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LEVI STRAUSS & CO - Quarter Report: 2011 August (Form 10-Q)

e10vq
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form 10-Q
 
     
(Mark One)    
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the Quarterly Period Ended August 28, 2011
or
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission file number: 002-90139
 
 
 
 
LEVI STRAUSS & CO.
(Exact Name of Registrant as Specified in Its Charter)
 
     
DELAWARE
(State or Other Jurisdiction of
Incorporation or Organization)
  94-0905160
(I.R.S. Employer
Identification No.)
 
1155 Battery Street, San Francisco, California 94111
(Address of Principal Executive Offices) (Zip Code)
 
(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 o     No þ
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ     No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See definition of “Large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o Accelerated filer o Non-accelerated filer þ Smaller reporting company o
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No þ
 
The Company is privately held. Nearly all of its common equity is owned by descendants of the family of the Company’s founder, Levi Strauss, and their relatives. There is no trading in the common equity and therefore an aggregate market value based on sales or bid and asked prices is not determinable.
 
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 — 37,354,021 shares outstanding on October 6, 2011
 


 

 
LEVI STRAUSS & CO. AND SUBSIDIARIES
 
INDEX TO FORM 10-Q
 
FOR THE QUARTERLY PERIOD ENDED AUGUST 28, 2011
 
             
        Page
        Number
 
PART I — FINANCIAL INFORMATION
Item 1.   Consolidated Financial Statements (unaudited):        
      Consolidated Balance Sheets as of August 28, 2011, and November 28, 2010     3  
      Consolidated Statements of Income for the Three and Nine Months Ended August 28, 2011, and August 29, 2010     4  
      Consolidated Statements of Cash Flows for the Nine Months Ended August 28, 2011, and August 29, 2010     5  
      Notes to Consolidated Financial Statements     6  
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations     19  
Item 3.   Quantitative and Qualitative Disclosures About Market Risk     29  
Item 4.   Controls and Procedures     29  
 
PART II — OTHER INFORMATION
Item 1.   Legal Proceedings     30  
Item 1A.   Risk Factors     30  
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds     30  
Item 3.   Defaults Upon Senior Securities     30  
Item 4.   Removed and Reserved     30  
Item 5.   Other Information     30  
Item 6.   Exhibits     30  
SIGNATURE     31  
 EX-31.1
 EX-31.2
 EX-32
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT


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PART I — FINANCIAL INFORMATION
 
Item 1.   CONSOLIDATED FINANCIAL STATEMENTS
 
LEVI STRAUSS & CO. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
 
                 
    (Unaudited)
       
    August 28,
    November 28,
 
    2011     2010  
    (Dollars in thousands)  
 
ASSETS
Current Assets:
               
Cash and cash equivalents
  $ 230,844     $ 269,726  
Restricted cash
    7,432       4,028  
Trade receivables, net of allowance for doubtful accounts of $22,778 and $24,617
    539,042       553,385  
Inventories:
               
Raw materials
    7,960       6,770  
Work-in-process
    13,421       9,405  
Finished goods
    709,253       563,728  
                 
Total inventories
    730,634       579,903  
Deferred tax assets, net
    143,466       137,892  
Other current assets
    140,546       106,198  
                 
Total current assets
    1,791,964       1,651,132  
Property, plant and equipment, net of accumulated depreciation of $729,843 and $683,258
    507,933       488,603  
Goodwill
    243,680       241,472  
Other intangible assets, net
    76,015       84,652  
Non-current deferred tax assets, net
    558,881       559,053  
Other assets
    109,285       110,337  
                 
Total assets
  $ 3,287,758     $ 3,135,249  
                 
 
LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS’ DEFICIT
Current Liabilities:
               
Short-term debt
  $ 129,010     $ 46,418  
Current maturities of long-term debt
           
Current maturities of capital leases
    1,740       1,777  
Accounts payable
    248,806       212,935  
Other accrued liabilities
    233,871       275,443  
Accrued salaries, wages and employee benefits
    192,553       196,152  
Accrued interest payable
    37,319       9,685  
Accrued income taxes
    18,333       17,115  
                 
Total current liabilities
    861,632       759,525  
Long-term debt
    1,856,237       1,816,728  
Long-term capital leases
    2,795       3,578  
Postretirement medical benefits
    139,410       147,065  
Pension liability
    326,344       400,584  
Long-term employee related benefits
    94,441       102,764  
Long-term income tax liabilities
    48,659       50,552  
Other long-term liabilities
    54,250       54,281  
                 
Total liabilities
    3,383,768       3,335,077  
                 
Commitments and contingencies
               
Temporary equity
    10,720       8,973  
                 
Stockholders’ Deficit:
               
Levi Strauss & Co. stockholders’ deficit
               
Common stock — $.01 par value; 270,000,000 shares authorized; 37,346,643 shares and 37,322,358 shares issued and outstanding
    373       373  
Additional paid-in capital
    24,857       18,840  
Retained earnings
    106,894       33,346  
Accumulated other comprehensive loss
    (247,555 )     (272,168 )
                 
Total Levi Strauss & Co. stockholders’ deficit
    (115,431 )     (219,609 )
Noncontrolling interest
    8,701       10,808  
                 
Total stockholders’ deficit
    (106,730 )     (208,801 )
                 
Total liabilities, temporary equity and stockholders’ deficit
  $ 3,287,758     $ 3,135,249  
                 
 
The accompanying notes are an integral part of these consolidated financial statements.


