<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended May 29, 1994.
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Commission file number 33-762
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LEVI STRAUSS ASSOCIATES INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2973849
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
1155 Battery Street, San Francisco, California 94111
(Address of principal executive offices)
Registrant's telephone number, including area code: (415) 544-6000
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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock July 1, 1994
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Class E Common, $.10 par value 1,263,312 shares
Class L Common, $.10 par value 51,327,001 shares<PAGE>
FORM 10-Q
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income (Loss). . . . . . . . . . . 3
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements. . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . 10
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security
Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . 18
SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
- - ----------------------------------------------------------------------------
The following financial statements have been prepared by Levi Strauss
Associates Inc. (the "Company"), without audit, and reflect all adjustments
which are, in the opinion of the Company, necessary for a fair statement of
the results for the interim periods. The statements omit certain information
and footnote disclosures necessary to present the statements in accordance
with generally accepted accounting principles.
The following financial statements should be read in conjunction with the
financial statements and notes included in the Company's Form 10-K for the
year ended November 28, 1993. The Company believes that along with the
following information, the disclosures are adequate to make the information
presented herein not misleading.
All percentage changes in this report are based on unrounded amounts.<PAGE>
<TABLE>
LEVI STRAUSS ASSOCIATES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Dollars in Thousands Except Per Share Data)
(Unaudited)
<CAPTION>
Second Quarter Second Quarter Six Months Six Months
Ended Ended Ended Ended
May 29, May 30, May 29, May 30,
1994 1993 1994 1993
-------------- -------------- ------------ --------------
<S> <C> <C> <C> <C>
Net sales $ 1,381,327 $ 1,339,172 $ 2,719,964 $ 2,733,177
Cost of goods sold 847,142 828,370 1,658,099 1,675,765
-------------- -------------- ------------ --------------
Gross profit 534,185 510,802 1,061,865 1,057,412
Marketing, general and
administrative expenses 347,742 355,167 673,481 672,805
Management compensation charge -- -- 3,755 --
Other operating (income), net (4,664) (5,477) (3,400) (9,989)
-------------- -------------- ------------ --------------
Operating income 191,107 161,112 388,029 394,596
Interest expense 5,310 9,664 10,732 18,964
Other (income) expense, net 6,440 (5,376) 7,043 (10,044)
-------------- -------------- ------------ --------------
Income before taxes and
cumulative effect of changes
in accounting principles 179,357 156,824 370,254 385,676
Provision for taxes 67,925 65,866 148,102 161,984
-------------- -------------- ------------ --------------
Income before cumulative effect
of changes in accounting
principles 111,432 90,958 222,152 223,692
Cumulative effect of changes in
accounting principles:
Postretirement benefits other
than pensions (SFAS 106),
net of applicable income tax
benefits of $153,885 -- -- (248,429) --
Income taxes (SFAS 109) -- -- 11,912 --
-------------- -------------- ------------ --------------
Net income (loss) $ 111,432 $ 90,958 $ (14,365) $ 223,692
============== ============== ============ ==============
Income (loss) per common share:
Income before cumulative effect
of changes in accounting
principles $ 2.12 $ 1.73 $ 4.22 $ 4.26
Postretirement benefits other
than pensions (SFAS 106) -- -- (4.72) --
Income taxes (SFAS 109) -- -- 0.23 --
-------------- -------------- ------------ --------------
Net income (loss) $ 2.12 $ 1.73 $ (0.27) $ 4.26
============== ============== ============ ==============
Average common shares outstanding 52,591,782 52,487,706 52,613,458 52,460,427
============== ============== ============ ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.<PAGE>
<TABLE>
Page 1 of 2
LEVI STRAUSS ASSOCIATES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<CAPTION>
May 29, November 28,
1994 1993
------------ --------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 509,229 $ 252,673
Trade receivables (less allowance for doubtful accounts:
1994 - $30,756; 1993 - $28,551) 753,813 858,117
Inventories:
Raw materials 115,501 109,289
Work-in-process 149,365 135,797
Finished goods 618,040 546,754
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Total inventories 882,906 791,840
Deferred tax assets 103,585 70,979
Other current assets 96,147 116,815
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Total current assets 2,345,680 2,090,424
Property, plant and equipment (less accumulated depreciation:
