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 February 29, 2004
OR
| ¨ | 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 x No ¨
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 April 9, 2004
INDEX TO FORM 10-Q
FEBRUARY 29, 2004
2
LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
| February 29, 2004 |
November 30, 2003 |
|||||||
| ASSETS | ||||||||
| Current Assets: |
||||||||
| Cash and cash equivalents |
$ | 153,753 | $ | 203,940 | ||||
| Trade receivables, net of allowance for doubtful accounts of $25,473 in 2004 and $26,956 in 2003 |
550,057 | 555,106 | ||||||
| Inventories: |
||||||||
| Raw materials |
46,867 | 57,925 | ||||||
| Work-in-process |
37,178 | 36,154 | ||||||
| Finished goods |
527,854 | 585,989 | ||||||
| Total inventories |
611,899 | 680,068 | ||||||
| Deferred tax assets, net of valuation allowance of $25,281 in 2004 and in 2003 |
118,245 | 131,827 | ||||||
| Other current assets |
89,422 | 104,176 | ||||||
| Total current assets |
1,523,376 | 1,675,117 | ||||||
| Property, plant and equipment, net of accumulated depreciation of $500,884 in 2004 and $491,121 in 2003 |
444,595 | 486,714 | ||||||
| Goodwill, net of accumulated amortization of $151,569 in 2004 and in 2003 |
199,905 | 199,905 | ||||||
| Other intangible assets, net of accumulated amortization of $36,429 in 2004 and $36,349 in 2003 |
44,703 | 44,722 | ||||||
| Non-current deferred tax assets, net of valuation allowance of $324,269 in 2004 and in 2003 |
527,879 | 490,021 | ||||||
| Other assets |
84,507 | 87,283 | ||||||
| Total Assets |
$ | 2,824,965 | $ | 2,983,762 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
| Current Liabilities: |
||||||||
| Current maturities of long-term debt and short-term borrowings |
$ | 31,401 | $ | 34,700 | ||||
| Accounts payable |
198,489 | 296,188 | ||||||
| Restructuring reserves |
78,077 | 96,406 | ||||||
| Accrued liabilities |
217,940 | 244,520 | ||||||
| Accrued salaries, wages and employee benefits |
217,059 | 195,129 | ||||||
| Accrued taxes |
25,799 | 29,863 | ||||||
| Total current liabilities |
768,765 | 896,806 | ||||||
| Long-term debt, less current maturities |
2,285,757 | 2,281,729 | ||||||
| Postretirement medical benefits |
534,423 | 555,008 | ||||||
| Pension liability |
253,480 | 250,814 | ||||||
| Long-term employee related benefits |
178,146 | 193,188 | ||||||
| Long-term tax liabilities |
146,013 | 143,082 | ||||||
| Other long-term liabilities |
33,108 | 32,576 | ||||||
| Minority interest |
22,565 | 23,731 | ||||||
| Total liabilities |
4,222,257 | 4,376,934 | ||||||
| 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 |
(1,387,185 | ) | (1,384,818 | ) | ||||
| Accumulated other comprehensive loss |
(99,288 | ) | (97,535 | ) | ||||
| Stockholders’ (deficit) |
(1,397,292 | ) | (1,393,172 | ) | ||||
| Total Liabilities and Stockholders’ Equity (Deficit) |
$ | 2,824,965 | $ | 2,983,762 | ||||
The accompanying notes are an integral part of these financial statements.
3
LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands)
(Unaudited)
| Three Months Ended |
||||||||
| February 29, 2004 |
February 23, 2003 |
|||||||
| (Restated) | ||||||||
| Net sales |
$ | 962,304 | $ | 877,034 | ||||
| Cost of goods sold |
554,058 | 516,882 | ||||||
| Gross profit |
408,246 | 360,152 | ||||||
| Selling, general and administrative expenses |
301,695 | 304,770 | ||||||
| Other operating income |
(8,513 | ) | (7,316 | ) | ||||
| Restructuring charges, net of reversals |
54,362 | (3,050 | ) | |||||
| Operating income |
60,702 | 65,748 | ||||||
| Interest expense |
68,227 | 59,679 | ||||||
| Other (income) expense, net |
(1,591 | ) | 34,615 | |||||
| Loss before taxes |
(5,934 | ) | (28,546 | ) | ||||
| Income tax expense (benefit) |
(3,566 | ) | 29,500 | |||||
| Net loss |
$ | (2,368 | ) | $ | (58,046 | ) | ||
The accompanying notes are an integral part of these financial statements.
