Levi Strauss & Co. Announces Second-Quarter 2008 Financial Results

Highlights include:

Three Months Ended % Increase (Decrease) ---------------------------------------------------------------------- ($ millions) May 25, 2008 May 27, 2007 As Reported ---------------------------------------------------------------------- Net revenues $936 $1,016 (8)% ---------------------------------------------------------------------- Net income $1 $46 (98)% ----------------------------------------------------------------------

Lower net revenues reflected reduced sales in the Americas' region, partly offset by reported net revenue increases in Europe and Asia Pacific. Net revenues in Europe and Asia Pacific were down slightly on a constant currency basis. The revenue decline in the Americas is largely attributable to the impact of the difficult U.S. economic environment, shipping issues related to the transition of the U.S. business to a new enterprise resource planning system (ERP), lower performance in the U.S. Dockers(R) business and early shipments executed in the first quarter in anticipation of the second-quarter U.S. ERP implementation.

The company recorded $1 million in net income in the second quarter compared to $46 million in net income for the same period in 2007, primarily reflecting lower net sales, and higher costs related to ERP stabilization efforts and retail expansion. Lower operating income was partially offset by reduced interest expense and other financing costs in the period.

"We expected the second quarter to be tough, and it was," said John Anderson, president and chief executive officer. "The retail environment in the United States remained challenging. In addition, our transition to a new enterprise resource planning system in the United States negatively affected our results. Increasingly difficult economic conditions in many markets worldwide are impacting consumer spending, but our brands remain strong. We are pleased with the continued strong growth of our emerging markets and our retail network around the world.

"Given the slowing macroeconomic indicators we are seeing globally and our continued investment to stabilize our ERP system, we expect the rest of the year to be challenging. Nonetheless, we are taking decisive actions to position the company well for when market conditions improve," added Mr. Anderson.

Second Quarter 2008 Highlights

-- Gross profit in the second quarter decreased to $437 million compared with $463 million for the same period in 2007. Gross margin increased to 46.7 percent of revenues for the quarter compared with 45.6 percent of revenues in the second quarter of 2007. Gross margin benefited from a higher-margin product mix, lower sourcing costs and increased company-operated store sales.

-- Selling, general and administrative expenses for the second quarter increased to $385 million from $345 million in the same period of 2007. Approximately half of the increase reflects the effect of currency; the remainder of the increase reflects the substantial costs related to the ERP stabilization efforts in the United States and the company's global retail expansion compared to the prior year.

-- Operating income for the second quarter was $52 million compared with $118 million for the same period of 2007, reflecting lower net revenues, and higher selling, general and administrative expenses.

-- Interest expense for the second quarter decreased to $41 million compared to $56 million in the second quarter of 2007. The decrease was primarily attributable to lower average interest rates and lower debt levels during the quarter due to the company's debt refinancing actions last year.

"This was clearly a difficult quarter," said Hans Ploos van Amstel, chief financial officer. "Despite the operational challenges, we continued to reduce our debt and paid a dividend to our stockholders. Our balance sheet gives us the flexibility to weather the economic cycle and invest in our brands to build our business for the long term."

Regional Overview

Net Revenues for the quarter were as follows:

% Increase (Decrease) ---------------------------------------------------------------------- Net Revenues May 25, 2008 May 27, 2007 As Reported Constant ($ millions) Currency ---------------------------------------------------------------------- Americas $477 $591 (19)% (20)% ---------------------------------------------------------------------- Europe $268 $244 10% (4)% ---------------------------------------------------------------------- Asia Pacific $191 $181 6% (1)% ----------------------------------------------------------------------

-- Net revenues in the Americas' region decreased 19 percent compared with the same period of 2007. The region's results primarily reflect the challenges related to the implementation of the ERP system in the United States and the impact of the weak U.S. economy. Sales in the U.S. Dockers(R) brand decreased substantially during the period and the U.S. Levi's(R) and Signature by Levi Strauss & Co.(TM) brands reported smaller sales decreases. Results in the region also were adversely impacted by the Chapter 11 filing of a U.S. customer.

-- Net revenues in Europe increased 10 percent on a reported basis and decreased 4 percent excluding the positive impact of currency for the quarter. The decline in constant currency reflected weaker wholesale performance in certain markets, partly offset by sales growth in the company-operated retail network.

-- Net revenues in Asia Pacific increased 6 percent on a reported basis, and decreased 1 percent excluding the positive currency impact. Revenues in the company's emerging markets in Asia Pacific continued to grow, offset by declines in certain of the company's mature markets in the region, particularly the continued weak performance in Japan.

