LEVI STRAUSS & CO
10-Ks and 10-Qs
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Table of Contents
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form 10-K
| (Mark One) | ||
|
þ
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
|
or
|
||
|
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
|
For the fiscal
year ended November 29,
2009
|
||
Commission file number:
002-90139
LEVI STRAUSS &
CO.
(Exact Name of Registrant as
Specified in Its Charter)
| DELAWARE | 94-0905160 | |
|
(State or Other Jurisdiction
of
Incorporation or Organization) |
(I.R.S. Employer
Identification No.) |
1155 BATTERY STREET, SAN FRANCISCO, CALIFORNIA 94111
(Address of Principal Executive
Offices)
(415) 501-6000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act: None
Securities registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
o
No
þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
þ
No
o
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes
o
No
þ
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes
o
No
o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K.
þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule
12b-2
of the
Exchange Act. (Check one):
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o |
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes
o
No
þ
The Company is privately held. Nearly all of its common equity
is owned by descendants of the family of the Company’s
founder, Levi Strauss, and their relatives. There is no trading
in the common equity and therefore an aggregate market value
based on sales or bid and asked prices is not determinable.
Indicate the number of shares outstanding of each of the
issuer’s classes of common stock, as of the latest
practicable date.
Common Stock $.01 par value —
37,300,215 shares outstanding on February 4, 2010
Documents
incorporated by reference: None
LEVI
STRAUSS & CO.
TABLE OF
CONTENTS TO
FORM 10-K
FOR
FISCAL YEAR ENDING NOVEMBER 29, 2009
2
Table of Contents
| Item 1. | BUSINESS |
Overview
From our California Gold Rush beginnings, we have grown into one
of the world’s largest brand-name apparel companies. A
history of responsible business practices, rooted in our core
values, has helped us build our brands and engender consumer
trust around the world. Under our brand names, we design and
market products that include jeans and jeans-related pants,
casual and dress pants, tops, jackets, footwear, and related
accessories for men, women and children. We also license our
trademarks for a wide array of products, including accessories,
pants, tops, footwear, home and other products.
An
Authentic American Icon
Our
Levi’s
®
brand has become one of the most widely recognized brands in the
history of the apparel industry. Its broad distribution reflects
the brand’s appeal across consumers of all ages and
lifestyles. Its merchandising and marketing reflect the
brand’s core attributes: original, definitive, honest,
confident and youthful.
Our
Dockers
®
brand was at the forefront of the business casual trend in the
United States. It has since grown to be a global brand covering
a wide range of wearing occasions for men and women with
products rooted in the brand’s heritage of the essential
khaki pant. We also bring style, authenticity and quality to
value-seeking jeanswear consumers through our Signature by Levi
Strauss &
Co.
tm
brand.
Our
Global Reach
We operate our business through three geographic regions:
Americas, Europe and Asia Pacific. Each of our regions includes
established markets, which we refer to as mature markets, such
as the United States, Japan, and Western Europe, and developing
markets, such as India, China, Brazil and Russia. Although our
brands are recognized as authentically “American,” we
derive approximately half of our net revenues from outside the
United States. A summary of financial information for each
geographical region, which comprise our three reporting
segments, is found in Note 20 to our audited consolidated
financial statements included in this report.
Our products are sold in approximately 55,000 retail locations
in more than 110 countries. This includes approximately 1,900
retail stores dedicated to our brands, including both franchised
and company-operated stores.
We support our brands through a global infrastructure, both
sourcing and marketing our products around the world. We
distribute our
Levi’s
®
and
Dockers
®
products primarily through chain retailers and department stores
in the United States and primarily through department stores,
specialty retailers and franchised stores outside of the United
States. We also operate our own brand-dedicated retail network
in all three regions. We distribute Signature by Levi
Strauss &
Co.
tm
brand products primarily through mass channel retailers in the
United States and Canada and mass and other value-oriented
retailers and franchised stores in Asia Pacific.
Levi Strauss & Co. was founded in San Francisco,
California, in 1853 and incorporated in Delaware in 1971. We
conduct our operations outside the United States through foreign
subsidiaries owned directly or indirectly by Levi
Strauss & Co. We manage our regional operations
through headquarters in San Francisco, Brussels and
Singapore. Our corporate offices are located at Levi’s
Plaza, 1155 Battery Street, San Francisco, California
94111, and our main telephone number is
(415) 501-6000.
Our common stock is primarily owned by descendants of the family
of Levi Strauss and their relatives.
Our Website —
www.levistrauss.com
—
contains additional and detailed information about our history,
our products and our commitments. Financial news and reports and
related information about our company can be found at
http://www.levistrauss.com/Financials
.
Our Website and the information contained on our Website are not
part of this annual report and are not incorporated by reference
into this annual report.
3
Table of Contents
Our
Business Strategies
Our management team is actively investing in strategies to grow
our business, respond to marketplace dynamics and build on our
competitive strengths. Our key strategies are:
| • | Build upon our brands’ leadership in jeans and khakis . We intend to build upon our brand equity and our design and marketing expertise to expand the reach and appeal of our brands globally. We believe that our insights, innovation and market responsiveness enable us to create trend-right and trend-leading products and marketing programs that appeal to our existing consumer base, while also providing a solid foundation to enhance our appeal to under-served consumer segments such as women’s. We also seek to further extend our brands’ leadership in jeans and khakis into product and pricing categories that we believe offer attractive opportunities for growth. | |
| • | Diversify and transform our wholesale business. We intend to develop new wholesale opportunities based on targeted consumer segments and seek to continue to strengthen our relationship with existing wholesale customers. We are focused on generating competitive economics and engaging in collaborative volume, inventory and marketing planning to achieve mutual commercial success with our customers. Our goal is to be central to our wholesale customers’ success by using our brands and our strengths in product development and marketing to drive consumer traffic and demand to their stores. | |
| • | Accelerate growth through dedicated retail stores. We continue to strategically expand our dedicated store presence around the world. We believe dedicated full-price and outlet stores represent an attractive opportunity to establish incremental distribution and sales as well as to showcase the full breadth of our product offerings and to enhance our brands’ appeal. We aim to provide a compelling and brand-elevating consumer experience in our dedicated retail stores. | |
| • | Drive productivity to enable investment in initiatives intended to deliver sustained, incremental growth. We are focused on deriving greater efficiencies in our operations by increasing cost effectiveness across our regions and support functions and undertaking projects to transform our supply chain and information systems. We intend to invest the benefits of these efforts into our businesses to drive growth and to continue to build sustainability and social responsibility into all aspects of our operations, including our global sourcing arrangements. | |
| • | Capitalize upon our global footprint. Our global footprint is a key factor in the success of the above strategies. We intend to leverage our expansive global presence and local-market talent to drive growth globally and will focus on those markets that offer us the best opportunities for profitable growth, including an emphasis on fast-growing developing markets and their emerging middle-class consumers. We aim to identify global consumer trends, adapt successes from one market to another and drive growth across our brand portfolio, balancing the power of our global reach with local-market insight. |
Our
Brands and Products
We offer a broad range of products, including jeans, casual and
dress pants, tops, skirts, jackets, footwear and related
accessories. Across all of our brands, pants —
including jeans, casual pants and dress pants —
represented approximately 85%, 85% and 86% of our total units
sold in each of fiscal years 2009, 2008 and 2007, respectively.
Men’s products generated approximately 73%, 75% and 72% of
our total net sales in each of fiscal years 2009, 2008 and 2007,
respectively.
Levi’s
®
Brand
The
Levi’s
®
brand epitomizes classic American style and effortless cool and
is positioned as the original and definitive jeans brand. Since
their inception in 1873,
Levi’s
®
jeans have become one of the most recognizable garments in the
world — reflecting the aspirations and earning the
loyalty of people for generations. Consumers around the world
instantly recognize the distinctive traits of
Levi’s
®
jeans — the double arc of stitching, known as the
Arcuate Stitching Design, and the red Tab Device, a fabric tab
stitched into the back right pocket. Today, the
Levi’s
®
brand continues to evolve, driven by its distinctive pioneering
and innovative spirit. Our range of leading
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Table of Contents
jeanswear and accessories for men, women and children is
available in more than 110 countries, allowing individuals
around the world to express their personal style.
The current
Levi’s
®
product range includes:
| • | Levi’s ® Red Tab tm 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, styles and price points intended to appeal to a broad spectrum of consumers. The line is anchored by the flagship 501 ® jean, the original and best-selling five-pocket jean in history. The Red Tab tm line also incorporates a full range of jeanswear fits and styles designed specifically for women. Sales of Red Tab tm products represented the majority of our Levi’s ® brand net sales in all three of our regions in fiscal years 2009, 2008 and 2007. | |
| • | Premium Products. In addition to Levi’s ® Red Tab tm premium products available around the world, we offer an expanded range of high-end products. In 2009, we consolidated the management of our most premium Levi’s ® jeanswear product lines under a new division based in Amsterdam. This division will oversee the marketing and development of two global product lines: our existing Levi’s ® Vintage Clothing line, which showcases our most premium products by offering detailed replicas of our historical products, and Levi’s ® Made & Crafted, a recently-launched line of premium apparel. |
Our
Levi’s
®
brand products accounted for approximately 79%, 76% and 73% of
our total net sales in fiscal 2009, 2008 and 2007, respectively,
approximately half of which were generated in our Americas
region.
Dockers
®
Brand
First introduced in 1986 as an alternative between jeans and
dress pants, the
Dockers
®
brand is positioned as the khaki authority and aspires to be the
world’s best and most-loved khakis. The
Dockers
®
brand offers a full range of products rooted in the brand’s
khaki heritage and appropriate for a wide-range of wearing
occasions. We seek to renew the appeal of the casual pant
category by dialing up khakis’ masculinity and swagger and
reminding men what they love about the essential khaki pant.
This positioning is reflected in the “Wear the Pants”
campaign launched globally in December 2009. The brand also
offers a complete range of khaki-inspired styles for women with
products designed to flatter her figure and provide versatility
for a wide range of wearing occasions.
Our
Dockers
®
brand products accounted for approximately 16%, 18% and 21% of
our total net sales in fiscal 2009, 2008 and 2007, respectively.
Although the substantial majority of these net sales were in the
Americas region,
Dockers
®
brand products are sold in more than 50 countries.
Signature
by Levi Strauss &
Co.
tm
Brand
We seek to extend the style, authenticity and quality for which
our company is recognized to more value-conscious consumers
through our Signature by Levi Strauss &
Co.
tm
brand. We offer products under this brand name through the mass
retail channel in the United States and Canada and
value-oriented retailers and franchised stores in Asia Pacific.
We use these distribution channels to reach consumers who seek
access to high-quality, affordable and fashionable jeanswear
from a company they trust. The product portfolio includes denim
jeans, casual pants, tops and jackets in a variety of fits,
fabrics and finishes for men, women and kids.
Signature by Levi Strauss &
Co.
tm
brand products accounted for approximately 5%, 6% and 6% of our
total net sales in fiscal years 2009, 2008 and 2007,
respectively. Although a substantial majority of these sales
were in the United States, Signature by Levi Strauss &
Co.
tm
brand products are sold in seven additional countries in our
Americas and Asia Pacific regions.
Licensing
The appeal of our brands across consumer groups and our global
reach enable us to license our
Levi’s
®
,
Dockers
®
and Signature by Levi Strauss &
Co.
tm
trademarks for a variety of product categories in multiple
markets including footwear, belts, wallets and bags, outerwear,
eyewear, sweaters, dress shirts, kidswear, loungewear and
sleepwear, hosiery and luggage.
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Table of Contents
We have licensees for our
Levi’s
®
and
Dockers
®
brands in each of our regions and for our Signature by
Levi Strauss &
Co.
tm
brand in the Americas region. In addition, we enter into
agreements with third parties to produce, market and distribute
our products in several countries around the world, including
various Latin American, Middle Eastern and Asia Pacific
countries.
We enter into licensing agreements with our licensees covering
royalty payments, product design and manufacturing standards,
marketing and sale of licensed products, and protection of our
trademarks. We require our licensees to comply with our code of
conduct for contract manufacturing and engage independent
monitors to perform regular
on-site
inspections and assessments of production facilities.
Sales,
Distribution and Customers
We distribute our products through a wide variety of retail
formats around the world, including chain and department stores,
franchise stores dedicated to our brands, our own
company-operated retail network, multi-brand specialty stores,
mass channel retailers, and both company-operated and retailer
websites.
Multi-brand
Retailers
We seek to make our brands and products available where
consumers shop, including offering products and assortments that
are appropriately tailored for our wholesale customers and their
retail consumers. Our products are also sold through authorized
third-party Internet sites. Sales to our top ten wholesale
customers accounted for approximately 36%, 37% and 42% of our
total net revenues in fiscal years 2009, 2008 and 2007,
respectively. No customer represented 10% or more of net
revenues in any of these years, although our largest customer in
2009, Kohl’s Corporation, accounted for nearly 10% of net
revenues in 2009, and our largest customer in 2008,
J.C. Penney Company, Inc., accounted for nearly 8% of net
revenues in 2008. The loss of one of these or any major customer
could have a material adverse effect on one of our segments or
on us and our subsidiaries as a whole.
Dedicated
Stores
We believe retail stores dedicated to our brands are important
for the growth, visibility, availability and commercial success
of our brands, and they are an increasingly important part of
our strategy for expanding distribution of our products in all
three of our regions. Our brand-dedicated stores are either
operated by us or by independent third parties such as
franchisees and licensees. In addition to the dedicated stores,
we maintain brand-dedicated websites that sell products directly
to retail consumers.
Company-operated retail stores.
Our online
stores and company-operated stores, including both full-price
and outlet stores, generated approximately 11%, 8% and 6% of our
net revenues in fiscal 2009, 2008 and 2007, respectively. As of
November 29, 2009, we had 414 company-operated stores,
predominantly
Levi’s
®
stores, located in 26 countries across our three regions. We had
176 stores in the Americas, 153 stores in Europe and 85 stores
in Asia Pacific. During 2009, we added 180 company-operated
stores and closed 26 stores. These store counts reflect the
impact of our acquisition of 73
U.S. Levi’s
®
and
Dockers
®
outlets during the third quarter of 2009.
Franchised and other stores.
Franchised,
licensed, or other forms of brand-dedicated stores operated by
independent third parties sell
Levi’s
®
,
Dockers
®
and Signature by Levi Strauss &
Co.
tm
products in markets outside the United States. There were
approximately 1,500 of these stores as of November 29,
2009, and they are a key element of our international
distribution. In addition to these stores, we consider our
network of dedicated
shop-in-shops
located within department stores, which may be either operated
directly by us or third parties, to be an important component of
our retail distribution in international markets. Approximately
200 dedicated
shop-in-shops
were operated directly by us as of November 29, 2009.
Seasonality
of Sales
We typically achieve our largest quarterly revenues in the
fourth quarter, reflecting the “holiday” season,
generally followed by the third quarter, reflecting the Fall or
“back to school” season. In 2009, our net revenues in
the first, second, third and fourth quarters represented 23%,
22%, 25% and 30%, respectively, of our total net
6
Table of Contents
revenues for the year. In 2008, our net revenues in the first,
second, third and fourth quarters represented 25%, 21%, 25% and
29%, respectively, of our total net revenues for the year.
Our fiscal year ends on the last Sunday of November in each
year, although the fiscal years of certain foreign subsidiaries
are fixed at November 30 due to local statutory requirements.
Apart from these subsidiaries, each quarter of fiscal years
2009, 2008 and 2007 consisted of 13 weeks, with the
exception of the fourth quarter of 2008, which consisted of
14 weeks.
Marketing
and Promotion
We support our brands with a diverse mix of marketing
initiatives to drive consumer demand.
We advertise around the world through a broad mix of media,
including television, national publications, the Internet,
cinema, billboards and other outdoor vehicles. We use other
marketing vehicles, including event and music sponsorships,
product placement in major motion pictures, television shows,
music videos and leading fashion magazines, and alternative
marketing techniques, including street-level events and similar
targeted “viral” marketing activities.
We root our brand messages in globally consistent brand values
that reflect the unique attributes of our brands: the
Levi’s
®
brand as the original and definitive jeans brand and the
Dockers
®
brand as world’s best and most loved khaki. We then tailor
these programs to local markets in order to maximize relevance
and effectiveness.
We also maintain the Websites
www.levi.com
and
www.dockers.com
which sell products directly to consumers
in the United States and other countries. We operate these
Websites, as well as
www.levistrausssignature.com
, as
marketing vehicles to enhance consumer understanding of our
brands and help consumers find and buy our products. This is
consistent with our strategies of ensuring that our brands and
products are available where consumers shop and that our product
offerings and assortments are appropriately differentiated.
Sourcing
and Logistics
Organization.
Our global sourcing and regional
logistics organizations are responsible for taking a product
from the design concept stage through production to delivery to
our customers. Our objective is to leverage our global scale to
achieve product development and sourcing efficiencies and reduce
total delivered product cost across brands and regions while
maintaining our focus on local service levels and working
capital management.
Product procurement.
We source nearly all of
our products through independent contract manufacturers, with
the remainder sourced from our company-operated manufacturing
and finishing plants, including facilities for our innovation
and development efforts that provide us with the opportunity to
develop new jean styles and finishes to distinguish our products
from that of our competitors. See “Item 2 —
Properties” for more information about those manufacturing
facilities.
Sources and availability of raw materials.
The
principal fabrics used in our business are cotton, blends,
synthetics and wools. The prices we pay our suppliers for our
products are dependent in part on the market price for raw
materials — primarily cotton — used to
produce them. The price and availability of cotton may fluctuate
substantially, depending on a variety of factors, which might
cause a decrease of our profitability or could impair our
ability to meet our production requirements in a timely manner.
Sourcing locations.
We use numerous
independent manufacturers located throughout the world for the
production and finishing of our garments. We conduct assessments
of political, social, economic, trade, labor and intellectual
property protection conditions in the countries in which we
source our products before we place production in those
countries and on an ongoing basis.
In 2009, we sourced products from contractors located in
approximately 45 countries around the world. We sourced products
in North and South Asia, South and Central America (including
Mexico and the Caribbean), Europe and Africa. We expect to
increase our sourcing from contractors located in Asia. No
single country accounted for more than 20% of our sourcing in
2009.
7
Table of Contents
Sourcing practices.
Our sourcing practices
include these elements:
| • | We require all third-party contractors and subcontractors who manufacture or finish products for us to comply with our code of conduct relating to supplier working conditions as well as environmental 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 solid waste disposal, and ethical and legal conduct. | |
| • | We regularly assess manufacturing and finishing facilities through periodic on-site facility inspections and improvement activities, including use of independent monitors to supplement our internal staff. We integrate review and performance 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. We regularly evaluate and
refine our code of conduct processes.
Logistics.
We own and operate dedicated
distribution centers in a number of countries. For more
information, see “Item 2 — Properties.”
Distribution center activities include receiving finished goods
from our contractors and plants, inspecting those products,
preparing them for presentation at retail, and shipping them to
our customers and to our own stores. Our distribution centers
maintain a combination of replenishment and seasonal inventory
from which we ship to our stores and wholesale customers. In
certain locations around the globe we have consolidated our
distribution centers to service multiple countries and brands.
Our inventory significantly builds during peaks in seasonal
shipping periods. We are constantly monitoring our inventory
levels and adjusting them as necessary to meet market demand. In
addition, we outsource some of our logistics activities to
third-party logistics providers.
Competition
The worldwide apparel industry is highly competitive and
fragmented. It is characterized by low barriers to entry, brands
targeted at specific consumer segments, many regional and local
competitors, and an increasing number of global competitors.
Principal competitive factors include:
| • | developing products with relevant fits, finishes, fabrics, style and performance features; | |
| • | maintaining favorable brand recognition and appeal through strong and effective marketing; | |
| • | anticipating and responding to changing consumer demands in a timely manner; | |
| • | providing sufficient retail distribution, visibility and availability, and presenting products effectively at retail; | |
| • | delivering compelling value for the price; and | |
| • | generating competitive economics for wholesale customers, including retailers, franchisees, and distributors. |
We face competition from a broad range of competitors at the
worldwide, regional and local levels in diverse channels across
a wide range of retail price points. Worldwide, a few of our
primary competitors include vertically integrated specialty
stores operated by such companies such as Gap Inc. and Inditex;
jeanswear brands such as those marketed by VF Corporation, a
competitor in multiple channels and product lines; and athletic
wear companies such as adidas Group and Nike, Inc. In addition,
each region faces local or regional competition, such as G-Star
and Diesel in Europe; Pepe in Spain; Brax in Germany; UNIQLO in
Asia Pacific; Edwin in Japan; Apple/Texwood in China; and
retailers’ private or exclusive labels such as those from
Wal-Mart Stores, Inc. (Faded Glory brand); Target Corporation
(Mossimo and Merona brands); JC Penney (Arizona brand) and
Macy’s (INC. brand) in the Americas. For more information
on the factors affecting our competitive position, see
“Item 1A — Risk Factors.”
8
Table of Contents
Trademarks
We have more than 5,000 trademark registrations and pending
applications in approximately 180 countries worldwide, and we
create new trademarks on an ongoing basis. Substantially all of
our global trademarks are owned by Levi Strauss & Co.,
the parent and U.S. operating company. We regard our
trademarks as our most valuable assets and believe they have
substantial value in the marketing of our products. The
Levi’s
®
,
Dockers
®
and
501
®
trademarks, the Arcuate Stitching Design, the Tab Device, the
Two
Horse
®
Design and the Wings and Anchor Design are among our core
trademarks.
We protect these trademarks by registering them with the
U.S. Patent and Trademark Office and with governmental
agencies in other countries, particularly where our products are
manufactured or sold. We work vigorously to enforce and protect
our trademark rights by engaging in regular market reviews,
helping local law enforcement authorities detect and prosecute
counterfeiters, issuing
cease-and-desist
letters against third parties infringing or denigrating our
trademarks, opposing registration of infringing trademarks, and
initiating litigation as necessary. We currently are pursuing
approximately 427 infringement matters around the world. We also
work with trade groups and industry participants seeking to
strengthen laws relating to the protection of intellectual
property rights in markets around the world.
Employees
As of November 29, 2009, we employed approximately
11,800 people, approximately 5,400 of whom were located in
the Americas, 4,200 in Europe, and 2,200 in Asia Pacific.
Approximately 3,000 of our employees were associated with
manufacturing of our products, 3,600 worked in retail, 1,500
worked in distribution and 3,700 were other non-production
employees.
History
and Corporate Citizenship
Our history and longevity are unique in the apparel industry.
Our commitment to quality, innovation and corporate citizenship
began with our founder, Levi Strauss, who infused the business
with the principle of responsible commercial success that has
been embedded in our business practices throughout our more than
150-year
history. This mixture of history, quality, innovation and
corporate citizenship contributes to the iconic reputations of
our brands.
In 1853, during the California Gold Rush, Mr. Strauss
opened a wholesale dry goods business in San Francisco that
became known as “Levi Strauss & Co.” Seeing
a need for work pants that could hold up under rough conditions,
he and Jacob Davis, a tailor, created the first jean. In 1873,
they received a U.S. patent for “waist overalls”
with metal rivets at points of strain. The first product line
designated by the lot number “501” was created in 1890.
In the 19th and early 20th centuries, our work pants were worn
primarily by cowboys, miners and other working men in the
western United States. Then, in 1934, we introduced our first
jeans for women, and after World War II, our jeans began to
appeal to a wider market. By the 1960s they had become a symbol
of American culture, representing a unique blend of history and
youth. We opened our export and international businesses in the
1950s and 1960s. In 1986, we introduced the
Dockers
®
brand of casual apparel which revolutionized the concept of
business casual.
Throughout this long history, we upheld our strong belief that
we can help shape society through civic engagement and community
involvement, responsible labor and workplace practices,
philanthropy, ethical conduct, environmental stewardship and
transparency. We have engaged in a “profits through
principles” business approach from the earliest years of
the business. Among our milestone initiatives over the years, we
integrated our factories two decades prior to the
U.S. civil rights movement and federally mandated
desegregation, we developed a comprehensive supplier code of
conduct requiring safe and healthy working conditions among our
suppliers (a first of its kind for a multinational apparel
company), and we offered full medical benefits to domestic
partners of employees prior to other companies of our size, a
practice that is widely accepted today.
Our Website —
www.levistrauss.com
—
contains additional and detailed information about our history
and corporate citizenship initiatives. Our Website and the
information contained on our Website are not part of this annual
report and are not incorporated by reference into this annual
report.
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| Item 1A. | RISK FACTORS |
Risks
Relating to the Industry in Which We Compete
Our
revenues are influenced by general economic
conditions.
Apparel is a cyclical industry that is dependent upon the
overall level of consumer spending. Our wholesale customers
anticipate and respond to adverse changes in economic conditions
and uncertainty by reducing inventories and canceling orders.
Our brand-dedicated stores are also affected by these conditions
which may lead to a decline in consumer traffic to and spending
in these stores. As a result, factors that diminish consumer
spending and confidence in any of the regions in which we
compete, particularly deterioration in general economic
conditions, high levels and fear of unemployment, increases in
energy costs or interest rates, housing market downturns, fear
about and impact of pandemic illness, and other factors such as
acts of war, acts of nature or terrorist or political events
that impact consumer confidence, could reduce our sales and
adversely affect our business and financial condition through
their impact on our wholesale customers as well as its direct
impact on us. For example, the global financial economic
downturn that began in 2008 has impacted consumer confidence and
spending negatively. In this economic environment we saw several
wholesale customers declare bankruptcy or otherwise exhibit
signs of distress, and even if the economy rebounds we do not
anticipate that our wholesale customers will return to carrying
the levels of inventory in our products as that prior to the
downturn. These outcomes and behaviors have and may continue to
adversely affect our business and financial condition.
Intense
competition in the worldwide apparel industry could lead to
reduced sales and prices.
We face a variety of competitive challenges from jeanswear and
casual apparel marketers, fashion-oriented apparel marketers,
athletic and sportswear marketers, vertically integrated
specialty stores, and retailers of private-label products. Some
of these competitors have greater financial and marketing
resources than we do and may be able to adapt to changes in
consumer preferences or retail requirements more quickly, devote
greater resources to the building and sustaining of their brand
equity and the marketing and sale of their products, or adopt
more aggressive pricing policies than we can. As a result, we
may not be able to compete as effectively with them and may not
be able to maintain or grow the equity of and demand for our
brands. Increased competition in the worldwide apparel
industry — including from international expansion of
vertically integrated specialty stores, from department stores,
chain stores and mass channel retailers developing exclusive
labels, and from well-known and successful non-apparel brands
(such as athletic wear marketers) expanding into jeans and
casual apparel — could reduce our sales and adversely
affect our business and financial condition.
The
success of our business depends upon our ability to offer
innovative and upgraded products at attractive price
points.
The worldwide apparel industry is characterized by constant
product innovation due to changing fashion trends and consumer
preferences and by the rapid replication of new products by
competitors. As a result, our success depends in large part on
our ability to develop, market and deliver innovative and
stylish products at a pace, intensity, and price competitive
with other brands in our segments. We must also have the agility
to respond to changes in consumer preference such as the
consumer shift in Japan away from premium-priced brands to
lower-priced fast-fashion products. In addition, we must create
products at a range of price points that appeal to the consumers
of both our wholesale customers and our dedicated retail stores.
Failure on our part to regularly and rapidly develop innovative
and stylish products and update core products could limit sales
growth, adversely affect retail and consumer acceptance of our
products, negatively impact the consumer traffic in our
dedicated retail stores, leave us with a substantial amount of
unsold inventory which we may be forced to sell at discounted
prices, and impair the image of our brands. Moreover, our newer
products may not produce as high a gross margin as our
traditional products and thus may have an adverse effect on our
overall margins and profitability.
The
worldwide apparel industry is subject to ongoing pricing
pressure.
The apparel market is characterized by low barriers to entry for
both suppliers and marketers, global sourcing through suppliers
located throughout the world, trade liberalization, continuing
movement of product sourcing to
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lower cost countries, and the ongoing emergence of new
competitors with widely varying strategies and resources. These
factors contribute to ongoing pricing pressure throughout the
supply chain. This pressure has had and may continue to have the
following effects:
| • | 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 reduce our production costs and our operating expenses. |
Any of these factors could adversely affect our business and
financial condition.
Increases
in the price of raw materials or their reduced availability
could increase our cost of goods and decrease our
profitability.
The principal fabrics used in our business are cotton, blends,
synthetics and wools. The prices we pay our suppliers for our
products are dependent in part on the market price for raw
materials — primarily cotton — used to
produce them. The price and availability of cotton may fluctuate
substantially, depending on a variety of factors, including
demand, crop yields, weather, supply conditions, transportation
costs, energy prices, work stoppages, government regulation,
economic climates and other unpredictable factors. Any and all
of these factors may be exacerbated by global climate change.
Fluctuations in the price and availability of raw materials have
not materially affected our cost of goods in recent years.
However, increases in raw material costs, together with other
factors, might cause a decrease of our profitability unless we
are able to pass higher prices on to our customers. Moreover,
any decrease in the availability of cotton could impair our
ability to meet our production requirements in a timely manner.
Our
business is subject to risks associated with sourcing and
manufacturing overseas.
We import finished garments and raw materials into all of our
operating regions. Our ability to import products in a timely
and cost-effective manner may be affected by conditions at ports
or issues that otherwise affect transportation and warehousing
providers, such as port and shipping capacity, labor disputes
and work stoppages, political unrest, severe weather, or
homeland security requirements in the United States and other
countries. These issues could delay importation of products or
require us to locate alternative ports or warehousing providers
to avoid disruption to our customers. These alternatives may not
be available on short notice or could result in higher transit
costs, which could have an adverse impact on our business and
financial condition.
Substantially all of our import operations are subject to
customs and tax requirements and to tariffs and quotas set by
governments through mutual agreements or bilateral actions. In
addition, the countries in which our products are manufactured
or imported may from time to time impose additional quotas,
duties, tariffs or other restrictions on our imports or
adversely modify existing restrictions. Adverse changes in these
import costs and restrictions, or our suppliers’ failure to
comply with customs regulations or similar laws, could harm our
business.
Our operations are also subject to the effects of international
trade agreements and regulations such as the North American Free
Trade Agreement, the Dominican-Republic Central America Free
Trade Agreement, the Egypt Qualified Industrial Zone program,
and the activities and regulations of the World Trade
Organization. Although generally these trade agreements have
positive effects on trade liberalization, sourcing flexibility
and cost of goods by reducing or eliminating the duties
and/or
quotas assessed on products manufactured in a particular
country, trade agreements can also impose requirements that
adversely affect our business, such as setting quotas on
products that may be imported from a particular country into our
key markets such as the United States or the European Union.
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Risks
Relating to Our Business
Our
net sales have not grown substantially for more than ten years,
and actions we have taken, and may take in the future, to
address these and other issues facing our business may not be
successful over the long term.
Our net sales have declined from a peak of $7.1 billion in
1996 to $4.1 billion in 2003, with no growth through our
fiscal year 2009. We face intense competition, customer
financial hardship and consolidation, increased focus by
retailers on private-label offerings, expansion of and growth in
new distribution sales channels, declining sales of traditional
core products and continuing pressure on both wholesale and
retail pricing. Our ability to successfully compete could be
impaired by our debt and interest payments, which reduces our
operating flexibility and could limit our ability to respond to
developments in the worldwide apparel industry as effectively as
competitors that do not have comparable debt levels. In
addition, the strategic, operations and management changes we
have made in recent years, including in 2009 and that we will
continue to make in 2010 and beyond, to improve our business and
drive future sales growth may not be successful over the long
term.
We
depend on a group of key customers for a significant portion of
our revenues. A significant adverse change in a customer
relationship or in a customer’s performance or financial
position could harm our business and financial
condition.
Net sales to our ten largest customers totaled approximately 36%
and 37% of total net revenues in 2009 and 2008, respectively.
Our largest customer in 2009, Kohl’s Corporation, accounted
for nearly 10% of net revenues in 2009, and our largest customer
in 2008, J.C. Penney Company, Inc., accounted for nearly 8% of
net revenues in 2008. While we have long-standing relationships
with our wholesale customers, we do not have long-term contracts
with them. As a result, purchases generally occur on an
order-by-order
basis, and the relationship, as well as particular orders, can
generally be terminated by either party at any time. If any
major customer decreases or ceases its purchases from us,
reduces the floor space, assortments, fixtures or advertising
for our products or changes its manner of doing business with us
for any reason, such actions could adversely affect our business
and financial condition.
For example, our wholesale customers are subject to the
fluctuations in general economic cycles and the current global
economic conditions which are impacting consumer spending, and
our customers may also be affected by the credit environment,
which may impact their ability to access the credit necessary to
operate their business. The performance and financial condition
of a wholesale customer may cause us to alter our business terms
or to cease doing business with that customer, which could in
turn adversely affect our own business and financial condition.
In addition, our wholesale customers may change their apparel
strategies or reduce fixture spaces and purchases of brands that
do not meet their strategic requirements, leading to a loss of
sales for our products at those customers.
In addition, the retail industry in the United States has
experienced substantial consolidation in recent years, and
further consolidation may occur. Consolidation in the retail
industry typically results in store closures, centralized
purchasing decisions, increased customer leverage over
suppliers, greater exposure for suppliers to credit risk and an
increased emphasis by retailers on inventory management and
productivity, any of which can, and have, adversely impacted our
net revenues, margins and ability to operate efficiently.
We may
be unable to maintain or increase our sales through our primary
distribution channels.
In the United States, chain stores and department stores are the
primary distribution channels for our
Levi’s
®
and
Dockers
®
products, and the mass channel is the primary distribution
channel for Signature products. Outside the United States,
department stores, independent jeanswear retailers and national
jeans chains have traditionally been our primary distribution
channels.
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We may be unable to maintain or increase sales of our products
through these distribution channels for several reasons,
including the following:
| • | The retailers in these channels maintain — and seek to grow — substantial private-label and exclusive offerings as they strive to differentiate the brands and products they offer from those of their competitors. | |
| • | These retailers may also change their apparel strategies and reduce fixture spaces and purchases of brands misaligned with their strategic requirements. | |
| • | Other channels, including vertically integrated specialty stores, account for a substantial portion of jeanswear and casual wear sales. In some of our mature markets, these stores have already placed competitive pressure on our primary distribution channels, and many of these stores are now looking to our developing markets to grow their business. |
Further success by retailer private-labels and vertically
integrated specialty stores may continue to adversely affect the
sales of our products across all channels, as well as the
profitability of our brand-dedicated stores. Additionally, our
ability to secure or maintain retail floor space, market share
and sales in these channels depends on our ability to offer
differentiated products and to increase retailer profitability
on our products, which could have an adverse impact on our
margins.
Our
inability to revitalize our business in certain markets or
product lines could harm our financial results.
Given the global reach and nature of our business and the
breadth of our product lines, we may experience business
declines in certain markets even while experiencing growth in
others. For example, recent declines in certain mature markets
in our Europe and Asia Pacific regions impact our overall
business performance despite growth in other areas such as
developing markets and our retail network, and the cumulative
effect of these declines could adversely affect our results of
operations. Although we have taken, and continue to take,
product, marketing, distribution and organizational actions to
reverse such declines, if our actions are not successful on a
sustained basis, our results of operations and our ability to
grow may be adversely affected.
During
the past several years, we have experienced significant changes
in senior management and our board. The success of our business
depends on our ability to attract and retain qualified and
effective senior management and board leadership.
Collective or individual changes in our senior management group
or board membership could have an adverse effect on our ability
to determine and implement our strategies, which in turn may
adversely affect our business and results of operations. Recent
changes in our senior management team include Aaron Boey, who
became our Senior Vice President and President, Levi Strauss
Asia Pacific on February 19, 2009, Blake Jorgensen, who
became our Executive Vice President and Chief Financial Officer
on July 1, 2009, and Jaime Cohen Szulc, who became our
Senior Vice President and Chief Marketing Officer —
Levi’s
®
on August 31, 2009. In addition, T. Gary Rogers, the
Chairman of our Board of Directors, retired from our Board in
December 2009, and Richard Kauffman subsequently became Chairman
of the Board. Martin Coles joined our Board in February 2009 and
resigned on January 11, 2010.
Increasing
the number of company-operated stores will require us to enhance
our capabilities and increase our expenditures and will
increasingly impact our financial performance.
Although our business is substantially a wholesale business, we
operated 414 retail stores as of November 29, 2009. As part
of our objective to accelerate growth though dedicated retail
stores, we plan to continue to strategically open
company-operated retail stores, while taking into consideration
the changing economic environment. The results from our retail
network may be adversely impacted if we do not find ways to
generate sufficient sales from our existing and new
company-operated stores, which may be particularly challenging
in light of the recent and ongoing global economic downturn.
Like other retail operators, we regularly assess store
performance and as part of that review we may determine to close
or impair the value of underperforming stores in the future.
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Any increase in the number of company-operated stores will
require us to further develop our retailing skills and
capabilities. We will be required to enter into additional
leases, which will cause an increase in our rental expenses and
off-balance sheet rental obligations and our capital
expenditures for retail locations. These commitments may be
costly to terminate, and these investments may be difficult to
recapture if we decide to close stores or change our strategy.
We must also offer a broad product assortment (especially
women’s and tops), appropriately manage retail inventory
levels, install and operate effective retail systems, execute
effective pricing strategies, and integrate our stores into our
overall business mix. Finally, we will need to hire and train
additional qualified employees and incur additional costs to
operate these stores, which will increase our operating
expenses. These factors, including those relating to securing
retail space and management talent, are even more challenging
considering that many of our competitors either have large
company-operated retail operations today or are seeking to
expand substantially their retail presence. If the actions we
are taking to expand our retail network are not successful on a
sustained basis, our margins, results of operations and ability
to grow may be adversely affected.
We
must successfully maintain and/or upgrade our information
technology systems.
We rely on various information technology systems to manage our
operations. We are currently implementing modifications and
upgrades to our systems, including making changes to legacy
systems, replacing legacy systems with successor systems with
new functionality and acquiring new systems with new
functionality. These types of activities subject us to inherent
costs and risks associated with replacing and changing these
systems, including impairment of our ability to fulfill customer
orders, potential disruption of our internal control structure,
substantial capital expenditures, additional administration and
operating expenses, retention of sufficiently skilled personnel
to implement and operate the new systems, demands on management
time, and other risks and costs of delays or difficulties in
transitioning to new systems or of integrating new systems into
our current systems. Our system implementations may not result
in productivity improvements at a level that outweighs the costs
of implementation, or at all. In addition, the implementation of
new technology systems may cause disruptions in our business
operations and have an adverse effect on our business and
operations, if not anticipated and appropriately mitigated.
We
rely on contract manufacturing of our products. Our inability to
secure production sources meeting our quality, cost, working
conditions and other requirements, or failures by our
contractors to perform, could harm our sales, service levels and
reputation.
We source approximately 95% of our products from independent
contract manufacturers who purchase fabric and make our products
and may also provide us with design and development services. As
a result, we must locate and secure production capacity. We
depend on independent manufacturers to maintain adequate
financial resources, including access to sufficient credit,
secure a sufficient supply of raw materials, and maintain
sufficient development and manufacturing capacity in an
environment characterized by continuing cost pressure and
demands for product innovation and
speed-to-market.
In addition, we do not have material long-term contracts with
any of our independent manufacturers, and these manufacturers
generally may unilaterally terminate their relationship with us
at any time. Finally, we may experience capability-building and
infrastructure challenges as we expand our sourcing to new
contractors throughout the world.
Our suppliers are subject to the fluctuations in general
economic cycles, and the global economic conditions may impact
their ability to operate their business. The performance and
financial condition of a supplier may cause us to alter our
business terms or to cease doing business with that supplier,
which could in turn adversely affect our own business and
financial condition.
Our dependence on contract manufacturing could subject us to
difficulty in obtaining timely delivery of products of
acceptable quality. A contractor’s failure to ship products
to us in a timely manner or to meet our quality standards, or
interference with our ability to receive shipments due to
factors such as port or transportation conditions, could cause
us to miss the delivery date requirements of our customers.
Failing to make timely deliveries may cause our customers to
cancel orders, refuse to accept deliveries, impose
non-compliance charges, demand reduced prices, or reduce future
orders, any of which could harm our sales and margins.
We require contractors to meet our standards in terms of working
conditions, environmental protection, security and other matters
before we are willing to place business with them. As such, we
may not be able to obtain
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the lowest-cost production. In addition, the labor and business
practices of apparel manufacturers have received increased
attention from the media, non-governmental organizations,
consumers and governmental agencies in recent years. Any failure
by our independent manufacturers to adhere to labor or other
laws or appropriate labor or business practices, and the
potential litigation, negative publicity and political pressure
relating to any of these events, could harm our business and
reputation.
We are
a global company with nearly half our revenues coming from our
Europe and Asia Pacific businesses, which exposes us to
political and economic risks as well as the impact of foreign
currency fluctuations.
We generated approximately 43%, 44% and 41% of our net revenues
from our Europe and Asia Pacific businesses in 2009, 2008 and
2007, respectively. A substantial amount of our products came
from sources outside of the country of distribution. As a
result, we are subject to the risks of doing business outside of
the United States, including:
| • | currency fluctuations, which have impacted our results of operations significantly in recent years; | |
| • | changes in tariffs and taxes; | |
| • | regulatory restrictions on repatriating foreign funds back to the United States; | |
| • | less protective foreign laws relating to intellectual property; and | |
| • | political, economic and social instability. |
The functional currency for most of our foreign operations is
the applicable local currency. As a result, fluctuations in
foreign currency exchange rates affect the results of our
operations and the value of our foreign assets and liabilities,
including debt, which in turn may benefit or adversely affect
reported earnings and cash flows and the comparability of
period-to-period
results of operations. In addition, we engage in hedging
activities to manage our foreign currency exposures resulting
from certain product sourcing activities, some intercompany
sales, foreign subsidiaries’ royalty payments, earnings
repatriations, net investment in foreign operations and funding
activities. However, our earnings may be subject to volatility
since we do not fully hedge our foreign currency exposures and
we are required to record in income the changes in the market
values of our exposure management instruments that we do not
designate or that do not qualify for hedge accounting treatment.
Changes in the value of the relevant currencies may affect the
cost of certain items required in our operations as the majority
of our sourcing activities are conducted in U.S. Dollars.
Changes in currency exchange rates may also affect the relative
prices at which we and foreign competitors sell products in the
same market. Foreign policies and actions regarding currency
valuation could result in actions by the United States and other
countries to offset the effects of such fluctuations. Recently,
there has been a high level of volatility in foreign currency
exchange rates and that level of volatility may continue and
thus adversely impact our business or financial conditions.
Furthermore, due to our global operations, we are subject to
numerous domestic and foreign laws and regulations affecting our
business, such as those related to labor, employment, worker
health and safety, antitrust and competition, environmental
protection, consumer protection, import/export, and
anti-corruption, including but not limited to the Foreign
Corrupt Practices Act which prohibits giving anything of value
intended to influence the awarding of government contracts.
Although we have put into place policies and procedures aimed at
ensuring legal and regulatory compliance, our employees,
subcontractors and agents could take actions that violate these
requirements. Violations of these regulations could subject us
to criminal or civil enforcement actions, any of which could
have a material adverse effect on our business.
As a global company, we are exposed to risks of doing business
in foreign jurisdictions and risks relating to U.S. policy
with respect to companies doing business in foreign
jurisdictions. For example, on May 4, 2009, President
Obama’s administration announced several proposals to
reform U.S. tax laws, including a proposal to further limit
foreign tax credits as compared to current law and a proposal to
defer tax deductions allocable to
non-U.S. earnings
until the earnings are repatriated. At this time it is not known
whether these proposed tax reforms will be enacted or, if
enacted, what the scope of the reforms will be. The proposed
legislation or other changes in the U.S. tax laws could
increase our U.S. income tax liability and adversely affect
our after-tax profitability.
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We
have made changes in our logistics operations in recent years
and continue to look for opportunities to increase
efficiencies.
We have closed several of our distribution centers in recent
years and continually work to identify additional opportunities
to optimize our distribution network. Changes in logistics and
distribution activities could result in temporary shipping
disruptions and increased expense as we bring new arrangements
to full operation, which could have an adverse effect on our
results of operations.
Most
of the employees in our production and distribution facilities
are covered by collective bargaining agreements, and any
material job actions could negatively affect our results of
operations.
In North America, most of our distribution employees are covered
by various collective bargaining agreements, and outside North
America, most of our production and distribution employees are
covered by either industry-sponsored
and/or
state-sponsored collective bargaining mechanisms. Any work
stoppages or other job actions by these employees could harm our
business and reputation.
Our
licensees may not comply with our product quality, manufacturing
standards, marketing and other requirements.
We license our trademarks to third parties for manufacturing,
marketing and distribution of various products. While we enter
into comprehensive agreements with our licensees covering
product design, product quality, sourcing, manufacturing,
marketing and other requirements, our licensees may not comply
fully with those agreements. Non-compliance could include
marketing products under our brand names that do not meet our
quality and other requirements or engaging in manufacturing
practices that do not meet our supplier code of conduct. These
activities could harm our brand equity, our reputation and our
business.
Our
success depends on the continued protection of our trademarks
and other proprietary intellectual property
rights.
Our trademarks and other intellectual property rights are
important to our success and competitive position, and the loss
of or inability to enforce trademark and other proprietary
intellectual property rights could harm our business. We devote
substantial resources to the establishment and protection of our
trademark and other proprietary intellectual property rights on
a worldwide basis. Our efforts to establish and protect our
trademark and other proprietary intellectual property rights may
not be adequate to prevent imitation of our products by others
or to prevent others from seeking to block sales of our
products. Unauthorized copying of our products or unauthorized
use of our trademarks or other proprietary rights may not only
erode sales of our products but may also cause significant
damage to our brand names and our ability to effectively
represent ourselves to our customers, contractors, suppliers
and/or
licensees. Moreover, others may seek to assert rights in, or
ownership of, our trademarks and other proprietary intellectual
property, and we may not be able to successfully resolve those
claims. In addition, the laws and enforcement mechanisms of some
foreign countries may not allow us to protect our proprietary
rights to the same extent as we are able to in the United States
and other countries.
We
have substantial liabilities and cash requirements associated
with postretirement benefits, pension and our deferred
compensation plans.
Our postretirement benefits, pension, and our deferred
compensation plans result in substantial liabilities on our
balance sheet. These plans and activities have and will generate
substantial cash requirements for us, and these requirements may
increase beyond our expectations in future years based on
changing market conditions. The difference between plan
obligations and assets, or the funded status of the plans, is a
significant factor in determining the net periodic benefit costs
of our pension plans and the ongoing funding requirements of
those plans. Many variables, such as changes in interest rates,
mortality rates, health care costs, early retirement rates,
investment returns,
and/or
the
market value of plan assets can affect the funded status of our
defined benefit pension, other postretirement, and
postemployment benefit plans and cause volatility in the net
periodic benefit cost and future funding requirements of the
plans. Our pension expense increased by more than
$30 million in 2009 as a result of the decline in the value
of our pension plan assets in 2008. Additionally, our current
estimates indicate our
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future annual funding requirements may increase to as much as
$140 million in 2011. While actual results may differ from
these estimates, the increased pension expense and related
funding may extend into future years if current market
conditions persist. Plan liabilities may impair our liquidity,
have an unfavorable impact on our ability to obtain financing
and place us at a competitive disadvantage compared to some of
our competitors who do not have such liabilities and cash
requirements.
Earthquakes
or other events outside of our control may damage our facilities
or the facilities of third parties on which we
depend.
Our corporate headquarters are located in California near major
geologic faults that have experienced earthquakes in the past.
An earthquake or other natural disaster or the loss of power
caused by power shortages could disrupt operations or impair
critical systems. Any of these disruptions or other events
outside of our control could affect our business negatively,
harming our operating results. In addition, if any of our other
facilities, including our manufacturing, finishing or
distribution facilities or our company-operated or franchised
stores, or the facilities of our suppliers or customers, is
affected by earthquakes, power shortages, floods, monsoons,
terrorism, epidemics or other events outside of our control, our
business could suffer.
We are
required to evaluate our internal control over financial
reporting under Section 404 of the
Sarbanes-Oxley
Act. Failure to comply with the requirements of Section 404
or any adverse results from such evaluation could result in a
loss of investor confidence in our financial reports and have an
adverse effect on the credit ratings and trading price of our
debt securities.
We are not currently an “accelerated filer” as defined
in
Rule 12b-2
under the Securities Exchange Act of 1934, as amended. As
required by Section 404 of the Sarbanes-Oxley Act of 2002,
we have provided an internal control report with this Annual
Report, which includes management’s assessment of the
effectiveness of our internal control over financial reporting
as of the end of the fiscal year. Beginning with our Annual
Report for the year ending November 28, 2010, our
independent registered public accounting firm will also be
required to issue a report on their evaluation of the
effectiveness of our internal control over financial reporting.
Our assessment requires us to make subjective judgments and our
independent registered public accounting firm may not agree with
our assessment. If we or our independent registered public
accounting firm were unable to conclude that our internal
control over financial reporting was effective as of the
relevant period, investors could lose confidence in our reported
financial information, which could have an adverse effect on the
trading price of our debt securities, negatively affect our
credit rating, and affect our ability to borrow funds on
favorable terms.
Risks
Relating to Our Debt
We
have debt and interest payment requirements at a level that may
restrict our future operations.
As of November 29, 2009, we had approximately
$1.9 billion of debt, of which all but approximately
$108 million was unsecured, and we had $243.9 million
of additional borrowing capacity under our senior secured
revolving credit facility. Our next debt maturity occurs in
2012. Our debt requires us to dedicate a substantial portion of
any cash flow from operations to the payment of interest and
principal due under our debt, which will reduce funds available
for other business purposes, and result in us having lower net
income than we would otherwise have had. It could also have
important adverse consequences to holders of our securities. Our
ability to successfully compete could be impaired by our debt
and interest expense; for example, our debt and interest levels
could:
| • | 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. |
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In addition, borrowings under our senior secured revolving
credit facility and our unsecured term loan bear interest at
variable rates of interest. As a result, increases in market
interest rates would require a greater portion of our cash flow
to be used to pay interest, which could further hinder our
operations and affect the trading price of our debt securities.
Our ability to satisfy our obligations and to reduce our total
debt depends on our future operating performance and on
economic, financial, competitive and other factors, many of
which are beyond our control.
The
downturn in the economy and the volatility in the capital
markets could limit our ability to access capital or could
increase our costs of capital.
We experienced a dramatic downturn in the U.S. and global
economy and disruption in the credit markets, which began in
2008 and extended through 2009. Although we have had continued
solid operating cash flow, any subsequent downturn and or
disruption in the credit markets may reduce sources of liquidity
available to us. We can provide no assurance that we will
continue to meet our capital requirements from our cash
resources, future cash flow and external sources of financing,
particularly if current market or economic conditions continue
or deteriorate further. We manage cash and cash equivalents in
various institutions at levels beyond FDIC coverage limits, and
we purchase investments not guaranteed by the FDIC. Accordingly,
there may be a risk that we will not recover the full principal
of our investments or that their liquidity may be diminished. We
rely on multiple financial institutions to provide funding
pursuant to existing credit agreements, and those institutions
may not be able to meet their obligations to provide funding in
a timely manner, or at all, when we require it. The cost of or
lack of available credit could impact our ability to develop
sufficient liquidity to maintain or grow our business, which in
turn may adversely affect our business and results of operations.
