10-Q 1 a2q2013form10-q.htm 10-Q 2Q 2013 Form 10-Q
 
 
 
 
 
 
 
 
 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
Form 10-Q
(Mark One)
 þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended May 26, 2013
or
 ¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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) (Zip Code)
(415) 501-6000
(Registrant’s Telephone Number, Including Area Code)
None
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
_________________
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  ¨    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  þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See definition of “Large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
 
 
 
 
 
 
Large accelerated filer ¨
 
Accelerated filer ¨
 
Non-accelerated filer þ
 
Smaller reporting company ¨
 
(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  ¨    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 — 37,399,086 shares outstanding on July 3, 2013
 
 
 
 
 
 
 
 
 
 



LEVI STRAUSS & CO. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MAY 26, 2013
 
 
 
 
Page
Number
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
 
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 3.
 
Item 4.
 
Item 5.
 
Item 6.
 
 



PART I — FINANCIAL INFORMATION

Item 1.
CONSOLIDATED FINANCIAL STATEMENTS
LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
(Unaudited)
 
 
 
May 26,
2013
 
November 25,
2012
 
(Dollars in thousands)
ASSETS
Current Assets:
 
 
 
Cash and cash equivalents
$
389,785

 
$
406,134

Trade receivables, net of allowance for doubtful accounts of $21,117 and $20,738
342,863

 
500,672

Inventories:
 
 
 
Raw materials
4,013

 
5,312

Work-in-process
6,580

 
9,558

Finished goods
528,900

 
503,990

Total inventories
539,493

 
518,860

Deferred tax assets, net
114,677

 
116,224

Other current assets
130,687

 
136,483

Total current assets
1,517,505

 
1,678,373

Property, plant and equipment, net of accumulated depreciation of $782,200 and $782,766
445,887

 
458,807

Goodwill
239,797

 
239,971

Other intangible assets, net
53,991

 
59,909

Non-current deferred tax assets, net
607,177

 
612,916

Other non-current assets
116,415

 
120,101

Total assets
$
2,980,772

 
$
3,170,077

 
 
 
 
LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current Liabilities:
 
 
 
Short-term debt
$
54,370

 
$
59,759

Current maturities of capital leases
987

 
1,760

Accounts payable
208,121

 
225,726

Other accrued liabilities
189,330

 
263,575

Accrued salaries, wages and employee benefits
176,291

 
223,850

Accrued interest payable
6,152

 
5,471

Accrued income taxes
50,672

 
16,739

Total current liabilities
685,923

 
796,880

Long-term debt
1,488,060

 
1,669,452

Long-term capital leases
4,382

 
262

Postretirement medical benefits
137,153

 
140,958

Pension liability
467,586

 
492,396

Long-term employee related benefits
67,057

 
62,529

Long-term income tax liabilities
30,812

 
40,356

Other long-term liabilities
59,623

 
60,869

Total liabilities
2,940,596

 
3,263,702

Commitments and contingencies


 


Temporary equity
26,262

 
7,883

 
 
 
 
Stockholders’ Equity (Deficit):
 
 
 
Levi Strauss & Co. stockholders’ equity (deficit)
 
 
 
Common stock — $.01 par value; 270,000,000 shares authorized; 37,397,437 shares and 37,392,343 shares issued and outstanding
374

 
374

Additional paid-in capital
18,169

 
33,365

Retained earnings
403,713

 
273,975

Accumulated other comprehensive loss
(412,561
)
 
(414,635
)
Total Levi Strauss & Co. stockholders’ equity (deficit)
9,695

 
(106,921
)
Noncontrolling interest
4,219

 
5,413

Total stockholders’ equity (deficit)
13,914

 
(101,508
)
Total liabilities, temporary equity and stockholders’ equity (deficit)
$
2,980,772

 
$
3,170,077

The accompanying notes are an integral part of these consolidated financial statements.


3


LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
 
 
Three Months Ended
 
Six Months Ended
 
May 26,
2013
 
May 27,
2012
 
May 26,
2013
 
May 27,
2012
 
(Dollars in thousands)
(Unaudited)
Net revenues
$
1,098,898

 
$
1,047,157

 
$
2,245,576

 
$
2,212,118

Cost of goods sold
550,187

 
566,471

 
1,104,987

 
1,182,638

Gross profit
548,711

 
480,686

 
1,140,589

 
1,029,480

Selling, general and administrative expenses
449,074

 
435,056

 
859,497

 
873,639

Operating income
99,637

 
45,630

 
281,092

 
155,841

Interest expense
(32,883
)
 
(32,411
)
 
(65,040
)
 
(70,984
)
Loss on early extinguishment of debt
(575
)
 
(8,206
)
 
(689
)
 
(8,206
)
Other income (expense), net
(830
)
 
10,697

 
5,236

 
11,869

Income before income taxes
65,349

 
15,710

 
220,599

 
88,520

Income tax expense
17,140

 
2,467

 
65,515

 
25,980

Net income
48,209

 
13,243

 
155,084

 
62,540

Net (income) loss attributable to noncontrolling interest
(60
)
 
(10
)
 
85

 
(89
)
Net income attributable to Levi Strauss & Co.
$
48,149

 
$
13,233

 
$
155,169

 
$
62,451
































The accompanying notes are an integral part of these consolidated financial statements.


4


LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
Three Months Ended
 
Six Months Ended
 
May 26,
2013
 
May 27,
2012
 
May 26,
2013
 
May 27,
2012
 
(Dollars in thousands)
(Unaudited)
Net income
$
48,209

 
$
13,243

 
$
155,084

 
$
62,540

Other comprehensive income (loss), net of related income taxes:
 
 
 
 
 
 
 
Pension and postretirement benefits
3,199

 
321

 
7,108

 
617

Net investment hedge gains
6,039

 
15,320

 
2,401

 
15,845

Foreign currency translation losses
(5,076
)
 
(25,068
)
 
(8,173
)
 
(17,644
)
Unrealized gain (loss) on marketable securities
592

 
(449
)
 
(370
)
 
819

Total other comprehensive income (loss)
4,754

 
(9,876
)
 
966

 
(363
)
Comprehensive income
52,963

 
3,367

 
156,050

 
62,177

Comprehensive (loss) income attributable to noncontrolling interest
(387
)
 
53

 
(1,193
)
 
(201
)
Comprehensive income attributable to Levi Strauss & Co.
$
53,350

 
$
3,314

 
$
157,243

 
$
62,378



































The accompanying notes are an integral part of these consolidated financial statements.