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF INCOME
 
                                 
    Three Months Ended     Nine Months Ended  
    August 28,
    August 29,
    August 28,
    August 29,
 
    2011     2010     2011     2010  
          (Dollars in thousands)
       
          (Unaudited)        
 
Net sales
  $ 1,183,890     $ 1,090,448     $ 3,358,175     $ 3,064,414  
Licensing revenue
    20,127       18,557       59,457       56,326  
                                 
Net revenues
    1,204,017       1,109,005       3,417,632       3,120,740  
Cost of goods sold
    634,573       565,393       1,749,525       1,544,779  
                                 
Gross profit
    569,444       543,612       1,668,107       1,575,961  
Selling, general and administrative expenses
    488,545       457,309       1,423,358       1,313,185  
                                 
Operating income
    80,899       86,303       244,749       262,776  
Interest expense
    (30,208 )     (31,734 )     (98,589 )     (100,347 )
Loss on early extinguishment of debt
                      (16,587 )
Other income (expense), net
    (5,779 )     (7,695 )     (12,744 )     11,462  
                                 
Income before income taxes
    44,912       46,874       133,416       157,304  
Income tax expense
    13,612       20,252       42,437       93,203  
                                 
Net income
    31,300       26,622       90,979       64,101  
Net loss attributable to noncontrolling interest
    893       1,556       2,860       6,050  
                                 
Net income attributable to Levi Strauss & Co. 
  $ 32,193     $ 28,178     $ 93,839     $ 70,151  
                                 
 
The accompanying notes are an integral part of these consolidated financial statements.


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                 
    Nine Months Ended  
    August 28,
    August 29,
 
    2011     2010  
    (Dollars in thousands) (Unaudited)  
 
Cash Flows from Operating Activities:
               
Net income
  $ 90,979     $ 64,101  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    87,420       77,983  
Asset impairments
    2,957       2,307  
Gain on disposal of property, plant and equipment
          (100 )
Unrealized foreign exchange losses (gains)
    11,262       (15,789 )
Realized loss on settlement of forward foreign exchange contracts not designated for hedge accounting
    8,252       8,412  
Employee benefit plans’ amortization from accumulated other comprehensive loss
    (4,555 )     2,557  
Employee benefit plans’ curtailment loss, net
    1,629       100  
Noncash gain on extinguishment of debt, net of write-off of unamortized debt issuance costs
          (13,647 )
Amortization of deferred debt issuance costs
    3,241       3,293  
Stock-based compensation
    7,741       4,419  
Allowance for doubtful accounts
    4,957       6,428  
Change in operating assets and liabilities:
               
Trade receivables
    22,260       16,871  
Inventories
    (115,169 )     (134,592 )
Other current assets
    (28,823 )     (6,930 )
Other non-current assets
    1,124       (17,320 )
Accounts payable and other accrued liabilities
    1,309       55,700  
Income tax liabilities
    (3,554 )     63,760  
Accrued salaries, wages and employee benefits and long-term employee related benefits
    (73,019 )     (40,820 )
Other long-term liabilities
    (994 )     19,113  
Other, net
    270       (17 )
                 
Net cash provided by operating activities
    17,287       95,829  
                 
Cash Flows from Investing Activities:
               
Purchases of property, plant and equipment
    (106,010 )     (107,874 )
Proceeds from sale of property, plant and equipment
    158       1,375  
Payments on settlement of forward foreign exchange contracts not designated for hedge accounting
    (8,252 )     (8,412 )
Acquisitions, net of cash acquired
          (12,242 )
Other
    (500 )     (114 )
                 
Net cash used for investing activities
    (114,604 )     (127,267 )
                 
Cash Flows from Financing Activities:
               
Proceeds from issuance of long-term debt
          909,390  
Repayments of long-term debt and capital leases
    (1,470 )     (865,527 )
Proceeds from senior revolving credit facility
    70,000        
Short-term borrowings, net
    6,926       19,176  
Debt issuance costs
          (17,512 )
Restricted cash
    (2,866 )     (248 )
Repurchase of common stock
    (245 )      
Dividend to stockholders
    (20,023 )     (20,013 )
                 
Net cash provided by financing activities
    52,322       25,266  
                 
Effect of exchange rate changes on cash and cash equivalents
    6,113       (3,434 )
                 
Net decrease in cash and cash equivalents
    (38,882 )     (9,606 )
Beginning cash and cash equivalents
    269,726       270,804  
                 
Ending cash and cash equivalents
  $ 230,844     $ 261,198  
                 
Supplemental disclosure of cash flow information:
               
Cash paid during the period for:
               
Interest
  $ 69,124     $ 87,097  
Income taxes
    43,697       34,980  
 
The accompanying notes are an integral part of these consolidated financial statements.


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
FOR THE QUARTERLY PERIOD ENDED AUGUST 28, 2011
 
NOTE 1:   SIGNIFICANT ACCOUNTING POLICIES
 
Nature of Operations
 
Levi Strauss & Co. (the “Company”) is one of the world’s leading branded apparel companies. The Company designs and markets jeans, casual and dress pants, tops, skirts, jackets, footwear and related accessories, for men, women and children under the Levi’s®, Dockers®, Signature by Levi Strauss & Co.tm and Denizentm brands. The Company markets its products in three geographic regions: Americas, Europe and Asia Pacific.
 
Basis of Presentation and Principles of Consolidation
 
The unaudited consolidated financial statements of the Company and its wholly-owned and majority-owned foreign and domestic subsidiaries are prepared in conformity with generally accepted accounting principles in the United States (“U.S.”) for interim financial information. In the opinion of management, all adjustments necessary for a fair statement of the financial position and the results of operations for the periods presented have been included. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended November 28, 2010, included in the Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission (“SEC”) on February 8, 2011.
 
The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions have been eliminated. Management believes 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 and nine months ended August 28, 2011, may not be indicative of the results to be expected for any other interim period or the year ending November 27, 2011.
 
