-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Jr/wTguQbWYt7EA9XEfeo+K3oUIDOCqxyEcABbK6bvKaGR1TEo7ouZa6JjiweeLz rxZhxF7GC7ONE58nZ+xOpA== 0000094845-02-000021.txt : 20020416 0000094845-02-000021.hdr.sgml : 20020416 ACCESSION NUMBER: 0000094845-02-000021 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020224 FILED AS OF DATE: 20020409 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LEVI STRAUSS & CO CENTRAL INDEX KEY: 0000094845 STANDARD INDUSTRIAL CLASSIFICATION: APPAREL & OTHER FINISHED PRODS OF FABRICS & SIMILAR MATERIAL [2300] IRS NUMBER: 940905160 STATE OF INCORPORATION: DE FISCAL YEAR END: 1125 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 002-90139 FILM NUMBER: 02605277 BUSINESS ADDRESS: STREET 1: 1155 BATTERY ST CITY: SAN FRANCISCO STATE: CA ZIP: 94111 BUSINESS PHONE: 4155446000 MAIL ADDRESS: STREET 1: 1155 BATTERY STREET CITY: SAN FRAINCISCO STATE: CA ZIP: 94111 10-Q 1 q1_10q.txt FROM 10-Q FOR PERIOD ENDED FEBRUARY 24, 2002 ================================================================================ 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 24, 2002 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 (I.R.S. Employer Incorporation or Organization) 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 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 1, 2002 LEVI STRAUSS & CO. INDEX TO FORM 10-Q FEBRUARY 24, 2002
PAGE NUMBER ------ PART I - FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Balance Sheets as of February 24, 2002 and November 25, 2001.............. 3 Consolidated Statements of Income for the Three Months Ended February 24, 2002 and February 25, 2001............................................... 4 Consolidated Statements of Cash Flows for the Three Months Ended February 24, 2002 and February 25, 2001............................................... 5 Notes to the Consolidated Financial Statements......................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................................... 17 Item 3. Quantitative and Qualitative Disclosures about Market Risk............................. 23 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K....................................................... 24 SIGNATURE........................................................................................ 25 2
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
LEVI STRAUSS & CO. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) February 24, November 25, 2002 2001 ---- ---- ASSETS (Unaudited) Current Assets: Cash and cash equivalents...................................................... $ 112,365 $ 102,831 Restricted cash ............................................................... 42,954 -- Trade receivables, net of allowance for doubtful accounts of $27,627 in 2002 and $26,666 in 2001......................................................... 573,908 621,224 Inventories: Raw materials.............................................................. 96,751 97,261 Work-in-process............................................................ 67,339 50,499 Finished goods............................................................. 439,636 462,417 ---------- ---------- Total inventories....................................................... 603,726 610,177 Deferred tax assets............................................................ 185,594 189,958 Other current assets........................................................... 107,038 110,252 ---------- ---------- Total current assets............................................... 1,625,585 1,634,442 Property, plant and equipment, net of accumulated depreciation of $527,219 in 2002 and $527,647 in 2001......................................................... 495,108 514,711 Goodwill and other intangibles, net of accumulated amortization of $178,246 in 2002 and $175,603 in 2001......................................................... 251,488 254,233 Non-current deferred tax assets...................................................... 463,734 484,260 Other assets......................................................................... 102,743 95,840 ---------- ---------- Total Assets....................................................... $2,938,658 $2,983,486 ========== ========== LIABILITIES AND STOCKHOLDERS' DEFICIT Current Liabilities: Current maturities of long-term debt and short-term borrowings................. $ 106,577 $ 162,944 Accounts payable............................................................... 179,999 234,199 Restructuring reserves......................................................... 36,789 45,220 Accrued liabilities............................................................ 278,885 301,620 Accrued salaries, wages and employee benefits.................................. 203,066 212,728 Accrued taxes.................................................................. 88,876 26,475 ---------- ---------- Total current liabilities.......................................... 894,192 983,186 Long-term debt, less current maturities.............................................. 1,853,971 1,795,489 Postretirement medical benefits...................................................... 545,943 544,476 Long-term employee related benefits.................................................. 397,742 384,751 Long-term tax liability.............................................................. 109,325 174,978 Other long-term liabilities.......................................................... 15,718 16,402 Minority interest.................................................................... 19,875 20,147 ---------- ---------- Total liabilities.................................................. 3,836,766 3,919,429 ---------- ---------- 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............................................................ (977,262) (1,020,860) Accumulated other comprehensive loss........................................... (10,027) (4,264) ---------- ---------- Total stockholders' deficit........................................ (898,108) (935,943) ---------- ---------- Total Liabilities and Stockholders' Deficit........................ $2,938,658 $2,983,486 ========== ========== The accompanying notes are an integral part of these financial statements. 3
LEVI STRAUSS & CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Dollars in Thousands, Except Per Share Data) (Unaudited) Three Months Ended ------------------ February 24, February 25, 2002 2001 ---- ---- Net sales....................................................... $ 935,285 $ 996,382 Cost of goods sold.............................................. 536,701 556,449 ---------- ---------- Gross profit................................................. 398,584 439,933 Marketing, general and administrative expenses.................. 298,935 326,095 Other operating (income)........................................ (6,113) (7,174) ---------- ---------- Operating income............................................. 105,762 121,012 Interest expense................................................ 48,023 69,205 Other (income) expense, net..................................... (11,465) 4,868 ---------- ---------- Income before taxes.......................................... 69,204 46,939 Provision for taxes............................................. 25,606 17,367 ---------- ---------- Net income................................................... $ 43,598 $ 29,572 ========== ========== Earnings per share--basic and diluted........................... $ 1.17 $ 0.79 ========== ========== Weighted-average common shares outstanding...................... 37,278,238 37,278,238 ========== ========== 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 24, February 25, 2002 2001 ---- ---- Cash Flows from Operating Activities: Net income................................................................... $ 43,598 $ 29,572 Adjustments to reconcile net cash provided by (used for) operating activities: Depreciation and amortization........................................ 18,228 20,841 (Gain) loss on dispositions of property, plant and equipment......... 204 (140) Unrealized foreign exchange gains.................................... (15,412) (20,978) Decrease in trade receivables........................................ 42,530 99,397 Decrease (increase) in inventories................................... 2,075 (84,596) Decrease in other current assets..................................... 