1994 - $413,780; 1993 - $364,830) 605,303 594,592
Goodwill and other intangibles (less accumulated amortization:
1994 - $185,992; 1993 - $175,538) 353,125 361,936
Noncurrent deferred tax assets 169,452 20,466
Other assets 32,025 41,242
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$ 3,505,585 $ 3,108,660
============ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt and capital lease
obligations $ 48,981 $ 42,695
Short-term borrowings 26,916 10,094
Accounts payable 227,083 259,747
Accrued liabilities 363,494 370,094
Salaries, wages and employee benefits 258,256 250,291
Taxes payable 154,036 139,641
Dividends payable 378 688
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Total current liabilities 1,079,144 1,073,250
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</TABLE>
The accompanying notes are an integral part of these financial statements.<PAGE>
<TABLE>
Page 2 of 2
LEVI STRAUSS ASSOCIATES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<CAPTION>
May 29, November 28,
1994 1993
------------ --------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (continued)
Long-term debt and capital lease obligations -
less current maturities 17,643 93,050
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Employee related benefits 751,518 293,147
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Long-term tax liability 347,207 334,627
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Minority interest 32,297 30,047
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Common Stock - Employee Stock Purchase and Award Plan:
Class E common stock - $.10 par value; issued:
1994 - 347,315 shares; 1993 - 300,848 shares
(Redemption value $44,804) 35 30
Additional paid-in capital, common 38,729 33,475
------------ --------------
Total common stock - employee stock purchase
and award plan 38,764 33,505
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Stockholders' Equity:
Class E common stock - $.10 par value; authorized
100,000,000 shares; issued and outstanding:
1994 - 921,317 shares; 1993 - 894,172 shares 92 89
Class L common stock - $.10 par value; authorized
170,000,000 shares; issued: 1994 - 51,826,750
shares; 1993 - 51,910,699 shares 5,183 5,191
Additional paid-in capital, common 249,219 242,572
Retained earnings 966,397 990,130
Translation adjustment 53,806 48,322
Pension liability (16,574) (16,574)
Treasury stock, at cost - Class E: 1994 - 5,311
shares; 1993 - 1,379 shares; Class L: 1994 and
1993 - 499,749 shares (19,111) (18,696)
------------ --------------
Total stockholders' equity 1,239,012 1,251,034
------------ --------------
$ 3,505,585 $ 3,108,660
============ ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.<PAGE>
<TABLE>
LEVI STRAUSS ASSOCIATES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<CAPTION>
Six Months Six Months
Ended Ended
May 29, May 30,
1994 1993
------------ --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by operating activities $ 343,559 $ 184,559
------------ --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (46,655) (65,968)
Other, net 4,983 6,877
------------ --------------
Net cash used for investing activities (41,672) (59,091)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (68,794) (256,215)
Net increase in short-term borrowings 20,322 982
Proceeds from sale of common stock to employee plans 8,353 13,383
Purchase of management Class L common stock (5,815) --
Dividends paid (1,945) (81,205)
Proceeds from issuance of long-term debt 28 121,776
Other, net (647) (3,963)
------------ --------------
Net cash used for financing activities (48,498) (205,242)
------------ --------------
Effect of exchange rate changes on cash 3,167 5,232
------------ --------------
Net increase (decrease) in cash and cash equivalents 256,556 (74,542)
Beginning cash and cash equivalents 252,673 237,702
------------ --------------
Ending cash and cash equivalents $ 509,229 $ 163,160
============ ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 8,701 $ 19,905
Income taxes 139,194 183,805
Non-cash financing activity:
Notes issued for payment of dividends -- 77,116
</TABLE>
The accompanying notes are an integral part of these financial statements.<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1
RECLASSIFICATIONS
A new line item, other operating (income), net was created for the year-end
1993 Consolidated Statements of Income. This new line includes certain
operations-related items that were classified as other (income) expense, net
or marketing, general and administrative expenses prior to year-end 1993.
The other operating (income), net line represents operating income or expense
items that are not related to marketing, general and administrative expenses.
Consolidated Statements of Income for the second quarter and first six months
of 1993 have been reclassified to conform to this presentation format.
The 1994 employee related benefits line item on the Consolidated Balance
Sheets includes postretirement medical benefits of $422.1 million, workers'
compensation liabilities of $177.7 million and other deferred employment
benefits of $151.7 million. The 1993 other liabilities amounts have been
reclassified to conform to this presentation format.