The Company’s fiscal year ends on the last Sunday of November in each year, although the fiscal years of certain foreign subsidiaries are fixed at November 30 due to local statutory requirements. Apart from these subsidiaries, each quarter of both fiscal years 2011 and 2010 consists of 13 weeks. All references to years relate to fiscal years rather than calendar years.
 
Subsequent events have been evaluated through the issuance date of these financial statements.
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the related notes to consolidated financial statements. Estimates are based upon historical factors, current circumstances and the experience and judgment of the Company’s management. Management evaluates its estimates and assumptions on an ongoing basis and may employ outside experts to assist in its evaluations. Changes in such estimates, based on more accurate future information, or different assumptions or conditions, may affect amounts reported in future periods.
 
Pension and Postretirement Benefits
 
The Company has several non-contributory defined benefit retirement plans covering eligible employees. The Company also provides certain health care benefits for U.S. employees who meet age, participation and length of service requirements at retirement. In addition, the Company sponsors other retirement or post-employment plans for its foreign employees in accordance with local government programs and requirements. The Company retains the right to amend, curtail or discontinue any aspect of the plans, subject to local regulations.


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
 
FOR THE QUARTERLY PERIOD ENDED AUGUST 28, 2011
 
The Company recognizes either an asset or a liability for any plan’s funded status in its consolidated balance sheets. The Company measures changes in funded status using actuarial models which utilize an attribution approach that generally spreads individual events either over the estimated service lives of the remaining employees in the plan, or, for plans where participants will not earn additional benefits by rendering future service — which, beginning in the second quarter of 2011, includes the Company’s U.S. plans — over the plan participants’ estimated remaining lives. The Company’s policy is to fund its retirement plans based upon actuarial recommendations and in accordance with applicable laws, income tax regulations and credit agreements. Net pension and postretirement benefit income or expense is generally determined using assumptions which include expected long-term rates of return on plan assets, discount rates, compensation rate increases (where applicable) and medical trend rates. The Company considers several factors including actual historical rates, expected rates and external data to determine the assumptions used in the actuarial models.
 
Pension benefits are primarily paid through trusts funded by the Company. The Company pays postretirement benefits to the healthcare service providers on behalf of the plan’s participants.
 
Recently Issued Accounting Standards
 
There have been no developments to recently issued accounting standards, including the expected dates of adoption and estimated effects on the Company’s consolidated financial statements, from those disclosed in the Company’s 2010 Annual Report on Form 10-K, except for the following, which have been grouped by their required effective dates for the Company:
 
Second Quarter of 2012
 
  •  In May 2011, the FASB issued Accounting Standards Update No. 2011-04, “Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” (“ASU 2011-04”). ASU 2011-04 changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to ensure consistency between U.S. GAAP and IFRS. ASU 2011-04 also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This new guidance is to be applied prospectively. The Company anticipates that the adoption of this standard will not materially change its consolidated financial statement footnote disclosures.
 
Fourth Quarter of 2012
 
  •  In September 2011, the FASB issued Accounting Standards Update No. 2011-09, “Compensation — Retirement Benefits — Multiemployer Plans (Subtopic 715-80),” (“ASU 2011-09”). ASU 2011-09 requires that employers provide additional separate disclosures for multiemployer pension plans and multiemployer other postretirement benefit plans. The additional quantitative and qualitative disclosures will provide users with more detailed information about an employer’s involvement in multiemployer pension plans. The Company anticipates that the adoption of this standard will expand its consolidated financial statement footnote disclosures.
 
First Quarter of 2013
 
  •  In June 2011, the FASB issued Accounting Standards Update No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income,” (“ASU 2011-05”). ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in equity. ASU 2011-05 requires that all nonowner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. This new guidance is to


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
 
FOR THE QUARTERLY PERIOD ENDED AUGUST 28, 2011
 
  be applied retrospectively. The Company anticipates that the adoption of this standard may materially change the presentation of its consolidated financial statements.
 
• In September 2011, the FASB issued Accounting Standards Update No. 2011-08, “Intangibles — Goodwill and Other (Topic 350),” (“ASU 2011-08”). ASU 2011-08 allows entities to first assess qualitatively whether it is necessary to perform the two-step goodwill impairment test. If an entity believes, as a result of its qualitative assessment, that it is more likely than not that the fair value of a reporting period is less than its carrying amount, the quantitative two-step goodwill impairment test is required. An entity has the unconditional option to bypass the qualitative assessment and proceed directly to performing the first step of the goodwill impairment test. The Company elected to early adopt this accounting guidance at the beginning of its fourth quarter of 2011 on a prospective basis for goodwill impairment tests. The Company anticipates that the adoption of this standard will not have a material impact on its consolidated financial statements and footnote disclosures.
 
NOTE 2:   GOODWILL AND OTHER INTANGIBLE ASSETS
 
The changes in the carrying amount of goodwill by business segment for the nine months ended August 28, 2011, were as follows:
 
                                 
                Asia
       
    Americas     Europe     Pacific     Total  
          (Dollars in thousands)        
 
Balance, November 28, 2010
  $ 207,427     $ 31,603     $ 2,442     $ 241,472  
Foreign currency fluctuation
    (1 )     2,279       (70 )     2,208  
                                 
Balance, August 28, 2011
  $ 207,426     $ 33,882     $ 2,372     $ 243,680  
                                 
 
Other intangible assets, net, were as follows:
 
                                                 
    August 28, 2011     November 28, 2010  
    Gross
    Accumulated
          Gross
    Accumulated
       
    Carrying Value     Amortization     Total     Carrying Value     Amortization     Total  
                (Dollars in thousands)              
 
Unamortized intangible assets:
                                               
Trademarks
  $ 42,743     $     $ 42,743     $ 42,743     $     $ 42,743  
Amortized intangible assets:
                                               
Acquired contractual rights
    41,944       (20,881 )     21,063       45,712       (17,765 )     27,947  
Customer lists
    21,567       (9,358 )     12,209       20,037       (6,075 )     13,962  
                                                 
Total
  $ 106,254     $ (30,239 )   $ 76,015     $ 108,492     $ (23,840 )   $ 84,652  
                                                 
 
For the three and nine months ended August 28, 2011, amortization of these intangible assets was $3.1 million and $9.1 million, respectively, compared to $3.6 million and $11.2 million, respectively, in the same periods of 2010.