Restrictions
in our notes indentures, unsecured term loan and senior secured
revolving credit facility may limit our activities, including
dividend payments, share repurchases and
acquisitions.
The indentures relating to our senior unsecured notes, our Euro
notes, our Yen-denominated Eurobonds, our unsecured term loan
and our senior secured revolving credit facility contain
restrictions, including covenants limiting our ability to incur
additional debt, grant liens, make acquisitions and other
investments, prepay specified debt, consolidate, merge or
acquire other businesses, sell assets, pay dividends and other
distributions, repurchase stock, and enter into transactions
with affiliates. These restrictions, in combination with our
leveraged condition, may make it more difficult for us to
successfully execute our business strategy, grow our business or
compete with companies not similarly restricted.
If our
foreign subsidiaries are unable to distribute cash to us when
needed, we may be unable to satisfy our obligations under our
debt securities, which could force us to sell assets or use cash
that we were planning to use elsewhere in our
business.
We conduct our international operations through foreign
subsidiaries, and therefore we depend upon funds from our
foreign subsidiaries for a portion of the funds necessary to
meet our debt service obligations. We only receive the cash that
remains after our foreign subsidiaries satisfy their
obligations. Any agreements our foreign subsidiaries enter into
with other parties, as well as applicable laws and regulations
limiting the right and ability of
non-U.S. subsidiaries
and affiliates to pay dividends and remit cash to affiliated
companies, may restrict the ability of our foreign subsidiaries
to pay dividends or make other distributions to us. If those
subsidiaries are unable to pass on the amount of cash that we
need, we will be unable to make payments on our debt
obligations, which could force us to sell assets or use cash
that we were planning on using elsewhere in our business, which
could hinder our operations and affect the trading price of our
debt securities.
Our
approach to corporate governance may lead us to take actions
that conflict with our creditors’ interests as holders of
our debt securities.
All of our common stock is owned by a voting trust described
under “Item 12 — Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters.” Four voting trustees have the exclusive ability
to elect and remove directors, amend our by-laws and take other
actions which would normally be within the power of stockholders
of a Delaware corporation. The voting trust agreement gives
certain powers to the holders of two-thirds of the outstanding
voting trust certificates, such as the power to remove trustees
and terminate
18
Table of Contents
the voting trust. The ownership of two-thirds of the outstanding
voting trust certificates is concentrated in the hands of a
small group of holders (including three of the four voting
trustees), providing the group the voting power to block
stockholder action on matters for which the holders of the
voting trust certificates are entitled to vote and direct the
trustees under the voting trust agreement.
Our principal stockholders created the voting trust in part to
ensure that we would continue to operate in a socially
responsible manner while seeking the greatest long-term benefit
for our stockholders, employees and other stakeholders and
constituencies. As a result, we cannot assure that the voting
trustees will cause us to be operated and managed in a manner
that benefits our creditors or that the interests of the voting
trustees or our principal equity holders will not diverge from
our creditors.
| Item 1B. | UNRESOLVED STAFF COMMENTS |
Not applicable.
| Item 2. | PROPERTIES |
We conduct manufacturing, distribution and administrative
activities in owned and leased facilities. We operate three
manufacturing-related facilities abroad and nine
distribution-only centers around the world. We have renewal
rights for most of our property leases. We anticipate that we
will be able to extend these leases on terms satisfactory to us
or, if necessary, locate substitute facilities on acceptable
terms. We believe our facilities and equipment are in good
condition and are suitable for our needs. Information about our
key operating properties in use as of November 29, 2009, is
summarized in the following table
:
|
Location
|
Primary Use
|
Leased/Owned | ||
|
Americas
|
||||
|
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
|
||||
|
Plock, Poland
|
Manufacturing and Finishing | Leased (1) | ||
|
Northhampton, U.K
|
Distribution | Owned | ||
|
Sabadell, Spain
|
Distribution | Leased | ||
|
Corlu, Turkey
|
Manufacturing, Finishing and Distribution | Owned | ||
|
Asia Pacific
|
||||
|
Adelaide, Australia
|
Distribution | Leased | ||
|
Cape Town, South Africa
|
Manufacturing, Finishing and Distribution | Leased | ||
|
Hiratsuka Kanagawa, Japan
|
Distribution | Owned (2) |
| (1) | Building and improvements are owned but subject to a ground lease. | |
| (2) | Owned by our 84%-owned Japanese subsidiary. |
Our global headquarters and the headquarters of our Americas
region are both located in leased premises in
San Francisco, California. Our Europe and Asia Pacific
headquarters are located in leased premises in Brussels, Belgium
and Singapore, respectively. As of November 29, 2009, we
also leased or owned 102 administrative and sales offices in 41
countries, as well as leased a small number of warehouses in
three countries. We own or lease several facilities that are no
longer in operation that we are working to sell or sublease.
In addition, as of November 29, 2009, we had
414 company-operated retail and outlet stores in leased
premises in 26 countries. We had 176 stores in the Americas
region, 153 stores in the Europe region and 85 stores in the
Asia Pacific region.
19
Table of Contents
| Item 3. | LEGAL PROCEEDINGS |
In the ordinary course of business, we have various pending
cases involving contractual matters, employee-related matters,
distribution questions, product liability claims, trademark
infringement and other matters. We do not believe there are any
of these pending legal proceedings that will have a material
impact on our financial condition, results of operations or cash
flows.
| Item 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
No matters were submitted to a vote of our security holders
during the fourth quarter of the fiscal year ended
November 29, 2009.
20
Table of Contents
| Item 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
All outstanding shares of our common stock are deposited in a
voting trust, a legal arrangement that transfers the voting
power of the shares to a trustee or group of trustees. The four
voting trustees are Miriam L. Haas, Peter E. Haas Jr., Robert D.
Haas and Stephen C. Neal, three of whom are also directors. The
voting trustees have the exclusive ability to elect and remove
directors, amend our by-laws and take certain other actions
which would normally be within the power of stockholders of a
Delaware corporation. Our equity holders, who, as a result of
the voting trust, legally hold “voting trust
certificates,” not stock, retain the right to direct the
trustees on specified mergers and business combinations,
liquidations, sales of substantially all of our assets and
specified amendments to our certificate of incorporation.
The expiration date of the voting trust is April 15, 2011,
unless the trustees unanimously decide, or holders of at least
two-thirds of the outstanding voting trust certificates decide,
to terminate it earlier. If Robert D. Haas ceases to be a
trustee for any reason, then the question of whether to continue
the voting trust will be decided by the holders. The existing
trustees will select the successors to the other trustees. The
agreement among the stockholders and the trustees creating the
voting trust contemplates that, in selecting successor trustees,
the trustees will attempt to select individuals who share a
common vision with the sponsors of the 1996 recapitalization
transaction that gave rise to the voting trust, represent and
reflect the financial and other interests of the equity holders
and bring a balance of perspectives to the trustee group as a
whole. A trustee may be removed if the other three trustees
unanimously vote for removal or if holders of at least
two-thirds of the outstanding voting trust certificates vote for
removal.
Our common stock and the voting trust certificates are not
publicly held or traded. All shares and the voting trust
certificates are subject to a stockholders’ agreement. The
agreement, which expires in April 2016, limits the transfer of
shares and certificates to other holders, family members,
specified charities and foundations and back to the Company. The
agreement does not provide for registration rights or other
contractual devices for forcing a public sale of shares or
certificates, or other access to liquidity. The scheduled
expiration date of the stockholders’ agreement is five
years later than that of the voting trust agreement in order to
permit an orderly transition from effective control by the
voting trust trustees to direct control by the stockholders.
As of February 1, 2010, there were 199 record holders of
voting trust certificates. Our shares are not registered on any
national securities exchange, there is no established public
trading market for our shares and none of our shares are
convertible into shares of any other class of stock or other
securities.
We paid cash dividends of $20 million and $50 million
on our common stock on May 6, 2009 and April 16, 2008,
respectively. Please see Note 15 to our audited
consolidated financial statements included in this report for
more information. The Company will continue to review its
ability to pay cash dividends at least annually, and dividends
may be declared at the discretion of our board of directors and
depending upon, among other factors, our financial condition and
if the Company is in compliance with the terms of our debt
agreements. Our senior secured revolving credit facility and the
indentures governing our senior unsecured notes limit our
ability to pay dividends. For more detailed information about
these limitations, see Note 6 to our audited consolidated
financial statements included in this report.
We did not repurchase any of our common stock during the fourth
quarter of the fiscal year ended November 29, 2009.
21
Table of Contents
| Item 6. | SELECTED FINANCIAL DATA |
The following table sets forth our selected historical
consolidated financial data which are derived from our
consolidated financial statements that have been audited by
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, for 2009, 2008 and 2007, and KPMG LLP, an
independent registered public accounting firm, for 2006 and
2005. The financial data set forth below should be read in
conjunction with, and are qualified by reference to,
“Item 7 — Management’s Discussion and
Analysis of Financial Condition and Results of Operations,”
our consolidated financial statements for 2009, 2008 and 2007
and the related notes to those consolidated financial
statements, included elsewhere in this report.
|
Year Ended
|
Year Ended
|
Year Ended
|
Year Ended
|
Year Ended
|
||||||||||||||||
|
November 29,
|
November 30,
|
November 25,
|
November 26,
|
November 27,
|
||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
|
Statements of Income Data:
|
||||||||||||||||||||
|
Net sales
|
$ | 4,022,854 | $ | 4,303,075 | $ | 4,266,108 | $ | 4,106,572 | $ | 4,150,931 | ||||||||||
|
Licensing revenue
|
82,912 | 97,839 | 94,821 | 86,375 | 73,879 | |||||||||||||||
|
Net revenues
|
4,105,766 | 4,400,914 | 4,360,929 | 4,192,947 | 4,224,810 | |||||||||||||||
|
Cost of goods sold
|
2,132,361 | 2,261,112 | 2,318,883 | 2,216,562 | 2,236,962 | |||||||||||||||
|
Gross profit
|
1,973,405 | 2,139,802 | 2,042,046 | 1,976,385 | 1,987,848 | |||||||||||||||
|
Selling, general and administrative expenses
|
1,590,093 | 1,606,482 | 1,386,547 | 1,348,577 | 1,381,955 | |||||||||||||||
|
Restructuring charges, net
|
5,224 | 8,248 | 14,458 | 14,149 | 16,633 | |||||||||||||||
|
Operating income
|
378,088 | 525,072 | 641,041 | 613,659 | 589,260 | |||||||||||||||
|
Interest expense
|
(148,718 | ) | (154,086 | ) | (215,715 | ) | (250,637 | ) | (263,650 | ) | ||||||||||
|
Loss on early extinguishment of debt
|
— | (1,417 | ) | (63,838 | ) | (40,278 | ) | (66,066 | ) | |||||||||||
|
Other income (expense), net
|
(38,282 | ) | (1,400 | ) | 14,138 | 22,418 | 23,057 | |||||||||||||
|
Income before taxes
|
191,088 | 368,169 | 375,626 | 345,162 | 282,601 | |||||||||||||||
|
Income tax expense
(benefit)
(1)
|
39,213 | 138,884 | (84,759 | ) | 106,159 | 126,654 | ||||||||||||||
|
Net income
|
$ | 151,875 | $ | 229,285 | $ | 460,385 | $ | 239,003 | $ | 155,947 | ||||||||||
|
Statements of Cash Flow Data:
|
||||||||||||||||||||
|
Net cash flow provided by (used for):
|
||||||||||||||||||||
|
Operating activities
|
$ | 388,783 | $ | 224,809 | $ | 302,271 | $ | 261,880 | $ | (43,777 | ) | |||||||||
|
Investing
activities
(2)
|
(233,029 | ) | (26,815 | ) | (107,277 | ) | (69,597 | ) | (34,657 | ) | ||||||||||
|
Financing
activities
(3)
|
(97,155 | ) | (135,460 | ) | (325,534 | ) | (155,228 | ) | 23,072 | |||||||||||
|
Balance Sheet Data:
|
||||||||||||||||||||
|
Cash and cash equivalents
|
$ | 270,804 | $ | 210,812 | $ | 155,914 | $ | 279,501 | $ | 239,584 | ||||||||||
|
Working capital
|
778,888 | 713,644 | 647,256 | 805,976 | 657,374 | |||||||||||||||
|
Total assets
|
2,989,381 | 2,776,875 | 2,850,666 | 2,804,065 | 2,804,134 | |||||||||||||||
|
Total debt, excluding capital leases
|
1,852,900 | 1,853,207 | 1,960,406 | 2,217,412 | 2,326,699 | |||||||||||||||
|
Total capital leases
|
7,365 | 7,806 | 8,177 | 4,694 | 5,587 | |||||||||||||||
|
Stockholders’
deficit
(4)
|
(333,119 | ) | (349,517 | ) | (398,029 | ) | (994,047 | ) | (1,222,085 | ) | ||||||||||
|
Other Financial Data:
|
||||||||||||||||||||
|
Depreciation and amortization
|
$ | 84,603 | $ | 77,983 | $ | 67,514 | $ | 62,249 | $ | 59,423 | ||||||||||
|
Capital expenditures
|
82,938 | 80,350 | 92,519 | 77,080 | 41,868 | |||||||||||||||
|
Dividends
paid
(5)
|
20,001 | 49,953 | — | — | — | |||||||||||||||
| (1) | In the fourth quarter of 2007, as a result of improvements in business performance and recent positive developments in an ongoing IRS examination, we reversed valuation allowances against our deferred tax assets for foreign tax credit carryforwards, as we believed that it was more likely than not that these credits will be utilized prior to their expiration. | |
| (2) | Cash used for investing activities in 2009 reflects business acquisitions in our Americas and Europe regions. For more information, see Note 3 to our audited consolidated financial statements included in this report. | |
| (3) | Cash used for financing activities in 2007 reflects our refinancing actions, including the redemption of all of our floating rate notes due 2012 as well as the repurchase of over 95% of our outstanding 12.25% senior notes due 2012. For more information, see Note 6 to our audited consolidated financial statements included in this report. | |
| (4) | 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. | |
| (5) | We will continue to review our ability to pay cash dividends at least annually, and we may elect to declare and pay cash dividends in the future at the discretion of our board of directors and depending upon, among other factors, our financial condition and compliance with the terms of our debt agreements. |
22
Table of Contents
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Overview
Our
Company
We design and market jeans, casual and dress pants, tops,
jackets, footwear and related accessories for men, women and
children under our
Levi’s
®
,
Dockers
®
and Signature by Levi Strauss &
Co.
tm
(“Signature”) brands around the world. We also license
our trademarks in many countries throughout the world for a wide
array of products, including accessories, pants, tops, footwear,
home and other products.
Our business is operated through three geographic regions:
Americas, Europe and Asia Pacific. Our products are sold in
approximately 55,000 retail locations in more than 110
countries. We support our brands through a global
infrastructure, both sourcing and marketing our products around
the world. We distribute our
Levi’s
®
and
Dockers
®
products primarily through chain retailers and department stores
in the United States and primarily through department stores,
specialty retailers and franchised stores outside of the United
States. We also distribute our
Levi’s
®
and
Dockers
®
products through our online stores, and
414 company-operated stores located in 26 countries,
including the United States. These stores generated
approximately 11% of our net revenues in 2009. We distribute
products under the Signature brand primarily through mass
channel retailers in the United States and Canada and mass and
other value-oriented retailers and franchised stores in Asia
Pacific.
We derived 43% of our net revenues and 42% of our regional
operating income from our Europe and Asia Pacific
businesses in 2009. Sales of
Levi’s
®
brand products represented approximately 79% of our total net
sales in 2009. Pants, including jeans, casual pants and dress
pants, represented approximately 85% of our total units sold in
2009, and men’s products generated approximately 73% of our
total net sales.
Trends
Affecting our Business
We believe the key business and marketplace factors affecting us
include the following:
| • | Continuing pressures in the U.S. and global economy related to the global economic downturn, access to credit, volatility in investment returns, real estate market and employment concerns, and other similar elements that impact consumer discretionary spending, are creating a challenging retail environment for us and our customers. We and our customers are responding by adjusting business practices such as tightly managing inventories. | |
| • | Wholesaler/retailer dynamics are changing as the wholesale channels continue to consolidate and many of our wholesale customers face slowed growth prospects. As a result, many of our customers are building competitive exclusive or private-label offerings and desire increased returns on investment through increased margins and inventory turns. In response, many apparel wholesalers, including us, seek to strengthen relationships with customers through efforts such as investment in new products, marketing programs, fixtures and collaborative planning systems. | |
| • | Many apparel companies, including us, that have traditionally relied on wholesale distribution channels continue to invest in expanding their own retail store distribution network, which has raised competitiveness in the retail market. We have increased our investment in our retail network, and will continue to do so, which while benefiting revenue and gross profit, will likely increase selling expense and capital expenditures. | |
| • | Apparel markets have matured in certain geographic locations such as the United States, Japan, Western Europe and Canada, due in part to demographic shifts and the existence of appealing discretionary purchase alternatives and the increasing availability of on-trend lower-priced apparel offerings. Opportunities for major brands are increasing in rapidly growing developing markets such as India, China, Brazil and Russia. | |
| • | More competitors are seeking growth globally and are raising the competitiveness of the international markets in which we already have an established presence. |
23
Table of Contents
| • | The global nature of our business exposes us to earnings volatility resulting from exchange rate fluctuations. | |
| • | Brand and product proliferation continues around the world as we and other companies compete through differentiated brands and products targeted for specific consumers, price-points and retail segments. In addition, the ways of marketing these brands are changing to new mediums, challenging the effectiveness of more mass-market approaches such as television advertising. | |
| • | Quality low-cost sourcing alternatives continue to emerge around the world, resulting in pricing pressure and minimal barriers to entry for new competitors. This proliferation of low-cost sourcing alternatives enables competitors to attract consumers with a constant flow of competitively-priced new products that reflect the newest styles, bringing additional pressure on us and other wholesalers and retailers to shorten lead-times and reduce costs. In response, we must continue to seek efficiencies throughout our global supply chain. |
These factors contribute to a global market environment of
intense competition, constant product innovation and continuing
cost pressure throughout the supply chain, from manufacturer to
consumer, and combine with the global economic downturn to
create a challenging commercial and economic environment. We
expect these factors to continue into the foreseeable future.
Our
2009 Results
Our 2009 results reflect the difficult economic conditions that
continue to persist in most markets around the world. In
response to these conditions, we focused on our inventory
management and cost-cutting initiatives and sought opportunities
to invest in initiatives to grow our business. We expanded our
company-operated retail network by more than 150 stores, the
majority of which we added through acquisitions that we
completed during the year.
| • | Net revenues. Our consolidated net revenues decreased by 7% compared to 2008, a decrease of 3% on a constant-currency basis. Increased sales from new company-operated and franchised stores, as well as growth in revenues associated with the Levi’s ® brand, were more than offset by wholesale channel declines in Europe and declines in the net revenues of our Dockers ® brand in the Americas. | |
| • | Operating income. Our operating income decreased by $147 million, and our consolidated operating margin in 2009 declined to 9% as compared to 12% in 2008, driven by declines in our Europe region, primarily reflecting the unfavorable impact of currency, the wholesale channel declines and our continued investment in retail expansion. These declines were partially offset by our cost management initiatives as well as lower costs associated with our conversion to an enterprise resource planning (“ERP”) system in the United States. | |
| • | Cash flows. Cash flows provided by operating activities were $389 million in 2009 as compared to $225 million in 2008. The impact on our operating cash flows from the decline in our net revenues was more than offset by our inventory management initiatives and lower operating expenses. Increased cash used for investing activities in 2009 reflects our business acquisitions in the Americas and Europe as well as our foreign exchange management activities. |
Our
Objectives
Our key long-term objectives are to strengthen our brands
globally in order to deliver sustainable profitable growth,
continue to generate strong cash flow and reduce our debt.
Critical strategies to achieve these objectives include driving
continued product and marketing innovation that builds upon our
leadership position in the jean and khaki categories, driving
sales growth through enhancing relationships with wholesale
customers and expanding our dedicated store network,
capitalizing on our global footprint to maximize opportunities
in targeted growth markets, and continuously enhancing our
productivity. Investments in initiatives in 2010 to support the
execution of our strategies and achieve our long-term objectives
will likely result in an increase in advertising and selling
expenses, a lower operating margin, and higher capital
expenditures during the 2010 fiscal year.
Financial
Information Presentation
Fiscal year.
Our fiscal year ends on the last
Sunday of November in each year, although the fiscal years of
certain foreign subsidiaries are fixed at November 30 due to
local statutory requirements. Apart from these
24
Table of Contents
subsidiaries, each quarter of fiscal years 2009, 2008 and 2007
consisted of 13 weeks, with the exception of the fourth
quarter of 2008, which consisted of 14 weeks.
Segments.
We manage our business according to
three regional segments: the Americas, Europe and Asia Pacific.
Classification.
Our classification of certain
significant revenues and expenses reflects the following:
| • | Net sales is primarily comprised of sales of products to wholesale customers, including franchised stores, and direct sales to consumers at our company-operated and online stores and at our company-operated shop-in-shops located within department stores. It includes discounts, allowances for estimated returns and incentives. | |
| • | Licensing revenue consists of royalties earned from the use of our trademarks by third-party licensees in connection with the manufacturing, advertising and distribution of trademarked products. | |
| • | Cost of goods sold is primarily comprised of product costs, labor and related overhead, sourcing costs, inbound freight, internal transfers, and the cost of operating our remaining manufacturing facilities, including the related depreciation expense. | |
| • | Selling costs include, among other things, all occupancy costs associated with our company-operated stores and our company-operated shop-in-shops. | |
| • | We reflect substantially all distribution costs in selling, general and administrative expenses, including costs related to receiving and inspection at distribution centers, warehousing, shipping to our customers, handling, and certain other activities associated with our distribution network. |
Constant currency.
Constant-currency
comparisons are based on translating local currency amounts in
both periods at the foreign exchange rates used in the
Company’s internal planning process for the current year.
We routinely evaluate our financial performance on a
constant-currency basis in order to facilitate
period-to-period
comparisons without regard to the impact of changing foreign
currency exchange rates.
25
Table of Contents
Results
of Operations
2009
compared to 2008
The following table summarizes, for the periods indicated, the
consolidated statements of income, the changes in these items
from period to period and these items expressed as a percentage
of net revenues:
| Year Ended | ||||||||||||||||||||
|
November 29,
|
November 30,
|
|||||||||||||||||||
|
%
|
2009
|
2008
|
||||||||||||||||||
|
November 29,
|
November 30,
|
Increase
|
% of Net
|
% of Net
|
||||||||||||||||
| 2009 | 2008 | (Decrease) | Revenues | Revenues | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Net sales
|
$ | 4,022.9 | $ | 4,303.1 | (6.5 | )% | 98.0 | % | 97.8 | % | ||||||||||
|
Licensing revenue
|
82.9 | 97.8 | (15.3 | )% | 2.0 | % | 2.2 | % | ||||||||||||
|
Net revenues
|
4,105.8 | 4,400.9 | (6.7 | )% | 100.0 | % | 100.0 | % | ||||||||||||
|
Cost of goods sold
|
2,132.4 | 2,261.1 | (5.7 | )% | 51.9 | % | 51.4 | % | ||||||||||||
|
Gross profit
|
1,973.4 | 2,139.8 | (7.8 | )% | 48.1 | % | 48.6 | % | ||||||||||||
|
Selling, general and administrative expenses
|
1,590.1 | 1,606.5 | (1.0 | )% | 38.7 | % | 36.5 | % | ||||||||||||
|
Restructuring charges, net
|
5.2 | 8.2 | (36.7 | )% | 0.1 | % | 0.2 | % | ||||||||||||
|
Operating income
|
378.1 | 525.1 | (28.0 | )% | 9.2 | % | 11.9 | % | ||||||||||||
|
Interest expense
|
(148.7 | ) | (154.1 | ) | (3.5 | )% | (3.6 | )% | (3.5 | )% | ||||||||||
|
Loss on early extinguishment of debt
|
— | (1.4 | ) | (100.0 | )% | — | — | |||||||||||||
|
Other expense, net
|
(38.3 | ) | (1.4 | ) | 2634.4 | % | (0.9 | )% | — | |||||||||||
|
Income before income taxes
|
191.1 | 368.2 | (48.1 | )% | 4.7 | % | 8.4 | % | ||||||||||||
|
Income tax expense
|
39.2 | 138.9 | (71.8 | )% | 1.0 | % | 3.2 | % | ||||||||||||
|
Net income
|
$ | 151.9 | $ | 229.3 | (33.8 | )% | 3.7 | % | 5.2 | % | ||||||||||
Net
revenues
The following table presents net revenues by reporting segment
for the periods indicated and the changes in net revenues by
reporting segment on both reported and constant-currency bases
from period to period:
| Year Ended | ||||||||||||||||
| % Increase (Decrease) | ||||||||||||||||
|
November 29,
|
November 30,
|
As
|
Constant
|
|||||||||||||
| 2009 | 2008 | Reported | Currency | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
Net revenues:
|
||||||||||||||||
|
Americas
|
$ | 2,357.7 | $ | 2,476.4 | (4.8 | )% | (3.2 | )% | ||||||||
|
Europe
|
1,042.1 | 1,195.6 | (12.8 | )% | (3.3 | )% | ||||||||||
|
Asia Pacific
|
706.0 | 728.9 | (3.2 | )% | (0.9 | )% | ||||||||||
|
Total net revenues
|
$ | 4,105.8 | $ | 4,400.9 | (6.7 | )% | (2.9 | )% | ||||||||
Total net revenues decreased on both reported and
constant-currency bases for the year ended November 29,
2009, as compared to the prior year. Reported amounts were
affected unfavorably by changes in foreign currency exchange
rates across all regions, particularly in Europe.
Americas.
On both reported and
constant-currency bases, net revenues in our Americas region
decreased in 2009. Currency affected net revenues unfavorably by
approximately $39 million.
26
Table of Contents
Net revenues decreased due to the weak economic environment,
lower demand for our
U.S. Dockers
®
brand products, and lower sales of Signature products. These
declines were partially offset by increased
Levi’s
®
brand revenues driven by strong performance of our men’s
and boy’s products and growth in the Juniors business in
our wholesale channel, and increased revenues from our retail
network from our July 13, 2009, acquisition of the
operating rights to 73
Levi’s
®
and
Dockers
®
outlet stores from Anchor Blue Retail Group, Inc.
As compared to prior year, 2009 also reflects the loss of
customers due to bankruptcy in the second and third quarters of
2008. In addition, 2008 was adversely impacted by issues we
encountered during our stabilization of an ERP system in the
United States in the beginning of the second quarter of 2008.
Europe.
Net revenues in Europe
decreased on both reported and constant-currency bases. Currency
affected net revenues unfavorably by approximately
$118 million.
The region’s depressed retail environment drove net revenue
declines across most markets, primarily due to lower sales in
our wholesale channels. This was partially offset by the impact
of our business acquisitions and our expanding company-operated
retail network throughout the region.
Asia Pacific.
Net revenues in Asia
Pacific decreased on both reported and constant-currency bases.
Currency affected net revenues unfavorably by approximately
$17 million.
Net revenues in the region decreased primarily due to lower
sales in Japan. These declines were offset by strong performance
in most other markets in the region, driven by product
promotions and the continued expansion of our brand-dedicated
store network.
Gross
profit
The following table shows consolidated gross profit and gross
margin for the periods indicated and the changes in these items
from period to period:
| Year Ended | ||||||||||||
|
%
|
||||||||||||
|
November 29,
|
November 30,
|
Increase
|
||||||||||
| 2009 | 2008 | (Decrease) | ||||||||||
| (Dollars in millions) | ||||||||||||
|
Net revenues
|
$ | 4,105.8 | $ | 4,400.9 | (6.7 | )% | ||||||
|
Cost of goods sold
|
2,132.4 | 2,261.1 | (5.7 | )% | ||||||||
|
Gross profit
|
$ | 1,973.4 | $ | 2,139.8 | (7.8 | )% | ||||||
|
Gross margin
|
48.1 | % | 48.6 | % | ||||||||
Compared to the prior year, gross profit declined in 2009
primarily due to the unfavorable impact of currency across all
regions, which totaled approximately $128 million.
Excluding the effects of currency, the impact of our lower net
revenues to gross profit was partially offset by a slight
improvement in gross margin, primarily driven by our Americas
region, due to the strong performance of the
Levi’s
®
brand, and the increased contribution from our company-operated
retail network, which has a higher gross margin than our
wholesale business.
Our gross margins may not be comparable to those of other
companies in our industry, since some companies may include
costs related to their distribution network and occupancy costs
associated with company-operated stores in cost of goods sold.
27
Table of Contents
Selling,
general and administrative expenses
The following table shows our selling, general and
administrative expenses (“SG&A”) for the periods
indicated, the changes in these items from period to period and
these items expressed as a percentage of net revenues:
| Year Ended | ||||||||||||||||||||
|
November 29,
|
November 30,
|
|||||||||||||||||||
|
%
|
2009
|
2008
|
||||||||||||||||||
|
November 29,
|
November 30,
|
Increase
|
% of Net
|
% of Net
|
||||||||||||||||
| 2009 | 2008 | (Decrease) | Revenues | Revenues | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Selling
|
$ | 498.9 | $ | 438.9 | 13.6 | % | 12.1 | % | 10.0 | % | ||||||||||
|
Advertising and promotion
|
266.1 | 297.9 | (10.6 | )% | 6.5 | % | 6.8 | % | ||||||||||||
|
Administration
|
366.6 | 364.3 | 0.7 | % | 8.9 | % | 8.3 | % | ||||||||||||
|
Other
|
458.5 | 505.4 | (9.3 | )% | 11.2 | % | 11.5 | % | ||||||||||||
|
Total SG&A
|
$ | 1,590.1 | $ | 1,606.5 | (1.0 | )% | 38.7 | % | 36.5 | % | ||||||||||
Compared to the prior year, total SG&A expenses declined in
2009 due to a favorable currency impact of approximately
$62 million.
Selling.
Selling expenses increased
across all business segments, primarily reflecting additional
company-operated stores, partially offset by a favorable
currency impact of $25 million in 2009.
Advertising and promotion.
The decrease
in advertising and promotion expenses was attributable to the
effects of currency and planned reduction of our advertising
activities in most markets as compared to the prior year.
Administration.
Administration expenses
include corporate expenses and other administrative charges.
Currency favorably impacted these expenses by $13 million
in 2009. Reflected in 2009 are increased pension expense of
approximately $38 million and costs associated with our
business acquisitions during the year, while 2008 included
higher costs associated with our conversion to an ERP system in
the United States as well as various other corporate initiatives.
Other.
Other SG&A costs include
distribution, information resources, and marketing organization
costs
,
gain or loss on sale of assets and other operating
income. Currency favorably impacted these expenses by
$14 million in 2009. The decrease in expenses was primarily
due to lower distribution costs, resulting from actions we have
taken in recent years to restructure our distribution center
operations and the decline in sales volume, as well as lower
marketing organization costs.
28
Table of Contents
Operating
income
The following table shows operating income by reporting segment
and certain components of corporate expense for the periods
indicated, the changes in these items from period to period and
these items expressed as a percentage of net revenues:
| Year Ended | ||||||||||||||||||||
|
November 29,
|
November 30,
|
|||||||||||||||||||
|
%
|
2009
|
2008
|
||||||||||||||||||
|
November 29,
|
November 30,
|
Increase
|
% of Net
|
% of Net
|
||||||||||||||||
| 2009 | 2008 | (Decrease) | Revenues | Revenues | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Operating income:
|
||||||||||||||||||||
|
Americas
|
$ | 346.3 | $ | 346.9 | (0.2 | )% | 14.7 | % | 14.0 | % | ||||||||||
|
Europe
|
154.8 | 257.9 | (40.0 | )% | 14.9 | % | 21.6 | % | ||||||||||||
|
Asia Pacific
|
91.0 | 99.5 | (8.6 | )% | 12.9 | % | 13.7 | % | ||||||||||||
|
Total regional operating income
|
592.1 | 704.3 | (15.9 | )% | 14.4 | %* | 16.0 | %* | ||||||||||||
|
Corporate:
|
||||||||||||||||||||
|
Restructuring charges, net
|
5.2 | 8.2 | (36.7 | )% | 0.1 | %* | 0.2 | %* | ||||||||||||
|
Other corporate staff costs and expenses
|
208.8 | 171.0 | 22.1 | % | 5.1 | %* | 3.9 | %* | ||||||||||||
|
Corporate expenses
|
214.0 | 179.2 | 19.4 | % | 5.2 | %* | 4.1 | %* | ||||||||||||
|
Total operating income
|
$ | 378.1 | $ | 525.1 | (28.0 | )% | 9.2 | %* | 11.9 | %* | ||||||||||
|
Operating margin
|
9.2 | % | 11.9 | % | ||||||||||||||||
| * | Percentage of consolidated net revenues |
Currency unfavorably affected operating income by approximately
$66 million in 2009.
Regional operating income.
The
following describes the changes in operating income by segment
for the year ended November 29, 2009, as compared to the
prior year:
| • | Americas. Operating income decreased due to the unfavorable impact of currency. Excluding currency, operating income increased due to an improved operating margin, driven by the improved gross margin and lower SG&A expenses in the region. | |
| • | Europe. The decrease in the region’s operating income was due to the unfavorable impact of currency, as well as a decline in operating margin. The decline in operating margin is due to the sales decline in our wholesale channel and higher expenses from our retail network, which reflects our increasing investment in company-operated store expansion and acquisitions in 2009. | |
| • | Asia Pacific. Operating income decreased due to the unfavorable impact of currency, as the decline in Japan’s operating income was substantially offset by the revenue growth and lower SG&A expenses in most other markets in the region. |
Corporate.
Corporate expense is
comprised of net restructuring charges and other corporate
expenses, including corporate staff costs. Corporate expenses in
2009 reflect the higher pension expense, resulting from the
decline in the fair value of our pension plan assets in 2008,
higher severance costs for headcount reductions, and increased
incentive compensation accruals, relating to greater achievement
against our internally-set objectives. These increases were
partially offset by a decline in corporate staff costs in 2009,
reflecting our cost-cutting initiatives.
Corporate expenses in 2009 and 2008 include amortization of
prior service benefit of $39.7 million and
$41.4 million, respectively, related to postretirement
benefit plan amendments in 2004 and 2003. We will continue to
amortize the prior service benefit in the future; however, it
will decline in 2010 by approximately $10 million, in
relation to the expected service lives of the employees affected
by these plan changes. We also expect the higher
29
Table of Contents
pension expenses to continue in 2010, despite a recovery in
asset values, as changes in the financial markets during 2009,
including a decrease in corporate bond yield indices, drove a
reduction in the discount rates used to measure our benefit
obligations. Higher pension expense may potentially extend into
future periods should market conditions persist. For more
information, see Note 8 to our audited consolidated
financial statements included in this report.
Interest
expense
Interest expense was $148.7 million for the year ended
November 29, 2009, as compared to $154.1 million in
the prior year. Lower average borrowing rates and lower debt
levels in 2009, resulting primarily from our required payments
on the trademark tranche of our senior secured revolving credit
facility, caused the decrease.
The weighted-average interest rate on average borrowings
outstanding for 2009 was 7.44% as compared to 8.09% for 2008.
Other
expense, net
Other expense, net, primarily consists of foreign exchange
management activities and transactions. For the year ended
November 29, 2009, we recorded net expense of
$38.3 million compared to $1.4 million for the prior
year. The increase in expense primarily reflects losses in 2009
on foreign exchange derivatives which economically hedge future
cash flow obligations of our foreign operations, partially
offset by foreign currency transaction gains. During 2009, the
U.S. Dollar depreciated relative to the rate included in
many of our forward contracts, particularly the Euro and the
Australian Dollar, negatively impacting the value of the related
derivatives.
Income
tax expense
Income tax expense was $39.2 million for the year ended
November 29, 2009, compared to $138.9 million for the
prior year. Our effective tax rate was 20.5% for the year ended
November 29, 2009, compared to 37.7% for the prior year.
The decrease in income tax expense and effective tax rate was
primarily driven by the reduction in income before income taxes
and a $33.2 million tax benefit relating to the expected
reversal of basis differences, consisting primarily of
undistributed earnings in investments in certain foreign
subsidiaries. During the fourth quarter of 2009, we adopted
specific plans to remit the prior undistributed earnings of
certain foreign subsidiaries, which were previously considered
permanently reinvested. As a result of the planned distribution,
we recognized a deferred tax asset and a corresponding tax
benefit of $33.2 million, for the foreign tax credits in
excess of the associated U.S. income tax liability that are
expected to become available upon the planned distribution.
30
Table of Contents
2008
compared to 2007
The following table summarizes, for the periods indicated, the
consolidated statements of income, the changes in these items
from period to period and these items expressed as a percentage
of net revenues:
| Year Ended | ||||||||||||||||||||
|
November 30,
|
November 25,
|
|||||||||||||||||||
|
%
|
2008
|
2007
|
||||||||||||||||||
|
November 30,
|
November 25,
|
Increase
|
% of Net
|
% of Net
|
||||||||||||||||
| 2008 | 2007 | (Decrease) | Revenues | Revenues | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Net sales
|
$ | 4,303.1 | $ | 4,266.1 | 0.9 | % | 97.8 | % | 97.8 | % | ||||||||||
|
Licensing revenue
|
97.8 | 94.8 | 3.2 | % | 2.2 | % | 2.2 | % | ||||||||||||
|
Net revenues
|
4,400.9 | 4,360.9 | 0.9 | % | 100.0 | % | 100.0 | % | ||||||||||||
|
Cost of goods sold
|
2,261.1 | 2,318.9 | (2.5 | )% | 51.4 | % | 53.2 | % | ||||||||||||
|
Gross profit
|
2,139.8 | 2,042.0 | 4.8 | % | 48.6 | % | 46.8 | % | ||||||||||||
|
Selling, general and administrative expenses
|
1,606.5 | 1,386.5 | 15.9 | % | 36.5 | % | 31.8 | % | ||||||||||||
|
Restructuring charges, net
|
8.2 | 14.5 | (43.0 | )% | 0.2 | % | 0.3 | % | ||||||||||||
|
Operating income
|
525.1 | 641.0 | (18.1 | )% | 11.9 | % | 14.7 | % | ||||||||||||
|
Interest expense
|
(154.1 | ) | (215.7 | ) | (28.6 | )% | (3.5 | )% | (4.9 | )% | ||||||||||
|
Loss on early extinguishment of debt
|
(1.4 | ) | (63.8 | ) | (97.8 | )% | — | (1.5 | )% | |||||||||||
|
Other income (expense), net
|
(1.4 | ) | 14.1 | (109.9 | )% | — | 0.3 | % | ||||||||||||
|
Income before income taxes
|
368.2 | 375.6 | (2.0 | )% | 8.4 | % | 8.6 | % | ||||||||||||
|
Income tax (benefit) expense
|
138.9 | (84.8 | ) | (263.9 | )% | 3.2 | % | (1.9 | )% | |||||||||||
|
Net income
|
$ | 229.3 | $ | 460.4 | (50.2 | )% | 5.2 | % | 10.6 | % | ||||||||||
Net
revenues
The following table presents net revenues by reporting segment
for the periods indicated and the changes in net revenues by
reporting segment on both reported and constant-currency bases
from period to period:
| Year Ended | ||||||||||||||||
| % Increase (Decrease) | ||||||||||||||||
|
November 30,
|
November 25,
|
As
|
Constant
|
|||||||||||||
| 2008 | 2007 | Reported | Currency | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
Net revenues:
|
||||||||||||||||
|
Americas
|
$ | 2,476.4 | $ | 2,581.3 | (4.1 | )% | (4.2 | )% | ||||||||
|
Europe
|
1,195.6 | 1,099.7 | 8.7 | % | 0.9 | % | ||||||||||
|
Asia Pacific
|
728.9 | 681.1 | 7.0 | % | 4.9 | % | ||||||||||
|
Corporate
|
— | (1.2 | ) | — | — | |||||||||||
|
Total net revenues
|
$ | 4,400.9 | $ | 4,360.9 | 0.9 | % | (1.4 | )% | ||||||||
Consolidated net revenues were stable on a reported basis and
decreased on a constant-currency basis for the year ended
November 30, 2008, as compared to the prior year. Reported
amounts were affected favorably by changes in foreign currency
exchange rates, particularly in Europe.
31
Table of Contents
Americas.
Net revenues in our Americas
region decreased in 2008 on both reported and constant-currency
bases. Currency affected net revenues favorably by approximately
$4 million in 2008.
Net revenue declines in the region reflected a weakening retail
environment. Net sales in the region decreased due to lower
demand and higher sales allowances and discounts for our
U.S. Dockers
®
brand products, the bankruptcy filings of two
U.S. customers and a decline in sales of our
U.S. Signature brand. Additionally, net sales decreased due
to issues encountered during stabilization of an ERP system we
implemented in the United States, which impacted our ability to
fulfill customer orders in the second quarter. The region’s
net sales decreases were partially offset by increased sales
from both the addition of new and continued growth at existing
company-operated retail stores and strong performance of our
Levis
®
brand.
Europe.
Net revenues in Europe
increased on both reported and constant-currency bases. Currency
affected net revenues favorably by approximately
$85 million.
Net sales increases, primarily from new company-operated stores,
partially offset declines in our wholesale channels in certain
markets. The increases related primarily to increased sales of
our
Levi’s
®
Red
Tab
tm
products.
Asia Pacific.
Net revenues in Asia
Pacific increased on both reported and constant-currency bases.
Currency affected net revenues favorably by approximately
$14 million.
We had mixed performance across the region. Net sales increased
primarily in our developing markets, particularly China and
India, through continued expansion of our dedicated store
network and stronger consumer spending. These net sales
increases were offset primarily by continuing weak performance
in our mature markets, primarily Japan.
Gross
profit
The following table shows consolidated gross profit and gross
margin for the periods indicated and the changes in these items
from period to period:
| Year Ended | ||||||||||||
|
%
|
||||||||||||
|
November 30,
|
November 25,
|
Increase
|
||||||||||
| 2008 | 2007 | (Decrease) | ||||||||||
| (Dollars in millions) | ||||||||||||
|
Net revenues
|
$ | 4,400.9 | $ | 4,360.9 | 0.9 | % | ||||||
|
Cost of goods sold
|
2,261.1 | 2,318.9 | (2.5 | )% | ||||||||
|
Gross profit
|
$ | 2,139.8 | $ | 2,042.0 | 4.8 | % | ||||||
|
Gross margin
|
48.6 | % | 46.8 | % | ||||||||
Compared to prior year, gross profit increased in 2008 due to
the favorable impact of foreign currency in our Europe region
and an increase in consolidated gross margin, resulting from a
more favorable sales mix, the increased contribution of net
sales from company-operated stores, and lower sourcing costs.
Gross margins increased for each of our regions.
Our gross margins may not be comparable to those of other
companies in our industry, since some companies may include
costs related to their distribution network and occupancy costs
associated with company-operated stores in cost of goods sold.
32
Table of Contents
Selling,
general and administrative expenses
The following table shows our SG&A expenses for the periods
indicated, the changes in these items from period to period and
these items expressed as a percentage of net revenues:
| Year Ended | ||||||||||||||||||||
|
November 30,
|
November 25,
|
|||||||||||||||||||
|
%
|
2008
|
2007
|
||||||||||||||||||
|
November 30,
|
November 25,
|
Increase
|
% of Net
|
% of Net
|
||||||||||||||||
| 2008 | 2007 | (Decrease) | Revenues | Revenues | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Selling
|
$ | 438.9 | $ | 370.6 | 18.4 | % | 10.0 | % | 8.5 | % | ||||||||||
|
Advertising and promotion
|
297.9 | 277.0 | 7.5 | % | 6.8 | % | 6.4 | % | ||||||||||||
|
Administration
|
370.2 | 302.0 | 22.6 | % | 8.4 | % | 6.9 | % | ||||||||||||
|
Postretirement benefit plan curtailment gains
|
(5.9 | ) | (52.8 | ) | (88.7 | )% | (0.1 | )% | (1.2 | )% | ||||||||||
|
Other
|
505.4 | 489.7 | 3.2 | % | 11.5 | % | 11.2 | % | ||||||||||||
|
Total SG&A
|
$ | 1,606.5 | $ | 1,386.5 | 15.9 | % | 36.5 | % | 31.8 | % | ||||||||||
Total SG&A expenses increased $220.0 million for the
year ended November 30, 2008, as compared to the prior
year. Currency contributed approximately $32 million to the
increase in SG&A expenses.
Selling.
Selling expenses increased
across all business segments, primarily reflecting higher
selling costs associated with additional company-operated
stores, and an impairment charge of $16.1 million in the
fourth quarter of 2008 relating to the assets of certain
underperforming company-operated stores.
Advertising and promotion.
The increase
in advertising and promotion expenses primarily reflects our
global
Levi’s
®
501
®
campaign in the second half of the year.
Administration.
Administration expenses
include corporate expenses and other administrative charges.
Administration expenses increased primarily due to the
additional expenses associated with our U.S. ERP
implementation and stabilization efforts, higher costs
reflecting various corporate initiatives, and an increase in our
bad debt expense reflecting the bankruptcy filings of two
U.S. customers and overall market conditions.
Postretirement benefit plan curtailment
gains.
During 2008 we recorded postretirement
benefit plan curtailment gains of $5.9 million primarily
associated with the departure of the remaining employees who
elected the voluntary separation and buyout program contained in
the new labor agreement we entered into during the third quarter
of 2007. During 2007, we recorded a gain of $27.5 million
associated with this same voluntary separation and buyout
program, as well as a $25.3 million gain associated with
the closure of our Little Rock, Arkansas, distribution facility.
For more information, see Notes 8 and 13 to our audited
consolidated financial statements included in this report.
Other.
Other SG&A costs include
distribution, information resources, and marketing costs
,
gain or loss on sale of assets and other operating income.
These costs increased as compared to prior year primarily due to
effects of currency.
Restructuring
charges, net
Restructuring charges, net, decreased to $8.2 million for
the year ended November 30, 2008, from $14.5 million
for the prior year. The 2008 amount primarily consisted of
severance and other charges of $4.5 million recorded in
association with the planned closure of our manufacturing
facility in the Philippines and our distribution facility in
Italy and an additional asset impairment of $4.2 million
recorded for our closed distribution center in Germany. The 2007
amount primarily consisted of asset impairment of
$9.0 million and severance charges of $4.3 million
recorded in association with the planned closure of our
distribution center in Germany. For more information, see
Note 13 to our audited consolidated financial statements
included in this report.
33
Table of Contents
Operating
income
The following table shows operating income by reporting segment
and the significant components of corporate expense for the
periods indicated, the changes in these items from period to
period and these items expressed as a percentage of net revenues:
| Year Ended | ||||||||||||||||||||
|
November 30,
|
November 25,
|
|||||||||||||||||||
|
%
|
2008
|
2007
|
||||||||||||||||||
|
November 30,
|
November 25,
|
Increase
|
As% of Net
|
As% of Net
|
||||||||||||||||
| 2008 | 2007 | (Decrease) | Revenues | Revenues | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
|
Operating income:
|
||||||||||||||||||||
|
Americas
|
$ | 346.9 | $ | 403.2 | (14.0 | )% | 14.0 | % | 15.6 | % | ||||||||||
|
Europe
|
257.9 | 236.9 | 8.9 | % | 21.6 | % | 21.5 | % | ||||||||||||
|
Asia Pacific
|
99.5 | 95.3 | 4.5 | % | 13.7 | % | 14.0 | % | ||||||||||||
|
Total regional operating income
|
704.3 | 735.4 | (4.2 | )% | 16.0 | %* | 16.9 | %* | ||||||||||||
|
Corporate:
|
||||||||||||||||||||
|
Restructuring charges, net
|
8.2 | 14.5 | (43.0 | )% | 0.2 | %* | 0.3 | %* | ||||||||||||
|
Postretirement benefit plan curtailment gains
|
(5.9 | ) | (52.8 | ) | (88.7 | )% | (0.1 | )%* | (1.2 | )% | ||||||||||
|
Other corporate staff costs and expenses
|
176.9 | 132.7 | 33.4 | % | 4.0 | %* | 3.0 | %* | ||||||||||||
|
Total corporate
|
179.2 | 94.4 | 89.9 | % | 4.1 | %* | 2.2 | %* | ||||||||||||
|
Total operating income
|
$ | 525.1 | $ | 641.0 | (18.1 | )% | 11.9 | %* | 14.7 | %* | ||||||||||
|
Operating Margin
|
11.9 | % | 14.7 | % | ||||||||||||||||
| * | Percentage of consolidated net revenues |
Regional operating income.
The
following describes the changes in operating income by reporting
segment for the year ended November 30, 2008, as compared
to the prior year:
| • | Americas. Operating income decreased primarily due to a decline in operating margin, as well as the decline in net revenues. Operating margin decreased as the region’s gross margin improvement was more than offset by the increase in SG&A expenses, reflecting our continued investment in retail expansion, our U.S. ERP implementation and stabilization efforts, and increased advertising and promotion expenses. | |
| • | Europe. The increase in the region’s operating income was due to the favorable impact of currency. The region’s net sales increase was offset by an increase in SG&A expenses, primarily reflecting our continued investment in retail expansion. | |
| • | Asia Pacific. The region’s net sales increase and the favorable impact of currency drove the slight increase in operating income. These increases were partially offset by a slight decline in operating margin, reflecting the region’s continued investment in retail and infrastructure, particularly within our developing markets, and increased advertising and promotion expenses. |
Corporate.
Corporate expense is
comprised of restructuring charges, net, postretirement benefit
plan curtailment gains, and other corporate expenses, including
corporate staff costs.
Other corporate staff costs and expenses increased as compared
to prior year primarily due to higher costs, reflecting our
global information technology investment and various other
corporate initiatives, and the impairment charge related to our
company-operated stores. A reduction in distribution expenses
related to the separation and buyout costs of the voluntary
termination of certain distribution center employees in North
America was offset by a reduction in our workers’
compensation liability reversals.
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Corporate expenses in 2008 and 2007 include amortization of
prior service benefit of $41.4 million and
$45.7 million, respectively, related to postretirement
benefit plan amendments in 2004 and 2003, and workers’
compensation reversals of $4.3 million and
$8.1 million, respectively.
Interest
expense
Interest expense decreased 28.6% to $154.1 million for the
year ended November 30, 2008, from $215.7 million in
the prior year. Lower average borrowing rates and lower debt
levels in 2008, resulting primarily from our refinancing and
debt reduction activities in 2007, caused the decrease.
The weighted-average interest rate on average borrowings
outstanding for 2008 was 8.09% as compared to 9.59% for 2007.
Loss
on early extinguishment of debt
For the year ended November 30, 2008, we recorded a loss of
$1.4 million on early extinguishment of debt primarily as a
result of our redemption of our remaining 12.25% senior
notes due 2012. For the year ended November 25, 2007, we
recorded a loss of $63.8 million on early extinguishment of
debt primarily as a result of our redemption of our floating
rate senior notes due 2012 during the second quarter of 2007 and
our repurchase of $506.2 million of the then-outstanding
$525.0 million of our 12.25% senior notes due 2012
during the fourth quarter of 2007. The 2007 losses were
comprised of prepayment premiums, tender offer consideration,
applicable consent payments and other fees and expenses of
approximately $46.7 million and the write-off of
approximately $17.1 million of unamortized capitalized
costs and debt discount. For more information, see Note 6
to our audited consolidated financial statements included in
this report.
