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 27, 2005
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 002-90139
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 6, 2005
INDEX TO FORM 10-Q
February 27, 2005
| Page Number | ||||
| PART I—FINANCIAL INFORMATION |
||||
| Item 1. |
3 | |||
| Consolidated Balance Sheets as of February 27, 2005 and November 28, 2004 |
3 | |||
| 4 | ||||
| 5 | ||||
| 6 | ||||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
24 | ||
| Item 3. |
45 | |||
| Item 4. |
45 | |||
| 47 | ||||
| Item 1. |
47 | |||
| Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds. |
47 | ||
| Item 3. |
47 | |||
| Item 4. |
47 | |||
| Item 5. |
47 | |||
| Item 6. |
48 | |||
| 48 | ||||
2
Item 1. Consolidated Financial Statements
LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
| February 27, 2005 |
November 28, 2004 |
|||||||
| ASSETS | ||||||||
| Current Assets: |
||||||||
| Cash and cash equivalents |
$ | 223,139 | $ | 299,596 | ||||
| Restricted cash |
4,721 | 1,885 | ||||||
| Trade receivables, net of allowance for doubtful accounts of $28,726 and $29,002 |
546,778 | 607,679 | ||||||
| Inventories: |
||||||||
| Raw materials |
36,037 | 45,271 | ||||||
| Work-in-process |
20,592 | 22,950 | ||||||
| Finished goods |
551,938 | 486,633 | ||||||
| Total inventories |
608,567 | 554,854 | ||||||
| Deferred tax assets, net of valuation allowance of $26,364 and $26,364 |
131,491 | 131,491 | ||||||
| Other current assets |
94,917 | 83,599 | ||||||
| Total current assets |
1,609,613 | 1,679,104 | ||||||
| Property, plant and equipment, net of accumulated depreciation of $484,708 and $486,439 |
404,556 | 416,277 | ||||||
| Goodwill |
199,905 | 199,905 | ||||||
| Other intangible assets, net of accumulated amortization of $740 and $720 |
46,482 | 46,779 | ||||||
| Non-current deferred tax assets, net of valuation allowance of $360,319 and $360,319 |
455,303 | 455,303 | ||||||
| Other assets |
93,896 | 88,634 | ||||||
| Total assets |
$ | 2,809,755 | $ | 2,886,002 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current Liabilities: |
||||||||
| Current maturities of long-term debt and short-term borrowings |
$ | 21,876 | $ | 75,165 | ||||
| Current maturities of capital lease obligations |
1,603 | 1,587 | ||||||
| Accounts payable |
214,516 | 279,406 | ||||||
| Restructuring reserves |
26,758 | 41,995 | ||||||
| Accrued liabilities |
222,083 | 253,322 | ||||||
| Accrued salaries, wages and employee benefits |
226,679 | 293,762 | ||||||
| Accrued income taxes |
140,064 | 124,795 | ||||||
| Total current liabilities |
853,579 | 1,070,032 | ||||||
| Long-term debt, less current maturities |
2,320,496 | 2,248,723 | ||||||
| Long-term capital lease, less current maturities |
5,434 | 5,854 | ||||||
| Post-retirement medical benefits |
483,093 | 493,110 | ||||||
| Pension liability |
219,653 | 217,459 | ||||||
| Long-term employee related benefits |
158,213 | 154,495 | ||||||
| Long-term income tax liabilities |
26,826 | — | ||||||
| Other long-term liabilities |
42,767 | 43,205 | ||||||
| Minority interest |
22,282 | 24,048 | ||||||
| Total liabilities |
4,132,343 | 4,256,926 | ||||||
| Commitments and contingencies (Note 7) |
||||||||
| Stockholders’ Deficit: |
||||||||
| Common stock—$.01 par value; 270,000,000 shares authorized; 37,278,238 shares issued and outstanding |
372 | 373 | ||||||
| Additional paid-in capital |
88,808 | 88,808 | ||||||
| Accumulated deficit |
(1,307,109 | ) | (1,354,428 | ) | ||||
| Accumulated other comprehensive loss |
(104,659 | ) | (105,677 | ) | ||||
| Stockholders’ deficit |
(1,322,588 | ) | (1,370,924 | ) | ||||
| Total liabilities and stockholders’ deficit |
$ | 2,809,755 | $ | 2,886,002 | ||||
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 27, 2005 |
February 29, 2004 |
|||||||
| Net sales |
$ | 1,005,872 | $ | 962,304 | ||||
| Cost of goods sold |
519,287 | 554,058 | ||||||
| Gross profit |
486,585 | 408,246 | ||||||
| Selling, general and administrative expenses |
308,922 | 289,495 | ||||||
| Long-term incentive compensation expense |
5,619 | 12,200 | ||||||
| (Gain) loss on disposal of assets |
(1,362 | ) | 45 | |||||
| Other operating income |
(13,590 | ) | (8,513 | ) | ||||
| Restructuring charges, net of reversals |
3,190 | 54,362 | ||||||
| Operating income |
183,806 | 60,657 | ||||||
| Interest expense |
68,330 | 68,227 | ||||||
| Loss on early extinguishment of debt |
23,006 | — | ||||||
| Other income, net |
(3,959 | ) | (1,636 | ) | ||||
| Income (loss) before taxes |
96,429 | (5,934 | ) | |||||
| Income tax expense (benefit) |
49,110 | (3,566 | ) | |||||
| Net income (loss) |
$ | 47,319 | $ | (2,368 | ) | |||
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 27, 2005 |
February 29, 2004 |
|||||||
| Cash Flows from Operating Activities: |
||||||||
| Net income (loss) |
$ | 47,319 | $ | (2,368 | ) | |||
| Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: |
||||||||
| Depreciation and amortization |
15,181 | 15,528 | ||||||
| Non-cash asset write-offs associated with reorganization initiatives |
— | 33,782 | ||||||
| (Gain) loss on disposal of assets |
(1,362 | ) | 45 | |||||
| Unrealized foreign exchange gains |
(770 | ) | (9,270 | ) | ||||
| Decrease in trade receivables |
63,689 | 407 | ||||||