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
 
FOR THE QUARTERLY PERIOD ENDED AUGUST 28, 2011
 
NOTE 3:   FAIR VALUE OF FINANCIAL INSTRUMENTS
 
The following table presents the Company’s financial instruments that are carried at fair value:
 
                                                 
    August 28, 2011     November 28, 2010  
          Fair Value Estimated Using           Fair Value Estimated Using  
          Leve1 1
    Level 2
          Leve1
    Level 2
 
    Fair Value     Inputs(1)     Inputs(2)     Fair Value     Inputs(1)     Inputs(2)  
    (Dollars in thousands)  
 
Financial assets carried at fair value
                                               
Rabbi trust assets
  $ 18,365     $ 18,365     $     $ 18,316     $ 18,316     $  
Forward foreign exchange contracts, net(3)
    7,753             7,753       1,385             1,385  
                                                 
Total
  $ 26,118     $ 18,365     $ 7,753     $ 19,701     $ 18,316     $ 1,385  
                                                 
Financial liabilities carried at fair value
                                               
Forward foreign exchange contracts, net(3)
  $ 4,489     $     $ 4,489     $ 5,003     $     $ 5,003  
                                                 
Total
  $ 4,489     $     $ 4,489     $ 5,003     $     $ 5,003  
                                                 
 
 
(1) Fair values estimated using Level 1 inputs are inputs which consist of quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Rabbi trust assets consist of a diversified portfolio of equity, fixed income and other securities.
 
(2) Fair values estimated using Level 2 inputs are inputs, other than quoted prices, that are observable for the asset or liability, either directly or indirectly and include among other things, quoted prices for similar assets or liabilities in markets that are active or inactive as well as inputs other than quoted prices that are observable. For forward foreign exchange contracts, inputs include foreign currency exchange and interest rates and, where applicable, credit default swap prices.
 
(3) The Company’s over-the-counter forward foreign exchange contracts are subject to International Swaps and Derivatives Association, Inc. master agreements. These agreements permit the net-settlement of these contracts on a per-institution basis.
 
The following table presents the carrying value — including accrued interest — and estimated fair value of the Company’s financial instruments that are carried at adjusted historical cost:
 
                                         
    August 28, 2011     November 28, 2010        
    Carrying
    Estimated
    Carrying
    Estimated
       
    Value     Fair Value(1)     Value     Fair Value(1)        
          (Dollars in thousands)              
 
Financial liabilities carried at adjusted historical cost
                                       
Senior revolving credit facility
  $ 178,529     $ 177,638     $ 108,482     $ 107,129          
Senior term loan due 2014
    324,665       282,553       324,423       311,476          
8.875% senior notes due 2016
    362,770       373,270       355,004       373,379          
4.25% Yen-denominated Eurobonds due 2016
    119,304       100,765       109,429       98,063          
7.75% Euro senior notes due 2018
    440,971       389,210       401,982       407,993          
7.625% senior notes due 2020
    536,564       510,314       526,557       542,307          
Short-term borrowings
    59,454       59,454       46,722       46,722          
                                         
Total
  $ 2,022,257     $ 1,893,204     $ 1,872,599     $ 1,887,069          
                                         
 
 
(1) Fair value estimate incorporates mid-market price quotes.


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
 
FOR THE QUARTERLY PERIOD ENDED AUGUST 28, 2011
 
NOTE 4:   DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
 
As of August 28, 2011, the Company had forward foreign exchange contracts to buy $551.1 million and to sell $455.3 million against various foreign currencies. These contracts are at various exchange rates and expire at various dates through June 2012.
 
The table below provides data about the carrying values of derivative instruments and non-derivative instruments designated as net investment hedges:
 
                                                 
    August 28, 2011     November 28, 2010  
    Assets     (Liabilities)           Assets     (Liabilities)        
                Derivative
                Derivative
 
    Carrying
    Carrying
    Net Carrying
    Carrying
    Carrying
    Net Carrying
 
    Value     Value     Value     Value     Value     Value  
                (Dollars in thousands)              
 
Derivatives not designated as hedging
                                               
instruments
                                               
Forward foreign exchange contracts(1)
  $ 9,369     $ (1,616 )   $ 7,753     $ 7,717     $ (6,332 )   $ 1,385  
Forward foreign exchange contracts(2)
    9,147       (13,636 )     (4,489 )     4,266       (9,269 )     (5,003 )
                                                 
Total
  $ 18,516     $ (15,252 )           $ 11,983     $ (15,601 )        
                                                 
Non-derivatives designated as hedging instruments
                                               
4.25% Yen-denominated Eurobonds due 2016
  $     $ (50,615 )           $     $ (61,075 )        
7.75% Euro senior notes due 2018
          (431,340 )                   (400,740 )        
                                                 
Total
  $     $ (481,955 )           $     $ (461,815 )        
                                                 
 
 
(1) Included in “Other current assets” or “Other assets” on the Company’s consolidated balance sheets.
 