Other
income (expense), net
Other income (expense), net, primarily consists of foreign
exchange management activities and transactions as well as
interest income. For the year ended November 30, 2008, we
recorded other expense of $1.4 million compared to other
income of $14.1 million for the prior year. This primarily
reflects foreign currency transaction losses in 2008 as compared
to gains in 2007 resulting from the weakening of the
U.S. Dollar against the Japanese Yen in the fourth quarter
of 2008. These losses were partially offset by gains on our
forward foreign exchange and option contracts, resulting from
the appreciation of the U.S. Dollar against the Euro in the
second half of 2008.
Income
tax expense (benefit)
Income tax expense was $138.9 million for the year ended
November 30, 2008, compared to a benefit of
$84.8 million for the prior year. The effective tax rate
was 37.7% for the year ended November 30, 2008, compared to
a 22.6% benefit for the prior year.
The increase in the effective tax rate for 2008 as compared to
2007 was mostly attributable to a $215.3 million tax
benefit from a reversal during the fourth quarter of 2007 of
valuation allowances against our deferred tax assets primarily
for foreign tax credit carryforwards. This reversal was due to
improvements in our business performance and positive
developments in the IRS examination of the
2000-2002
U.S. federal corporate income tax returns.
Liquidity
and Capital Resources
Liquidity
outlook
We believe we will have adequate liquidity over the next twelve
months to operate our business and to meet our cash requirements.
Cash
sources
We are a privately-held corporation. We have historically relied
primarily on cash flows from operations, borrowings under credit
facilities, issuances of notes and other forms of debt
financing. We regularly explore financing and debt reduction
alternatives, including new credit agreements, unsecured and
secured note issuances,
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equity financing, equipment and real estate financing,
securitizations and asset sales. Key sources of cash include
earnings from operations and borrowing availability under our
revolving credit facility.
We are borrowers under an amended and restated senior secured
revolving credit facility. The maximum availability under the
facility is $750 million secured by certain of our domestic
assets and certain U.S. trademarks associated with the
Levi’s
®
brand and other related intellectual property. The facility
includes a $250 million trademark tranche and a
$500 million revolving tranche. The revolving tranche
increases as the trademark tranche is repaid, up to a maximum of
$750 million when the trademark tranche is repaid in full.
Upon repayment of the trademark tranche, the secured interest in
the U.S. trademarks will be released. As of
November 29, 2009, we had borrowings of $108.3 million
under the trademark tranche and no outstanding borrowings under
the revolving tranche. Unused availability under the revolving
tranche was $243.9 million, as our total availability of
$325.2 million, based on collateral levels as defined by
the agreement, was reduced by $81.3 million of other
credit-related instruments such as documentary and standby
letters of credit allocated under the facility.
Under the facility, we are required to meet a fixed charge
coverage ratio as defined in the agreement of 1.0:1.0 when
unused availability is less than $100 million. This
covenant will be discontinued upon the repayment in full and
termination of the trademark tranche described above and with
the implementation of an unfunded availability reserve of
$50 million, which implementation will reduce availability
under our credit facility.
As of November 29, 2009, we had cash and cash equivalents
totaling $270.8 million, resulting in a net liquidity
position (unused availability and cash and cash equivalents) of
$514.7 million.
Cash
uses
Our principal cash requirements include working capital, capital
expenditures, payments of principal and interest on our debt,
payments of taxes, contributions to our pension plans and
payments for postretirement health benefit plans, and, if market
conditions warrant, occasional investments in, or acquisitions
of, business ventures in our line of business. In addition, we
regularly evaluate our ability to pay dividends or repurchase
stock, all consistent with the terms of our debt agreements.
The following table presents selected cash uses in 2009 and the
related projected cash uses for these items in 2010:
|
Projected
|
||||||||
|
Cash Used in
|
Cash Uses in
|
|||||||
| 2009 | 2010 | |||||||
| (Dollars in millions) | ||||||||
|
Interest
|
$ | 136 | $ | 130 | ||||
|
Federal, foreign and state taxes (net of refunds)
|
57 | 68 | ||||||
|
Postretirement health benefit plans
|
19 | 22 | ||||||
|
Capital
expenditures
(1)
|
83 | 166 | ||||||
|
Pension plans
|
18 | 42 | ||||||
|
Business acquisitions
|
100 | — | ||||||
|
Dividend
(2)
|
20 | 20 | ||||||
|
Total selected cash requirements
|
$ | 433 | $ | 448 | ||||
| (1) | Capital expenditures for 2009 consisted primarily of investment in company-operated retail stores in the Americas and Europe that were not a part of the business acquisitions as well as costs associated with information technology systems. | |
| The increase in projected capital expenditures in 2010 primarily reflects costs associated with information technology systems and costs associated with improvement of the Company’s headquarters. Our projection excludes approximately $16 million of tenant improvement allowances that will be paid directly by the landlord. | ||
| (2) | Cash used reflects dividend paid in the second quarter of 2009. Amount projected in 2010 reflects management’s current estimate; however, the declaration, amount and payment of dividends are at the discretion of our board of directors and are dependent upon, among other factors, our financial condition and compliance with the terms of our debt agreements. |
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The following table provides information about our significant
cash contractual obligations and commitments as of
November 29, 2009:
| Payments Due or Projected by Period | ||||||||||||||||||||||||||||
| Total | 2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | ||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||
|
Contractual and Long-term Liabilities:
|
||||||||||||||||||||||||||||
|
Short-term and long-term debt
obligations
(1)
|
$ | 1,853 | $ | 19 | $ | — | $ | 108 | $ | 375 | $ | 323 | $ | 1,028 | ||||||||||||||
|
Interest
(2)
|
653 | 130 | 129 | 129 | 110 | 86 | 69 | |||||||||||||||||||||
|
Capital lease obligations
|
8 | 2 | 2 | 3 | 1 | — | — | |||||||||||||||||||||
|
Operating
leases
(3)
|
784 | 133 | 129 | 112 | 86 | 69 | 255 | |||||||||||||||||||||
|
Purchase
obligations
(4)
|
319 | 311 | 8 | — | — | — | — | |||||||||||||||||||||
|
Postretirement
obligations
(5)
|
192 | 22 | 22 | 21 | 21 | 20 | 86 | |||||||||||||||||||||
|
Pension
obligations
(6)
|
478 | 42 | 140 | 56 | 51 | 51 | 138 | |||||||||||||||||||||
|
Long-term employee related
benefits
(7)
|
94 | 14 | 12 | 12 | 12 | 12 | 32 | |||||||||||||||||||||
|
Total
|
$ | 4,381 | $ | 673 | $ | 442 | $ | 441 | $ | 656 | $ | 561 | $ | 1,608 | ||||||||||||||
| (1) | The terms of the trademark tranche of our credit facility require payments of the remaining balance at maturity in 2012. Additionally, the 2010 amount includes short-term borrowings. | |
| (2) | Interest obligations are computed using constant interest rates until maturity. The LIBOR rate as of November 29, 2009, was used for variable-rate debt. | |
| (3) | Amounts reflect contractual obligations relating to our existing leased facilities as of November 29, 2009, and therefore do not reflect our planned future openings of company-operated retail stores. For more information, see “Item 2 — Properties.” | |
| (4) | Amounts reflect estimated commitments of $279 million for inventory purchases and $40 million for human resources, advertising, information technology and other professional services. | |
| (5) | The amounts presented in the table represent an estimate for the next ten years of our projected payments, based on information provided by our plans’ actuaries, and have not been reduced by estimated Medicare subsidy receipts. Our policy is to fund postretirement benefits as claims and premiums are paid. For more information, see Note 8 to our audited consolidated financial statements included in this report. | |
| (6) | The amounts presented in the table represent an estimate of our projected contributions to the plans for the next ten years based on information provided by our plans’ actuaries. For U.S qualified plans, these estimates comply with minimum funded status and minimum required contributions under the Pension Protection Act. The expected increase in 2011 and 2012 is primarily due to the reduction of the fair value of plan assets in the Company’s U.S. pension plans at November 29, 2009, as compared to the related plan obligations, however actual contributions may differ from those presented based on factors including changes in discount rates and the valuation of pension assets. For more information, see Note 8 to our audited consolidated financial statements included in this report. | |
| (7) | Long-term employee-related benefits relate to the current and non-current portion of deferred compensation arrangements and workers’ compensation. We estimated these payments based on prior experience and forecasted activity for these items. For more information, see Note 12 to our audited consolidated financial statements included in this report. |
This table does not include amounts related to our income tax
liabilities associated with uncertain tax positions, as we are
unable to make reasonable estimates for the periods in which
these liabilities may become due. We do not anticipate a
material effect on our liquidity as a result of payments in
future periods of liabilities for uncertain tax positions.
Information in the two preceding tables reflects our estimates
of future cash payments. These estimates and projections are
based upon assumptions that are inherently subject to
significant economic, competitive, legislative and other
uncertainties and contingencies, many of which are beyond our
control. Accordingly, our actual expenditures and liabilities
may be materially higher or lower than the estimates and
projections reflected in these tables. The inclusion of these
projections and estimates should not be regarded as a
representation by us that the estimates will prove to be correct.
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Cash
flows
The following table summarizes, for the periods indicated,
selected items in our consolidated statements of cash flows:
| Year Ended | ||||||||||||
|
November 29,
|
November 30,
|
November 25,
|
||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (Dollars in millions) | ||||||||||||
|
Cash provided by operating activities
|
$ | 388.8 | $ | 224.8 | $ | 302.3 | ||||||
|
Cash used for investing activities
|
(233.0 | ) | (26.8 | ) | (107.3 | ) | ||||||
|
Cash used for financing activities
|
(97.2 | ) | (135.5 | ) | (325.5 | ) | ||||||
|
Cash and cash equivalents
|
270.8 | 210.8 | 155.9 | |||||||||
2009
as compared to 2008
Cash
flows from operating activities
Cash provided by operating activities was $388.8 million
for 2009, as compared to $224.8 million for 2008. As
compared to the prior year, we used less cash for inventory,
reflecting our focus on inventory management, and payments to
vendors declined, reflecting our lower SG&A expenses. These
results more than offset the decline in our cash collections,
which was driven primarily by our lower net revenues as well as
our lower beginning accounts receivable balance. Additionally,
the increase in cash provided by operating activities reflected
lower payments for incentive compensation and interest.
Cash
flows from investing activities
Cash used for investing activities was $233.0 million for
2009 compared to $26.8 million for 2008. As compared to the
prior year, the increase in cash used for investing activities
primarily reflects business acquisitions in our Americas and
Europe regions, as well as higher payments on settlement of
forward foreign exchange contracts.
Cash
flows from financing activities
Cash used for financing activities was $97.2 million for
2009 compared to $135.5 million for 2008. Cash used in both
periods primarily related to required payments on the trademark
tranche of our senior secured revolving credit facility and our
dividend payments to stockholders. Cash used for financing
activities in 2008 also reflects our redemption in March 2008 of
our remaining $18.8 million outstanding 12.25% senior
notes due 2012.
2008
as compared to 2007
Cash
flows from operating activities
Cash provided by operating activities was $224.8 million
for 2008, as compared to $302.3 million for 2007. The
decrease, primarily due to our lower operating income, was
partially offset by several factors including: lower interest
payments; higher cash collections on receivables, reflecting
later timing of sales in the fourth quarter of 2007 as compared
to the fourth quarter of 2006; and lower incentive compensation
payments. Additionally, we used more cash for inventory in 2008
due to commencing the year with a lower inventory base as
compared to prior year.
Cash
flows from investing activities
Cash used for investing activities was $26.8 million for
2008 compared to $107.3 million for 2007. Cash used in both
periods primarily related to investments made in our
company-operated retail stores and information technology
systems associated with our global ERP installation.
Additionally, in 2008 we realized gains and received the related
proceeds on the settlement of our forward foreign exchange
contracts, reflecting the appreciation of the U.S. Dollar
against the Euro in the second half of 2008, as compared to
realized losses in 2007,
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reflecting the weakening of the U.S. Dollar against major
foreign currencies including the Euro, the Canadian Dollar and
the Japanese Yen.
Cash
flows from financing activities
Cash used for financing activities was $135.5 million for
2008 compared to $325.5 million for 2007. Cash used for
financing activities in 2008 primarily reflects
$70.9 million of required payments on the trademark tranche
of our senior secured revolving credit facility, our redemption
in March 2008 of our remaining $18.8 million outstanding
12.25% senior notes due 2012 and our $50.0 million
dividend payment to stockholders in the second quarter. Cash
used for financing activities in 2007 primarily reflects our
redemption in April 2007 of all of our floating rate notes due
2012 through borrowings under a new senior unsecured term loan
and use of cash on hand, and the repurchase in October 2007 of
over 95% of our outstanding 12.25% senior notes due 2012
through borrowings under an amended and restated senior secured
revolving credit facility and use of cash on hand.
Indebtedness
The borrower of substantially all of our debt is Levi
Strauss & Co., the parent and U.S. operating
company. Of our total debt of $1.9 billion, we had
fixed-rate debt of approximately $1.4 billion (76% of total
debt) and variable-rate debt of approximately $0.5 billion
(24% of total debt) as of November 29, 2009. Our required
aggregate debt principal payments, excluding short-term
borrowings, are $108.3 million in 2012, $374.6 million
in 2013, $323.3 million in 2014 and the remaining
$1.0 billion in years after 2014. Short-term borrowings
totaling $18.7 million as of November 29, 2009, are
expected to be either paid over the next twelve months or
refinanced at the end of their applicable terms.
Effective May 1, 2008, in order to mitigate a portion of
our interest rate risk, we entered into a $100 million
interest rate swap agreement to pay a fixed-rate interest of
approximately 3.2% and receive
3-month
LIBOR variable rate interest payments quarterly through May 2010.
Our long-term debt agreements contain customary covenants
restricting our activities as well as those of our subsidiaries.
Currently, we are in compliance with all of these covenants.
Effects
of Inflation
We believe that inflation in the regions where most of our sales
occur has not had a significant effect on our net revenues or
profitability.
Off-Balance
Sheet Arrangements, Guarantees and Other Contingent
Obligations
Off-balance sheet arrangements and other.
We
have contractual commitments for non-cancelable operating
leases. For more information, see Note 14 to our audited
consolidated financial statements included in this report. We
have no other material non-cancelable guarantees or commitments,
and no material special-purpose entities or other off-balance
sheet debt obligations.
Indemnification agreements.
In the ordinary
course of our business, we enter into agreements containing
indemnification provisions under which we agree to indemnify the
other party for specified claims and losses. For example, our
trademark license agreements, real estate leases, consulting
agreements, logistics outsourcing agreements, securities
purchase agreements and credit agreements typically contain
these provisions. This type of indemnification provision
obligates us to pay certain amounts associated with claims
brought against the other party as the result of trademark
infringement, negligence or willful misconduct of our employees,
breach of contract by us including inaccuracy of representations
and warranties, specified lawsuits in which we and the other
party are co-defendants, product claims and other matters. These
amounts are generally not readily quantifiable: the maximum
possible liability or amount of potential payments that could
arise out of an indemnification claim depends entirely on the
specific facts and circumstances associated with the claim. We
have insurance coverage that minimizes the potential exposure to
certain of these claims. We also believe that the likelihood of
substantial payment obligations under these agreements to third
parties is low and that any such amounts would be immaterial.
39
Table of Contents
Critical
Accounting Policies, Assumptions and Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles in the United States
requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial
statements and the related notes. We believe that the following
discussion addresses our critical accounting policies, which are
those that are most important to the portrayal of our financial
condition and results of operations and require
management’s most difficult, subjective and complex
judgments, often as a result of the need to make estimates about
the effect of matters that are inherently uncertain. Changes in
such estimates, based on newly available information, or
different assumptions or conditions, may affect amounts reported
in future periods.
We summarize our critical accounting policies below.
Revenue recognition.
Net sales is primarily
comprised of sales of products to wholesale customers, including
franchised stores, and direct sales to consumers at our
company-operated and online stores and at our company-operated
shop-in-shops
located within department stores. We recognize revenue on sale
of product when the goods are shipped or delivered and title to
the goods passes to the customer provided that: there are no
uncertainties regarding customer acceptance; persuasive evidence
of an arrangement exists; the sales price is fixed or
determinable; and collectibility is reasonably assured. Revenue
is recorded net of an allowance for estimated returns, discounts
and retailer promotions and other similar incentives. Licensing
revenues from the use of our trademarks in connection with the
manufacturing, advertising, and distribution of trademarked
products by third-party licensees are earned and recognized as
products are sold by licensees based on royalty rates as set
forth in the licensing agreements.
We recognize allowances for estimated returns in the period in
which the related sale is recorded. We recognize allowances for
estimated discounts, retailer promotions and other similar
incentives at the later of the period in which the related sale
is recorded or the period in which the sales incentive is
offered to the customer. We estimate non-volume based allowances
based on historical rates as well as customer and
product-specific circumstances. Actual allowances may differ
from estimates due to changes in sales volume based on retailer
or consumer demand and changes in customer and product-specific
circumstances. Sales and value-added taxes collected from
customers and remitted to governmental authorities are presented
on a net basis in the accompanying consolidated statements of
income.
Accounts receivable, net.
In the normal course
of business, we extend credit to our wholesale and licensing
customers that satisfy pre-defined credit criteria. Accounts
receivable are recorded net of an allowance for doubtful
accounts. We estimate the allowance for doubtful accounts based
upon an analysis of the aging of accounts receivable at the date
of the consolidated financial statements, assessments of
collectibility based on historic trends, customer-specific
circumstances, and an evaluation of economic conditions.
Inventory valuation.
We value inventories at
the lower of cost or market value. Inventory cost is generally
determined using the
first-in
first-out method. We include product costs, labor and related
overhead, sourcing costs, inbound freight, internal transfers,
and the cost of operating our remaining manufacturing
facilities, including the related depreciation expense, in the
cost of inventories. In determining inventory market values,
substantial consideration is given to the expected product
selling price. We estimate quantities of slow-moving and
obsolete inventory by reviewing on-hand quantities, outstanding
purchase obligations and forecasted sales. We then estimate
expected selling prices based on our historical recovery rates
for sale of slow-moving and obsolete inventory and other
factors, such as market conditions, expected channel of
disposition, and current consumer preferences. Estimates may
differ from actual results due to the quantity, quality and mix
of products in inventory, consumer and retailer preferences and
economic conditions.
Impairment.
We review our goodwill and other
non-amortized
intangible assets for impairment annually in the fourth quarter
of our fiscal year, or more frequently as warranted by events or
changes in circumstances which indicate that the carrying amount
may not be recoverable. In our impairment tests, we use a
two-step approach. In the first step, we compare the carrying
value of the applicable asset or reporting unit to its fair
value, which we estimate using a discounted cash flow analysis
or by comparison to the market values of similar assets. If the
carrying amount of the asset or reporting unit exceeds its
estimated fair value, we perform the second step, and
40
Table of Contents
determine the impairment loss, if any, as the excess of the
carrying value of the goodwill or intangible asset over its fair
value.
We review our other long-lived assets for impairment whenever
events or changes in circumstances indicate the carrying amount
of an asset may not be recoverable. If the carrying amount of an
other long-lived asset exceeds the expected future undiscounted
cash flows, we measure and record an impairment loss for the
excess of the carrying value of the asset over its fair value.
To determine the fair value of impaired assets, we utilize the
valuation technique or techniques deemed most appropriate based
on the nature of the impaired asset and the data available,
which may include the use of quoted market prices, prices for
similar assets or other valuation techniques such as discounted
future cash flows or earnings.
Income tax assets and liabilities.
We are
subject to income taxes in both the U.S. and numerous
foreign jurisdictions. We compute our provision for income taxes
using the asset and liability method, under which deferred tax
assets and liabilities are recognized for the expected future
tax consequences of temporary differences between the financial
reporting and tax bases of assets and liabilities and for
operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using the currently enacted tax
rates that are expected to apply to taxable income for the years
in which those tax assets and liabilities are expected to be
realized or settled. Significant judgments are required in order
to determine the realizability of these deferred tax assets. In
assessing the need for a valuation allowance, we evaluate all
significant available positive and negative evidence, including
historical operating results, estimates of future taxable income
and the existence of prudent and feasible tax planning
strategies. Changes in the expectations regarding the
realization of deferred tax assets could materially impact
income tax expense in future periods.
We do not recognize deferred taxes with respect to temporary
differences between the book and tax bases in our investments in
foreign subsidiaries, unless it becomes apparent that these
temporary differences will reverse in the foreseeable future.
We continuously review issues raised in connection with all
ongoing examinations and open tax years to evaluate the adequacy
of our liabilities. We evaluate uncertain tax positions under a
two-step approach. The first step is to evaluate the uncertain
tax position for recognition by determining if the weight of
available evidence indicates that it is more likely than not
that the position will be sustained upon examination based on
its technical merits. The second step is, for those positions
that meet the recognition criteria, to measure the tax benefit
as the largest amount that is more than fifty percent likely of
being realized. We believe our recorded tax liabilities are
adequate to cover all open tax years based on our assessment.
This assessment relies on estimates and assumptions and involves
significant judgments about future events. To the extent that
our view as to the outcome of these matters changes, we will
adjust income tax expense in the period in which such
determination is made. We classify interest and penalties
related to income taxes as income tax expense.
Derivative and foreign exchange management
activities.
We recognize all derivatives as
assets and liabilities at their fair values. We may use
derivatives and establish programs from time to time to manage
foreign currency and interest rate exposures that are sensitive
to changes in market conditions. The instruments that we
designate and that qualify for hedge accounting treatment hedge
our net investment position in certain of our foreign
subsidiaries and, through the first quarter of 2007, certain
intercompany royalty cash flows. For these instruments, we
document the hedge designation by identifying the hedging
instrument, the nature of the risk being hedged and the approach
for measuring hedge ineffectiveness. The ineffective portions of
hedges are recorded in “Other income (expense), net”
in our consolidated statements of income. The gains and losses
on the instruments that we designate and that qualify for hedge
accounting treatment are recorded in “Accumulated other
comprehensive income (loss)” in our consolidated balance
sheets until the underlying has been settled and is then
reclassified to earnings. Changes in the fair values of the
derivative instruments that we do not designate or that do not
qualify for hedge accounting are recorded in “Other income
(expense), net” or “Interest expense” in our
consolidated statements of income to reflect the economic risk
being mitigated.
41
Table of Contents
Employee
benefits and incentive compensation
Pension and postretirement benefits.
We have
several non-contributory defined benefit retirement plans
covering eligible employees. We also provide certain health care
benefits for U.S. employees who meet age, participation and
length of service requirements at retirement. In addition, we
sponsor other retirement or post-employment plans for our
foreign employees in accordance with local government programs
and requirements. We retain the right to amend, curtail or
discontinue any aspect of the plans, subject to local
regulations. Any of these actions, either individually or in
combination, could have a material impact on our consolidated
financial statements and on our future financial performance.
We recognize either an asset or liability for any plan’s
funded status in our consolidated balance. We measure changes in
funded status using actuarial models which use an attribution
approach that generally spreads individual events over the
estimated service lives of the employees in the plan. The
attribution approach assumes that employees render service over
their service lives on a relatively smooth basis and as such,
presumes that the income statement effects of pension or
postretirement benefit plans should follow the same pattern. Our
policy is to fund our pension plans based upon actuarial
recommendations and in accordance with applicable laws, income
tax regulations and credit agreements.
Net pension and postretirement benefit income or expense is
generally determined using assumptions which include expected
long-term rates of return on plan assets, discount rates,
compensation rate increases and medical trend rates. We use a
mix of actual historical rates, expected rates and external data
to determine the assumptions used in the actuarial models. For
example, in 2009 we utilized a yield curve constructed from a
portfolio of high-quality corporate bonds with various
maturities to determine the appropriate discount rate to use for
our U.S. benefit plans. Under this model, each year’s
expected future benefit payments are discounted to their present
value at the appropriate yield curve rate, thereby generating
the overall discount rate. We utilized country-specific
third-party bond indices to determine appropriate discount rates
to use for benefit plans of our foreign subsidiaries. Changes in
actuarial assumptions and estimates, either individually or in
combination, could have a material impact on our consolidated
financial statements and on our future financial performance.
Employee incentive compensation.
We maintain
short-term and long-term employee incentive compensation plans.
These plans are intended to reward eligible employees for their
contributions to our short-term and long-term success. For our
short-term plans, the amount of the cash bonus earned depends
upon business unit and corporate financial results as measured
against pre-established targets, and also depends upon the
performance and job level of the individual. Our long-term plans
are intended to reward management for its long-term impact on
our total earnings performance. Performance is measured at the
end of a three-year period based on our performance over the
period measured against certain pre-established targets such as
earnings before interest, taxes, depreciation and amortization
(“EBITDA”) or compound annual growth rates over the
periods. We accrue the related compensation expense over the
period of the plan, and changes in the liabilities for these
incentive plans generally correlate with our financial results
and projected future financial performance and could have a
material impact on our consolidated financial statements.
Recently
Issued Accounting Standards
See Note 1 to our audited consolidated financial statements
included in this report for recently issued accounting
standards, including the expected dates of adoption and expected
impact to our consolidated financial statements upon adoption.
FORWARD-LOOKING
STATEMENTS
Certain matters discussed in this report, including (without
limitation) statements under “Management’s Discussion
and Analysis of Financial Condition and Results of
Operations” contain forward-looking statements. Although we
believe that, in making any such statements, our expectations
are based on reasonable assumptions, any such statement may be
influenced by factors that could cause actual outcomes and
results to be materially different from those projected.
42
Table of Contents
These forward-looking statements include statements relating to
our anticipated financial performance and business prospects
and/or
statements preceded by, followed by or that include the words
“believe”, “anticipate”, “intend”,
“estimate”, “expect”, “project”,
“could”, “plans”, “seeks” and
similar expressions. These forward-looking statements speak only
as of the date stated and we do not undertake any obligation to
update or revise publicly any forward-looking statements,
whether as a result of new information, future events or
otherwise, even if experience or future events make it clear
that any expected results expressed or implied by these
forward-looking statements will not be realized. Although we
believe that the expectations reflected in these forward-looking
statements are reasonable, these expectations may not prove to
be correct or we may not achieve the financial results, savings
or other benefits anticipated in the forward-looking statements.
These forward-looking statements are necessarily estimates
reflecting the best judgment of our senior management and
involve a number of risks and uncertainties, some of which may
be beyond our control, that could cause actual results to differ
materially from those suggested by the forward-looking
statements and include, without limitation:
| • | changes in the level of consumer spending for apparel in view of general economic conditions, and our ability to plan for and withstand the impact of those changes; | |
| • | consequences of impacts to the businesses of our wholesale customers caused by factors such as lower consumer spending, general economic conditions, changing consumer preferences and consolidations through mergers and acquisitions; | |
| • | our ability to increase the number of dedicated stores for our products, including through opening and profitably operating company-operated stores; | |
| • | our dependence on key distribution channels, customers and suppliers; | |
| • | our ability to gauge and adapt to changing U.S. and international retail environments and fashion trends and changing consumer preferences in product, price-points and shopping experiences; | |
| • | our ability to withstand the impacts of foreign currency exchange rate fluctuations; | |
| • | our ability to revitalize our Dockers ® brand and our mass-channel offering in the United States; | |
| • | our wholesale customers’ shift in product mix in all channels of distribution, including the mass channel; | |
| • | our ability to implement, stabilize and optimize our ERP system throughout our business without disruption or to mitigate such disruptions; | |
| • | our ability to respond to price, innovation and other competitive pressures in the apparel industry and on our key customers; | |
| • | our effectiveness in increasing productivity and efficiency in our operations; | |
| • | our ability to utilize our tax credits and net operating loss carryforwards; | |
| • | ongoing or future litigation matters and disputes and regulatory developments; | |
| • | changes in or application of trade and tax laws; and | |
| • | political, social or economic instability in countries where we do business. |
Our actual results might differ materially from historical
performance or current expectations. We do not undertake any
obligation to update or revise publicly any forward-looking
statements, whether as a result of new information, future
events or otherwise.
43
Table of Contents
| Item 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Investment
and Credit Availability Risk
We manage cash and cash equivalents in various institutions at
levels beyond FDIC coverage limits, and we purchase investments
not guaranteed by the FDIC. Accordingly, there may be a risk
that we will not recover the full principal of our investments
or that their liquidity may be diminished. To mitigate this
risk, our investment policy emphasizes preservation of principal
and liquidity.
Multiple financial institutions are committed to provide loans
and other credit instruments under our secured revolving credit
facility. There may be a risk that some of these institutions
cannot deliver against these obligations in a timely manner, or
at all.
Derivative
Financial Instruments
We are exposed to market risk primarily related to foreign
currencies. We actively manage foreign currency risks with the
objective of mitigating the potential impact of currency
fluctuations while maximizing the U.S. Dollar value of cash
flows.
We are exposed to credit loss in the event of nonperformance by
the counterparties to the forward foreign exchange and interest
rate swap contracts. However, we believe that our exposures are
appropriately diversified across counterparties and that these
counterparties are creditworthy financial institutions. We
monitor the creditworthiness of our counterparties in accordance
with our foreign exchange and investment policies. In addition,
we have International Swaps and Derivatives Association, Inc.
(“ISDA”) master agreements in place with our
counterparties to mitigate the credit risk related to the
outstanding derivatives. These agreements provide the legal
basis for
over-the-counter
transactions in many of the world’s commodity and financial
markets.
Foreign
Exchange Risk
The global scope of our business operations exposes us to the
risk of fluctuations in foreign currency markets. This exposure
is the result of certain product sourcing activities, some
intercompany sales, foreign subsidiaries’ royalty payments,
interest payments, earnings repatriations, net investment in
foreign operations and funding activities. Our foreign currency
management objective is to mitigate the potential impact of
currency fluctuations on the value of our U.S. Dollar cash
flows and to reduce the variability of certain cash flows at the
subsidiary level. We actively manage forecasted exposures.
We use a centralized currency management operation to take
advantage of potential opportunities to naturally offset
exposures against each other. For any residual exposures under
management, we may enter into various financial instruments
including forward exchange and option contracts to hedge certain
forecasted transactions as well as certain firm commitments,
including third-party and intercompany transactions. We manage
the currency risk associated with certain cash flows
periodically and only partially manage the timing mismatch
between our forecasted exposures and the related financial
instruments used to mitigate the currency risk.
Our foreign exchange risk management activities are governed by
a foreign exchange risk management policy approved by our board
of directors. Members of our foreign exchange committee,
comprised of a group of our senior financial executives, review
our foreign exchange activities to ensure compliance with our
policies. The operating policies and guidelines outlined in the
foreign exchange risk management policy provide a framework that
allows for an active approach to the management of currency
exposures while ensuring the activities are conducted within
established parameters. Our policy includes guidelines for the
organizational structure of our risk management function and for
internal controls over foreign exchange risk management
activities, including various measurements for monitoring
compliance. We monitor foreign exchange risk and related
derivatives using different techniques including a review of
market value, sensitivity analysis and a
value-at-risk
model. We use the market approach to estimate the fair value of
our foreign exchange derivative contracts.
We use derivative instruments to manage certain but not all
exposures to foreign currencies. Our approach to managing
foreign currency exposures is consistent with that applied in
previous years. As of November 29, 2009,
44
Table of Contents
we had forward foreign exchange contracts to buy
$523.5 million and to sell $175.1 million against
various foreign currencies. These contracts are at various
exchange rates and expire at various dates through December 2010.
As of November 30, 2008, we had forward foreign exchange
currency contracts to buy $559.8 million and to sell
$179.4 million against various foreign currencies. We also
had Euro forward currency contracts to sell 14.5 million
Euros ($18.6 million equivalent) against the British Pound.
These contracts are at various exchange rates and expire at
various dates through March 2010.
The following table presents the currency, average forward
exchange rate, notional amount and fair values for our
outstanding forward and swap contracts as of November 29,
2009, and November 30, 2008. The average forward rate is
the forward rate weighted by the total of the transacted
amounts. The notional amount represents the total net position
outstanding as of the stated date. A positive notional amount
represents a long position in U.S. Dollar versus the
exposure currency, while a negative notional amount represents a
short position in U.S. Dollar versus the exposure currency.
The net position is the sum of all buy transactions minus the
sum of all sell transactions. All amounts are stated in
U.S. Dollar equivalents. All transactions will mature
before the end of December 2010.
Outstanding
Forward and Swap Transactions
| As of November 29, 2009 | As of November 30, 2008 | |||||||||||||||||||||||
|
Average Forward
|
Notional
|
Fair
|
Average Forward
|
Notional
|
Fair
|
|||||||||||||||||||
| Exchange Rate | Amount | Value | Exchange Rate | Amount | Value | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
|
Currency
|
||||||||||||||||||||||||
|
Australian Dollar
|
0.84 | $ | 53,061 | $ | (2,420 | ) | 0.65 | $ | 37,576 | $ | (231 | ) | ||||||||||||
|
Brazilian Real
|
1.96 | 626 | (23 | ) | — | — | — | |||||||||||||||||
|
Canadian Dollar
|
1.09 | 52,946 | (1,972 | ) | 1.18 | 63,065 | 2,352 | |||||||||||||||||
|
Swiss Franc
|
1.00 | (15,246 | ) | (125 | ) | 1.20 | (6,010 | ) | (4 | ) | ||||||||||||||
|
Czech Koruna
|
17.36 | 2,689 | 62 | 19.86 | 1,849 | (26 | ) | |||||||||||||||||
|
Danish Krona
|
0.20 | 26,684 | 245 | 5.81 | 21,586 | (53 | ) | |||||||||||||||||
|
Euro
(1)
|
1.46 | 70,472 | (1,192 | ) | 1.31 | 209,976 | 4,255 | |||||||||||||||||
|
British Pound
|
0.62 | 34,414 | (497 | ) | 1.63 | 4,305 | 2,289 | |||||||||||||||||
|
Hong Kong Dollar
|
7.75 | (14 | ) | — | 7.75 | 173 | — | |||||||||||||||||
|
Hungarian Forint
|
200.87 | (5,887 | ) | (392 | ) | 202.76 | (32,589 | ) | (970 | ) | ||||||||||||||
|
Japanese Yen
|
93.67 | 37,704 | (3,228 | ) | 97.97 | 2,828 | (3,134 | ) | ||||||||||||||||
|
Korean Won
|
1,224.91 | 16,745 | (824 | ) | 1,107.22 | (5,123 | ) | (1,799 | ) | |||||||||||||||
|
Mexican Peso
|
13.94 | 30,588 | (1,623 | ) | 13.10 | 12,054 | 945 | |||||||||||||||||
|
Norwegian Krona
|
0.17 | 8,878 | (464 | ) | 6.84 | 20,422 | 329 | |||||||||||||||||
|
New Zealand Dollar
|
1.38 | (9,581 | ) | (270 | ) | 0.54 | (6,968 | ) | 180 | |||||||||||||||
|
Polish Zloty
|
2.85 | (52,830 | ) | 224 | 2.85 | (22,137 | ) | (638 | ) | |||||||||||||||
|
Swedish Krona
|
6.97 | 73,272 | 635 | 7.89 | 63,710 | 1,086 | ||||||||||||||||||
|
Singapore Dollar
|
1.40 | (28,734 | ) | 167 | 1.46 | (29,847 | ) | (758 | ) | |||||||||||||||
|
Taiwan Dollar
|
1.40 | 29,678 | 487 | 32.45 | 21,484 | 453 | ||||||||||||||||||
|
South African Rand
|
31.70 | 22,961 | (2,588 | ) | 8.77 | 5,473 | 710 | |||||||||||||||||
|
Total
|
$ | 348,426 | $ | (13,798 | ) | $ | 361,827 | $ | 4,986 | |||||||||||||||
| (1) | The decrease in the notional amount of Euro contracts outstanding as compared to prior year reflects our reduced exposure under management due to our 2009 prepayment of royalties related to our operations in Europe. For more information see Notes 5 and 18 to our audited consolidated financial statements included in this report. |
45
Table of Contents
Interest
rate risk
We maintain a mix of medium and long-term fixed- and
variable-rate debt. We currently manage a portion of our
interest rate risk by holding a $100 million interest rate
swap derivative to pay fixed rate interest of approximately 3.2%
and receive
3-month
LIBOR variable interest payments through May 2010.
The following table provides information about our financial
instruments that are sensitive to changes in interest rates. The
table presents principal (face amount) outstanding balances of
our debt instruments and the related weighted-average interest
rates for the years indicated based on expected maturity dates.
The applicable floating rate index is included for variable-rate
instruments. All amounts are stated in U.S. Dollar
equivalents.
| As of November 29, 2009 |
As of
|
|||||||||||||||||||||||||||||||
| Expected Maturity Date |
Fair
|
November 30,
|
||||||||||||||||||||||||||||||
|
2010
(1)
-
|
Value
|
2008
|
||||||||||||||||||||||||||||||
| 2011 | 2012 | 2013 | 2014 | Thereafter | Total | 2009 | Total | |||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||
|
Debt Instruments
|
||||||||||||||||||||||||||||||||
|
Fixed Rate (US$)
|
$ | — | $ | — | $ | — | $ | — | $ | 796,210 | $ | 796,210 | $ | 852,067 | $ | 796,210 | ||||||||||||||||
|
Average Interest Rate
|
— | — | — | — | 9.37 | % | 9.37 | % | ||||||||||||||||||||||||
|
Fixed Rate (Yen 20 billion)
|
— | — | — | — | 231,709 | 231,709 | 197,448 | 209,886 | ||||||||||||||||||||||||
|
Average Interest Rate
|
— | — | — | — | 4.25 | % | 4.25 | % | ||||||||||||||||||||||||
|
Fixed Rate (Euro 250 million)
|
— | — | 372,325 | — | — | 372,325 | 379,935 | 321,625 | ||||||||||||||||||||||||
|
Average Interest Rate
|
— | — | 8.63 | % | — | — | 8.63 | % | ||||||||||||||||||||||||
|
Variable Rate (US$)
|
— | 108,250 | — | 325,000 | — | 433,250 | 394,781 | 504,125 | ||||||||||||||||||||||||
|
Average Interest
Rate
(2)
|
— | 2.74 | % | — | 2.50 | % | — | 2.56 | % | |||||||||||||||||||||||
|
Total Principal (face amount) of our debt instruments
|
$ | — | $ | 108,250 | $ | 372,325 | $ | 325,000 | $ | 1,027,919 | $ | 1,833,494 | $ | 1,824,231 | $ | 1,831,846 | ||||||||||||||||
| (1) | Excludes short-term borrowings. | |
| (2) | Assumes no change in short-term interest rates. Expected maturities due 2012 relate to the trademark tranche of our senior revolving credit facility. Amounts maturing thereafter relate to our Senior Term Loan due 2014. |
46
Table of Contents
| Item 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
Levi Strauss & Co.:
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of income,
stockholders’ deficit and comprehensive income, and cash
flows present fairly, in all material respects, the financial
position of Levi Strauss & Co. and its subsidiaries at
November 29, 2009 and November 30, 2008, and the
results of their operations and their cash flows for each of the
three years in the period ended November 29, 2009, in
conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the
related financial statement schedule listed in the index
appearing under Item 15(2) presents fairly, in all material
respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
These financial statements and the financial statement schedule
are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements and the financial statement schedule based on our
audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 16 to the consolidated financial
statements, the Company changed the manner in which it accounts
for defined pension and other postretirement plans effective
November 25, 2007. As discussed in Note 18 to the
consolidated financial statements, the Company changed the
manner in which it accounts for uncertain tax positions in
fiscal 2008.
PricewaterhouseCoopers LLP
San Francisco, CA
February 9, 2010
47
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
|
November 29,
|
November 30,
|
|||||||
| 2009 | 2008 | |||||||
| (Dollars in thousands) | ||||||||
|
ASSETS
|
||||||||
|
Current Assets:
|
||||||||
|
Cash and cash equivalents
|
$ | 270,804 | $ | 210,812 | ||||
|
Restricted cash
|
3,684 | 2,664 | ||||||
|
Trade receivables, net of allowance for doubtful accounts of
$22,523 and $16,886
|
552,252 | 546,474 | ||||||
|
Inventories:
|
||||||||
|
Raw materials
|
6,818 | 15,895 | ||||||
|
Work-in-process
|
10,908 | 8,867 | ||||||
|
Finished goods
|
433,546 | 517,912 | ||||||
|
Total inventories
|
451,272 | 542,674 | ||||||
|
Deferred tax assets, net
|
135,508 | 114,123 | ||||||
|
Other current assets
|
92,344 | 88,527 | ||||||
|
Total current assets
|
1,505,864 | 1,505,274 | ||||||
|
Property, plant and equipment, net of accumulated depreciation
of $664,891 and $596,967
|
430,070 | 411,908 | ||||||
|
Goodwill
|
241,768 | 204,663 | ||||||
|
Other intangible assets, net
|
103,198 | 42,774 | ||||||
|
Non-current deferred tax assets, net
|
601,526 | 526,069 | ||||||
|
Other assets
|
106,955 | 86,187 | ||||||
|
Total assets
|
$ | 2,989,381 | $ | 2,776,875 | ||||
| LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS’ DEFICIT | ||||||||
|
Current Liabilities:
|
||||||||
|
Short-term borrowings
|
$ | 18,749 | $ | 20,339 | ||||
|
Current maturities of long-term debt
|
— | 70,875 | ||||||
|
Current maturities of capital leases
|
1,852 | 1,623 | ||||||
|
Accounts payable
|
198,220 | 203,207 | ||||||
|
Restructuring liabilities
|
1,410 | 2,428 | ||||||
|
Other accrued liabilities
|
269,609 | 251,720 | ||||||
|
Accrued salaries, wages and employee benefits
|
195,434 | 194,289 | ||||||
|
Accrued interest payable
|
28,709 | 29,240 | ||||||
|
Accrued income taxes
|
12,993 | 17,909 | ||||||
|
Total current liabilities
|
726,976 | 791,630 | ||||||
|
Long-term debt
|
1,834,151 | 1,761,993 | ||||||
|
Long-term capital leases
|
5,513 | 6,183 | ||||||
|
Postretirement medical benefits
|
156,834 | 130,223 | ||||||
|
Pension liability
|
382,503 | 240,701 | ||||||
|
Long-term employee related benefits
|
97,508 | 87,704 | ||||||
|
Long-term income tax liabilities
|
55,862 | 42,794 | ||||||
|
Other long-term liabilities
|
43,480 | 46,590 | ||||||
|
Minority interest
|
17,735 | 17,982 | ||||||
|
Total liabilities
|
3,320,562 | 3,125,800 | ||||||
|
Commitments and contingencies (Note 14)
|
||||||||
|
Temporary equity
|
1,938 | 592 | ||||||
|
Stockholders’ Deficit:
|
||||||||
|
Common stock — $.01 par value;
270,000,000 shares authorized; 37,284,741
|
||||||||
|
shares and 37,278,238 shares issued and outstanding
|
373 | 373 | ||||||
|
Additional paid-in capital
|
39,532 | 53,057 | ||||||
|
Accumulated deficit
|
(123,157 | ) | (275,032 | ) | ||||
|
Accumulated other comprehensive loss
|
(249,867 | ) | (127,915 | ) | ||||
|
Total stockholders’ deficit
|
(333,119 | ) | (349,517 | ) | ||||
|
Total liabilities, temporary equity and stockholders’
deficit
|
$ | 2,989,381 | $ | 2,776,875 | ||||
The accompanying notes are an integral part of these
consolidated financial statements.
48
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
|
Year Ended
|
Year Ended
|
Year Ended
|
||||||||||
|
November 29,
|
November 30,
|
November 25,
|
||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Net sales
|
$ | 4,022,854 | $ | 4,303,075 | $ | 4,266,108 | ||||||
|
Licensing revenue
|
82,912 | 97,839 | 94,821 | |||||||||
|
Net revenues
|
4,105,766 | 4,400,914 | 4,360,929 | |||||||||
|
Cost of goods sold
|
2,132,361 | 2,261,112 | 2,318,883 | |||||||||
|
Gross profit
|
1,973,405 | 2,139,802 | 2,042,046 | |||||||||
|
Selling, general and administrative expenses
|
1,590,093 | 1,606,482 | 1,386,547 | |||||||||
|
Restructuring charges, net
|
5,224 | 8,248 | 14,458 | |||||||||
|
Operating income
|
378,088 | 525,072 | 641,041 | |||||||||
|
Interest expense
|
(148,718 | ) | (154,086 | ) | (215,715 | ) | ||||||
|
Loss on early extinguishment of debt
|
— | (1,417 | ) | (63,838 | ) | |||||||
|
Other income (expense), net
|
(38,282 | ) | (1,400 | ) | 14,138 | |||||||
|
Income before income taxes
|
191,088 | 368,169 | 375,626 | |||||||||
|
Income tax expense (benefit)
|
39,213 | 138,884 | (84,759 | ) | ||||||||
|
Net income
|
$ | 151,875 | $ | 229,285 | $ | 460,385 | ||||||
The accompanying notes are an integral part of these
consolidated financial statements.
49
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
|
Accumulated
|
||||||||||||||||||||
|
Additional
|
Other
|
|||||||||||||||||||
|
Common
|
Paid-in
|
Accumulated
|
Comprehensive
|
Stockholders’
|
||||||||||||||||
| Stock | Capital | Deficit | Income (Loss) | Deficit | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
|
Balance at November 26, 2006
|
$ | 373 | $ | 89,837 | $ | (959,478 | ) | $ | (124,779 | ) | $ | (994,047 | ) | |||||||
|
Net income
|
— | — | 460,385 | — | 460,385 | |||||||||||||||
|
Other comprehensive income (net of tax)
|
— | — | — | 60,015 | 60,015 | |||||||||||||||
|
Total comprehensive income
|
— | — | — | — | 520,400 | |||||||||||||||
|
Adjustment to initially apply ASC Topic
No. 715-20
|
— | — | — | 72,805 | 72,805 | |||||||||||||||
|
Stock-based compensation (net of $4,120 temporary equity)
|
— | 2,813 | — | — | 2,813 | |||||||||||||||
|
Balance at November 25, 2007
|
373 | 92,650 | (499,093 | ) | 8,041 | (398,029 | ) | |||||||||||||
|
Net income
|
— | — | 229,285 | — | 229,285 | |||||||||||||||
|
Other comprehensive loss (net of tax)
|
— | — | — | (135,956 | ) | (135,956 | ) | |||||||||||||
|
Total comprehensive income
|
— | — | — | — | 93,329 | |||||||||||||||
|
Cumulative impact of ASC Topic
No. 740-10-25
|
— | — | (5,224 | ) | — | (5,224 | ) | |||||||||||||
|
Stock-based compensation (net of $592 temporary equity)
|
— | 10,360 | — | — | 10,360 | |||||||||||||||
|
Cash dividend paid
|
— | (49,953 | ) | — | — | (49,953 | ) | |||||||||||||
|
Balance at November 30, 2008
|
373 | 53,057 | (275,032 | ) | (127,915 | ) | (349,517 | ) | ||||||||||||
|
Net income
|
— | — | 151,875 | — | 151,875 | |||||||||||||||
|
Other comprehensive loss (net of tax)
|
— | — | — | (121,952 | ) | (121,952 | ) | |||||||||||||
|
Total comprehensive income
|
— | — | — | — | 29,923 | |||||||||||||||
|
Stock-based compensation (net of $1,938 temporary equity)
|
— | 6,476 | — | — | 6,476 | |||||||||||||||
|
Cash dividend paid
|
— | (20,001 | ) | — | — | (20,001 | ) | |||||||||||||
|
Balance at November 29, 2009
|
$ | 373 | $ | 39,532 | $ | (123,157 | ) | $ | (249,867 | ) | $ | (333,119 | ) | |||||||
The accompanying notes are an integral part of these
consolidated financial statements.
50
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
|
Year Ended
|
Year Ended
|
Year Ended
|
||||||||||
|
November 29,
|
November 30,
|
November 25,
|
||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Cash Flows from Operating Activities:
|
||||||||||||
|
Net income
|
$ | 151,875 | $ | 229,285 | $ | 460,385 | ||||||
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
||||||||||||
|
Depreciation and amortization
|
84,603 | 77,983 | 67,514 | |||||||||
|
Asset impairments
|
16,814 | 20,308 | 9,070 | |||||||||
|
(Gain) loss on disposal of property, plant and equipment
|
(175 | ) | 40 | 444 | ||||||||
|
Unrealized foreign exchange losses (gains)
|
14,657 | 50,736 | (7,186 | ) | ||||||||
|
Realized loss (gain) on settlement of forward foreign exchange
contracts not designated for hedge accounting
|
50,760 | (53,499 | ) | 16,137 | ||||||||
|
Employee benefit plans’ amortization from accumulated other
comprehensive loss
|
(19,730 | ) | (35,995 | ) | — | |||||||
|
Employee benefit plans’ curtailment loss (gain), net
|
1,643 | (5,162 | ) | (51,575 | ) | |||||||
|
Write-off of unamortized costs associated with early
extinguishment of debt
|
— | 394 | 17,166 | |||||||||
|
Amortization of deferred debt issuance costs
|
4,344 | 4,007 | 5,192 | |||||||||
|
Stock-based compensation
|
7,822 | 6,832 | 4,977 | |||||||||
|
Allowance for doubtful accounts
|
7,246 | 10,376 | 615 | |||||||||
|
Deferred income taxes
|
(5,128 | ) | 75,827 | (150,079 | ) | |||||||
|
Change in operating assets and liabilities (excluding assets and
liabilities acquired):
|
||||||||||||
|
Trade receivables
|
27,568 | 61,707 | (18,071 | ) | ||||||||
|
Inventories
|
113,014 | (21,777 | ) | 40,422 | ||||||||
|
Other current assets
|
5,626 | (25,400 | ) | 19,235 | ||||||||
|
Other non-current assets
|
(11,757 | ) | (16,773 | ) | (10,598 | ) | ||||||
|
Accounts payable and other accrued liabilities
|
(55,649 | ) | (93,012 | ) | 16,168 | |||||||
|
Income tax liabilities
|
(3,377 | ) | 3,923 | 9,527 | ||||||||
|
Restructuring liabilities
|
(2,536 | ) | (7,376 | ) | (8,134 | ) | ||||||
|
Accrued salaries, wages and employee benefits
|
(20,082 | ) | (30,566 | ) | (89,031 | ) | ||||||
|
Long-term employee related benefits
|
26,871 | (35,112 | ) | (32,634 | ) | |||||||
|
Other long-term liabilities
|
(4,452 | ) | 6,922 | 1,973 | ||||||||
|
Other, net
|
(1,174 | ) | 1,141 | 754 | ||||||||
|
Net cash provided by operating activities
|
388,783 | 224,809 | 302,271 | |||||||||
|
Cash Flows from Investing Activities:
|
||||||||||||
|
Purchases of property, plant and equipment
|
(82,938 | ) | (80,350 | ) | (92,519 | ) | ||||||
|
Proceeds from sale of property, plant and equipment
|
939 | 995 | 3,881 | |||||||||
|
(Payments) proceeds on settlement of forward foreign exchange
contracts not designated for hedge accounting
|
(50,760 | ) | 53,499 | (16,137 | ) | |||||||
|
Acquisitions, net of cash acquired
|
(100,270 | ) | (959 | ) | (2,502 | ) | ||||||
|
Net cash used for investing activities
|
(233,029 | ) | (26,815 | ) | (107,277 | ) | ||||||
|
Cash Flows from Financing Activities:
|
||||||||||||
|
Proceeds from issuance of long-term debt
|
— | — | 669,006 | |||||||||
|
Repayments of long-term debt and capital leases
|
(72,870 | ) | (94,904 | ) | (984,333 | ) | ||||||
|
Short-term borrowings, net
|
(2,704 | ) | 12,181 | (1,711 | ) | |||||||
|
Debt issuance costs
|
— | (446 | ) | (5,297 | ) | |||||||
|
Restricted cash
|
(602 | ) | (1,224 | ) | (58 | ) | ||||||
|
Dividends to minority interest shareholders of Levi Strauss
Japan K.K.
|
(978 | ) | (1,114 | ) | (3,141 | ) | ||||||
|
Dividend to stockholders
|
(20,001 | ) | (49,953 | ) | — | |||||||
|
Net cash used for financing activities
|
(97,155 | ) | (135,460 | ) | (325,534 | ) | ||||||
|
Effect of exchange rate changes on cash and cash equivalents
|
1,393 | (7,636 | ) | 6,953 | ||||||||
|
Net increase (decrease) in cash and cash equivalents
|
59,992 | 54,898 | (123,587 | ) | ||||||||
|
Beginning cash and cash equivalents
|
210,812 | 155,914 | 279,501 | |||||||||
|
Ending cash and cash equivalents
|
$ | 270,804 | $ | 210,812 | $ | 155,914 | ||||||
|
Supplemental disclosure of cash flow information:
|
||||||||||||
|
Cash paid during the period for:
|
||||||||||||
|
Interest
|
$ | 135,576 | $ | 154,103 | $ | 237,017 | ||||||
|
Income taxes
|
56,922 | 63,107 | 52,275 | |||||||||
The accompanying notes are an integral part of these
consolidated financial statements.