8,006 53,449 Decrease (increase) in other long-term assets........................ 520 (22,086) Decrease in net deferred tax assets.................................. 21,770 4,527 Decrease in accounts payable and accrued liabilities................. (72,035) (103,216) Decrease in restructuring reserves................................... (8,431) (10,223) Decrease in accrued salaries, wages and employee benefits............ (8,754) (76,904) Increase (decrease) in accrued taxes................................. 62,135 (56,638) Increase in long-term employee benefits.............................. 5,653 23,419 (Decrease) increase in other long-term liabilities................... (65,276) 8,260 Other, net........................................................... 830 3,391 --------- ---------- Net cash provided by (used for) operating activities.............. 35,641 (131,925) --------- ---------- Cash Flows from Investing Activities: Purchases of property, plant and equipment........................... (6,649) (4,874) Proceeds from sale of property, plant and equipment.................. 6,486 763 Gains (losses) on net investment hedges.............................. 2,496 (78) -------- ---------- Net cash provided by (used for) investing activities.............. 2,333 (4,189) -------- ---------- Cash Flows from Financing Activities: Proceeds from issuance of long-term debt............................. 155,500 1,235,214 Repayments of long-term debt......................................... (140,987) (1,132,967) Net increase (decrease) in short-term borrowings..................... 1,284 (3,164) (Increase) in restricted cash........................................ (42,954) -- -------- ---------- Net cash (used for) provided by financing activities.............. (27,157) 99,083 -------- ---------- Effect of exchange rate changes on cash...................................... (1,283) 2,196 -------- ---------- Net increase (decrease) in cash and cash equivalents.............. 9,534 (34,835) Beginning cash and cash equivalents.......................................... 102,831 117,058 -------- ---------- Ending Cash and Cash Equivalents............................................. $112,365 $ 82,223 ======== ========== Supplemental Disclosures of Cash Flow Information: Cash paid during the year for: Interest............................................................. $ 41,053 $ 41,442 Income taxes......................................................... 6,589 60,951 Restructuring initiatives............................................ 8,431 10,223 The accompanying notes are an integral part of these financial statements. 5
LEVI STRAUSS & CO. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1: SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Principles of Consolidation The unaudited consolidated financial statements of Levi Strauss & Co. and subsidiaries ("LS&CO." or "Company") are prepared in conformity with generally accepted accounting principles for interim financial information. In the opinion of management, all adjustments necessary for a fair presentation of the financial position and operating results 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 25, 2001 included in the annual report on Form 10-K filed by LS&CO. with the Securities and Exchange Commission (the "SEC") on February 7, 2002. The consolidated financial statements include the accounts of LS&CO. and its subsidiaries. All intercompany transactions have been eliminated. Management believes that, along with the following information, 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 24, 2002 may not be indicative of the results to be expected for the year ending November 24, 2002. Restricted Cash The U.S. receivables securitization transaction requires the Company to maintain the level of its net eligible U.S. trade receivables at a certain targeted amount. Sales incentives are taken into account under the securitization agreements in determining targeted net eligible receivables. As a result of the amount of sales incentives recorded and the manner in which incentives are currently treated in that calculation, the Company foresaw a decline in net eligible receivables as well as an increase of the targeted amount during the first quarter of 2002. In response, the Company requested that the trustee under the arrangement begin retaining cash collections in an amount covering the deficiency. Under the agreements, the retention of cash by the trustee has the effect of reducing the deficiency. Amounts retained in this manner are not available to the Company until released by the trustee. The trustee receives daily reports comparing the net eligible receivables with the targeted amounts, and if appropriate releases retained cash accordingly. As of February 24, 2002, the amount of cash being retained by the trustee was $43.0 million. This amount is separately identified on the balance sheet as "Restricted Cash." 6
LEVI STRAUSS & CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued) (Unaudited) NOTE 2: COMPREHENSIVE INCOME The following is a summary of the components of total comprehensive income, net of related income taxes: Three Months Ended ------------------ February 24, February 25, 2002 2001 ---- ---- (Dollars in Thousands) Net income................................................... $ 43,598 $29,572 -------- ------- Other comprehensive income (loss): Transition adjustments: Unrealized losses on cash flow hedges............... - (522) -------- ------- Net cash flow hedges................................ - (522) Net investment hedges............................... - 76 -------- ------- Total transition adjustments.................... - (446) -------- ------- Foreign currency translation adjustments: Net investment hedges................................ 5,035 (7,118) Foreign currency translations........................ (10,226) 18,178 -------- ------- Total foreign currency translation adjustments.. (5,191) 11,060 -------- ------- Unrealized gains on cash flow hedges.................... - 1,928 Reclassification of cash flow hedges to other income/expense....................................... (572) (153) -------- ------- Net cash flow hedges................................ (572) 1,775 -------- ------- Total other comprehensive income (loss)......... (5,763) 12,389 -------- ------- Total comprehensive income.................................. $ 37,835 $41,961 ======== ======= The following is a summary of the components of accumulated other comprehensive income (loss) balances: February 24, November 25, 2002 2001 ---- ---- (Dollars in Thousands) Cumulated transition adjustments: Beginning balance of cash flow hedges.................. $ - $ - Unrealized losses on cash flow hedges................ - (522) Reclassification of cash flow hedges to other income/expense..................................... - 522 -------- -------- Ending balance of cash flow hedges...................... - - Net investment hedges................................... - 76 -------- -------- Total cumulated transition adjustments............. - 76 -------- -------- Cumulated translation adjustments: Net investment hedges.................................. 54,929 49,818 Foreign currency translations.......................... (64,956) (54,730) -------- -------- Total cumulated translation adjustments............ (10,027) (4,912) -------- -------- Beginning balance of cash flow hedges.................... 572 - Unrealized gains on cash flow hedges................. - 3,052 Reclassification of cash flow hedges to other income/expense..................................... (572) (2,480) -------- -------- Ending balance of cash flow hedges....................... - 572 -------- -------- Accumulated other comprehensive loss....................... $(10,027) $ (4,264) ======== ======== 7