5


LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Six Months Ended
 
May 26,
2013
 
May 27,
2012
 
(Dollars in thousands)
(Unaudited)
Cash Flows from Operating Activities:
 
 
 
Net income
$
155,084

 
$
62,540

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
57,263

 
62,777

Asset impairments
1,091

 
233

Gain on disposal of property, plant and equipment
(144
)
 
(151
)
Unrealized foreign exchange gains
(11,048
)
 
(19,463
)
Realized loss (gain) on settlement of forward foreign exchange contracts not designated for hedge accounting
6,197

 
(2,530
)
Employee benefit plans’ amortization from accumulated other comprehensive loss
11,717

 
858

Employee benefit plans’ curtailment gain, net
(510
)
 
(995
)
Noncash loss (gain) on extinguishment of debt
689

 
(3,643
)
Amortization of deferred debt issuance costs
2,143

 
2,223

Stock-based compensation
3,246

 
2,542

Allowance for doubtful accounts
2,367

 
3,740

Change in operating assets and liabilities:
 
 
 
Trade receivables
156,324

 
280,568

Inventories
(20,949
)
 
95,336

Other current assets
7,767

 
18,322

Other non-current assets
(289
)
 
(4,557
)
Accounts payable and other accrued liabilities
(84,347
)
 
(73,242
)
Income tax liabilities
30,196

 
(3,483
)
Accrued salaries, wages and employee benefits and long-term employee related benefits
(72,422
)
 
(95,576
)
Other long-term liabilities
10,004

 
1,866

Other, net
(180
)
 
259

Net cash provided by operating activities
254,199

 
327,624

Cash Flows from Investing Activities:
 
 
 
Purchases of property, plant and equipment
(41,891
)
 
(36,571
)
Proceeds from sale of property, plant and equipment
147

 
202

(Payments) proceeds on settlement of forward foreign exchange contracts not designated for hedge accounting
(6,197
)
 
2,530

Net cash used for investing activities
(47,941
)
 
(33,839
)
Cash Flows from Financing Activities:
 
 
 
Proceeds from issuance of long-term debt
140,000

 
385,000

Repayments of long-term debt and capital leases
(325,820
)
 
(407,203
)
Proceeds from senior revolving credit facility

 
50,000

Repayments of senior revolving credit facility

 
(220,000
)
Short-term borrowings, net
(4,774
)
 
6,566

Debt issuance costs
(2,412
)
 
(6,972
)
Restricted cash
(65
)
 
969

Repurchase of common stock
(365
)
 
(479
)
Dividend to stockholders
(25,076
)
 
(20,036
)
Net cash used for financing activities
(218,512
)
 
(212,155
)
Effect of exchange rate changes on cash and cash equivalents
(4,095
)
 
(8,279
)
Net (decrease) increase in cash and cash equivalents
(16,349
)
 
73,351

Beginning cash and cash equivalents
406,134

 
204,542

Ending cash and cash equivalents
$
389,785

 
$
277,893

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
58,520

 
$
68,466

Income taxes
13,948

 
22,306


The accompanying notes are an integral part of these consolidated financial statements.


6


LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIOD ENDED MAY 26, 2013
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Levi Strauss & Co. (the “Company”) is one of the world’s leading branded apparel companies. The Company designs, markets and sells – directly or through third parties and licensees – products that include jeans, casual and dress pants, tops, shorts, skirts, jackets, footwear and related accessories for men, women and children under the Levi’s®, Dockers®, Signature by Levi Strauss & Co.™ and Denizen® brands. The Company operates its business through three geographic regions: Americas, Europe and Asia Pacific.
Basis of Presentation and Principles of Consolidation
The unaudited consolidated financial statements of the Company 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. GAAP”) for interim financial information. In the opinion of management, all adjustments necessary for a fair statement of the financial position and the results of operations for the periods presented have been included. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended November 25, 2012, included in the Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission (“SEC”) on February 7, 2013.
The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions have been eliminated. Management believes the disclosures are adequate to make the information presented herein not misleading. The results of operations for the three and six months ended May 26, 2013, may not be indicative of the results to be expected for any other interim period or the year ending November 24, 2013.
The Company’s fiscal year ends on the last Sunday of November in each year, although the fiscal years of certain foreign subsidiaries end on November 30. Each quarter of both fiscal years 2013 and 2012 consists of 13 weeks. All references to years relate to fiscal years rather than calendar years.
Subsequent events have been evaluated through the issuance date of these financial statements.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the related notes to the consolidated financial statements. Estimates are based upon historical factors, current circumstances and the experience and judgment of the Company’s management. Management evaluates its estimates and assumptions 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.
Temporary Equity
Equity-classified stock-based compensation 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 includes 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 Company's 2006 Equity Incentive Plan ("EIP"). The increase in temporary equity from the year ended November 25, 2012, to May 26, 2013, was due to an increase in the fair value of the Company's common stock.