51
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
FOR THE
YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER
25, 2007
| NOTE 1: | SIGNIFICANT ACCOUNTING POLICIES |
Nature of
Operations
Levi Strauss & Co. (“LS&Co.” or the
“Company”) is one of the world’s leading branded
apparel companies. The Company designs and markets jeans, casual
and dress pants, tops, jackets, footwear and related
accessories, for men, women and children under the
Levi’s
®
,
Dockers
®
and Signature by Levi Strauss &
Co.
tm
brands. The Company markets its products in three geographic
regions: Americas, Europe and Asia Pacific.
Basis of
Presentation and Principles of Consolidation
The consolidated financial statements of LS&Co. and its
wholly-owned and majority-owned foreign and domestic
subsidiaries are prepared in conformity with generally accepted
accounting principles in the United States (“U.S.”).
All significant intercompany balances and transactions have been
eliminated. LS&Co. is privately held primarily by
descendants of the family of its founder, Levi Strauss, and
their relatives.
The Company’s fiscal year ends on the last Sunday of
November in each year, although the fiscal years of certain
foreign subsidiaries are fixed at November 30 due to local
statutory requirements. Apart from these subsidiaries, each
quarter of fiscal years 2009, 2008 and 2007 consists of
13 weeks, with the exception of the fourth quarter of 2008,
which consisted of 14 weeks. All references to years relate
to fiscal years rather than calendar years.
Subsequent events have been evaluated through the date these
financial statements were issued, February 9, 2010.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial
statements and the related notes to consolidated financial
statements. Estimates are based upon historical factors, current
circumstances and the experience and judgment of the
Company’s management. Management evaluates its assumptions
and estimates on an ongoing basis and may employ outside experts
to assist in its evaluations. Changes in such estimates, based
on more accurate future information, or different assumptions or
conditions, may affect amounts reported in future periods.
Cash and
Cash Equivalents
The Company considers all highly liquid investments with an
original maturity of three months or less to be cash
equivalents. Cash equivalents are stated at fair value.
Restricted
Cash
Restricted cash primarily relates to required cash deposits for
customs and rental guarantees to support the Company’s
international operations.
Accounts
Receivable, Net
In the normal course of business, the Company extends credit to
its wholesale customers that satisfy pre-defined credit
criteria. Accounts receivable, which includes receivables
related to the Company’s net sales and licensing revenues,
are recorded net of an allowance for doubtful accounts. The
Company estimates the allowance for doubtful accounts based upon
an analysis of the aging of accounts receivable at the date of
the consolidated financial statements, assessments of
collectibility based on historic trends, customer-specific
circumstances, and an evaluation of economic conditions.
52
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER
25, 2007
Inventory
Valuation
The Company values inventories at the lower of cost or market
value. Inventory cost is determined using the
first-in
first-out method. The Company includes product costs, labor and
related overhead, sourcing costs, inbound freight, internal
transfers, and the cost of operating its remaining manufacturing
facilities, including the related depreciation expense, in the
cost of inventories. The Company estimates quantities of
slow-moving and obsolete inventory, by reviewing on-hand
quantities, outstanding purchase obligations and forecasted
sales. The Company determines inventory market values by
estimating expected selling prices based on the Company’s
historical recovery rates for slow-moving and obsolete inventory
and other factors, such as market conditions, expected channel
of distribution and current consumer preferences.
Income
Tax Assets and Liabilities
The Company is subject to income taxes in both the U.S. and
numerous foreign jurisdictions. The Company computes its
provision for income taxes using the asset and liability method,
under which deferred tax assets and liabilities are recognized
for the expected future tax consequences of temporary
differences between the financial reporting and tax bases of
assets and liabilities and for operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using the currently enacted tax rates that are expected to apply
to taxable income for the years in which those tax assets and
liabilities are expected to be realized or settled. Significant
judgments are required in order to determine the realizability
of these deferred tax assets. In assessing the need for a
valuation allowance, the Company’s management evaluates all
significant available positive and negative evidence, including
historical operating results, estimates of future taxable income
and the existence of prudent and feasible tax planning
strategies.
The Company does not recognize deferred taxes with respect to
temporary differences between the book and tax bases in its
investments in foreign subsidiaries, unless it becomes apparent
that these temporary differences will reverse in the foreseeable
future.
The Company continuously reviews issues raised in connection
with all ongoing examinations and open tax years to evaluate the
adequacy of its liabilities. Beginning in the first quarter of
2008, the Company evaluates uncertain tax positions under a
two-step approach. The first step is to evaluate the uncertain
tax position for recognition by determining if the weight of
available evidence indicates that it is more likely than not
that the position will be sustained upon examination based on
its technical merits. The second step, for those positions that
meet the recognition criteria, is to measure the tax benefit as
the largest amount that is more than fifty percent likely to be
realized. The Company believes that its recorded tax liabilities
are adequate to cover all open tax years based on its
assessment. This assessment relies on estimates and assumptions
and involves significant judgments about future events. To the
extent that the Company’s view as to the outcome of these
matters change, the Company will adjust income tax expense in
the period in which such determination is made. The Company
classifies interest and penalties related to income taxes as
income tax expense.
Property,
Plant and Equipment
Property, plant and equipment are carried at cost, less
accumulated depreciation. The cost is depreciated on a
straight-line basis over the estimated useful lives of the
related assets. Buildings are depreciated over 20 to
40 years, and leasehold improvements are depreciated over
the lesser of the life of the improvement or the initial lease
term. Machinery and equipment includes furniture and fixtures,
automobiles and trucks, and networking communication equipment,
and is depreciated over a range from three to 20 years.
Capitalized internal-use software is depreciated over periods
ranging from three to seven years.
53
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER
25, 2007
Goodwill
and Other Intangible Assets
Goodwill resulted primarily from a 1985 acquisition of
LS&Co. by Levi Strauss Associates Inc., a former parent
company that was subsequently merged into the Company in 1996,
and the Company’s recent acquisitions. Goodwill is not
amortized and is subject to an annual impairment test which the
Company performs in the fourth quarter of each fiscal year.
Intangible assets are comprised of owned trademarks with
indefinite useful lives which are not being amortized and
acquired contractual rights and customers lists with finite
lives which are being amortized over periods ranging from two to
eight years.
Impairment
The Company reviews its goodwill and other
non-amortized
intangible assets for impairment annually in the fourth quarter
of its fiscal year, or more frequently as warranted by events or
changes in circumstances which indicate that the carrying amount
may not be recoverable. In the Company’s impairment tests,
the Company uses a two-step approach. In the first step, the
Company compares the carrying value of the applicable asset or
reporting unit to its fair value, which the Company estimates
using a discounted cash flow analysis or by comparison with the
market values of similar assets. If the carrying amount of the
asset or reporting unit exceeds its estimated fair value, the
Company performs the second step, and determines the impairment
loss, if any, as the excess of the carrying value of the
goodwill or intangible asset over its fair value.
The Company reviews its other long-lived assets for impairment
whenever events or changes in circumstances indicate the
carrying amount of an asset may not be recoverable. If the
carrying amount of an asset exceeds the expected future
undiscounted cash flows, the Company measures and records an
impairment loss for the excess of the carrying value of the
asset over its fair value.
To determine the fair value of impaired assets, the Company
utilizes the valuation technique or techniques deemed most
appropriate based on the nature of the impaired asset and the
data available, which may include the use of quoted market
prices, prices for similar assets or other valuation techniques
such as discounted future cash flows or earnings.
Debt
Issuance Costs
The Company capitalizes debt issuance costs, which are included
in “Other assets” in the Company’s consolidated
balance sheets. These costs are amortized using the
straight-line method of amortization for all debt issuances
prior to 2005, which approximates the effective interest method.
Costs associated with debt issuances in 2005 and later are
amortized using the effective interest method. Amortization of
debt issuance costs is included in “Interest expense”
in the consolidated statements of income.
Restructuring
Liabilities
Upon approval of a restructuring plan by management, the Company
records restructuring liabilities for employee severance and
related termination benefits when they become probable and
estimable for recurring arrangements and on the accrual basis
for one-time benefit arrangements. The Company records other
costs associated with exit activities as they are incurred. The
long-term portion of restructuring liabilities is included in
“Other long-term liabilities” in the Company’s
consolidated balance sheets.
Deferred
Rent
The Company is obligated under operating leases of property for
manufacturing, finishing and distribution facilities, office
space, retail stores and equipment. Rental expense relating to
operating leases are recognized on a straight-line basis over
the lease term after consideration of lease incentives and
scheduled rent escalations
54
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER
25, 2007
beginning as of the date the Company takes physical possession
or control of the property. Differences between rental expense
and actual rental payments are recorded as deferred rent
liabilities included in “Other accrued liabilities”
and “Other long-term liabilities” on the consolidated
balance sheets.
Fair
Value of Financial Instruments
The fair values of the Company’s financial instruments
reflect the amounts that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between
market participants at the measurement date (exit price). The
fair value estimates presented in this report are based on
information available to the Company as of November 29,
2009, and November 30, 2008.
The carrying values of cash and cash equivalents, trade
receivables and short-term borrowings approximate fair value.
The Company has estimated the fair value of its other financial
instruments using the market and income approaches. Rabbi trust
assets, forward foreign exchange contracts and the interest rate
swap contract are carried at their fair values. Notes, loans and
borrowings under the Company’s credit facilities are
carried at historical cost and adjusted for amortization of
premiums or discounts, foreign currency fluctuations and
principal payments.
Pension
and Postretirement Benefits
The Company has several non-contributory defined benefit
retirement plans covering eligible employees. The Company also
provides certain health care benefits for U.S. employees
who meet age, participation and length of service requirements
at retirement. In addition, the Company sponsors other
retirement or post-employment plans for its foreign employees in
accordance with local government programs and requirements. The
Company retains the right to amend, curtail or discontinue any
aspect of the plans, subject to local regulations.
The Company recognizes either an asset or a liability for any
plan’s funded status in its consolidated balance sheets.
The Company measures changes in funded status using actuarial
models which use an attribution approach that generally spreads
individual events over the estimated service lives of the
employees in the plan. The attribution approach assumes that
employees render service over their service lives on a
relatively smooth basis and as such, presumes that the income
statement effects of pension or postretirement benefit plans
should follow the same pattern. The Company’s policy is to
fund its retirement plans based upon actuarial recommendations
and in accordance with applicable laws, income tax regulations
and credit agreements. Net pension and postretirement benefit
income or expense is generally determined using assumptions
which include expected long-term rates of return on plan assets,
discount rates, compensation rate increases and medical trend
rates. The Company considers several factors including actual
historical rates, expected rates and external data to determine
the assumptions used in the actuarial models.
Pension benefits are primarily paid through trusts funded by the
Company. The Company pays postretirement benefits to the
healthcare service providers on behalf of the plan’s
participants. The Company’s postretirement benefit plan
provides a benefit to retirees that is at least actuarially
equivalent to the benefit provided by the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 (“Medicare
Part D”) and thus, the U.S. government provides a
federal subsidy to the plan. Accordingly, the net periodic
postretirement benefit cost is reduced to reflect the impact of
the federal subsidy.
Employee
Incentive Compensation
The Company maintains short-term and long-term employee
incentive compensation plans. These plans are intended to reward
eligible employees for their contributions to the Company’s
short-term and long-term success. Provisions for employee
incentive compensation are recorded in “Accrued salaries,
wages and employee benefits” and “Long-term employee
related benefits” in the Company’s consolidated
balance sheets. The Company accrues
55
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER
25, 2007
the related compensation expense over the period of the plan and
changes in the liabilities for these incentive plans generally
correlate with the Company’s financial results and
projected future financial performance.
Stock-Based
Compensation
The Company has incentive plans which reward certain employees
and directors with cash or equity. The amount of compensation
cost for share-based payments is measured based on the fair
value on the grant date of the equity or liability instruments
issued, based on the estimated number of awards that are
expected to vest. No compensation cost is ultimately recognized
for awards for which employees do not render the requisite
service and are forfeited. Compensation cost for equity
instruments is recognized on a straight-line basis over the
period that an employee provides service for that award, which
generally is the vesting period. Liability instruments are
revalued at each reporting period and compensation expense
adjusted. Changes in the fair value of unvested liability
instruments during the requisite service period are recognized
as compensation cost on a straight-line basis over that service
period. Changes in the fair value of vested liability
instruments after the service period are recognized as an
adjustment to compensation cost in the period of the change in
fair value.
The Company’s common stock is not listed on any established
stock exchange. Accordingly, the stock’s fair market value
is determined by the Board based upon a valuation performed by
an independent third-party, Evercore Group LLC
(“Evercore”). Determining the fair value of the
Company’s stock requires complex and subjective judgments.
The valuation process includes comparison of the Company’s
historical and estimated future financial results with selected
publicly-traded companies, and application of an appropriate
discount for the illiquidity of the stock to derive the fair
value of the stock. The Company uses this valuation for, among
other things, making determinations under its share-based
compensation plans, such as grant date fair value of awards.
The fair value of stock-based compensation is estimated on the
date of grant using the Black-Scholes option pricing model. The
Black-Scholes option pricing model requires the input of highly
subjective assumptions including volatility. Due to the fact
that the Company’s common stock is not publicly traded, the
computation of expected volatility is based on the average of
the historical and implied volatilities, over the expected life
of the awards, of comparable companies from a representative
peer group of publicly traded entities, selected based on
industry and financial attributes. Other assumptions include
expected life, risk-free rate of interest and dividend yield.
Expected life is computed using the simplified method. The
risk-free interest rate is based on zero coupon
U.S. Treasury bond rates corresponding to the expected life
of the awards. Dividend assumptions are based on historical
experience.
Due to the job function of the award recipients, the Company has
included stock-based compensation cost in “Selling, general
and administrative expenses” in the consolidated statements
of income.
Self-Insurance
The Company self-insures, up to certain limits, workers’
compensation risk and employee and eligible retiree medical
health benefits. The Company carries insurance policies covering
claim exposures which exceed predefined amounts, both per
occurrence and in the aggregate, for all workers’
compensation claims and for the medical claims of active
employees as well as those salaried retirees who retired after
June 1, 2001. Accruals for losses are made based on the
Company’s claims experience and actuarial assumptions
followed in the insurance industry, including provisions for
incurred but not reported losses.
Derivative
Financial Instruments and Hedging Activities
The Company recognizes all derivatives as assets and liabilities
at their fair values. The Company may use derivatives and
establish programs from time to time to manage foreign currency
and interest rate exposures that are sensitive to changes in
market conditions. The instruments that we designate or that
qualify for hedge accounting
56
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER
25, 2007
treatment hedge the Company’s net investment position in
certain of its foreign subsidiaries and, through the first
quarter of 2007, certain intercompany royalty cash flows. For
these instruments, the Company documents the hedge designation
by identifying the hedging instrument, the nature of the risk
being hedged and the approach for measuring hedge
ineffectiveness. The ineffective portions of hedges are recorded
in “Other income (expense), net” in the Company’s
consolidated statements of income. The gains and losses on the
instruments that we designate and that qualify for hedge
accounting treatment are recorded in “Accumulated other
comprehensive income (loss)” in the Company’s
consolidated balance sheets until the underlying has been
settled and is then reclassified to earnings. Changes in the
fair values of the derivative instruments that we do not
designate or that do not qualify for hedge accounting are
recorded in “Other income (expense), net” or
“Interest expense” in the Company’s consolidated
statements of income to reflect the economic risk being
mitigated.
Foreign
Currency
The functional currency for most of the Company’s foreign
operations is the applicable local currency. For those
operations, assets and liabilities are translated into
U.S. Dollars using period-end exchange rates, income and
expenses are translated at average monthly exchange rates, and
equity accounts are translated at historical rates. Net changes
resulting from such translations are recorded as a component of
translation adjustments in “Accumulated other comprehensive
income (loss)” in the Company’s consolidated balance
sheets.
The U.S. Dollar is the functional currency for foreign
operations in countries with highly inflationary economies. The
translation adjustments for these entities, as applicable, are
included in “Other income (expense), net” in the
Company’s consolidated statements of income.
Foreign currency transactions are transactions denominated in a
currency other than the entity’s functional currency. At
each balance sheet date, each entity remeasures the recorded
balances related to foreign-currency transactions using the
period-end exchange rate. Gains or losses arising from the
remeasurement of these balances are recorded in “Other
income expense, net” in the Company’s consolidated
statements of income. In addition, at the settlement date of
foreign currency transactions, foreign currency gains and losses
are recorded in “Other income (expense), net” in the
Company’s consolidated statements of income to reflect the
difference between the rate effective at the settlement date and
the historical rate at which the transaction was originally
recorded or remeasured at the balance sheet date.
Minority
Interest
Minority interest includes a 16.4% minority interest of third
parties in Levi Strauss Japan K.K., the Company’s Japanese
affiliate.
Stockholders’
Deficit
The stockholders’ deficit primarily resulted from a 1996
recapitalization transaction in which the Company’s
stockholders created new long-term governance arrangements,
including a voting trust and stockholders’ agreement. As a
result, shares of stock of a former parent company, Levi Strauss
Associates Inc., including shares held under several employee
benefit and compensation plans, were converted into the right to
receive cash. The funding for the cash payments in this
transaction was provided in part by cash on hand and in part
from proceeds of approximately $3.3 billion of borrowings
under bank credit facilities.
Revenue
Recognition
Net sales is primarily comprised of sales of products to
wholesale customers, including franchised stores, and direct
sales to consumers at the Company’s company-operated and
online stores and at the Company’s company-operated
shop-in-shops
located within department stores. The Company recognizes revenue
on sale of product
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STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER
25, 2007
when the goods are shipped or delivered and title to the goods
passes to the customer provided that: there are no uncertainties
regarding customer acceptance; persuasive evidence of an
arrangement exists; the sales price is fixed or determinable;
and collectibility is reasonably assured. The revenue is
recorded net of an allowance for estimated returns, discounts
and retailer promotions and other similar incentives. Licensing
revenues from the use of the Company’s trademarks in
connection with the manufacturing, advertising, and distribution
of trademarked products by third-party licensees are earned and
recognized as products are sold by licensees based on royalty
rates as set forth in the licensing agreements.
The Company recognizes allowances for estimated returns in the
period in which the related sale is recorded. The Company
recognizes allowances for estimated discounts, retailer
promotions and other similar incentives at the later of the
period in which the related sale is recorded or the period in
which the sales incentive is offered to the customer. The
Company estimates non-volume based allowances based on
historical rates as well as customer and product-specific
circumstances. Sales and value-added taxes collected from
customers and remitted to governmental authorities are presented
on a net basis in the consolidated statements of income.
Net sales to the Company’s ten largest customers totaled
approximately 36%, 37% and 42% of net revenues for 2009, 2008
and 2007, respectively. No customer represented 10% or more of
net revenues in any year.
Cost of
Goods Sold
Cost of goods sold includes the expenses incurred to acquire and
produce inventory for sale, including product costs, labor and
related overhead, sourcing costs, inbound freight, internal
transfers, and the cost of operating the Company’s
remaining manufacturing facilities, including the related
depreciation expense. Cost of goods sold excludes depreciation
expense on the Company’s other facilities. Costs relating
to the Company’s licensing activities are included in
“Selling, general and administrative expenses” in the
consolidated statements of income.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses are primarily
comprised of costs relating to advertising, marketing, selling,
distribution, information technology and other corporate
functions. Selling costs include all occupancy costs associated
with company-operated stores and with the Company’s
company-operated
shop-in-shops
located within department stores. The Company expenses
advertising costs as incurred. For 2009, 2008 and 2007, total
advertising expense was $266.1 million, $297.9 million
and $277.0 million, respectively. Distribution costs
include costs related to receiving and inspection at
distribution centers, warehousing, shipping to the
Company’s customers, handling and certain other activities
associated with the Company’s distribution network. These
expenses totaled $185.7 million, $215.8 million and
$225.2 million for 2009, 2008 and 2007, respectively.
Recently
Issued Accounting Standards
The following recently issued accounting standards have been
grouped by their required effective dates for the Company:
First
Quarter of 2010
| • | In December 2007 the FASB issued SFAS 141 (revised 2007), “Business Combinations” and in April 2009, the FASB issued FASB Staff Position No. FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies,” both of which were subsequently codified by the FASB under ASC Topic 805 (“Topic 805”). This guidance establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired and liabilities assumed (including those arising from contingencies) and any |
58
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER
25, 2007
| noncontrolling interest in the acquiree. Topic 805 requires assets acquired, liabilities assumed and any noncontrolling interest in the acquiree to be measured at their acquisition-date fair value (with limited exceptions). If such items are contingent upon future events, Topic 805 requires measurement at acquisition-date fair value only if it can be determined during the prescribed measurement period. If it cannot be determined during the measurement period, the asset acquired or liability assumed may only be recognized if certain criteria are met. The Company does not anticipate that the adoption of this statement will have a material impact on its consolidated financial statements, absent any material business combinations. |
| • | In December 2007 the FASB issued SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51,” which was subsequently codified by the FASB under ASC Subtopic 810-10. In January 2010 the FASB Issued Accounting Standards Update No. 2010-02 “Consolidation,” to amend Subtopic 810-10. Subtopic 810-10 as amended establishes accounting and reporting standards for the noncontrolling interest (previously referred to as “minority interest”) in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. Subtopic 810-10 also provides guidance on the accounting and reporting to be applied by an entity that experiences a decrease in ownership in a subsidiary that is a business or nonprofit activity, and provides amendments that affect the accounting and reporting by an entity that exchanges a group of assets that constitutes a business or nonprofit for an equity interest in another entity. This new guidance requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements of this standard shall be applied prospectively. The Company does not anticipate that the adoption of this statement will have a material impact on its consolidated financial statements. | |
| • | In December 2007 the FASB issued EITF Issue No. 07-1, “Accounting for Collaborative Arrangements,” which was subsequently codified by the FASB under ASC Topic 808-10 (“Topic 808-10”). Topic 808-10 defines collaborative arrangements and requires that transactions with third parties that do not participate in the arrangement be reported in the appropriate income statement line items pursuant to the guidance in EITF 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent.” Income statement classification of payments made between participants of a collaborative arrangement are to be based on other applicable authoritative accounting literature. If the payments are not within the scope or analogy of other authoritative accounting literature, a reasonable, rational and consistent accounting policy is to be elected. This new guidance is to be applied retrospectively to all prior periods presented for all collaborative arrangements existing as of the effective date. The Company does not anticipate that the adoption of this statement will have a material impact on its consolidated financial statements. | |
| • | In April 2008 the FASB issued FASB Staff Position No. FAS 142-3, “Determination of the Useful Life of Intangible Assets,” which was subsequently codified by the FASB under ASC Topic 350-30 (“Topic 350”). This new guidance amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets.” More specifically, it removes the requirement under paragraph 11 of SFAS 142 to consider whether an intangible asset can be renewed without substantial cost or material modifications to the existing terms and conditions and instead, requires an entity to consider its own historical experience in renewing similar arrangements. This standard also requires expanded disclosure related to the determination of intangible asset useful lives. The Company does not anticipate that the adoption of this statement will have a material impact on its consolidated financial statements. | |
| • | In June 2009 the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140,” which was subsequently codified by the FASB under ASC Topic 860 (“Topic 860”). Topic 860 seeks to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of |
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STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER
25, 2007
| financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. Specifically, Topic 860 eliminates the concept of a qualifying special-purpose entity, creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies other sale-accounting criteria, and changes the initial measurement of a transferor’s interest in transferred financial assets. The Company does not anticipate that the adoption of this statement will have a material impact on its consolidated financial statements. |
| • | In June 2009 the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R),” which was subsequently codified by the FASB as ASC Topic 810 (“Topic 810-10”). Topic 810 amends FASB Interpretation No. 46(R), “ Variable Interest Entities ” for determining whether an entity is a variable interest entity (“VIE”) and requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a VIE. Under Topic 810, an enterprise has a controlling financial interest when it has (a) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance, and (b) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. Topic 810 also requires an enterprise to assess whether it has an implicit financial responsibility to ensure that a VIE operates as designed when determining whether it has power to direct the activities of the VIE that most significantly impact the entity’s economic performance. Topic 810 also requires ongoing assessments of whether an enterprise is the primary beneficiary of a VIE, requires enhanced disclosures and eliminates the scope exclusion for qualifying special-purpose entities. The Company does not anticipate that the adoption of this statement will have a material impact on its consolidated financial statements. |
Second
Quarter of 2010
| • | In January 2010 the FASB issued Accounting Standards Update No. 2010-06, “Fair Value Measurements Disclosures ,” which amends Subtopic 820-10 of the FASB Accounting Standards Codification to require new disclosures for fair value measurements and provides clarification for existing disclosures requirements. More specifically, this update will require (a) an entity to disclose separately the amounts of significant transfers in and out of Levels 1 and 2 fair value measurements and to describe the reasons for the transfers; and (b) information about purchases, sales, issuances and settlements to be presented separately (i.e. present the activity on a gross basis rather than net) in the reconciliation for fair value measurements using significant unobservable inputs (Level 3 inputs). This update clarifies existing disclosure requirements for the level of disaggregation used for classes of assets and liabilities measured at fair value and requires disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements using Level 2 and Level 3 inputs. The Company does not anticipate that the adoption of this statement will materially expand its consolidated financial statement footnote disclosures. |
Fourth
Quarter of 2010
| • | In December 2008 the FASB issued FASB Staff Position No. FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets,” which was subsequently codified by the FASB under ASC Topic 715-20-65 (“Topic 715-20-65”). This standard amends FASB Statement No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” (“FAS 132(R)”) to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The additional disclosure requirements under this FSP include expanded disclosures about an entity’s investment policies and strategies, the categories of plan assets, concentrations of credit risk and fair value methodologies and measurements of plan assets. The Company anticipates that the adoption of this statement will materially expand its consolidated financial statement footnote disclosures. |
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STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER
25, 2007
First
Quarter of 2011
| • | In September 2009 the FASB issued Accounting Standards Update 2009-13, “Revenue Recognition (Topic 605): Multiple Deliverable Revenue Arrangements (a consensus of the FASB Emerging Issues Task Force),” (“ASU 2009-13”). ASU 2009-13 provides principles and application guidance on whether multiple deliverables exist, how the arrangement should be separated and the consideration allocation. Additionally, ASU 2009-13 requires an entity to allocate revenue in an arrangement using estimated selling prices of deliverables if a vendor does not have vendor-specific objective evidence or third-party evidence of selling price, eliminates the residual method and requires an entity to allocate revenue using the relative selling price method. ASU 2009-13 may be applied retrospectively or prospectively for new or materially modified arrangements and early adoption is permitted. The Company does not anticipate that the adoption of this statement will have a material impact on its consolidated financial statements. |
| NOTE 2: | PROPERTY, PLANT AND EQUIPMENT |
The components of property, plant and equipment
(“PP&E”) were as follows:
|
November 29,
|
November 30,
|
|||||||
| 2009 | 2008 | |||||||
| (Dollars in thousands) | ||||||||
|
Land
|
$ | 30,118 | $ | 27,864 | ||||
|
Buildings and leasehold improvements
|
380,601 | 357,203 | ||||||
|
Machinery and equipment
|
493,152 | 473,456 | ||||||
|
Capitalized internal-use software
|
158,630 | 133,593 | ||||||
|
Construction in progress
|
32,460 | 16,759 | ||||||
|
Subtotal
|
1,094,961 | 1,008,875 | ||||||
|
Accumulated depreciation
|
(664,891 | ) | (596,967 | ) | ||||
|
PP&E, net
|
$ | 430,070 | $ | 411,908 | ||||
Depreciation expense for the years ended November 29, 2009,
November 30, 2008, and November 25, 2007, was
$76.8 million, $78.0 million and $67.5 million,
respectively.
Construction in progress at November 29, 2009, and
November 30, 2008, primarily related to the installation of
various information technology systems and leasehold
improvements.
The Company recorded impairment charges of $11.5 million
and $16.1 million, in 2009 and 2008, respectively, to
reduce the carrying values of certain long-lived assets,
primarily in the Americas for leasehold improvements in
company-operated stores, to their estimated fair values. The
remaining fair values of the impaired stores are not material.
The impairment charges were recorded as “Selling, general
and administrative expenses” in the Company’s
consolidated statements of income.
| NOTE 3: | BUSINESS ACQUISITIONS |
The impact of the Company’s acquisitions during 2009 on the
Company’s results of operations, as if the acquisitions had
been completed as of the beginning of the periods presented, is
not significant.
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NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER
25, 2007
The changes in the carrying amount of goodwill by business
segment for the years ended November 29, 2009, and
November 30, 2008, were as follows:
|
Asia
|
||||||||||||||||
| Americas | Europe | Pacific | Total | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
Balance, November 25, 2007
|
$ | 199,905 | $ | 4,063 | $ | 2,518 | $ | 206,486 | ||||||||
|
Foreign currency fluctuation
|
— | (1,025 | ) | (798 | ) | (1,823 | ) | |||||||||
|
Balance, November 30, 2008
|
$ | 199,905 | $ | 3,038 | $ | 1,720 | $ | 204,663 | ||||||||
|
Additions
|
7,513 | 24,427 | — | 31,940 | ||||||||||||
|
Foreign currency fluctuation
|
5 | 4,615 | 545 | 5,165 | ||||||||||||
|
Balance, November 29, 2009
|
$ | 207,423 | $ | 32,080 | $ | 2,265 | $ | 241,768 | ||||||||
The increase in goodwill in Europe primarily resulted from the
Company’s acquisition of a former distributor, which
distributes and markets
Levi’s
®
products within the Russian Federation. The Company acquired a
51% ownership interest in the business venture in December 2008,
and acquired the remaining 49% in September 2009. Total purchase
consideration for the acquisition was approximately
$32 million. The Company preliminarily allocated the
purchase price to the fair values of the tangible assets and
intangible contractual rights acquired and the liabilities
assumed at the acquisition date, with the difference of
approximately $20 million recorded as goodwill. Cash paid
for the acquisition, net of cash acquired, was $20 million.
The increase in goodwill in Europe also reflects the
Company’s July 1, 2009, acquisition of a former
licensee for a base purchase price of $21 million, plus a
purchase price adjustment for the acquired net asset value based
on the final balance sheet of the acquired business, estimated
at $16 million. The Company preliminarily allocated the
purchase price to the fair values of the tangible assets,
intangible customer lists and contractual rights acquired, and
the liabilities assumed at the acquisition date, with the
difference of approximately $4 million recorded as
goodwill. During 2009, the Company made payments totaling
$16 million, net of cash acquired, in partial payment for
this acquisition. The liability for the remaining purchase
consideration, which is expected to be paid in the second
quarter of 2010, is included in “Other accrued
liabilities” on the Company’s consolidated balance
sheet.
The increase in goodwill in the Americas resulted from the
Company’s July 13, 2009, acquisition of the operating
rights to 73
Levi’s
®
and
Dockers
®
outlet stores from Anchor Blue Retail Group, Inc., who
previously operated the stores under a license agreement with
the Company. The Company preliminarily allocated the
$62 million cost of the acquisition to the fair values of
the tangible assets and intangible contractual rights acquired
and the liabilities assumed at the acquisition date, with the
difference of approximately $7 million recorded as goodwill.
Other intangible assets, net, were as follows:
| November 29, 2009 | November 30, 2008 | |||||||||||||||||||||||
|
Gross
|
Gross
|
|||||||||||||||||||||||
|
Carrying
|
Accumulated
|
Carrying
|
Accumulated
|
|||||||||||||||||||||
| Value | Amortization | Total | Value | Amortization | Total | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
|
Unamortized intangible assets:
|
||||||||||||||||||||||||
|
Trademarks
|
$ | 42,743 | $ | — | $ | 42,743 | $ | 42,771 | $ | — | $ | 42,771 | ||||||||||||
|
Amortized intangible assets:
|
||||||||||||||||||||||||
|
Acquired contractual rights
|
46,529 | (6,019 | ) | 40,510 | 142 | (139 | ) | 3 | ||||||||||||||||
|
Customer lists
|
22,340 | (2,395 | ) | 19,945 | — | — | — | |||||||||||||||||
| $ | 111,612 | $ | (8,414 | ) | $ | 103,198 | $ | 42,913 | $ | (139 | ) | $ | 42,774 | |||||||||||
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NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER
25, 2007
The estimated useful lives of the Company’s amortized
intangible assets range from two to eight years. For the year
ended November 29, 2009, amortization of these intangible
assets was $7.8 million. The estimated amortization of
these intangible assets, which is included in “Selling,
general and administrative expenses” in the Company’s
consolidated statements of income, in each of the five
succeeding fiscal years is approximately $16 million in
2010, $13 million in 2011, $13 million in 2012,
$11 million in 2013, and $3 million in 2014.
As of November 29, 2009, there was no impairment to the
carrying value of the Company’s goodwill or indefinite
lived intangible assets.
| NOTE 4: | FAIR VALUE OF FINANCIAL INSTRUMENTS |
The following table presents the Company’s financial
instruments that are carried at fair value.
| November 29, 2009 | November 30, 2008 | |||||||||||||||||||||||
| Fair Value Estimated Using | Fair Value Estimated Using | |||||||||||||||||||||||
|
Level 1
|
Level 2
|
Level 1
|
Level 2
|
|||||||||||||||||||||
| Fair Value | Inputs (1) | Inputs (2) | Fair Value | Inputs (1) | Inputs (2) | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
|
Financial assets carried at fair value
|
||||||||||||||||||||||||
|
Rabbi trust assets
|
$ | 16,855 | $ | 16,855 | $ | — | $ | 13,465 | $ | 13,465 | $ | — | ||||||||||||
|
Forward foreign exchange contracts,
net
(3)
|
721 | — | 721 | 10,211 | — | 10,211 | ||||||||||||||||||
|
Total financial assets carried at fair value
|
$ | 17,576 | $ | 16,855 | $ | 721 | $ | 23,676 | $ | 13,465 | $ | 10,211 | ||||||||||||
|
Financial liabilities carried at fair value
|
||||||||||||||||||||||||
|
Forward foreign exchange contracts,
net
(3)
|
$ | 14,519 | $ | — | $ | 14,519 | $ | 5,225 | $ | — | $ | 5,225 | ||||||||||||
|
Interest rate swap, net
|
1,451 | — | 1,451 | 1,454 | — | 1,454 | ||||||||||||||||||
|
Total financial liabilities carried at fair value
|
$ | 15,970 | $ | — | $ | 15,970 | $ | 6,679 | $ | — | $ | 6,679 | ||||||||||||
| (1) | Fair values estimated using Level 1 inputs, which consist of quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Rabbi trust assets consist of a diversified portfolio of equity, fixed income and other securities. See Note 12 for more information on rabbi trust assets. | |
| (2) | Fair values estimated using Level 2 inputs are inputs, other than quoted prices, that are observable for the asset or liability, either directly or indirectly and include among other things, quoted prices for similar assets or liabilities in markets that are active or inactive as well as inputs other than quoted prices that are observable. For forward foreign exchange contracts, inputs include foreign currency exchange and interest rates and credit default swap prices. For the interest rate swap, for which the Company’s fair value estimate incorporates discounted future cash flows using a forward curve mid-market pricing convention, inputs include LIBOR forward rates and credit default swap prices. | |
| (3) | The Company’s forward foreign exchange contracts are subject to International Swaps and Derivatives Association, Inc. (“ISDA”) master agreements. These agreements are signed between the Company and each respective financial institution, and permit the net-settlement of forward foreign exchange contracts on a per institution basis. |
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER
25, 2007
The following table presents the carrying value —
including accrued interest as applicable — and
estimated fair value of the Company’s financial instruments
that are carried at adjusted historical cost.
| November 29, 2009 | November 30, 2008 | |||||||||||||||
|
Carrying
|
Estimated
|
Carrying
|
Estimated
|
|||||||||||||
| Value | Fair Value (1) | Value | Fair Value (1) | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
Financial liabilities carried at adjusted historical cost
|
||||||||||||||||
|
Senior revolving credit facility
|
$ | 108,489 | $ | 103,618 | $ | 179,992 | $ | 149,541 | ||||||||
|
U.S. dollar notes
|
817,824 | 852,067 | 818,029 | 477,583 | ||||||||||||
|
Euro senior notes
|
379,935 | 379,935 | 329,169 | 151,900 | ||||||||||||
|
Senior term loan
|
323,497 | 291,163 | 323,589 | 204,069 | ||||||||||||
|
Yen-denominated Eurobonds
|
232,494 | 197,448 | 210,621 | 86,788 | ||||||||||||
|
Short-term and other borrowings
|
19,027 | 19,027 | 20,943 | 20,943 | ||||||||||||
|
Total financial liabilities carried at adjusted historical cost
|
$ | 1,881,266 | $ | 1,843,258 | $ | 1,882,343 | $ | 1,090,824 | ||||||||
| (1) | Fair value estimate incorporates mid-market price quotes. |
As of November 30, 2008, the decline in fair value of the
Company’s long-term debt as compared to its carrying value
is primarily due to changes in overall capital market conditions
as demonstrated by lower liquidity in the markets, increases in
credit spread, and decreases in bank lending activities, which
generally resulted in investors moving from high yield
securities to lower yield investment grade or U.S. Treasury
securities in efforts to preserve capital.
The overall increase in fair value of the Company’s
long-term debt as of November 29, 2009, as compared to
November 30, 2008, is primarily due to improvements in the
capital markets during 2009.
| NOTE 5: | DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES |
The Company is exposed to certain risks relating to its ongoing
business operations. The primary risks managed by using
derivative instruments are foreign currency risk and interest
rate risk. Forward exchange contracts on various currencies are
entered into to manage foreign currency exposures associated
with certain product sourcing activities, some intercompany
sales, foreign subsidiaries’ royalty payments, interest
payments, earnings repatriations, net investment in foreign
operations and funding activities. The Company designates its
outstanding Euro senior notes and a portion of its outstanding
Yen-denominated Eurobonds as net investment hedges to manage
foreign currency exposures in its foreign operations. Interest
rate swaps are entered into to manage interest rate risk
associated with the Company’s variable-rate borrowings. The
Company does not currently apply hedge accounting to its
derivative transactions.
The Company’s foreign currency management objective is to
mitigate the potential impact of currency fluctuations on the
value of its U.S. Dollar cash flows and to reduce the
variability of certain cash flows at the subsidiary level. The
Company actively manages certain forecasted foreign currency
exposures and uses a centralized currency management operation
to take advantage of potential opportunities to naturally offset
foreign currency exposures against each other. The Company
manages the currency risk associated with certain forecasted
cash flows periodically and only partially manages the timing
mismatch between its forecasted exposures and the related
financial instruments used to mitigate the currency risk. As of
November 29, 2009, the Company had forward foreign exchange
contracts to buy $523.5 million and to sell
$175.1 million against various foreign currencies. These
contracts are at various exchange rates and expire at various
dates through December 2010.
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER
25, 2007
The table below provides data about the carrying values of
derivative and non-derivative instruments:
| November 29, 2009 | November 30, 2008 | |||||||||||||||||||||||
| Assets | (Liabilities) | Assets | (Liabilities) | |||||||||||||||||||||
|
Derivative
|
Derivative
|
|||||||||||||||||||||||
|
Carrying
|
Carrying
|
Net Carrying
|
Carrying
|
Carrying
|
Net Carrying
|
|||||||||||||||||||
| Value | Value | Value | Value | Value | Value | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
|
Derivatives not designated as hedging instruments
|
||||||||||||||||||||||||
|
Forward foreign exchange
contracts
(1)
|
$ | 1,189 | $ | (468 | ) | $ | 721 | $ | 13,522 | $ | (3,311 | ) | $ | 10,211 | ||||||||||
|
Forward foreign exchange
contracts
(2)
|
5,675 | (20,194 | ) | (14,519 | ) | 2,766 | (7,991 | ) | (5,225 | ) | ||||||||||||||
|
Interest rate
contracts
(2)
|
— | (1,451 | ) | (1,451 | ) | — | (1,454 | ) | (1,454 | ) | ||||||||||||||
|
Total derivatives not designated as hedging instruments
|
$ | 6,864 | $ | (22,113 | ) | $ | 16,288 | $ | (12,756 | ) | ||||||||||||||
|
Non-derivatives designated as hedging instruments
|
||||||||||||||||||||||||
|
Euro senior notes
|
$ | — | $ | (374,641 | ) | $ | — | $ | (324,520 | ) | ||||||||||||||
|
Yen-denominated
Eurobonds
(3)
|
— | (92,684 | ) | — | (83,954 | ) | ||||||||||||||||||
|
Total non-derivatives designated as hedging instruments
|
$ | — | $ | (467,325 | ) | $ | — | $ | (408,474 | ) | ||||||||||||||
| (1) | Included in “Other current assets” on the Company’s consolidated balance sheets. | |
| (2) | Included in “Other accrued liabilities” on the Company’s consolidated balance sheets. | |
| (3) | Represents the portion of the Yen-denominated Eurobonds that have been designated as a net investment hedge. |
The table below provides data about the amount of gains and
losses related to derivative and non-derivative instruments
designated as net investment hedges included in the
“Accumulated other comprehensive income (loss)”
(“AOCI”) section of “Stockholders’
deficit” on the Company’s consolidated balance sheets,
and in “Other income (expense), net” in the
Company’s consolidated statements of income:
|
Gain or (Loss)
|
||||||||||||||||||||
|
Gain or (Loss)
|
Recognized in Other Income (Expense), net
|
|||||||||||||||||||
|
Recognized in AOCI
|
(Ineffective Portion and Amount
|
|||||||||||||||||||
| (Effective Portion) | Excluded from Effectiveness Testing) | |||||||||||||||||||
|
As of
|
As of
|
Year Ended | ||||||||||||||||||
|
November 29,
|
November 30,
|
November 29,
|
November 30,
|
November 25,
|
||||||||||||||||
| 2009 | 2008 | 2009 | 2008 | 2007 | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
|
Forward foreign exchange
contracts
(1)
|
$ | 4,637 | $ | 4,637 | $ | — | $ | — | $ | — | ||||||||||
|
Euro senior notes
|
(61,570 | ) | (10,870 | ) | — | — | — | |||||||||||||
|
Yen-denominated Eurobonds
|
(23,621 | ) | (14,892 | ) | (13,094 | ) | (14,815 | ) | (6,981 | ) | ||||||||||
|
Cumulative income taxes
|
31,237 | 8,828 | ||||||||||||||||||
|
Total
|
$ | (49,317 | ) | $ | (12,297 | ) | ||||||||||||||
| (1) | Realized gains on settled foreign exchange derivatives designated as net investment hedges. |
65
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER
25, 2007
The table below provides data about the amount of gains and
losses recognized in income on derivative instruments not
designated as hedging instruments:
| Gain or (Loss) During | ||||||||||||
| Year Ended | ||||||||||||
|
November 29,
|
November 30,
|
November 25,
|
||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Forward foreign exchange
contracts
(1)
:
|
||||||||||||
|
Realized
|
$ | (50,760 | ) | $ | 53,499 | $ | (16,137 | ) | ||||
|
Unrealized
|
(18,794 | ) | 10,944 | (5,934 | ) | |||||||
|
Total
|
$ | (69,554 | ) | $ | 64,443 | $ | (22,071 | ) | ||||
| (1) | Recognized in “Other income (expense), net” in the Company’s consolidated statements of income. |
| NOTE 6: | DEBT |
|
November 29,
|
November 30,
|
|||||||
| 2009 | 2008 | |||||||
| (Dollars in thousands) | ||||||||
|
Long-term debt
|
||||||||
|
Secured:
|
||||||||
|
Senior revolving credit facility
|
$ | 108,250 | $ | 179,125 | ||||
|
Notes payable, at various rates
|
— | 99 | ||||||
|
Total secured
|
108,250 | 179,224 | ||||||
|
Unsecured:
|
||||||||
|
8.625% Euro senior notes due 2013
|
374,641 | 324,520 | ||||||
|
Senior term loan due 2014
|
323,340 | 323,028 | ||||||
|
9.75% senior notes due 2015
|
446,210 | 446,210 | ||||||
|
8.875% senior notes due 2016
|
350,000 | 350,000 | ||||||
|
4.25% Yen-denominated Eurobonds due 2016
|
231,710 | 209,886 | ||||||
|
Total unsecured
|
1,725,901 | 1,653,644 | ||||||
|
Less: current maturities
|
— | (70,875 | ) | |||||
|
Total long-term debt
|
$ | 1,834,151 | $ | 1,761,993 | ||||
|
Short-term debt
|
||||||||
|
Short-term borrowings
|
$ | 18,749 | $ | 20,339 | ||||
|
Current maturities of long-term debt
|
— | 70,875 | ||||||
|
Total short-term debt
|
$ | 18,749 | $ | 91,214 | ||||
|
Total long-term and short-term debt
|
$ | 1,852,900 | $ | 1,853,207 | ||||
Senior
Revolving Credit Facility
The Company is a party to an amended and restated senior secured
credit facility. The facility is an asset-based facility, in
which the borrowing availability varies according to the levels
of the Company’s domestic accounts receivable, inventory
and cash and investment securities deposited in secured accounts
with the administrative agent or other lenders. Subject to the
level of this borrowing base, the Company may make and repay
borrowings from time to time until the maturity of the facility.
The Company may make voluntary prepayments of borrowings at
66
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER
25, 2007
any time and must make mandatory prepayments if certain events
occur, such as asset sales. Other material terms of the credit
facility are discussed below.
Availability, interest and maturity.
The
maximum availability under the credit facility is
$750.0 million, including a $250.0 million trademark
tranche. The trademark tranche amortizes on a quarterly basis
based on a straight line two-year amortization schedule to a
residual value of 25% of the net orderly liquidation value of
the trademarks with no additional repayments required until
maturity so long as the remaining amount of the tranche does not
exceed such 25% valuation. The trademark tranche will be
borrowed on a first dollar drawn basis. As the trademark tranche
is repaid, the revolving tranche increases, up to a maximum of
$750.0 million when the trademark tranche is repaid in
full. The revolving portion of the credit facility initially
bears an interest rate of LIBOR plus 150 basis points or
base rate plus 25 basis points subject to subsequent
adjustments based on availability. The trademark tranche bears
an interest rate of LIBOR plus 250 basis points or base
rate plus 125 basis points. The credit facility matures on
October 11, 2012.
Guarantees and security.
The Company’s
obligations under the senior secured revolving credit facility
are guaranteed by the Company’s domestic subsidiaries. The
senior secured revolving credit facility is collateralized by a
first-priority lien on domestic inventory and accounts
receivable, patents, certain U.S. trademarks associated
with the
Levi’s
®
brand, and other related intellectual property, 100% of the
equity interests in all domestic subsidiaries and other assets.
The aggregate carrying value of the collateralized assets
exceeds the total availability under the senior secured
revolving credit facility. The lien on the trademarks, but not
the other assets, will be released upon the full repayment of
the trademark tranche. In addition, the Company has the ability
to deposit cash or certain investment securities with the
administrative agent for the facility to secure the
Company’s reimbursement and other obligations with respect
to letters of credit. Such cash-collateralized letters of credit
are subject to lower letter of credit fees.
Covenants.
The senior secured revolving credit
facility contains customary covenants restricting the
Company’s activities as well as those of the Company’s
subsidiaries, including limitations on the Company’s, and
the Company’s domestic subsidiaries’, ability to sell
assets; engage in mergers; enter into capital leases or certain
leases not in the ordinary course of business; enter into
transactions involving related parties or derivatives; incur or
prepay indebtedness or grant liens or negative pledges on the
Company’s assets; make loans or other investments; pay
dividends or repurchase stock or other securities; guaranty
third-party obligations; and make changes in the Company’s
corporate structure. Some of these covenants are suspended if
unused availability exceeds certain minimum thresholds. In
addition, a minimum fixed charge coverage ratio of 1.0:1.0
arises when unused availability under the facility is less than
$100.0 million. As of November 29, 2009, the Company
had sufficient unused availability under the facility to exceed
all applicable minimum thresholds. This financial covenant will
be discontinued upon repayment in full and termination of the
trademark tranche described above and the implementation of an
unfunded availability reserve of $50.0 million.
Events of default.
The senior secured
revolving credit facility contains customary events of default,
including payment failures; failure to comply with covenants;
failure to satisfy other obligations under the credit agreements
or related documents; defaults in respect of other indebtedness;
bankruptcy, insolvency and inability to pay debts when due;
material judgments; pension plan terminations or specified
underfunding; substantial voting trust certificate or stock
ownership changes; specified changes in the composition of the
Company’s board of directors; and invalidity of the
guaranty or security agreements. The cross-default provisions in
the senior secured revolving credit facility apply if a default
occurs on other indebtedness in excess of $25.0 million and
the applicable grace period in respect of the indebtedness has
expired, such that the lenders of or trustee for the defaulted
indebtedness have the right to accelerate. If an event of
default occurs under the senior secured revolving credit
facility, the Company’s lenders may terminate their
commitments, declare immediately payable all borrowings under
the credit facility and foreclose on the collateral.
67
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER
25, 2007
Use of proceeds — Tender offer and redemption of
the senior notes due 2012.
In October 2007, the
Company borrowed $346.4 million (including all
$250.0 million of the trademark tranche) under its senior
secured credit facility and used the proceeds plus
$220.5 million of cash on hand to prepay
$506.2 million of its then-existing senior notes due 2012
plus accrued and unpaid interest, prepayment premiums, tender
offer consideration, applicable consent payments and other fees
and expenses. At November 25, 2007, there were no
borrowings outstanding under the revolving tranche of the credit
facility as the $96.4 million used above was repaid.