LEVI STRAUSS & CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued) (Unaudited) NOTE 3: EXCESS MANUFACTURING CAPACITY/RESTRUCTURING RESERVES The following is a summary of the actions taken associated with our excess manufacturing capacity and other reorganization activities. Severance and employee benefits relate to severance packages, out-placement services and career counseling for employees affected by the plant closures and reorganization initiatives. Reductions consist of payments for severance and employee benefits, and other restructuring costs. The balance of severance and employee benefits and other restructuring costs are included under restructuring reserves on the balance sheet. 2001 REORGANIZATION INITIATIVES In November 2001, the Company instituted various reorganization initiatives in the U.S. that included simplifying product lines and realigning the Company's resources. The Company recorded an initial charge of $20.3 million in November 2001 reflecting an estimated displacement of approximately 517 employees. As of February 24, 2002, approximately 190 employees have been displaced. The table below displays the activity and liability balance of this reserve. In November 2001, the Company instituted various reorganization initiatives in Japan. These initiatives were prompted by business declines as a result of the prolonged economic slowdown, political uncertainty, major retail bankruptcies and dramatic shrinkage of the core denim jeans market in Japan. The Company recorded an initial charge of $2.0 million in November 2001 reflecting an estimated displacement of 22 employees all of whom have been displaced. The table below displays the activity and liability balance of this reserve. U.S. Reorganization Initiatives
Balance Balance At At 11/25/01 Reductions 2/24/02 -------- ---------- ------- (Dollars in Thousands) Severance and employee benefits.................................... $19,989 $(5,776) $14,213 ------- ------- ------- Total......................................................... $19,989 $(5,776) $14,213 ======= ======= ======= Japan Reorganization Initiatives Balance Balance At At 11/25/01 Reductions 2/24/02 -------- ---------- ------- (Dollars in Thousands) Severance and employee benefits.................................... $1,657 $(1,579) $ 78 Other restructuring costs.......................................... 349 (44) 305 ------ ------- ---- Total......................................................... $2,006 $(1,623) $383 ====== ======= ====
CORPORATE REORGANIZATION INITIATIVES In 1998, the Company instituted various corporate reorganization initiatives, displacing approximately 770 employees. The goal of these initiatives was to reduce overhead costs and consolidate operations. The table below displays the activity and liability balance of this reserve. 8 LEVI STRAUSS & CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued) (Unaudited)
1998 Corporate Reorganization Initiatives Balance Balance At At 11/25/01 Reductions 2/24/02 -------- ---------- ------- (Dollars in Thousands) Other restructuring costs.......................................... $1,508 $(34) $1,474 ------ ---- ------ Total......................................................... $1,508 $(34) $1,474 ====== ==== ======
In line with these overhead reorganization initiatives, the Company announced restructuring plans during 1999, displacing approximately 720 employees. The balance for this reserve at November 25, 2001 consisted of $113 thousand for severance and employee benefits. As of February 24, 2002, the reserve balance was fully utilized. NORTH AMERICA PLANT CLOSURES In view of declining sales that started in 1997, a need to bring manufacturing capacity in line with sales projections and a need to reduce costs, the Company decided to close some of its owned and operated production facilities in North America. The Company announced in 1997 the closure of ten manufacturing facilities and a finishing center in the U.S. that were closed during 1998, displacing approximately 6,400 employees. The balances for this reserve at November 25, 2001 consisted of $18 thousand for severance and employee benefits and $30 thousand for other restructuring costs, with reductions of $6 thousand and $30 thousand, respectively, during the first quarter of 2002. As of February 24, 2002, the ending balance for severance and employee benefits was $12 thousand and the balance for other restructuring costs was fully utilized. The Company announced in November 1998 the closure of two more finishing centers in the U.S. that were closed by the end of 1999, displacing approximately 990 employees. The balance for this reserve at November 25, 2001 consisted of $223 thousand for other restructuring costs, with a reduction of $105 thousand during the first quarter of 2002. As of February 24, 2002, the ending balance for this reserve was $118 thousand for other restructuring costs. The Company announced in February 1999 the closure of 11 additional manufacturing facilities in North America. Those facilities were closed by the end of 1999, displacing approximately 5,900 employees. The table below displays the activity and liability balance of this reserve. The remaining balances are primarily for employee benefits and costs associated with a real estate lease that will expire in September 2002. 1999 North America Plant Closures
Balance Balance At At 11/25/01 Reductions 2/24/02 -------- ---------- ------- (Dollars in Thousands) Severance and employee benefits.................................... $ 7,323 $(530) $ 6,793 Other restructuring costs.......................................... 11,336 (39) 11,297 ------- ----- ------- Total......................................................... $18,659 $(569) $18,090 ======= ===== ======= 9
LEVI STRAUSS & CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued) (Unaudited) EUROPE REORGANIZATION AND PLANT CLOSURES In September 1998 the Company announced plans to close two manufacturing and two finishing facilities, and reorganize operations throughout Europe, displacing approximately 1,650 employees. These plans were prompted by decreased demand for denim jeans products and a resulting over-capacity in the Company's European owned and operated plants. The production facilities were closed by the end of 1999. The balance for this reserve at November 25, 2001 consisted of $225 thousand for severance and employee benefits, with a reduction of $129 thousand during the first quarter of 2002. As of February 24, 2002, the ending balance for this reserve was $96 thousand for severance and employee benefits. In conjunction with these plans in Europe, the Company announced in September 1999 plans to close a production facility and reduce capacity at a finishing facility in the United Kingdom in order to further reduce overhead costs and consolidate operations. The production facility was closed in December 1999, displacing approximately 945 employees. The table below displays the activity and liability balances of this reserve. 1999 Europe Reorganization and Plant Closures
Balance Balance At At 11/25/01 Reductions 2/24/02 -------- ---------- ------- (Dollars in Thousands) Severance and employee benefits...................................... $1,970 $(46) $1,924 Other restructuring costs............................................ 479 -- 479 ------ ---- ------ Total........................................................... $2,449 $(46) $2,403 ====== ==== ======
On March 22, 2002, the Company announced that it is closing its two manufacturing plants in Scotland. On April 8, 2002, the Company announced that it is closing six manufacturing plants in the U.S. (See Note 9 to the Consolidated Financial Statements.) NOTE 4: FINANCING CREDIT FACILITY AMENDMENT Effective January 29, 2002, the Company completed an amendment to its principal credit agreement. The amendment has three principal features. First, the amendment excludes from the computation of earnings for covenant compliance purposes certain cash expenses, as well as certain non-cash costs, relating to the 2002 plant closures in the U.S. and Scotland. The amendment also excludes from those computations the non-cash portion of the Company's long-term incentive compensation plans. Second, the amendment reduces by 0.25 the amount of the required tightening of the leverage ratio beginning with the fourth quarter of 2002. Third, the amendment tightens the senior secured leverage ratio. The amendment did not change the interest rate, size of the facility or required payment provisions of the facility. INTEREST RATE CONTRACTS The Company is exposed to interest rate risk. It is the Company's policy and practice to use derivative instruments, primarily interest rate swaps and options, to manage and reduce interest rate exposures. The Company currently has no derivative instruments managing interest rate risk outstanding as of February 24, 2002. 