
Decrease in long-term employee related benefits | (79,329 | ) | (130,733 | ) | (87,952 | ) | ||||||
(Decrease) increase in other long-term liabilities | (827 | ) | 1,777 | (493 | ) | |||||||
Other, net | 844 | 3,154 | 4,257 | |||||||||
Net cash (used for) provided by operating activities | (43,777 | ) | 199,896 | (190,650 | ) | |||||||
Cash Flows from Investing Activities: | ||||||||||||
Purchases of property, plant and equipment | (41,868 | ) | (16,299 | ) | (68,608 | ) | ||||||
Proceeds from sale of property, plant and equipment | 11,528 | 11,351 | 13,431 | |||||||||
Cash inflow (outflow) from net investment hedges | 2,163 | (7,982 | ) | (29,307 | ) | |||||||
Acquisition of Turkey minority interests | (3,835 | ) | — | — | ||||||||
Acquisition of U.K. retail stores | (2,645 | ) | — | — | ||||||||
Net cash used for investing activities | (34,657 | ) | (12,930 | ) | (84,484 | ) | ||||||
Cash Flows from Financing Activities: | ||||||||||||
Proceeds from issuance of long-term debt | 1,031,255 | — | 1,616,039 | |||||||||
Repayments of long-term debt | (979,253 | ) | (13,532 | ) | (1,192,162 | ) | ||||||
Net decrease in short-term borrowings | (2,975 | ) | (4,018 | ) | (1,732 | ) | ||||||
Debt issuance costs | (24,632 | ) | (10,844 | ) | (73,049 | ) | ||||||
Increase in restricted cash | (1,323 | ) | (1,885 | ) | — | |||||||
Other, net | — | (1,841 | ) | — | ||||||||
Net cash provided by (used for) financing activities | 23,072 | (32,120 | ) | 349,096 | ||||||||
Effect of exchange rate changes on cash | (4,650 | ) | 1,305 | 5,037 | ||||||||
Net (decrease) increase in cash and cash equivalents | (60,012 | ) | 156,151 | 78,999 | ||||||||
Beginning cash and cash equivalents | 299,596 | 143,445 | 64,446 | |||||||||
Ending cash and cash equivalents | $ | 239,584 | $ | 299,596 | $ | 143,445 | ||||||
Supplemental disclosure of cash flow information: | ||||||||||||
Cash paid during the period for: | ||||||||||||
Interest | $ | 238,683 | $ | 233,512 | $ | 191,902 | ||||||
Income taxes | 197,315 | 82,985 | 167,264 | |||||||||
Restructuring initiatives | 43,112 | 143,593 | 49,727 |
F-27
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED NOVEMBER 27, 2005, NOVEMBER 28, 2004 AND NOVEMBER 30, 2003
NOTE 1: | SIGNIFICANT ACCOUNTING POLICIES |
F-28
Table of Contents
F-29
Table of Contents
F-30
Table of Contents
F-31
Table of Contents
F-32
Table of Contents
Year Ended | ||||||||||||
November 27, 2005 | November 28, 2004 | November 30, 2003 | ||||||||||
(Dollars in thousands) | ||||||||||||
Foreign exchange management losses | $ | 1,062 | $ | 26,809 | $ | 84,803 | ||||||
Foreign currency transaction gains | (14,724 | ) | (15,028 | ) | (20,960 | ) | ||||||
Interest income | (7,965 | ) | (3,933 | ) | (4,470 | ) | ||||||
Minority interest — Levi Strauss Japan K.K. | 1,847 | 709 | 2,270 | |||||||||
Minority interest — Levi Strauss Istanbul Konfeksiyon(1) | 1,309 | 65 | (725 | ) | ||||||||
Other | (4,586 | ) | (3,172 | ) | (9,895 | ) | ||||||
Total | $ | (23,057 | ) | $ | 5,450 | $ | 51,023 | |||||
(1) | On March 31, 2005, the Company acquired full ownership of its joint venture in Turkey for $3.8 million in cash; subsequent to that date, all income from the joint venture was attributed to the Company. |
F-33
Table of Contents
F-34
Table of Contents
F-35
Table of Contents
NOTE 2: | ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) |
Additional | Unrealized | |||||||||||||||||||
Minimum | Net | Gain on | ||||||||||||||||||
Pension | Investment | Marketable | Translation | |||||||||||||||||
Liability | Hedges | Securities | Adjustments | Totals | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Accumulated other comprehensive income (loss) at November 24, 2002 | $ | (84,441 | ) | $ | 28,350 | $ | — | $ | (25,918 | ) | $ | (82,009 | ) | |||||||
Gross changes | (6,593 | ) | (39,347 | ) | — | 16,572 | (29,368 | ) | ||||||||||||
Tax | 2,080 | 14,983 | — | (3,221 | ) | 13,842 | ||||||||||||||
Other comprehensive income (loss), net of tax | (4,513 | ) | (24,364 | ) | — | 13,351 | (15,526 | ) | ||||||||||||
Accumulated other comprehensive income (loss) at November 30, 2003 | (88,954 | ) | 3,986 | — | (12,567 | ) | (97,535 | ) | ||||||||||||
Gross changes | 20,816 | (19,956 | ) | 377 | 7,174 | 8,411 | ||||||||||||||
Tax | (8,114 | ) | 7,759 | (147 | ) | (16,051 | ) | (16,553 | ) | |||||||||||
Other comprehensive income (loss), net of tax | 12,702 | (12,197 | ) | 230 | (8,877 | ) | (8,142 | ) | ||||||||||||
Accumulated other comprehensive income (loss) at November 28, 2004 | (76,252 | ) | (8,211 | ) | 230 | (21,444 | ) | (105,677 | ) | |||||||||||
Gross changes | (30,578 | ) | 34,876 | 153 | (21,878 | ) | (17,427 | ) | ||||||||||||
Tax | 11,583 | (13,434 | ) | (59 | ) | 12,229 | 10,319 | |||||||||||||
Other comprehensive income (loss), net of tax | (18,995 | ) | 21,442 | 94 | (9,649 | ) | (7,108 | ) | ||||||||||||
Accumulated other comprehensive income (loss) at November 27, 2005 | $ | (95,247 | ) | $ | 13,231 | $ | 324 | $ | (31,093 | ) | $ | (112,785 | ) | |||||||
NOTE 3: | RESTRUCTURING RESERVES |
F-36
Table of Contents
Restructuring | Restructuring | |||||||||||||||||||||||
Reserve at | Reserve at | |||||||||||||||||||||||
November 28, | Restructuring | SG&A | Restructuring | Restructuring | November 27, | |||||||||||||||||||
2004 | Charges | Reversals | Reductions | Reversals | 2005 | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
2004 Reorganization initiatives | $ | 36,904 | $ | 20,548 | $ | — | $ | (32,251 | ) | $ | (3,570 | ) | $ | 21,631 | ||||||||||
2003 and 2002 Reorganization initiatives | 13,935 | 785 | (95 | ) | (10,861 | ) | (2,740 | ) | 1,024 | |||||||||||||||
Total | $ | 50,839 | 21,333 | $ | (95 | ) | $ | (43,112 | ) | $ | (6,310 | ) | $ | 22,655 | ||||||||||
Asset write-off | 1,610 | |||||||||||||||||||||||
Total | $ | 22,943 | ||||||||||||||||||||||
Current portion of restructuring reserves | $ | 41,995 | $ | 14,594 | ||||||||||||||||||||
Non-current portion of restructuring reserves | 8,844 | 8,061 | ||||||||||||||||||||||
Total | $ | 50,839 | $ | 22,655 | ||||||||||||||||||||
F-37
Table of Contents
Restructuring | Restructuring | Cumulative | |||||||||||||||||||||||