4
LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
| Three Months Ended |
||||||||
| February 29, 2004 |
February 23, 2003 |
|||||||
| (Restated) | ||||||||
| Cash Flows from Operating Activities: |
||||||||
| Net loss |
$ | (2,368 | ) | $ | (58,046 | ) | ||
| Adjustments to reconcile net cash used for operating activities: |
||||||||
| Depreciation and amortization |
15,528 | 14,908 | ||||||
| Asset write-offs associated with restructuring charges |
33,782 | — | ||||||
| Loss (gain) on dispositions of property, plant and equipment |
45 | (142 | ) | |||||
| Unrealized foreign exchange (gains) losses |
(9,270 | ) | 11,290 | |||||
| Decrease in trade receivables |
407 | 125,842 | ||||||
| Decrease in income taxes receivables |
348 | 901 | ||||||
| Decrease (increase) in inventories |
64,013 | (18,355 | ) | |||||
| Decrease (increase) in other current assets |
20,274 | (12,908 | ) | |||||
| Decrease (increase) in other long-term assets |
3,670 | (25,656 | ) | |||||
| (Increase) decrease in net deferred tax assets |
(20,175 | ) | 30,704 | |||||
| (Decrease) in accounts payable and accrued liabilities |
(107,800 | ) | (62,692 | ) | ||||
| (Decrease) in restructuring reserves |
(18,329 | ) | (24,497 | ) | ||||
| Increase (decrease) in accrued salaries, wages and employee benefits |
22,213 | (47,520 | ) | |||||
| (Decrease) in accrued taxes |
(3,767 | ) | (13,157 | ) | ||||
| (Decrease) in long-term employee related benefits |
(35,778 | ) | (75,920 | ) | ||||
| Increase in other long-term liabilities |
3,446 | 1,032 | ||||||
| Other, net |
(970 | ) | 2,008 | |||||
| Net cash used for operating activities |
(34,731 | ) | (152,208 | ) | ||||
| Cash Flows from Investing Activities: |
||||||||
| Purchases of property, plant and equipment |
(2,581 | ) | (20,408 | ) | ||||
| Proceeds from sale of property, plant and equipment |
588 | 5,092 | ||||||
| Cash (outflow) from net investment hedges |
(8,052 | ) | (10,625 | ) | ||||
| Net cash used for investing activities |
(10,045 | ) | (25,941 | ) | ||||
| Cash Flows from Financing Activities: |
||||||||
| Proceeds from issuance of long-term debt |
— | 982,560 | ||||||
| Repayments of long-term debt |
(3,310 | ) | (274,455 | ) | ||||
| Net decrease in short-term borrowings |
(1,821 | ) | (3,494 | ) | ||||
| Debt issuance costs |
(284 | ) | — | |||||
| Restricted cash |
— | (244,272 | ) | |||||
| Net cash provided by (used for) financing activities |
(5,415 | ) | 460,339 | |||||
| Effect of exchange rate changes on cash |
4 | 2,766 | ||||||
| Net (decrease) increase in cash and cash equivalents |
(50,187 | ) | 284,956 | |||||
| Beginning cash and cash equivalents |
203,940 | 96,478 | ||||||
| Ending cash and cash equivalents |
$ | 153,753 | $ | 381,434 | ||||
| Supplemental Disclosure of cash flow information: |
||||||||
| Cash paid during the year for: |
||||||||
| Interest |
$ | 82,669 | $ | 40,478 | ||||
| Income taxes |
10,109 | 18,014 | ||||||
| Restructuring initiatives |
39,174 | 21,447 | ||||||
The accompanying notes are an integral part of these financial statements.
5
NOTE 1: PREPARATION OF FINANCIAL STATEMENTS
Basis of Presentation and Principles of Consolidation
The unaudited consolidated financial statements of Levi Strauss & Co. and its wholly-owned and majority-owned foreign and domestic subsidiaries (“LS&CO.” or the “Company”) are prepared in conformity with generally accepted accounting principles in the United States (“U.S.”) for interim financial information. In the opinion of management, all adjustments necessary for a fair presentation 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 LS&CO. for the year ended November 30, 2003 included in the annual report on Form 10-K filed by LS&CO. with the Securities and Exchange Commission on March 1, 2004.
The consolidated financial statements include the accounts of Levi Strauss & Co. and its subsidiaries. All intercompany transactions have been eliminated. Management believes that the disclosures are adequate to make the information presented herein not misleading. Certain prior year amounts have been reclassified to conform to the current presentation. The results of operations for the three months ended February 29, 2004 may not be indicative of the results to be expected for the year ending November 28, 2004.
The Company’s fiscal year consists of 52 or 53 weeks, ending on the last Sunday of November in each year. The 2004 fiscal year consists of 52 weeks ending November 28, 2004. Each quarter of fiscal year 2004 consists of 13 weeks. The 2003 fiscal year consisted of 53 weeks ended November 30, 2003. The first, second and third quarters of fiscal year 2003 consisted of 13 weeks and the fourth quarter of 2003 consisted of 14 weeks.
The consolidated financial statements for the quarter ended February 23, 2003 have been restated. All information in the notes to the consolidated financial statements referring to the quarter ended February 23, 2003 give effect to this restatement. Information about the restatement is included in the annual report on Form 10-K filed by LS&CO. with the Securities and Exchange Commission on March 1, 2004.
