LEVI STRAUSS & CO - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended August 24, 2003

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 333-36234

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)

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 x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ¨ No x

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—37,278,238 shares outstanding on March 1, 2004

LEVI STRAUSS & CO.

INDEX TO FORM 10-Q

AUGUST 24, 2003

EXPLANATORY NOTE

Background. On October 9, 2003, we issued a press release and, on the next day, filed a Form 12b-25 with the Securities and Exchange Commission stating that we would not be able to file our third quarter Form 10-Q on a timely basis, and that we would be restating our quarterly and annual financial statements for 2001. The press release and Form 12b-25 also amended financial information previously included in our fiscal year 2001 financial statements and in press releases issued on September 10, 2003 and September 30, 2003 announcing our results for the third quarter of 2003. On October 10, 2003, we voluntarily furnished on Form 8-K the following sections from the draft Form 10-Q for the quarter ended August 24, 2003: Item 1—“Financial Statements (unaudited);” Item 2—“Management’s Discussion and Analysis of Financial Condition and Results of Operations;” and Item 3—“Quantitative and Qualitative Disclosure about Market Risk.”

New Information. The information included in this Form 10-Q for the period ended August 24, 2003 as filed today describes several developments since we filed our Current Report on Form 8-K on October 10, 2003. These developments are discussed under Item 2—“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments.” They include:

•

our retention of Alvarez & Marsal, Inc. that we announced on December 1, 2003;

•

our appointment of James P. Fogarty as our interim chief financial officer that we announced on December 1, 2003 and other changes in our senior management team;

•

completion by our Audit Committee of a review of an accounting error we announced on October 9, 2003;

•

our receipt of a letter from our independent auditor relating to a material weakness in our internal control; and

•

our decision to suspend indefinitely installation of an enterprise resource planning system.

In addition, this Form 10-Q includes revised financial information. There are three primary reasons for these revisions:

•

First, as contemplated by our Current Report on Form 8-K filed on October 10, 2003, we restated our quarterly and annual financial statements for 2001. We also concluded that it was necessary to restate our financial statements for 2002 and the first two quarters of 2003. These restatements result in changes in our three and nine month results for 2002 and 2003 from those furnished in the Current Report on Form 8-K.

•

Second, in November 2003, we issued revised financial guidance in which we lowered our expectations concerning net sales, gross margins and operating margins for the full-year 2003. In mid-December 2003, we revised our 2004 plan, taking into account these adverse business developments. In January 2004, we concluded that, for purposes of valuing our deferred tax assets, we should use a long-term forecast that takes into account these recent developments but assumes no change from current performance levels, including any revenue growth or any cost reduction or other performance improvement actions we may take as a result of our work with Alvarez & Marsal, Inc. as the impact of these actions are not presently determinable. In short, we assumed flat business projections into the future. Based on this revised forecast, we recorded in the third quarter a substantial increase in the valuation allowance against our deferred tax assets. This reflects our assessment, using the revised January 2004 long-term forecast that reflected the developments and assumptions noted above, of our ability to use our foreign tax credits before they expire and our ability to utilize our alternative minimum tax credits, state and foreign net operating loss carryforwards and other foreign deferred tax assets in the foreseeable future. We were also required to adjust our results for the three and nine months ended

August 24, 2003 to reflect a higher annual effective tax rate resulting from the increase in the valuation allowance on our deferred tax assets.

•

Third, under generally accepted accounting principles, we are required to reflect these new estimates and certain other new developments after the end of the quarter in our third quarter financial statements because our third quarter statements had not been finalized at the time the new information became available.