Balance Sheet and Cash Flow

After paying the previously announced $50 million cash dividend to common stockholders and reducing long-term debt by $54 million, the company ended the second quarter with cash and cash equivalents of $124 million, a decrease of $32 million from November 25, 2007. Cash provided by operating activities was $121 million for the first half of 2008, compared with $126 million for the same period in 2007, primarily reflecting lower net income offset by lower payments for interest. Total debt was $1.94 billion at the end of the second quarter.

Investor Conference Call

The company's second-quarter 2008 investor conference call will be available through a live audio Webcast at www.levistrauss.com/Financials/EarningsWebcasts.aspx today, July 8, 2008, at 1 p.m. PDT/4 p.m. EDT. A replay is available on the Web site the same day and will be archived for one month. A telephone replay also is available through July 15 at 800-642-1687 in the United States and Canada, or 706-645-9291 internationally; I.D. No. 53415870.

This news release contains, in addition to historical information, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We have based these forward-looking statements on our current assumptions, expectations and projections about future events. We use words like "believe," "anticipate," "intend," "estimate," "expect," "project" and similar expressions to identify forward-looking statements, although not all forward-looking statements contain these words. These forward-looking statements are necessarily estimates reflecting the best judgment of our senior management and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Investors should consider the information contained in our filings with the U.S. Securities and Exchange Commission (the "SEC"), including our Annual Report on Form 10-K for the fiscal year ended 2007 and in our intervening quarterly reports on Form 10Q, especially in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors" sections as well as in our Current Reports on Form 8-K. Other unknown or unpredictable factors also could have material adverse effects on our future results, performance or achievements. In light of these risks, uncertainties, assumptions and factors, the forward-looking events discussed in this news release may not occur. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date stated, or if no date is stated, as of the date of this news release. We are not under any obligation and do not intend to make publicly available any update or other revisions to any of the forward-looking statements contained in this news release to reflect circumstances existing after the date of this news release or to reflect the occurrence of future events even if experience or future events make it clear that any expected results expressed or implied by those forward-looking statements will not be realized.

LEVI STRAUSS & CO. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) May 25, November 25, 2008 2007 ----------- ------------ ASSETS (Dollars in thousands) Current Assets: Cash and cash equivalents $ 123,816 $ 155,914 Restricted cash 3,282 1,871 Trade receivables, net of allowance for doubtful accounts of $20,085 and $14,805 495,252 607,035 Inventories: Raw materials 17,475 17,784 Work-in-process 16,313 14,815 Finished goods 542,634 483,265 ----------- ------------ Total inventories 576,422 515,864 Deferred tax assets, net 142,570 133,180 Other current assets 111,374 75,647 ----------- ------------ Total current assets 1,452,716 1,489,511 Property, plant and equipment, net of accumulated depreciation of $634,138 and $605,859 445,643 447,340 Goodwill 206,039 206,486 Other intangible assets, net 42,774 42,775 Non-current deferred tax assets, net 558,677 511,128 Other assets 159,885 153,426 ----------- ------------ Total assets $2,865,734 $2,850,666 =========== ============ LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS' DEFICIT Current Liabilities: Short-term borrowings $ 15,932 $ 10,339 Current maturities of long-term debt 70,875 70,875 Current maturities of capital leases 1,924 2,701 Accounts payable 246,965 243,630 Restructuring liabilities 6,146 8,783 Other accrued liabilities 249,446 248,159 Accrued salaries, wages and employee benefits 181,914 218,325 Accrued interest payable 28,306 30,023 Accrued income taxes 32,443 9,420 ----------- ------------ Total current liabilities 833,951 842,255 Long-term debt 1,854,942 1,879,192 Long-term capital leases 8,779 5,476 Postretirement medical benefits 147,426 157,447 Pension liability 150,228 147,417 Long-term employee related benefits 104,166 113,710 Long-term income tax liabilities 56,324 35,122 Other long-term liabilities 76,344 48,123 Minority interest 15,582 15,833 ----------- ------------ Total liabilities 3,247,742 3,244,575 ----------- ------------ Commitments and contingencies (Note 6) Temporary equity 5,074 4,120 ----------- ------------ Stockholders' deficit: Common stock--$.01 par value; 270,000,000 shares authorized; 37,278,238 shares issued and outstanding 373 373 Additional paid-in capital 44,558 92,650 Accumulated deficit (406,509) (499,093) Accumulated other comprehensive income (loss) (25,504) 8,041 ----------- ------------ Total stockholders' deficit (387,082) (398,029) ----------- ------------ Total liabilities, temporary equity and stockholders' deficit $2,865,734 $2,850,666 =========== ============ The notes accompanying our consolidated financial statements in our Form 10-Q are an integral part of these consolidated financial statements.