Reserve at | Reserve at | Restructuring | |||||||||||||||||||||||
November 28, | Restructuring | Restructuring | Restructuring | November 27, | Charges | ||||||||||||||||||||
2004 | Charges | Reductions(8) | Reversals(9) | 2005 | to Date(10) | ||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||
2004 Spain Plant Closures(1) | |||||||||||||||||||||||||
Severance and employee benefits | $ | 2,425 | $ | 483 | $ | (2,736 | ) | $ | — | $ | 172 | $ | 26,558 | ||||||||||||
Other restructuring costs | 3 | 504 | (413 | ) | (31 | ) | 63 | 1,676 | |||||||||||||||||
Total | 2,428 | 987 | (3,149 | ) | (31 | ) | 235 | 28,234 | |||||||||||||||||
2004 Australia Plant Closure(2) | |||||||||||||||||||||||||
Severance and employee benefits | 751 | 59 | (709 | ) | — | 101 | 2,621 | ||||||||||||||||||
Other restructuring costs | — | — | — | — | — | — | |||||||||||||||||||
Total | 751 | 59 | (709 | ) | — | 101 | 2,621 | ||||||||||||||||||
2004 U.S. Organizational Changes(3) | |||||||||||||||||||||||||
Severance and employee benefits | 4,852 | 1,688 | (4,905 | ) | (761 | ) | 874 | 11,420 | |||||||||||||||||
Other restructuring costs | 14,543 | 3,178 | (4,056 | ) | (159 | ) | 13,506 | 18,677 | |||||||||||||||||
Asset write-off | — | — | — | — | — | 543 | |||||||||||||||||||
Total | 19,395 | 4,866 | (8,961 | ) | (920 | ) | 14,380 | 30,640 | |||||||||||||||||
2004 Europe Organizational Changes(4) | |||||||||||||||||||||||||
Severance and employee benefits | 9,702 | 6,731 | (11,716 | ) | (1,645 | ) | 3,072 | 19,159 | |||||||||||||||||
Other restructuring costs | 1,098 | 1,729 | (535 | ) | (456 | ) | 1,836 | 2,446 | |||||||||||||||||
Total | 10,800 | 8,460 | (12,251 | ) | (2,101 | ) | 4,908 | 21,605 | |||||||||||||||||
Asset write-off(5) | 1,610 | 1,610 | |||||||||||||||||||||||
2004 Dockers®Europe Organizational Changes(6) | |||||||||||||||||||||||||
Severance and employee benefits | 1,349 | 2,385 | (3,143 | ) | (364 | ) | 227 | 3,472 | |||||||||||||||||
Other restructuring costs | — | 3,694 | (1,782 | ) | (132 | ) | 1,780 | 3,562 | |||||||||||||||||
Total | 1,349 | 6,079 | (4,925 | ) | (496 | ) | 2,007 | 7,034 | |||||||||||||||||
2004 Indefinite Suspension of ERP Installation(7) | |||||||||||||||||||||||||
Severance and employee benefits | 520 | 97 | (595 | ) | (22 | ) | — | 2,676 | |||||||||||||||||
Other restructuring costs | 1,661 | — | (1,661 | ) | — | — | 6,668 | ||||||||||||||||||
Asset write-off | — | — | — | — | — | 33,417 | |||||||||||||||||||
Total | 2,181 | 97 | (2,256 | ) | (22 | ) | — | 42,761 | |||||||||||||||||
Total — 2004 reorganization initiatives | $ | 36,904 | $ | 22,158 | $ | (32,251 | ) | $ | (3,570 | ) | $ | 21,631 | $ | 134,505 | |||||||||||
(1) | During the year ended November 28, 2004, the Company closed its two owned and operated manufacturing plants in Spain. A portion of the property, plant and equipment was sold in March 2005 for a gain of approximately $3.6 million. The Company sold the remaining property, plant and equipment in October 2005 for approximately $0.2 million. Current period charges represent additional severance and employee benefits and facility closure costs. The Company expects to incur no additional restructuring costs in connection with this action. |
F-38
Table of Contents
(2) | During the year ended November 28, 2004, the Company closed its owned and operated manufacturing plant in Adelaide, Australia. In December 2005, the Company sold the manufacturing plant, along with its Adelaide distribution center and business office, for approximately $2.1 million and is leasing back the distribution center and business office for an initial period of two years. The lease agreement contains two renewal options, each for a term of two years. The Company expects to incur no additional restructuring costs in connection with this action. | |
(3) | During the year ended November 28, 2004, the Company reduced resources associated with the Company’s corporate support functions by eliminating staff, not filling certain open positions and outsourcing most of the transaction activities in the U.S. human resources function. Current period charges represent additional severance and employee benefits and costs associated with remaining lease liabilities. The Company estimates that it will incur future additional restructuring charges principally related to costs associated with remaining lease liabilities of approximately $1.8 million. | |
(4) | During the year ended November 28, 2004, the Company commenced additional reorganization actions in its overall European operations which will result in the displacement of approximately 160 employees, 145 of which had been displaced at November 27, 2005. Current period charges represent additional severance and employee benefits primarily related to headcount reductions at the Company’s distribution centers in Europe and other facility closure costs. The Company estimates that it will incur additional restructuring charges of approximately $2.0 million relating to these actions, principally in the form of severance and employee benefits payments and facility closure costs, which will be recorded as they become probable and estimable. | |
(5) | During the year ended November 27, 2005, the Company entered into negotiations to sell its manufacturing plant in Hungary for approximately $2.4 million, and recognized a $1.6 million impairment charge to record the related assets at their estimated fair value. The sale is expected to close in the first quarter of 2006. No significant severance or benefits charges are expected as a result of this action as the plant employees are expected to remain employed by the new ownership. The Company expects to incur additional charges of approximately $0.3 million, which will be recorded as they become probable and estimable. | |
(6) | During the year ended November 28, 2004, the Company commenced reorganization actions in its Dockers® business in Europe. During the year ended November 27, 2005, the Company transferred and consolidated its Dockers® operations into the European headquarters in Brussels. Current period charges represent additional severance and employee benefits and facility closure costs. The Company expects to incur no additional restructuring costs in connection with this action. | |