Note 2
POSTRETIREMENT BENEFITS
In December 1990, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 106 "Employers'
Accounting for Postretirement Benefits Other Than Pensions". This statement
requires the Company to accrue postretirement benefits (other than pensions),
including health care and life insurance benefits for retired employees over
the period that an employee becomes fully eligible for benefits. The Company
adopted SFAS No. 106 effective November 29, 1993. Previously, the Company
used a "pay-as-you-go" method whereby expenses were recorded as claims were
incurred.
SFAS No. 106 requires the Company to recognize an expense to establish a
"transition obligation", representing the actuarially determined value at
November 29, 1993 of the postretirement benefit obligation earned by
employees and retirees in prior periods. The weighted average discount rate
used to determine the present value of the transition obligation was
6.5 percent. A 12.4 percent annual rate of increase in the per capita claims
cost reducing to 5.0 percent after 14 years was also used to determine the
present value of the transition obligation.
The transition obligation was recorded as a one-time, non-cash charge against
earnings of $402.3 million before taxes and $248.4 million after taxes. The
transition obligation is shown as a cumulative effect of a change in
accounting principles, net of income tax effects, on the Consolidated
Statements of Income (Loss). The $153.9 million noncurrent deferred tax
benefit related to the adoption of SFAS No. 106 was recorded in accordance
with SFAS No. 109 on the Consolidated Balance Sheets (see Note 3 to
Consolidated Financial Statements relating to the adoption of SFAS No. 109
"Accounting for Income Taxes").
The adoption of SFAS No. 106 also results in additional ongoing expenses for
service and interest costs related to postretirement benefits, which were
$10.8 million and $21.6 million, respectively, for the second quarter and
first six months of 1994. The 1994 full year expense for these ongoing costs
is estimated to be $43.0 million.
The Company is evaluating the weighted average discount rate used to
determine the actuarial present value of postretirement benefits for year-end
1994 due to the recent rise in the market rate of interest. It is expected
that the discount rate will increase, which may result in a decrease in the
liability for the present value of postretirement benefits.
Note 3
INCOME TAXES
In February 1992, the FASB issued SFAS No. 109 "Accounting for Income Taxes,"
which requires an asset and liability approach for financial accounting and
reporting of income taxes. Under SFAS No. 109, deferred tax assets and
liabilities are established at the balance sheet date in amounts that are
expected to be recoverable or payable when the difference in the tax bases
and financial statement carrying amounts of assets and liabilities
("temporary differences") reverse. The Company complied with the provisions
of SFAS No. 109 as of November 29, 1993. The adoption resulted in an
$11.9 million credit to income, which was recorded as a cumulative effect of
changes in accounting principles on the Consolidated Statements of Income
(Loss). Upon adoption, deferred tax assets and deferred tax liabilities were
adjusted accordingly.
Temporary differences which gave rise to deferred tax assets and liabilities
at May 29, 1994 were as follows:
<TABLE>
<CAPTION>
Deferred Tax Deferred Tax
Assets Liabilities
-------------- ------------
(000's)
<S> <C> <C>
Employee compensation and benefit plans $ 156,493 $ --
Postretirement benefits 153,885 --
Inventory 27,799 --
Restructuring charges 20,611 --
Depreciation and amortization 23,836 33,946
State income tax 20,949 --
Foreign exchange gains/losses 14,106 48,761
Tax on unremitted non-U.S. earnings -- 88,939
Other 53,712 26,707
---------- ----------
$ 471,391 $ 198,353
========== ==========
</TABLE>
The net deferred tax assets at May 29, 1994 were $273.0 million.
The U.S. consolidated tax returns of the Company for 1983 through 1985 are
under examination by the Internal Revenue Service (IRS). The audit includes
the review of certain transactions relating to the 1985 leveraged buyout.
The Company believes it has made adequate provision for income taxes and
interest, which may become payable upon settlement. The IRS has not yet
concluded its audit and a settlement has not been negotiated.
Note 4
COMMITMENTS AND CONTINGENCIES
The Company has forward currency contracts to buy the aggregate equivalent of
$306.1 million of the following foreign currencies: Swedish Kroner,
Portuguese Escudos, Spanish Pesetas, Netherlands Guilders, Italian Lire,
British Pounds, French Francs, Danish Kroner, German Marks, Swiss Francs and
Belgian Francs, principally as a result of intercompany financing
transactions. The Company has forward currency contracts to sell the
aggregate equivalent of $1.0 billion of the following foreign currencies:
Japanese Yen, Swedish Kroner, Spanish Pesetas, Norwegian Kroner, Netherlands
Guilders, Italian Lire, British Pounds, French Francs, Danish Kroner, German
Marks, Swiss Francs and Belgian Francs, to hedge currency exposures resulting
from sourcing operations as well as intercompany royalties and dividend
payments. These contracts are at various exchange rates and expire at
various dates through 1996.