Senior
Notes due 2012
On September 19, 2007, the Company commenced a cash tender
offer for its remaining $525.0 million aggregate principal
amount of its then-existing 12.25% senior notes due 2012.
On October 18, 2007, the Company repurchased
$506.2 million, or 96.4%, of the aggregate principal amount
of the notes outstanding for a total cash consideration of
$566.9 million, consisting of the accrued and unpaid
interest, prepayment premiums, tender offer consideration,
applicable consent payments and other fees and expenses.
On March 25, 2008, the Company redeemed the remaining
$18.8 million face amount of the notes, excluding discount,
for a total cash consideration of $20.6 million, consisting
of accrued and unpaid interest, and other fees and expenses. The
total cash consideration was paid using cash on hand.
Euro
Notes due 2013
On March 11, 2005, the Company issued
€150.0 million in notes to qualified institutional
buyers. These notes are unsecured obligations that rank equally
with all of the Company’s other existing and future
unsecured and unsubordinated debt. These notes mature on
April 1, 2013, and bear interest at 8.625% per annum,
payable semi-annually in arrears on April 1 and October 1.
The notes became redeemable on April 1, 2009, in whole or
in part, at once or over time, at redemption prices specified in
the indenture governing the notes, after giving the required
notice under the indenture. These notes were offered at par.
Costs representing underwriting fees and other expenses of
$5.3 million are amortized over the term of the notes to
interest expense.
Exchange offer.
In June 2005, after a required
exchange offer, all but €2.0 million of the
€150.0 million aggregate principal amount of the notes
were exchanged for new notes on identical terms, except that the
new notes are registered under the Securities Act.
Additional Euro senior notes due 2013.
On
March 17, 2006, the Company issued an additional
€100.0 million in Euro senior notes due 2013 to
qualified institutional buyers. These notes have the same terms
and are part of the same series as the €150.0 million
aggregate principal amount of Euro-denominated
8.625% senior notes due 2013 the Company issued in March
2005. These notes were offered at a premium of 3.5%, or
$4.2 million, which original issuance premium will be
amortized over the term of the notes. Costs representing
underwriting fees and other expenses of $2.8 million are
being amortized over the term of the notes to interest expense.
Exchange offer.
In July 2006, after a required
exchange offer, €100.7 million of the remaining
€102.0 million unregistered 2013 Euro notes (which
includes €2.0 million of unregistered 2013 Euro notes
from the March 2005 offering) were exchanged for new notes on
identical terms, except that the new notes are registered under
the Securities Act.
Covenants.
The indenture governing the 2013
Euro notes contains covenants that limit the Company and its
subsidiaries’ ability to 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 the Company and its
subsidiaries; merge or consolidate with any other person; and
sell, assign, transfer, lease, convey or otherwise dispose of
all or substantially all of the Company’s assets or its
subsidiaries’ assets.
68
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER
25, 2007
Covenant suspension.
If these notes receive
and maintain an investment grade rating by both Standard and
Poor’s and Moody’s and the Company and its
subsidiaries are and remain in compliance with the indenture,
then the Company and its subsidiaries will not be required to
comply with specified covenants contained in the indenture.
These specified covenants were in effect at November 29,
2009, and will remain so until such time as the Company obtains
the required investment grade rating.
Asset sales.
The indenture governing these
notes provides that the Company’s asset sales must be at
fair market value and the consideration must consist of at least
75% cash or cash equivalents or the assumption of liabilities.
The Company must use the net proceeds from the asset sale within
360 days after receipt either to repay bank debt, with an
equivalent permanent reduction in the available commitment in
the case of a repayment under the Company’s senior secured
revolving credit facility, or to invest in additional assets in
a business related to the Company’s business. To the extent
proceeds not so used within the time period exceed
$10.0 million, the Company is required to make an offer to
purchase outstanding notes at par plus accrued an unpaid
interest, if any, to the date of repurchase.
Change in control.
If the Company experiences
a change in control as defined in the indenture governing the
notes, then the Company will be required under the indenture to
make an offer to repurchase the notes at a price equal to 101%
of the principal amount plus accrued and unpaid interest, if
any, to the date of repurchase.
Events of default.
The indenture governing
these notes contains customary events of default, including
failure to pay principal, failure to pay interest after a
30-day
grace
period, failure to comply with the merger, consolidation and
sale of property covenant, failure to comply with other
covenants in the indenture for a period of 30 days after
notice given to the Company, failure to satisfy certain
judgments in excess of $25.0 million after a
30-day
grace
period, and certain events involving bankruptcy, insolvency or
reorganization. The indenture also contains a cross-acceleration
event of default that applies if debt of the Company or any
restricted subsidiary in excess of $25.0 million is
accelerated or is not paid when due at final maturity.
Use of proceeds — Initial
issuance.
The proceeds from the initial issuance
in March 2005 were used to repurchase the Company’s
then-existing 2008 notes. The remaining proceeds were used to
pay a portion of the fees, expenses and premiums payable in
connection with the March 2005 offering and 2008 note repurchase.
Use of proceeds — Additional
issuance.
The proceeds from the additional
issuance of 2013 Euro notes in March 2006, and the issuance of
the senior notes due 2016 plus cash on hand were used to prepay
the remaining balance of then-existing senior secured term loan
of $488.8 million.
Senior
Term Loan due 2014
On March 27, 2007, the Company entered into a senior
unsecured term loan agreement. The term loan consists of a
single borrowing of $325.0 million, net of a 0.75% discount
to the lenders. On April 4, 2007, the Company borrowed the
maximum available of $322.6 million under the term loan and
used the borrowings plus cash on hand of $66.4 million to
redeem all of its outstanding $380.0 million floating rate
senior notes due 2012 and to pay related redemption premiums,
transaction fees and expenses, and accrued interest of
$9.0 million. The term loan matures on April 4, 2014,
and bears interest at 2.25% over LIBOR or 1.25% over the base
rate. The term loan may not be prepaid during the first year but
thereafter may be prepaid without premium or penalty.
The covenants, events of default, asset sale, change of control,
covenant suspension and other terms of the term loan are
comparable to those contained in the indentures governing the
Company’s 2013 Euro senior notes described above.
69
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER
25, 2007
Senior
Notes due 2015
Principal, interest and maturity.
On
December 22, 2004, the Company issued $450.0 million
in notes to qualified institutional buyers. These notes are
unsecured obligations that rank equally with all of the
Company’s other existing and future unsecured and
unsubordinated debt. They are
10-year
notes maturing on January 15, 2015, and bear interest at
9.75% per annum, payable semi-annually in arrears on January 15
and July 15. Starting on January 15, 2010, the notes
became redeemable, in whole or in part, at once or over time, at
redemption prices specified in the indenture governing the
notes, after giving the required notice under the indenture.
Costs representing underwriting fees and other expenses of
$10.3 million are amortized over the term of the notes to
interest expense.
During the third quarter of 2008, the Company repurchased
$3.8 million of these notes on the open market for a net
gain of $0.2 million.
Use of proceeds — Repurchase of then-existing
senior notes due 2006.
The proceeds from this
issuance were used to repurchase and repay all of the
Company’s then-existing senior unsecured notes due 2006.
Exchange offer.
In June 2005, after a required
exchange offer, all but $50,000 of the $450.0 million
aggregate principal amount of the notes were exchanged for new
notes on identical terms, except that the new notes are
registered under the Securities Act.
The covenants, events of default, asset sale, change of control,
covenant suspension and other terms of the notes are comparable
to those contained in the indentures governing the
Company’s 2013 Euro notes described above.
Senior
Notes due 2016
Principal, interest and maturity.
On
March 17, 2006, the Company issued $350.0 million in
notes to qualified institutional buyers. These notes are
unsecured obligations that rank equally with all of the
Company’s other existing and future unsecured and
unsubordinated debt. They are
10-year
notes maturing on April 1, 2016, and bear interest at
8.875% per annum, payable semi-annually in arrears on April 1
and October 1. The Company may redeem these notes, in whole
or in part, at any time prior to April 1, 2011, at a price
equal to 100% of the principal amount plus accrued and unpaid
interest, if any, to the date of redemption and a
“make-whole” premium. Starting on April 1, 2011,
the Company may redeem all or any portion of the notes, at once
or over time, at redemption prices specified in the indenture
governing the notes, after giving the required notice under the
indenture. These notes were offered at par. Costs representing
underwriting fees and other expenses of $8.0 million are
being amortized over the term of the notes to interest expense.
The covenants, events of default, asset sale, change of control,
covenant suspension and other terms of the notes are comparable
to those contained in the indentures governing the
Company’s 2013 Euro notes described above.
Exchange offer.
In July 2006, after a required
exchange offer, all of the 2016 notes were exchanged for new
notes on identical terms, except that the new notes are
registered under the Securities Act.
Use of proceeds — Prepayment of term
loan.
In March 2006, the Company used the
proceeds of the additional 2013 Euro notes and the senior notes
due 2016 plus cash on hand to prepay the remaining balance of
then existing senior secured term loan of $488.8 million.
70
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER
25, 2007
Yen-denominated
Eurobonds due 2016
In 1996, the Company issued ¥20 billion principal
amount Eurobonds (equivalent to approximately
$180.0 million at the time of issuance) due in November
2016, with interest payable at 4.25% per annum. The bond is
redeemable at the option of the Company at a make-whole
redemption price.
The agreement governing these bonds contains customary events of
default and restricts the Company’s ability and the ability
of its subsidiaries and future subsidiaries to incur liens;
engage in sale and leaseback transactions and engage in mergers
and sales of assets. The agreement contains a cross-acceleration
event of default that applies if any of the Company’s debt
in excess of $25.0 million is accelerated and the debt is
not discharged or acceleration rescinded within 30 days
after the Company’s receipt of a notice of default from the
fiscal agent or from the holders of at least 25% of the
principal amount of the bond.
Loss on
Early Extinguishment of Debt
For the year ended November 25, 2007, the Company recorded
a loss of $63.8 million on early extinguishment of debt as
a result of its redemption of its floating rate senior notes due
2012 during the second quarter of 2007 and its repurchase of
$506.2 million of its 12.25% senior notes due 2012
during the fourth quarter of 2007. The 2007 losses were
comprised of prepayment premiums, tender offer consideration,
applicable consent payments and other fees and expenses of
$46.7 million and the write-off of $17.1 million of
unamortized capitalized costs and debt discount.
The table below sets forth, as of November 29, 2009, the
Company’s required aggregate short-term and long-term debt
principal payments (inclusive of premium and discount) for the
next five fiscal years and thereafter.
| (Dollars in thousands) | ||||
|
2010
|
$ | 18,749 | ||
|
2011
|
— | |||
|
2012
|
108,250 | |||
|
2013
|
374,641 | |||
|
2014
|
323,340 | |||
|
Thereafter
|
1,027,920 | |||
|
Total future debt principal payments
|
$ | 1,852,900 | ||
Short-term
Credit Lines and Standby Letters of Credit
The Company’s unused lines of credit under its senior
secured revolving credit facility totaled $243.9 million at
November 29, 2009, as the Company’s total availability
of $325.2 million, based on the collateral levels discussed
above, was reduced by $81.3 million of letters of credit
and other credit usage allocated under the facility, yielding a
net availability of $243.9 million. Included in the
$81.3 million of letters of credit on November 29,
2009, were $13.6 million of other credit usage and
$67.7 million of stand-by letters of credit with various
international banks, of which $28.2 million serve as
guarantees by the creditor banks to cover
U.S. workers’ compensation claims and customs bonds.
The Company pays fees on the standby letters of credit, and
borrowings against the letters of credit are subject to interest
at various rates.
Interest
Rates on Borrowings
The Company’s weighted-average interest rate on average
borrowings outstanding during 2009, 2008 and 2007 was 7.44%,
8.09% and 9.59%, respectively. The weighted-average interest
rate on average borrowings
71
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER
25, 2007
outstanding includes the amortization of capitalized bank fees
and underwriting fees, and excludes interest on obligations to
participants under deferred compensation plans.
Dividends
and Restrictions
The terms of certain of the indentures relating to the
Company’s unsecured notes and its senior secured revolving
credit facility agreement contain covenants that restrict the
Company’s ability to pay dividends to its stockholders.
During 2009 and 2008, the Company paid cash dividends of
$20 million and $50 million, respectively. For further
information, see Note 15. As of November 29, 2009, and
at the time the dividends were paid, the Company met the
requirements of its debt instruments. Subsidiaries of the
Company that are not wholly-owned subsidiaries (the
Company’s Japanese subsidiary was the only such subsidiary
at November 29, 2009) are permitted under the
indentures to pay dividends to all stockholders either on a pro
rata basis or on a basis that results in the receipt by the
Company of dividends or distributions of greater value than it
would receive on a pro rata basis. There are no restrictions
under the Company’s senior secured revolving credit
facility or its indentures on the transfer of the assets of the
Company’s subsidiaries to the Company in the form of loans,
advances or cash dividends without the consent of a third party.
| NOTE 7: | GUARANTEES |
Guarantees.
See Note 6 regarding
guarantees of the Company’s senior secured revolving credit
facility.
Indemnification agreements.
In the ordinary
course of business, the Company enters into agreements
containing indemnification provisions under which the Company
agrees to indemnify the other party for specified claims and
losses. For example, the Company’s trademark license
agreements, real estate leases, consulting agreements, logistics
outsourcing agreements, securities purchase agreements and
credit agreements typically contain such provisions. This type
of indemnification provision obligates the Company to pay
certain amounts associated with claims brought against the other
party as the result of trademark infringement, negligence or
willful misconduct of Company employees, breach of contract by
the Company including inaccuracy of representations and
warranties, specified lawsuits in which the Company and the
other party are co-defendants, product claims and other matters.
These amounts generally are not readily quantifiable; the
maximum possible liability or amount of potential payments that
could arise out of an indemnification claim depends entirely on
the specific facts and circumstances associated with the claim.
The Company has insurance coverage that minimizes the potential
exposure to certain of such claims. The Company also believes
that the likelihood of substantial payment obligations under
these agreements to third parties is low and that any such
amounts would be immaterial.
Covenants.
The Company’s long-term debt
agreements contain customary covenants restricting its
activities as well as those of its subsidiaries, including
limitations on its, and its subsidiaries’, ability to sell
assets; engage in mergers; enter into capital leases or certain
leases not in the ordinary course of business; enter into
transactions involving related parties or derivatives; incur or
prepay indebtedness or grant liens or negative pledges on its
assets; make loans or other investments; pay dividends or
repurchase stock or other securities; guaranty third-party
obligations; make capital expenditures; and make changes in its
corporate structure. For additional information see Note 6.
| NOTE 8: | EMPLOYEE BENEFIT PLANS |
Pension plans.
The Company has several
non-contributory defined benefit retirement plans covering
eligible employees. Plan assets are invested in a diversified
portfolio of securities including stocks, bonds, real estate
investment funds, cash equivalents, and alternative investments.
Benefits payable under the plans are based on years of service,
final average compensation, or both. The Company retains the
right to amend, curtail or discontinue any aspect of the plans,
subject to local regulations.
Postretirement plans.
The Company maintains
several plans that provide postretirement benefits to eligible
employees, principally health care, to substantially all
U.S. retirees and their qualified dependents. These plans
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER
25, 2007
were established with the intention that they would continue
indefinitely. However, the Company retains the right to amend,
curtail or discontinue any aspect of the plans at any time. The
plans are contributory and contain certain cost-sharing
features, such as deductibles and coinsurance. The
Company’s policy is to fund postretirement benefits as
claims and premiums are paid.
Changes in the financial markets during 2009, including a
decrease in corporate bond yield indices, drove a reduction in
the discount rates used to measure the benefit obligations for
the Company’s pension and postretirement benefit plans for
2009 as compared to the rates used for the prior year
measurement. The reduction in the discount rates is the primary
driver of the higher actuarial losses included in the change in
benefit obligation for both plans for the fiscal
2009 year-end measurement.
The following tables summarize activity of the Company’s
defined benefit pension plans and postretirement benefit plans:
| Pension Benefits | Postretirement Benefits | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
Change in benefit obligation:
|
||||||||||||||||
|
Benefit obligation at beginning of year
|
$ | 840,683 | $ | 957,693 | $ | 151,097 | $ | 179,581 | ||||||||
|
Service cost
|
5,254 | 6,370 | 428 | 590 | ||||||||||||
|
Interest cost
|
61,698 | 61,581 | 11,042 | 10,785 | ||||||||||||
|
Plan participants’ contribution
|
1,294 | 1,456 | 6,431 | 6,691 | ||||||||||||
|
Actuarial loss
(gain)
(1)
|
195,390 | (90,340 | ) | 30,569 | (17,334 | ) | ||||||||||
|
Net curtailment (gain) loss
|
(852 | ) | 978 | 2,996 | 218 | |||||||||||
|
Impact of foreign currency changes
|
16,946 | (32,062 | ) | — | — | |||||||||||
|
Plan settlements
|
(5,787 | ) | (5,127 | ) | — | — | ||||||||||
|
Special termination benefits
|
78 | 36 | — | — | ||||||||||||
|
Benefits paid
|
(53,439 | ) | (59,902 | ) | (25,798 | ) | (29,434 | ) | ||||||||
|
Benefit obligation at end of year
|
$ | 1,061,265 | $ | 840,683 | $ | 176,765 | $ | 151,097 | ||||||||
|
Change in plan assets:
|
||||||||||||||||
|
Fair value of plan assets at beginning of year
|
$ | 601,612 | $ | 883,566 | $ | — | $ | — | ||||||||
|
Actual return on plan
assets
(2)
|
108,388 | (213,486 | ) | — | — | |||||||||||
|
Employer contribution
|
18,051 | 18,260 | 19,367 | 22,743 | ||||||||||||
|
Plan participants’ contributions
|
1,294 | 1,456 | 6,431 | 6,691 | ||||||||||||
|
Plan settlements
|
(5,787 | ) | (5,127 | ) | — | — | ||||||||||
|
Impact of foreign currency changes
|
10,889 | (23,155 | ) | — | — | |||||||||||
|
Benefits paid
|
(53,439 | ) | (59,902 | ) | (25,798 | ) | (29,434 | ) | ||||||||
|
Fair value of plan assets at end of year
|
681,008 | 601,612 | — | — | ||||||||||||
|
Funded status at end of year
|
$ | (380,257 | ) | $ | (239,071 | ) | $ | (176,765 | ) | $ | (151,097 | ) | ||||
| (1) | Actuarial (gains) and losses in the Company’s pension benefit and postretirement benefit plans were driven by changes in discount rate assumptions, primarily for the Company’s U.S. plans. | |
| (2) | Global financial market conditions drove the 2008 decline in fair value of pension plan assets, primarily related to the Company’s U.S. pension plans. |
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER
25, 2007
Amounts recognized in the consolidated balance sheets as of
November 29, 2009, and November 30, 2008, consist of
the following:
| Pension Benefits | Postretirement Benefits | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
Prepaid benefit cost
|
$ | 2,107 | $ | 2,337 | $ | — | $ | — | ||||||||
|
Accrued benefit liability — current portion
|
(7,698 | ) | (7,852 | ) | (19,931 | ) | (20,874 | ) | ||||||||
|
Accrued benefit liability — long-term portion
|
(374,666 | ) | (233,556 | ) | (156,834 | ) | (130,223 | ) | ||||||||
| $ | (380,257 | ) | $ | (239,071 | ) | $ | (176,765 | ) | $ | (151,097 | ) | |||||
|
Accumulated other comprehensive income (loss):
|
||||||||||||||||
|
Net actuarial loss
|
$ | (316,561 | ) | $ | (207,979 | ) | $ | (56,707 | ) | $ | (27,872 | ) | ||||
|
Net prior service benefit (cost)
|
710 | (346 | ) | 75,360 | 117,587 | |||||||||||
| $ | (315,851 | ) | $ | (208,325 | ) | $ | 18,653 | $ | 89,715 | |||||||
The accumulated benefit obligation for all defined benefit plans
was $1.0 billion and $0.8 billion at November 29,
2009, and November 30, 2008, respectively. Information for
the Company’s defined benefit plans with an accumulated or
projected benefit obligation in excess of plan assets is as
follows:
| Pension Benefits | ||||||||
| 2009 | 2008 | |||||||
| (Dollars in thousands) | ||||||||
|
Accumulated benefit obligations in excess of plan assets:
|
||||||||
|
Aggregate accumulated benefit obligation
|
$ | 983,057 | $ | 795,598 | ||||
|
Aggregate fair value of plan assets
|
621,826 | 579,918 | ||||||
|
Projected benefit obligations in excess of plan assets:
|
||||||||
|
Aggregate projected benefit obligation
|
$ | 1,036,245 | $ | 821,326 | ||||
|
Aggregate fair value of plan assets
|
653,881 | 579,918 | ||||||
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER
25, 2007
The components of the Company’s net periodic benefit cost
(income) were as follows:
| Pension Benefits | Postretirement Benefits | |||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
|
Net periodic benefit cost (income):
|
||||||||||||||||||||||||
|
Service cost
|
$ | 5,254 | $ | 6,370 | $ | 7,930 | $ | 428 | $ | 590 | $ | 713 | ||||||||||||
|
Interest cost
|
61,698 | 61,581 | 58,237 | 11,042 | 10,785 | 10,833 | ||||||||||||||||||
|
Expected return on plan assets
|
(42,191 | ) | (62,847 | ) | (60,252 | ) | — | — | — | |||||||||||||||
|
Amortization of prior service cost
(benefit)
(1)
|
792 | 857 | 3,614 | (39,698 | ) | (41,405 | ) | (45,726 | ) | |||||||||||||||
|
Amortization of transition asset
|
— | 231 | 491 | — | — | — | ||||||||||||||||||
|
Amortization of actuarial loss
|
17,082 | 577 | 6,059 | 1,734 | 3,960 | 4,682 | ||||||||||||||||||
|
Curtailment loss
(gain)
(2)
|
1,176 | 782 | 1,188 | 467 | (5,944 | ) | (52,763 | ) | ||||||||||||||||
|
Special termination benefit
|
78 | 36 | 164 | — | — | — | ||||||||||||||||||
|
Net settlement loss (gain)
|
1,655 | (65 | ) | 55 | — | — | — | |||||||||||||||||
|
Net periodic benefit cost (income)
|
45,544 | 7,522 | 17,486 | (26,027 | ) | (32,014 | ) | (82,261 | ) | |||||||||||||||
|
Changes in accumulated other comprehensive income (loss) :
|
||||||||||||||||||||||||
|
Actuarial loss
(gain)
(3)
|
127,374 | 184,375 | 30,569 | (17,334 | ) | |||||||||||||||||||
|
Amortization of prior service (cost) benefit
|
(792 | ) | (857 | ) | 39,698 | 41,405 | ||||||||||||||||||
|
Amortization of transition asset
|
— | (231 | ) | — | — | |||||||||||||||||||
|
Amortization of actuarial loss
|
(17,082 | ) | (577 | ) | (1,734 | ) | (3,960 | ) | ||||||||||||||||
|
Curtailment (loss) gain
|
(1,625 | ) | (83 | ) | 2,529 | 6,162 | ||||||||||||||||||
|
Net settlement (loss) gain
|
(360 | ) | 214 | — | — | |||||||||||||||||||
|
Total recognized in accumulated other comprehensive income (loss)
|
107,515 | 182,841 | 71,062 | 26,273 | ||||||||||||||||||||
|
Total recognized in net periodic benefit cost (income) and
accumulated other comprehensive income (loss)
|
$ | 153,059 | $ | 190,363 | $ | 45,035 | $ | (5,741 | ) | |||||||||||||||
| (1) | Postretirement benefits amortization of prior service benefit recognized during each of years 2009, 2008 and 2007, relates primarily to the favorable impact of the February 2004 and August 2003 plan amendments. | |
| (2) | In 2007, the Company entered into a new labor agreement with the union that represents many of its distribution-related employees in North America, which contained a voluntary separation and buyout program. As a result of the voluntary terminations that occurred with this program, the Company remeasured certain pension and postretirement benefit obligations as of July 31, 2007, which resulted in an estimated $31.7 million postretirement benefit curtailment gain, attributable to the accelerated recognition of benefits associated with prior plan changes. Of the total $31.7 million, $27.5 million was recognized during 2007 related to employees that elected the buyout and left the Company. The remaining curtailment gain of $4.2 million was recognized in 2008. | |
| As a result of the 2006 closure of and job reductions related to the Company’s facility in Little Rock, Arkansas, the Company recognized a $54.3 million curtailment gain attributable to the accelerated recognition of prior service benefit associated with prior plan amendments. Of the total $54.3 million, $25.3 million was recognized during 2007 as the related employees terminated. | ||
| (3) | Reflects the impact of the changes in the discount rate assumptions for the pension and postretirement benefit plans for 2009, and for 2008, reflects the impact of the substantial decline in the fair value of the pension plan assets in that year. |
75
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER
25, 2007
The estimated net loss and net prior service benefit for the
Company’s defined benefit pension and postretirement
benefit plans, respectively, that will be amortized from
“Accumulated other comprehensive income (loss)” into
net periodic benefit cost (income) in 2010 are expected to be a
cost of $27 million and a benefit of $24 million,
respectively.
Assumptions used in accounting for the Company’s benefit
plans were as follows:
| Pension Benefits | Postretirement Benefits | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
|
Weighted-average assumptions used to determine net periodic
benefit cost:
|
||||||||||||||||
|
Discount rate
|
7.5 | % | 6.7 | % | 7.9 | % | 6.4 | % | ||||||||
|
Expected long-term rate of return on plan assets
|
7.2 | % | 7.4 | % | ||||||||||||
|
Rate of compensation increase
|
4.0 | % | 4.0 | % | ||||||||||||
|
Weighted-average assumptions used to determine benefit
obligations:
|
||||||||||||||||
|
Discount
rate
(1)
|
5.8 | % | 7.5 | % | 5.2 | % | 7.9 | % | ||||||||
|
Rate of compensation increase
|
4.0 | % | 4.0 | % | ||||||||||||
|
Assumed health care cost trend rates were as follows:
|
||||||||||||||||
|
Health care trend rate assumed for next year
|
8.0 | % | 9.0 | % | ||||||||||||
|
Rate trend to which the cost trend is assumed to decline
|
4.5 | % | 5.0 | % | ||||||||||||
|
Year that rate reaches the ultimate trend
rate
(2)
|
2028 | 2020 | ||||||||||||||
| (1) | Decline in discount rate driven by changes in the financial markets during 2009, including a decrease in corporate bond yield indices. | |
| (2) | Change as compared to prior year had no significant effect on the total service and interest cost components or on the postretirement benefit obligation. |
For the Company’s U.S. benefit plans, the discount
rate used in 2009 to determine the present value of the future
pension and postretirement plan obligations was based on a yield
curve constructed from a portfolio of high quality corporate
bonds with various maturities. Each year’s expected future
benefit payments are discounted to their present value at the
appropriate yield curve rate, thereby generating the overall
discount rate. Prior to 2009, the Company utilized a bond
pricing model that was tailored to the attributes of its pension
and postretirement plans to determine the appropriate discount
rate to use for its U.S. benefit plans. In 2009 and 2008,
the Company utilized a variety of country-specific third-party
bond indices to determine the appropriate discount rates to use
for the benefit plans of its foreign subsidiaries.
The Company bases the overall expected long-term rate of return
on assets on anticipated long-term returns of individual asset
classes and each pension plans’ target asset allocation
strategy based on current economic conditions. For the
U.S. pension plans, the expected long-term returns for each
asset class are determined through a mean-variance model to
estimate 20 year returns for the plan.
Assumed health care cost trend rates have a significant effect
on the amounts reported for the Company’s postretirement
benefits plans. A one percentage point change in assumed health
care cost trend rates would have no significant effect on the
total service and interest cost components or on the
postretirement benefit obligation.
76
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER
25, 2007
The allocation of the Company’s consolidated pension plan
assets, by asset category was as follows:
|
November 29,
|
November 30,
|
|||||||
| 2009 | 2008 | |||||||
|
Equity securities
|
46.1 | % | 51.1 | % | ||||
|
Debt securities
|
44.2 | % | 44.2 | % | ||||
|
Real estate and other
|
9.7 | % | 4.7 | % | ||||
|
Total
|
100.0 | % | 100.0 | % | ||||
Consolidated pension plan assets relate primarily to the
U.S. pension plans. The Company utilizes the services of
independent third-party investment managers to oversee the
management of U.S. pension plan assets. The Company’s
investment strategy is to invest plan assets in a diversified
portfolio of domestic and international equity securities, fixed
income securities and real estate and other alternative
investments with the objective of generating long-term growth in
plan assets at a reasonable level of risk. The current target
allocation percentages for the Company’s U.S. pension
plan assets are
43-47%
for
equity securities,
43-47%
for
fixed income securities and
8-12%
for
real estate and other alternative investments.
The Company’s estimated future benefit payments to
participants, which reflect expected future service, as
appropriate, are anticipated to be paid as follows:
|
Pension
|
Postretirement
|
|||||||||||
|
Fiscal year
|
Benefits | Benefits | Total | |||||||||
| (Dollars in thousands) | ||||||||||||
|
2010
|
$ | 55,520 | $ | 22,167 | $ | 77,687 | ||||||
|
2011
|
53,788 | 21,841 | 75,629 | |||||||||
|
2012
|
56,157 | 21,317 | 77,474 | |||||||||
|
2013
|
56,795 | 20,559 | 77,354 | |||||||||
|
2014
|
57,518 | 19,695 | 77,213 | |||||||||
|
2015-2019
|
318,807 | 85,991 | 404,798 | |||||||||
The Company’s contributions to its pension plans in 2010
are estimated to be approximately $41.7 million. The
Company expects its minimum pension plan funding requirements to
increase in future years as a result of the substantial decline
in market value of the plan assets in 2008.
The Company estimates Medicare subsidy receipts of approximately
$2.2 million, $2.6 million, $2.9 million,
$3.3 million, $3.6 million, and $21.5 million in
fiscal years ending 2010, 2011, 2012, 2013, 2014 and next five
years thereafter, respectively. Accordingly, the Company’s
net contributions to its postretirement plans in 2010 are
estimated to be approximately $19.9 million.
| NOTE 9: | EMPLOYEE INVESTMENT PLANS |
The Company maintained two significant employee investment plans
as of November 29, 2009. The Employee Savings and
Investment Plan of Levi Strauss & Co.
(“ESIP”) and the Levi Strauss & Co. Employee
Long-Term Investment and Savings Plan (“ELTIS”) are
two qualified plans that cover eligible home office employees
and U.S. field employees, respectively.
The Company matches 100% of ESIP participant’s
contributions to all funds maintained under the qualified plan
up to the first 7.5% of eligible compensation. Under ELTIS, the
Company may match 50% of participants’ contributions to all
funds maintained under the qualified plan up to the first 10% of
eligible compensation. Employees are immediately 100% vested in
the Company match. The Company matched eligible employee
77
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER
25, 2007
contributions in ELTIS at 50% for the fiscal years ended
November 29, 2009, November 30, 2008, and
November 25, 2007. The ESIP includes a profit sharing
feature that provides Company contributions of
1.0%-2.5%
of
home office employee eligible pay if the Company meets its
earnings target or exceeds it by 10%. The ELTIS also includes a
profit sharing provision with payments made at the sole
discretion of the board of directors.
Total amounts charged to expense for the years ended
November 29, 2009, November 30, 2008, and
November 25, 2007, were $10.0 million,
$11.0 million and $10.2 million, respectively.
| NOTE 10: | EMPLOYEE INCENTIVE COMPENSATION PLANS |
Annual
Incentive Plan
The Annual Incentive Plan (“AIP”) provides a cash
bonus that is earned based upon business unit and consolidated
financial results as measured against pre-established internal
targets and upon the performance and job level of the
individual. The majority of the Company’s employees are
eligible for this plan. Total amounts charged to expense for the
years ended November 29, 2009, November 30, 2008, and
November 25, 2007, were $51.9 million,
$41.1 million and $42.4 million, respectively. As of
November 29, 2009, and November 30, 2008, the Company
had accrued $55.4 million and $44.3 million,
respectively, for the AIP.
Long-Term
Incentive Plans
2006 Equity incentive plan.
In July 2006, the
Company’s board of directors (the “Board”)
adopted, and the stockholders approved, the 2006 Equity
Incentive Plan (“EIP”). For more information on this
plan, see Note 11.
2005 Long-term incentive plan
(“LTIP”).
The Company established a
long-term cash incentive plan effective at the beginning of
2005. Executive officers are not participants in this plan. The
plan is intended to reward management for its long-term impact
on total Company earnings performance. Performance will be
measured at the end of a three-year period based on the
Company’s performance over the period measured against the
following pre-established targets: (i) the Company’s
target earnings before interest, taxes, depreciation and
amortization (“EBITDA”), excluding business
restructuring charges, for the three-year period; and
(ii) the target compound annual growth rate in the
Company’s earnings before interest, taxes, depreciation and
amortization over the three-year period. Individual target
amounts are set for each participant based on job level. Awards
will be paid out in the quarter following the end of the
three-year period based on Company performance against
objectives. In 2007, additional grants of LTIP awards were made
with the same terms as the 2005 grant with the exception of the
Company’s target earnings measures. The 2007 grants’
earnings measures are the Company’s three-year cumulative
earnings before interest and taxes (“EBIT”), excluding
business restructuring charges, and the EBIT compound annual
growth rate over the three-year period. In 2008 and 2009,
additional grants of LTIP awards were made based on two target
measures: net revenue compound annual growth rate and EBIT
compound annual growth rate, excluding business restructuring
charges, over a three-year period.
The Company recorded expense for the LTIP of $10.2 million,
$4.1 million and $5.1 million for the years ended
November 29, 2009, November 30, 2008, and
November 25, 2007, respectively. As of November 29,
2009, and November 30, 2008, the Company had accrued a
total of $15.9 million and $12.7 million,
respectively, for the LTIP, of which $7.2 million was
recorded in “Accrued salaries, wages and benefits” as
of November 30, 2008, and $15.9 million and
$5.5 million were recorded in “Long-term employee
related benefits” as November 29, 2009, and
November 30, 2008, respectively, on the Company’s
consolidated balance sheets.
78
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER
25, 2007
| NOTE 11: | STOCK-BASED INCENTIVE COMPENSATION PLANS |
The Company recognized stock-based compensation expense of
$9.1 million, $7.3 million and $5.1 million, and
related income tax benefits of $3.3 million,
$2.8 million and $2.0 million, respectively, for the
years ended November 29, 2009, November 30, 2008, and
November 25, 2007. As of November 29, 2009, there was
$12.1 million of total unrecognized compensation cost
related to nonvested awards, which cost is expected to be
recognized on a straight-line basis over a weighted-average
period of 2.2 years. No stock-based compensation cost has
been capitalized in the accompanying consolidated financial
statements.
2006
Equity Incentive Plan
Under the Company’s 2006 Equity Incentive Plan
(“EIP”), a variety of stock awards, including stock
options, restricted stock, restricted stock units
(“RSUs”), and stock appreciation rights
(“SARs”) may be granted. The EIP also provides for the
grant of performance awards in the form of cash or equity. The
aggregate number of shares of common stock authorized for
issuance under the EIP is 700,000 shares. At
November 29, 2009, 693,497 shares remained available
for issuance.
Under the EIP, stock awards have a maximum contractual term of
ten years and generally must have an exercise price at least
equal to the fair market value of the Company’s common
stock on the date the award is granted. The Company’s
common stock is not listed on any stock exchange. Accordingly,
as provided by the EIP, the stock’s fair market value is
determined by the Board based upon a valuation performed by
Evercore. Awards vest according to terms determined at the time
of grant. Unvested stock awards are subject to forfeiture upon
termination of employment prior to vesting, but are subject in
some cases to early vesting upon specified events, including
certain corporate transactions as defined in the EIP or as
otherwise determined by the Board in its discretion. Some stock
awards are payable in either shares of the Company’s common
stock or cash at the discretion of the Board as determined at
the time of grant.
Upon the exercise of a SAR, the participant will receive a share
of common stock in an amount equal to the product of
(i) the excess of the per share fair market value of the
Company’s common stock on the date of exercise over the
exercise price, multiplied by (ii) the number of shares of
common stock with respect to which the SAR is exercised.
Each recipient’s initial grant of RSUs is converted to a
share of common stock six months after discontinuation of
service with the Company for each fully vested RSU held at that
date. Subsequent grants of RSUs provide recipients with the
opportunity to make deferral elections regarding when the
Company’s common stock are to be delivered in settlement of
vested RSUs. If the recipient does not elect to defer the
receipt of common stock, then the RSUs are immediately converted
to common stock upon vesting. The RSUs additionally have
“dividend equivalent rights,” of which dividends paid
by the Company on its common stock are credited by the
equivalent addition of RSUs.
Shares of common stock will be issued from the Company’s
authorized but unissued shares. However, all outstanding shares
of the Company’s common stock are currently deposited in a
voting trust, and consequently, equity holders legally hold
“voting trust certificates,” not stock. Therefore,
during the effective term of the voting trust, voting trust
certificates are issued in lieu of shares of common stock.
Put rights.
Prior to an initial public
offering (“IPO”) of the Company’s common stock, a
participant (or estate or other beneficiary of a deceased
participant) may require the Company to repurchase shares of the
common stock held by the participant at then-current fair market
value (a “put right”). Put rights may be exercised
only with respect to shares of the Company’s common stock
that have been held by a participant for at least six months
following their issuance date, thus exposing the holder to the
risk and rewards of ownership for a reasonable period of time.
79
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER
25, 2007
Accordingly, the SARs and RSUs are classified as equity awards,
and are reported in “Stockholders’ deficit” in
the accompanying consolidated balance sheets
Call rights.
Prior to an IPO, the Company also
has the right to repurchase shares of its common stock held by a
participant (or estate or other beneficiary of a deceased
participant, or other permitted transferee) at then-current fair
market value (a “call right”). Call rights apply to an
award as well as any shares of common stock acquired pursuant to
the award. If the award or common stock is transferred to
another person, that person is subject to the call right. As
with the put rights, call rights may be exercised only with
respect to shares of common stock that have been held by a
participant for at least six months following their issuance
date.
Temporary equity.
Equity-classified awards
that may be settled in cash at the option of the holder are
presented on the balance sheet outside permanent equity.
Accordingly, “Temporary equity” on the face of the
accompanying consolidated balance sheets include the portion of
the intrinsic value of these awards relating to the elapsed
service period since the grant date as well as the fair value of
common stock issued pursuant to the EIP.
SARs.
The Company grants SARs to a small group
of the Company’s senior executives. SAR activity during the
years ended November 29, 2009, and November 30, 2008,
was as follows:
|
Weighted-Average
|
||||||||||||
|
Weighted-Average
|
Remaining
|
|||||||||||
| Units | Exercise Price | Contractual Life (Yrs) | ||||||||||
|
Outstanding at November 25, 2007
|
1,639,856 | $ | 48.11 | |||||||||
|
Granted
|
41,898 | 50.00 | ||||||||||
|
Exercised
|
— | — | ||||||||||
|
Forfeited
|
(256,923 | ) | 48.12 | |||||||||
|
Expired
|
(10,122 | ) | 42.00 | |||||||||
|
Outstanding at November 30, 2008
|
1,414,709 | 48.20 | 4.8 | |||||||||
|
Granted
|
471,455 | 24.90 | ||||||||||
|
Exercised
|
— | — | ||||||||||
|
Forfeited
|
(173,608 | ) | 48.73 | |||||||||
|
Expired
|
— | — | ||||||||||
|
Outstanding at November 29, 2009
|
1,712,556 | $ | 41.73 | 4.7 | ||||||||
|
Vested and expected to vest at November 29, 2009
|
1,626,511 | $ | 40.31 | 4.7 | ||||||||
|
Exercisable at November 29, 2009
|
1,054,253 | $ | 46.15 | 3.8 | ||||||||
The vesting terms of SARs range from
two-and-a-half
to four years, and have maximum contractual lives ranging from
six-and-a-half
to ten years.
80
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER
25, 2007
The weighted-average grant date fair value of SARs were
estimated using a Black-Scholes option valuation model. The
weighted-average grant date fair values and corresponding
weighted-average assumptions used in the model were as follows:
| SARs Granted | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Weighted-average grant date fair value
|
$ | 11.98 | $ | 18.26 | $ | 24.79 | ||||||
|
Weighted-average assumptions:
|
||||||||||||
|
Expected life (in years)
|
4.5 | 4.5 | 5.5 | |||||||||
|
Expected volatility
|
59.2 | % | 39.0 | % | 31.8 | % | ||||||
|
Risk-free interest rate
|
1.9 | % | 2.7 | % | 4.7 | % | ||||||
|
Expected dividend
|
0.4 | % | — | — | ||||||||
RSUs.
The Company grants RSUs to certain
members of its Board of Directors. RSU unit activity during the
years ended November 29, 2009, and November 30, 2008,
was as follows:
|
Weighted-Average
|
||||||||
| Units | Fair Value | |||||||
|
Outstanding at November 25, 2007
|
10,301 | $ | 68.00 | |||||
|
Granted
|
27,159 | 44.50 | ||||||
|
Converted
|
— | — | ||||||
|
Forfeited
|
(3,768 | ) | 53.05 | |||||
|
Outstanding at November 30, 2008
|
33,692 | $ | 50.73 | |||||
|
Granted
|
48,651 | 25.42 | ||||||
|
Converted
|
(6,503 | ) | 49.06 | |||||
|
Forfeited
|
— | — | ||||||
|
Outstanding, vested and expected to vest at November 29,
2009
|
75,840 | $ | 34.63 | |||||
The weighted-average grant date fair value of RSUs were
estimated using the Evercore stock valuation.
RSUs vest in a series of three equal installments at thirteen
months, twenty-four months and thirty-six months following the
date of grant. However, if the recipient’s continuous
service terminates for reason other than cause after the first
vesting installment, but prior to full vesting, then the
remaining unvested portion of the award becomes fully vested as
of the date of such termination.
Total
Shareholder Return Plan
In 2008, the Company established the Total Shareholder Return
Plan (“TSRP”) as a cash-settled plan under the EIP to
provide long-term incentive compensation for the Company’s
senior management. The TSRP provides for grants of units that
vest over a three-year performance period. Upon vesting of a
TSRP unit, the participant will receive a cash payout in an
amount equal to the excess of the per share value of the
Company’s common stock at the end of the three-year
performance period over the per share value at the date of
grant. The common stock values used in the determination of the
TSRP grants and payouts are approved by the Board based on the
Evercore stock valuation. These values do not incorporate any
discount related to the illiquid nature of the Company’s
stock. Unvested units are subject to forfeiture upon termination
of employment, but are subject in some cases to early vesting
upon specified events, as defined in the agreement. The TSRP
units are classified as liability instruments due to their cash
settlement feature and are required to be remeasured to fair
value at the end of each reporting period until settlement.
81
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER
25, 2007
TSRP activity during the years ended November 29, 2009, and
November 30, 2008, was as follows:
|
Weighted-Average
|
||||||||||||
|
Weighted-Average
|
Fair Value
|
|||||||||||
| Units | Exercise Price | At Period End | ||||||||||
|
Outstanding at November 25, 2007
|
— | — | ||||||||||
|
Granted
|
392,250 | $ | 49.77 | |||||||||
|
Exercised
|
— | — | ||||||||||
|
Forfeited
|
(25,200 | ) | 50.00 | |||||||||
|
Outstanding at November 30, 2008
|
367,050 | $ | 49.76 | $ | 7.27 | |||||||
|
Granted
|
694,425 | 24.83 | ||||||||||
|
Exercised
|
— | — | ||||||||||
|
Forfeited
|
(153,400 | ) | 38.94 | |||||||||
|
Outstanding at November 29, 2009
|
908,075 | $ | 32.52 | $ | 8.56 | |||||||
|
Vested and expected to vest at November 29, 2009
|
664,248 | $ | 33.55 | $ | 8.19 | |||||||
The weighted-average fair value of TSRPs at November 29,
2009, and November 30, 2008, was estimated using a
Black-Scholes option valuation model. The weighted-average
assumptions used in the model were as follows
| TSRPs Outstanding at | ||||||||
|
November 29,
|
November 30,
|
|||||||
| 2009 | 2008 | |||||||
|
Weighted-average assumptions:
|
||||||||
|
Expected life (in years)
|
1.8 | 2.1 | ||||||
|
Expected volatility
|
63.5 | % | 66.8 | % | ||||
|
Risk-free interest rate
|
0.6 | % | 1.0 | % | ||||
|
Expected dividend
|
2.0 | % | — | |||||
| NOTE 12: | LONG-TERM EMPLOYEE RELATED BENEFITS |
The liability for long-term employee related benefits was
comprised of the following:
|
November 29,
|
November 30,
|
|||||||
| 2009 | 2008 | |||||||
| (Dollars in thousands) | ||||||||
|
Workers’ compensation
|
$ | 21,185 | $ | 28,722 | ||||
|
Deferred compensation
|
58,706 | 53,023 | ||||||
|
Non-current portion of liabilities for long-term and stock-based
incentive plans
|
17,617 | 5,959 | ||||||
|
Total
|
$ | 97,508 | $ | 87,704 | ||||
82
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER
25, 2007
Workers’
Compensation
The Company maintains a workers’ compensation program in
the United States that provides for statutory benefits arising
from work-related employee injuries. For the years ended
November 29, 2009, November 30, 2008, and
November 25, 2007, the Company reduced its self-insurance
liabilities for workers’ compensation claims by
$8.4 million, $4.3 million and $8.1 million,
respectively. The reductions were primarily driven by continuing
changes in the Company’s estimated future claims payments
as a result of more favorable than projected actual claims
development during the year. As of November 29, 2009, and
November 30, 2008, the current portions of workers’
compensation liabilities were $2.0 million and
$3.0 million, respectively, and were included in
“Accrued salaries, wages and employee benefits” on the
Company’s consolidated balance sheets.
Deferred
Compensation
Deferred compensation plan for executives and outside
directors, established January 1, 2003.
The
Company has a non-qualified deferred compensation plan for
executives and outside directors that was established on
January 1, 2003. The deferred compensation plan obligations
are payable in cash upon retirement, termination of employment
and/or
certain other times in a lump-sum distribution or in
installments, as elected by the participant in accordance with
the plan. As of November 29, 2009, and November 30,
2008, these plan liabilities totaled $16.8 million and
$12.1 million, respectively, of which $1.6 million and
$2.7 million was included in “Accrued salaries, wages
and employee benefits” as of November 29, 2009, and
November 30, 2008, respectively. The Company held funds of
approximately $16.9 million and $13.5 million in an
irrevocable grantor’s rabbi trust as of November 29,
2009, and November 30, 2008, respectively, related to this
plan.
Deferred compensation plan for executives, prior to
January 1, 2003.
The Company also maintains
a non-qualified deferred compensation plan for certain
management employees relating to compensation deferrals for the
period prior to January 1, 2003. The rabbi trust is not a
feature of this plan. As of November 29, 2009, and
November 30, 2008, liabilities for this plan totaled
$53.5 million and $57.1 million, respectively, of
which $10.0 million and $13.6 million, respectively,
was included in “Accrued salaries, wages and employee
benefits” on the Company’s consolidated balance sheets.
Interest earned by the participants in deferred compensation
plans was $10.1 million, $5.0 million and
$8.6 million for the years ended November 29, 2009,
November 30, 2008, and November 25, 2007,
respectively. The charges were included in “Interest
expense” in the Company’s consolidated statements of
income.
| NOTE 13: | RESTRUCTURING LIABILITIES |
The following describes the reorganization initiatives,
including facility closures and organizational changes,
associated with the Company’s restructuring liabilities as
of November 29, 2009, November 30, 2008 and
November 25, 2007. In the table below, “Severance and
employee benefits” relates to items such as severance
packages, out-placement services and career counseling for
employees affected by the closures and other reorganization
initiatives. “Other restructuring costs” primarily
relates to lease loss liability and facility closure costs.
“Asset impairment” relates to the write-down of assets
to their estimated fair value. “Charges” represents
the initial charge related to the restructuring activity.
“Utilization” consists of payments for severance,
employee benefits and other restructuring costs, the effect of
foreign exchange differences and asset impairments.
“Adjustments” includes revisions of estimates related
to severance, employee benefits and other restructuring costs.
83
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER
25, 2007
For the years ended November 29, 2009, November 30,
2008, and November 25, 2007, the Company recognized
restructuring charges, net, of $5.2 million,
$8.2 million and $14.5 million, respectively. The
following tables summarize the restructuring activity for these
years and the related restructuring liabilities balances as of
November 29, 2009, November 30, 2008,
November 25, 2007, and November 26, 2006:
| 2009 Restructuring Activities | ||||||||||||||||||||
|
Liabilities
|
Liabilities
|
|||||||||||||||||||
|
November 30,
|
November 29,
|
|||||||||||||||||||
| 2008 | Charges | Utilization | Adjustments | 2009 | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
|
2009 reorganization
initiatives:
(1)
|
||||||||||||||||||||
|
Severance and employee benefits
|
$ | — | $ | 3,407 | $ | (3,239 | ) | $ | (27 | ) | $ | 141 | ||||||||
|
Other restructuring costs
|
— | 224 | (150 | ) | — | 74 | ||||||||||||||
|
Asset impairment
|
— | 1,325 | (1,325 | ) | — | — | ||||||||||||||
|
Prior reorganization
initiatives:
(2)
|
||||||||||||||||||||
|
Severance and employee benefits
|
1,105 | 2 | (839 | ) | (155 | ) | 113 | |||||||||||||
|
Other restructuring costs
|
4,782 | 506 | (1,693 | ) | (59 | ) | 3,536 | |||||||||||||
|
Total
|
$ | 5,887 | $ | 5,464 | $ | (7,246 | ) | $ | (241 | ) | $ | 3,864 | ||||||||
|
Current portion
|
$ | 2,428 | $ | 1,410 | ||||||||||||||||
|
Long-term portion
|
3,459 | 2,454 | ||||||||||||||||||
|
Total
|
$ | 5,887 | $ | 3,864 | ||||||||||||||||
| (1) | In the first quarter of 2009, the Company decided to close its manufacturing facility in Hungary. This closure resulted in the elimination of the jobs of approximately 549 employees through the fourth quarter of 2009. Charges in 2009 include estimated severance costs and an asset impairment charge reflecting the write-down of building, land and some machinery and equipment to their estimated fair values. The Company does not expect to incur significant additional restructuring charges related to this initiative. | |
| (2) | Prior reorganization initiatives include organizational changes and distribution center closures in 2003-2008, primarily in Europe and the Americas. The restructuring liability at November 29, 2009, of $3.6 million, primarily consists of lease loss liabilities. The Company does not expect to incur significant future additional restructuring charges related to these prior reorganization initiatives. |
| 2008 Restructuring Activities | ||||||||||||||||||||
|
Liabilities
|
Liabilities
|
|||||||||||||||||||
|
November 25,
|
November 30,
|
|||||||||||||||||||
| 2007 | Charges | Utilization | Adjustments | 2008 | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
|
2008 and prior reorganization initiatives
|
$ | 13,405 | $ | 10,110 | $ | (15,766 | ) | $ | (1,862 | ) | $ | 5,887 | ||||||||
Restructuring charges in 2008 relate primarily to severance and
employee benefit costs for activities associated with the
closure of the Company’s manufacturing facility in the
Philippines and distribution facility in Italy and an impairment
charge of $4.2 million in association with the
Company’s closed distribution center in Heusenstamm,
Germany.
| 2007 Restructuring Activities | ||||||||||||||||||||
|
Liabilities
|
Liabilities
|
|||||||||||||||||||
|
November 26,
|
November 25,
|
|||||||||||||||||||
| 2006 | Charges | Utilization | Adjustments | 2007 | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
|
2007 and prior reorganization initiatives
|
$ | 20,747 | $ | 16,705 | $ | (21,800 | ) | $ | (2,247 | ) | $ | 13,405 | ||||||||
84
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER
25, 2007
Restructuring charges in 2007 relate primarily to severance
costs and a $9.0 million impairment charge in association
with the Company’s closure and intent to sell its
distribution center in Heusenstamm, Germany.
| NOTE 14: | COMMITMENTS AND CONTINGENCIES |
Operating
Lease Commitments
The Company is obligated under operating leases for
manufacturing, finishing and distribution facilities, office
space, retail stores and equipment. At November 29, 2009,
obligations for future minimum payments under operating leases
were as follows:
| (Dollars in thousands) | ||||
|
2010
|
$ | 132,490 | ||
|
2011
|
129,062 | |||
|
2012
|
112,111 | |||
|
2013
|
86,421 | |||
|
2014
|
68,838 | |||
|
Thereafter
|
255,481 | |||
|
Total future minimum lease payments
|
$ | 784,403 | ||
The amounts shown have not been reduced by estimated future
income of $7.8 million from non-cancelable subleases and
have not been increased by estimated future operating expense
and property tax escalations. The amounts shown include amounts
payable under leases affected by the Company’s
reorganization initiatives described in Note 13.