(7) | In December 2003, the Company indefinitely suspended the installation of a worldwide enterprise resource planning system in order to reduce costs and prioritize work and resource use. The Company expects to incur no additional restructuring costs in connection with this action. | |
(8) | Reductions consist of payments for severance, employee benefits and other restructuring costs, and foreign exchange differences. | |
(9) | Restructuring reversals of approximately $3.6 million recorded by the Company for the year ended November 27, 2005 related primarily to lower than anticipated severance and employee benefit costs. | |
(10) | Amounts represent cumulative restructuring charges, net of reversals, from the initiative’s inception through November 27, 2005. |
F-39
Table of Contents
Restructuring | Restructuring | Cumulative | |||||||||||||||||||||||||||
Reserve at | Reserve at | Restructuring | |||||||||||||||||||||||||||
November 28, | Restructuring | SG&A | Restructuring | Restructuring | November 27, | Charges | |||||||||||||||||||||||
2004 | Charges | Reversals(4) | Reductions(5) | Reversals | 2005 | to date(6) | |||||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||||||
2003 U.S. Organizational Changes(1) | |||||||||||||||||||||||||||||
Severance and employee benefits | $ | 3,033 | $ | 29 | $ | — | $ | (2,127 | ) | $ | (910 | ) | $ | 25 | $ | 28,780 | |||||||||||||
Other restructuring costs | 66 | — | — | (13 | ) | (53 | ) | — | 970 | ||||||||||||||||||||
Total | 3,099 | 29 | — | (2,140 | ) | (963 | ) | 25 | 29,750 | ||||||||||||||||||||
2003 North America Plant Closures(2) | |||||||||||||||||||||||||||||
Severance and employee benefits | 6,624 | 251 | (5,804 | ) | (603 | ) | 468 | 45,298 | |||||||||||||||||||||
Other restructuring costs | 1,800 | 372 | (1,706 | ) | (466 | ) | — | 7,987 | |||||||||||||||||||||
Asset write-off | — | — | — | — | — | — | 12,212 | ||||||||||||||||||||||
Total | 8,424 | 623 | — | (7,510 | ) | (1,069 | ) | 468 | 65,497 | ||||||||||||||||||||
2003 Europe Organizational Changes(3) | |||||||||||||||||||||||||||||
Severance and employee benefits | 1,827 | 115 | (942 | ) | (588 | ) | 412 | 26,993 | |||||||||||||||||||||
Other restructuring costs | 291 | 18 | (131 | ) | (120 | ) | 58 | 1,524 | |||||||||||||||||||||
Total | 2,118 | 133 | — | (1,073 | ) | (708 | ) | 470 | 28,517 | ||||||||||||||||||||
2002 Europe Reorganization Initiatives(4) | |||||||||||||||||||||||||||||
Severance and employee benefits | 275 | — | (80 | ) | (134 | ) | — | 61 | 6,947 | ||||||||||||||||||||
Other restructuring costs | 19 | — | (15 | ) | (4 | ) | — | — | 50 | ||||||||||||||||||||
Total | 294 | — | (95 | ) | (138 | ) | — | 61 | 6,997 | ||||||||||||||||||||
Total 2003 and prior reorganization initiatives | $ | 13,935 | $ | 785 | $ | (95 | ) | $ | (10,861 | ) | $ | (2,740 | ) | $ | 1,024 | $ | 123,764 | ||||||||||||
(1) | In September 2003, the Company commenced a reorganization of its U.S. business to further reduce the time it takes from initial product concept to placement of the product on the retailer’s shelf and to reduce costs. During year ended November 27, 2005, the Company reversed approximately $1.0 million of charges primarily related to revised COBRA and annual incentive plan liabilities. The Company expects to incur no significant additional restructuring charges in connection with this initiative. | |
(2) | In January 2004, the Company closed its sewing and finishing operations in San Antonio, Texas and in March 2004, the Company closed three Canadian facilities, two sewing plants in Edmonton, Alberta and Stoney Creek, Ontario, and a finishing center in Brantford, Ontario. Current year charges represent additional severance, employee benefits and facility closure costs. During the year ended November 27, 2005, the Company reversed approximately $0.6 million of charges related to lower than anticipated severance and employee benefit costs and $0.5 million related to facility closure costs. The $0.5 million reserve balance at November 27, 2005 primarily relates to remaining salary and benefit payments that are scheduled to be paid out in 2006. The Company expects to incur no significant additional restructuring charges in connection with this initiative. | |
(3) | During the fourth quarter of 2003, the Company commenced reorganization actions to consolidate and streamline operations in its European headquarters in Belgium and in various field offices. Current year charges represent additional severance and employee benefit costs. During the year ended November 27, 2005, the Company reversed approximately $0.7 million of charges primarily related to severance agreements that had been finalized during the period. The $0.5 million reserve balance at November 27, 2005 primarily relates to salary and benefit payments that are scheduled to be paid out in 2006. The Company expects to incur no additional restructuring charges in connection with this action. |
F-40
Table of Contents
(4) | In November 2002, the Company initiated the first of a series of reorganization initiatives affecting several countries to realign its resources with its European sales strategy to improve customer service, reduce operating costs and streamline product distribution activities. These actions included the closures of the leased distribution centers in Belgium, France and Holland during the first half of 2004. All costs related to the 2002 Europe reorganization were charged to selling, general and administrative expenses as the activity did not qualify for restructuring expense treatment. Reversals in 2005 related primarily to lower than anticipated severance and employee benefit costs. The Company expects to incur no additional charges in connection with these initiatives. | |
(5) | Reductions consist primarily of payments for severance, employee benefits and other restructuring costs, and foreign exchange differences. | |
(6) | Amounts represent cumulative charges, net of reversals, from the initiative’s inception through November 27, 2005. |
F-41
Table of Contents
NOTE 4: | INCOME TAXES |
Year Ended | ||||||||||||