In addition, the Company has the right to sell Japanese Yen for
$10.0 million. This contract expires in March 1995.
The Company's market risk is directly related to fluctuations in the currency
exchange rates. The Company's credit risk is limited to the currency rate
differential for each agreement, if a counterparty failed to meet the terms
of the contract. These instruments are executed with credit worthy financial
institutions and the Company does not anticipate nonperformance by the
counterparties.<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Summary
Net income for the second quarter of 1994 was $111.4 million, an increase of
23 percent over the comparable quarter of 1993. Record second quarter dollar
sales, a lower effective tax rate, lower operating expense and lower interest
expense contributed to this increase. This increase was partially offset by
higher other expense, net.
The Company recorded a net loss of $14.4 million for the first half of 1994
mostly due to the effects of adopting Statement of Financial Accounting
Standards (SFAS) No. 106 "Employers' Accounting for Postretirement Benefits
Other Than Pensions". Despite record first half gross profit, the Company's
results were also impacted by higher other expense, net, offset by the
positive effect of adopting SFAS No. 109 "Accounting for Income Taxes", a
lower effective tax rate and lower interest expense. Without the effects of
adopting SFAS Nos. 106 and 109, year-to-date net income would have been
1 percent lower than the prior year period.
Net income for full year 1994 is expected to be significantly lower than 1993
mostly due to the net impact of adopting SFAS Nos. 106 and 109.
Additionally, the Company expects net income to be negatively impacted by
non-cash expenses associated with the Company's stock liquidity program for
Class L common stock management holders (see Management Compensation Charge
caption).
Net Sales
Record second quarter 1994 dollar sales increased 3 percent over the second
quarter of 1993, despite a 1 percent decrease in unit sales. The increase in
dollar sales was mostly due to a 4 percent increase in average unit selling
prices. Record dollar and unit sales were recorded in the U.S. Levi's(R)
product line, Europe and Asia Pacific. On a year-to-date basis, dollar sales
decreased less than 1 percent from the prior year period.
Record second quarter 1994 U.S. dollar sales of $834.5 million increased
3 percent over the comparable quarter of 1993 mostly due to an increase in
average unit selling prices. The increase in U.S. dollar sales was primarily
due to record sales in the Levi's(R) product line, that were partially offset
by lower dollar and unit sales in the Dockers(R) product line.
All three U.S. Levi's(R) product line marketing groups posted record second
quarter 1994 dollar sales, with Levi's(R) jeans for women achieving record
unit sales. Dollar and unit sales of men's Dockers(R) products decreased
4 percent and 6 percent, respectively, from the prior year periods mostly due
to finishing capacity limitations for wrinkle-resistant products. In
addition, the new type of finishing process for wrinkle-resistant products
has caused a higher rate of irregular garments. Lower sales for women's
Dockers(R) brand products continued to reflect the repositioning of the
women's Dockers(R) product line. (See Inventories caption for additional
information.)
Year-to-date U.S. dollar sales were $1.6 billion, a 4 percent decrease from
the prior year period, primarily due to a decrease in unit sales. These
decreases were mostly reflected in the Dockers(R) product line. Men's
Dockers(R) brand dollar and unit sales decreased 14 percent and 17 percent,
respectively, from the comparable 1993 periods mostly due to the finishing
capacity limitations noted above. The finishing capacity limitations are
expected to adversely impact the amount of wrinkle-resistant products sold
throughout the remainder of 1994. The decreases in the Dockers(R) brand were
partially offset by a record performance for the combined Levi's(R) brand
product line.
Record second quarter and six month 1994 dollar sales outside the U.S. of
$546.9 million and $1.1 billion increased 3 percent and 5 percent,
respectively, over the comparable periods of 1993 due to record unit sales
and higher average unit selling prices. Despite the negative effects of
unfavorable translation rates of certain European currencies to the U.S.
dollar, the Europe division reported record 1994 second quarter and year-
to-date dollar and unit sales. The Asia Pacific division posted record
second quarter 1994 dollar and unit sales and record first half dollar sales.