7




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 26, 2013

Recently Issued Accounting Standards
There have been no developments to recently issued accounting standards, including the expected dates of adoption and estimated effects on the Company’s consolidated financial statements, from those disclosed in the Company’s 2012 Annual Report on Form 10-K, except for the following, which have been grouped by their required effective dates for the Company:
First Quarter of 2015
In March 2013, the FASB issued Accounting Standards Update No. 2013-05, "Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity," ("ASU 2013-05"). The objective of ASU 2013-05 is to resolve the diversity in practice regarding the release into net income of the cumulative translation adjustment upon derecognition of a subsidiary or group of assets within a foreign entity. The Company does not anticipate that the adoption of this standard will have a material impact on its consolidated financial statements, absent any material transactions involving the derecognition of subsidiaries or groups of assets within a foreign entity.
In April 2013, the FASB issued Accounting Standards Update No. 2013-07, "Liquidation Basis of Accounting," ("ASU 2013-07"). The objective of ASU 2013-07 is to clarify when an entity should apply the liquidation basis of accounting. The update provides principles for the recognition and measurement of assets and liabilities and requirements for financial statements prepared using the liquidation basis of accounting. The Company does not anticipate that the adoption of this standard will have a material impact on its consolidated financial statements, absent any indications that liquidation is imminent.

NOTE 2: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the Company’s financial instruments that are carried at fair value:
 
May 26, 2013
 
November 25, 2012
 
 
 
Fair Value  Estimated
Using
 
 
 
Fair Value  Estimated
Using
 
Fair Value
 
Level 1 Inputs(1)
 
Level 2 Inputs(2)
 
Fair Value
 
Level 1 Inputs(1)
 
Level 2 Inputs(2)
 
(Dollars in thousands)
Financial assets carried at fair value
 
 
 
 
 
 
 
 
 
 
 
Rabbi trust assets
$
22,523

 
$
22,523

 
$

 
$
20,322

 
$
20,322

 
$

Forward foreign exchange contracts, net(3)
11,080

 

 
11,080

 
5,792

 

 
5,792

Total
$
33,603

 
$
22,523

 
$
11,080

 
$
26,114

 
$
20,322

 
$
5,792

Financial liabilities carried at fair value
 
 
 
 
 
 
 
 
 
 
 
Forward foreign exchange contracts, net(3)
$
2,221

 
$

 
$
2,221

 
$
3,018

 
$

 
$
3,018

_____________
 
(1)
Fair values estimated using Level 1 inputs are 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.

(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, where applicable, credit default swap prices.

(3)
The Company’s over-the-counter forward foreign exchange contracts are subject to International Swaps and Derivatives Association, Inc. master agreements. These agreements permit the net-settlement of these contracts on a per-institution basis.


8




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 26, 2013

The following table presents the carrying value – including related accrued interest – and estimated fair value of the Company’s financial instruments that are carried at adjusted historical cost:
 
May 26, 2013
 
November 25, 2012
 
Carrying
Value
 
Estimated Fair Value(1)
 
Carrying
Value
 
Estimated Fair Value(1)
 
(Dollars in thousands)
Financial liabilities carried at adjusted historical cost
 
 
 
 
 
 
 
Senior term loan due 2014
$

 
$

 
$
324,890

 
$
324,484

4.25% Yen-denominated Eurobonds due 2016
39,334

 
40,363

 
48,656

 
47,201

7.75% Euro senior notes due 2018
388,998

 
421,007

 
387,433

 
416,422

7.625% senior notes due 2020
526,335

 
588,678

 
526,223

 
572,161

6.875% senior notes due 2022
538,465

 
602,769

 
386,838

 
404,163

Short-term borrowings
54,694

 
54,694

 
59,861

 
59,861

Total
$
1,547,826

 
$
1,707,511

 
$
1,733,901

 
$
1,824,292

_____________
 
(1)
Fair value estimate incorporates mid-market price quotes.

NOTE 3: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
As of May 26, 2013, the Company had forward foreign exchange contracts to buy $577.7 million and to sell $309.8 million against various foreign currencies. These contracts are at various exchange rates and expire at various dates through July 2014.
The table below provides data about the carrying values of derivative instruments and non-derivative instruments: 
 
May 26, 2013
 
November 25, 2012
 
Assets
 
(Liabilities)
 
Derivative Net Carrying Value
 
Assets
 
(Liabilities)
 
Derivative Net Carrying Value
 
Carrying
Value
 
Carrying
Value
 
 
Carrying
Value
 
Carrying
Value
 
 
(Dollars in thousands)
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Forward foreign exchange contracts(1)
$
17,987

 
$
(6,907
)
 
$
11,080

 
$
7,131

 
$
(1,339
)
 
$
5,792

Forward foreign exchange contracts(2)
2,753

 
(4,974
)
 
(2,221
)
 
5,183

 
(8,201
)
 
(3,018
)
Total
$
20,740

 
$
(11,881
)
 
 
 
$
12,314

 
$
(9,540
)
 
 
Non-derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
4.25% Yen-denominated Eurobonds due 2016
$

 
$
(22,743
)
 
 
 
$

 
$
(28,135
)
 
 
7.75% Euro senior notes due 2018

 
(387,990
)
 
 
 

 
(386,520
)
 
 
Total
$

 
$
(410,733
)
 
 
 
$

 
$
(414,655
)
 
 
_____________
 
(1)
Included in “Other current assets” or “Other non-current assets” on the Company’s consolidated balance sheets.
(2)
Included in “Other accrued liabilities” on the Company’s consolidated balance sheets.



9




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 26, 2013

The table below provides data about the amount of gains and losses related to derivative instruments and non-derivative instruments designated as net investment hedges included in “Accumulated other comprehensive loss” (“AOCI”) on the Company’s consolidated balance sheets, and in “Other income (expense), net” in the Company’s consolidated statements of income:
 
Gain or (Loss)
Recognized in AOCI
(Effective Portion)
 
Gain or (Loss) Recognized in Other
Income (Expense), net (Ineffective
Portion and Amount Excluded from
Effectiveness Testing)
 
As of
 
As of
 
Three Months Ended
 
Six Months Ended
May 26,
2013
November 25,
2012
May 26,
2013
 
May 27,
2012
 
May 26,
2013
 
May 27,
2012
 
(Dollars in thousands)
Forward foreign exchange contracts
$
4,637

 
$
4,637

 

 


 


 


4.25% Yen-denominated Eurobonds due 2016
(20,893
)
 
(26,285
)
 
$
1,576

 
$
(83
)
 