November 27, | November 28, | November 30, | ||||||||||
2005 | 2004 | 2003 | ||||||||||
(Dollars in thousands) | ||||||||||||
Domestic | $ | 95,052 | $ | (1,207 | ) | $ | (62,762 | ) | ||||
Foreign | 187,549 | 96,732 | 31,470 | |||||||||
Total income (loss) before income taxes | $ | 282,601 | $ | 95,525 | $ | (31,292 | ) | |||||
Year Ended | ||||||||||||
November 27, | November 28, | November 30, | ||||||||||
2005 | 2004 | 2003 | ||||||||||
(Dollars in thousands) | ||||||||||||
U.S. Federal | ||||||||||||
Current | $ | 80,176 | $ | 11,174 | $ | 86,538 | ||||||
Deferred | 2,529 | 15,331 | 188,802 | |||||||||
82,705 | 26,505 | 275,340 | ||||||||||
U.S. State | ||||||||||||
Current | 5,758 | (678 | ) | 6,629 | ||||||||
Deferred | 11,193 | (5,830 | ) | 4,309 | ||||||||
16,951 | (6,508 | ) | 10,938 | |||||||||
Foreign | ||||||||||||
Current | 38,893 | 25,893 | 35,986 | |||||||||
Deferred | (11,895 | ) | 19,245 | (4,239 | ) | |||||||
26,998 | 45,138 | 31,747 | ||||||||||
Consolidated | ||||||||||||
Current | 124,827 | 36,389 | 129,153 | |||||||||
Deferred | 1,827 | 28,746 | 188,872 | |||||||||
Total income tax expense | $ | 126,654 | $ | 65,135 | $ | 318,025 | ||||||
F-42
Table of Contents
Year Ended | ||||||||||||||||||||||||
November 27, | November 28, | November 30, | ||||||||||||||||||||||
2005 | 2004 | 2003 | ||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
% | % | % | ||||||||||||||||||||||
Income tax expense at U.S. federal statutory rate | $ | 98,910 | 35.0 | % | $ | 33,434 | 35.0 | % | $ | (10,953 | ) | 35.0 | % | |||||||||||
State income taxes, net of U.S. federal impact | 8,777 | 3.1 | % | (20,257 | ) | (21.2 | )% | (3,488 | ) | 11.1 | % | |||||||||||||
Change in valuation allowance | (62,432 | ) | (22.1 | )% | 37,133 | 38.9 | % | 282,448 | (902.6 | )% | ||||||||||||||
Impact of foreign operations | 86,290 | 30.5 | % | (8,711 | ) | (9.1 | )% | 39,741 | (127.0 | )% | ||||||||||||||
Reassessment of reserves due to change in estimate | (9,612 | ) | (3.4 | )% | 15,985 | 16.7 | % | 12,911 | (41.3 | )% | ||||||||||||||
Other, including non-deductible expenses | 4,721 | 1.7 | % | 7,551 | 7.9 | % | (2,634 | ) | 8.4 | % | ||||||||||||||
Total | $ | 126,654 | 44.8 | % | $ | 65,135 | 68.2 | % | $ | 318,025 | (1016.4 | )% | ||||||||||||
F-43
Table of Contents
Valuation | Valuation | |||||||||||||||
Allowance at | Current Year | Current Year | Allowance at | |||||||||||||
November 28, 2004 | Additions | (Reductions) | November 27, 2005 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Foreign tax credits on unremitted foreign earnings | $ | 147,035 | $ | — | $ | (1,529 | ) | $ | 145,506 | |||||||
Foreign net operating loss carryforwards and other foreign deferred tax assets | 152,786 | — | (63,157 | ) | 89,629 | |||||||||||
U.S. state net operating loss carryforward | 36,343 | 2,254 | — | 38,597 | ||||||||||||
Foreign tax credit carryforwards | 50,519 | — | (20,978 | ) | 29,541 | |||||||||||
Total | $ | 386,683 | $ | 2,254 | $ | (85,664 | ) | $ | 303,273 | |||||||
F-44
Table of Contents
F-45
Table of Contents
2005 | 2004 | |||||||
Deferred | Deferred | |||||||
Tax Assets | Tax Assets | |||||||
(Liabilities) | (Liabilities) | |||||||
(Dollars in thousands) | ||||||||
Deferred tax assets/(liabilities): | ||||||||
Foreign tax credits on unremitted foreign earnings | $ | 223,854 | $ | 226,208 | ||||
Post-retirement benefits | 182,300 | 214,666 | ||||||
Federal net operating loss carryforward | 235,905 | 149,838 | ||||||
Employee compensation and benefit plans | 130,138 | 133,667 | ||||||
Foreign net operating loss carryforward | 82,869 | 133,569 | ||||||
Other | 70,558 | 77,197 | ||||||
Additional minimum pension liability | 57,365 | 46,804 | ||||||
Restructuring and special charges | 12,301 | 22,350 | ||||||
Prepaid royalty income | — | 17,138 | ||||||
Inventory basis difference | 20,678 | 21,457 | ||||||
Foreign tax credit carryforward | 29,541 | 50,519 | ||||||
State net operating loss carryforward | 38,597 | 36,343 | ||||||
Alternative minimum tax credit carryforward | 7,577 | 24,291 | ||||||
Depreciation and amortization | 4,685 | (5,996 | ) | |||||
Foreign exchange gains and losses | (7,856 | ) | 9,799 | |||||
Additional U.S. tax on unremitted foreign earnings | (191,455 | ) | (184,373 | ) | ||||
Subtotal | 897,057 | 973,477 | ||||||
Less: Valuation allowance | (303,273 | ) | (386,683 | ) | ||||
Total net deferred tax assets | $ | 593,784 | $ | 586,794 | ||||
F-46
Table of Contents
F-47
Table of Contents
NOTE 5: | PROPERTY, PLANT AND EQUIPMENT |
November 27, | November 28, | |||||||
2005 | 2004 | |||||||
(Dollars in thousands) | ||||||||
Land | $ | 28,699 | $ | 34,294 | ||||
Buildings and leasehold improvements | 321,265 | 351,057 | ||||||
Machinery and equipment | 442,894 | 477,284 | ||||||
Capitalized internal-use software | 43,522 | 34,515 | ||||||
Construction in progress | 15,351 | 5,566 | ||||||
Total PP&E | 851,731 | 902,716 | ||||||
Accumulated depreciation | (471,545 | ) | (486,439 | ) | ||||
PP&E, net | $ | 380,186 | $ | 416,277 | ||||
NOTE 6: | GOODWILL AND OTHER INTANGIBLE ASSETS |
Goodwill Balance | Goodwill Acquired | Goodwill Balance | ||||||||||
November 28, 2004 | During 2005 | November 27, 2005 | ||||||||||
(Dollars in thousands) | ||||||||||||
U.S. Levi’s® brand | $ | 199,905 | $ | — | $ | 199,905 | ||||||
Europe | — | 2,345 | 2,345 | |||||||||
Total | $ | 199,905 | $ | 2,345 | $ | 202,250 | ||||||
F-48
Table of Contents
November 27, 2005 | November 28, 2004 | |||||||||||||||||||||||
Gross | Accumulated | Gross | Accumulated | |||||||||||||||||||||
Carrying Value | Amortization | Total | Carrying Value | Amortization | Total | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Amortized intangible assets: | ||||||||||||||||||||||||
Other intangible assets | $ | 2,599 | $ | (1,081 | ) | $ | 1,518 | $ | 3,103 | $ | (720 | ) | $ | 2,383 | ||||||||||
Unamortized intangible assets: | ||||||||||||||||||||||||
Trademarks and other intangible assets | 44,197 | — | 44,197 | 44,396 | — | 44,396 | ||||||||||||||||||
$ | 46,796 | $ | (1,081 | ) | $ | 45,715 | $ | 47,499 | $ | (720 | ) | $ | 46,779 | |||||||||||
F-49
Table of Contents
NOTE 7: | LONG-TERM DEBT |