(2) Included in “Other accrued liabilities” on the Company’s consolidated balance sheets.
 
The table below provides data about the amount of gains and losses related to derivative instruments and non-derivative instruments designated as net investment hedges included in “Accumulated other comprehensive loss” (“AOCI”) on the Company’s consolidated balance sheets, and in “Other income (expense), net” in the Company’s consolidated statements of income:
 
                                                 
                Gain or (Loss) Recognized in Other
 
    Gain or (Loss)
    Income (Expense), net (Ineffective
 
    Recognized in AOCI
    Portion and Amount Excluded from
 
    (Effective Portion)     Effectiveness Testing)  
    As of
    As of
    Three Months Ended     Nine Months Ended  
    August 28,
    November 28,
    August 28,
    August 29,
    August 28,
    August 29,
 
    2011     2010     2011     2010     2011     2010  
    (Dollars in thousands)  
 
Forward foreign exchange contracts
  $ 4,637     $ 4,637     $     $     $     $  
Yen-denominated Eurobonds
    (28,316 )     (24,377 )     (3,161 )     (2,818 )     (4,707 )     2,732  
Euro senior notes
    (54,271 )     (23,671 )                        
Cumulative income taxes
    30,316       17,022                                  
                                                 
Total
  $ (47,634 )   $ (26,389 )                                
                                                 


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
 
FOR THE QUARTERLY PERIOD ENDED AUGUST 28, 2011
 
The table below provides data about the amount of gains and losses related to derivatives not designated as hedging instruments included in “Other income (expense), net” in the Company’s consolidated statements of income:
 
                                 
    Gain or (Loss)  
    Three Months Ended     Nine Months Ended  
    August 28,
    August 29,
    August 28,
    August 29,
 
    2011     2010     2011     2010  
          (Dollars in thousands)        
 
Forward foreign exchange contracts:
                               
Realized
  $ (3,389 )   $ (3,072 )   $ (8,252 )   $ (8,412 )
Unrealized
    8,008       (3,459 )     7,040       12,486  
                                 
Total
  $ 4,619     $ (6,531 )   $ (1,212 )   $ 4,074  
                                 
 
NOTE 5:   DEBT
 
                 
    August 28,
    November 28,
 
    2011     2010  
    (Dollars in thousands)  
 
Long-term debt
               
Secured:
               
Senior revolving credit facility
  $ 108,250     $ 108,250  
Unsecured:
               
Senior term loan due 2014
    323,939       323,676  
8.875% senior notes due 2016
    350,000       350,000  
4.25% Yen-denominated Eurobonds due 2016
    117,708       109,062  
7.75% Euro senior notes due 2018
    431,340       400,740  
7.625% senior notes due 2020
    525,000       525,000  
                 
Total unsecured
    1,747,987       1,708,478  
Less: current maturities
           
                 
Total long-term debt
  $ 1,856,237     $ 1,816,728  
                 
Short-term debt
               
Secured:
               
Senior revolving credit facility
  $ 70,000     $  
Unsecured:
               
Short-term borrowings
    59,010       46,418  
Current maturities of long-term debt
           
                 
Total short-term debt
  $ 129,010     $ 46,418  
                 
Total long-term and short-term debt
  $ 1,985,247     $ 1,863,146  
                 


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
 
FOR THE QUARTERLY PERIOD ENDED AUGUST 28, 2011
 
Interest Rates on Borrowings
 
The Company’s weighted-average interest rate on average borrowings outstanding during the three and nine months ended August 28, 2011, was 6.74% and 6.81%, respectively, as compared to 6.74% and 7.27%, respectively, in the same periods of 2010.
 
Senior Revolving Credit Facility
 
As of August 28, 2011, the Company’s total availability of $421.0 million under its then-effective senior secured revolving credit facility was reduced by $84.3 million of letters of credit and other credit usage under the facility, yielding a net availability of $336.7 million.
 
On September 30, 2011, the Company entered into a new senior secured revolving credit facility. The new facility is an asset-based facility, in which the borrowing availability varies according to the levels of accounts receivable, inventory and cash and investment securities deposited in secured accounts with the administrative agent or other lenders as further described below.
 
Availability, interest and maturity.  The maximum availability under the new facility is $850.0 million, of which $800.0 million is available to the Company for revolving loans in U.S. Dollars and $50.0 million is available to the Company for revolving loans either in U.S. Dollars or Canadian Dollars. Subject to the level of this borrowing base, the Company may make and repay borrowings from time to time until the maturity of the facility. The Company may make voluntary prepayments of borrowings at any time and must make mandatory prepayments if certain events occur. Borrowings under the facility will bear an interest rate of LIBOR plus 150 to 275 basis points, depending on borrowing base availability, and undrawn availability bears a rate of 37.5 to 50 basis points. The facility has a maturity date of September 30, 2016, which may be accelerated to December 26, 2013, if the senior term loan due 2014 is still outstanding on that date and the Company has not met other conditions set forth in the new facility. Upon the maturity date, all of the obligations outstanding under the new facility become due.
 
Guarantees and security.  The Company’s obligations under the new facility are guaranteed by its domestic subsidiaries. The facility is secured by, among other domestic assets, certain U.S. trademarks associated with the Levi’s® brand and accounts receivable, goods and inventory in the U.S. Additionally, the obligations of Levi Strauss & Co. (Canada) Inc. under the new facility are secured by Canadian accounts receivable, goods, inventory and other Canadian assets. The lien on the U.S. Levi’s® trademarks and related intellectual property may be released at the Company’s discretion so long as it meet certain conditions; such release would reduce the borrowing base.
 