During 2009, the Company signed a
10-year
extension for its San Francisco headquarters lease. The
lease, previously scheduled to expire in 2012, will now expire
in 2022, and includes five additional
10-year
renewal options and one
7-year
renewal option. The annual rent during the additional ten years
ranges from $10 million to $13 million.
In general, leases relating to real estate include renewal
options of up to approximately 27 years, except for the
San Francisco headquarters office lease, which contains
multiple renewal options of up to 57 years. Some leases
contain escalation clauses relating to increases in operating
costs. One operating lease provides the Company with an option
to purchase the property after the current lease term at the
then prevailing market value. Rental expense for the years ended
November 29, 2009, November 30, 2008, and
November 25, 2007, was $151.8 million,
$128.2 million and $110.5 million, respectively.
Foreign
Exchange Contracts
The Company uses derivative instruments to manage its exposure
to foreign currencies. The Company is exposed to credit loss in
the event of nonperformance by the counterparties to the forward
foreign exchange contracts. However, the Company believes that
its exposures are appropriately diversified across
counterparties and that these counterparties are creditworthy
financial institutions. Please see Note 5 for additional
information.
Other
Contingencies
Other litigation.
In the ordinary course of
business, the Company has various other pending cases involving
contractual matters, employee-related matters, distribution
questions, product liability claims, trademark infringement and
other matters. The Company does not believe there are any of
these pending legal proceedings that will have a material impact
on its financial condition, results of operations or cash flows.
85
Table of Contents
LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER
25, 2007
| NOTE 15: | DIVIDEND PAYMENT |
In the second quarter of 2009 and 2008, the Company paid cash
dividends of $20 million and $50 million,
respectively. The Company will continue to review its ability to
pay cash dividends at least annually, and dividends may be
declared at the discretion of the board of directors depending
upon, among other factors, our financial condition and if the
Company is in compliance with the terms of our debt agreements.
The dividend payments resulted in a decrease to “Additional
paid-in capital” as the Company is in an accumulated
deficit position.
| NOTE 16: | ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) |
Accumulated other comprehensive income (loss) is summarized
below:
| Translation Adjustments |
Unrealized
|
|||||||||||||||||||||||
|
Pension and
|
Net
|
Foreign
|
Cash
|
Gain (Loss) on
|
||||||||||||||||||||
|
Postretirement
|
Investment
|
Currency
|
Flow
|
Marketable
|
||||||||||||||||||||
| Benefits | Hedges | Translation | Hedges | Securities (5) | Totals | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
|
Accumulated other comprehensive income (loss) at
November 26, 2006
|
$ | (88,176 | ) | $ | (6,407 | ) | $ | (30,359 | ) | $ | (1,369 | ) | $ | 1,532 | $ | (124,779 | ) | |||||||
|
Gross
changes
(1)
|
128,635 | (48,258 | ) | 21,542 | 2,255 | (2,325 | ) | 101,849 | ||||||||||||||||
|
Tax
|
(47,837 | ) | 18,831 | (12,856 | ) | (863 | ) | 891 | (41,834 | ) | ||||||||||||||
|
Other comprehensive income (loss), net of tax
|
80,798 | (29,427 | ) | 8,686 | 1,392 | (1,434 | ) | 60,015 | ||||||||||||||||
|
Adjustment to initially apply ASC Topic
No. 715-20
(2)
|
72,805 | 72,805 | ||||||||||||||||||||||
|
Accumulated other comprehensive income (loss) at
November 25, 2007
|
65,427 | (35,834 | ) | (21,673 | ) | 23 | 98 | 8,041 | ||||||||||||||||
|
Gross
changes
(3)
|
(209,114 | ) | 38,369 | (26,395 | ) | (37 | ) | (6,691 | ) | (203,868 | ) | |||||||||||||
|
Tax
|
75,526 | (14,832 | ) | 4,592 | 14 | 2,612 | 67,912 | |||||||||||||||||
|
Other comprehensive income (loss), net of tax
|
(133,588 | ) | 23,537 | (21,803 | ) | (23 | ) | (4,079 | ) | (135,956 | ) | |||||||||||||
|
Accumulated other comprehensive income (loss) at
November 30, 2008
|
(68,161 | ) | (12,297 | ) | (43,476 | ) | — | (3,981 | ) | (127,915 | ) | |||||||||||||
|
Gross
changes
(4)
|
(178,577 | ) | (59,429 | ) | 21,550 | — | 3,178 | (213,278 | ) | |||||||||||||||
|
Tax
|
69,858 | 22,409 | 331 | — | (1,272 | ) | 91,326 | |||||||||||||||||
|
Other comprehensive income (loss), net of tax
|
(108,719 | ) | (37,020 | ) | 21,881 | — | 1,906 | (121,952 | ) | |||||||||||||||
|
Accumulated other comprehensive income (loss) at
November 29, 2009
|
$ | (176,880 | ) | $ | (49,317 | ) | $ | (21,595 | ) | $ | — | $ | (2,075 | ) | $ | (249,867 | ) | |||||||
| (1) | Amounts in 2007 primarily reflect the impact to the minimum pension liability resulting from the remeasurement of certain pension obligations resulting from the Little Rock, Arkansas, facility closure and the voluntary terminations associated with the 2007 labor agreement. | |
| (2) | Reflects the Company’s adoption of ASC Topic No. 715-20 in 2008, which required recognition of the funded status of pension plans and other postretirement benefit plans on the consolidated balance sheet and to measure plan assets and the benefit obligations as of the balance sheet date. | |
| (3) | Pension and postretirement benefit amounts in 2008 primarily resulted from the actuarial loss recorded in conjunction with the 2008 year-end remeasurement of pension benefit obligations, and was primarily driven by reductions in the fair value of the pension plan assets. See Note 8 for more information. | |
| (4) | Pension and postretirement benefit amounts in 2009 primarily resulted from the actuarial loss recorded in conjunction with the 2009 year-end remeasurement of pension and postretirement benefit obligations, and was primarily due to a decline in discount rates driven by changes in the financial markets during 2009, including a decrease in corporate bond yield indices. See Note 8 for more information. | |
| (5) | Reflects unrealized loss on rabbi trust assets. See Note 12 for more information. |
86
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER
25, 2007
| NOTE 17: | OTHER INCOME (EXPENSE), NET |
The following table summarizes significant components of
“Other income (expense), net” in the Company’s
consolidated statements of income:
| Year Ended | ||||||||||||
|
November 29,
|
November 30,
|
November 25,
|
||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Foreign exchange management (losses)
gains
(1)
|
$ | (69,554 | ) | $ | 64,443 | $ | (22,071 | ) | ||||
|
Foreign currency transaction gains
(losses)
(2)
|
25,651 | (71,752 | ) | 20,608 | ||||||||
|
Interest income
|
2,537 | 5,167 | 12,434 | |||||||||
|
Minority interest
|
1,163 | (1,097 | ) | (909 | ) | |||||||
|
Other
|
1,921 | 1,839 | 4,076 | |||||||||
|
Total other income (expense), net
|
$ | (38,282 | ) | $ | (1,400 | ) | $ | 14,138 | ||||
| (1) | Foreign exchange management losses and gains reflect the impact of foreign currency fluctuation on the Company’s forward foreign exchange contracts. Losses in 2009 were primarily driven by the weakening of the U.S. Dollar against the Euro and the Australian Dollar relative to the contracted rates. Gains in 2008 were primarily driven by the appreciation of the U.S. Dollar against the Euro and the Swedish Krona relative to the contracted rates. | |
| (2) | Foreign currency transaction gains and losses reflect the impact of foreign currency fluctuation on the Company’s foreign currency denominated balances. Gains in 2009 were primarily driven by the appreciation of various foreign currencies against the U.S. Dollar. Losses in 2008 were primarily driven by the weakening of the U.S. Dollar against the Japanese Yen. |
| NOTE 18: | INCOME TAXES |
The Company’s income tax (benefit) expense was
$39.2 million, $138.9 million and $(84.8) million
for fiscal years 2009, 2008 and 2007, respectively. The
Company’s effective tax rate was 20.5%, 37.7% and (22.6)%
for fiscal years 2009, 2008 and 2007, respectively.
The 2009 decrease in income tax expense and effective tax rate
as compared to 2008 was primarily driven by the reduction in
income before income taxes and a $33.2 million tax benefit
relating to the expected reversal of basis differences,
consisting primarily of undistributed earnings, in investments
in certain foreign subsidiaries. During the fourth quarter of
2009, the Company adopted specific plans to remit the prior
undistributed earnings of certain foreign subsidiaries, which
were previously considered permanently reinvested. As a result
of the planned distribution, the Company recognized a deferred
tax asset and a corresponding tax benefit of $33.2 million,
for the foreign tax credits in excess of the associated
U.S. income tax liability that are expected to become
available upon the planned distribution.
The increase in income tax expense and the effective tax rate
for 2008 as compared to 2007 was mostly attributable to the
recognition in 2007 of a tax benefit resulting from a
non-recurring reversal of valuation allowances against the
Company’s deferred tax assets for foreign tax credit
carryforwards, primarily reflecting the Company’s
expectations about future recoverability due to improvements in
business performance and developments in the IRS examination of
the
2000-2002
U.S. federal corporate income tax returns. In connection
with the IRS examination, during the fourth quarter of 2007, the
Company agreed to an adjustment relating to the prepayment of
royalties from its European affiliates which, along with current
year operating income, contributed to the full utilization of
the Company’s U.S. federal net operating loss
carryforward as of November 25, 2007. This net operating
loss carryforward had been a significant piece of negative
evidence that impaired the Company’s ability to utilize
foreign tax credits in prior periods. As a result of these
developments, during the fourth quarter of 2007, the Company
concluded it was more likely than not its foreign tax credits
will be utilized prior to expiration resulting in a reduction in
tax expense of $215.3 million.
87
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER
25, 2007
The U.S. and foreign components of income before income
taxes were as follows
:
| Year Ended | ||||||||||||
|
November 29,
|
November 30,
|
November 25,
|
||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Domestic
|
$ | 47,155 | $ | 196,879 | $ | 210,770 | ||||||
|
Foreign
|
143,933 | 171,290 | 164,856 | |||||||||
|
Total income before income taxes
|
$ | 191,088 | $ | 368,169 | $ | 375,626 | ||||||
Income tax expense (benefit) consisted of the following:
| Year Ended | ||||||||||||
|
November 29,
|
November 30,
|
November 25,
|
||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
U.S. Federal
|
||||||||||||
|
Current
|
$ | 17,949 | $ | 10,333 | $ | 15,292 | ||||||
|
Deferred
|
(11,866 | ) | 77,706 | (156,647 | ) | |||||||
| 6,083 | 88,039 | (141,355 | ) | |||||||||
|
U.S. State
|
||||||||||||
|
Current
|
5,361 | 2,322 | 3,676 | |||||||||
|
Deferred
|
5,077 | 6,507 | 745 | |||||||||
| 10,438 | 8,829 | 4,421 | ||||||||||
|
Foreign
|
||||||||||||
|
Current
|
21,031 | 50,402 | 46,352 | |||||||||
|
Deferred
|
1,661 | (8,386 | ) | 5,823 | ||||||||
| 22,692 | 42,016 | 52,175 | ||||||||||
|
Consolidated
|
||||||||||||
|
Current
|
44,341 | 63,057 | 65,320 | |||||||||
|
Deferred
|
(5,128 | ) | 75,827 | (150,079 | ) | |||||||
|
Total income tax expense (benefit)
|
$ | 39,213 | $ | 138,884 | $ | (84,759 | ) | |||||
88
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER
25, 2007
The Company’s income tax (benefit) expense differed from
the amount computed by applying the U.S. federal statutory
income tax rate of 35% to income before income taxes as follows:
| Year Ended | ||||||||||||||||||||||||
|
November 29,
|
November 30,
|
November 25,
|
||||||||||||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
|
Income tax expense at U.S. federal statutory rate
|
$ | 66,881 | 35.0 | % | $ | 128,859 | 35.0 | % | $ | 131,470 | 35.0 | % | ||||||||||||
|
State income taxes, net of U.S. federal impact
|
6,976 | 3.7 | % | 6,248 | 1.7 | % | 2,354 | 0.6 | % | |||||||||||||||
|
Change in valuation allowance
|
4,090 | 2.1 | % | (1,768 | ) | (0.5 | )% | (206,830 | ) | (55.1 | )% | |||||||||||||
|
Impact of foreign operations
|
(38,703 | ) | (20.3 | )% | 3,647 | 1.0 | % | (21,946 | ) | (5.8 | )% | |||||||||||||
|
Reassessment of tax liabilities due to change in estimate
|
(917 | ) | (0.5 | )% | 1,533 | 0.4 | % | 10,813 | 2.9 | % | ||||||||||||||
|
Other, including non-deductible expenses
|
886 | 0.5 | % | 365 | 0.1 | % | (620 | ) | (0.2 | )% | ||||||||||||||
|
Total
|
$ | 39,213 | 20.5 | % | $ | 138,884 | 37.7 | % | $ | (84,759 | ) | (22.6 | )% | |||||||||||
State income taxes, net of U.S. federal
impact.
This item primarily reflects the current
and deferred state income tax expense, net of related federal
benefit. The increase in this item as compared to 2008 is
primarily driven by a reduction in net state deferred tax assets
resulting from remeasurement at a lower blended tax rate,
primarily due to recently enacted legislation in the State of
California.
The increase in this item in 2008 as compared to 2007 was
primarily due to the recognition in 2007 of a tax benefit of
$6.3 million resulting from the Company’s election to
change the filing methodology of its California state income tax
return.
Change in valuation allowance.
This item
relates to changes in the Company’s expectations regarding
its ability to realize certain deferred tax assets. The Company
evaluates all significant available positive and negative
evidence, including the existence of losses in recent years and
its forecast of future taxable income, in assessing the need for
a valuation allowance. The underlying assumptions the Company
uses in forecasting future taxable income require significant
judgment and take into account the Company’s recent
performance. The following table details the changes in
valuation allowance during the year ended November 29, 2009:
|
Valuation
|
Valuation
|
|||||||||||||||
|
Allowance at
|
Changes in Related
|
Allowance at
|
||||||||||||||
|
November 30,
|
Gross Deferred Tax
|
Charge /
|
November 29,
|
|||||||||||||
| 2008 | Asset | (Release) | 2009 | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
U.S. state net operating loss carryforwards
|
$ | 1,837 | $ | 223 | $ | — | $ | 2,060 | ||||||||
|
Foreign net operating loss carryforwards and other foreign
deferred tax assets
|
56,856 | 9,980 | 4,090 | 70,926 | ||||||||||||
| $ | 58,693 | $ | 10,203 | $ | 4,090 | $ | 72,986 | |||||||||
In 2009, the $4.1 million increase primarily relates to the
recognition of a valuation allowance to offset deferred tax
assets for foreign tax loss carryforwards in certain foreign
jurisdictions where the Company believes that it is more likely
that these losses will expire unused.
In 2008, the $1.8 million release of valuation allowance
was primarily due to changes in judgment regarding the
recoverability of certain foreign deferred tax assets as a
result of business improvements in certain jurisdictions outside
the United States.
89
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER
25, 2007
In 2007, the $206.8 million net release of valuation
allowance was driven by a reversal of $215.3 million
relating to foreign tax credit carryforwards, partially offset
by a net charge of $8.5 million primarily relating to
foreign net operating loss carryforwards and other foreign
deferred tax assets.
Impact of foreign operations.
The
$38.7 million benefit in 2009 was primarily driven by a
$33.2 million tax benefit arising from the expected
reversal of basis differences in certain foreign subsidiaries as
described above.
The $3.6 million expense in 2008 primarily reflects the
impact of the taxation of foreign profits in jurisdictions with
rates that differ from the U.S. federal statutory rate and
additional U.S. income tax imposed upon distributions of
foreign earnings. In 2008, the Company’s effective income
tax rate was not materially impacted by the Company’s
foreign operations due to the Company’s ability to utilize
foreign tax credits.
In 2007, the $21.9 million benefit arose as the 2007
foreign profits were subject to an average rate of tax below the
U.S. statutory rate of 35%; primarily due to a change in
the Company’s expectation regarding its ability to utilize
foreign tax credit carryforwards prior to expiration, no
additional U.S. tax expense was incurred relating to the
expected future repatriation of these earnings.
The Company’s deferred tax assets and deferred tax
liabilities were as follows:
|
November 29,
|
November 30,
|
|||||||
| 2009 | 2008 | |||||||
| (Dollars in thousands) | ||||||||
|
Deferred tax assets (liabilities):
|
||||||||
|
Basis differences in foreign subsidiaries
|
$ | 33,218 | $ | — | ||||
|
Foreign tax credit carryforwards
|
136,591 | 246,021 | ||||||
|
State net operating loss carryforwards
|
12,251 | 14,296 | ||||||
|
Foreign net operating loss carryforwards
|
89,931 | 77,705 | ||||||
|
Employee compensation and benefit plans
|
288,741 | 238,939 | ||||||
|
Prepaid royalties
|
85,073 | — | ||||||
|
Restructuring and special charges
|
15,558 | 14,370 | ||||||
|
Sales returns and allowances
|
31,621 | 34,494 | ||||||
|
Inventory
|
6,719 | 4,680 | ||||||
|
Property, plant and equipment
|
18,516 | 13,562 | ||||||
|
Unrealized gains/losses on investments
|
32,466 | 10,058 | ||||||
|
Other
|
59,335 | 44,760 | ||||||
|
Total gross deferred tax assets
|
810,020 | 698,885 | ||||||
|
Less: Valuation allowance
|
(72,986 | ) | (58,693 | ) | ||||
|
Total net deferred tax assets
|
$ | 737,034 | $ | 640,192 | ||||
|
Current
|
||||||||
|
Deferred tax assets
|
$ | 139,811 | $ | 115,954 | ||||
|
Valuation allowance
|
(4,303 | ) | (1,831 | ) | ||||
|
Total current deferred tax assets
|
$ | 135,508 | $ | 114,123 | ||||
|
Long-term
|
||||||||
|
Deferred tax assets
|
$ | 670,209 | $ | 582,931 | ||||
|
Valuation allowance
|
(68,683 | ) | (56,862 | ) | ||||
|
Total long-term deferred tax assets
|
$ | 601,526 | $ | 526,069 | ||||
90
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER
25, 2007
Basis differences in foreign subsidiaries.
The
Company recognizes deferred taxes with respect to basis
differences in its investments in foreign subsidiaries that are
expected to reverse in the foreseeable future. These basis
differences exist primarily due to undistributed foreign
earnings. During the fourth quarter of 2009, management changed
its permanent reinvestment assertion with respect to the
undistributed earnings of certain foreign subsidiaries as
specific plans were adopted to distribute these earnings.
Accordingly, as of November 29, 2009, the Company
recognized a $33.2 million deferred tax asset for the
foreign tax credits that would become available in excess of the
associated U.S. federal income tax liability relating to
the planned distribution.
Foreign tax credit carryforwards.
As of
November 29, 2009, the Company had a gross deferred tax
asset for foreign tax credit carryforwards of
$136.6 million. This asset decreased from
$246.0 million in the prior year period primarily due to
the utilization of foreign tax credits in the 2009
U.S. federal income tax return resulting from the receipt
in 2009 of $229.1 million of advanced royalty payments
described more fully below. The foreign tax credit carryforward
of $136.6 million existing at November 29, 2009, is
subject to expiration from 2012 to 2017, if not utilized.
State net operating loss carryforwards.
As of
November 29, 2009, the Company had a gross deferred tax
asset of $12.3 million for state net operating loss
carryforwards of approximately $249.2 million, partially
offset by a valuation allowance of $2.1 million to reduce
this gross asset to the amount that will more likely than not be
realized. These loss carryforwards are subject to expiration
from 2010 to 2029, if not utilized.
Foreign net operating loss carryforwards.
As
of November 29, 2009, cumulative foreign operating losses
of $323.2 million generated by the Company were available
to reduce future taxable income. Approximately
$181.8 million of these operating losses expire between the
years 2011 and 2020. The remaining $141.4 million are
available as indefinite carryforwards under applicable tax law.
The gross deferred tax asset for the cumulative foreign
operating losses of $89.9 million is partially offset by a
valuation allowance of $69.7 million to reduce this gross
asset to the amount that will more likely than not be realized.
Prepaid royalties.
During the fourth quarter
of 2009, the Company accelerated the payment of
$229.1 million of royalties from its European operations
and included this amount in its U.S. federal income tax
return. This prepayment resulted in the recognition of a
deferred tax asset of $85.1 million.
Uncertain income tax positions.
As of
November 29, 2009, the Company’s total gross amount of
unrecognized tax benefits was $160.5 million, of which
$92.0 million would impact the Company’s effective tax
rate, if recognized. As of November 30, 2008, the
Company’s total amount of unrecognized tax benefits was
$167.2 million, of which $104.6 million would impact
the Company’s effective tax rate, if recognized. The
reduction in gross unrecognized tax benefits was primarily due
to the resolution of transfer pricing agreements with certain
foreign tax jurisdictions. These agreements were consistent with
management’s expectations in prior periods and have not
materially impacted the Company’s effective income tax rate
or its income tax provision in the current year.
91
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER
25, 2007
The following table reflects the changes to the Company’s
unrecognized tax benefits for the year ended November 29,
2009 and November 30, 2008:
| (Dollars in thousands) | ||||
|
Gross unrecognized tax benefits as of November 26, 2007
(Adoption date of relevant guidance in ASC 740)
|
$ | 178,417 | ||
|
Increases related to current year tax positions
|
7,515 | |||
|
Increases related to tax positions from prior years
|
4,227 | |||
|
Decreases related to tax positions from prior years
|
(10,518 | ) | ||
|
Settlement with tax authorities
|
(1,290 | ) | ||
|
Lapses of statutes of limitation
|
(2,963 | ) | ||
|
Other, including foreign currency translation
|
(8,213 | ) | ||
|
Gross unrecognized tax benefits as of November 30, 2008
|
167,175 | |||
|
Increases related to current year tax positions
|
11,188 | |||
|
Increases related to tax positions from prior years
|
8,222 | |||
|
Decreases related to tax positions from prior years
|
(2,804 | ) | ||
|
Settlement with tax authorities
|
(16,363 | ) | ||
|
Lapses of statutes of limitation
|
(7,344 | ) | ||
|
Other, including foreign currency translation
|
464 | |||
|
Gross unrecognized tax benefits as of November 29, 2009
|
$ | 160,538 | ||
The Company believes that it is reasonably possible that
unrecognized tax benefits could decrease by as much as
$100.2 million within the next twelve months, due primarily
to the potential resolution of a refund claim with the State of
California. However, at this point it is not possible to
estimate whether the Company will realize any significant income
tax benefit upon the resolution of this claim.
As of November 29, 2009 and November 30, 2008, accrued
interest and penalties primarily relating to
non-U.S. jurisdictions
were $16.8 million and $15.6 million, respectively.
The Company’s income tax returns are subject to examination
in the U.S. federal and state jurisdictions and numerous
foreign jurisdictions. The IRS examination of the Company’s
2003-2005
U.S. federal income tax returns is still in progress during
2009. The following table summarizes the tax years that are
either currently under audit or
92
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER
25, 2007
remain open and subject to examination by the tax authorities in
the major jurisdictions in which the Company operates:
|
Jurisdiction
|
Open Tax Years | |
|
U.S. federal
|
2003-2009 | |
|
California
|
1986-2009 | |
|
Belgium
|
2007-2009 | |
|
United Kingdom
|
2007-2009 | |
|
Spain
|
2005-2009 | |
|
Mexico
|
2004-2009 | |
|
Canada
|
2003-2009 | |
|
Hong Kong
|
2003-2009 | |
|
Italy
|
2004-2009 | |
|
France
|
2006-2009 | |
|
Turkey
|
2005-2009 | |
|
Japan
|
2004-2009 |
| NOTE 19: | RELATED PARTIES |
Directors
Robert D. Haas, a director and Chairman Emeritus of the Company,
is the President of the Levi Strauss Foundation, which is not a
consolidated entity of the Company. During 2009, 2008 and 2007,
the Company donated $5.5 million, $14.8 million and
$0.7 million, respectively, to the Levi Strauss Foundation.
Stephen C. Neal, a director, is chairman of the law firm Cooley
Godward Kronish LLP. The firm provided legal services to the
Company in 2009 and to the Company and Human Resources Committee
of the Company’s Board of Directors in 2008 and 2007, for
which the Company paid fees of approximately $0.6 million,
$0.2 million and $0.2 million, respectively.
Vanessa J. Castagna, a director of the Company since October
2007, is a former employee of Mervyns LLC, a position she left
in February 2007. The Company had net sales to Mervyns LLC in
the amount of approximately $144 million from the beginning
of fiscal 2006 through the first quarter of 2007, after which
Ms. Castagna was no longer an employee of Mervyns LLC.
| NOTE 20: | BUSINESS SEGMENT INFORMATION |
The Company manages its business according to three regional
segments: the Americas, Europe and Asia Pacific. Each regional
segment is managed by a senior executive who reports directly to
the chief operating decision maker: the Company’s chief
executive officer. The Company’s management, including the
chief operating decision maker, manages business operations,
evaluates performance and allocates resources based on the
regional segments’ net revenues and operating income. The
Company reports net trade receivables and inventories by segment
as that information is used by the chief operating decision
maker in assessing segment performance. The Company does not
report its other assets by segment as that information is not
used by the chief operating decision maker in assessing segment
performance.
93
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER
25, 2007
Business segment information for the Company was as follows:
| Year Ended | ||||||||||||
|
November 29,
|
November 30,
|
November 25,
|
||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Net revenues:
|
||||||||||||
|
Americas
|
$ | 2,357,662 | $ | 2,476,370 | $ | 2,581,271 | ||||||
|
Europe
|
1,042,131 | 1,195,596 | 1,099,674 | |||||||||
|
Asia Pacific
|
705,973 | 728,948 | 681,154 | |||||||||
|
Corporate
|
— | — | (1,170 | ) | ||||||||
|
Total net revenues
|
$ | 4,105,766 | $ | 4,400,914 | $ | 4,360,929 | ||||||
|
Operating income:
|
||||||||||||
|
Americas
|
$ | 346,329 | $ | 346,855 | $ | 403,252 | ||||||
|
Europe
|
154,839 | 257,941 | 236,904 | |||||||||
|
Asia Pacific
|
90,967 | 99,526 | 95,262 | |||||||||
|
Regional operating income
|
592,135 | 704,322 | 735,418 | |||||||||
|
Corporate:
|
||||||||||||
|
Restructuring charges, net
|
5,224 | 8,248 | 14,458 | |||||||||
|
Postretirement benefit plan curtailment gains
|
467 | (5,944 | ) | (52,763 | ) | |||||||
|
Other corporate staff costs and expenses
|
208,356 | 176,946 | 132,682 | |||||||||
|
Corporate expenses
|
214,047 | 179,250 | 94,377 | |||||||||
|
Total operating income
|
378,088 | 525,072 | 641,041 | |||||||||
|
Interest expense
|
(148,718 | ) | (154,086 | ) | (215,715 | ) | ||||||
|
Loss on early extinguishment of debt
|
— | (1,417 | ) | (63,838 | ) | |||||||
|
Other income (expense), net
|
(38,282 | ) | (1,400 | ) | 14,138 | |||||||
|
Income before income taxes
|
$ | 191,088 | $ | 368,169 | $ | 375,626 | ||||||
| Year Ended | ||||||||||||
|
November 29,
|
November 30,
|
November 25,
|
||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Depreciation and amortization expense:
|
||||||||||||
|
Americas
|
$ | 44,492 | $ | 41,580 | $ | 33,238 | ||||||
|
Europe
|
21,599 | 18,250 | 19,315 | |||||||||
|
Asia Pacific
|
11,238 | 11,227 | 7,833 | |||||||||
|
Corporate
|
7,274 | 6,926 | 7,128 | |||||||||
|
Total depreciation and amortization expense
|
$ | 84,603 | $ | 77,983 | $ | 67,514 | ||||||
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER
25, 2007
| November 29, 2009 | ||||||||||||||||||||
|
Asia
|
Consolidated
|
|||||||||||||||||||
| Americas | Europe | Pacific | Unallocated | Total | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
|
Assets:
|
||||||||||||||||||||
|
Trade receivables, net
|
$ | 312,110 | $ | 134,428 | $ | 87,416 | $ | 18,298 | $ | 552,252 | ||||||||||
|
Inventories
|
208,859 | 150,639 | 90,181 | 1,593 | 451,272 | |||||||||||||||
|
All other assets
|
— | — | — | 1,985,857 | 1,985,857 | |||||||||||||||
|
Total assets
|
$ | 2,989,381 | ||||||||||||||||||
| November 30, 2008 | ||||||||||||||||||||
|
Asia
|
Consolidated
|
|||||||||||||||||||
| Americas | Europe | Pacific | Unallocated | Total | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
|
Assets:
|
||||||||||||||||||||
|
Trade receivables, net
|
$ | 309,904 | $ | 132,328 | $ | 83,538 | $ | 20,704 | $ | 546,474 | ||||||||||
|
Inventories
|
277,910 | 159,861 | 105,379 | (476 | ) | 542,674 | ||||||||||||||
|
All other assets
|
— | — | — | 1,687,727 | 1,687,727 | |||||||||||||||
|
Total assets
|
$ | 2,776,875 | ||||||||||||||||||
Geographic information for the Company was as follows:
| Year Ended | ||||||||||||
|
November 29,
|
November 30,
|
November 25,
|
||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Net revenues:
|
||||||||||||
|
United States
|
$ | 2,107,055 | $ | 2,197,968 | $ | 2,321,561 | ||||||
|
Foreign countries
|
1,998,711 | 2,202,946 | 2,039,368 | |||||||||
|
Total net revenues
|
$ | 4,105,766 | $ | 4,400,914 | $ | 4,360,929 | ||||||
|
November 29,
|
November 30,
|
November 25,
|
||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Deferred tax assets:
|
||||||||||||
|
United States
|
$ | 677,245 | $ | 578,653 | $ | 585,182 | ||||||
|
Foreign countries
|
59,789 | 61,539 | 59,126 | |||||||||
|
Total deferred tax assets
|
$ | 737,034 | $ | 640,192 | $ | 644,308 | ||||||
|
November 29,
|
November 30,
|
November 25,
|
||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (Dollars in thousands) | ||||||||||||
|
Long-lived assets:
|
||||||||||||
|
United States
|
$ | 270,344 | $ | 273,761 | $ | 300,513 | ||||||
|
Foreign countries
|
181,023 | 155,836 | 164,642 | |||||||||
|
Total long-lived assets
|
$ | 451,367 | $ | 429,597 | $ | 465,155 | ||||||
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LEVI
STRAUSS & CO. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
FOR THE
YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER
25, 2007
| NOTE 21: | QUARTERLY FINANCIAL DATA (UNAUDITED) |
Set forth below are the consolidated statements of operations
for the first, second, third and fourth quarters of 2009 and
2008.
|
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
|
Year Ended November 29, 2009
|
Quarter | Quarter | Quarter | Quarter | ||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
Net sales
|
$ | 931,254 | $ | 886,519 | $ | 1,021,829 | $ | 1,183,252 | ||||||||
|
Licensing revenue
|
20,210 | 17,999 | 18,571 | 26,132 | ||||||||||||
|
Net revenues
|
951,464 | 904,518 | 1,040,400 | 1,209,384 | ||||||||||||
|
Cost of goods sold
|
506,343 | 489,141 | 545,985 | 590,892 | ||||||||||||
|
Gross profit
|
445,121 | 415,377 | 494,415 | 618,492 | ||||||||||||
|
Selling, general and administrative expenses
|
336,720 | 357,889 | 394,838 | 500,646 | ||||||||||||
|
Restructuring charges, net of reversals
|
2,361 | 1,379 | 1,203 | 281 | ||||||||||||
|
Operating income
|
106,040 | 56,109 | 98,374 | 117,565 | ||||||||||||
|
Interest expense
|
(34,690 | ) | (40,027 | ) | (37,931 | ) | (36,070 | ) | ||||||||
|
Other income (expense), net
|
3,068 | (20,476 | ) | (6,393 | ) | (14,481 | ) | |||||||||
|
Income before taxes
|
74,418 | (4,394 | ) | 54,050 | 67,014 | |||||||||||
|
Income tax expense (benefit)
|
26,349 | (266 | ) | 13,347 | (217 | ) | ||||||||||
|
Net income (loss)
|
$ | 48,069 | $ | (4,128 | ) | $ | 40,703 | $ | 67,231 | |||||||
|
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
|
Year Ended November 30, 2008
|
Quarter | Quarter | Quarter | Quarter | ||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
Net sales
|
$ | 1,060,920 | $ | 915,090 | $ | 1,088,384 | $ | 1,238,681 | ||||||||
|
Licensing revenue
|
21,948 | 21,247 | 22,409 | 32,235 | ||||||||||||
|
Net revenues
|
1,082,868 | 936,337 | 1,110,793 | 1,270,916 | ||||||||||||
|
Cost of goods sold
|
537,669 | 498,938 | 578,294 | 646,211 | ||||||||||||
|
Gross profit
|
545,199 | 437,399 | 532,499 | 624,705 | ||||||||||||
|
Selling, general and administrative expenses
|
356,431 | 385,484 | 385,262 | 479,305 | ||||||||||||
|
Restructuring charges, net of reversals
|
2,222 | 156 | 3,344 | 2,526 | ||||||||||||
|
Operating income
|
186,546 | 51,759 | 143,893 | 142,874 | ||||||||||||
|
Interest expense
|
(40,680 | ) | (41,070 | ) | (37,305 | ) | (35,031 | ) | ||||||||
|
Loss on early extinguishment of debt
|
(30 | ) | (1,488 | ) | 101 | — | ||||||||||
|
Other income (expense), net
|
3,909 | (8,108 | ) | 14,216 | (11,417 | ) | ||||||||||
|
Income before taxes
|
149,745 | 1,093 | 120,905 | 96,426 | ||||||||||||
|
Income tax expense
|
52,638 | 392 | 51,740 | 34,114 | ||||||||||||
|
Net income
|
$ | 97,107 | $ | 701 | $ | 69,165 | $ | 62,312 | ||||||||
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Table of Contents
| Item 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
|
|
CONTROLS AND PROCEDURES |
Evaluation
of disclosure controls and procedure
As of November 29, 2009, we updated our evaluation of the
effectiveness of the design and operation of our disclosure
controls and procedures for purposes of filing reports under the
Securities and Exchange Act of 1934 (the “Exchange
Act”). This controls evaluation was done under the
supervision and with the participation of management, including
our chief executive officer and our chief financial officer. Our
chief executive officer and our chief financial officer
concluded that at November 29, 2009, our disclosure
controls and procedures (as defined in
Rule 13(a)-15(e)
and 15(d)-15(e) under the Exchange Act) are effective to provide
reasonable assurance that information that we are required to
disclose in the reports that we file or submit to the SEC is
recorded, processed, summarized and reported with the time
periods specified in the SEC’s rules and forms. Our
disclosure controls and procedures are designed to ensure that
such information is accumulated and communicated to our
management, including our chief executive officer and chief
financial officer, as appropriate to allow timely decisions
regarding required disclosure.
Management’s
annual report on internal control over financial
reporting
We maintain a system of internal control over financial
reporting that is designed to provide reasonable assurance that
our books and records accurately reflect our transactions and
that our established policies and procedures are followed.
Because of inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined
in
Rule 13a-15(f)
under the Exchange Act). Our management assessed the
effectiveness of our internal control over financial reporting
and concluded that our internal control over financial reporting
was effective as of November 29, 2009. In making this
assessment, our management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”) in
Internal Control — Integrated
Framework
.
This Annual Report does not include an attestation report of our
registered public accounting firm regarding internal control
over financial reporting. Management’s report was not
subject to attestation by the registered public accounting firm
pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide management’s report in
this Annual Report. Under those rules, we will not be required
to include the attestation report until the 2010 fiscal year
end. We expect to meet these requirements.
Changes
in Internal Controls
We maintain a system of internal control over financial
reporting that is designed to provide reasonable assurance that
our books and records accurately reflect our transactions and
that our established policies and procedures are followed. There
were no changes to our internal control over financial reporting
during our last fiscal quarter that have materially affected, or
are reasonably likely to materially affect, our internal control
over financial reporting.
| Item 9B. | OTHER INFORMATION |
On February 4, 2010, the Board of Directors appointed
Richard L. Kauffman as its Chairman. Mr. Kauffman had been
Interim Chairman since December 3, 2009. He is also a
member of the Board’s Audit Committee and Chairman of the
Board’s Finance Committee.
As Chairman, Mr. Kauffman will be eligible to receive an
annual retainer in the amount of $200,000, 50% of which is to be
paid in cash and 50% of which is to be paid in the form of
restricted stock units (“RSUs”), resulting in an
initial Chairman RSU grant of 1,142 RSUs. In addition, he will
receive an office and related administrative support. He is also
eligible to receive the standard non-employee director
compensation, which consists of an annual cash retainer fee of
$100,000 and annual equity award based on a fixed dollar grant
value of $100,000, as well as an annual $10,000 retainer fee as
Chair of the Finance Committee for as long as he retains that
position.
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Table of Contents
| Item 10. | DIRECTORS AND EXECUTIVE OFFICERS |
The following provides information about our directors and
executive officers as of February 4, 2010.
|
Name
|
Age
|
Position
|
||||
|
Richard L.
Kauffman
(2)(3)
|
54 | Chairman of the Board of Directors | ||||
|
R. John Anderson
|
58 | Director, President and Chief Executive Officer | ||||
|
Robert D.
Haas
(1)(2)
|
67 | Director, Chairman Emeritus | ||||
|
Vanessa J.
Castagna
(1)(4)
|
60 | Director | ||||
|
Peter A.
Georgescu
(3)(4)
|
70 | Director | ||||
|
Peter E. Haas
Jr.
(1)(4)
|
62 | Director | ||||
|
Leon J.
Level
(2)(3)
|
69 | Director | ||||
|
Stephen C.
Neal
(2)(4)
|
60 | Director | ||||
|
Patricia Salas
Pineda
(1)(4)
|
58 | Director | ||||
|
Beng (Aaron) Keong Boey
|
48 | Senior Vice President and President, Levi Strauss Asia Pacific | ||||
|
Armin Broger
|
48 | Senior Vice President and President, Levi Strauss Europe | ||||
|
Robert L. Hanson
|
46 | Senior Vice President and President, Levi Strauss Americas | ||||
|
Blake Jorgensen
|
50 | Executive Vice President and Chief Financial Officer | ||||
|
Jaime Cohen Szulc
|
47 | Senior Vice President and Chief Marketing Officer | ||||
| (1) | Member, Human Resources Committee. | |
| (2) | Member, Finance Committee. | |
| (3) | Member, Audit Committee. | |
| (4) | Member, Nominating and Governance Committee. |
Members of the Haas family are descendants of the family of our
founder, Levi Strauss. Peter E. Haas Jr. is a cousin of Robert
D. Haas.
Richard L. Kauffman
, a director since
October 1, 2008, was Interim Chairman as of
December 3, 2009, and became Chairman of the Board on
February 4, 2010. Mr. Kauffman is currently the Chief
Executive Officer and President of Good Energies, Inc. a global
investment firm focusing on renewable energy and energy
efficiencies, a position he has held since 2006. Previously,
Mr. Kauffman was a Managing Director of Goldman Sachs,
where he also held positions as the chairman of the Global
Financing Group and a member of the firm’s Partnership
Committee, Commitments Committee and Investment Banking
Division Operating Committee. Before joining Goldman Sachs
in 2004, he was a vice chairman of Morgan Stanley’s
Institutional Securities Business and co-head of its Banking
Department and, prior to that, vice chairman and a member of the
European Executive Committee of Morgan Stanley International
since 1993. Mr. Kauffman is also currently a director of
Q-Cells AG, and sits on the boards of several nonprofit
organizations, including The Brookings Institution.
R. John Anderson
, our President and Chief Executive
Officer since November 2006, previously served as Executive Vice
President and Chief Operating Officer since July 2006, President
of our Global Supply Chain Organization since 2004 and Senior
Vice President and President of our Asia Pacific region since
1998. He joined us in 1979. Mr. Anderson served as General
Manager of Levi Strauss Canada and as President of Levi Strauss
Canada and Latin America from 1996 to 1998. He has held a series
of merchandising positions with us in Europe and the United
States, including Vice President, Merchandising and Product
Development for the Levi’s brand in 1995. Mr. Anderson
also served as interim President of Levi Strauss Europe from
2003 to 2004.
Robert D. Haas,
a director since 1980, was named Chairman
Emeritus in February 2008. He served as Chairman of our Board
from 1989 until February 2008. Mr. Haas joined us in 1973
and served in a variety of marketing, planning and operating
positions including serving as our Chief Executive Officer from
1984 to 1999.
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Table of Contents
Vanessa J. Castagna,
a director since 2007, led
Mervyns LLC department stores as its executive chairwoman of the
board from 2005 until early 2007. Prior to Mervyns LLC,
Ms. Castagna served as chairman and chief executive officer
of JC Penney Stores, Catalog and Internet from 2002 through
2004. She joined JC Penney in 1999 as chief operating officer,
and was both president and Chief Operating Officer of JC Penney
Stores, Catalog and Internet in 2001. Ms. Castagna is
currently a director of SpeedFC and Carter’s Inc.
Peter A. Georgescu
, a director since 2000, is Chairman
Emeritus of Young & Rubicam Inc., a global advertising
agency. Prior to his retirement in 2000, Mr. Georgescu
served as Chairman and Chief Executive Officer of
Young & Rubicam since 1993 and, prior to that, as
President of Y&R Inc. from 1990 to 1993, Y&R
Advertising from 1986 to 1990 and President of its
Young & Rubicam international division from 1982 to
1986. Mr. Georgescu is currently a director of
International Flavors & Fragrances Inc.
Peter E. Haas Jr.
, a director since 1985, is a director
or trustee of each of the Levi Strauss Foundation, Red Tab
Foundation, Joanne and Peter Haas Jr. Fund, Walter and Elise
Haas Fund and the Novato Youth Center Honorary Board.
Mr. Haas was one of our managers from 1972 to 1989. He was
Director of Product Integrity of The Jeans Company, one of our
former operating units, from 1984 to 1989. He served as Director
of Materials Management for Levi Strauss USA in 1982 and Vice
President and General Manager in the Menswear Division in 1980.
Leon J. Level
, a director since 2005, is a former Chief
Financial Officer and director of Computer Sciences Corporation,
a leading global information technology services company.
Mr. Level held ascending and varied financial management
and executive positions at Computer Sciences Corporation from
1989 to 2006 and previously at Unisys Corporation (Corporate
Vice President, Treasurer and Chairman of Unisys Finance
Corporation), Burroughs Corporation (Vice President, Treasurer),
The Bendix Corporation (Executive Director and Assistant
Corporate Controller) and Deloitte, Haskins & Sells
(now Deloitte & Touche). Mr. Level is also
currently a director of UTi Worldwide Inc.
Stephen C. Neal,
a director since 2007, is the
chairman of the law firm Cooley Godward Kronish LLP. He was also
chief executive officer of the firm until January 1, 2008.
In addition to his extensive experience as a trial lawyer on a
broad range of corporate issues, Mr. Neal has represented
and advised numerous boards of directors, special committees of
boards and individual directors on corporate governance and
other legal matters. Prior to joining Cooley Godward in 1995 and
becoming CEO in 2001, Mr. Neal was a partner of the law
firm Kirkland & Ellis.
Patricia Salas Pineda
, a director since 1991, is
currently Group Vice President, National Philanthropy and the
Toyota USA Foundation for Toyota Motor North America, Inc., an
affiliate of one of the world’s largest automotive firms.
Ms. Pineda joined Toyota Motor North America, Inc. in
September 2004 as Group Vice President of Corporate
Communications and General Counsel. Prior to that,
Ms. Pineda was Vice President of Legal, Human Resources and
Government Relations and Corporate Secretary of New United Motor
Manufacturing, Inc. with which she was associated since 1984.
She is currently a director of the Congressional Hispanic Caucus
Institute and a member of the board of advisors of Catalyst.
Beng (Aaron) Keong Boey
became Senior Vice President and
President, Levi Strauss Asia Pacific in February 2009 after
serving as interim president since October 2008. Previously,
Mr. Boey was Regional Managing Director in our Asia Pacific
business from 2005. Prior to joining LS&Co., Mr. Boey
was Regional Managing Director for Jacuzzi, Inc. from 2003 until
he joined us.
Armin Broger
joined us as Senior Vice President and
President, Levi Strauss Europe in 2007. Prior to joining us,
Mr. Broger was Chief Executive Officer for the European
business of 7 For All Mankind, a jeans marketer, from 2004 to
2006. From 2000 to 2004, he was the Chief Operating Officer in
Europe of Tommy Hilfiger, an apparel marketer. Mr. Broger
has also held positions with Diesel, The Walt Disney Company and
Bain & Company.
Robert L. Hanson
is our Senior Vice President and
President of Levi Strauss Americas. He became president of the
North America business in 2006. Previously, Mr. Hanson was
President and Commercial General Manager of the
U.S. Levi’s
®
brand and U.S. Supply Chain Services since 2005, and
President and General Manager of the
U.S. Levi’s
®
brand since 2001. Mr. Hanson was President of the
Levi’s
®
brand in Europe from 1998 to 2000. He began his career with us
in 1988, holding executive-level advertising, marketing and
business development positions in both the
Levi’s
®
and
Dockers
®
brands in the United States before taking his first position in
Europe.
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Table of Contents
Blake Jorgensen
, joined us as Executive Vice President
and Chief Financial Officer in July 2009. Prior to joining us,
Mr. Jorgensen was Chief Financial Officer of Yahoo! Inc.,
an internet services company from June 2007 to June 2009. Prior
to joining Yahoo!, Mr. Jorgensen was the Chief Operating
Officer and
Co-Director
of Investment Banking at Thomas Weisel Partners, which he
co-founded in 1998. From December 1998 to January 2002,
Mr. Jorgensen served as a Partner and Director of
Private Placement at Thomas Weisel Partners. From
December 1996 to September 1998, Mr. Jorgensen was a
Managing Director and Chief of Staff for the CEO and Executive
Committee of Montgomery Securities and a Principal in the
Corporate Finance Department of Montgomery Securities.
Previously, Mr. Jorgensen worked as a management consultant
at MAC Group/Gemini Consulting and Marakon Associates.
Jaime Cohen Szulc
joined us as Chief Marketing Officer on
August 31, 2009. He was previously employed by the Eastman
Kodak Company in a variety of roles starting in 1998, including
Managing Director, Global Customer Operations and Chief
Operating Officer for the Consumer Digital Group; Chairman,
Eastman Kodak S.A., General Manager of the Consumer Digital,
Film and Photofinishing Groups, and Corporate Vice President,
EAME Region; and General Manager, Consumer and Professional
Imaging and Digital and Film Imaging Systems divisions, and
Corporate Vice President, Americas Region.
Our Board
of Directors
Our board of directors currently has nine members. Our board is
divided into three classes with directors elected for
overlapping three-year terms. The term for directors in
Class III (Mr. Anderson and Ms. Pineda) will end
at our annual stockholders’ meeting in 2010. The term for
directors in Class I (Mr. Georgescu, Mr. R.D.
Haas, Mr. Level and Mr. Neal) will end at our annual
stockholders’ meeting in 2011. The term for directors in
Class II (Ms. Castagna, Mr. P. E. Haas Jr. and
Mr. Kauffman) will end at our annual stockholders’
meeting in 2012.
Committees.
Our board of directors has four
committees.
| • | 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 seven meetings during 2009. |
— Members: Mr. Level (Chair), Mr. Georgescu
and Mr. Kauffman.
Mr. Level is our audit committee financial expert as
currently defined under SEC rules. We believe that the
composition of our audit committee meets the criteria for
independence under, and the functioning of our audit committee
complies with the applicable requirements of, the Sarbanes-Oxley
Act and SEC rules and regulations.
| • | 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. The finance committee held five meetings in 2009 and otherwise acted by unanimous written consent. |
— Members: Mr. Kauffman (Chair), Mr. R.D.
Haas, Mr. Level and Mr. Neal.
| • | 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 |
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Table of Contents
| processes for making compensation decisions and approves (or, in the case of our chief executive officer, recommends to the Board) the annual and long term compensation for our executive officers, including our long term incentive compensation plans. The committee also reviews our succession planning, diversity and benefit plans. The human resources committee held three meetings in 2009. |
— Members: Ms. Pineda (Chair),
Ms. Castagna, Mr. P.E. Haas Jr. and Mr. R.D. Haas.
| • | 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, reporting and making recommendations to the board concerning corporate governance matters, reviewing the performance of our chairman and chief executive officer and determining director compensation. The nominating and governance committee held one meeting in 2009. |
— Members: Mr. Georgescu (Chair),
Ms. Castagna, Mr. Neal, Mr. P.E. Haas Jr. and
Ms. Pineda.