$
3,904

 
$
2,523

7.75% Euro senior notes due 2018
(10,921
)
 
(9,451
)
 

 

 

 

Cumulative income taxes
10,725

 
12,246

 
 
 
 
 
 
 
 
Total
$
(16,452
)
 
$
(18,853
)
 
 
 
 
 
 
 
 
The table below provides data about the amount of gains and losses related to derivatives not designated as hedging instruments included in “Other income (expense), net” in the Company’s consolidated statements of income:
 
Gain or (Loss)
 
Three Months Ended
 
Six Months Ended
 
May 26,
2013
 
May 27,
2012
 
May 26,
2013
 
May 27,
2012
 
(Dollars in thousands)
Forward foreign exchange contracts:
 
 
 
 
 
 
 
Realized
$
(3,487
)
 
$
6,015

 
$
(6,197
)
 
$
2,530

Unrealized
6,277

 
15,318

 
6,169

 
3,551

Total
$
2,790

 
$
21,333

 
$
(28
)
 
$
6,081




10




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 26, 2013

NOTE 4: DEBT 
 
 
May 26,
2013
 
November 25,
2012
 
 
 
(Dollars in thousands)
 
 
 
 
 
 
Long-term debt
 
 
 
 
 
Unsecured:
 
 
 
 
 
Senior term loan due 2014
$

 
$
324,424

 
 
4.25% Yen-denominated Eurobonds due 2016
39,212

 
48,508

 
 
7.75% Euro senior notes due 2018
387,990

 
386,520

 
 
7.625% senior notes due 2020
525,000

 
525,000

 
 
6.875% senior notes due 2022
535,858

 
385,000

 
 
Total unsecured
1,488,060

 
1,669,452

 
 
Total long-term debt
$
1,488,060

 
$
1,669,452

 
 
Short-term debt
 
 
 
 
 
Short-term borrowings
$
54,370

 
$
59,759

 
 
Total short-term debt
$
54,370

 
$
59,759

 
 
Total long-term and short-term debt
$
1,542,430

 
$
1,729,211

 
Senior Term Loan due 2014
During the three months ended May 26, 2013, the Company repaid in full the remaining balance of its Senior Term Loan due 2014 with the proceeds of the notes issued on March 14, 2013, and cash on hand. See “Additional Issuance of Senior Notes due 2022” below.
Additional Issuance of Senior Notes due 2022
Additional Senior Notes due 2022. On March 14, 2013, the Company issued an additional $140.0 million in 6.875% senior notes due 2022 (the “Additional Senior Notes due 2022”) to qualified institutional buyers in compliance with the Securities Act of 1933, as amended (the “Securities Act”). The Additional Senior Notes due 2022 have the same terms and are part of the same series as the $385.0 million aggregate principal amount of 6.875% senior notes due 2022 the Company issued in May 2012 (the “Existing Senior Notes due 2022”). The Additional Senior Notes due 2022 were offered at a premium of $11.2 million, which will be amortized to interest expense over the term of the notes. Costs of approximately $2.6 million associated with the issuance of the notes, representing underwriting fees and other expenses, will also be amortized to interest expense over the term of the notes.
Exchange offer. In accordance with a registration rights agreement, the Company conducted an exchange offer to allow holders of the Additional Senior Notes due 2022 to exchange the Additional Senior Notes due 2022 for new notes in the same principal amount with substantially identical terms ("Exchange Notes"), except that the Exchange Notes were registered under the Securities Act. The exchange offer expired at 5:00 p.m. on New York City time on June 11, 2013, and all of the Additional Senior Notes due 2022 were exchanged.
Covenants. The Exchange Notes and the Existing Senior Notes due 2022 will be treated as a single class for all purposes under the indenture governing the Company's Existing Senior Notes due 2022, including without limitation, the covenants, events of default, asset sale, change of control, covenant suspension and other terms.
Use of Proceeds. The Company used the net proceeds from the offering, together with cash on hand, to prepay in full its Senior Term Loan due 2014. The Company recorded a $0.7 million loss on the early extinguishment of debt, which was comprised of the write-off of the remaining unamortized discount and unamortized debt issuance costs.


11




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 26, 2013

Senior Revolving Credit Facility
The Company’s unused availability under its senior secured revolving credit facility was $558.9 million at May 26, 2013, as the Company’s total availability of $627.5 million was reduced by $68.6 million of letters of credit and other credit usage allocated under the facility.
Interest Rates on Borrowings
The Company’s weighted-average interest rate on average borrowings outstanding during the three and six months ended May 26, 2013, was 7.70% and 7.29%, respectively, as compared to 7.17% and 7.08%, respectively, in each of the same periods of 2012.

NOTE 5: EMPLOYEE BENEFIT PLANS
The following table summarizes the components of net periodic benefit cost (income) and the changes recognized in “Accumulated other comprehensive loss” for the Company’s defined benefit pension plans and postretirement benefit plans: 
 
 
 
 
 
 
 
 
 
Pension Benefits
 
Postretirement Benefits
 
Three Months Ended
 
Three Months Ended
 
May 26,
2013
 
May 27,
2012
 
May 26,
2013
 
May 27,
2012
 
(Dollars in thousands)
Net periodic benefit cost (income):
 
 
 
 
 
 
 
Service cost
$
2,215

 
$
2,247

 
$
94

 
$
100

Interest cost
12,994

 
14,435

 
1,240

 
1,658

Expected return on plan assets
(13,946
)
 
(13,108
)
 

 

Amortization of prior service benefit
(17
)
 
(21
)
 
(122
)
 
(4,089
)
Amortization of actuarial loss
4,213

 
3,161

 
1,692

 
1,289

Curtailment gain
(510
)
 
(222
)
 

 

Net settlement loss
584

 
310

 

 

Net periodic benefit cost (income)
5,533

 
6,802

 
2,904

 
(1,042
)
Changes in accumulated other comprehensive loss:
 
 
 
 
 
 
 
Actuarial loss

 
74

 