Covenants.  The new facility contains customary covenants restricting the Company’s activities as well as those of the Company’s subsidiaries, including limitations on the ability to sell assets; engage in mergers; enter into transactions involving related parties or derivatives; incur or prepay indebtedness or grant liens or negative pledges on the Company’s assets; make loans or other investments; pay dividends or repurchase stock or other securities; guaranty third-party obligations; and make changes in the Company’s corporate structure. There are exceptions to these covenants, and some are only applicable when unused availability falls below specified thresholds. In addition, the new facility includes as a financial covenant a springing fixed charge coverage ratio of 1.0:1.0, which arises when availability falls below a specified threshold.
 
Events of default.  The new facility contains customary events of default, including payment failures; failure to comply with covenants; failure to satisfy other obligations under the credit agreements or related documents; defaults in respect of other indebtedness; bankruptcy, insolvency and inability to pay debts when due; material judgments; pension plan terminations or specified underfunding; substantial stock ownership changes; and specified changes in the composition of our board of directors. The cross-default provisions in the facility apply if a default occurs on other indebtedness in excess of $50.0 million and the applicable grace period in respect of the indebtedness has expired, such that the lenders of or trustee for the defaulted indebtedness have the right to


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
 
FOR THE QUARTERLY PERIOD ENDED AUGUST 28, 2011
 
accelerate. If an event of default occurs under the new facility, the lenders may terminate their commitments, declare immediately payable all borrowings under the facility and foreclose on the collateral.
 
Use of proceeds.  In connection with the new senior secured revolving credit facility, the Company terminated the previous amended and restated senior secured revolving credit facility. Borrowings outstanding under the previous facility were refinanced into the new senior secured revolving credit facility.
 
NOTE 6:   EMPLOYEE BENEFIT PLANS
 
The following table summarizes the components of net periodic benefit cost (income) and the changes recognized in “Accumulated other comprehensive loss” for the Company’s defined benefit pension plans and postretirement benefit plans:
 
                                 
    Pension Benefits     Postretirement Benefits  
    Three Months Ended     Three Months Ended  
    August 28,
    August 29,
    August 28,
    August 29,
 
    2011     2010     2011     2010  
          (Dollars in thousands)        
 
Net periodic benefit cost (income):
                               
Service cost
  $ 2,552     $ 1,908     $ 119     $ 120  
Interest cost
    15,123       14,855       1,908       2,168  
Expected return on plan assets
    (13,535 )     (11,439 )            
Amortization of prior service (benefit) cost(1)
    (20 )     111       (7,236 )     (7,392 )
Amortization of actuarial loss
    1,939       6,665       1,256       1,402  
Curtailment gain
    (1,426 )                  
Net settlement loss
    20       117              
                                 
Net periodic benefit cost (income)
    4,653       12,217       (3,953 )     (3,702 )
                                 
Changes in accumulated other comprehensive loss:
                               
Actuarial loss
    105                    
Amortization of prior service benefit (cost)
    20       (111 )     7,236       7,392  
Amortization of actuarial loss
    (1,939 )     (6,665 )     (1,256 )     (1,402 )
Curtailment loss
    (7 )                  
Net settlement loss
    (9 )     (39 )            
                                 
Total recognized in accumulated other comprehensive loss
    (1,830 )     (6,815 )     5,980       5,990  
                                 
Total recognized in net periodic benefit cost (income) and accumulated other comprehensive loss
  $ 2,823     $ 5,402     $ 2,027     $ 2,288  
                                 
 


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
 
FOR THE QUARTERLY PERIOD ENDED AUGUST 28, 2011
 
                                 
    Pension Benefits     Postretirement Benefits  
    Nine Months Ended     Nine Months Ended  
    August 28,
    August 29,
    August 28,
    August 29,
 
    2011     2010     2011     2010  
    (Dollars in thousands)  
 
Net periodic benefit cost (income):
                               
Service cost
  $ 7,739     $ 5,822     $ 358     $ 356  
Interest cost
    45,277       44,732       5,722       6,506  
Expected return on plan assets
    (39,490 )     (34,529 )            
Amortization of prior service cost (benefit)(1)
    65       340       (21,709 )     (22,175 )
Amortization of actuarial loss
    12,973       19,996       3,769       4,206  
Curtailment loss
    1,629       100              
Net settlement loss
    736       309              
                                 
Net periodic benefit cost (income)
    28,929       36,770       (11,860 )     (11,107 )
                                 
Changes in accumulated other comprehensive loss:
                               
Actuarial (gain) loss
    (32,310 )     303              
Amortization of prior service (cost) benefit
    (65 )     (340 )     21,709       22,175  
Amortization of actuarial loss
    (12,973 )     (19,996 )     (3,769 )     (4,206 )
Curtailment loss
    (3,078 )     (13 )            
Net settlement loss
    (347 )     (190 )            
                                 
Total recognized in accumulated other comprehensive loss
    (48,773 )     (20,236 )     17,940       17,969  
                                 
Total recognized in net periodic benefit cost (income) and accumulated other comprehensive loss
  $ (19,844 )   $ 16,534     $ 6,080     $ 6,862  
                                 
 
 
(1) Postretirement benefits amortization of prior service benefit recognized during each period relates primarily to the favorable impact of the February 2004 and August 2003 plan amendments.
 
The estimated net loss for the Company’s defined benefit pension plans that will be amortized from “Accumulated other comprehensive loss” into net periodic benefit cost in 2011 is expected to be approximately $15.0 million.
 