Worldwide
Code of Business Conduct
We have a Worldwide Code of Business Conduct which applies to
all of our directors and employees, including the chief
executive officer, the chief financial officer, the controller
and our other senior financial officers. The Worldwide Code of
Business Conduct covers a number of topics including:
| • | accounting practices and financial communications; | |
| • | conflicts of interest; | |
| • | confidentiality; | |
| • | corporate opportunities; | |
| • | insider trading; and | |
| • | compliance with laws. |
A copy of the Worldwide Code of Business Conduct is an exhibit
to this Annual Report on
Form 10-K.
| Item 11. | EXECUTIVE COMPENSATION |
COMPENSATION
DISCUSSION AND ANALYSIS
LS&Co.’s compensation policies and programs are
designed to support the achievement of our strategic business
plans by attracting, retaining and motivating exceptional
talent. Our ability to compete effectively in the marketplace
depends on the knowledge, capabilities and integrity of our
leaders. Our compensation programs help create a
high-performance, outcome-driven and principled culture by
holding leaders accountable for delivering results, developing
our employees and exemplifying our core values of empathy,
originality, integrity and courage.
The Human Resources Committee of the Board of Directors (the
“HR Committee”) is responsible for fulfilling the
Board’s obligation to oversee executive compensation
practices at LS&Co. Each year, the HR Committee conducts a
review of LS&Co.’s compensation and benefits programs
to ensure that the programs are aligned with the Company’s
business strategies, the competitive practices of our peer
companies and our stockholders’ interests.
Compensation
Philosophy and Objectives
LS&Co.’s executive compensation philosophy focuses on
the following key goals:
| • | Attract, motivate and retain high performing talent in an extremely competitive marketplace |
| • | Our ability to achieve our strategic business plans and compete effectively in the marketplace is based on our ability to attract, motivate and retain exceptional leadership talent in a highly competitive talent market. |
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| • | Deliver competitive compensation for competitive results |
| • | The Company provides competitive total compensation opportunities that are intended to attract, motivate and retain a highly capable and results-driven executive team, with the majority of compensation based on the achievements of performance results. |
| • | Align the interests of our executives with those of our stockholders |
| • | LS&Co. programs offer compensation incentives designed to motivate executives to enhance total stockholder return. These programs align certain elements of compensation with our achievement of corporate growth objectives (including defined financial targets and increases in stockholder value) as well as individual performance. |
Policies
and Practices for Establishing Compensation Packages
Establishing
the elements of compensation
The HR Committee establishes the elements of compensation for
our named executive officers after an extensive review of market
data on the executives from the peer group described below. The
HR Committee reviews each element of compensation independently
and in the aggregate to determine the right mix of elements, and
associated amounts, for each named executive officer.
A consistent approach is used for all named executive officers
when setting each compensation element. However, the HR
Committee, and the Board for the CEO, maintains flexibility to
exercise its independent judgment in how it applies the standard
approach to each executive, taking into account unique
considerations existing at an executive’s time of hire, or
the current and future estimated value of previously granted
long-term incentives relative to individual performance.
Competitive
peer group
In determining the design and the amount of each element of
compensation, the HR Committee conducts a thorough annual review
of competitive market information. The HR Committee references
data provided by Hewitt Associates concerning 31 peer companies
in the consumer products, apparel and retail industry segments.
The HR Committee also references data from the Apparel
Industry & Footwear Compensation Survey published by
Salary.com for commercial positions. The peer group is
representative of the types of companies LS&Co. competes
with for executive talent, which is the primary consideration
for inclusion in the peer group. Revenue size and other
financial measures, such as cash flow and profit margin, are
secondary considerations in selecting the peer companies.
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Table of Contents
The peer group used in establishing our named executive
officers’ 2009 compensation packages was:
| Company Name | ||
|
Abercrombie & Fitch Co.
|
LVMH Moët Hennessy Louis Vuitton Inc | |
|
Alberto-Culver Company
|
Mattel, Inc. | |
|
AnnTaylor Stores Corporation
|
The Neiman-Marcus Group, Inc. | |
|
Avon Products, Inc.
|
NIKE, Inc. | |
|
The Bon-Ton Stores, Inc.
|
Nordstrom, Inc. | |
|
Charming Shoppes, Inc.
|
Pacific Sunwear of California, Inc. | |
|
The Clorox Company
|
J.C. Penney Company, Inc. | |
|
Colgate-Palmolive Company
|
Phillips-Van Heusen Corporation | |
|
Eddie Bauer Holdings, Inc.
|
Retail Ventures, Inc. | |
|
The Gap, Inc.
|
Revlon Inc. | |
|
General Mills, Inc.
|
Sara Lee Corporation | |
|
Hasbro, Inc.
|
The Timberland Company | |
|
Kellogg Company
|
Whirlpool Corporation | |
|
Kimberly-Clark Corporation
|
Williams-Sonoma, Inc. | |
|
Kohl’s Corporation
|
Yum! Brands Inc. | |
|
Limited Brands, Inc.
|
||
Establishing
compensation for named executive officers other than the
CEO
The HR Committee has established guidelines calling for annual
cash compensation (base salary and target annual incentive
bonus) levels of our named executive officers to be set near the
median
(50
th
percentile) of the peer companies, near the
75
th
percentile for long-term incentives and between the
50
th
—
75
th
percentiles for total compensation. These relative levels serve
as a general guideline for compensation decisions and are
consistent with our philosophy of deemphasizing annual cash
compensation and focusing more heavily on long-term compensation.
The HR Committee approves all compensation decisions affecting
the named executive officers (other than the CEO) based on
recommendations provided by the CEO. The CEO conducts an annual
performance review of each member of the executive leadership
team against his or her annual objectives and reviews the
relevant peer group data provided by the Human Resources staff.
The CEO then develops a recommended compensation package for
each executive. The HR Committee reviews the recommendations
with the CEO and the Chairman, seeks advice from its consultant
Hewitt Associates and approves or adjusts the recommendations as
it deems appropriate. The HR Committee then reports on its
decisions to the full Board.
Ms. Manes served as the Company’s Interim Chief
Financial Officer, until July 2009 when Blake Jorgensen joined
the Company as the new Chief Financial Officer, while also
continuing in her role as Vice President, Controller. As such,
the compensation guidelines and procedures established for our
named executive officers as described here did not apply to her
during the interim period. Her compensation continues to be
managed in a manner consistent with the guidelines for all other
vice president and director level employees.
Establishing
the CEO compensation package
At the completion of each year, the Nominating and Governance
Committee (the “N&G Committee”) assesses the
CEO’s performance against annual objectives that were
established jointly by the CEO and the N&G Committee at the
beginning of that year. The N&G Committee takes into
consideration feedback gathered from Board members and the
direct reports to the CEO, in addition to the financial and
operating results of the Company for the year, and submits its
performance assessment to the HR Committee. The HR Committee
then reviews the performance assessment and peer group data in
its deliberations. During this decision-making process, the HR
Committee consults with Hewitt Associates, which informs the HR
Committee of market trends and conditions, comments on market
data relative to the CEO’s current compensation, and
provides perspective on other company CEO compensation
practices. Based on all of these inputs, in addition to the same
guidelines used for setting annual
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cash, long-term and total compensation for the other named
executives, described above, the HR Committee prepares a
recommendation to the full Board on all elements of the CEO
compensation. The full Board then considers the HR
Committee’s recommendation and approves the final
compensation package for the CEO.
Role
of executives and third parties in compensation
decisions
Hewitt Associates acts as the HR Committee’s independent
consultant and as such, advises the HR Committee on industry
standards and competitive compensation practices, as well as on
the Company’s specific executive compensation practices. In
2009, Hewitt Associates also contracted separately with the
Company to provide consulting services relating to the strategic
transformation of the human resources function.
Executive officers may influence the compensation package
developed by the Board for the CEO by providing input on the
CEO’s performance in the past year. The CEO influences the
compensation packages for each of the other named executive
officers through his recommendations made to the HR Committee.
Elements
of Compensation
The primary elements of compensation for our named executive
officers are:
| • | Base Salary | |
| • | Annual Incentive Awards | |
| • | Long-Term Incentive Awards | |
| • | Retirement Savings and Insurance Benefits | |
| • | Perquisites |
Base
Salary
The objective of base salary is to provide fixed compensation
that reflects what the market pays to individuals in similar
roles with comparable experience and performance. The HR
Committee targets base salaries for each position near the
median
(50
th
percentile) of the peer group. However, the peer group data
serves as a general guideline only and the HR Committee, and for
the CEO, the Board, retains the authority to exercise its
independent judgment in establishing the base salary levels for
each individual. Therefore, the final salary may not be at the
median of the peer group. Merit increases for the named
executive officers are considered by the HR Committee on an
annual basis and are based on the executive’s individual
performance against planned objectives and his or her base
salary relative to the median of that paid to similar executives
by the peer group. Due to economic and business challenges, no
merit increases were awarded to the named executive officers for
the 2009 fiscal year. However, Ms. Manes received a salary
increase for the period she was in the interim CFO role.
Annual
Incentive Plan
Our Annual Incentive Plan (“AIP”) provides the named
executive officers, and other eligible employees, an opportunity
to share in the success that they help create. The AIP
encourages the achievement of our internal annual business goals
and rewards Company, business unit and individual performance
against those annual objectives. The alignment of AIP with our
internal annual business goals is intended to motivate all
participants to achieve and exceed our annual performance
objectives.
Performance
measures
Our priorities for 2009 were to strengthen our business in a
challenging global economy and position the Company to return to
long-term profitable growth. Our 2009 AIP goals were aligned
with these key priorities through three performance measures:
| • | Earnings before interest and taxes (“EBIT”), a non-GAAP measure that is determined by deducting from operating income, as determined under generally accepted accounting principles in the United States (“GAAP”), the following: restructuring expense, net curtailment gains from our post retirement medical |
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| plan in the United States and pension plans worldwide, and certain management-defined unusual, non-recurring SG&A expense/income items, |
| • | Days in working capital , a non-GAAP measure defined as the average days in net trade receivables, plus the average days in inventories, minus the average days in accounts payable, where averages are calculated based on ending balances over the past thirteen months, and | |
| • | Net revenues as determined under GAAP. |
We use these measures because we believe they are key drivers in
increasing stockholder value and because every AIP participant
can impact them in some way. EBIT and days in working capital
are used as indicators of our earnings and operating cash flow
performance, and net revenue is used as an indicator of our
growth. These measures may change from time to time based on
business priorities. The HR Committee approves the goals for
each measure and the respective funding scale at the beginning
of each year to incent the executive team and all employee
participants to strive and perform at a high level to meet the
goals. The reward for meeting the AIP goals is set by the HR
Committee and, in recent years, it has ranged from 100% to 80%
of the employee target. If goal levels are not met, but
performance reaches minimum thresholds, participants may receive
partial payouts to recognize their efforts that contributed to
Company performance.
Funding
the AIP pool
The AIP funding, or the amount of money made available in the
AIP pool at the end of the year, is dependent on how actual
performance compares to the goals. Actual performance is
measured after eliminating any variance introduced by foreign
currency movements and other adjustments determined to be
appropriate by management based on business circumstances. The
three measures of EBIT, days in working capital and net revenue
worked together as follows to determine AIP funding.
| • | At the beginning of 2009, when the goals for the three measures were being established, the Company considered the potential impact of the global economic challenges, anticipated to continue through 2009. These challenges were reflected in the 2009 annual business goals. As a result, the 2009 AIP funding was set at a level where the payout under the AIP would be at a rate of only 80% of the employee target if the EBIT, working capital and net revenue goals were fully achieved. | |
| • | Actual EBIT performance compared to our EBIT goals determines initial EBIT AIP funding. | |
| • | Actual days in working capital performance compared to our days in working capital goals results in a working capital modifier, which increases or decreases the initial EBIT AIP funding. | |
| • | Actual net revenue performance compared to our net revenue goals determines Net Revenue AIP funding. To ensure that any incremental net revenue meets profitability goals, actual EBIT must meet or exceed our EBIT goals in order for net revenue funding to be in excess of 100%. | |
| • | EBIT funding and Net Revenue funding are multiplied by the respective incentive pool funding weight and are totaled to determine the AIP funding. |
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Table of Contents
There are multiple AIP pools reflecting the multiplicity of our
businesses and geographic segments. For most employees, the AIP
funding is based on a mix of their respective business
unit’s performance and the performance of the next higher
organizational level. Therefore, the final AIP funding for
employees in a business unit is the resulting weighted sum of
this mix. The intention is to tie individual rewards to the
local business unit that the employee most directly impacts and
to reinforce the message that the same efforts and results have
an impact on the larger organization. For example, the funding
for an employee in one of our European countries is based on a
mixture of the performance of our business in that country and
the overall European region’s business performance.
Likewise, the funding for employees in our European region
headquarters is based on the mixture of total regional
performance and total Company performance. For corporate staff,
employees in such departments as Finance, Human Resources and
Legal who provide support to the entire Company, the funding is
based entirely on total Company performance.
The AIP funding for our named executive officers is based on the
following: For our CEO and CFO, the AIP funding is fully based
on total Company performance. For our three regional presidents
who are named executive officers, the AIP funding is based 50%
on total Company and 50% on their respective region’s
performance.
The table below shows the goals for each of our three
performance measures and the actual 2009 funding levels
reflecting the total Company or blended
50
/
50
total Company/Region performance, as appropriate for each named
executive officer:
|
Days in
|
||||||||||||||||
|
Working
|
Actual AIP
|
|||||||||||||||
|
EBIT
|
Capital
|
Net Revenue
|
Funding
|
|||||||||||||
| Goal | Goal | Goal | Level* | |||||||||||||
| (Dollars in millions) | ||||||||||||||||
|
Total Company
|
$ | 400 | 84 | $ | 4,000 | 97.0 | % | |||||||||
|
Americas
|
330 | 82 | 2,300 | 102.0 | % | |||||||||||
|
Europe
|
190 | 104 | 1,014 | 78.0 | % | |||||||||||
|
Asia Pacific
|
97 | 57 | 736 | 70.0 | % | |||||||||||
| * | The funding results exclude the impacts of foreign currency exchange rate fluctuations on our business results. |
At the close of the fiscal year, the HR Committee reviews and
approves the final AIP funding levels based on the level of
attainment of the designated financial measures at the local,
regional and total Company levels. AIP funding can range from 0%
to a maximum of 175% of the target AIP pool.
Determining
named executives’ AIP targets and actual award
amounts
The AIP targets for the named executive officers are a specific
dollar amount based on a defined percentage of the
executive’s base salary, called the AIP participation rate.
The AIP participation rate is typically based on the
executive’s position and peer group practices.
In determining each executive’s actual AIP award in any
given year, the HR Committee or, with respect to the CEO, the
Board, considers the AIP target, the individual’s
performance and the AIP funding for the respective business unit
of the respective executive. Because the sum of all actual
payments for any given region or business unit cannot exceed the
amount of the AIP funding pool for that unit, the individual
awards reflect both performance against individual objectives
and relative performance against the balance of employees being
paid out of that pool. Executives, like all employees, must be
employed on the date of payment to receive payment, except in
the cases of layoff, retirement, disability or death. The AIP
awards for all employee participants are made in the same
manner, except that the employees’ managers determine the
individual awards.
Although the AIP participation rates of the named executive
officers are targeted at the median
(50
th
percentile) of that established by the peer group, an
executive’s actual award is not formulaic. Like all
employees, the actual AIP award is based on the assessment of
the executive’s performance against his or her annual
objectives and performance relative to his or her peers, in
addition to the AIP funding. Both business and individual annual
objectives are taken into account in determining the actual
award payments to our named executive officers. Individual
annual objectives include non-financial goals which are not
stated in quantitative terms, and a particular
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Table of Contents
weighting is not assigned to any one of these individual goals.
The non-financial objectives are not established in terms of how
difficult or easy they are to attain; rather, they are taken
into account in assessing the overall quality of the
individual’s performance. The target AIP participation
rates, target amounts, actual award payments and actual award
payment as a percentage of each named executive officer’s
target payment were as follows:
|
2009 AIP
|
2009 Target
|
2009 AIP Actual
|
Payment as %
|
|||||||||||||
|
Name
|
Participation Rate | Amount | Award Payment | of Target | ||||||||||||
|
John Anderson
|
110 | % | $ | 1,402,500 | $ | 1,600,000 | 114 | % | ||||||||
|
Blake
Jorgensen
(1)
|
75 | % | 487,500 | 472,875 | 97 | % | ||||||||||
|
Armin
Broger
(2)
|
65 | % | 723,907 | 217,172 | 30 | % | ||||||||||
|
Robert Hanson
|
70 | % | 499,800 | 674,730 | 135 | % | ||||||||||
|
Aaron
Boey
(3)
|
60 | % | 305,765 | 183,459 | 60 | % | ||||||||||
|
Heidi
Manes
(4)
|
50 | % | 279,167 | 270,792 | 97 | % | ||||||||||
| (1) | Mr. Jorgensen’s AIP target assumes full-year employment, based on the terms of his employment agreement. | |
| (2) | Mr. Broger is paid in Euros. For purposes of the table, this amount was converted into U.S. Dollars using an exchange rate of 1.4914, which is the average exchange rate for the last month of the fiscal year. | |
| (3) | Mr. Boey is paid in Singapore Dollars (SGD). For purposes of the table, this amount was converted into U.S. Dollars using an exchange rate of 1.3893, which is the average exchange rate for the last month of the fiscal year. | |
| (4) | For the purposes of calculating Ms. Manes’ AIP target amount, her base salary includes the monthly cash bonuses paid to her in recognition for her serving as the interim CFO for the duration of the interim assignment. |
Long-Term
Incentives
The HR Committee believes a large part of an executive’s
compensation should be linked to long-term stockholder value
creation as an incentive for sustained, profitable growth.
Therefore, our long-term incentives for our named executive
officers are in the form of equity awards and provide reward
opportunities competitive with those offered by companies in the
peer group for similar jobs. The HR Committee targets long-term
incentive award opportunities for our named executive officers
near the
75
th
percentile of the peer group, although the HR Committee, and for
the CEO, the Board, retains the authority to exercise its
independent judgment in establishing the long-term incentive
award levels for each individual. Should we deliver against our
long-term goals, the long-term equity incentive awards become a
significant portion of the total compensation of each named
executive officer. For more information on the 2009 long-term
equity grants, see the 2009 Grants of Plan-Based Awards table.
The Company’s common stock is not listed on any stock
exchange. Accordingly, the price of a share of our common stock
for all purposes, including determining the value of equity
awards, is established by the Board based on an independent
third-party valuation conducted by Evercore Group LLC
(“Evercore”). The valuation process is typically
conducted two times a year, with interim valuations occurring
from time to time based on stockholder and Company needs. Please
see “Stock-Based Compensation” under Note 1 to
our audited consolidated financial statements included in this
report for more information about the valuation process.
Equity
Incentive Plan
Our omnibus 2006 Equity Incentive Plan (“EIP”) enables
our HR Committee to select from a variety of stock awards in
defining long-term incentives for our management, including
stock options, restricted stock and restricted stock units, and
stock appreciation rights (“SARs”). The EIP permits
the grant of performance awards in the form of equity or cash.
Stock awards and performance awards may be granted to employees,
including named executive officers, non-employee directors and
consultants.
To date, SARs have been the only form of equity granted to our
named executive officers under the EIP, with the exception of
Ms. Manes. SARs are typically granted annually with
four-year vesting periods and exercise periods of up to ten
years. (See the table entitled “Outstanding Equity Awards
at 2009 Fiscal Year-End” for details concerning the
SARs’ vesting schedule.) The HR Committee chose to grant
SARs rather than other available forms of equity compensation to
allow the Company the flexibility to grant SARs that may be
settled in either stock or cash. The terms of the SAR grants
made to our named executive officers to-date provide for stock
settlement only.
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When a SAR is exercised and settled in stock, the shares issued
are subject to the terms of the Stockholders’ Agreement and
the Voting Trust Agreement, including restrictions on
voting rights and transfer. After the participant has held the
shares issued under the EIP for six months, he or she may
require the Company to repurchase, or the Company may require
the participant to sell to the Company, those shares of common
stock. The Company’s obligations under the EIP are subject
to certain restrictive covenants in our various debt agreements
(See Note 6 to our audited consolidated financial
statements included in this report for more details).
Ms. Manes served as a named executive officer on an interim
basis until July 2009. As such, she is ineligible to receive a
SAR grant. However, Ms. Manes does participate in the
cash-based long-term incentive plans that are in place for all
vice president and director level employees. The Total
Shareholder Return Plan (“TSRP”) under our EIP is
similar to a stock appreciation rights plan in that awards are
based on the amount of stock price increase. The Long-Term
Incentive Plan (“LTIP”) is based on performance
against the Company’s
3-year
internal goals. Awards under both plans vest automatically at
the end of their respective
3-year
performance periods and payments are made in cash.
Long-term
incentive grant practices
LS&Co. does not have any program, plan, or practice to time
equity grants to take advantage of the release of material,
non-public information. Equity grants are made in connection
with compensation decisions made by the HR Committee and the
timing of the Evercore valuation process, and are made under the
terms of the governing plan.
Retirement
Savings and Insurance Benefits
In order to provide a competitive total compensation package,
LS&Co. offers a qualified 401(k) defined contribution
retirement plan to its U.S. salaried employees through the
Employee Savings and Investment Plan. We also offer a similar
defined contribution retirement savings plan, called the
Singapore Central Provident Fund, to our employees in Singapore.
Executive officers participate in these plans on the same terms
as other salaried employees. The ability of executive officers
to participate fully in these plans is limited by local/national
tax and other related legal requirements. Like many of the
companies in the peer group, the Company offers a nonqualified
supplement to the 401(k) plan, which is not subject to the IRS
and ERISA limitations, through the Deferred Compensation Plan
for Executives and Outside Directors. The Company also offers
its executive officers the health and welfare insurance plans
offered to all employees such as medical, dental, supplemental
life, long-term disability and business travel insurance,
consistent with the practices of the majority of the companies
in the peer group.
In 2004, we froze our U.S. defined benefit pension plan and
increased the Company match under the 401(k) plan. This change
was made in recognition of an employment market that is
characterized by career mobility, and traditional pension plan
benefits are not portable. Of our named executive officers,
Heidi Manes and Robert Hanson, have adequate years of service to
be eligible for future benefits under the frozen
U.S. defined benefit pension plan.
Defined
contribution retirement plan
The Employee Savings and Investment Plan is a qualified 401(k)
defined contribution savings plan that allows
U.S. employees, including executive officers, to save for
retirement on a pre-tax basis. The Company matches up to a
certain level of employee contributions. In addition, the
Company provides a profit-sharing contribution if we exceed our
internal annual business plan goals. This enables employees to
share in the Company’s success when we outperform our goals.
Deferred
compensation plan
The Deferred Compensation Plan for Executives and Outside
Directors is a nonqualified, unfunded tax effective savings plan
provided to the named executive officers and other executives,
and the outside directors.
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Table of Contents
Perquisites
LS&Co. believes perquisites are an element of competitive
total rewards. The Company is highly selective in its use of
perquisites, the total value of which is modest. The primary
perquisite provided to the named executive officers is a
flexible allowance to cover expenses such as auto-related
expenses, financial and tax planning, legal assistance and
excess medical costs.
Tax
and Accounting Considerations
We have structured our compensation program to comply with
Internal Revenue Code Section 409A. Because our common
stock is not registered on any exchange, we are not subject to
Section 162(m) of the Internal Revenue Code.
Severance
and Change in Control Benefits
The Executive Severance Plan is meant to provide a reasonable
and competitive level of financial transitional support to
executives who are involuntarily terminated. If employment is
involuntarily terminated by the Company due to reduction in
force, layoff or position elimination, the executive is eligible
for severance payments and benefits. Severance benefits are not
payable upon a change in control if the executive is still
employed by or offered a comparable position with the surviving
entity.
Under the 2006 EIP, in the event of a change in control in which
the surviving corporation does not assume or continue the
outstanding SARs program or substitute similar awards for such
outstanding SARs, the vesting schedule of all SARs held by
executives that are still employed upon the change in control
will be accelerated in full as of a date prior to the effective
date of the transaction as the Board determines. This
accelerated vesting structure is designed to encourage the
executives to remain employed with the Company through the date
of the change in control and to ensure that the equity
incentives awarded to the executives are not eliminated by the
surviving company.
Compensation
Committee Report
The Human Resources Committee has reviewed and discussed the
Compensation Discussion and Analysis with management. Based on
the review and discussion, the Committee recommends to the Board
of Directors that the Compensation Discussion and Analysis be
included in the Company’s annual report on
Form 10-K
for the fiscal year ended November 29, 2009.
The Human
Resources Committee
Patricia Salas Pineda (Chair)
Vanessa J. Castagna
Peter E. Haas Jr.
Robert D. Haas
Vanessa J. Castagna
Peter E. Haas Jr.
Robert D. Haas
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Table of Contents
Summary
Compensation Data
The following table provides compensation information for
(i) our chief executive officer, (ii) our current
chief financial officer and our former interim chief financial
officer, and (iii) three executive officers who were our
most highly compensated officers and who were serving as
executive officers as of the last day of the fiscal year.
|
Change in
|
||||||||||||||||||||||||||||||||
|
Pension
|
||||||||||||||||||||||||||||||||
|
Value and
|
||||||||||||||||||||||||||||||||
|
Nonqualified
|
||||||||||||||||||||||||||||||||
|
Non-Equity
|
Deferred
|
|||||||||||||||||||||||||||||||
|
Name and
|
Option
|
Incentive Plan
|
Compensation
|
All Other
|
||||||||||||||||||||||||||||
|
Principal Position
|
Year | Salary | Bonus (2) | Awards (3) | Compensation (4) | Earnings (5) | Compensation (6) | Total | ||||||||||||||||||||||||
|
John Anderson
|
2009 | $ | 1,275,000 | $ | — | $ | 3,468,287 | $ | 1,600,000 | $ | 121,279 | $ | 1,295,424 | $ | 7,759,990 | |||||||||||||||||
|
President and Chief
|
2008 | 1,270,192 | — | 2,868,398 | 561,000 | — | 1,211,550 | 5,911,140 | ||||||||||||||||||||||||
|
Executive Officer
|
2007 | 1,250,000 | — | 2,298,664 | 1,031,250 | 36,341 | 2,166,438 | 6,782,693 | ||||||||||||||||||||||||
|
Blake Jorgensen
|
2009 | 257,500 | 250,000 | 79,029 | 472,875 | — | 1,974 | 1,061,378 | ||||||||||||||||||||||||
|
Chief Financial Officer
|
||||||||||||||||||||||||||||||||
|
Armin
Broger
(1)
|
2009 | 1,113,703 | — | 475,536 | 217,172 | — | 676,991 | 2,483,402 | ||||||||||||||||||||||||
|
Senior Vice President and
|
2008 | 950,837 | — | 357,386 | 216,315 | — | 401,951 | 1,926,489 | ||||||||||||||||||||||||
|
President Levi Strauss Europe
|
2007 | 812,556 | 804,430 | 218,011 | 808,398 | — | 583,619 | 3,227,014 | ||||||||||||||||||||||||
|
Robert Hanson
|
2009 | 714,000 | — | 919,025 | 674,730 | — | 113,580 | 2,421,335 | ||||||||||||||||||||||||
|
Senior Vice President and
|
2008 | 711,846 | — | 766,801 | 249,900 | 12,234 | 111,359 | 1,852,140 | ||||||||||||||||||||||||
|
President Levi Strauss Americas
|
2007 | 700,769 | — | 635,597 | 400,776 | — | 128,595 | 1,865,737 | ||||||||||||||||||||||||
|
Aaron
Boey
(1)
|
2009 | 483,460 | — | 34,503 | 183,459 | — | 88,534 | 789,956 | ||||||||||||||||||||||||
|
Senior Vice President and President Levi Struass Asia
|
||||||||||||||||||||||||||||||||
|
Heidi Manes
|
2009 | 307,061 | — | — | 270,792 | — | 323,534 | 901,387 | ||||||||||||||||||||||||
|
Chief Financial Officer (Interim)
|
2008 | 282,048 | — | — | 171,188 | — | 122,412 | 575,648 | ||||||||||||||||||||||||
| (1) | Mr. Broger is paid in Euros. For purposes of the table, his 2009 payments were converted into U.S. Dollars using an exchange rate of 1.4914, for 2008, an exchange rate of 1.2733 and for 2007, an exchange rate of 1.4626. | |
| Mr. Boey is paid in Singapore Dollars. For purposes of the table, his 2009 payments were converted into U.S. Dollars using an exchange rate of 1.3893. | ||
| These rates were the average exchange rates for the last month of the 2009, 2008 and 2007 fiscal years, respectively. | ||
| (2) | For Mr. Jorgensen, the 2009 amount reflects a sign-on bonus of $250,000, per his employment contract. For Mr. Broger, the 2007 amount reflects a sign-on bonus of $804,430 per his employment contract. | |
| (3) | These amounts reflect the dollar amount recognized for financial statement reporting purposes for the fiscal years ended November 29, 2009, November 30, 2008 and November 25, 2007 for awards granted under the EIP. The amounts are calculated using the same valuation methodology used for financial reporting purposes and as such, do not reflect the amount of compensation actually received by the named executive officer during the fiscal year. For a description of the assumptions used in the calculation of these amounts, see Notes 1 and 11 of the audited consolidated financial statements included elsewhere in this report. | |
| (4) | These amounts reflect the AIP awards made to the named executive officers. | |
| For Mr. Broger, the 2007 amount reflects an AIP payment of $808,398 which was based on a guaranteed AIP target of 100%, per his employment contract, prorated for the number of months Mr. Broger was employed during the fiscal year. | ||
| (5) | For Mr. Anderson, the 2009 amount reflects the change in his Australian pension benefits value from November 30, 2008, to November 29, 2009. | |
| For Ms. Manes and Mr. Hanson, the 2009 change in U.S. pension value is due solely to changes in actuarial assumptions used in determining the present value of the benefits. These assumptions, such as discount rates, age-rating and mortality assumptions, may vary from year-to-year. Effective November 28, 2004, we froze our U.S. pension plan for all salaried employees. Only positive changes in pension value have been reported. | ||
| For Mr. Broger, in 2008, the approach to providing a company-managed retirement plan, under the terms of his employment contract, was still in the process of being finalized at the time of reporting. It was assumed he would participate in the existing Dutch defined benefit plan, and therefore, an estimated change in pension value of $12,310 was reported in 2008. However, no actual contributions were made. In 2009, it was determined that Mr. Broger would participate in a deferred compensation/defined contribution plan, not the Dutch defined benefit plan. As a result, a plan was established and contributions retroactive to his hire date were deposited into the plan. These contributions are reflected under All Other Compensation for 2009. | ||
| For Mr. Hanson, in 2007 no positive change in pension value was reported because the value of the Home Office Pension Plan declined from the 2006 pension plan measurement date to the 2007 pension plan measurement date. The decline was due to the actuarial assumptions used to determine the present value of his benefits. |
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Table of Contents
| (6) | For Mr. Anderson, the 2009 amount reflects a payment of $1,000,000, the final installment of the total amount to assist with his relocation from Singapore to San Francisco, per his employment agreement, a company 401(k) match of $17,250, a 401(k) excess plan match of $80,058, a company match of $40,392 on deferred compensation, and an executive allowance of $39,325, $19,291 of which was toward the provision of a car and $15,000 of which was for legal, financial or other similar expenses. In addition, the amount reflects a payment of $60,914 for ongoing home leave benefits and $53,719 tax gross-up of those benefits, per his employment contract. | |
| For Mr. Broger, the 2009 amount reflects items provided under his employment contract using the foreign exchange rates noted above. The 2009 amount reflects $14,203 for tax administration and legal fees, $63,534 as a housing allowance, $59,334 for children’s schooling, a car provided for Mr. Broger’s use valued at $35,943, $289,226 for the purchase of individual pension insurance, a company contribution of $41,318 to his retirement savings plan and a tax protection benefit of $173,434 based on his Netherlands tax rate. | ||
| For Mr. Hanson, the 2009 amount reflects a company 401(k) match of $17,250, an excess 401(k) plan match of $55,043, an executive allowance of $28,784, $23,750 of which was for legal, financial or other similar expenses, and a payment of $12,503 to reimburse the cost of cancelling a personal vacation due to company business needs. | ||
| For Mr. Boey, the 2009 amount reflects a payment of $30,890 which was a bonus for his interim assignment as president of the Asia Pacific Division. The amount also reflects an executive allowance of $15,475 and $31,234 toward the provision of a car. These amounts are based on the foreign exchange rates noted above. | ||
| For Ms. Manes, the 2009 amount reflects a bonus of $300,000 for her interim assignment as the Chief Financial Officer, a company 401(k) match of $11,500 and an executive allowance of $12,034. |
OTHER
MATTERS
Employment
Contracts
Mr. Anderson.
We have an employment
arrangement with Mr. Anderson effective November 27,
2006. The arrangement provides for a minimum base salary of
$1,250,000. His base salary has since been adjusted, and may be
further adjusted, by annual merit increases. Mr. Anderson
is also eligible to participate in our AIP at a target
participation rate of 110% of base salary.
Mr. Anderson also receives benefits to assist with the
relocation of Mr. Anderson and his family from Singapore to
San Francisco, California as follows: a one-time
irrevocable gross payment of $5,800,000, of which $3,800,000 was
paid in November 2006 and $1,000,000 was paid in each of January
2008 and January 2009, availability of a company-paid apartment
and automobile while his family remained in Singapore; prior to
their relocation, temporary housing in San Francisco upon
his arrival and application of his Australian hypothetical tax
rate on his 2006 Annual Incentive Plan and final 2006 Management
Incentive Plan payments. Mr. Anderson also receives
healthcare, life insurance, long-term savings program and
relocation program benefits, as well as benefits under our
various executive perquisite programs with an annual value of
less than $30,000. Mr. Anderson continues to be eligible
for ongoing home leave benefits. The portions of these benefits
that were paid in 2007, 2008 and 2009 are reflected in the
Summary Compensation Table.
In addition to the foregoing arrangements, Mr. Anderson was
considered a global assignee during the period that he was
employed with us in Singapore in 2006. 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, in this case Australia, 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. Although Mr. Anderson was no longer
formally considered a global assignee upon his assuming the
President and Chief Executive Officer role at the beginning of
2007, his family’s relocation from Singapore to the United
States occurred throughout the middle of 2007. Therefore,
certain global assignee benefits were provided to
Mr. Anderson during 2007 as he completed the transition.
Mr. Anderson’s employment is at-will and may be
terminated by us or by Mr. Anderson at any time.
Mr. Anderson does not receive any separate compensation for
his services as a member of our board of directors.
Mr. Jorgensen.
We entered into an
employment arrangement with Mr. Jorgensen, effective
July 1, 2009. The employment arrangement with
Mr. Jorgensen provides for an annual base salary of
$650,000. Mr. Jorgensen is also eligible to participate in
our AIP at a target participation rate of 75% of his base
salary, and with a guaranteed 2009 award at a minimum of 50% of
the target value. His 2009 AIP award assumes full-year
employment, based on the terms of his employment agreement. He
also received a one-time signing bonus of $250,000 which is
subject to prorated repayment if his employment with the Company
does not exceed twenty-four months under certain
111
Table of Contents
conditions. Mr. Jorgensen also receives healthcare, life
insurance and long-term savings program benefits, as well as
benefits under our various executive perquisite programs,
including a cash allowance of $15,000 per year.
Mr. Jorgenson also participates in our 2006 Equity
Incentive Plan and received 82,264 SAR units, which included a
standard grant of 41,132 units and a one-time special grant
of 41,132 units. In addition, Mr. Jorgenson will
receive 1.5 times the standard grant level in 2010 pending
approval by the Board of Directors.
Mr. Jorgensen’s employment is at-will and may be
terminated by us or by Mr. Jorgensen at any time.
Mr. Broger.
We entered into an employment
contract with Mr. Broger, effective February 26, 2007.
Mr. Broger is a resident of the Netherlands, and his
employment is based in Brussels. Our employment contract with
Mr. Broger was structured in a manner consistent with
European employment practices for senior executives. Therefore,
Mr. Broger’s compensation and benefits are different
from our
U.S.-based
named executive officers. Under the terms of his employment
agreement, Mr. Broger was offered a base salary at an
annual rate of EUR 725,000, which has been adjusted, and
may be further adjusted, by annual merit increases.
Mr. Broger is eligible to participate in our AIP at a
target participation rate of 65% of base salary, except that in
2007 only, he had a target participation rate of 100% of his
base salary. Mr. Broger received a one-time sign-on bonus
of EUR 550,000 net, and ongoing pension benefits, subsidies
for housing and his children’s education, life insurance
and car usage benefits, and certain de minimus perquisites.
His agreement also provided for a grant with a target value of
$1,500,000 under the Company’s previous Senior Executive
Long-Term Incentive Plan which, because that plan was replaced
by the EIP, was converted to a SAR grant. We have also agreed to
provide Mr. Broger tax protection, similar to our global
assignment practices described above. Should he experience a tax
burden in excess of the tax burden that he would have
experienced had he been working 100% of his time in the
Netherlands, the Company will pay the excess amount. The
portions of these benefits that were paid in 2007 and 2008 are
reflected in the Summary Compensation Table.
In the case of termination, for reasons other than cause, we
will provide Mr. Broger with eight months’ notice in
addition to a lump sum payment of two times his annual base
salary and two times his AIP target amount at the time of
termination. In addition, in exchange for a six month
non-compete restriction, we will pay a one-time payment of six
months’ salary.
Mr. Broger’s employment is at-will and may be
terminated by us or by Mr. Broger at any time.
Mr. Boey.
We have an employment
arrangement with Mr. Boey effective February 19, 2009.
Mr. Boey is a resident of Singapore where his employment is
also based. The arrangement provides for a minimum base salary
of SGD 708,000 (US $469,123) and an initial grant of 14,763
stock appreciation rights under our 2006 Equity Incentive Plan.
Mr. Boey is also eligible to participate in our AIP at a
target participation rate of 60% of his annual base salary.
Mr. Boey’s employment is at-will and may be terminated
by us or by Mr. Boey at any time.
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Table of Contents
2009
Grants of Plan-Based Awards
The following table provides information on awards under our
2009 Annual Incentive Plan and stock appreciation rights granted
under the Equity Incentive Plan in 2009 to each of our named
executive officers. The 2009 actual AIP awards for our named
executive officers are disclosed in the Summary Compensation
Table.
|
Estimated Future Payouts
|
||||||||||||||||||||||||||||
|
Under Non-Equity
|
||||||||||||||||||||||||||||
| Incentive Plan Awards | All Other Option Awards | |||||||||||||||||||||||||||
|
Number of
|
||||||||||||||||||||||||||||
|
Securities
|
Exercise or Base
|
|||||||||||||||||||||||||||
|
Underlying
|
Price of Option
|
Full Grant Date
|
||||||||||||||||||||||||||
|
Name
|
Grant Date | Threshold | Target | Maximum | Options (1) | Awards (2) | Fair Value (3) | |||||||||||||||||||||
|
John Anderson
|
2009 | $ | — | $ | 1,402,500 | $ | 2,805,000 | $ | 150,000 | $ | 24.75 | $ | 350,568 | |||||||||||||||
|
Blake Jorgensen
|
2009 | — | 487,500 | 975,000 | 82,264 | 25.50 | 79,029 | |||||||||||||||||||||
|
Armin Broger
|
2009 | — | 723,907 | 1,447,814 | 14,763 | 24.75 | 34,503 | |||||||||||||||||||||
|
Robert Hanson
|
2009 | — | 499,800 | 999,600 | 36,908 | 24.75 | 86,258 | |||||||||||||||||||||
|
Aaron Boey
|
2009 | — | 305,765 | 611,530 | 14,763 | 24.75 | 34,503 | |||||||||||||||||||||
|
Heidi Manes
|
2009 | — | 279,167 | 558,334 | — | — | — | |||||||||||||||||||||
| (1) | Reflects SARs granted in 2009 under the EIP. | |
| (2) | The exercise price is based on the fair market value of the Company’s common stock as of the grant date established by the Evercore valuation process. | |
| (3) | These amounts reflect the dollar amount recognized for financial statement reporting purposes for the fiscal years ended November 29, 2009 for awards granted under the EIP. |
Ms. Manes received a 2009 grant under the TSRP, the
Company’s cash-settled stock appreciation rights plan, as
detailed below. The plan has a
3-year
vesting period and a mandatory cash-out at the end of the
period, based on the amount the stock price has appreciated from
the original grant date. Like the SARs, the share price is also
determined by the Board based on the Evercore valuation process.
|
Number of
|
||||||||||||||||
|
Name
|
Grant Date | TSRP Units | Strike Price (1) | Payment Date | ||||||||||||
|
Heidi Manes
|
2/5/2009 | 10,150 | $ | 24.75 | Feb. 2012 | |||||||||||
| (1) | The exercise price is based on the fair market value of the Company’s common stock as of the grant date established by the Evercore valuation process. |
113
Table of Contents
Outstanding
Equity Awards at 2009 Fiscal Year-End
The following table provides information on the current
unexercised and unvested SAR holdings by the Company’s
named executive officers as of November 29, 2009. The
vesting schedule for each grant is shown following this table.
Ms. Manes has not been granted any SARs.
| SAR Awards | ||||||||||||||||
|
Number of
|
Number of
|
|||||||||||||||
|
Securities
|
Securities
|
|||||||||||||||
|
Underlying
|
Underlying
|
SAR
|
SAR
|
|||||||||||||
|
Unexercised SARs
|
Unexercised SARs
|
Exercise
|
Expiration
|
|||||||||||||
|
Name
|
Exercisable | Unexercisable (1) | Price (2) | Date | ||||||||||||
|
John Anderson
|
443,417 | 19,279 | $ | 42.00 | 12/31/2012 | |||||||||||
| 72,599 | 51,856 | 68.00 | 8/1/2017 | |||||||||||||
| — | 150,000 | 24.75 | 2/5/2016 | |||||||||||||
|
Blake Jorgensen
|
— | 82,264 | 25.50 | 7/8/2016 | ||||||||||||
|
Armin Broger
|
22,653 | 31,715 | 53.25 | 2/26/2013 | ||||||||||||
| 9,900 | 7,071 | 68.00 | 8/1/2017 | |||||||||||||
| — | 14,763 | 24.75 | 2/5/2016 | |||||||||||||
|
Robert Hanson
|
121,940 | 5,302 | 42.00 | 12/31/2012 | ||||||||||||
| 18,150 | 12,964 | 68.00 | 8/1/2017 | |||||||||||||
| — | 36,908 | 24.75 | 2/5/2016 | |||||||||||||
|
Aaron Boey
|
— | 14,763 | 24.75 | 2/5/2016 | ||||||||||||
| (1) | SAR Vesting Schedule |
|
Grant Date
|
Exercise Price |
Vesting Schedule
|
||||
|
7/13/2006
|
$ | 42.00 | 1/24 th monthly vesting beginning 1/1/08 | |||
|
2/8/2007
|
$ | 52.25 | 1/24 th monthly vesting beginning 2/8/08 | |||
|
2/26/2007
|
$ | 53.25 | 1/24 th monthly vesting beginning 2/26/09 | |||
|
8/1/2007
|
$ | 68.00 | 25% vested on 7/31/08; monthly vesting over remaining 36 months | |||
|
2/5/2009
|
$ | 24.75 | 25% vested on 2/4/10; monthly vesting over remaining 36 months | |||
|
7/8/2009
|
$ | 25.50 | 25% vested on 7/7/10; monthly vesting over remaining 36 months | |||
The named executive officers may only exercise vested SARs
during certain times of the year under the terms of the EIP.
| (2) | The SAR exercise prices reflect the fair market value of the Company’s common stock as of the grant date as established by the Evercore valuation process. Upon the vesting and exercise of a SAR, the recipient will receive shares of common stock (or, during the period of time that the Voting Trust Agreement is effective, a voting trust certificate representing shares of common stock) in an amount equal to the product of (i) the excess of the per share fair market value of the Company’s common stock on the date of exercise over the exercise price, multiplied by (ii) the number of shares of common stock with respect to which the SAR is exercised. |
EXECUTIVE
RETIREMENT PLANS
Heidi
Manes and Robert Hanson
Effective November 28, 2004, we froze our U.S. pension
plan for all salaried employees. Of our named executive
officers, Ms. Manes and Mr. Hanson have adequate years
of service to be eligible for benefits under the frozen defined
benefit pension plan. The normal retirement age is 65 with five
years of service; early retirement age is 55 with 15 years
of service. None of the named executive officers noted above are
eligible for early retirement at this time. If they elect to
receive their benefits before normal retirement age, the accrued
benefit is reduced by an applicable factor based on the number
of years before normal retirement. Benefits are 100% vested
after five years of service, measured from the date of hire.
There are two components to this pension plan, the Home Office
Pension Plan (“HOPP”), an IRS qualified defined
benefit plan, which has specific compensation limits and rules
under which it operates, and the Supplemental Benefits
Restoration Plan (“SBRP”), a non-qualified defined
benefit plan, that provides benefits in excess of the IRS limit.
114
Table of Contents
The benefit formula under the HOPP is the following:
a) 2% of final average compensation (as defined below)
multiplied by the participant’s years of benefit service
(not in excess of 25 years), less
b) 2% of Social Security benefit multiplied by the
participant’s years of benefit service (not in excess of
25 years), plus
c) 0.25% of final average compensation multiplied by the
participant’s years of benefit service earned after
completing 25 years of service.
Final average compensation is defined as the average
compensation (comprised of base salary, commissions, bonuses,
incentive compensation and overtime earned for the fiscal year)
over the five consecutive plan years producing the highest
average out of the ten consecutive plan years immediately
preceding the earlier of the participant’s retirement date
or termination date.
The benefit formula under the SBRP is the excess of
(a) over (b):
a) Accrued benefit as described above for the qualified
pension plan determined using non-qualified compensation and
removing the application of maximum annuity amounts payable from
qualified plans under Internal Revenue Code Section 415(b);
b) Actual accrued benefit from the qualified pension plan.
The valuation method and assumptions are as follows:
a) The values presented in the Pension Benefits table are
based on certain actuarial assumptions as of November 29,
2009; see Notes 1 and 8 of the audited consolidated
financial statements included elsewhere in this report for more
information.
b) The discount rate and post-retirement mortality utilized
are based on information presented in the pension footnotes. No
assumptions are included for early retirement, termination,
death or disability prior to normal retirement at age 65.
c) Present values incorporate the normal form of payment of
life annuity for single participants and 50% joint and survivor
for married participants.
Pension
Benefits
The following table provides information regarding executive
retirement arrangements applicable to the named executive
officers as of November 29, 2009.
|
Present Value of
|
||||||||||||||
|
Number of Years
|
Accumulated
|
Payments
|
||||||||||||
|
Credited Service as
|
Benefits as of
|
During Last
|
||||||||||||
|
Name
|
Plan Name
|
of 11/29/2009 | 11/29/2009 | Fiscal Year | ||||||||||
|
Robert Hanson
|
U.S. Home Office Pension Plan (qualified plan) | 16.8 | $ | 219,846 | $ | — | ||||||||
| U.S. Supplemental Benefit Restoration Plan (non-qualified plan) | 16.8 | 558,745 | — | |||||||||||
| Total | $ | 778,591 | ||||||||||||
|
Heidi Manes
|
U.S. Home Office Pension Plan (qualified plan) | 2.3 | $ | 18,699 | — | |||||||||
Non-Qualified
Deferred Compensation
The Deferred Compensation Plan for Executives and Outside
Directors (“Deferred Compensation Plan”) is a
U.S. nonqualified, unfunded tax effective savings plan
provided to the named executive officers, among other executives
and the directors, as part of competitive compensation.
115
Table of Contents
Participants may elect to defer all or a portion of their base
salary and AIP payment and may elect an in-service
and/or
retirement distribution. Executive officers who defer salary or
bonus under this plan are credited with market-based returns
depending upon the investment choices made by the executive
applicable to each deferral. The investment options under the
plan, which closely mirror the options provided under our
qualified 401(k) plan, include a number of mutual funds with
varying risk and return profiles. Participants may change their
investment choices as frequently as they desire, consistent with
our 401(k) plan.
In addition, under the Deferred Compensation Plan, the Company
provides a match on all deferrals, up to 10% of eligible
compensation that cannot be provided under the qualified 401(k)
plan due to IRS qualified plan compensation limits. The amounts
in the table reflect non-qualified contributions over the 401(k)
limit by the executive officers and the resulting Company match.
Armin
Broger
Per Mr. Broger’s employment contract, we agreed to pay
12% of his gross base salary for pension/retirement savings
purposes, the exact type of plan to be determined after his hire
date. Part of that amount is paid directly to Mr. Broger in
cash, so he may purchase individual pension insurance. The
remaining portion is to be contributed to a company-managed
retirement plan. In 2008, the approach to providing a
company-managed retirement plan for Mr. Broger, under the
terms of his employment contract, was in the process of being
finalized at the time of reporting. It was assumed he would
participate in the existing Dutch defined benefit plan, and
therefore, an estimated defined benefit was reported in 2008.
However, no actual contributions were made. In 2009, it was
determined that Mr. Broger would participate in a deferred
compensation/defined contribution plan, not the Dutch defined
benefit plan. As a result, a plan was established and
contributions retroactive to his hire date were deposited into
the plan. These company contributions are deposited into an
investment fund, on a pre-tax basis, twice per year by the
company. No contributions are made by Mr. Broger. The funds
become available at normal retirement age 65, and must be
used to purchase a pension annuity.
Aaron
Boey
Mr. Boey participates in the Singapore Central Provident
Fund (CPF). The CPF, a type of deferred compensation/defined
contribution plan, is a government-run social security program.
Funds are contributed both by the employee and the employer and
can be used for retirement, home ownership, healthcare expenses,
a child’s tertiary education, investments and insurance.
The plan is funded by mandatory contributions by both the
employer and employee. Rates of employee and employer
contributions vary based on the employee’s age and a
pre-set salary limit, currently SGD 4,500 per month. The rates
vary from 5-20% of monthly salary for employee’s
contributions and 5-14.5% for employer’s contributions. The
yearly employer’s CPF contribution limit is currently SGD
11,099 as a result of the salary limit of SGD 4,500 per month
for all employees.
Individuals may begin drawing down from this account starting
from age 55 after setting aside the CPF Minimum Sum. The
CPF Minimum Sum can be used to buy CPF LIFE, a lifelong annuity
administered by the CPF Board. If the individual chooses to
remain in the CPF Minimum Sum Scheme, the sum of money can also
be used to purchase a private annuity from a participating
insurance company, be placed with a participating bank, or left
it in their own Retirement Accounts. If the individual chooses
either CPF LIFE or to keep the money in their Retirement
Accounts, they will receive monthly payments from the scheme
they chose starting from their draw-down age (currently at
age 62).