 

Amortization of prior service benefit
17

 
21

 
122

 
4,089

Amortization of actuarial loss
(4,213
)
 
(3,161
)
 
(1,692
)
 
(1,289
)
Curtailment gain
949

 

 

 

Net settlement loss
(184
)
 
(145
)
 

 

Total recognized in accumulated other comprehensive loss
(3,431
)
 
(3,211
)
 
(1,570
)
 
2,800

Total recognized in net periodic benefit cost (income) and accumulated other comprehensive loss
$
2,102

 
$
3,591

 
$
1,334

 
$
1,758



12




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 26, 2013

 
Pension Benefits
 
Postretirement Benefits
 
Six Months Ended
 
Six Months Ended
 
May 26,
2013
 
May 27,
2012
 
May 26,
2013
 
May 27,
2012
 
(Dollars in thousands)
Net periodic benefit cost (income):
 
 
 
 
 
 
 
Service cost
$
4,496

 
$
4,494

 
$
188

 
$
199

Interest cost
26,060

 
28,848

 
2,479

 
3,317

Expected return on plan assets
(27,960
)
 
(26,117
)
 

 

Amortization of prior service benefit
(37
)
 
(41
)
 
(244
)
 
(8,178
)
Amortization of actuarial loss
8,431

 
6,303

 
3,383

 
2,578

Curtailment gain
(510
)
 
(995
)
 

 

Net settlement loss
629

 
417

 

 

Net periodic benefit cost (income)
11,109

 
12,909

 
5,806

 
(2,084
)
Changes in accumulated other comprehensive loss:
 
 
 
 
 
 
 
Actuarial loss

 
70

 

 

Amortization of prior service benefit
37

 
41

 
244

 
8,178

Amortization of actuarial loss
(8,431
)
 
(6,303
)
 
(3,383
)
 
(2,578
)
Curtailment gain (loss)
509

 
(1
)
 

 

Net settlement loss
(184
)
 
(196
)
 

 

Total recognized in accumulated other comprehensive loss
(8,069
)
 
(6,389
)
 
(3,139
)
 
5,600

Total recognized in net periodic benefit cost (income) and accumulated other comprehensive loss
$
3,040

 
$
6,520

 
$
2,667

 
$
3,516


NOTE 6: COMMITMENTS AND CONTINGENCIES
Forward Foreign Exchange Contracts
The Company uses over-the-counter 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 3 for additional information.
Other Contingencies
Litigation.    There have been no material developments with respect to the information previously reported in the Company’s 2012 Annual Report on Form 10-K related to legal proceedings.

In the ordinary course of business, the Company has various pending cases involving contractual matters, facility- and employee-related matters, distribution matters, product liability claims, trademark infringement and other matters. The Company does not believe any of these pending legal proceedings will have a material impact on its financial condition, results of operations or cash flows.



13




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 26, 2013

NOTE 7: DIVIDEND PAYMENT
The Company paid a cash dividend of $25.1 million in the first quarter of 2013. The Company does not have an established annual dividend policy. 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 Company's Board of Directors depending upon, among other factors, the income tax impact to the dividend recipients, the Company's financial condition and compliance with the terms of the Company's debt agreements.

NOTE 8: ACCUMULATED OTHER COMPREHENSIVE LOSS

The following is a summary of the components of “Accumulated other comprehensive loss,” net of related income taxes: 
 
 
May 26,
2013
 
November 25,
2012
 
 
 
(Dollars in thousands)
 
 
Pension and postretirement benefits
$
(323,853
)
 
$
(330,961
)
 
 
Net investment hedge losses
(16,452
)
 
(18,853
)
 
 
Foreign currency translation losses
(63,596
)
 
(55,423
)
 
 
Unrealized gain on marketable securities
644

 
1,014

 
 
Accumulated other comprehensive loss
(403,257
)
 
(404,223
)
 
 
Accumulated other comprehensive income attributable to noncontrolling interest
9,304

 
10,412

 
 
Accumulated other comprehensive loss attributable to Levi Strauss & Co.
$
(412,561
)
 
$
(414,635
)
 

No amounts were reclassified out of "Accumulated other comprehensive loss" into net income other than those that pertain to the Company's pension and postretirement benefit plans. Please see Note 5 for additional information. These amounts are included in "Selling, general and administrative expenses" in the consolidated statements of income.

NOTE 9: OTHER INCOME (EXPENSE), NET
The following table summarizes significant components of “Other income (expense), net”:
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
May 26,
2013
 
May 27,
2012
 
May 26,
2013
 
May 27,
2012
 
 
 
(Dollars in thousands)
 
 
Foreign exchange management gains (losses)
$
2,790

 
$
21,333

 
$
(28
)
 
$
6,081

 
 
Foreign currency transaction (losses) gains
(4,915
)
 
(12,237
)
 
(518
)
 
3,204

 
 
Interest income
390

 
461

 
781

 
808

 
 
Investment income

 
100

 
2,805

 
227

 
 
Other
905

 
1,040

 
2,196

 
1,549

 
 
Total other income (expense), net
$
(830
)
 
$
10,697

 
$
5,236

 
$
11,869

 

NOTE 10: INCOME TAXES
The effective income tax rate was 29.7% for the six months ended May 26, 2013, compared to 29.3% for the same period ended May 27, 2012. The effective tax rate remained relatively flat compared to the same prior-year period as the projected mix of earnings was consistent with the prior year.



14




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 26, 2013

NOTE 11: RELATED PARTIES
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 the three- and six-month periods ended May 26, 2013, the Company donated $0.4 million and $3.5 million, respectively, to the Levi Strauss Foundation as compared to $1.6 million and $1.9 million, respectively, for the same prior-year periods.

NOTE 12: BUSINESS SEGMENT INFORMATION
The Company manages its business according to three regional segments, the Americas, Europe and Asia Pacific. The Company considers its chief executive officer to be the Company’s chief operating decision maker. 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.