November 27, | November 28, | |||||||
2005 | 2004 | |||||||
(Dollars in thousands) | ||||||||
Long-term debt | ||||||||
Secured: | ||||||||
Term loan | $ | 491,250 | $ | 495,000 | ||||
Revolving credit facility | — | — | ||||||
Customer service center equipment financing(1) | — | 55,936 | ||||||
Notes payable, at various rates | 133 | 408 | ||||||
Subtotal | 491,383 | 551,344 | ||||||
Unsecured: | ||||||||
Notes: | ||||||||
7.00%, due 2006(2) | 77,782 | 449,095 | ||||||
11.625% Dollar denominated, due 2008(3) | — | 378,022 | ||||||
11.625% Euro denominated, due 2008(3) | — | 165,260 | ||||||
12.25% Senior Notes, due 2012 | 571,924 | 571,671 | ||||||
9.75% Senior Notes, due 2015(2) | 450,000 | — | ||||||
Floating rate notes due 2012(3) | 380,000 | — | ||||||
8.625% Euro notes, due 2013(3) | 176,280 | — | ||||||
Yen-denominated Eurobond 4.25%, due 2016 | 167,588 | 194,534 | ||||||
Subtotal | 1,823,574 | 1,758,582 | ||||||
Current maturities | (84,055 | ) | (61,203 | ) | ||||
Total long-term debt | $ | 2,230,902 | $ | 2,248,723 | ||||
Short-term debt: | ||||||||
Short-term borrowings | $ | 11,742 | $ | 13,962 | ||||
Current maturities of long-term debt | 84,055 | 61,203 | ||||||
Total short-term debt | $ | 95,797 | $ | 75,165 | ||||
Total long-term and short-term debt | $ | 2,326,699 | $ | 2,323,888 | ||||
(1) | In December 1999, the Company entered into a secured financing transaction consisting of a five-year credit facility secured by owned equipment at customer service centers (distribution centers) located in Nevada, Mississippi and Kentucky. On December 7, 2004, the Company paid at maturity the remaining principal outstanding under this facility of $55.9 million. | |
(2) | In December 2004, the Company issued $450.0 million in Senior Notes due 2015 and in January 2005 subsequently repurchased $372.1 million of the outstanding notes due 2006. | |
(3) | In March 2005, the Company issued $380.0 million in Floating Rate Senior Notes due 2012, which are referred to as the 2012 floating rate notes, and €150.0 million in Euro Senior Notes due 2013, which are referred to as the 2013 Euro notes, and in March and April 2005 subsequently repurchased or redeemed all of the outstanding notes due 2008. |
F-50
Table of Contents
F-51
Table of Contents
• | 3.00 to 1.00 for any fiscal quarter ending after August 2005 and in or before February 2007; and | |
• | 2.75 to 1.00 for any fiscal quarter thereafter. |
F-52
Table of Contents
F-53
Table of Contents
F-54
Table of Contents
F-55
Table of Contents
F-56
Table of Contents
F-57
Table of Contents
Principal Payments as of November 27, 2005 | ||||||||
Assuming 2006 Notes | Assuming 2006 Notes | |||||||
Fiscal year | Refinancing Condition Not Met | Refinancing Condition Met | ||||||
(Dollars in thousands) | ||||||||
2006(1) (2) | $ | 580,797 | $ | 95,797 | ||||
2007 | — | 5,000 | ||||||
2008 | — | 5,000 | ||||||
2009 | — | 475,000 | ||||||
2010 | — | — | ||||||
Thereafter | 1,745,902 | 1,745,902 | ||||||
Total | $ | 2,326,699 | $ | 2,326,699 | ||||
(1) | Under the Company’s senior secured term loan, the Company must refinance, repay or otherwise irrevocably set aside funds for all of the Company’s senior unsecured notes due 2006 by May 1, 2006, or its senior secured term loan will mature on August 1, 2006. In that case, coupled with the scheduled maturity of the remaining balance of the Company’s 2006 notes of $77.8 million and payments relating to short-term borrowings of approximately $11.7 million, the Company will have to repay or otherwise satisfy approximately $580.8 million of debt in fiscal 2006. If the Company meets the 2006 notes refinancing condition, the senior secured term loan will mature on September 29, 2009 and the Company will have to repay or otherwise satisfy approximately $95.8 million of debt in 2006, which includes required payments of approximately $6.3 million related to the senior secured term loan, approximately $11.7 million related to short-term borrowings and $77.8 million related to the 2006 notes. | |
(2) | The Company intends to use the remaining proceeds of $77.9 million from the issuance of senior notes due 2015 to repay outstanding debt (which may include any remaining 2006 notes). The Company may also elect to use these remaining proceeds for other corporate purposes consistent with the requirements of the Company’s credit agreements, indentures and other agreements. |
F-58
Table of Contents
(Dollars in thousands) | ||||
2006 | $ | 1,778 | ||
2007 | 1,675 | |||
2008 | 1,534 | |||
2009 | 1,248 | |||
2010 | 20 | |||
Thereafter | 12 | |||
Total minimum lease payments | 6,267 | |||
Less: amount representing interest | 680 | |||
Present value of minimum lease payments | 5,587 | |||
Less: current maturities of capital lease | 1,510 | |||
Long-term capital lease | $ | 4,077 | ||
F-59
Table of Contents
NOTE 8: | FAIR VALUE OF FINANCIAL INSTRUMENTS |
November 27, 2005 | November 28, 2004 | |||||||||||||||
Carrying | Estimated | Carrying | Estimated | |||||||||||||
Value(1) | Fair Value(1) | Value(2) | Fair Value(2) | |||||||||||||
Assets (Liabilities) | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||
Debt Instruments: | ||||||||||||||||
U.S. dollar notes offerings | $ | (1,533,000 | ) | $ | (1,618,160 | ) | $ | (1,449,410 | ) | $ | (1,495,072 | ) | ||||
Euro notes offering | (178,735 | ) | (179,176 | ) | (172,381 | ) | (177,817 | ) | ||||||||
Yen-denominated Eurobond placement | (168,119 | ) | (161,416 | ) | (195,173 | ) | (173,774 | ) | ||||||||
Term loan | (496,510 | ) | (510,757 | ) | (500,527 | ) | (545,077 | ) | ||||||||
Customer service center equipment financing | — | — | (57,297 | ) | (56,654 | ) | ||||||||||
Short-term and other borrowings | (12,330 | ) | (12,330 | ) | (14,724 | ) | (14,724 | ) | ||||||||
Total | $ | (2,388,694 | ) | $ | (2,481,839 | ) | $ | (2,389,512 | ) | $ | (2,463,118 | ) | ||||
Foreign Exchange Contracts: | ||||||||||||||||
Foreign exchange forward contracts | $ | (874 | ) | $ | (874 | ) | $ | (4,501 | ) | $ | (4,501 | ) | ||||
Foreign exchange option contracts | 1,250 | 1,250 | 579 | 579 | ||||||||||||
Total | $ | 376 | $ | 376 | $ | (3,922 | ) | $ | (3,922 | ) | ||||||
(1) | Includes accrued interest of $62.0 million. | |