The Asia Pacific division results reflect higher sales volume in the
businesses in the Far East that was slightly offset by lower sales in Japan
due to the weak economy and consumers' increased sensitivity to prices.
Total Company dollar sales for full year 1994 are expected to be slightly
higher than the dollar sales records of 1993 mostly due to the U.S. Levi's(R)
brand and Europe division. However, overall unit sales are expected to
decrease mostly due to lower sales for the U.S. Dockers(R) brand products.
Gross Profit
As a percent of sales, 1994 second quarter and year-to-date gross profit was
relatively flat compared to the prior year periods. In dollars, gross profit
increased 5 percent for the current quarter and was slightly higher year-to-
date over the comparable 1993 periods, mostly due to higher overall average
unit selling prices that were partially offset by higher U.S. production
costs.
Included in second quarter and year-to-date 1994 U.S. production costs were
excess production capacity costs at certain U.S. owned and operated
facilities. The excess production capacity in 1994 was caused by lower U.S.
production requirements compared to the prior year period. Accordingly, to
mitigate downtime at these plants, the Company produced a higher proportion
of certain U.S. products at its owned and operated plants, as opposed to
contractor production. It is expected that these trends will continue
through the remainder of 1994. Also included in U.S. production costs were
charges of $8.4 million and $16.8 million, respectively, for ongoing expenses
related to SFAS 106 (see Postretirement Benefits caption), that were
partially offset by lower than expected workers' health and safety costs.
The businesses outside the U.S. continue to record higher gross profit as a
percent of sales than businesses in the U.S., mostly due to higher overall
average unit selling prices. Additionally, the non-U.S. businesses sell a
greater proportion of denim bottoms compared to the U.S., which typically
command higher margins. The businesses outside the U.S. also sell a higher
proportion (within denim bottoms) of high margin 501(R) and Red Tab(TM)
products, compared to the U.S. Non-U.S. production costs for the current
quarter and year-to-date were relatively flat compared to the prior year
periods.
The businesses outside the U.S. represented 57 percent of the Company's 1994
second quarter profit contribution before corporate expenses and taxes,
compared to 61 percent in 1993. On a year-to-date basis, the percentage was
63 percent in 1994 compared to 59 percent for the prior year period. The
lower second quarter 1994 percentage was primarily due to higher U.S. sales
volume coupled with lower U.S. operating expenses in the second quarter of
1994 compared to the 1993 second quarter. The higher year-to-date percentage
was mostly due to lower first half 1994 U.S. sales volume compared to the
prior year period.
Marketing, General and Administrative Expenses
Marketing, general and administrative expenses, as a percentage of sales, for
the current quarter and year-to-date were both 25 percent compared to
27 percent and 25 percent, respectively, for the prior year periods.
Marketing, general and administrative expenses, in dollars, for the second
quarter of 1994 decreased 2 percent from the prior year period. The decrease
was mostly due to lower advertising and administrative expenses, partially
offset by higher selling expense. On a year-to-date basis, marketing,
general and administrative expenses, in dollars, were slightly higher
compared to 1993. The increase was mostly due to higher selling expense that
was substantially offset by lower advertising expense.
Current quarter and year-to-date advertising expense decreased 10 percent and
7 percent, respectively, from the comparable periods of 1993 mostly due to
planned reductions in media production expenditures and local cooperative
advertising in the U.S.
Administrative expense for the 1994 second quarter decreased 3 percent from
the comparable 1993 quarter primarily due to initial start-up costs in 1993
related to the Company's initiative to improve customer service in the U.S.,
partially offset by expenses in connection with a customer service initiative
in Europe. The increase in selling expense for the second quarter of 1994
was in line with the increase in 1994 second quarter sales. Selling expense
for the first six months of 1994 increased primarily due to increased sales
volume in Europe.
The majority of systems and software costs related to the Company's
initiative to improve customer service are not expected to occur until the
end of 1994/early 1995.
Management Compensation Charge
During the 1994 first quarter, the Company purchased 83,949 shares of Class L
common stock, for a total of $9.6 million, held by certain management
stockholders that have left or are leaving the employment of the Company.
The purchase price of $114 per share was the appraised value as determined by
a valuation obtained in November 1993 from an independent investment banking
firm for the Company's employee stock plans.
The selling stockholders acquired the shares through exercises of stock
options granted to them to encourage such employees to remain with the
Company and align management's and shareholders' interests. As a result of
the purchase transaction, compensation expense of $3.8 million was recorded
to recognize the difference between the original compensation amount recorded
for the related stock options and the current appraised value of the stock.