Business segment information for the Company is as follows:
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
May 26,
2013
 
May 27,
2012
 
May 26,
2013
 
May 27,
2012
 
 
 
(Dollars in thousands)
 
 
Net revenues:
 
 
 
 
 
 
 
 
 
Americas
$
665,914

 
$
605,169

 
$
1,313,041

 
$
1,252,463

 
 
Europe
253,117

 
253,897

 
549,704

 
543,349

 
 
Asia Pacific
179,867

 
188,091

 
382,831

 
416,306

 
 
Total net revenues
$
1,098,898

 
$
1,047,157

 
$
2,245,576

 
$
2,212,118

 
 
Operating income:
 
 
 
 
 
 
 
 
 
Americas
$
118,907

 
$
71,325

 
$
251,370

 
$
150,961

 
 
Europe
36,709

 
29,556

 
99,635

 
81,629

 
 
Asia Pacific
32,602

 
18,752

 
81,567

 
59,912

 
 
Regional operating income
188,218

 
119,633

 
432,572

 
292,502

 
 
Corporate expenses
88,581

 
74,003

 
151,480

 
136,661

 
 
Total operating income
99,637

 
45,630

 
281,092

 
155,841

 
 
Interest expense
(32,883
)
 
(32,411
)
 
(65,040
)
 
(70,984
)
 
 
Loss on early extinguishment of debt
(575
)
 
(8,206
)
 
(689
)
 
(8,206
)
 
 
Other income (expense), net
(830
)
 
10,697

 
5,236

 
11,869

 
 
Income before income taxes
$
65,349

 
$
15,710

 
$
220,599

 
$
88,520

 

NOTE 13: SUBSEQUENT EVENT
Subsequent to the end of the second quarter, on July 8, 2013, the Company settled the U.S. Federal audit for fiscal years 2003 through 2008.  The Company will record the previously unrecognized tax benefits of $23.4 million, of which approximately $11 million will reduce the Company's income tax expense in the third quarter of fiscal year 2013. 


15


Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
Overview
We design, market and sell – directly or through third parties and licensees – products that include jeans, casual and dress pants, tops, shorts, skirts, jackets, footwear and related accessories for men, women and children under our Levi’s®, Dockers®, Signature by Levi Strauss & Co.™ (“Signature”) and Denizen® brands around the world.
Our business is operated through three geographic regions: Americas, Europe and Asia Pacific. Our products are sold in approximately 50,000 retail locations in more than 110 countries. We support our brands through a global infrastructure, developing, 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 approximately 2,400 franchised or other brand-dedicated stores and shop-in-shops outside of the United States. We also distribute our Levi’s® and Dockers® products through 508 company-operated stores located in 33 countries, including the United States, and through the online stores we operate. Our company-operated and online stores generated approximately 24% of our net revenues in the first half of 2013, as compared to 21% in the same period in 2012. In addition, we distribute our Levi’s® and Dockers® products through online stores operated by certain of our key wholesale customers and other third parties. We distribute products under our Signature and Denizen® brands primarily through mass channel retailers in the Americas.
Our Europe and Asia Pacific businesses, collectively, contributed approximately 42% of both our net revenues and our regional operating income in the six-month period in 2013. Sales of Levi’s® brand products represented approximately 84% of our total net sales in the six-month period in 2013.
Trends Affecting Our Business
Our key long-term objectives are to strengthen our brands globally in order to deliver sustainable profitable growth, generate strong cash flow and reduce our debt. Critical strategies to achieve these objectives include driving our profitable core business; expanding the reach of our global brands in product categories, consumer segments and geographic markets; elevating the performance of our retail channel; and leveraging our global scale to develop a competitive cost structure.
During the second quarter of 2013, economic challenges and uncertainty continued to impact retail performance in many markets around the world, including key markets in Asia Pacific and an increasing number of markets in Europe. The industry trend towards vertically-integrated retailers is reflected in the changing mix of our business, which is generally shifting towards our global retail network, particularly our outlets. Input costs for cotton in the products we sold during the quarter were lower than they were in the second quarter of 2012, although we expect this trend will abate as we move into the second half of 2013. As such, we expect our full-year gross margin will be approximately 50%, a more than 200 basis-point improvement over full-year 2012.
Our Second Quarter 2013 Results
 
Net revenues. Compared to the second quarter of 2012, consolidated net revenues increased on both a reported and constant-currency basis by 5% and 6%, respectively. The increase reflected higher sales in the Americas, both at our company-operated retail network and to certain wholesale customers.
Operating income. Compared to the second quarter of 2012, consolidated operating income increased by 118% and operating margin rose to 9%, primarily reflecting a higher gross margin due to the lower cost of cotton.
Cash flows. Cash flows provided by operating activities were $254 million for the six-month period in 2013 as compared to $328 million for the same period in 2012; the decrease primarily reflected our lower beginning accounts receivable balance.
Balance sheet. In March 2013, we issued an additional $140 million aggregate principal amount of our 6.875% Senior Notes due 2022. We used the net proceeds along with cash on hand to repay in full our outstanding $275 million Senior Term Loan due 2014, extending the maturity profile of our debt while securing a low weighted-average cost of borrowing.



16



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 end on November 30. Each quarter of fiscal years 2013 and 2012 consisted of 13 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 revenues 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. Net revenues also includes 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 and depreciation associated with our company-operated stores and commissions associated with 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.
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.
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.