(2) | Includes accrued interest of $65.6 million. |
F-60
Table of Contents
NOTE 9: | COMMITMENTS AND CONTINGENCIES |
Minimum Lease | ||||
Payments | ||||
(Dollars in thousands) | ||||
2006 | $ | 73,931 | ||
2007 | 68,654 | |||
2008 | 62,716 | |||
2009 | 56,985 | |||
2010 | 53,360 | |||
Thereafter | 109,999 | |||
Total minimum lease payments | $ | 425,645 | ||
F-61
Table of Contents
F-62
Table of Contents
NOTE 10: | DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES |
F-63
Table of Contents
Year Ended | Year Ended | Year Ended | ||||||||||||||||||||||
November 27, 2005 | November 28, 2004 | November 30, 2003 | ||||||||||||||||||||||
Other (Income) | Other (Income) | Other (Income) | ||||||||||||||||||||||
Expense, Net | Expense, Net | Expense, Net | ||||||||||||||||||||||
Realized | Unrealized | Realized | Unrealized | Realized | Unrealized | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Foreign exchange management | $ | (1,368 | ) | $ | 2,430 | $ | 34,024 | $ | (7,215 | ) | $ | 83,150 | $ | 1,653 | ||||||||||
At November 27, 2005 | At November 28, 2004 | |||||||||||||||
Accumulated OCI | Accumulated OCI | |||||||||||||||
Gain (Loss) | Gain (Loss) | |||||||||||||||
Realized | Unrealized | Realized | Unrealized | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Foreign exchange management | ||||||||||||||||
Net investment hedges | ||||||||||||||||
Derivative instruments | $ | 4,637 | $ | — | $ | 2,474 | $ | (6,728 | ) | |||||||
Euro Bond | — | 13,035 | — | — | ||||||||||||
Yen Bond | — | 2,900 | — | (10,050 | ) | |||||||||||
Cumulative income taxes | (1,230 | ) | (6,111 | ) | (398 | ) | 6,491 | |||||||||
$ | 3,407 | $ | 9,824 | $ | 2,076 | $ | (10,287 | ) | ||||||||
At November 27, 2005 | At November 28, 2004 | |||||||
Fair Value Asset | Fair Value Liability | |||||||
(Dollars in thousands) | ||||||||
Foreign exchange management | $ | 376 | $ | (3,922 | ) | |||
NOTE 11: | GUARANTEES |
F-64
Table of Contents
NOTE 12: | EMPLOYEE BENEFIT PLANS |
F-65
Table of Contents
• | The Company recognized a benefit from the amortization of a gain from prior service cost of approximately $45 million as a result of the impact of the February 2004 plan amendment to its post-retirement benefit plans, discussed further below; and | |
• | The Company recognized a benefit from the amortization of a gain from prior service cost of approximately $12 million as a result of the impact of the August 2003 plan amendment to its post-retirement benefit plans, discussed further below. |
• | Termination of employees in connection with the2003-2004 U.S. organizational changes resulted in a net curtailment gain of $23.1 million; | |
• | Termination of employees in connection with the 2003 North America plant closures resulted in a net curtailment gain of $3.1 million; | |
• | On February 3, 2004, the Company amended one of its post-retirement benefit plans to change the benefit coverage for certain employees and retired participants, and to exclude new employees from being eligible for medical coverage. The plan changes were effective for eligible employees and retired participants in fiscal year 2004. The plan amendment also limits the amount that the Company will contribute for medical coverage and prescription drug coverage for retirees. The plan amendment resulted in a net curtailment gain of $1.2 million and the recognition of a benefit from the amortization of a gain from prior service cost of approximately $37 million for the year ended November 28, 2004; and | |
• | The Company recognized a benefit from the amortization of a gain from prior service cost of approximately $12 million as a result of the impact of the August 2003 plan amendment to its post-retirement benefit plans, discussed further below. |
F-66
Table of Contents
F-67
Table of Contents
Pension Benefits | Postretirement Benefits | |||||||||||||||
2005(1) | 2004 | 2005 | 2004 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Change in benefit obligation: | ||||||||||||||||
Benefit obligation at beginning of year | $ | 938,373 | $ | 903,512 | $ | 333,158 | $ | 743,829 | ||||||||
Service cost | 8,680 | 17,772 | 1,098 | 1,415 | ||||||||||||
Interest cost | 54,921 | 53,776 | 18,119 | 25,675 | ||||||||||||
Plan participants’ contribution | 1,231 | 1,263 | 7,907 | 5,980 | ||||||||||||
Plan amendments | — | 4,782 | — | (376,441 | ) | |||||||||||
Actuarial loss (gain) | 46,673 | 47,498 | (105,606 | ) | (25,345 | ) | ||||||||||
Net curtailment (gain) loss | (744 | ) | (59,456 | ) | — | (1,713 | ) | |||||||||
Impact of foreign currency changes | (14,398 | ) | 15,843 | — | — | |||||||||||
Plan settlements | (803 | ) | — | — | — | |||||||||||
Benefits paid(2) | (46,598 | ) | (46,617 | ) | (30,676 | ) | (40,242 | ) | ||||||||
Benefit obligation at end of year | $ | 987,335 | $ | 938,373 | $ | 224,000 | $ | 333,158 | ||||||||
Change in plan assets: | ||||||||||||||||
Fair value of plan assets at beginning of year | $ | 692,210 | $ | 624,536 | $ | — | $ | — | ||||||||
Actual return on plan assets | 57,470 | 81,396 | — | — | ||||||||||||
Employer contribution | 31,778 | 38,609 | 22,769 | 34,262 | ||||||||||||
Plan participants’ contributions | 1,231 | 1,263 | 7,907 | 5,980 | ||||||||||||
Plan settlements(3) | (803 | ) | (15,140 | ) | — | — | ||||||||||
Impact of foreign currency changes | (7,490 | ) | 8,163 | — | — | |||||||||||
Benefits paid(2) | (46,598 | ) | (46,617 | ) | (30,676 | ) | (40,242 | ) | ||||||||
Fair value of plan assets at end of year | 727,798 | 692,210 | — | — | ||||||||||||
Funded status | (259,537 | ) | (246,163 | ) | (224,000 | ) | (333,158 | ) | ||||||||
Unrecognized net transition obligation | 2,906 | 3,469 | — | — | ||||||||||||
Unrecognized prior service cost (benefit) | 6,765 | 8,623 | (349,268 | ) | (406,825 | ) | ||||||||||
Unrecognized net actuarial loss | 181,328 | 147,218 | 85,437 | 209,173 | ||||||||||||
Net amount recognized on the balance sheet | $ | (68,538 | ) | $ | (86,853 | ) | $ | (487,831 | ) | $ | (530,810 | ) | ||||
The consolidated balance sheets consist of: | ||||||||||||||||
Accrued benefit liability — current portion | $ | (45,922 | ) | $ | (14,341 | ) | $ | (29,700 | ) | $ | (37,700 | ) | ||||