Additionally, stockholders' equity decreased by a total of $5.8 million due
to the purchase and retirement of these shares of stock.
Separately, during the first quarter of 1994, the Board of Directors approved
a stock liquidity program (the "Liquidity Program") for Class L common stock
management holders. This program received stockholder approval at the April
1994 annual meeting of stockholders. The Liquidity Program allows the
Company to enter into contracts with management holders of Class L common
stock relating to in-service, employment separation-related and post-
separation stock purchases. Currently, holders of 1,297,526 shares of
Class L common stock (including outstanding options) are eligible to
participate in this program. This program would allow participating
management stockholders to annually sell a specified amount of their stock to
the Company, subject to certain limitations and conditions. The program also
entitles the Company to purchase all of the shares held by a management
holder at the time of separation from employment.
Once individual contracts for the Liquidity Program are entered into, shares
of participating stock would be reflected outside of stockholders' equity due
to the liquidity feature. If all eligible management stockholders
participated in the Liquidity Program, the Company would incur an initial
pre-tax compensation expense increase of approximately $57.0 million (based
on the current appraised stock value of $129 per share), the addition of
common stock outside of stockholders' equity of approximately $167.0 million
and a reduction in stockholders' equity of approximately $121.0 million.
Future changes in the stock valuation would result in periodic adjustments to
compensation expense. Stock related compensation expense would generally
result in a permanent tax difference and will not be deductible for tax
purposes. Actual purchases of stock by the Company under the Liquidity
Program would result in cash outflows.
Other Operating (Income), Net
Other operating (income), net for the second quarter of 1994 decreased
$.8 million from the prior year period primarily due to gains realized in
1993 from the sale of certain quota rights and income recognized in 1993 from
joint ventures, partially offset by additional reserves recognized in 1993
for costs associated with pre-LBO idle facilities.
On a year-to-date basis, other operating (income), net decreased $6.6 million
from the comparable period of 1993 for the same reasons noted above, as well
as current and future costs associated with environmental-related soil
remediation of a facility previously owned by the Company. (See Note 1 to
Consolidated Financial Statements regarding the reclassification of certain
1993 quarterly amounts to Other Operating (Income), Net.)
Interest Expense
Current quarter and year-to-date interest expense decreased 45 percent and
43 percent, respectively, from the comparable periods of 1993 primarily due
to lower average debt balances. Debt reductions after the second quarter of
1993 included net repayments of debt on the Company's working capital
facility and repayment and cancellation of the first and second series of
dividend notes payable to Class L stockholders. The debt was repaid using
cash flows from operations.
During the second quarter of 1994, the Company renegotiated and amended its
primary credit agreement which, among other items, provides for lower
commitment fees and interest rate basis points. The Company also terminated
its remaining interest rate swap agreement (see Liquidity and Capital
Resources caption).
Full year 1994 interest expense related to borrowings is expected to be lower
than 1993 due to anticipated lower 1994 average debt levels. The Company
anticipates that it will not need to borrow funds during 1994 for costs
relating to its initiative to improve customer service. These costs are
expected to be funded by cash flows from operations during 1994.
Other (Income) Expense, Net
Other (income) expense, net for the current quarter and year-to-date changed
by $11.8 million net expense and $17.1 million net expense, respectively,
from the prior year periods. The 1994 second quarter and first half net
expense changes were mostly due to greater 1994 net foreign currency
transaction losses, translation losses recorded by a Company affiliate
located in a high inflationary environment, higher net costs for foreign
currency exchange contracts and interest rate swap termination costs. The
1994 net foreign currency transaction losses were mostly due to the weakening
of the U.S. dollar compared to European currencies during the first half of
1994 coupled with a higher volume of hedging transactions compared to 1993.
These net expense changes were partially offset by lower minority interest
expense. (See Note 1 to Consolidated Financial Statements regarding the
reclassification of certain Other (Income) Expense, Net amounts.)
Provision for Taxes
The increase in the current quarter provision for taxes compared to the
second quarter of 1993 was primarily due to higher earnings, partially offset
by a 4 percentage point decrease in the Company's effective tax rate. The
provision for taxes for the first half of 1994 reflected a 2 percentage point
decrease in the Company's effective tax rate. The effective tax rates for
the second quarter and six months of 1994 were 38 percent and 40 percent,
respectively, compared to the 1993 rate for both periods of 42 percent.