| (Increase) decrease in inventories |
(51,972 | ) | 64,013 | |||||
| (Increase) decrease in other current assets |
(14,111 | ) | 20,622 | |||||
| Decrease in other non-current assets |
5,651 | 3,670 | ||||||
| Decrease in accounts payable and accrued liabilities |
(99,613 | ) | (61,863 | ) | ||||
| Decrease in deferred income taxes |
— | (20,175 | ) | |||||
| Decrease in restructuring reserves |
(15,611 | ) | (18,329 | ) | ||||
| (Decrease) increase in accrued salaries, wages and employee benefits |
(67,083 | ) | 22,490 | |||||
| Increase (decrease) in current income tax liabilities |
16,874 | (3,767 | ) | |||||
| Increase in long-term income tax liabilities |
26,826 | 2,931 | ||||||
| Decrease in long-term employee related benefits |
(4,325 | ) | (35,778 | ) | ||||
| (Decrease) increase in other long-term liabilities |
(452 | ) | 515 | |||||
| Other, net |
(837 | ) | (970 | ) | ||||
| Net cash (used in) provided by operating activities |
(80,596 | ) | 11,483 | |||||
| Cash Flows from Investing Activities: |
||||||||
| Purchases of property, plant and equipment |
(4,668 | ) | (2,581 | ) | ||||
| Proceeds from sale of property, plant and equipment |
2,246 | 588 | ||||||
| Cash outflow from net investment hedges |
(2,302 | ) | (8,052 | ) | ||||
| Net cash used in investing activities |
(4,724 | ) | (10,045 | ) | ||||
| Cash Flows from Financing Activities: |
||||||||
| Proceeds from issuance of long-term debt |
450,000 | — | ||||||
| Repayments of long-term debt |
(429,737 | ) | (3,310 | ) | ||||
| Net increase (decrease) in short-term borrowings |
1,668 | (1,821 | ) | |||||
| Debt issuance costs |
(10,415 | ) | (284 | ) | ||||
| Increase in restricted cash |
(2,999 | ) | — | |||||
| Net cash provided by (used in) financing activities |
8,517 | (5,415 | ) | |||||
| Effect of exchange rate changes on cash |
346 | 4 | ||||||
| Net decrease in cash and cash equivalents |
(76,457 | ) | (3,973 | ) | ||||
| Beginning cash and cash equivalents |
299,596 | 143,445 | ||||||
| Ending cash and cash equivalents |
$ | 223,139 | $ | 139,472 | ||||
| Supplemental disclosure of cash flow information: |
||||||||
| Cash paid during the period for: |
||||||||
| Interest |
$ | 87,775 | $ | 82,669 | ||||
| Income taxes |
20,283 | 10,109 | ||||||
| Restructuring initiatives |
18,800 | 39,174 | ||||||
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 28, 2004 included in the annual report on Form 10-K filed by LS&CO. with the Securities and Exchange Commission on February 17, 2005.
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 ended February 27, 2005 may not be indicative of the results to be expected for any other interim period or the year ending November 27, 2005.
The Company’s fiscal year consists of 52 or 53 weeks, ending on the last Sunday of November in each year. The 2005 fiscal year consists of 52 weeks ending November 27, 2005. Each quarter of fiscal year 2005 consists of 13 weeks. The 2004 fiscal year consisted of 52 weeks ended November 28, 2004 with all four quarters consisting of 13 weeks.
Restricted Cash
Restricted cash as of February 27, 2005 and November 28, 2004 was $4.7 million and $1.9 million, respectively, and primarily relates to required cash deposits for customs and rental guarantees in Europe. The 2005 amount includes approximately $2.9 million of restricted cash for dividends declared but unpaid for the minority shareholders of the Company’s subsidiary in Japan.
Reclassification of Outstanding Checks
The Company included approximately $14.3 million of outstanding checks in “accounts payable” in its statement of cash flows for the three months ended February 29, 2004. Outstanding checks represent checks that have been issued by the Company but have not been processed against the Company’s bank accounts as of the balance sheet date. As of November 28, 2004, the Company has reported outstanding checks as a reduction in “cash and cash equivalents” in the consolidated balance sheet and statement of cash flows, and the prior year amount in the statement of cash flows has been reclassified to reflect this presentation.
Long-lived Assets Held for Sale
At February 27, 2005 and November 28, 2004, the Company had approximately $2.4 million and $2.3 million, respectively, of long-lived assets held for sale. Such assets are recorded in “Property, plant and equipment.” Long-lived assets held for sale as of February 27, 2005 primarily relate to closed manufacturing plants in San Antonio, Texas and San Francisco, CA.
Loss on Early Extinguishment of Debt
During the three months ended February 27, 2005, the Company recorded a $23.0 million loss on early extinguishment of debt as a result of its debt refinancing activities during the period. The loss was comprised of a tender offer premium and other fees and expenses approximating $19.7 million incurred in conjunction with the Company’s completion in January 2005 of a tender offer to repurchase $372.1 million of its 2006 notes and the write-off of approximately $3.3 million of unamortized debt discount and capitalized costs related to such notes (See also Note 5 to the Consolidated Financial Statements).
New Accounting Standards
In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment” (“SFAS 123(R)”). Under this standard, all