10 LEVI STRAUSS & CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued) (Unaudited) INTEREST RATES ON BORROWINGS The Company's weighted average interest rate on average borrowings outstanding during the three months ended February 24, 2002 and February 25, 2001, including the amortization of capitalized bank fees, interest rate swap cancellations and underwriting fees, was 9.30% and 10.26%, respectively. The weighted average interest rate on average borrowings outstanding excludes interest payable to participants under deferred compensation plans and other miscellaneous items. In addition, the 2001 weighted average interest rate on average borrowings outstanding excludes the write-off of fees that resulted from the replacement of the credit agreement dated January 31, 2000. NOTE 5: COMMITMENTS AND CONTINGENCIES FOREIGN EXCHANGE CONTRACTS At February 24, 2002, the Company had U.S. dollar forward currency contracts to buy $1.0 billion and to sell $510.7 million against various foreign currencies. The Company also had euro forward currency contracts to buy 228.0 million euro against various foreign currencies and to sell 102.2 million euro against various foreign currencies. In addition, the Company had U.S. dollar option contracts to buy $833.7 million and to sell $412.0 million against various foreign currencies. The Company also had euro option currency contracts to buy 70.0 million euro against various foreign currencies and to sell 50.0 million euro against various foreign currencies. These contracts are at various exchange rates and expire at various dates through December 2002. The Company has entered into option contracts to manage its exposure to numerous foreign currencies. Option transactions included in the amounts above are principally for the exchange of the euro and U.S. dollar. At February 24, 2002, the Company had bought U.S. dollar options resulting in a net long position against the euro of $131.5 million, should the options be exercised. To finance the premiums related to the options bought, the Company sold options resulting in a net long position against the euro of $285.3 million, should the options be exercised. The Company's market risk is generally related to fluctuations in the currency exchange rates. The Company is exposed to credit loss in the event of nonperformance by the counterparties to the foreign exchange contracts. However, the Company believes these counterparties are creditworthy financial institutions and does not anticipate nonperformance. OTHER CONTINGENCIES In the ordinary course of its business, the Company has pending various cases involving contractual matters, employee-related matters, distribution questions, product liability claims, trademark infringement and other matters. The Company does not believe there are any pending legal proceedings that will have a material impact on the Company's financial position or results of operations. The operations and properties of the Company comply with all applicable federal, state and local laws enacted for the protection of the environment, and with permits and approvals issued in connection therewith, except where the failure to comply would not reasonably be expected to have a material adverse effect on the Company's financial position or business operations. Based on currently available information, the Company does not consider there to be any circumstances existing that would be reasonably likely to form the basis of an action against the Company that could have a material adverse effect on the Company's financial position or business operations. 11 LEVI STRAUSS & CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued) (Unaudited) NOTE 6: FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value of certain financial instruments has been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The carrying amount and estimated fair value (in each case including accrued interest) of the Company's financial instrument assets and (liabilities) at February 24, 2002 and November 25, 2001 are as follows:
February 24, 2002 November 25, 2001 ------------------ ----------------- Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value ----- ---------- ----- ---------- (Dollars in Thousands) DEBT INSTRUMENTS: U.S. dollar notes offering......................... $(1,196,192) $(1,084,701) $(1,193,012) $(932,138) Euro notes offering................................ (110,084) (106,792) (114,378) (85,719) Yen-denominated eurobond placement................. (153,567) (113,636) (164,413) (113,115) Credit facilities.................................. (269,046) (269,046) (252,748) (252,748) Domestic receivables-backed securitization......... (110,066) (110,066) (110,081) (110,081) Customer service center equipment financing........ (78,512) (79,659) (80,278) (81,970) European receivables-backed securitization......... (40,991) (40,991) (41,366) (41,366) Industrial development revenue refunding bond...... (10,010) (10,010) (10,015) (10,015) CURRENCY AND INTEREST RATE CONTRACTS: Foreign exchange forward contracts................. $ 13,451 $ 13,451 $ 13,797 $ 13,797 Foreign exchange option contracts.................. 1,977 1,977 4,328 4,328 Interest rate option contracts..................... -- -- (2,266) (2,266)
Quoted market prices or dealer quotes are used to determine the estimated fair value of foreign exchange contracts, option contracts and interest rate swap contracts. Dealer quotes and other valuation methods, such as the discounted value of future cash flows, replacement cost and termination cost have been used to determine the estimated fair value for long-term debt and the remaining financial instruments. The carrying values of cash and cash equivalents, trade receivables, current assets, certain current and non-current maturities of long-term debt, short-term borrowings and taxes approximate fair value. The fair value estimates presented herein are based on information available to the Company as of February 24, 2002 and November 25, 2001. These amounts have not been updated since those dates and, therefore, the current estimates of fair value at dates subsequent to February 24, 2002 and November 25, 2001 may differ substantially from these amounts. In addition, the aggregation of the fair value calculations presented herein do not represent and should not be construed to represent the underlying value of the Company. 12 LEVI STRAUSS & CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued) (Unaudited) NOTE 7: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The Company adopted Statement of Financial Accounting Standards No. ("SFAS") 133, "Accounting for Derivative Instruments and Hedging Activities," on the first day of fiscal year 2001. SFAS 133 requires all derivatives to be recognized as assets or liabilities at fair value. Due to the adoption of SFAS 133, the Company reported a net transition gain of $87 thousand in other income/expense for the three months ended February 25, 2001. The transition amount was not recorded on a separate line item as a change in accounting principle, net of tax, due to the minimal impact on the Company's results of operations. In addition, the Company recorded a transition amount of $0.7 million (or $0.4 million net of related income taxes) that reduced accumulated other comprehensive income. Foreign Exchange Management The Company manages foreign currency exposures primarily to maximize the U.S. dollar value over the long term. The Company attempts to take a long-term view of managing exposures on an economic basis, using forecasts to develop exposure positions and engaging in active management of those exposures with the objective of protecting future cash flows and mitigating risks. As a result, not all exposure management activities and foreign currency derivative instruments will qualify for hedge accounting treatment. For derivative instruments utilized in these transactions, changes in fair value are classified into earnings. The Company holds derivative positions only in currencies to which it has exposure. The Company has established a policy for a maximum allowable level of losses that may occur as a result of its currency exposure management activities. The maximum level of loss is based on a percentage of the total forecasted currency exposure being managed. The Company uses a variety of derivative instruments, including forward, swap and option contracts, to protect against foreign currency exposures related to sourcing, net investment positions, royalties and cash management. The derivative instruments used to manage sourcing exposures do not qualify for hedge accounting treatment and are recorded at their fair value. Any changes in fair value are included in other income/expense. The Company manages its net investment position in its subsidiaries in major currencies