Critical Accounting Policies and Estimates
The Company identified the critical accounting policies upon which its financial position and results of operations depend as those relating to revenue recognition, inventory valuation, restructuring reserves, income tax assets and liabilities, derivatives and foreign exchange management activities, and employee benefits.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the related notes to the consolidated financial statements. Changes in such estimates, based on more accurate future information, may affect amounts reported in future periods.
The Company summarizes its critical accounting policies below.
Revenue recognition. The Company recognizes revenue on sale of product when the goods are shipped and title passes to the customer provided that: there are no uncertainties regarding customer acceptance; persuasive evidence of an arrangement exists; the sales price is fixed or determinable; and collectibility is probable. Revenue is recognized when the sale is recorded net of an allowance for estimated returns, discounts and retailer promotions and incentives.
The Company recognizes allowances for estimated returns, discounts and retailer promotions and incentives in the period when the sale is recorded. Allowances principally relate only to the Company’s U.S. operations and primarily reflect price discounts, non-volume-based incentives and other returns and discounts. The Company estimates non-volume-based allowances by considering special customer and product-specific circumstances as well as historical customer claim rates. Actual allowances may differ from estimates due primarily to changes in sales volume based on retailer or consumer demand.
Inventory valuation. The Company values inventories at the lower of cost or market value. Inventory costs are based on standard costs on a first-in first-out basis, which are updated periodically and supported by actual cost data. The Company includes materials, labor and manufacturing overhead in the cost of inventories. In determining inventory market values, substantial consideration is given to the expected product selling price. The Company considers various factors, including estimated quantities of slow-moving and obsolete inventory, by reviewing on-hand quantities, outstanding purchase obligations and forecasted sales. The Company then estimates expected selling prices based on its historical recovery rates for sale of slow-moving and obsolete inventory and other factors, such as market conditions and current consumer preferences. Estimates may differ from actual results due to the
6
quantity, quality and mix of products in inventory, consumer and retailer preferences and economic conditions. The Company reduced during the three months ended February 29, 2004 its estimated allowance for obsolete and slow-moving inventory by approximately $5.3 million due to further improvements in its estimation process. These improvements related to the definition of product attributes that are taken into consideration in evaluating the likelihood of recovery rates below cost.
Restructuring reserves. Upon approval of a restructuring plan by management with the appropriate level of authority, the Company records restructuring reserves for certain costs associated with plant closures and business reorganization activities as they are incurred or when they become probable and estimable. Such costs are recorded as a current liability. Restructuring costs associated with initiatives commenced prior to January 1, 2003 were recorded in compliance with Emerging Issues Task Force No. 94-3 as a current liability and primarily include employee severance, certain employee termination benefits, such as outplacement services and career counseling, and resolution of contractual obligations.
For initiatives commenced after December 31, 2002, the Company recorded restructuring reserves in compliance with Statement of Financial Accounting Standards No. (“SFAS”) 112, “Employers’ Accounting for Postemployment Benefits,” and SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities,” resulting in the recognition of employee severance and related termination benefits for recurring arrangements when they become probable and estimable and on the accrual basis for one-time benefit arrangements. The Company records other costs associated with exit activities as they are incurred. Employee severance and termination benefit costs reflect estimates based on agreements with the relevant union representatives or plans adopted by the Company that are applicable to employees not affiliated with unions. These costs are not associated with nor do they benefit continuing activities. Changing business conditions may affect the assumptions related to the timing and extent of facility closure activities. The Company reviews the status of restructuring activities on a quarterly basis and, if appropriate, records changes based on updated estimates.
Income tax assets and liabilities. In establishing its deferred income tax assets and liabilities, the Company makes judgments and interpretations based on the enacted tax laws and published tax guidance applicable to its operations. The Company records deferred tax assets and liabilities and evaluates the need for valuation allowances to reduce the deferred tax assets to estimated realizable amounts. The likelihood of a material change in the Company’s expected realization of these assets is dependent on estimated assessments of future taxable income, ability to use foreign tax credit carryforwards and carrybacks and net operating losses; U.S. and foreign tax settlements; the effectiveness of tax planning strategies in the various relevant jurisdictions; and other factors. The Company is also subject to examination of income tax returns for multiple years by the Internal Revenue Service and other tax authorities. The Company periodically assesses the likelihood of adverse outcomes resulting from these examinations to determine the impact on its deferred taxes and income tax liabilities and the adequacy of its provision for income taxes. Changes in the Company’s valuation of the deferred tax assets and liabilities or changes in the income tax provision may affect its annual effective income tax rate.
In January 2004, the Company revised the forecast used in valuing net deferred tax assets as of November 30, 2003. The revised forecast took into account recent business performance but assumed no change over the forecast period from current performance levels including any revenue growth or any additional cost reduction or other performance improvement actions the Company may take in 2004 as they are not yet determinable. The Company used the same forecast in valuing net deferred tax assets as of February 29, 2004. The Company performs a detailed analysis of all its deferred tax assets on an annual basis.
Derivative and foreign exchange management activities. The Company recognizes all derivatives as assets and liabilities at their fair values. The fair values are determined using widely accepted valuation models and reflect assumptions about currency fl