Levi Strauss Q2 sales off, earnings up; says debt cutting top goal, cites impact of debt transactions

By Paul Deckelman

New York, July 11 - Levi Strauss & Co. saw net earnings improve in the second quarter - although this was mostly due to a one-time tax break - while sales fell from year-ago levels. Nonetheless, the San Francisco-based apparel company is looking hopefully to the future and company officials said Tuesday that their top priority continues to be cutting debt.

"Priority Number One is to sustain the profitability of the business, to improve net income and to generate cash flow," for the purposes of paying down debt, declared the company's retiring president and chief executive officer, Philip A. Marineau, on a conference call with analysts following the release of the financial results.

"Our net income improved substantially this quarter, due in part to a tax benefit. We are now generating significant free cash flow, and our net debt is down at the end of Q2, even as we invest in the business. Delivering strong cash flow in order to reduce debt remains the top focus for the company."

Even though sales and operating income were lower during the second quarter ended May 28 than year-ago levels, Marineau said that the latest results "were good, in line with our expectations for the first six months of '06. We're particularly pleased with the continued improvement in profitability and cash flow, allowing us to drive down our debt."

Levi was active during the quarter on the debt front, selling the equivalent of $470 million of dollar- and euro-denominated bonds in a two-tranche deal that priced on March 10. It sold $350 million of new dollar-denominated 8 7/8% senior notes due 2016, as well as a €100 million add-on to its existing €150 million of 8 5/8% senior notes due 2013, using the proceeds of the bond deal plus cash on hand to pre-pay its senior secured term loan, which had $488.8 million outstanding.

On May 18, it closed on a $550 million amended and restated revolving credit facility due 2011, replacing the company's previous $650 million revolving loan, which was slated to mature next year. With the amendment and restatement, the interest rate was reduced from a fixed margin of 275 basis points to a floating margin which will not exceed 200 basis points, the exact level being based on availability under the facility. In addition, Levi is no longer subject to financial maintenance covenants. And for any period during which availability under the facility is at least $25 million, the debt, liens, investments, dispositions, restricted payments and debt prepayment covenants will be either fully or partially suspended.

According to information contained in the 10-Q quarterly report which the company filed with the Securities and Exchange Commission on Tuesday, as of the end of the second quarter, Levi Strauss had total debt of about $2.341 billion, up slightly from the $2.327 billion that it had on the balance sheet six months earlier at the end of fiscal 2005 in late November. It had long-term debt, minus current maturities, of $2.255 billion versus $2.231 billion six months earlier, and current maturities and short-term borrowings of $86.254 million versus $95.797 million.

The company had no term loan debt as of the quarter's end, as this had been repaid in March, and its revolver was undrawn. The vast bulk of its debt was in the form of outstanding bonds, including $77.823 million of 7% senior notes coming due on Nov. 1. After that, the company has no bond maturities until 2012, when $572.063 million of 12¼% senior notes and $380 million of floating-rate seniors come due. The balance sheet also listed $324.461 million equivalent of 8 5/8% euro notes due 2013, $450 million of 9¾% senior notes due 2015, the $350 million of new 8 7/8% seniors due 2016 which the company sold in March, and $178.635 million equivalent of 4¼% yen-denominated eurobonds.

Levi took a loss from early extinguishment of debt of $32.958 million in the latest period and for the first six months of fiscal 2006. In the year-ago quarter, it booked a loss of $43.019 million, and $66.025 million for the first six months of fiscal 2005.

Refinancing cuts interest expense

Interest expense was $61.791 million for the 2006 second quarter and $128.088 million for the first six months of the fiscal year - a 7% drop from $66.377 million in the year-ago second quarter. The six-month figure was also down from the year-earlier $134.707 million of interest expense. The company attributed the drop to lower interest rates and lower average debt balances during the most recent quarter.

"Our refinancing transactions helped to further reduce our interest expense" in the second quarter, the company's chief financial officer, Hans Ploos van Amstel, asserted during the conference call. "We expect the interest savings from repaying our secured term loan will be approximately $10 million annually. Amending our revolving credit facility also gives us additional financial flexibility."

When asked by an analyst during the question-and-answer portion of the conference call, following the official company presentation, what the company planned to do with the cash on its balance sheet - and whether that might include redeeming the 12¾% notes and/or the floating-rate notes, both of which are callable next year - van Amstel said that the company would definitely be spending close to $78 million to redeem the remaining 7% notes - but offered no other specifics.

'Constantly looking at refinancing'

"Going forward," he said, "we are always constantly looking at refinancing - but we are not ready to disclose anything at this stage," parrying the question of whether the other two series of bonds would be taken out early. "The key thing you need to know is we're going to have [spent] that $78 million in the second half, on the remainder of the 2006 bonds.

Van Amstel also declined to discuss how much of restricted cash the company is permitted to spend under its bond indentures and debt covenants.

Marineau, in answer to another analyst's question, said that the company - which is privately held - has "no plans at this particular time to pay dividends [to its shareholders]. Our focus is on reducing debt through improved cashflow."

In the second quarter, Levi had revenues of $953 million, down 1% from $961.6 million a year ago, primarily due to decreased net sales in Europe - where Marineau himself has stepped in to run things during his final months with the company in an attempt to turn the situation around - and in its Levi Strauss Signature brand business in the United States. The latter - which sells a special lower-priced line through such discount outlets as Wal-Mart - should not be confused with its venerable core Levi Strauss brand. The translation impact of foreign currencies was also a factor in the sales slippage.

While the company's net income jumped nearly $14 million, or 50%, to $40.2 million in the second quarter from $26.8 million a year earlier, it acknowledged that the rise was largely due to a $32 million income tax benefit it was able to book. Levi's operating income, on the other hand, fell to $115 million from $145 million a year ago.

Marineau: 'time is right'

Marineau announced last week that he plans to leave the company he has headed since 1999 by the end of the year. The former Pepsi-Cola executive has presided over a transformation of Levi, from primarily a domestic apparel manufacturer with roots stretching back to the California Gold Rush days of the 1850s, to essentially an international distributor and marketer of clothing produced by others elsewhere under license from the company. In the process of reshaping the company, a number of plants were closed and thousands of jobs were abolished, mostly in the United States. Marineau also saw Levi through a rash of accounting troubles, and worked to stabilize its sales, which had been sagging for years as newer, trendier brands of designer-label jeans grabbed a big chunk of the market share from Levi's flagship product. Marineau fought back with new product offerings, including the more affordably priced Signature line, and also promoted the growth of Levi's popular Dockers brand of non-jean casual clothing. Last year, he pulled the company out of its sustained revenue downturn and Levi eked out a 1% sales increase, stabilizing annual revenue at about $4.1 billion.

Marineau told the conference call that he had "accomplished what I set out to do" when he assumed leadership of the company seven years ago, adding that "the time is right to hand over the reins to the next generation of leaders."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.