These and other items result in changes in our unaudited financial statements as of and for the three and nine months ended August 24, 2003 and August 25, 2002 from those included in our Current Report on Form 8-K furnished with the Securities and Exchange Commission on October 10, 2003. The following table sets forth the consolidated statement of operations for the three and nine months ended August 24, 2003 and August 25, 2002 as furnished in our Current Report on Form 8-K and as filed in this Form 10-Q (dollars in thousands):


	As Furnished in Form 8-K on October 10, 2003						As Filed in this Form 10-Q
	Three Months Ended						Three Months Ended
	August 24, 2003			August 25, 2002			August 24, 2003			August 25, 2002
										(Restated)
Net sales	$	1,081,755		$	1,017,744		$	1,083,748		$	1,019,744
Cost of goods sold		677,854			603,249			686,487			600,666

Gross profit		403,901			414,495			397,261			419,078
Marketing, general and administrative expenses		316,261			340,390			214,345			342,574
Other operating (income)		(10,280	)		(6,015	)		(10,280	)		(6,016	)
Restructuring charges, net of reversals		—			(16,565	)		2,610			(15,848	)

Operating income		97,920			96,685			190,586			98,368
Interest expense		62,524			48,476			62,524			48,476
Other (income) expense, net		(9,342	)		20,791			(3,125	)		26,816

Income before taxes		44,738			27,418			131,187			23,076
Income tax expense		22,907			13,709			135,500			16,699

Net income (loss)	$	21,831		$	13,709		$	(4,313	)	$	6,377


	As Furnished in Form 8-K on October 10, 2003						As Filed in this Form 10-Q
	Nine Months Ended						Nine Months Ended
	August 24, 2003			August 25, 2002			August 24, 2003			August 25, 2002
										(Restated)
Net sales	$	2,886,873		$	2,876,546		$	2,892,803		$	2,882,547
Cost of goods sold		1,738,975			1,693,923			1,742,194			1,697,723

Gross profit		1,147,898			1,182,623			1,150,609			1,184,824
Marketing, general and administrative expenses		983,193			958,129			864,505			972,017
Other operating (income)		(27,348	)		(20,640	)		(27,348	)		(20,640	)
Restructuring charges, net of reversals		(9,719	)		124,513			(5,776	)		115,373

Operating income		201,772			120,621			319,228			118,074
Interest expense		185,549			139,009			185,549			139,009
Other expense, net		33,561			20,613			51,673			28,538

Income (loss) before taxes		(17,338	)		(39,001	)		82,006			(49,473	)
Income tax expense (benefit)		(1,303	)		(19,500	)		186,200			(35,801	)

Net loss	$	(16,035	)	$	(19,501	)	$	(104,194	)	$	(13,672	)

Additional information about these developments is contained in Item 2—“Management’s Discussion and Analysis of Financial Condition—Recent Developments.” Note 2 to the Consolidated Financial Statements contains additional information about the restatements.

Other Updated Information. In addition, please see Item 2—“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations” for additional information concerning the impact of these developments on several line items in our results of operations for the three and the nine months ended August 24, 2003 and August 25, 2002; “Liquidity and Capital Resources” for updated information concerning our expected contributions to our pension plans in 2004-2008, our expected net cash payments in 2004 in respect of restructuring activities, our expected net cash payments in 2004-2008 under our postretirement health benefits plans and our expected net cash payments in 2004 for capital expenditures and foreign taxes; “Financial Condition—Credit Ratings” for updated information concerning our credit ratings; “Note 4: Restructuring Reserves” and “Note 12: Subsequent Events—Organizational Changes” for updated information concerning several of our restructuring initiatives; “Note 7: Commitments and Contingencies” and “Part II—Item 1—Legal Proceedings” for updated information about our litigation; and “Statement Regarding Forward-Looking Disclosure” for updated information about our forward-looking statements.

Supplemental Information. We have also provided supplemental information in “Note 1: Preparation of Financial Statements—Estimates;” “Note 4: Restructuring Reserves—Summary;” “Note 5: Income Taxes;” “Note 6: Financing;” and “Note 12: Subsequent Events.”

Items 4 and 6. This Form 10-Q also contains the following sections required to be filed under Form 10-Q but not furnished with the Form 8-K filed on October 10, 2003: Item 4—“Controls and Procedures;” and Item 6—“Exhibits and Reports on Form 8-K,” including the Section 302 and 906 certifications required to be included with this Form 10-Q.