by using forward, swap and option contracts. Part of the contracts hedging these net investments qualify for hedge accounting and the related gains and losses are consequently categorized in the cumulative translation adjustment in the accumulated other comprehensive income section of stockholders' deficit. At February 24, 2002, the fair value of qualifying net investment hedges was a $4.4 million net asset that was recorded in the cumulative translation adjustment section of accumulated other comprehensive income. There were no gains or losses excluded from hedge effectiveness testing. In addition, the Company holds derivatives managing the net investment positions in major currencies that do not qualify for hedge accounting. The fair value of these net investment hedges at February 24, 2002 represented a $3.9 million net asset. The Company designates a portion of its outstanding yen-denominated eurobond as a net investment hedge. As of February 24, 2002, a $13.6 million net asset related to the translation effects of the eurobond was recorded in the cumulative translation adjustment section of accumulated other comprehensive income. As of February 24, 2002, the Company holds no derivatives hedging forecasted intercompany royalty flows that qualify as cash flow hedges. The amount of matured cash flow hedges reclassified during the first quarter from accumulated other comprehensive income to other income/expense amounted to a net gain of $0.7 million. The Company also enters into contracts managing forecasted intercompany royalty flows that do not qualify as cash flow hedges. The fair value of these instruments as of February 24, 2002 was a $3.5 million net asset. The derivative instruments utilized in transactions managing cash management exposures are currently marked to market at their fair value and any changes in fair value are recorded in other income/expense. 13 LEVI STRAUSS & CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued) (Unaudited) The Company also entered into transactions managing the exposure related to the Euro notes issued on January 18, 2001. These derivative instruments are currently marked to market at their fair value and any changes in fair value are recorded in other income/expense. Interest Rate Management The Company is exposed to interest rate risk. It is the Company's policy and practice to use derivative instruments, primarily interest rate swaps and options, to manage and reduce interest rate exposures using a mix of fixed and variable rate debt. The Company currently has no derivative instruments managing interest rate risk outstanding as of February 24, 2002. The tables below give an overview of the realized and unrealized gains and losses reported in other income/expense, realized and unrealized other comprehensive income ("OCI") balances, realized and unrealized cumulative translation adjustments ("CTA") balances, and the fair values of derivative instruments reported as an asset or liability. OCI and CTA are components of the accumulated other comprehensive income section of stockholders' deficit.
-------------------------- -------------------------- Three Months Ended Three Months Ended February 24, 2002 February 25, 2001 -------------------------- -------------------------- Other (income)/expense Other (income)/expense ------------------------------ -------------------------- -------------------------- (Dollars in Thousands) Realized Unrealized Realized Unrealized ------------------------------ ------------ ------------- ------------ ------------- Foreign Exchange Management: Sourcing $(5,480) $ 6,285 $ 9,175 $ 8,139 Net Investment 654 (3,655) 794 870 Yen Bond -- (5,589) -- (4,983) Royalties 3,442 (3,694) (777) 1,756 Cash Management 2,669 76 (6,901) 860 Transition Adjustments -- -- -- (1,333) Euro Notes Offering 1,318 (837) 3,682 540 ------------------------------ ------------ ------------- ------------ ------------- Interest Rate Management $2,266 (1) $(2,266) -- $ 3,471 Transition Adjustments -- -- -- 1,246 ------------------------------ ------------ ------------- ------------ ------------- (1) Recorded as an increase to interest expense. 14
LEVI STRAUSS & CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued) (Unaudited) ------------------------------------------- ------------------------------------------ At February 24, 2002 At November 25, 2001 ------------------------------------------- ------------------------------------------ OCI gain/(loss) CTA gain/(loss) OCI gain/(loss) CTA gain/(loss) ---------------------- ------------------- ----------------------- -------------------- --------------------- (Dollars in Thousands) Realized Unrealized Realized Unrealized Realized Unrealized Realized Unrealized ---------------------- --------- ---------- -------- ---------- -------- ---------- -------- ---------- Foreign Exchange Management: Net Investment $-- $-- $55,811 $ 4,449 $-- $ -- $53,314 $5,664 Yen Bond -- -- -- 13,610 -- -- -- 6,780 Royalties -- -- -- -- -- 908 -- -- Transition -- -- -- -- -- -- -- 120 Adjustments ---------------------- --------- --------- ---------- ------------ ---------- --------- ---------- ---------- --------------- ---------------- At February At November 24, 2002 25, 2001 --------------- ---------------- Fair value Fair value asset/(liability) asset/(liability) ---------------------------- ---------------- ---------------- (Dollars in Thousands) ---------------------------- --------------- ---------------- Foreign Exchange Management: Sourcing $4,672 $10,950 Net Investment 8,387 6,068 Royalties 3,515 729 Cash Management (814) (738) Euro Notes Offering (332) (1,169) ---------------------------- --------------- ---------------- Interest Rate Management $ -- $(2,266) ---------------------------- --------------- ---------------- 15
LEVI STRAUSS & CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued) (Unaudited)
NOTE 8: BUSINESS SEGMENT INFORMATION Asia All Americas Europe Pacific Other Consolidated -------- ------ ------- ----- ------------ (Dollars in Thousands) THREE MONTHS ENDED FEBRUARY 24, 2002: Net sales....................................... $601,341 $260,625 $73,319 $ -- $935,285 Earnings contribution........................... 79,987 60,024 14,075 -- 154,086 Interest expense................................ -- -- -- 48,023 48,023 Corporate and other expense, net................ -- -- -- 36,859 36,859 Income before income taxes...................... -- -- -- -- 69,204 THREE MONTHS ENDED FEBRUARY 25, 2001: Net sales....................................... $662,205 $257,273 $76,904 $ -- $996,382 Earnings contribution........................... 106,043 57,235 12,380 -- 175,658 Interest expense................................ -- -- -- 69,205 69,205 Corporate and other expense, net................ -- -- -- 59,514 59,514 Income before income taxes...................... -- -- -- -- 46,939
NOTE 9: SUBSEQUENT EVENTS Facility Closures On March 22, 2002, the Company announced that it is closing its two manufacturing plants in Scotland with an estimated displacement of approximately 650 employees. The Company plans to take a pre-tax restructuring charge in the second quarter of 2002 of approximately $20.0 - $25.0 million to cover costs associated with the closures. On April 8, 2002, the Company announced that it is closing six U.S. manufacturing plants with an estimated displacement of approximately 3,300 employees. In addition, as a result of these closures, the Company expects to reduce the workforce by approximately 300 positions at its U.S. finishing facility. The Company expects to record a restructuring charge in the second quarter of 2002 to cover costs associated with the closures. The amount of this charge will be determined upon conclusion of union negotiations. 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report. CRITICAL ACCOUNTING POLICIES In our annual report on Form 10-K for the year ended November 25, 2001, we identified our most critical accounting policies upon which our financial status depends as those relating to revenue recognition, foreign exchange management, inventory valuation and restructuring reserves. We reviewed our policies and determined that those policies remain our most critical accounting policies for the quarter ended February 24, 2002. We did not make any changes in those policies. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, selected items in our consolidated statements of operations, expressed as a percentage of net sales (amounts may not total due to rounding).