17


Results of Operations for Three and Six Months Ended May 26, 2013, as Compared to Same Periods in 2012
The following table summarizes, for the periods indicated, our consolidated statements of income, the changes in these items from period to period and these items expressed as a percentage of net revenues:
 
 
Three Months Ended
 
Six Months Ended
 
May 26,
2013
 
May 27,
2012
 
%
Increase
(Decrease)
 
May 26,
2013
 
May 27,
2012
 
May 26,
2013
 
May 27,
2012
 
%
Increase
(Decrease)
 
May 26,
2013
 
May 27,
2012
 
 
 
% of Net
Revenues
 
% of Net
Revenues
 
 
 
% of Net
Revenues
 
% of Net
Revenues
 
(Dollars in millions)
Net revenues
$
1,098.9

 
$
1,047.2

 
4.9
 %
 
100.0
 %
 
100.0
 %
 
$
2,245.6

 
$
2,212.1

 
1.5
 %
 
100.0
 %
 
100.0
 %
Cost of goods sold
550.2

 
566.5

 
(2.9
)%
 
50.1
 %
 
54.1
 %
 
1,105.0

 
1,182.6

 
(6.6
)%
 
49.2
 %
 
53.5
 %
Gross profit
548.7

 
480.7

 
14.2
 %
 
49.9
 %
 
45.9
 %
 
1,140.6

 
1,029.5

 
10.8
 %
 
50.8
 %
 
46.5
 %
Selling, general and administrative expenses
449.1

 
435.1

 
3.2
 %
 
40.9
 %
 
41.5
 %
 
859.5

 
873.7

 
(1.6
)%
 
38.3
 %
 
39.5
 %
Operating income
99.6

 
45.6

 
118.4
 %
 
9.1
 %
 
4.4
 %
 
281.1

 
155.8

 
80.4
 %
 
12.5
 %
 
7.0
 %
Interest expense
(32.9
)
 
(32.4
)
 
1.5
 %
 
(3.0
)%
 
(3.1
)%
 
(65.0
)
 
(71.0
)
 
(8.4
)%
 
(2.9
)%
 
(3.2
)%
Loss on early extinguishment of debt
(0.6
)
 
(8.2
)
 
(93.0
)%
 
(0.1
)%
 
(0.8
)%
 
(0.7
)
 
(8.2
)
 
(91.6
)%
 

 
(0.4
)%
Other income (expense), net
(0.8
)
 
10.7

 
(107.8
)%
 
(0.1
)%
 
1.0
 %
 
5.2

 
11.9

 
(55.9
)%
 
0.2
 %
 
0.5
 %
Income before income taxes
65.3

 
15.7

 
316.0
 %
 
5.9
 %
 
1.5
 %
 
220.6

 
88.5

 
149.2
 %
 
9.8
 %
 
4.0
 %
Income tax expense
17.1

 
2.5

 
594.8
 %
 
1.6
 %
 
0.2
 %
 
65.5

 
26.0

 
152.2
 %
 
2.9
 %
 
1.2
 %
Net income
48.2

 
13.2

 
264.0
 %
 
4.4
 %
 
1.3
 %
 
155.1

 
62.5

 
148.0
 %
 
6.9
 %
 
2.8
 %
Net (income) loss attributable to noncontrolling interest
(0.1
)
 

 
500.0
 %
 

 

 
0.1

 

 
(195.5
)%
 

 

Net income attributable to Levi Strauss & Co.
$
48.1

 
$
13.2

 
263.9
 %
 
4.4
 %
 
1.3
 %
 
$
155.2

 
$
62.5

 
148.5
 %
 
6.9
 %
 
2.8
 %


18


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.
 
 
Three Months Ended
 
Six Months Ended
 
 
 
 
 
% Increase
(Decrease)
 
 
 
 
 
% Increase
(Decrease)
 
May 26,
2013
 
May 27,
2012
 
As
Reported
 
Constant
Currency
 
May 26,
2013
 
May 27,
2012
 
As
Reported
 
Constant
Currency
 
(Dollars in millions)
Net revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Americas
$
665.9

 
$
605.2

 
10.0
 %
 
9.9
 %
 
$
1,313.1

 
$
1,252.5

 
4.8
 %
 
4.7
 %
Europe
253.1

 
253.9

 
(0.3
)%
 
0.9
 %
 
549.7

 
543.3

 
1.2
 %
 
0.8
 %
Asia Pacific
179.9

 
188.1

 
(4.4
)%
 
(0.5
)%
 
382.8

 
416.3

 
(8.0
)%
 
(5.6
)%
Total net revenues
$
1,098.9

 
$
1,047.2

 
4.9
 %
 
5.9
 %
 
$
2,245.6

 
$
2,212.1

 
1.5
 %
 
1.8
 %
Total net revenues increased on both reported and constant-currency bases for the three- and six-month periods ended May 26, 2013, as compared to the same prior-year periods.
Americas.    For the three- and six-month periods, net revenues in our Americas region increased on both reported and constant-currency bases, with currency affecting net revenues favorably but insignificantly.
Sales increased in our retail stores for both periods, mainly at our outlet and online stores. Levi's® and Dockers® brand wholesale revenues increased in both periods, due to strong second quarter 2013 sales to certain key customers. Our decision to license the Levi's® brand boys business beginning in the third quarter of 2012 partially offset the higher wholesale revenues.
Europe.    Net revenues in Europe increased on a constant-currency basis for the three- and six-month periods, with currency affecting net revenues unfavorably by approximately $3 million for the three-month period and favorably by approximately $2 million for the six-month period.
For both periods, net revenue growth reflecting improved performance and expansion of our company-operated retail network, particularly in Eastern Europe, was partially offset by lower sales in our traditional wholesale channels in several markets in the region, most notably in Southern Europe. 
Asia Pacific.    Net revenues in Asia Pacific declined on both reported and constant-currency bases for the three- and six-month periods, with currency affecting net revenues unfavorably by approximately $8 million and $11 million, respectively.
For both periods, the net revenues decline reflected lower Levi's® brand sales at our wholesale and retail channels due to ongoing challenging conditions in most markets in the region. The declines were partially offset by a slight improvement in our performance in Levi's® brand sales in India.



