Levi Strauss ends fiscal second quarter with over $550 million liquidity, $1.6 billion net debt

By Paul Deckelman

New York, July 12 - Levi Strauss & Co. ended its fiscal second quarter with more than $550 million of liquidity, and its chief financial officer said that the iconic San Francisco-based apparel maker is "comfortable that our ongoing investments can be covered by our current liquidity and cash flow."

CFO Blake Jorgensen told investors and analysts on a conference call Tuesday following the release of the company's results for the fiscal second quarter ended May 29 that as of that date, Levi had total cash of $258 million and $295 million of available credit under its senior secured revolving credit facility.

According to the latest 10-Q report, which the company filed with the Securities and Exchange Commission on Tuesday concurrently with the release of its results, Levi - which entered into its amended five-year revolver in the fall of 2007 - had total revolver availability of $378 million, less $83.5 million of letters of credit and other credit usage under the facility.

Debt levels hold steady

Jorgensen said that Levi's net debt level, reflecting total debt minus available cash, remains at $1.6 billion.

According to the 10-Q, as of the quarter's end, Levi had $1.895 billion of total debt, consisting of a little over $1.843 billion of long-term debt and $51.6 million of short-term debt. That compared to $1.863 billion at the end of its 2010 fiscal year on Nov. 28, 2010.

The latest debt figure included $108 million drawn against a $250 million five-year facility - a separate tranche from the revolver - which is secured by Levi's valuable trademarks, which have become world-famous ever since the pioneering blue-jeans maker began selling its durable, copper-riveted heavy denim pants back in the 1870s. As borrowings against this trademark tranche are repaid, the revolving tranche is increased from its $500 million nominal size, up to a maximum size of $750 million.

The end-of-quarter capital structure also included $350 million of 8 7/8% senior notes due 2016, $112 million equivalent of 4¼% yen-denominated eurobonds due 2016 and its most recently issued bonds - $424 million equivalent of 7¾% euro-denominated senior notes due 2018 and $525 million of 7 5/8% senior notes due 2020. The latter two tranches of paper came to market on April 28, 2010 with both the dollar bonds, upsized from the originally planned $460 million, and the €300 million of euro-denominated notes, upsized from €275 million, pricing at par.

Levi said that its weighted-average interest rate on average borrowings outstanding was 6.84% during both the three- and six-month periods ended May 29, versus 7.40% and 7.33%, respectively, in each of the same periods of 2010.

Refinancing trims interest

Jorgensen said on the call that the company's interest expense during the quarter was "consistent with the prior year."

According to the 10-Q, interest expense decreased slightly to $33.5 million and $68.4 million for the three- and six-month periods ended May 29, respectively, from $34.4 million and $68.6 million for the same periods in 2010.

The company credited lower average borrowing rates that resulted from its debt refinancing activity in the year-ago second quarter, when Levi sold the aforementioned 2018 and 2020 notes and used the proceeds from that bond deal to take out €199.8 million, or 79.9%, of its €250 million in then-outstanding 8 5/8% euro-denominated senior notes due 2013 and $415.5 million, or 93.1%, of its $446.2 million of outstanding 9¾% senior notes due 2015 via tender offers.

Revenues, earnings grow

During the fiscal second quarter, Levi saw its consolidated net revenues increase by 12% from the year-earlier quarter to $1.09 billion from $977 million. It said revenues increased by 8% on a constant-currency basis, reflecting growth in each of the company's geographic regions.

Increased net revenues were primarily associated with the company's famous Levi's brand, through the expansion and performance of the company's dedicated store network globally and growth in wholesale revenues in the Americas and Europe.

Net income improved to $21 million versus a $14 million loss in the year-ago fiscal second quarter, when results were impacted by two significant discrete tax charges and an early debt extinguishment loss associated with the refinancing noted previously.

Cash flows from operating activities fell to $85 million for the six-month period in 2011 from $146 million for the same period in 2010, primarily reflecting Levi's inventory build and a contribution to its pension plans in 2011.

Even with the reduced cash flow, the company declared in its regulatory filing that "we believe we will have adequate liquidity over the next 12 months to operate our business and to meet our cash requirements."

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