NOTE 7:   COMMITMENTS AND CONTINGENCIES
 
Forward Foreign Exchange Contracts
 
The Company uses over-the-counter derivative instruments to manage its exposure to foreign currencies. The Company is exposed to credit loss in the event of nonperformance by the counterparties to the forward foreign exchange contracts. However, the Company believes that its exposures are appropriately diversified across counterparties and that these counterparties are creditworthy financial institutions. Please see Note 4 for additional information.

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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
 
FOR THE QUARTERLY PERIOD ENDED AUGUST 28, 2011
 
Other Contingencies
 
Litigation.  There have been no material developments with respect to the information previously reported in the Company’s 2010 Annual Report on Form 10-K related to legal proceedings.
 
In the ordinary course of business, the Company has various pending cases involving contractual matters, employee-related matters, distribution questions, product liability claims, trademark infringement and other matters. The Company does not believe any of these pending legal proceedings will have a material impact on its financial condition or results of operations or cash flows.
 
NOTE 8:   DIVIDEND PAYMENT
 
The Company paid a cash dividend of $20 million in the first quarter of 2011. The Company does not have an annual dividend policy. The Company will continue to review its ability to pay cash dividends at least annually, and dividends may be declared at the discretion of the Company’s Board of Directors depending upon, among other factors, the tax impact to the dividend recipients, the Company’s financial condition and compliance with the terms of its debt agreements.
 
NOTE 9:   COMPREHENSIVE INCOME
 
The following is a summary of the components of total comprehensive income (loss), net of related income taxes:
 
                                 
    Three Months Ended     Nine Months Ended  
    August 28,
    August 29,
    August 28,
    August 29,
 
    2011     2010     2011     2010  
          (Dollars in thousands)        
 
Net income
  $ 31,300     $ 26,622     $ 90,979     $ 64,101  
Other comprehensive income (loss):
                               
Pension and postretirement benefits
    (2,700 )     560       19,150       1,583  
Net investment hedge (losses) gains
    (5,785 )     (9,673 )     (21,245 )     35,170  
Foreign currency translation gains (losses)
    4,943       13,054       27,833       (38,554 )
Unrealized (loss) gain on marketable securities
    (1,038 )     542       (371 )     726  
                                 
Total other comprehensive income (loss)
    (4,580 )     4,483       25,367       (1,075 )
                                 
Comprehensive income
    26,720       31,105       116,346       63,026  
Comprehensive loss attributable to noncontrolling interest
    (431 )     (1,775 )     (2,106 )     (7,237 )
                                 
Comprehensive income attributable to Levi Strauss & Co. 
  $ 27,151     $ 32,880     $ 118,452     $ 70,263  
                                 


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
 
FOR THE QUARTERLY PERIOD ENDED AUGUST 28, 2011
 
The following is a summary of the components of “Accumulated other comprehensive loss,” net of related income taxes:
 
                 
    August 28,
    November 28,
 
    2011     2010  
    (Dollars in thousands)  
 
Pension and postretirement benefits
  $ (179,657 )   $ (198,807 )
Net investment hedge losses
    (47,634 )     (26,389 )
Foreign currency translation losses
    (9,221 )     (37,054 )
Unrealized (loss) gain on marketable securities
    (214 )     157  
                 
Accumulated other comprehensive loss
    (236,726 )     (262,093 )
Accumulated other comprehensive income attributable to noncontrolling interest
    10,829       10,075  
                 
Accumulated other comprehensive loss attributable to Levi Strauss & Co. 
  $ (247,555 )   $ (272,168 )
                 
 
NOTE 10:   OTHER INCOME (EXPENSE), NET
 
The following table summarizes significant components of “Other income (expense), net”:
 
                                 
    Three Months Ended     Nine Months Ended  
    August 28,
    August 29,
    August 28,
    August 29,
 
    2011     2010     2011     2010  
          (Dollars in thousands)        
 
Foreign exchange management gains (losses)(1)
  $ 4,619     $ (6,531 )   $ (1,212 )   $ 4,074  
Foreign currency transaction (losses) gains(2)
    (10,118 )     (1,698 )     (13,412 )     6,505  
Interest income
    477       438       1,296       1,730  
Other
    (757 )     96       584       (847 )
                                 
Total other income (expense), net
  $ (5,779 )   $ (7,695 )   $ (12,744 )   $ 11,462  
                                 
 
 
(1) Gains on forward foreign exchange contracts in the three-month period in 2011 primarily resulted from favorable currency fluctuations relative to negotiated contract rates on positions to buy the Euro and sell the Mexican Peso. Losses in the three-month period in 2010 primarily resulted from unfavorable currency fluctuations relative to negotiated contract rates on positions to sell the Euro, the Swedish Krona and the Australian Dollar.
 
Losses in the nine-month period in 2011 primarily resulted from unfavorable currency fluctuations relative to negotiated contract rates on positions to sell the Swedish Krona and the Australian Dollar, partially offset by a correction recorded in the second quarter of 2011 for embedded foreign currency derivatives in certain of the Company’s leases. Gains in the nine-month period in 2010 were primarily due to the appreciation of the U.S. Dollar against negotiated contract rates on positions on the Euro and the Swedish Krona.
 
(2) Foreign currency transaction losses in 2011 were primarily due to the depreciation of the U.S. Dollar, the Turkish Lira and the Mexican Peso against various currencies. Foreign currency transaction gains in the nine-month period of 2010 were primarily due to the appreciation of the U.S. Dollar against the Euro and Japanese Yen.
 
NOTE 11:   INCOME TAXES
 
The effective income tax rate was 31.8% for the nine months ended August 28, 2011, compared to 59.3% for the same period ended August 29, 2010. The reduction in the effective tax rate as compared to the prior year was primarily caused by two significant discrete income tax charges recognized in the second quarter of 2010, described below, as well as an increase in 2011 of the proportion of earnings in foreign jurisdictions where the Company is subject to lower tax rates.