Form 10-K. We filed our Annual Report on Form 10-K for the year ended November 30, 2003 with the Securities and Exchange Commission on March 1, 2004. The Form 10-K contains information about the restatements, the valuation allowance and other matters discussed in this Form 10-Q. We recommend that you read the Form 10-K in conjunction with this Form 10-Q.

* * * *

As noted, we restated our annual and quarterly financial statements for 2001 and 2002 and our quarterly financial statements for the first two quarters of 2003. Except as otherwise clearly stated, all financial information contained in this Quarterly Report on Form 10-Q gives effect to these restatements. All amounts in financial tables herein, unless otherwise indicated, are in thousands.


		Page Number
PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited):
	Consolidated Balance Sheets as of August 24, 2003 and November 24, 2002 (restated)	6
	Consolidated Statements of Operations for the Three and Nine Months Ended August 24, 2003 and August 25, 2002 (restated)	7
	Consolidated Statements of Cash Flows for the Nine Months Ended August 24, 2003 and August 25, 2002 (restated)	8
	Notes to Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	55

Item 4.	Controls and Procedures	57

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	58

Item 6.	Exhibits and Reports on Form 8-K	60

SIGNATURE		63

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

LEVI STRAUSS & CO. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

(Unaudited)


	August 24, 2003			November 24, 2002
				(Restated)
ASSETS
Current Assets:
Cash and cash equivalents	$	50,677		$	96,478
Restricted cash		23,427			—
Trade receivables, net of allowance for doubtful accounts of $24,455 in 2003 and $24,857 in 2002		594,652			658,807
Inventories:
Raw materials		65,301			100,487
Work-in-process		58,204			74,048
Finished goods		675,310			423,857

Total inventories		798,815			598,392

Deferred tax assets, net of valuation allowance of $25,281 in 2003 and $9,626 in 2002		74,010			224,292
Other current assets		120,832			88,611

Total current assets		1,662,413			1,666,580
Property, plant and equipment, net of accumulated depreciation of $490,369 in 2003 and $478,447 in 2002		481,470			489,454
Goodwill, net of accumulated amortization of $151,569 in 2003 and 2002		199,905			199,905
Other intangible assets, net of accumulated amortization of $36,132 in 2003 and $35,911 in 2002		44,932			43,505
Non-current deferred tax assets, net of valuation allowance of $324,269 in 2003 and $57,476 in 2002		633,940			572,585
Other assets		85,162			60,891

Total Assets	$	3,107,822		$	3,032,920


LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current Liabilities:
Current maturities of long-term debt and short-term borrowings	$	39,588		$	95,225
Accounts payable		300,377			278,577
Restructuring reserves		9,452			62,165
Accrued liabilities		212,014			225,190
Accrued salaries, wages and employee benefits		206,626			310,445
Accrued taxes		16,700			112,060

Total current liabilities		784,757			1,083,662
Long-term debt, less current maturities		2,327,412			1,751,752
Postretirement medical benefits		551,700			548,930
Pension liability		223,232			228,740
Long-term employee related benefits		169,774			298,678
Long-term tax liabilities		128,142			95,230
Other long-term liabilities		35,001			32,716
Minority interest		21,378			21,541

Total liabilities		4,241,396			4,061,249

Stockholders’ Equity (Deficit):
Common stock—$.01 par value; 270,000,000 shares authorized; 37,278,238 shares issued and outstanding .		373			373
Additional paid-in capital		88,808			88,808
Accumulated deficit		(1,139,695	)		(1,035,501	)
Accumulated other comprehensive loss		(83,060	)		(82,009	)

Stockholders’ (deficit)		(1,133,574	)		(1,028,329	)

Total Liabilities and Stockholders’ Equity (Deficit)	$	3,107,822		$	3,032,920

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

LEVI STRAUSS & CO. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in Thousands)

(Unaudited)

Three Months Ended

Nine Months Ended

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