Accrued benefit liability — long-term portion | (189,823 | ) | (207,500 | ) | (458,131 | ) | (493,110 | ) | ||||||||
Prepaid benefit cost(4) | 6,356 | 6,170 | — | — | ||||||||||||
Intangible asset(4) | 8,683 | 7,228 | — | — | ||||||||||||
Accumulated other comprehensive loss — Additional minimum pension liability | 152,168 | 121,590 | — | — | ||||||||||||
Net amount recognized on balance sheet | $ | (68,538 | ) | $ | (86,853 | ) | $ | (487,831 | ) | $ | (530,810 | ) | ||||
(1) | The Company’s consolidated FAS 87 defined benefit pension plans information for 2005 includes amounts related to pension plans for its subsidiaries in South Korea and Mexico. Prior year amounts do not include information for the pension plans in these foreign subsidiaries, as the Company had determined in prior years that such information was not material to its consolidated financial statements, and obtaining such prior year information in the current year was not practicable. |
F-68
Table of Contents
(2) | Pension benefits are primarily paid through trusts. The Company pays post-retirement benefits directly to the participants. | |
(3) | The 2004 plan settlements primarily relate to curtailments resulting from the partial termination of the Company’s plans in Canada, as a result of plant closures. | |
(4) | Included in “Other assets” on the Company’s consolidated balance sheets. |
Pension Liability | Postretirement Liability | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Current portion of SFAS 87/106 plans | $ | 45,922 | $ | 14,341 | $ | 29,700 | $ | 37,700 | ||||||||
Current portion of other benefit plans | 1,600 | 835 | — | — | ||||||||||||
Total current benefit plans liability | $ | 47,522 | $ | 15,176 | $ | 29,700 | $ | 37,700 | ||||||||
Long-term portion of SFAS 87/106 plans | $ | 189,823 | $ | 207,500 | $ | 458,131 | $ | 493,110 | ||||||||
Long-term portion of other benefit plans | 6,116 | 9,959 | 98 | — | ||||||||||||
Total long-term benefit plans liability | $ | 195,939 | $ | 217,459 | $ | 458,229 | $ | 493,110 | ||||||||
Pension Benefits | ||||||||
2005 | 2004 | |||||||
(Dollars in thousands) | ||||||||
Aggregate projected benefit obligation | $ | 960,820 | $ | 911,654 | ||||
Aggregate accumulated benefit obligation | $ | 926,699 | $ | 879,547 | ||||
Aggregate fair value of plan assets | $ | 701,946 | $ | 667,524 |
Pension Benefits | Postretirement Benefits | |||||||||||||||||||||||
2005 | 2004 | 2003 | 2005 | 2004 | 2003 | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Service cost | $ | 8,680 | $ | 17,772 | $ | 17,754 | $ | 1,098 | $ | 1,415 | $ | 6,396 | ||||||||||||
Interest cost | 54,921 | 53,776 | 52,470 | 18,119 | 25,675 | 49,658 | ||||||||||||||||||
Expected return on plan assets | (53,053 | ) | (49,953 | ) | (46,307 | ) | — | — | ||||||||||||||||
Amortization of prior service cost | 2,557 | (393 | ) | 916 | (57,557 | ) | (50,790 | ) | (8,250 | ) | ||||||||||||||
Amortization of transition asset | 412 | 150 | 585 | — | — | — | ||||||||||||||||||
Amortization of actuarial loss | 5,051 | 7,970 | 8,815 | 18,130 | 19,774 | 10,281 | ||||||||||||||||||
Unrecognized prior service cost | — | — | 186 | — | — | — | ||||||||||||||||||
Termination benefits | — | — | 3,900 | — | — | 15,297 | ||||||||||||||||||
Settlement loss | 3 | — | — | — | — | — | ||||||||||||||||||
Net curtailment gain | — | (1,847 | ) | — | — | (27,426 | ) | (21,021 | ) | |||||||||||||||
Net periodic benefit cost (income) | $ | 18,571 | $ | 27,475 | $ | 38,319 | $ | (20,210 | ) | $ | (31,352 | ) | $ | 52,361 | ||||||||||
F-69
Table of Contents
Pension Liability | Postretirement Liability | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Weighted-average assumptions used to determine net periodic benefit cost: | ||||||||||||||||
Discount rate | 6.0 | % | 6.2 | % | 5.8 | % | 6.3 | % | ||||||||
Expected return on plan assets | 7.8 | % | 8.1 | % | — | — | ||||||||||
Rate of compensation increase | 4.0 | % | 3.9 | % | — | — | ||||||||||
Weighted-average assumptions used to determine benefit obligations: | ||||||||||||||||
Discount rate | 5.8 | % | 6.0 | % | 5.7 | % | 5.8 | % | ||||||||
Rate of compensation increase | 3.9 | % | 3.9 | % | — | — | ||||||||||
Assumed health care cost trend rates were as follows: | ||||||||||||||||
Health care trend rate assumed for next year | — | — | 12.5 | % | 15.0 | % | ||||||||||
Rate trend to which the cost trend is assumed to decline | — | — | 5.0 | % | 5.0 | % | ||||||||||
Year that rate reaches the ultimate trend rate | — | — | 201 | 3 | 201 | 3 |
1-Percentage Point | 1-Percentage Point | ||||||
Increase | Decrease | ||||||
(Dollars in thousands) | |||||||
Effect on the total service and interest cost components | $ | 164 | $ | (162 | ) | ||
Effect on the post-retirement benefit obligation | $ | 134 | $ | (1,842 | ) |
November 27, | November 28, | |||||||
Asset Category | 2005 | 2004 | ||||||
Equity securities | 45.7 | % | 62.8 | % | ||||
Debt securities | 44.0 | % | 32.6 | % | ||||
Real estate | 0.0 | % | 2.6 | % | ||||
Other | 10.3 | % | 2.0 | % | ||||
Total | 100.0 | % | 100.0 | % | ||||
F-70
Table of Contents
Pension | Postretirement | |||||||||||
Fiscal Year | Benefits | Benefits | Total | |||||||||
(Dollars in thousands) | ||||||||||||
2006 | $ | 60,315 | $ | 28,031 | $ | 88,346 | ||||||
2007 | 43,995 | 27,520 | 71,515 | |||||||||
2008 | 44,717 | 25,851 | 70,568 | |||||||||
2009 | 46,680 | 23,933 | 70,613 | |||||||||
2010 | 47,030 | 22,165 | 69,195 | |||||||||
2011-2015 | 265,339 | 83,160 | 348,499 |
NOTE 13: | EMPLOYEE INVESTMENT PLANS |
NOTE 14: | EMPLOYEE COMPENSATION PLANS |
F-71
Table of Contents
• | The Company granted stock appreciation rights (referred to as units) that vest in three years and will be payable in cash. | |
• | The strike price for each grant cycle is approved by the board at the beginning of the cycle. | |
• | The values used to determine appreciation and payouts will be approved by the board and will take into account an annual stock valuation obtained by the Company from an independent third-party under the Company’s valuation policy. | |
• | The plan includes a deferral arrangement. Award payouts in excess of a certain percentage may be subject to deferral with the final amount reflecting changes in the value of the shares during the deferral period. |