LEVI STRAUSS & CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Three Months Ended Six Months Ended ----------------------- ---------------------- May 25, May 27, May 25, May 27, 2008 2007 2008 2007 ----------- ----------- ---------- ----------- (Dollars in thousands) (Unaudited) Net sales $915,090 $ 997,323 $1,976,010 $2,013,622 Licensing revenue 21,247 19,037 43,195 40,143 ----------- ----------- ---------- ----------- Net revenues 936,337 1,016,360 2,019,205 2,053,765 Cost of goods sold 498,938 553,233 1,036,607 1,093,023 ----------- ----------- ---------- ----------- Gross profit 437,399 463,127 982,598 960,742 Selling, general and administrative expenses 385,484 344,792 741,915 640,354 Restructuring charges, net 156 66 2,378 12,881 ----------- ----------- ---------- ----------- Operating income 51,759 118,269 238,305 307,507 Interest expense 41,070 55,777 81,750 113,502 Loss on early extinguishment of debt 1,488 14,299 1,518 14,329 Other (income) expense, net 8,108 (4,306) 4,199 (17,894) ----------- ----------- ---------- ----------- Income before income taxes 1,093 52,499 150,838 197,570 Income tax expense 392 6,784 53,030 65,220 ----------- ----------- ---------- ----------- Net income $ 701 $ 45,715 $ 97,808 $ 132,350 =========== =========== ========== =========== The notes accompanying our consolidated financial statements in our Form 10-Q are an integral part of these consolidated financial statements.

LEVI STRAUSS & CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended ---------------------- May 25, May 27, 2008 2007 ----------- ---------- (Dollars in thousands) (Unaudited) Cash Flows from Operating Activities: Net income $ 97,808 $ 132,350 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 37,187 33,614 Asset impairments 316 7,318 Loss on disposal of property, plant and equipment 282 238 Unrealized foreign exchange losses (gains) 2,751 (7,150) Realized loss on foreign currency contracts not designated for hedge accounting 8,196 3,036 Employee benefit plans' amortization from accumulated other comprehensive income (loss) (17,981) - Employee benefit plans' curtailment gain, net (3,825) (25,321) Write-off of unamortized costs associated with early extinguishment of debt 329 6,570 Amortization of deferred debt issuance costs 1,939 2,816 Stock-based compensation 2,815 1,928 Allowance for doubtful accounts 6,731 (387) Change in operating assets and liabilities: Trade receivables 112,440 96,719 Inventories (63,649) 809 Other current assets (26,334) 12,735 Other non-current assets (10,440) (7,144) Accounts payable and other accrued liabilities 7,657 (67,022) Income tax liabilities 24,540 42,764 Restructuring liabilities (3,181) (2,046) Accrued salaries, wages and employee benefits (44,111) (85,617) Long-term employee related benefits (13,248) (18,538) Other long-term liabilities 1,069 (1,838) Other, net (33) 582 ----------- ---------- Net cash provided by operating activities 121,258 126,416 ----------- ---------- Cash Flows from Investing Activities: Purchases of property, plant and equipment (41,009) (30,200) Proceeds from sale of property, plant and equipment 1,272 500 Foreign currency contracts not designated for hedge accounting (8,196) (3,036) Acquisition of retail stores - (2,502) ----------- ---------- Net cash used for investing activities (47,933) (35,238) ----------- ---------- Cash Flows from Financing Activities: Proceeds from issuance of long-term debt - 322,563 Repayments of long-term debt and capital leases (55,434) (380,845) Short-term borrowings, net 3,519 (1,832) Debt issuance costs (395) (1,219) Restricted cash (1,269) (8) Dividends to minority interest shareholders of Levi Strauss Japan K.K. (1,114) (3,141) Dividends to stockholders (49,953) - ----------- ---------- Net cash used for financing activities (104,646) (64,482) ----------- ---------- Effect of exchange rate changes on cash (777) 1,005 ----------- ---------- Net (decrease) increase in cash and cash equivalents (32,098) 27,701 Beginning cash and cash equivalents 155,914 279,501 ----------- ---------- Ending cash and cash equivalents $ 123,816 $ 307,202 =========== ========== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 80,642 $ 108,227 Income taxes 37,095 19,352 The notes accompanying our consolidated financial statements in our Form 10-Q are an integral part of these consolidated financial statements.

SOURCE: Levi Strauss & Co.

Levi Strauss & Co. Roger Fleischmann, 800-438-0349 (Investor) Jeff Beckman, 415-501-3317 (Media)