The lower 1994 rates were primarily due to a change in the mix of U.S. and
non-U.S. earnings, lower state taxes and a reassessment of the Company's tax
settlement strategies. The 1994 second quarter and year-to-date rates would
have been 1 percent higher due to the 1993 U.S. tax bill that increased the
U.S. statutory tax rate to 35 percent from 34 percent, but was offset by
additional utilization of foreign tax credits. (See Note 3 to Consolidated
Financial Statements for information relating to the adoption of SFAS No. 109
"Accounting for Income Taxes".)
Postretirement Benefits
The Company recorded a one-time, non-cash charge against earnings of
$402.3 million before taxes and $248.4 million after taxes due to the
adoption of SFAS No. 106 "Employers' Accounting for Postretirement Benefits
Other Than Pensions" effective November 29, 1993. This charge was recorded
as a cumulative effect of a change in accounting principles, net of income
tax effects, on the Consolidated Statements of Income (Loss). The adoption
of SFAS No. 106 also results in additional ongoing expenses for service and
interest costs related to postretirement benefits, which were $10.8 million
and $21.6 million, respectively, for the current quarter and year-to-date.
The 1994 full year expense for these ongoing costs is estimated to be
$43.0 million (see Note 2 to Consolidated Financial Statements).
FINANCIAL CONDITION AND LIQUIDITY
Trade Receivables
Trade receivables of $754.0 million decreased 12 percent from year-end 1993,
primarily due to lower current quarter sales volume compared to the fourth
quarter of 1993. As a percent of sales, trade receivables for the 1994
second quarter was relatively unchanged compared to year-end. The allowance
for doubtful accounts as a percentage of accounts receivable of 4.08 percent
increased from the 1993 year-end percentage of 3.33 percent mostly due to
concerns related to retail industry bankruptcies in the current U.S. economic
environment.
Inventories
Inventories of $870.5 million at second quarter 1994 were 12 percent higher
than the level at year-end 1993. U.S. inventories and inventories outside
the U.S. increased 7 percent and 18 percent, respectively.
The U.S. inventories increase was primarily due to increases in the men's
Levi's(R) and youth Levi's(R) product lines. These increases were in
anticipation of the Back-to-School selling period. In response to consumer
demand for lower priced products, during 1994 the U.S. men's Levi's(R) brand
marketing division is carrying a higher percentage of lower margin Orange
Tab(TM) products and a lower percentage of certain silverTab(TM) and Red
Tab(TM) products, including 501(R) products.
The men's Dockers(R) brand work-in-process inventory increased due to
finishing capacity limitations for wrinkle-resistant products. Accordingly,
sales and inventory projections for full year 1994 have been adjusted to
reflect lower shipments. In addition, included in the mix of the men's
Dockers(R) finished goods inventory are a higher rate of irregular
wrinkle-resistant garments. The women's Dockers(R) product inventory
decreased from year-end 1993 as the line is continuing to be repositioned in
the market to carry core products with some seasonal items as opposed to
carrying predominately seasonal items. This repositioning is expected to
occur throughout the remainder of 1994.
Most of the increase in inventories outside the U.S. was due to higher
inventories in the Europe division (consisting primarily of denim bottoms) to
meet projected sales demand. In addition, inventories in the Europe division
grew in 1994 due to the consolidation of entities that were previously
accounted for by the equity method of accounting.
Inventory levels are currently in line with forecasted sales and are expected
to be lower at year-end 1994 to coincide with the end of the Holiday shipping
season.
Property, Plant and Equipment
Property, plant and equipment, net of $605.3 million, increased 2 percent
from year-end 1993. The increase in property, plant and equipment was
primarily due to capital expenditures and the consolidation of entities that
were previously accounted for by the equity method of accounting. These
increases were partially offset by depreciation expense and retirements
during the period. Capital expenditures in the U.S. were primarily for
customer service center design and engineering costs related to the Company's
initiative on customer service, and equipment and leasehold improvements in
connection with the Company's data center relocation. The data center will
be relocated outside of California during the third quarter of 1994 in
accordance with the Company's disaster recovery plan. Outside the U.S., the
Company continued to upgrade and expand its finishing and distribution
facilities in Europe.
Actual spending on projects during 1994 is expected to be $150.0 million, not
including spending related to the Company's initiative on customer service.
The Company expects to spend over $300.0 million during the next several
years in connection with this initiative.
