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 May 30, 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 July 12, 2004
INDEX TO FORM 10-Q
MAY 30, 2004
LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
| May 30, 2004 |
November 30, 2003 |
|||||||
| ASSETS | ||||||||
| Current Assets: |
||||||||
| Cash and cash equivalents |
$ | 347,249 | $ | 203,940 | ||||
| Trade receivables, net of allowances of $26,573 in 2004 and $26,956 in 2003 |
450,178 | 555,106 | ||||||
| Inventories |
519,112 | 680,068 | ||||||
| Deferred tax assets, net of valuation allowance of $25,281 in both 2004 and 2003 |
131,827 | 131,827 | ||||||
| Other current assets |
82,959 | 104,176 | ||||||
| Total current assets |
1,531,325 | 1,675,117 | ||||||
| Property, plant and equipment, net of accumulated depreciation of $471,225 in 2004 and $491,121 in 2003 |
427,708 | 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 $36,415 in 2004 and $36,349 in 2003 |
44,697 | 44,722 | ||||||
| Non-current deferred tax assets, net of valuation allowance of $324,269 in both 2004 and 2003 |
490,021 | 490,021 | ||||||
| Other assets |
79,505 | 87,283 | ||||||
| Total Assets |
$ | 2,773,161 | $ | 2,983,762 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current Liabilities: |
||||||||
| Current maturities of long-term debt and short-term borrowings |
$ | 85,434 | $ | 34,700 | ||||
| Accounts payable |
195,769 | 296,188 | ||||||
| Restructuring reserves |
66,364 | 96,406 | ||||||
| Accrued liabilities |
223,329 | 244,520 | ||||||
| Accrued salaries, wages and employee benefits |
238,653 | 195,129 | ||||||
| Accrued taxes |
36,369 | 29,863 | ||||||
| Total current liabilities |
845,918 | 896,806 | ||||||
| Long-term debt, less current maturities |
2,224,135 | 2,281,729 | ||||||
| Postretirement medical benefits |
514,435 | 555,008 | ||||||
| Pension liability |
226,798 | 250,814 | ||||||
| Long-term employee related benefits |
169,407 | 193,188 | ||||||
| Long-term tax liabilities |
109,352 | 143,082 | ||||||
| Other long-term liabilities |
33,242 | 32,576 | ||||||
| Minority interest |
23,571 | 23,731 | ||||||
| Total liabilities |
4,146,858 | 4,376,934 | ||||||
| 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 |
88,808 | 88,808 | ||||||
| Accumulated deficit |
(1,381,562 | ) | (1,384,818 | ) | ||||
| Accumulated other comprehensive loss |
(81,316 | ) | (97,535 | ) | ||||
| Total stockholders’ deficit |
(1,373,697 | ) | (1,393,172 | ) | ||||
| Total Liabilities and Stockholders’ Deficit |
$ | 2,773,161 | $ | 2,983,762 | ||||
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 May 30, 2004 |
Three Months Ended May 25, 2003 |
Six Months Ended May 30, 2004 |
Six Months Ended May 25, 2003 |
|||||||||||||
| (Restated) | (Restated) | |||||||||||||||
| Net sales |
$ | 958,833 | $ | 932,021 | $ | 1,921,137 | $ | 1,809,055 | ||||||||
| Cost of goods sold |
546,140 | 538,825 | 1,100,198 | 1,055,707 | ||||||||||||
| Gross profit |
412,693 | 393,196 | 820,939 | 753,348 | ||||||||||||
| Selling, general and administrative expenses |
319,061 | 345,390 | 620,756 | 650,160 | ||||||||||||
| Other operating income |
(9,520 | ) | (9,752 | ) | (18,033 | ) | (17,068 | ) | ||||||||
| Restructuring charges, net of reversals |
25,679 | (5,336 | ) | 80,041 | (8,386 | ) | ||||||||||
| Operating income |
77,473 | 62,894 | 138,175 | 128,642 | ||||||||||||
| Interest expense |
65,208 | 63,346 | 133,435 | 123,025 | ||||||||||||
| Other expense, net |
4,039 | 20,183 | 2,448 | 54,798 | ||||||||||||
| Income (loss) before taxes |
8,226 | (20,635 | ) | 2,292 | (49,181 | ) | ||||||||||
| Income tax expense (benefit) |
2,602 | 21,200 | (964 | ) | 50,700 | |||||||||||
| Net income (loss) |
$ | 5,624 | $ | (41,835 | ) | $ | 3,256 | $ | (99,881 | ) | ||||||
The accompanying notes are an integral part of these financial statements.
LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
| Six Months Ended |
||||||||
| May 30, 2004 |
May 25, 2003 |
|||||||
| (Restated) | ||||||||
| Cash Flows from Operating Activities: |
||||||||
| Net income (loss) |
$ | 3,256 | $ | (99,881 | ) | |||
| Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: |
||||||||
| Depreciation and amortization |
30,127 | 31,276 | ||||||
| Non-cash asset write-offs associated with reorganization initiatives |
34,653 | — | ||||||
| Gain on dispositions of property, plant and equipment |
(1,088 | ) | (495 | ) | ||||
| Unrealized foreign exchange (gains) losses |
(6,441 | ) | 17,409 | |||||
| Decrease in trade receivables |
97,013 | 169,852 | ||||||
| Decrease in income taxes receivables |
344 | 904 | ||||||
| Decrease (increase) in inventories |
149,137 | (171,941 | ) | |||||
| Decrease (increase) in other current assets |
21,756 | (14,885 | ) | |||||
| Decrease (increase) in other long-term assets |
7,592 | (22,440 | ) | |||||
| Decrease in accounts payable and accrued liabilities |
(103,095 | ) | (8,991 | ) | ||||
| Decrease in restructuring reserves |
(30,042 | ) | (40,164 | ) | ||||
| Increase (decrease) in accrued salaries, wages and employee benefits |
44,491 | (39,173 | ) | |||||
| Increase (decrease) in accrued taxes |
7,570 | (94,023 | ) | |||||
| Decrease in long-term employee related benefits |
(72,740 | ) | (74,225 | ) | ||||
| (Decrease) increase in other long-term liabilities |
(32,888 | ) | 1,789 | |||||
| Other, net |
2,774 | 733 | ||||||
| Net cash provided by (used for) operating activities |
152,419 | (344,255 | ) | |||||
| Cash Flows from Investing Activities: |
||||||||
| Purchases of property, plant and equipment |
(8,059 | ) | (35,435 | ) | ||||
| Proceeds from sale of property, plant and equipment |
5,592 | 7,604 | ||||||
| Cash outflow from net investment hedges |
(1,086 | ) | (18,468 | ) | ||||
| Net cash used for investing activities |
(3,553 | ) | (46,299 | ) | ||||
| Cash Flows from Financing Activities: |
||||||||
| Proceeds from issuance of long-term debt |
— | 1,114,060 | ||||||
| Repayments of long-term debt |
(6,664 | ) | (675,012 | ) | ||||
| Net decrease in short-term borrowings |
(380 | ) | (3,474 | ) | ||||
| Debt issuance costs |
(525 | ) | — | |||||
| Increase in restricted cash |
— | (23,427 | ) | |||||
| Net cash (used for) provided by financing activities |
(7,569 | ) | 412,147 | |||||
| Effect of exchange rate changes on cash |
2,012 | 2,894 | ||||||
| Net increase in cash and cash equivalents |
143,309 | 24,487 | ||||||
| Beginning cash and cash equivalents |
203,940 | 96,478 | ||||||
| Ending cash and cash equivalents |
$ | 347,249 | $ | 120,965 | ||||
| Supplemental disclosure of cash flow information: |
||||||||
| Cash paid during the period for: |
||||||||
| Interest |
$ | 117,853 | $ | 78,427 | ||||
| Income taxes |
24,696 | 159,319 | ||||||
| Restructuring initiatives |
75,307 | 35,024 | ||||||
The accompanying notes are an integral part of these financial statements.
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 unaudited 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 and six months ended May 30, 2004 may not be indicative of the results to be expected for any other interim period or 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 unaudited consolidated financial statements for the three and six months ended May 25, 2003 have been restated. All information in the notes to the unaudited consolidated financial statements referring to the three and six months ended May 25, 2003 gives 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.
Exploration of the Sale of the Company’s Dockers® Business
On May 11, 2004, the Company announced that it is exploring the sale of its worldwide Dockers® casual clothing business and has retained Citigroup Inc. to assist it with the potential sale. The Company is exploring the sale of the Dockers® business because it believes that a sale would help the Company reduce substantially its debt, improve its capital structure and focus its resources on growing its Levi’s® brand and Levi Strauss Signature™ brand businesses. As previously announced, the Company intends to seek amendments to its senior secured term loan and senior secured revolving credit facility to facilitate any proposed sale of the Dockers® business. The proposed amendments would, among other things, provide for the lenders’ consent to a sale of the Dockers® business (which generated approximately 24% of the Company’s revenues in 2003), provided that the application of sale proceeds results in a reduction in the Company’s net debt of at least 30%. If accepted as currently proposed, the amendments would also provide the Company greater flexibility than is currently permitted in applying the proceeds of a sale among the various debt instruments currently outstanding, as well as greater flexibility under several negative covenants in the Company’s senior secured term loan and senior secured revolving credit facility.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to