F-72
Table of Contents
F-73
Table of Contents
NOTE 15: | LONG-TERM EMPLOYEE RELATED BENEFITS |
As of | As of | |||||||
November 27, | November 28, | |||||||
2005 | 2004 | |||||||
(Dollars in thousands) | ||||||||
Workers’ compensation | $ | 44,339 | $ | 59,006 | ||||
Deferred compensation | 95,795 | 95,489 | ||||||
Non-current portion of liabilities for long-term incentive plans | 16,193 | — | ||||||
Total | $ | 156,327 | $ | 154,495 | ||||
F-74
Table of Contents
NOTE 16: | COMMON STOCK |
NOTE 17: | RELATED PARTIES |
F-75
Table of Contents
NOTE 18: | BUSINESS SEGMENT INFORMATION |
Year Ended | ||||||||||||
November 27, | November 28, | November 30, | ||||||||||
2005 | 2004 | 2003 | ||||||||||
(Dollars in thousands) | ||||||||||||
Net revenues: | ||||||||||||
U.S. Levi’s® brand | $ | 1,264,400 | $ | 1,262,016 | $ | 1,383,684 | ||||||
U.S. Dockers® brand | 676,094 | 679,093 | 846,903 | |||||||||
U.S. Levi Strauss Signature® brand | 364,633 | 337,043 | 216,726 | |||||||||
Canada and Mexico | 200,261 | 188,610 | 173,175 | |||||||||
Total North America | 2,505,388 | 2,466,762 | 2,620,488 | |||||||||
Europe | 990,185 | 1,048,982 | 998,533 | |||||||||
Asia Pacific | 703,461 | 613,828 | 515,682 | |||||||||
Consolidated net revenues | $ | 4,199,034 | $ | 4,129,572 | $ | 4,134,703 | ||||||
F-76
Table of Contents
Year Ended | ||||||||||||
November 27, | November 28, | November 30, | ||||||||||
2005 | 2004 | 2003 | ||||||||||
(Dollars in thousands) | ||||||||||||
Operating income: | ||||||||||||
U.S. Levi’s® brand | $ | 284,525 | $ | 285,122 | $ | 184,847 | ||||||
U.S. Dockers® brand | 130,852 | 137,368 | 140,363 | |||||||||
U.S. Levi Strauss Signature® brand | 19,376 | 33,151 | 21,990 | |||||||||
Canada and Mexico | 51,344 | 41,051 | 31,298 | |||||||||
Total North America | 486,097 | 496,692 | 378,498 | |||||||||
Europe | 213,104 | 154,522 | 94,650 | |||||||||
Asia Pacific | 144,934 | 120,121 | 86,930 | |||||||||
Regional operating income | 844,135 | 771,335 | 560,078 | |||||||||
Corporate: | ||||||||||||
Restructuring charges, net of reversals | 16,633 | 133,623 | 89,009 | |||||||||
Other corporate expense | 238,242 | 276,613 | 157,720 | |||||||||
Total corporate expense | 254,875 | 410,236 | 246,729 | |||||||||
Consolidated operating income | 589,260 | 361,099 | 313,349 | |||||||||
Interest expense | 263,650 | 260,124 | 254,265 | |||||||||
Loss on early extinguishment of debt | 66,066 | — | 39,353 | |||||||||
Other (income) expense, net | (23,057 | ) | 5,450 | 51,023 | ||||||||
Income (loss) before income taxes | $ | 282,601 | $ | 95,525 | $ | (31,292 | ) | |||||
Geographic information: | ||||||||||||
Net revenues: | ||||||||||||
United States | $ | 2,305,127 | $ | 2,278,152 | $ | 2,447,313 | ||||||
Foreign countries | 1,893,907 | 1,851,420 | 1,687,390 | |||||||||
Consolidated net revenues | $ | 4,199,034 | $ | 4,129,572 | $ | 4,134,703 | ||||||
Deferred tax assets: | ||||||||||||
United States | $ | 548,490 | $ | 552,903 | $ | 572,506 | ||||||
Foreign countries | 45,294 | 33,891 | 49,342 | |||||||||
$ | 593,784 | $ | 586,794 | $ | 621,848 | |||||||
Long-lived assets: | ||||||||||||
United States | $ | 501,353 | $ | 527,157 | $ | 597,010 | ||||||
Foreign countries | 126,798 | 135,804 | 134,331 | |||||||||
$ | 628,151 | $ | 662,961 | $ | 731,341 | |||||||
F-77
Table of Contents
NOTE 19: | QUARTERLY FINANCIAL DATA (UNAUDITED) |
First | Second | Third | Fourth | |||||||||||||
Year Ended November 27, 2005 | Quarter | Quarter | Quarter | Quarter | ||||||||||||
(Dollars in thousands) | ||||||||||||||||
Net sales | $ | 1,005,872 | $ | 943,670 | $ | 1,018,816 | $ | 1,156,797 | ||||||||
Licensing revenue | 13,399 | 17,964 | 17,705 | 24,811 | ||||||||||||
Net revenues | 1,019,271 | 961,634 | 1,036,521 | 1,181,608 | ||||||||||||
Cost of goods sold | 519,287 | 506,171 | 564,870 | 646,635 | ||||||||||||
Gross profit | 499,984 | 455,463 | 471,651 | 534,973 | ||||||||||||
Selling, general and administrative expenses | 314,648 | 307,937 | 331,029 | 410,793 | ||||||||||||
(Gain) loss on sale of assets | (1,362 | ) | (1,490 | ) | (2,936 | ) | 38 | |||||||||
Other operating income | (298 | ) | (1,033 | ) | (627 | ) | (521 | ) | ||||||||
Restructuring charges, net of reversals | 3,190 | 5,224 | 5,022 | 3,197 | ||||||||||||
Operating income | 183,806 | 144,825 | 139,163 | 121,466 | ||||||||||||
Interest expense | 68,330 | 66,377 | 63,918 | 65,025 | ||||||||||||
Loss on early extinguishment of debt | 23,006 | 43,019 | 39 | 2 | ||||||||||||
Other income, net | (3,959 | ) | (594 | ) | (2,805 | ) | (15,699 | ) | ||||||||
Income before income tax | 96,429 | 36,023 | 78,011 | 72,138 | ||||||||||||
Income tax expense | 49,110 | 9,256 | 39,765 | 28,523 | ||||||||||||
Net income | $ | 47,319 | $ | 26,767 | $ | 38,246 | $ | 43,615 | ||||||||
F-78
Table of Contents
First | Second | Third | Fourth | |||||||||||||
Year Ended November 28, 2004 | Quarter | Quarter | Quarter | Quarter | ||||||||||||
(Dollars in thousands) | ||||||||||||||||
Net sales | $ | 962,304 | $ | 958,833 | $ | 994,626 | $ | 1,156,692 | ||||||||
Licensing revenue | 8,547 | 11,054 | 12,878 | 24,638 | ||||||||||||
Net revenues | 970,851 | 969,887 | 1,007,504 | 1,181,330 | ||||||||||||
Cost of goods sold | 554,058 | 546,140 | 538,179 | 650,029 | ||||||||||||
Gross profit | 416,793 | 423,747 | 469,325 | 531,301 | ||||||||||||
Selling, general and administrative expenses | 301,729 | 320,595 | 312,560 | 415,136 | ||||||||||||
(Gain) loss on sale of assets | 45 | (1,133 | ) | 476 | (2,964 | ) | ||||||||||
Restructuring charges, net of reversals | 54,362 | 25,679 | 28,117 | 25,465 | ||||||||||||
Operating income | 60,657 | 78,606 | 128,172 | 93,664 | ||||||||||||
Interest expense | 68,227 | 65,208 | 64,252 | 62,437 | ||||||||||||
Other (income) expense, net | (1,636 | ) | 5,172 | (466 | ) | 2,380 | ||||||||||
Income (loss) before income taxes | (5,934 | ) | 8,226 | 64,386 | 28,847 | |||||||||||
Income tax (benefit) expense | (3,566 | ) | 2,602 | 17,821 | 48,278 | |||||||||||
Net (loss) income | $ | (2,368 | ) | $ | 5,624 | $ | 46,565 | $ | (19,431 | ) | ||||||
F-79