Working Capital
For the first half of 1994, working capital increased $249.4 million from
year-end 1993 to $1.3 billion. In addition, the current ratio increased to
2.2 from 1.9. Higher cash and cash equivalents from operations and higher
inventories, partially offset by lower accounts receivable, contributed to
the increase in working capital.
Liquidity and Capital Resources
The increase of $256.6 million in cash and cash equivalents from year-end
1993 was mostly due to cash provided by operations. Cash provided by
operations was partially used for the net repayment of debt and purchases of
property, plant and equipment. Most of the remaining cash was invested in
short-term investments. The Company is continuing to explore fixed-income
portfolio investment possibilities for its cash and cash equivalents balance.
During the second quarter of 1994, the Company renegotiated and amended its
primary credit agreement to reduce its $500.0 million unsecured working
capital facility to a $200.0 million 364 day revolving line of credit, which
is convertible at the option of the Company into a three-year term loan.
This amendment reflects the current financing needs and cash position of the
Company. Under the new revolving line of credit, commitment fees and
interest rate basis points are lower than under the working capital facility.
During 1994, the Company repaid $50.0 million on its working capital loan and
repaid its second series of dividend notes payable to Class L stockholders
for $18.0 million, plus accrued interest of $.7 million. The Company's total
outstanding debt balance was $93.5 million at the end of the second quarter
of 1994, a decrease of 36 percent from year-end 1993.
The Company expects total debt at year-end 1994 to be lower than the level at
year-end 1993 due to the continued repayment of debt using cash generated
from operations. The Company does not anticipate that it will need to borrow
funds during 1994 for costs related to the Company's initiative on customer
service.
In 1994, due to lower debt levels, the Company terminated its remaining
$200.0 million of interest rate swap agreements that hedged floating-rate
liabilities for fixed rates. The termination will become effective during
the fourth quarter of 1994 and resulted in a loss of $2.6 million that was
included in other (income) expense, net.
SUBSEQUENT EVENTS
Repayment of Third Series of Dividend Notes Payable
On June 15, 1994, the Company repaid the third series of dividend notes
payable to Class L stockholders for an aggregate amount of $20.6 million,
plus accrued interest of $1.3 million.
Declaration of Dividends on Class E Common Stock
In June 1994, the Board of Directors declared a dividend of $.65 per share,
payable on August 31, 1994 to Class E stockholders of record on July 29,
1994. There were no dividends declared on Class L common stock.
Proposed Sale of Class E Common Stock to Employee Investment Plans
In July 1994, the employee investment plans will have the opportunity to
purchase Class E common stock from the Company at $129 per share as
determined by the valuation of an independent investment banking firm. In
addition, the Company will contribute matching shares to these plans. It is
estimated that approximately 56,000 shares will be purchased by the plans,
collectively, and the Company will contribute 42,000 shares.<PAGE>
PART II. OTHER INFORMATION
LEVI STRAUSS ASSOCIATES INC. AND SUBSIDIARIES
Item 4 - Submission of Matters to a Vote of Security Holders
(a) The annual meeting of the stockholders of the Registrant was held on
Wednesday, April 27, 1994.
(b) At the annual meeting of the Company's stockholders on April 27, 1994,
holders of a majority of outstanding shares of the Company who are
entitled to vote in the election of directors elected the second class
of directors, consisting of Peter E. Haas, Jr., Walter A. Haas, Jr., F.
Warren Hellman and Patricia Salas Pineda, to three-year terms expiring
in 1997. The first class of directors consists of Tully M. Friedman,
Rhoda H. Goldman, Robert D. Haas and Angela Glover Blackwell. The term
for the first class expires at the 1996 annual meeting. The third class
of directors consists of James C. Gaither, Peter E. Haas, Sr., James M.
Koshland and Thomas W. Tusher. The term for the third class will expire
at the 1995 annual meeting.
(c) At the annual meeting of the Company's stockholders on April 27, 1994,
holders of a majority of outstanding shares of the Company who are
entitled to vote approved a stock liquidity program for Class L common
stock management holders.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) There were no reports on Form 8-K filed with the Commission during the
second quarter of 1994.<PAGE>
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.
LEVI STRAUSS ASSOCIATES INC.
----------------------------
(Registrant)
Date: July 11, 1994
By /s/Richard D. Murphy
---------------------------------------
(Richard D. Murphy)
Vice President and Corporate Controller<PAGE>