116
Table of Contents
The table below reflects the 2009 contributions to the
non-qualified Deferred Compensation Plans for the named
executive officers that participate in the plans, as well as the
earnings and balances under the plans.
|
Aggregate
|
||||||||||||||||||||
|
Aggregate
|
Balance at
|
|||||||||||||||||||
|
Executive
|
Registrant
|
Aggregate
|
Withdrawals /
|
November 29,
|
||||||||||||||||
|
Name
|
Contributions | Contributions | Earnings | Distributions | 2009 | |||||||||||||||
|
John
Anderson
(1)
|
$ | 645,304 | $ | 120,450 | $ | 513,326 | $ | — | $ | 2,340,486 | ||||||||||
| — | — | — | — | 4,048,719 | (2) | |||||||||||||||
| — | — | — | — | 992,234 | (3) | |||||||||||||||
|
Armin Broger
|
— | 41,318 | — | — | 41,318 | |||||||||||||||
|
Robert
Hanson
(1)
|
73,390 | 55,043 | 34,665 | (443,778 | ) | 471,180 | ||||||||||||||
|
Aaron
Boey
(4)
|
11,013 | 7,988 | — | — | — | |||||||||||||||
| (1) | For Mr. Anderson and Mr. Hanson, these amounts reflect the 401(k) excess match contributions made by the Company and are reflected in the Summary Compensation Table under All Other Compensation. | |
| (2) | While Mr. Anderson was the President of our Asia Pacific region, he participated in a Supplemental Executive Incentive Plan, an unfunded plan to which the Company contributed 20% of his base salary and annual bonus each year. The plan was frozen as of November 26, 2006, when he assumed the role of CEO and no further contributions were made. Upon Mr. Anderson’s termination, without cause, he will be paid out the balance of his accrued benefits in a lump sum. Mr. Anderson’s benefits under this plan are in Australian Dollars. For purposes of the table, these amounts were converted into U.S. Dollars using an exchange rate of 0.904, which was the average exchange rate for the last month of the 2007 fiscal year. | |
| (3) | Mr. Anderson previously participated in the Levi Strauss Australia Staff Superannuation Plan that applied to all employees in Australia. Plan benefits are similar to a U.S. defined contribution plan benefit, which are based on both company and participant contributions. Employee accounts are tied to the investment market and therefore, may vary from year-to-year. Mr. Anderson ceased to be an active participant in that plan in 1998, and is accruing no further company contributions under the plan. Part of his benefit continues to vest over time. Full vesting of his benefit is achieved at age 60. For purposes of the table, these amounts were converted into U.S. Dollars using an exchange rate of 0.9195, which was the average exchange rate for the last month of the 2009 fiscal year. | |
| (4) | The CPF is a government-managed program. As a result, we do not have access to information regarding Mr. Boey’s account activity. |
POTENTIAL
PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL
The named executive officers are eligible to receive certain
benefits and payments upon their separation from the Company
under certain circumstances under the terms of the Executive
Severance Plan for U.S. executives and the EIP. In
addition, Mr. Broger is entitled to certain payments upon
separation under the terms of his employment agreement as
described above and Mr. Anderson is entitled to payments
under a Supplemental Executive Incentive Plan as described below.
In 2009, the Company’s U.S. severance arrangements
under its Executive Severance Plan offered named executive
officers, except for Ms. Manes, basic severance of two
weeks of base salary and enhanced severance of 78 weeks of
base salary plus their AIP target amount, if their employment
ceases due to a reduction in force, layoff or position
elimination. Ms. Manes was eligible for basic severance of
two weeks of base salary, enhanced severance of 26 weeks of
base salary plus her AIP target amount, plus two additional
weeks of base salary plus her AIP target for each year of
service in excess of five years of service up to an additional
52 weeks. The Company also covers the cost of the COBRA
health coverage premium for the duration of the executive’s
severance payment period, up to a maximum of 18 months. The
COBRA premium coverage is shared between the individual and the
Company at the same shared percentage that was effective during
the executive’s employment. The Company would also provide
life insurance, career counseling and transition services. These
severance benefits would not be payable upon a change in control
if the executive is still employed or offered a comparable
position with the surviving entity.
Under the EIP, in the event of a change in control in which the
surviving corporation does not assume or continue the
outstanding SARs or substitute similar awards for the
outstanding SARs, the vesting schedule of all SARs held by
executives that are still employed will be accelerated in full
to a date prior to the effective time of the transaction as
determined by the Board. If the SARs are not exercised at or
prior to the effective time of the transaction, all rights to
exercise them will terminate, and any reacquisition or
repurchase rights held by the Company with respect to such SARs
shall lapse.
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Table of Contents
The information in the tables below reflects the estimated value
of the compensation to be paid by the Company to each of the
named executive officers in the event of termination or a change
in control under the Executive Severance Plan and the EIP. For
details of the arrangements with Armin Broger under his
employment agreement, please see the relevant table below. The
amounts shown below assume that each named individual was
employed and that a termination or change in control was
effective as of November 29, 2009. The actual amounts that
would be paid can only be determined at the time of an actual
termination event. The amounts also assume a share price of
$36.50 for the SAR grants, which is based on the most recent
Evercore share valuation approved by the Board.
John
Anderson
|
Involuntary
|
||||||||||||||||||||
|
Executive Benefits and
|
Voluntary
|
Not for Cause
|
For Cause
|
Change of
|
||||||||||||||||
|
Payments Upon Termination
|
Termination | Retirement | Termination | Termination | Control | |||||||||||||||
|
Compensation:
|
||||||||||||||||||||
|
Severance
(1)
|
$ | — | $ | — | $ | 4,065,288 | $ | — | $ | — | ||||||||||
|
Stock Appreciation Rights
|
— | — | — | — | 1,762,500 | |||||||||||||||
|
Benefits:
|
||||||||||||||||||||
|
COBRA & Life
Insurance
(2)
|
— | — | 7,527 | — | — | |||||||||||||||
|
Supplemental Executive Incentive
Plan:
(3)
|
4,048,719 | 4,048,719 | 4,048,719 | — | 4,048,719 | |||||||||||||||
| (1) | Based on Mr. Anderson’s annual base salary of $1,275,000 and his AIP target of 110% of his base salary. | |
| (2) | Reflects 18 months of COBRA and life insurance premiums at the same Company/employee percentage sharing as during employment. | |
| (3) | Reflects a lump sum payment under the Supplemental Executive Incentive Plan in which Mr. Anderson previously participated. The Company contributed 20% of his base salary and annual bonus into this unfunded plan each year. His participation in the plan was frozen as of November 26, 2006, when he assumed the role of CEO. |
Blake
Jorgensen
|
Involuntary
|
||||||||||||||||||||
|
Executive Benefits and
|
Voluntary
|
Not for Cause
|
For Cause
|
Change of
|
||||||||||||||||
|
Payments Upon Termination
|
Termination | Retirement | Termination | Termination | Control | |||||||||||||||
|
Compensation:
|
||||||||||||||||||||
|
Severance
(1)
|
$ | — | $ | — | $ | 1,731,250 | $ | — | $ | — | ||||||||||
|
Stock Appreciation Rights
|
— | — | — | — | 904,904 | |||||||||||||||
|
Benefits:
|
||||||||||||||||||||
|
COBRA & Life
Insurance
(2)
|
— | — | 5,805 | — | — | |||||||||||||||
| (1) | Based on Mr. Jorgensen’s annual base salary of $650,000 and his AIP target of 75% of his base salary. | |
| (2) | Reflects 18 months of COBRA and life insurance premiums at the same Company/employee percentage sharing as during employment. |
Armin
Broger
|
Involuntary
|
||||||||||||||||||||
|
Executive Benefits and
|
Voluntary
|
Not for Cause
|
For Cause
|
Change of
|
||||||||||||||||
|
Payments Upon Termination
|
Termination | Retirement | Termination | Termination | Control | |||||||||||||||
|
Compensation
(1)
:
|
||||||||||||||||||||
|
Severance
(2)
|
$ | — | $ | — | $ | 4,974,540 | $ | — | $ | — | ||||||||||
|
Stock Appreciation Rights
|
— | — | — | — | 173,465 | |||||||||||||||
| (1) | These payments do not reflect any tax protection benefit since that amount is determined only after review and approval of the individual’s tax return by the Belgian tax authorities during the calendar year following the applicable compensation year. | |
| (2) | Based on two times the sum of Mr. Broger’s base salary and AIP target of 65%, eight months’ notice pay and six months’ pay for a non-compete consideration (based on base salary only). |
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Table of Contents
Robert
Hanson
|
Involuntary
|
||||||||||||||||||||
|
Executive Benefits and
|
Voluntary
|
Not for Cause
|
For Cause
|
Change of
|
||||||||||||||||
|
Payments Upon Termination
|
Termination | Retirement | Termination | Termination | Control | |||||||||||||||
|
Compensation:
|
||||||||||||||||||||
|
Severance
(1)
|
$ | — | $ | — | $ | 1,848,162 | $ | — | $ | — | ||||||||||
|
Stock Appreciation Rights
|
— | — | — | — | 433,669 | |||||||||||||||
|
Benefits:
|
||||||||||||||||||||
|
COBRA & Life
Insurance
(2)
|
— | — | 5,547 | — | — | |||||||||||||||
| (1) | Based on Mr. Hanson’s annual base salary of $714,000 and his AIP target of 70% of his base salary. | |
| (2) | Reflects 18 months of COBRA and life insurance premiums at the same Company/employee percentage sharing as during employment. |
Aaron
Boey
|
Involuntary
|
||||||||||||||||||||
|
Executive Benefits and
|
Voluntary
|
Not for Cause
|
For Cause
|
Change of
|
||||||||||||||||
|
Payments Upon Termination
|
Termination | Retirement | Termination | Termination | Control | |||||||||||||||
|
Compensation:
|
||||||||||||||||||||
|
Severance
(1)
|
$ | — | $ | — | $ | 254,805 | $ | — | $ | — | ||||||||||
|
Stock Appreciation Rights
|
— | — | — | — | 173,465 | |||||||||||||||
| (1) | Based on two months of Mr. Boey’s base salary as notice pay and four months’ salary based on years of service, per the local Singapore provisions. |
Heidi
Manes
|
Involuntary
|
||||||||||||||||||||
|
Executive Benefits and
|
Voluntary
|
Not for Cause
|
For Cause
|
Change of
|
||||||||||||||||
|
Payments Upon Termination
|
Termination | Retirement | Termination | Termination | Control | |||||||||||||||
|
Compensation:
|
||||||||||||||||||||
|
Severance
(1)
|
$ | — | $ | — | $ | 376,443 | $ | — | $ | — | ||||||||||
|
Benefits:
|
||||||||||||||||||||
|
COBRA & Life
Insurance
(2)
|
— | — | 9,689 | — | — | |||||||||||||||
| (1) | Based on Ms. Manes’ annual base salary of $350,000 and her AIP target of 50% of her base salary. | |
| (2) | Reflects 18 months of COBRA and life insurance premiums at the same Company/employee percentage sharing as during employment. |
119
Table of Contents
DIRECTOR
COMPENSATION
The following table provides compensation information for our
directors who were not employees in fiscal 2009:
|
Fees Earned
|
||||||||||||||||
|
or Paid in
|
Stock
|
All Other
|
||||||||||||||
|
Name
|
Cash | Awards (1) | Compensation | Total | ||||||||||||
|
T. Gary
Rogers
(2)
|
$ | 202,500 | $ | 208,532 | $ | 60,659 | $ | 471,691 | ||||||||
|
Robert D.
Haas
(3)
|
100,000 | 100,504 | 217,366 | 417,870 | ||||||||||||
|
Vanessa J. Castagna
|
100,000 | 117,580 | — | 217,580 | ||||||||||||
|
Martin
Coles
(4)
|
83,334 | 68,789 | 152,123 | |||||||||||||
|
Peter A.
Georgescu
(5)
|
110,000 | 98,554 | — | 208,554 | ||||||||||||
|
Peter E. Haas, Jr.
|
100,000 | 98,554 | — | 198,554 | ||||||||||||
|
Richard Kauffman
|
107,500 | 94,415 | — | 201,915 | ||||||||||||
|
Leon J. Level
|
120,000 | 98,554 | — | 218,554 | ||||||||||||
|
Stephen C.
Neal
(6)
|
100,000 | 117,580 | — | 217,580 | ||||||||||||
|
Patricia Salas
Pineda
(7)
|
120,000 | 98,554 | — | 218,554 | ||||||||||||
| (1) | These amounts, from RSUs granted under the EIP in and prior to 2009, reflect the dollar amount recognized for financial statement reporting purposes for the fiscal year ended November 29, 2009. The amounts are calculated using the same valuation methodology used for financial reporting purposes and as such do not reflect the amount of compensation actually received by the director during the fiscal year. For a description of the assumptions used in the calculation of this amount for the fiscal year ended November 29, 2009, see Notes 1 and 11 of the audited consolidated financial statements included elsewhere in this report. Because dividend equivalents that are issued to RSU holders upon the payment of a dividend by the Company are not expensed in the same manner as the initial RSU grant on which the dividend equivalent is based, dividend equivalents are not reflected in these amounts. The amounts shown here reflect all other RSUs granted to the director, regardless of whether such RSU has vested and been converted to a voting trust certificate representing shares of common stock. In 2009, the following issuance and vesting activities took place with respect to our directors: Mr. Rogers was issued 7,988 RSUs, 145 of which were issued as dividend equivalents, and 1,856 of his RSUs vested and were converted to a voting trust certificate representing those shares of common stock. Ms. Castagna, Mr. P.E. Haas, Mr. Level and Mr. Neal were each issued 4,005 RSUs, 83 of which were issued as dividend equivalents, and 784 of their respective RSUs vested and were converted to a voting trust certificate representing those shares of common stock. Mr. Coles was issued 5,643 RSUs, 37 of which were issued as dividend equivalents. Mr. Georgescu was issued 4,005 RSUs, 83 of which were issued as dividend equivalents. Mr. R.D. Haas was issued 3,972 RSUs, 50 of which were issued as dividend equivalents. Mr. Kauffman was issued 7,018 RSUs, 66 of which were issued as dividend equivalents. Ms. Pineda was issued 4,005 RSUs, 83 of which were issued as dividend equivalents. | |
| (2) | Includes administrative support services valued at $42,266 and use of an office valued at $18,393, for his services as Chairman. Mr. Rogers retired from the Board on December 3, 2009, following the 2009 fiscal year. | |
| (3) | Includes administrative support services valued at $169,064, a leased car at a value of $23,136, use of an office valued at $19,214, parking, and home security coverage for his services as Chairman Emeritus. | |
| (4) | Mr. Coles resigned from the Board on January 11, 2010, following the 2009 fiscal year. | |
| (5) | Per agreement with Mr. Georgescu, his spouse’s travel expenses are paid by LS&Co. when she accompanies Mr. Georgescu when he travels to LS&Co. Board meetings. | |
| (6) | Mr. Neal elected to defer $75,000 under the Deferred Compensation Plan. | |
| (7) | Ms. Pineda elected to defer $22,500 under the Deferred Compensation Plan. |
T. Gary Rogers became Chairman of the Board on
February 8, 2008. In connection with that role, he was
entitled to receive an annual retainer in the amount of
$200,000, 50% of which was to be paid in cash and 50% of which
was to be paid in the form of restricted stock units
(“RSUs”). In addition, he received an office and
related administrative support. Mr. Rogers received an
initial grant of 833 RSUs. In addition, Mr. Rogers was
eligible to receive the non-employee director cash compensation
as described below. Mr. Rogers retired from the Board on
December 3, 2009.
Robert D. Haas was Chairman of the Board prior to
February 8, 2008. He has continued to serve as a director
and is entitled to be Chairman Emeritus of the Board until 2018.
In his role as Chairman Emeritus, we provide Mr. Haas an
office, related administrative support, a leased car with driver
and home security services.
Each non-employee director, including Mr. Rogers, received
compensation in 2009 consisting of an annual cash retainer fee
of $100,000 and, if applicable, committee chairperson retainer
fees ($20,000 for the Audit
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Table of Contents
Committee and the Human Resources Committee, and $10,000 for the
Finance Committee and the Nominating and Governance Committee).
Each non-employee director, excluding Mr. Rogers, also
received an annual equity award in the amount of 3,922 RSUs in
2009. Mr. Rogers, in his role as Chairman, received an
annual award of 7,843 RSUs. All directors who held RSUs as of
April 27, 2009, including Mr. Rogers, received
additional RSUs as a dividend equivalent under the terms of the
EIP. All dividend equivalents will be subject to all the terms
and conditions of the underlying Restricted Stock Unit Award
Agreement to which they relate.
RSUs are granted under the Company’s 2006 EIP. RSUs are
units, representing beneficial ownership interests,
corresponding in number and value to a specified number of
underlying shares of stock. Currently, RSUs have only been
granted to our Board members. The RSUs vest in three equal
installments after thirteen, twenty-four and thirty-six months
following the grant date. After the recipient of the RSU has
held the shares for six months, he or she may require the
Company to repurchase, or the Company may require the
participant to sell to the Company, those shares of common
stock. If the director’s service terminates for reason
other than cause after the first, but prior to full vesting,
then any unvested portion of the award will fully vest as of the
date of such termination. The 2007 RSU grant included a deferral
delivery feature, under which the directors will not receive the
vested awards until six months following the cessation of
service on the Board. The value of the RSUs is tracked against
the Company’s share prices, established by the Evercore
valuation process.
In 2007, the Board approved stock ownership guidelines for our
non-employee Board members consistent with governance practices
of similarly-situated companies. The ownership target is
$300,000 worth of equity ownership, to be achieved within five
years. Therefore, RSUs were granted under the EIP, rather than
other available forms of equity compensation, in order to
provide the directors with immediate stock ownership to
facilitate achievement of the ownership guidelines.
Directors are covered under travel accident insurance while on
Company business, as are all employees, and the non-employee
directors are eligible to participate in the provisions of the
Deferred Compensation Plan for Executives and Outside Directors
that apply to directors. In 2009, Mr. Neal and
Ms. Pineda participated in this Deferred Compensation Plan.
Compensation
Committee Interlocks and Insider Participation
The Human Resources Committee serves as the compensation
committee of our board of directors. Its members are
Ms. Pineda (Chair), Ms. Castagna, Mr. P.E. Haas
Jr. and Mr. R.D. Haas. In 2009, no member of the Human
Resources Committee was a current officer or employee, or former
officer, of ours. In addition, there are no compensation
committee interlocks between us and other entities involving our
executive officers and our Board members who serve as executive
officers of those other entities.
Mr. Neal, a director is chairman of the law firm Cooley
Godward Kronish LLP. Cooley Godward Kronish provided legal
services to us in 2009, for which we paid fees of approximately
$0.6 million.
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Table of Contents
| Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
All shares of our common stock are deposited in a voting trust,
a legal arrangement that transfers the voting power of the
shares to a trustee or group of trustees. The four voting
trustees are Miriam L. Haas, Peter E. Haas Jr., Robert D. Haas
and Stephen C. Neal. The voting trustees have the exclusive
ability to elect and remove directors, amend our by-laws and
take certain other actions which would normally be within the
power of stockholders of a Delaware corporation. Our equity
holders who, as a result of the voting trust, legally hold
“voting trust certificates,” not stock, retain the
right to direct the trustees on specified mergers and business
combinations, liquidations, sales of substantially all of our
assets and specified amendments to our certificate of
incorporation.
The voting trust will expire on April 15, 2011, unless the
trustees unanimously decide, or holders of at least two-thirds
of the outstanding voting trust certificates decide, to
terminate it earlier. If Robert D. Haas ceases to be a trustee
for any reason, then the question of whether to continue the
voting trust will be decided by the holders. The existing
trustees will select the successors to the other trustees. The
agreement among the stockholders and the trustees creating the
voting trust contemplates that, in selecting successor trustees,
the trustees will attempt to select individuals who share a
common vision with the sponsors of the 1996 transaction that
gave rise to the voting trust, represent and reflect the
financial and other interests of the equity holders and bring a
balance of perspectives to the trustee group as a whole. A
trustee may be removed if the other three trustees unanimously
vote for removal or if holders of at least two-thirds of the
outstanding voting trust certificates vote for removal.
The following table contains information about the beneficial
ownership of our voting trust certificates as of
February 1, 2010, by:
| • | Each person known by us to own beneficially more than 5% of our voting trust certificates; | |
| • | Each of our directors and each of our named executive officers; and | |
| • | All of our directors and executive officers as a group. |
Under the rules of the SEC, a person is deemed to be a
“beneficial owner” of a security if that person has or
shares “voting power,” which includes the power to
vote or to direct the voting of the security, or
“investment power,” which includes the power to
dispose of or to direct the disposition of the security. Under
these rules, more than one person may be deemed a beneficial
owner of the same securities and a person may be deemed to be a
beneficial owner of securities as to which that person has no
economic interest. Except as described in the footnotes to the
table below, the individuals named in the table have sole voting
and investment power with respect to all voting trust
certificates beneficially owned by them, subject to community
property laws where applicable.
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Table of Contents
As of February 1, 2010, there were 199 record holders of
voting trust certificates. The percentage of beneficial
ownership shown in the table is based on 37,300,215 shares
of common stock and related voting trust certificates
outstanding as of February 1, 2010. The business address of
all persons listed, including the trustees under the voting
trust, is 1155 Battery Street, San Francisco, California
94111.
|
Percentage of
|
||||||||
|
Number of Voting
|
Voting Trust
|
|||||||
|
Trust Certificates
|
Certificates
|
|||||||
|
Name
|
Beneficially Owned | Outstanding | ||||||
|
Peter E. Haas, Jr.
|
8,003,610 | (1) | 21.46 | % | ||||
|
Miriam L. Haas
|
6,547,314 | 17.55 | % | |||||
|
Margaret E. Haas
|
4,261,005 | (2) | 11.42 | % | ||||
|
Robert D. Haas
|
3,946,728 | (3) | 10.58 | % | ||||
|
Richard L. Kauffman
|
— | — | ||||||
|
R. John Anderson
|
— | — | ||||||
|
Vanessa J. Castagna
|
784 | * | ||||||
|
Peter A. Georgescu
|
— | — | ||||||
|
Leon J. Level
|
784 | * | ||||||
|
Stephen C. Neal
|
784 | * | ||||||
|
Patricia Salas Pineda
|
— | — | ||||||
|
Beng (Aaron) Keong Boey
|
— | — | ||||||
|
Armin Broger
|
— | — | ||||||
|
Robert L. Hanson
|
— | — | ||||||
|
Blake Jorgensen
|
— | — | ||||||
|
Heidi L. Manes
|
— | — | ||||||
|
Directors and executive officers as a group (14 persons)
|
11,952,690 | 32.04 | % | |||||
| * | Less than 0.01%. | |
| (1) | Includes 2,715,070 voting trust certificates held by the Joanne and Peter Haas Jr. Fund, of which Mr. Haas is president, for the benefit of charitable entities. Includes a total of 1,412,491 voting trust certificates held by trusts, of which Mr. Haas is trustee, for the benefit of his children. Mr. Haas disclaims beneficial ownership of all the foregoing voting trust certificates. Also includes 2,263,047 voting trust certificates representing shares of common stock pledged to a third party as collateral for a loan. | |
| (2) | Includes 20,437 voting trust certificates held in a custodial account, of which Ms. Haas is custodian, for the benefit of Ms. Haas’ son. Includes 905,390 voting trust certificates held by the Margaret E. Haas Fund, of which Ms. Haas is president, for the benefit of charitable entities. Ms. Haas disclaims beneficial ownership of all of the foregoing voting trust certificates. | |
| (3) | Includes an aggregate of 51,401 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. Includes 389 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 all of the foregoing voting trust certificates. |
Equity
Compensation Plan Information
The following table sets forth certain information, as of
November 29, 2009, with respect to the EIP, our only equity
compensation plan. This plan was approved by our shareholders.
See Note 11 to our audited consolidated financial
statements included in this report for more information about
the EIP.
|
Weighted-Average
|
Number of Securities
|
|||||||||||||
|
Number of Securities to
|
Exercise Price of
|
Remaining Available
|
||||||||||||
|
Number of
|
Be Issued Upon Exercise
|
Outstanding
|
for Future Issuance
|
|||||||||||
|
Outstanding Options,
|
of Outstanding Options,
|
Options, Warrants
|
Under Equity
|
|||||||||||
|
Warrants and
Rights
(1)
|
Warrants and Rights (2) | and Rights (1) | Compensation Plans (3) | |||||||||||
| 471,455 | 149,832 | $ | 24.90 | 543,665 | ||||||||||
| (1) | Includes only dilutive SARs. | |
| (2) | Represents the number of shares of common stock the dilutive SARs would convert to if exercised November 29, 2009, calculated based on the conversion formula as defined in the plan and the fair market value of our common stock on that date as determined by an independent third party. |
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Table of Contents
| (3) | Calculated based on the number of stock awards authorized upon the adoption of the EIP, less the number of securities to be issued upon exercise of outstanding dilutive SARs, less voting trust certificates issued in connection with converted RSUs; does not reflect 75,840 securities expected to be issued in the future upon conversion of outstanding RSUs. Note that the following shares may return to the EIP and be available for issuance in connection with a future award: (i) shares covered by an award that expires or otherwise terminates without having been exercised in full; (ii) shares that are forfeited or repurchased by us prior to becoming fully vested; (iii) shares covered by an award that is settled in cash; (iv) shares withheld to cover payment of an exercise price or cover applicable tax withholding obligations; (v) shares tendered to cover payment of an exercise price; and (vi) shares that are cancelled pursuant to an exchange or repricing program. |
Stockholders’
Agreement
Our common stock and the voting trust certificates are not
publicly held or traded. All shares and the voting trust
certificates are subject to a stockholders’ agreement. The
agreement, which expires in April 2016, limits the transfer of
shares and certificates to other holders, family members,
specified charities and foundations and to us. The agreement
does not provide for registration rights or other contractual
devices for forcing a public sale of shares, certificates or
other access to liquidity. The scheduled expiration date of the
stockholders’ agreement is five years later than that of
the voting trust agreement in order to permit an orderly
transition from effective control by the voting trust trustees
to direct control by the stockholders.
| Item 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Robert D. Haas, a director and Chairman Emeritus of our board of
directors, is the President of the Levi Strauss Foundation,
which is not a consolidated entity of the Company. During 2009,
we donated $5.5 million to the Levi Strauss Foundation.
Stephen C. Neal, a director, is chairman of the law firm Cooley
Godward Kronish LLP. The firm provided legal services to us in
2009 for which we paid fees of approximately $0.6 million.
Procedures
for Approval of Related Party Transactions
We have a written policy concerning the review and approval of
related party transactions. Potential related party transactions
are identified through an internal review process that includes
a review of director and officer questionnaires and a review of
any payments made in connection with transactions in which
related persons may have had a direct or indirect material
interest. Any business transactions or commercial relationships
between the Company and any director, stockholder, or any of
their immediate family members, are reviewed by the Nominating
and Governance Committee of the board and must be approved by at
least a majority of the disinterested members of the board.
Business transactions or commercial relationships between the
Company and named executive officers who are not directors or
any of their immediate family members requires approval of the
chief executive officer with reporting to the Audit Committee.
Director
Independence
Although our shares are not registered on a national securities
exchange, we review and take into consideration the director
independence criteria required by both the New York Stock
Exchange and the NASDAQ Stock Market in determining the
independence of our directors. In addition, the charters of our
board committees prohibit members from having any relationship
that would interfere with the exercise of their independence
from management and the Company. The fact that a director may
own stock or voting trust certificates representing stock in the
Company is not, by itself, considered an
“interference” with independence under the committee
charters. Family shareholders or other family member directors
are not eligible for membership on the Audit Committee. These
independence standards are disclosed on our website at
http://www.levistrauss.com/Company/DirectorIndependence.aspx
Each of our directors except for John Anderson, who serves as
our full-time President and Chief Executive Officer, meets these
standards of independence.
124
Table of Contents
| Item 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Engagement of the independent registered public accounting
firm.
The audit committee is responsible for
approving every engagement of our independent registered public
accounting firm to perform audit or non-audit services for us
before being engaged to provide those services. The audit
committee’s pre-approval policy provides as follows:
| • | First, once a year when the base audit engagement is reviewed and approved, management will identify all other services (including fee ranges) for which management knows or believes it will engage our independent registered public accounting firm for the next 12 months. Those services typically include quarterly reviews, employee benefit plan reviews, specified tax matters, certifications to the lenders as required by financing documents, consultation on new accounting and disclosure standards and, in future years, reporting on management’s internal controls assessment. | |
| • | Second, if any new proposed engagement comes up during the year that was not pre-approved by the audit committee as discussed above, the engagement will require: (i) specific approval of the chief financial officer and corporate controller (including confirming with counsel permissibility under applicable laws and evaluating potential impact on independence) and, if approved by management, (ii) approval of the audit committee. | |
| • | Third, the chair of the audit committee will have the authority to give such approval, but may seek full audit committee input and approval in specific cases as he or she may determine. |
Auditor fees.
The following table shows fees
billed to or incurred by us for professional services rendered
by PricewaterhouseCoopers LLP, our independent registered public
accounting firm during 2009 and 2008:
|
Year Ended
|
Year Ended
|
|||||||
|
November 29,
|
November 30,
|
|||||||
| 2009 | 2008 | |||||||
| (Dollars in thousands) | ||||||||
|
Services provided:
|
||||||||
|
Audit
fees
(1)
|
$ | 4,328 | $ | 4,415 | ||||
|
Audit-related
fees
(2)
|
977 | 1,330 | ||||||
|
Tax services
|
302 | 56 | ||||||
|
Total fees
|
$ | 5,607 | $ | 5,801 | ||||
| (1) | Includes fees for the audit of our annual consolidated financial statements, quarterly reviews of interim consolidated financial statements and statutory audits. | |
| (2) | Principally comprised of fees related to due diligence for our acquisitions in 2009 and controls reviews in connection with our implementation of our enterprise resource planning system in 2008. |
125
Table of Contents
| Item 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
List the following documents filed as a part of the report:
1. Financial Statements
The following consolidated financial statements of the Company
are included in Item 8:
2. Financial Statement Schedule
Schedule II — Valuation and Qualifying Accounts
All other schedules have been omitted because they are
inapplicable, not required or the information is included in the
Consolidated Financial Statements or Notes thereto.
|
Exhibits
|
||
|
3.1
|
Restated Certificate of Incorporation. Previously filed as Exhibit 3.3 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on April 6, 2001. | |
|
3.2
|
Amended and Restated By-Laws. Previously filed as Exhibit 3.1 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on July 12, 2005. | |
|
4.1
|
Fiscal Agency Agreement, dated November 21, 1996, between the Registrant and Citibank, N.A., relating to ¥20 billion 4.25% bonds due 2016. Previously filed as Exhibit 4.2 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 4, 2000. | |
|
4.2
|
Indenture relating to 9.75% Senior Notes due 2015, dated of December 22, 2004, between the Registrant and Wilmington Trust Company, as trustee. Previously filed as Exhibit 4.1 to Registrant’s Current Report on Form 8-K filed with the Commission on December 23, 2004. | |
|
4.3
|
Indenture relating to the 8.625% Senior Notes due 2013, dated March 11, 2005, between the Registrant and Wilmington Trust Company, as trustee. Previously filed as Exhibit 4.2 to Registrant’s Current Report on Form 8-K filed with the Commission on March 11, 2005. | |
|
4.4
|
First Supplemental Indenture relating to the 8.625% Senior Notes due 2013, dated March 11, 2005, between the Registrant and Wilmington Trust Company, as trustee. Previously filed as Exhibit 4.4 to Registrant’s Current Report on Form 8-K filed with the Commission on March 11, 2005. | |
|
4.5
|
Indenture relating to the 8.875% Senior Notes due 2016, dated as of March 17, 2006, between the Registrant and Wilmington Trust Company, as trustee. Previously filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on March 17, 2006. | |
|
4.6
|
Voting Trust Agreement, dated April 15, 1996, among LSAI Holding Corp. (predecessor of the Registrant), Robert D. Haas, Peter E. Haas, Sr., Peter E. Haas Jr., F. Warren Hellman, as voting trustees, and the stockholders. Previously filed as Exhibit 9 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 4, 2000. | |
|
10.1
|
Stockholders Agreement, dated April 15, 1996, among LSAI Holding Corp. (predecessor of the Registrant) and the stockholders. Previously filed as Exhibit 10.1 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 4, 2000. | |
|
10.2
|
Supply Agreement, dated March 30, 1992, and First Amendment to Supply Agreement, between the Registrant and Cone Mills Corporation. Previously filed as Exhibit 10.18 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 4, 2000. |
126
Table of Contents
|
Exhibits
|
||
|
10.3
|
Second Amendment to Supply Agreement dated May 13, 2002, between the Registrant and Cone Mills Corporation dated as of March 30, 1992. Previously filed as Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q/A filed with the Commission on September 19, 2002. | |
|
10.4
|
Deferred Compensation Plan for Executives and Outside Directors, effective January 1, 2003. Previously filed as Exhibit 10.64 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 12, 2003.* | |
|
10.5
|
First Amendment to Deferred Compensation Plan for Executives and Outside Directors, dated November 17, 2003. Previously filed as Exhibit 10.69 to the Registrant’s Annual Report on Form 10-K filed with the Commission on March 1, 2004.* | |
|
10.6
|
Second Amendment to Deferred Compensation Plan for Executives and Outside Directors, effective January 1, 2005. Previously filed as Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on October 12, 2004.* | |
|
10.7
|
Executive Severance Plan effective January 16, 2008. Previously filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Commission on January 23, 2008. | |
|
10.8
|
Excess Benefit Restoration Plan. Previously filed as Exhibit 10.27 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 4, 2000.* | |
|
10.9
|
Supplemental Benefit Restoration Plan. Previously filed as Exhibit 10.28 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 4, 2000.* | |
|
10.10
|
Amendment to Supplemental Benefit Restoration Plan effective January 1, 2001. Previously filed as Exhibit 10.47 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 5, 2001.* | |
|
10.11
|
Annual Incentive Plan, effective November 29, 2004. Previously filed as Exhibit 10.5 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on July 12, 2005.* | |
|
10.12
|
2006 Equity Incentive Plan. Previously filed as Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the Commission on July 19, 2006.* | |
|
10.13
|
Form of stock appreciation right award agreement. Previously filed as Exhibit 99.2 to Registrant’s Current Report on Form 8-K filed with the Commission on July 19, 2006.* | |
|
10.14
|
Rabbi Trust Agreement, effective January 1, 2003, between the Registrant and Boston Safe Deposit and Trust Company. Previously filed as Exhibit 10.65 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 12, 2003.* | |
|
10.15
|
Offer letter dated October 17, 2006, from the Registrant to John Anderson. Previously filed as Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the Commission on October 27, 2006.* | |
|
10.16
|
Amendment of November 28, 2006, to offer letter dated October 17, 2006, from the Registrant to John Anderson. Previously filed as Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the Commission on November 30, 2006.* | |
|
10.17
|
Limited Waiver dated as of March 1, 2007, by and among Levi Strauss & Co., the financial institutions listed therein and Bank of America, N.A. as agent for lenders. Previously filed as Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the Commission on March 2, 2007. | |
|
10.18
|
Term Loan Agreement, dated as of March 27, 2007, among Levi Strauss & Co., the lenders and other financial institutions party thereto and Bank of America, N.A. as administrative agent. Previously filed as Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the Commission on March 30, 2007. | |
|
10.19
|
Employment Contract and related agreements, dated as of February 23, 2007, between Armin Broger and Levi Strauss Nederland B.V. and various affiliates. Previously filed as Exhibit 10.3 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on April 10, 2007.* | |
|
10.20
|
Second Amended and Restated Credit Agreement, dated October 11, 2007, among Levi Strauss & Co., Levi Strauss Financial Center Corporation, the financial institutions party thereto and Bank of America, N.A., as agent, to the First Amended and Restated Credit Agreement, dated May 18, 2006, between Levi Strauss & Co., Levi Strauss Financial Center Corporation, the financial institutions party thereto and Bank of America, N.A., as agent. Previously filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Commission on October 12, 2007. |
127
Table of Contents
|
Exhibits
|
||
|
10.21
|
Second Amended and Restated Pledge and Security Agreement, dated October 11, 2007, by Levi Strauss & Co. and certain subsidiaries of Levi Strauss & Co. in favor of the agent. Previously filed as Exhibit 10.2 to Registrant’s Current Report on Form 8-K filed with the Commission on October 12, 2007. | |
|
10.22
|
Trademark Security Agreement, dated October 11, 2007, by Levi Strauss & Co. in favor of the agent. Previously filed as Exhibit 10.3 to Registrant’s Current Report on Form 8-K filed with the Commission on October 12, 2007. | |
|
10.23
|
First Amended and Restated Subsidiary Guaranty, dated October 11, 2007, by certain subsidiaries of Levi Strauss & Co. in favor of the agent. Previously filed as Exhibit 10.4 to Registrant’s Current Report on Form 8-K filed with the Commission on October 12, 2007. | |
|
10.24
|
Director Indemnification Agreement. Previously filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Commission on July 10, 2008. | |
|
10.25
|
Employment Offer Letter, dated May 27, 2009, between Levi Strauss & Co. and Blake Jorgensen. Previously filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Commission on May 28, 2009.* | |
|
10.26
|
Employment Offer Letter, dated August 19, 2009, between Levi Strauss & Co. and Jaime Cohen Szulc. Previously filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Commission on August 25, 2009.* | |
|
10.27
|
Second Amendment to Lease, dated November 12, 2009, by and among the Company, Blue Jeans Equities West, a California general partnership, Innsbruck LP, a California limited partnership, and Plaza GB LP, a California limited partnership. Previously filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Commission on November 25, 2009. | |
|
12
|
Statements re: Computation of Ratio of Earnings to Fixed Charges. Filed herewith. | |
|
14.1
|
Worldwide Code of Business Conduct of Registrant. Previously filed as Exhibit 14 to the Registrant’s Annual Report on Form 10-K filed with the Commission on March 1, 2004. | |
|
21
|
Subsidiaries of the Registrant. Filed herewith. | |
|
24
|
Power of Attorney. Contained in signature pages hereto. | |
|
31.1
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. | |
|
31.2
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. | |
|
32
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith. |
| * | Management contract, compensatory plan or arrangement. |
128
Table of Contents
SCHEDULE II
LEVI
STRAUSS & CO. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
VALUATION AND QUALIFYING ACCOUNTS
|
Balance at
|
Additions
|
Balance at
|
||||||||||||||
|
Beginning
|
Charged to
|
End of
|
||||||||||||||
|
Allowance for Doubtful Accounts
|
of Period | Expenses | Deductions (1) | Period | ||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
November 29, 2009
|
$ | 16,886 | $ | 7,246 | $ | 1,609 | $ | 22,523 | ||||||||
|
November 30, 2008
|
$ | 14,805 | $ | 10,376 | $ | 8,295 | $ | 16,886 | ||||||||
|
November 25, 2007
|
$ | 17,998 | $ | 542 | $ | 3,735 | $ | 14,805 | ||||||||
|
Balance at
|
Additions
|
Balance at
|
||||||||||||||
|
Beginning
|
Charged to
|
End of
|
||||||||||||||
|
Sales Returns
|
of Period | Net Sales | Deductions (1) | Period | ||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
November 29, 2009
|
$ | 37,333 | $ | 115,554 | $ | 119,781 | $ | 33,106 | ||||||||
|
November 30, 2008
|
$ | 54,495 | $ | 126,481 | $ | 143,643 | $ | 37,333 | ||||||||
|
November 25, 2007
|
$ | 29,888 | $ | 130,707 | $ | 106,100 | $ | 54,495 | ||||||||
|
Balance at
|
Additions
|
Balance at
|
||||||||||||||
|
Beginning
|
Charged to
|
End of
|
||||||||||||||
|
Sales Discounts and Incentives
|
of Period | Net Sales | Deductions (1) | Period | ||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
November 29, 2009
|
$ | 95,793 | $ | 257,022 | $ | 267,188 | $ | 85,627 | ||||||||
|
November 30, 2008
|
$ | 106,615 | $ | 266,169 | $ | 276,991 | $ | 95,793 | ||||||||
|
November 25, 2007
|
$ | 84,102 | $ | 319,315 | $ | 296,802 | $ | 106,615 | ||||||||
|
Balance at
|
Charges/
|
Balance at
|
||||||||||||||
|
Valuation Allowance Against
|
Beginning
|
(Releases) to
|
(Additions)/
|
End of
|
||||||||||||
|
Deferred Tax Assets
|
of Period | Tax Expense | Deductions (1) | Period | ||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
November 29, 2009
|
$ | 58,693 | $ | 4,090 | $ | (10,203 | ) | $ | 72,986 | |||||||
|
November 30, 2008
|
$ | 73,596 | $ | (1,768 | ) | $ | 13,135 | $ | 58,693 | |||||||
|
November 25, 2007
|
$ | 326,881 | $ | (206,830 | ) | $ | 46,455 | $ | 73,596 | |||||||
| (1) | The charges to the accounts are for the purposes for which the allowances were created. |
129
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
LEVI STRAUSS & CO.
| By: |
/s/
Blake
Jorgensen
|
Blake Jorgensen
Executive Vice President and
Chief Financial Officer
Chief Financial Officer
Date: February 9, 2010
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Heidi L. Manes,
and Hilary K. Krane and each of them, his or her
attorney-in-fact with power of substitution for him or her in
any and all capacities, to sign any amendments, supplements or
other documents relating to this Annual Report on
Form 10-K
he or she deems necessary or appropriate, and to file the same,
with exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that such attorney-in-fact or their
substitute may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
Signature
|
Title
|
|||||
|
/s/
Richard
L. Kauffman
|
Chairman of the Board | Date: February 9, 2010 | ||||
|
/s/
R.
John Anderson
|
Director, President and Chief
Executive Officer |
Date: February 9, 2010 | ||||
|
/s/
Robert
D. Haas
|
Director, Chairman Emeritus | Date: February 9, 2010 | ||||
|
/s/
Vanessa
J. Castagna
|
Director | Date: February 9, 2010 | ||||
|
/s/
Peter
A. Georgescu
|
Director | Date: February 9, 2010 | ||||
|
/s/
Peter
E. Haas Jr.
|
Director | Date: February 9, 2010 | ||||
|
/s/
Leon
J. Level
|
Director | Date: February 9, 2010 | ||||
130
Table of Contents
|
Signature
|
Title
|
|||||
|
/s/
Stephen
C. Neal
|
Director | Date: February 9, 2010 | ||||
|
/s/
Patricia
Salas Pineda
|
Director | Date: February 9, 2010 | ||||
|
/s/
Heidi
L. Manes
|
Vice President and Controller (Principal Accounting Officer) | Date: February 9, 2010 | ||||
131
Table of Contents
SUPPLEMENTAL
INFORMATION
We will furnish our 2009 annual report to our voting trust
certificate holders after the filing of this
Form 10-K
and will furnish copies of such material to the SEC at such
time. No proxy statement will be sent to our voting trust
certificate holders.
132
Table of Contents
EXHIBITS INDEX
| 3 | .1 | Restated Certificate of Incorporation. Previously filed as Exhibit 3.3 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on April 6, 2001. | ||
| 3 | .2 | Amended and Restated By-Laws. Previously filed as Exhibit 3.1 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on July 12, 2005. | ||
| 4 | .1 | Fiscal Agency Agreement, dated November 21, 1996, between the Registrant and Citibank, N.A., relating to ¥20 billion 4.25% bonds due 2016. Previously filed as Exhibit 4.2 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 4, 2000. | ||
| 4 | .2 | Indenture relating to 9.75% Senior Notes due 2015, dated of December 22, 2004, between the Registrant and Wilmington Trust Company, as trustee. Previously filed as Exhibit 4.1 to Registrant’s Current Report on Form 8-K filed with the Commission on December 23, 2004. | ||
| 4 | .3 | Indenture relating to the 8.625% Senior Notes due 2013, dated March 11, 2005, between the Registrant and Wilmington Trust Company, as trustee. Previously filed as Exhibit 4.2 to Registrant’s Current Report on Form 8-K filed with the Commission on March 11, 2005. | ||
| 4 | .4 | First Supplemental Indenture relating to the 8.625% Senior Notes due 2013, dated March 11, 2005, between the Registrant and Wilmington Trust Company, as trustee. Previously filed as Exhibit 4.4 to Registrant’s Current Report on Form 8-K filed with the Commission on March 11, 2005. | ||
| 4 | .5 | Indenture relating to the 8.875% Senior Notes due 2016, dated as of March 17, 2006, between the Registrant and Wilmington Trust Company, as trustee. Previously filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on March 17, 2006. | ||
| 4 | .6 | Voting Trust Agreement, dated April 15, 1996, among LSAI Holding Corp. (predecessor of the Registrant), Robert D. Haas, Peter E. Haas, Sr., Peter E. Haas Jr., F. Warren Hellman, as voting trustees, and the stockholders. Previously filed as Exhibit 9 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 4, 2000. | ||
| 10 | .1 | Stockholders Agreement, dated April 15, 1996, among LSAI Holding Corp. (predecessor of the Registrant) and the stockholders. Previously filed as Exhibit 10.1 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 4, 2000. | ||
| 10 | .2 | Supply Agreement, dated March 30, 1992, and First Amendment to Supply Agreement, between the Registrant and Cone Mills Corporation. Previously filed as Exhibit 10.18 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 4, 2000. | ||
| 10 | .3 | Second Amendment to Supply Agreement dated May 13, 2002, between the Registrant and Cone Mills Corporation dated as of March 30, 1992. Previously filed as Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q/A filed with the Commission on September 19, 2002. | ||
| 10 | .4 | Deferred Compensation Plan for Executives and Outside Directors, effective January 1, 2003. Previously filed as Exhibit 10.64 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 12, 2003.* | ||
| 10 | .5 | First Amendment to Deferred Compensation Plan for Executives and Outside Directors, dated November 17, 2003. Previously filed as Exhibit 10.69 to the Registrant’s Annual Report on Form 10-K filed with the Commission on March 1, 2004.* | ||
| 10 | .6 | Second Amendment to Deferred Compensation Plan for Executives and Outside Directors, effective January 1, 2005. Previously filed as Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on October 12, 2004.* | ||
| 10 | .7 | Executive Severance Plan effective January 16, 2008. Previously filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Commission on January 23, 2008. | ||
| 10 | .8 | Excess Benefit Restoration Plan. Previously filed as Exhibit 10.27 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 4, 2000.* | ||
| 10 | .9 | Supplemental Benefit Restoration Plan. Previously filed as Exhibit 10.28 to Registrant’s Registration Statement on Form S-4 filed with the Commission on May 4, 2000.* | ||
| 10 | .10 | Amendment to Supplemental Benefit Restoration Plan effective January 1, 2001. Previously filed as Exhibit 10.47 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 5, 2001.* | ||
| 10 | .11 | Annual Incentive Plan, effective November 29, 2004. Previously filed as Exhibit 10.5 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on July 12, 2005.* | ||
| 10 | .12 | 2006 Equity Incentive Plan. Previously filed as Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the Commission on July 19, 2006.* | ||
| 10 | .13 | Form of stock appreciation right award agreement. Previously filed as Exhibit 99.2 to Registrant’s Current Report on Form 8-K filed with the Commission on July 19, 2006.* |
Table of Contents
| 10 | .14 | Rabbi Trust Agreement, effective January 1, 2003, between the Registrant and Boston Safe Deposit and Trust Company. Previously filed as Exhibit 10.65 to Registrant’s Annual Report on Form 10-K filed with the Commission on February 12, 2003.* | ||
| 10 | .15 | Offer letter dated October 17, 2006, from the Registrant to John Anderson. Previously filed as Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the Commission on October 27, 2006.* | ||
| 10 | .16 | Amendment of November 28, 2006, to offer letter dated October 17, 2006, from the Registrant to John Anderson. Previously filed as Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the Commission on November 30, 2006.* | ||
| 10 | .17 | Limited Waiver dated as of March 1, 2007, by and among Levi Strauss & Co., the financial institutions listed therein and Bank of America, N.A. as agent for lenders. Previously filed as Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the Commission on March 2, 2007. | ||
| 10 | .18 | Term Loan Agreement, dated as of March 27, 2007, among Levi Strauss & Co., the lenders and other financial institutions party thereto and Bank of America, N.A. as administrative agent. Previously filed as Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the Commission on March 30, 2007. | ||
| 10 | .19 | Employment Contract and related agreements, dated as of February 23, 2007, between Armin Broger and Levi Strauss Nederland B.V. and various affiliates. Previously filed as Exhibit 10.3 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on April 10, 2007.* | ||
| 10 | .20 | Second Amended and Restated Credit Agreement, dated October 11, 2007, among Levi Strauss & Co., Levi Strauss Financial Center Corporation, the financial institutions party thereto and Bank of America, N.A., as agent, to the First Amended and Restated Credit Agreement, dated May 18, 2006, between Levi Strauss & Co., Levi Strauss Financial Center Corporation, the financial institutions party thereto and Bank of America, N.A., as agent. Previously filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Commission on October 12, 2007. | ||
| 10 | .21 | Second Amended and Restated Pledge and Security Agreement, dated October 11, 2007, by Levi Strauss & Co. and certain subsidiaries of Levi Strauss & Co. in favor of the agent. Previously filed as Exhibit 10.2 to Registrant’s Current Report on Form 8-K filed with the Commission on October 12, 2007. | ||
| 10 | .22 | Trademark Security Agreement, dated October 11, 2007, by Levi Strauss & Co. in favor of the agent. Previously filed as Exhibit 10.3 to Registrant’s Current Report on Form 8-K filed with the Commission on October 12, 2007. | ||
| 10 | .23 | First Amended and Restated Subsidiary Guaranty, dated October 11, 2007, by certain subsidiaries of Levi Strauss & Co. in favor of the agent. Previously filed as Exhibit 10.4 to Registrant’s Current Report on Form 8-K filed with the Commission on October 12, 2007. | ||
| 10 | .24 | Director Indemnification Agreement. Previously filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Commission on July 10, 2008. | ||
| 10 | .25 | Employment Offer Letter, dated May 27, 2009, between Levi Strauss & Co. and Blake Jorgensen. Previously filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Commission on May 28, 2009.* | ||
| 10 | .26 | Employment Offer Letter, dated August 19, 2009, between Levi Strauss & Co. and Jaime Cohen Szulc. Previously filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Commission on August 25, 2009.* | ||
| 10 | .27 | Second Amendment to Lease, dated November 12, 2009, by and among the Company, Blue Jeans Equities West, a California general partnership, Innsbruck LP, a California limited partnership, and Plaza GB LP, a California limited partnership. Previously filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Commission on November 25, 2009. | ||
| 12 | Statements re: Computation of Ratio of Earnings to Fixed Charges. Filed herewith. | |||
| 14 | .1 | Worldwide Code of Business Conduct of Registrant. Previously filed as Exhibit 14 to the Registrant’s Annual Report on Form 10-K filed with the Commission on March 1, 2004. | ||
| 21 | Subsidiaries of the Registrant. Filed herewith. | |||
| 24 | Power of Attorney. Contained in signature pages hereto. | |||
| 31 | .1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. | ||
| 31 | .2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. | ||
| 32 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith. |
| * | Management contract, compensatory plan or arrangement. |
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission Of Matters To A Vote Of Security HoldersPart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataNote 1: Significant Accounting PoliciesNote 2: Property, Plant and EquipmentNote 3: Business AcquisitionsNote 4: Fair Value Of Financial InstrumentsNote 5: Derivative Instruments and Hedging ActivitiesNote 6: DebtNote 7: GuaranteesNote 8: Employee Benefit PlansNote 9: Employee Investment PlansNote 10: Employee Incentive Compensation PlansNote 11: Stock-based Incentive Compensation PlansNote 12: Long-term Employee Related BenefitsNote 13: Restructuring LiabilitiesNote 14: Commitments and ContingenciesNote 15: Dividend PaymentNote 16: Accumulated Other Comprehensive Income (loss)Note 17: Other Income (expense), NetNote 18: Income TaxesNote 19: Related PartiesNote 20: Business Segment InformationNote 21: Quarterly Financial Data (unaudited)Item 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9a(t). Controls and ProceduresItem 9a(t)Item 9B. Other InformationPart IIIItem 10. Directors and Executive OfficersItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits, Financial Statement Schedules