Three Months Ended ------------------ February 24, February 25, 2002 2001 ---- ---- MARGIN DATA: Net sales...................................................... 100.0% 100.0% Cost of goods sold............................................. 57.4 55.8 ----- ----- Gross profit................................................... 42.6 44.2 Marketing, general and administrative expenses................. 32.0 32.7 Other operating (income)....................................... (0.7) (0.7) ----- ----- Operating income............................................... 11.3 12.1 Interest expense............................................... 5.1 6.9 Other (income) expense, net.................................... (1.2) 0.5 ----- ----- Income before taxes............................................ 7.4 4.7 Income tax expense............................................. 2.7 1.7 ----- ----- Net income..................................................... 4.7% 3.0% ===== ===== NET SALES SEGMENT DATA: Geographic Americas.............................................. 64.3% 66.5% Europe................................................ 27.9 25.8 Asia Pacific.......................................... 7.8 7.7
Net sales. Net sales for the three months ended February 24, 2002 decreased 6.1% to $935.3 million, as compared to $996.4 million for the same period in 2001. If currency exchange rates were unchanged from the prior year period, net sales for the three months ended February 24, 2002 would have declined approximately 4.3% from the same period in 2001. The reported decrease reflects the challenging economies and retail markets in which we operate, higher U.S. sales promotions and incentives that offset recorded sales, and the impact of a weaker euro and yen. Going forward, we believe our full year 2002 constant currency net sales will decline in the low single digits from 2001, with relatively stronger performance in the second half of 2002 as our turnaround strategies continue to take hold. 17 In the Americas, net sales for the three months ended February 24, 2002 decreased 9.2% to $601.3 million, as compared to $662.2 million for the same period in 2001, while unit volume decreased slightly. The sales decrease was primarily attributable to higher retailer sales promotions and incentives, and a reduction in wholesale prices for some of our core Dockers(R) products. Retailers appear to be very cautious in their buying habits in response to a weak apparel market and are continuing to maintain tight inventory levels. However, where we have introduced updated and relevant products, supporting them with the right advertising and retail presentations, our data shows good sell-through to consumers. Examples include our Levi's(R) 569(R) loose straight-fitting jeans and Stretch Superlow jeans, and the Dockers(R) Mobile(TM) pant and capri pants. In Europe, net sales for the three months ended February 24, 2002 increased 1.3% to $260.6 million, as compared to $257.3 million for the same period in 2001. On a constant currency basis, net sales would have increased by approximately 5.6% for the three months ended February 24, 2002 compared to the same period in 2001. The net sales increase was primarily due to higher first quality volume and a better product mix. We believe the constant currency growth in net sales for the first quarter of 2002 and during the latter half of 2001 indicate that our business in Europe is beginning to stabilize. We believe this result reflects the impact of our updated and innovative products such as Contrast Denim, our updated retail presentation programs and improved delivery performance in the region. However, we believe there are signs that retailers are managing their inventories more conservatively in an increasingly uncertain economic environment, which could have a negative effect on our sales going forward. In our Asia Pacific region, net sales for the three months ended February 24, 2002 decreased 4.7% to $73.3 million, as compared to $76.9 million for the same period in 2001. On a constant currency basis, net sales would have increased by approximately 3.3% for the three months ended February 24, 2002 compared to the same period in 2001. The reported sales decrease was primarily driven by the effects of translation to U.S. dollar reported results. In Japan, which accounted for approximately 46% of our business in Asia during the first quarter of 2002, we experienced a decrease in the rate of our sales decline on a constant currency basis. The narrowing sales decline in Japan reflects a price increase on our premium and super-premium product lines. In some regions, we reported double-digit net sales increases from the same period last year reflecting our product upgrades and distribution strategies, while other regions were affected by political and economic instability. Gross profit. Gross profit for the three months ended February 24, 2002 totaled $398.6 million compared with $439.9 million for the same period in 2001. Gross profit as a percentage of net sales, or gross margin, for the three months ended February 24, 2002 decreased to 42.6%, as compared to 44.2% for the same period in 2001. The gross profit decline for the three months ended February 24, 2002 was primarily due to lower net sales. The gross margin decline for the three months ended February 24, 2002 was primarily due to U.S. retailer sales promotions and incentives, and a reduction in some of our wholesale prices. For the three months ended February 25, 2001, gross profit included a reversal of workers' compensation accruals totaling $8.0 million that contributed to the higher gross margin in 2001. Because our European business imports fabric from the U.S., we are monitoring recent developments in the trade relationship between the U.S. and the European Union related to tariffs. An imposition of higher tariffs on fabric imports by the European Union could increase our costs. Marketing, general and administrative expenses. Marketing, general and administrative expenses for the three months ended February 24, 2002 decreased 8.3% to $298.9 million as compared to $326.1 million for the same period in 2001. Marketing, general and administrative expenses as a percentage of sales for the three months ended February 24, 2002 decreased to 32.0% as compared to 32.7% for the same period in 2001. The decrease in marketing, general and administrative expenses for the three months ended February 24, 2002 was primarily due to lower advertising expenses and incentive plan accruals, as well as continuing cost containment efforts. Advertising expense for the three months ended February 24, 2002 decreased 17.0% to $66.1 million, as compared to $79.6 million for the same period in 2001. Advertising expense as a percentage of sales for the three months ended February 24, 2002 decreased to 7.1% as compared to 8.0% for the same period in 2001. The decrease in advertising expense reflects lower media costs and our strategic decision to shift some of our advertising spending into sales incentive programs with U.S. retailers. 18 Other operating income. Licensing income for the three months ended February 24, 2002 of $6.1 million decreased 14.8%, as compared to $7.2 million for the same period in 2001. The decrease reflects the challenging retail markets in which some of our licensees operate. Operating income. Operating income for the three months ended February 24, 2002 of $105.8 million decreased 12.6%, as compared to $121.0 million from the same period in 2001. The decrease was primarily due to lower net sales and gross margins, partially offset by lower marketing, general and administrative expenses. Interest expense. Interest expense for the three months ended February 24, 2002 decreased 30.6% to $48.0 million, as compared to $69.2 million for the same period in 2001. Interest expense decreased due to lower market interest rates combined with lower average debt levels. In addition, interest expense for 2001 included the write-off of fees totaling $10.8 million related to the credit agreement dated January 31, 2000. We replaced that credit agreement with a new credit facility on February 1, 2001. The weighted average cost of borrowings for the three months ended February 24, 2002 and February 25, 2001 were 9.30% and 10.26%, respectively, excluding interest payable to participants under deferred compensation plans and other miscellaneous items, and the write-off of fees in 2001. Other income/expense, net. Other income, net for the three months ended February 