NEW YORK — S&P made Levi’s accounting headache worse on Friday.

Calling the timing “troublesome,” Standard & Poor’s Ratings Services reacted to Levi Strauss & Co.’s disclosure of accounting errors by lowering its outlook on the jeans giant to “negative” from “stable.”

As reported, Levi’s, in a regulatory filing with the Securities and Exchange Commission, said late Thursday that it had mistakenly twice claimed a tax deduction for costs related to plant closures, in 1998 and 1999.

This resulted in overstated profits in 2001 and again in the recently reported third quarter of 2003. Levi’s will restate both periods, trimming profits $26 million and $4.9 million, respectively.

“Although the amount of the error, about $30 million, is not material, Standard & Poor’s finds the timing of the disclosure troublesome because the company just completed a new $1.15 billion bank refinancing at the end of September,” wrote S&P analyst Jayne Ross.

KPMG will reaudit the 2001 numbers, raising the possibility of further restatements, and the audit committee of Levi’s board will need to review third-quarter results before they can be certified by senior management and sent to the SEC. Levi’s was required to file its quarterly numbers, or an explanation of their delay — a Form 12b-25 Notification of Late Filing — by last Wednesday. It chose the latter course.

The delay in the quarterly filing, or Form 10-Q, shouldn’t affect Levi’s credit ratings, all of which were affirmed by S&P, but the agency said, “This development represents another in a series of challenges for the company. Standard & Poor’s is very concerned about the impediment these events pose to the company as it seeks to execute a turnaround.”

The downward revision to “negative” has no effect on Levi’s ability to borrow or the cost to do so, but included in its wording was an indication that S&P just might be running out of patience with the San Francisco-based firm.

“Standard & Poor’s will closely monitor the company’s progress and any further meaningful deviations from plan will prompt an immediate review or downgrade,” the S&P statement read. “Furthermore, any additional surprises or a lack of a prompt resolution of the audit review and audit will also result in a rating review and/or downgrade.”Levi’s did file a Form 8-K covering third-quarter results on Thursday “to give investors as complete and timely information as possible with respect to the quarter ended Aug. 24.” That document became available on Friday and, among other data, provided a breakdown of the principal payments due on Levi’s bank financing package.

Principal payments accelerate from $24.7 million this year to $61 million in 2005, but then skyrocket to $453.5 million in 2006. They drop to $50.3 million in 2007 and are $1.74 billion thereafter, for a total of $2.37 billion.

The bank financing is divided between a $650 million revolving credit facility and a $500 million senior secured term loan facility. The former carries a “BB” rating from S&P and the latter a “BB-minus” rating, one and two notches below investment grade, respectively. The senior unsecured debt rating is slightly lower, rated “B.”

S&P’s Ross noted that Levi’s has $389 million available under the $650 million revolver, which is asset backed, as well as cash and cash equivalents of $50.7 million as of Aug. 24.

S&P did point out that Levi’s has had several successes in restructuring its production and organization, and that it has finally made its way into the discount channel through the introduction of its Signature label at Wal-Mart Stores, sales of which are said to be “on plan.” Enthusiasm about Signature is tempered by concern about adverse retail reaction among stores in other channels and the sobering decline of Levi’s sales to $4.1 billion last year from $7 billion in 1996.

“Although the company has made some progress in stemming the decline,” Ross noted, “the weak U.S. and European retail markets continue to be problematic.”

A spokeswoman for Moody’s Investors Service said her firm was unlikely to revise its ratings on Levi’s because of the tax errors. Citing “the rapid decline in the company’s financial flexibility” as a result of its new credit agreement, Moody’s last month downgraded several Levi’s credit instruments. All started at non-investment, or “junk,” grade and were lowered one or two notches.

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