19


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: 
 
Three Months Ended
 
Six Months Ended
 
May 26,
2013
 
May 27,
2012
 
%
Increase
(Decrease)
 
May 26,
2013
 
May 27,
2012
 
%
Increase
(Decrease)
 
(Dollars in millions)
Net revenues
$
1,098.9

 
$
1,047.2

 
4.9
 %
 
$
2,245.6

 
$
2,212.1

 
1.5
 %
Cost of goods sold
550.2

 
566.5

 
(2.9
)%
 
1,105.0

 
1,182.6

 
(6.6
)%
Gross profit
$
548.7

 
$
480.7

 
14.2
 %
 
$
1,140.6

 
$
1,029.5

 
10.8
 %
Gross margin
49.9
%
 
45.9
%
 
 
 
50.8
%
 
46.5
%
 
 
For both periods, gross margin improved primarily due to the benefit of the lower cost of cotton. Increased revenue contribution from our company-operated retail network and our decision in the third quarter of 2012 to license the Levi's® brand boys business in the Americas and to phase out the Denizen® brand in Asia Pacific also contributed to the improvement in gross margin. Currency affected gross profit favorably by approximately $1 million and $12 million for the three- and six-month periods ended May 26, 2013, respectively, as compared to the same prior-year periods.
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:
 
 
Three Months Ended
 
Six Months Ended
 
May 26,
2013
 
May 27,
2012
 
%
Increase
(Decrease)
 
May 26,
2013
 
May 27,
2012
 
May 26,
2013
 
May 27,
2012
 
%
Increase
(Decrease)
 
May 26,
2013
 
May 27,
2012
 
 
 
% of Net
Revenues
 
% of Net
Revenues
 
 
 
% of Net
Revenues
 
% of Net
Revenues
 
(Dollars in millions)
Selling
$
172.1

 
$
173.4

 
(0.8
)%
 
15.7
%
 
16.6
%
 
$
350.8

 
$
350.4

 
0.1
 %
 
15.6
%
 
15.8
%
Advertising and promotion
55.1

 
46.7

 
17.9
 %
 
5.0
%
 
4.5
%
 
87.9

 
92.6

 
(5.1
)%
 
3.9
%
 
4.2
%
Administration
102.7

 
98.8

 
3.9
 %
 
9.3
%
 
9.4
%
 
190.2

 
193.8

 
(1.9
)%
 
8.5
%
 
8.8
%
Other
119.2

 
116.2

 
2.6
 %
 
10.8
%
 
11.1
%
 
230.6

 
236.9

 
(2.6
)%
 
10.3
%
 
10.7
%
Total SG&A
$
449.1

 
$
435.1

 
3.2
 %
 
40.9
%
 
41.5
%
 
$
859.5

 
$
873.7

 
(1.6
)%
 
38.3
%
 
39.5
%

Currency impacted SG&A favorably by approximately $4 million for both the three- and six-month periods ended May 26, 2013, as compared to the same prior-year periods.
Selling.   We had 12 more company-operated stores at the end of the second quarter of 2013 than we did at the end of the second quarter of 2012. Higher expenses associated with the performance and expansion of our company-operated store network were offset by savings in our wholesale organization, reflecting our cost reduction initiatives.
Advertising and promotion.   The increase in advertising and promotion expenses for the three-month period primarily reflected a difference in the timing of our campaigns during the first half of the year. The decline in advertising and promotion expenses for the six-month period primarily reflected our decision to phase out the Denizen® brand in Asia Pacific, as we did not incur costs to advertise for that brand in Asia Pacific in 2013.
Administration.   For both periods, higher incentive compensation expense and higher postretirement benefit plan costs were offset by lower severance expenses.
Other.   Other SG&A includes distribution, information resources, and marketing organization costs. Higher costs for the three-month period reflected information resource spending related to planned technology initiatives at corporate. Lower costs for the six-month period primarily related to savings in our marketing organization.



20


Operating income
The following table shows operating income by reporting segment and corporate expenses for the periods indicated, the changes in these items from period to period and these items expressed as a percentage of net revenues:
 
 
Three Months Ended
 
Six Months Ended
 
 
May 26,
2013
 
May 27,
2012
 
%
Increase
(Decrease)
 
May 26,
2013
 
May 27,
2012
 
May 26,
2013
 
May 27,
2012
 
%
Increase
(Decrease)
 
May 26,
2013
 
May 27,
2012
 
 
 
 
% of Net
Revenues
 
% of Net
Revenues
 
 
 
% of Net
Revenues
 
% of Net
Revenues
 
 
(Dollars in millions)
 
Operating income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Americas
$
118.9

 
$
71.3

 
66.7
%
 
17.9
%
 
11.8
%
 
$
251.4

 
$
151.0

 
66.5
%
 
19.1
%
 
12.1
%
 
Europe
36.7

 
29.6

 
24.2
%
 
14.5
%
 
11.6
%
 
99.6

 
81.6

 
22.1
%
 
18.1
%
 
15.0
%
 
Asia Pacific
32.6

 
18.7

 
73.9
%
 
18.1
%
 
10.0
%
 
81.6

 
59.9

 
36.1
%
 
21.3
%
 
14.4
%
 
Total regional operating income
188.2

 
119.6

 
57.3
%
 
17.1
%
*
11.4
%
*
432.6

 
292.5

 
47.9
%
 
19.3
%
*
13.2
%
*
Corporate expenses
88.6

 
74.0

 
19.7
%
 
8.1
%
*
7.1
%
*
151.5

 
136.7

 
10.8
%
 
6.7
%
*
6.2
%
*
Total operating income
$
99.6

 
$
45.6

 
118.4
%
 
9.1
%
*
4.4
%
*
$
281.1

 
$
155.8

 
80.4
%
 
12.5
%
*
7.0
%
*
Operating margin
9.1
%
 
4.4
%
 
 
 
 
 
 
 
12.5
%
 
7.0
%
 
 
 
 
 
 
 
______________
 * Percentage of consolidated net revenues
Currency favorably affected total operating income by approximately $5 million and $16 million for the three- and six-month periods ended May 26, 2013.
Regional operating income.    For both periods, each of our regions' improved operating income and operating margin primarily reflected an improved gross margin, and to a lesser extent, lower SG&A. For Asia Pacific, these results were largely driven by our decision to phase out the Denizen® brand in the region, which we had substantially completed by the end of the quarter.    
Corpo