24, 2002 was $11.5 million, as compared to other expense, net of $4.9 million for the same period in 2001. The income for the three months ended February 24, 2002 was primarily attributable to net gains from foreign currency and interest rate management activities. Income tax expense. Income tax expense for the three months ended February 24, 2002 increased 47.4% to $25.6 million as compared to $17.4 million for the same period in 2001. The increase in income taxes was due to higher income before taxes. Our effective tax rate was 37% for both years and differs from the statutory federal income tax rate of 35% primarily due to the effect of state income taxes. Net income. Net income for the three months ended February 24, 2002 increased 47.4% to $43.6 million from $29.6 million for the same period in 2001. The increase was primarily due to lower marketing, general and administrative expenses, net gains from our foreign currency and interest rate management activities and lower interest expense, partially offset by lower sales and higher income tax expense. RESTRUCTURING AND EXCESS CAPACITY REDUCTION From 1997 to 2001 we closed 29 of our owned and operated production and finishing facilities in North America and Europe and instituted restructuring initiatives to reduce costs, eliminate excess capacity and align our sourcing strategy with changes in the industry and in consumer demand. The total balance of the reserves at February 24, 2002 was $36.8 million compared to $45.2 million at November 25, 2001. The following table summarizes the balances associated with the plant closures and restructuring reserves:
Balance as of Balance as of February 24, November 25, 2002 2001 ---- ---- (Dollars in Thousands) 2001 Corporate Restructuring Initiatives............................. $14,213 $19,989 2001 Japan Restructuring Initiative.................................. 383 2,006 1999 European Restructuring and Plant Closures....................... 2,403 2,449 1999 North America Plant Closures.................................... 18,090 18,659 1999 Corporate Restructuring Initiatives............................. -- 113 1998 Corporate Restructuring Initiatives............................. 1,474 1,508 1998 North America Plant Closures.................................... 118 223 1998 European Restructuring and Plant Closures....................... 96 225 1997 North America Plant Closures.................................... 12 48 ------- ------- Total........................................................... $36,789 $45,220 ======= =======
The majority of this balance is expected to be utilized by the end of 2002. 19 On March 22, 2002, we announced the closing of our two manufacturing plants in Scotland with an estimated displacement of approximately 650 employees. We plan to take a pre-tax restructuring charge in the second quarter of 2002 of approximately $20.0 - $25.0 million to cover costs associated with the closures. On April 8, 2002, we announced the closing of six U.S. manufacturing plants with an estimated displacement of approximately 3,300 employees. In addition, as a result of these closures, we expect to reduce the workforce by approximately 300 positions at our U.S. finishing facility. We expect to record a restructuring charge in the second quarter of 2002 to cover costs associated with the closures. The amount of this charge will be determined upon conclusion of union negotiations. LIQUIDITY AND CAPITAL RESOURCES We continue to focus on working capital control through improved forecasting, inventory management and product mix. We are also focusing on controlling operating expenses and using cash generated from operations to reduce debt. Our principal capital requirements have been to fund working capital and capital expenditures. As of February 24, 2002, total cash and cash equivalents were $112.4 million, a $9.5 million increase from the $102.8 million cash balance reported as of November 25, 2001. Restricted cash. As of February 24, 2002, the trustee under our U.S. receivables securitization arrangement held $43.0 million in cash received from collections of our U.S. trade receivables. This amount is shown as "restricted cash" on our balance sheet. Under the securitization arrangement, we must maintain the level of our net eligible U.S. trade receivables at a certain targeted amount. Sales incentives are taken into account under the securitization agreements in determining targeted net eligible receivables. As a result of the amount of sales incentives recorded and the manner in which incentives are currently treated in that calculation, we foresaw a decline in net eligible receivables as well as an increase of the targeted amount during the first quarter of 2002. In response, we requested that the trustee under the arrangement begin retaining cash collections in an amount covering the deficiency. Under the agreements, the retention of cash by the trustee has the effect of reducing the deficiency. Amounts retained in this manner are not available to us until released by the trustee. The trustee receives daily reports comparing the net eligible receivables with the targeted amounts, and if appropriate releases retained cash accordingly. We are currently seeking an amendment to the securitization agreements to revise the way in which sales incentives are treated in calculating the amount of net eligible receivables in order to reduce the likelihood and size of similar deficiencies in the future. We expect to obtain this amendment during the second quarter of 2002. The cash retention does not have, and we do not expect it to have, a material impact on our liquidity. Total debt. Total debt as of February 24, 2002 was $1,960.5 million, essentially unchanged from the balance as of November 25, 2001. We have no off-balance sheet debt obligations. As of February 24, 2002, the required aggregate short-term and long-term debt principal payments for the next five years and thereafter are as follows:
Principal Payments (Dollars in Year Thousands) ---- 2002.................................................................................... $ 82,192 2003.................................................................................... 619,258 2004.................................................................................... 118,521 2005.................................................................................... 56,202 2006.................................................................................... 447,822 Thereafter.............................................................................. 636,553 ---------- Total.............................................................................. $1,960,548 ==========
20 As of February 24, 2002, the credit facility consisted of $168.8 million of term loans and a $620.4 million revolving credit facility, of which $100.0 million of borrowings under the revolving credit facility were outstanding. Total availability under the revolving credit facility was further reduced by $147.2 million of letters of credit issued under the revolving credit facility, yielding a net availability of $373.2 million. We believe this is sufficient for our cash needs. We pay fees on the standby letters of credit. Borrowings against the letters of credit are subject to interest at various rates. Plant closures. On March 22, 2002, we announced the closing of our two manufacturing plants in Scotland with an estimated displacement of approximately 650 employees. We plan to take a pre-tax restructuring charge in the second quarter of 2002 of approximately $20.0 - $25.0 million to cover costs associated with the closures. On April 8, 2002, we announced the closing of six U.S. manufacturing plants with an estimated displacement of approximately 3,300 employees. In addition, as a result of these closures, we expect to reduce the workforce by approximately 300 positions at our U.S. finishing facility. We expect to record a restructuring charge in the second quarter of 2002 to cover costs associated with the closures. The amount of this charge will be determined upon conclusion of union negotiations. We believe we have sufficient liquidity to meet cash needs arising from closing these eight plants in 2002. Cash provided by/used for operations. Cash provided by operating activities for the three months ended February 24, 2002 was $35.6 million, as compared to a use of cash of $131.9 million for the same period in 2001. Trade receivables decreased during the three months ended February 24, 2002 primarily due to lower net sales. Net deferred tax assets decreased during the three months ended February 24, 2002 primarily due to lower retailer sales promotions and incentive activities, lower prepaid royalty income and spending associated with restructuring initiatives and deferred compensation than at November 25, 2001. Accounts payable and accrued liabilities decreased during the three months ended February 24, 2002 primarily due to lower accruals for contractors and raw material purchases resulting from lower production needs than at November 25, 2001. Restructuring reserves decreased during the three months ended February 24, 2002 due to spending related to the restructuring initiatives. Accrued salaries, wages, and employee benefits decreased during the three months ended February 24, 2002 primarily due to the payment of annual employee incentives. Accrued taxes increased and long-term tax liability decreased during the three months ended February 24, 2002 due to a tentative settlement with the Internal Revenue Service on most issues in connection with the examination of our income tax returns for the years 1990 - 1994. We expect to have a final settlement by the end of fiscal year 2002. Cash provided by/used for investing activities. Cash provided by investing activities during the three months ended February 24, 2002 was $2.3 million, as compared to cash used for investing activities of $4.2 million during the same period in 2001. Cash provided by investing activities for the three months ended February 24, 2002 resulted primarily from proceeds received on sales of property, plant and equipment and realized gains on net investment hedges, partially offset by purchases of property, plant and equipment. The proceeds received on the sale of property, plant and equipment were primarily attributable to a sale during the first quarter of 2002 of an idle distribution center located in Nevada. We expect capital spending of approximately $50.0 to $70.0 million for fiscal year 2002, primarily in the latter half of 2002. We will spend most of these amounts for information systems enhancements. Cash used for/provided by financing activities. Cash used for financing activities for the three months ended February 24, 2002 was $27.2 million, as compared to cash provided by financing activities of $99.1 million for the same period in 2001. Cash used for financing activities during the three months ended February 24, 2002 was primarily due to the retention of cash by the trustee under our U.S. receivables securitization agreement. 21 Financial Condition Credit agreement. Effective January 29, 2002, we completed an amendment to our principal credit agreement. The amendment has three principal features. First, the amendment excludes from the computation of earnings for covenant compliance purposes certain cash expenses, as well as certain non-cash costs, relating to the 2002 plant closures in the U.S. and Scotland. The amendment also excludes from those computations the non-cash portion of our long-term incentive compensation plans. Second, the amendment reduces by 0.25 the amount of the required tightening of the leverage ratio beginning with the fourth quarter of 2002. Third, the amendment tightens the senior secured leverage ratio. The amendment did not change the interest rate, size of the facility or required payment provisions of the facility. STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE This Form 10-Q includes forward-looking statements about retail conditions; sales performance and trends; turnaround strategies; debt repayment and liquidity; gross margins; product innovation and new product development in our brands; expense levels including overhead and advertising expense; consequences of amendments to the U.S. receivables securitization arrangements; capital expenditures; income tax audit settlements; plant closures and union negotiations; general economic, political and retail conditions; trade relationships between the U.S. and the European Union; retail relationships and developments including sell-through; presentation of product at retail and marketing collaborations; marketing and advertising initiatives; and other matters. We have based these forward-looking statements on our current assumptions, expectations and projections about future events. When used in this document, the words "believe," "anticipate," "intend," "estimate," "expect," "project," "plans" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these words. These forward-looking statements are subject to risks and uncertainties including, without limitation, risks related to the impact of changing domestic and international retail environments; changes in the level of consumer spending or preferences in apparel; dependence on key distribution channels, customers and suppliers; the impact of competitive products; changing fashion trends; our supply chain executional performance; the effectiveness of our promotion and marketing funding programs with retailers; ongoing competitive pressures in the apparel industry; trade restrictions; consumer and customer reactions to new products and retailers; political or financial instability in countries where our products are manufactured; and other risks detailed in our annual report on Form 10-K for the year ended November 25, 2001, registration statements and other filings with the Securities and Exchange Commission. Our actual results might differ materially from historical performance or current expectations. We do not undertake any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. 22 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK DERIVATIVE FINANCIAL INSTRUMENTS We are exposed to market risk primarily related to foreign exchange, interest rates and the price of cotton. We actively manage foreign currency and interest rate risks with the objective of reducing fluctuations in actual and anticipated cash flows by entering into a variety of derivative instruments including spot, forwards, options and swaps. We currently do not manage our exposure to the price of cotton with derivative instruments. The table below gives an overview of the fair values of derivative instruments reported as an asset or liability. These contracts expire at various dates through December 2002.
---------------- ---------------- At February At November 24, 2002 25, 2001 ---------------- ---------------- Fair value Fair value asset/(liability) asset/(liability) ---------------------------- ---------------- ---------------- (Dollars in Thousands) ---------------------------- ---------------- ---------------- Foreign Exchange Management: Sourcing $4,672 $10,950 Net Investment 8,387 6,068 Royalties 3,515 729 Cash Management (814) (738) Euro Notes Offering (332) (1,169) ---------------------------- ---------------- ---------------- Interest Rate Management $ -- $(2,266) ---------------------------- ---------------- ----------------
FOREIGN EXCHANGE RISK Foreign exchange market risk exposures are primarily related to cash management activities, raw material and finished goods purchases, net investment positions and royalty flows from affiliates. INTEREST RATE RISK We have an interest rate risk management policy designed to manage the interest rate risk on our borrowings by entering into a variety of interest rate derivatives. We currently have no derivative instruments managing interest rate risk outstanding as of February 24, 2002. For more information about market risk, see Notes 4, 5, and 7 to the Consolidated Financial Statements. 23 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K: (A) EXHIBITS: None (B) REPORTS ON FORM 8-K: Current Report on Form 8-K on January 16, 2002 filed pursuant to Item 5 of the report and containing a copy of the Company's press release titled "Levi Strauss & Co. Announces Fourth-Quarter and Fiscal 2001 Financial Results." Current Report on Form 8-K on January 30, 2002 filed pursuant to Item 5 of the report relating to amendments to the Company's credit agreement. Current Report on Form 8-K on March 19, 2002 filed pursuant to Item 5 of the report and containing a copy of the Company's press release titled "Levi Strauss & Co. Announces First-Quarter 2002 Financial Results." 24 SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: April 9, 2002 Levi Strauss & Co. ------------------ (Registrant) By: /s/ William B. Chiasson ----------------------- William B. Chiasson Senior Vice President and Chief Financial Officer 25 -----END PRIVACY-ENHANCED MESSAGE-----