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
 
FOR THE QUARTERLY PERIOD ENDED AUGUST 28, 2011
 
During the second quarter of 2010, the Company recorded a discrete tax expense of $14.2 million to recognize a valuation allowance to fully offset the amount of deferred tax assets in Japan and another discrete tax expense of $14.0 million to recognize the reduction in deferred tax assets as a result of the enactment of the Patient Protection and Affordable Care Act.
 
As of August 28, 2011, the Company’s total gross amount of unrecognized tax benefits was $148.7 million, of which $88.8 million would impact the effective tax rate, if recognized. As of November 28, 2010, the Company’s total gross amount of unrecognized tax benefits was $150.7 million, of which $87.2 million would have impacted the effective tax rate, if recognized.
 
NOTE 12:   RELATED PARTIES
 
Robert D. Haas, a director and Chairman Emeritus of the Company, is the President of the Levi Strauss Foundation, which is not a consolidated entity of the Company. During the three and nine months ended August 28, 2011, the Company donated $0.3 million and $1.0 million, respectively, to the Levi Strauss Foundation as compared to $0.4 million and $1.0 million, respectively, for the same prior-year periods.
 
Stephen C. Neal, a director and, effective September 1, 2011, Chairman of the Board of Directors, is Chairman of the law firm Cooley LLP. During the nine months ended August 29, 2010, the Company paid fees to Cooley LLP of approximately $0.2 million.
 
NOTE 13:   BUSINESS SEGMENT INFORMATION
 
The Company manages its business according to three regional segments, the Americas, Europe and Asia Pacific, under the leadership of senior executives who report to the chief operating decision maker: the Company’s chief executive officer. The Company’s management, including the chief operating decision maker, manages business operations, evaluates performance and allocates resources based on the regional segments’ net revenues and operating income.
 
In the first quarter of 2011, accountability for certain information technology, human resources, advertising and promotion, and marketing staff costs of a global nature, that in prior years were captured in the Company’s geographic regions, was centralized under corporate management. Beginning in 2011, these costs have been classified as corporate expenses. These costs were not significant to any of the Company’s regional segments individually in any of the periods presented herein, and accordingly business segment information for prior years has not been revised.


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
 
FOR THE QUARTERLY PERIOD ENDED AUGUST 28, 2011
 
Business segment information for the Company is as follows:
 
                                 
    Three Months Ended     Nine Months Ended  
    August 28,
    August 29,
    August 28,
    August 29,
 
    2011     2010     2011     2010  
          (Dollars in thousands)        
 
Net revenues:
                               
Americas
  $ 717,586     $ 673,443     $ 1,908,846     $ 1,776,654  
Europe
    275,127       259,097       867,839       805,350  
Asia Pacific
    211,304       176,465       640,947       538,736  
                                 
Total net revenues
  $ 1,204,017     $ 1,109,005     $ 3,417,632     $ 3,120,740  
                                 
Operating income:
                               
Americas
  $ 111,485     $ 102,934     $ 269,118     $ 263,914  
Europe
    31,316       34,401       140,129       132,384  
Asia Pacific
    26,450       15,340       89,242       62,889  
                                 
Regional operating income
    169,251       152,675       498,489       459,187  
Corporate expenses
    88,352       66,372       253,740       196,411  
                                 
Total operating income
    80,899       86,303       244,749       262,776  
Interest expense
    (30,208 )     (31,734 )     (98,589 )     (100,347 )
Loss on early extinguishment of debt
                      (16,587 )
Other income (expense), net
    (5,779 )     (7,695 )     (12,744 )     11,462  
                                 
Income before income taxes
  $ 44,912     $ 46,874     $ 133,416     $ 157,304  
                                 
 
NOTE 14:   SUBSEQUENT EVENT
 
On September 1, 2011, R. John Anderson retired as the Company’s President and Chief Executive Officer and was succeeded by Charles V. Bergh. Charges of $11.5 million associated with Mr. Anderson’s separation agreement were recorded in the Company’s third quarter financial statements and are included in “Selling, general and administrative expenses” in the Company’s consolidated statements of income. Costs associated with Mr. Bergh’s employment agreement will begin to be recorded in the fourth quarter.


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Item 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Overview
 
We design and market jeans, casual and dress pants, tops, skirts, jackets, footwear and related accessories for men, women and children under our Levi’s®, Dockers®, Signature by Levi Strauss & Co.tm (“Signature”) and Denizentm brands around the world. We also license our trademarks in many countries throughout the world for a wide array of products, including accessories, pants, tops, footwear and other products.
 
Our business is operated through three geographic regions: Americas, Europe and Asia Pacific. Our products are sold in approximately 55,000 retail locations in more than 110 countries. We support our brands through a global infrastructure, developing, sourcing and marketing our products around the world. We distribute our Levi’s® and Dockers® products primarily through chain retailers and department stores in the United States and primarily through department stores, specialty retailers and nearly 1,800 franchised and other brand-dedicated stores outside of the United States. We also distribute our Levi’s® and Dockers® products through the online stores we operate, and 499 company-operated stores located in 31 countries, including the United States. These stores generated approximately 18% of our net revenues in the nine-month period of 2011, as compared to the same period in 2010, when company-operated stores generated 15% of our net revenues. In addition, we distribute our Levi’s® and Dockers® products through online stores operated by certain of our key wholesale customers and other third parties. We distribute products under the Signature brand primarily through mass channel retailers in the United States and Canada and franchised stores in Asia Pacific. We currently distribute our Denizentm products through franchised stores in Asia Pacific and certain wholesale channels in the United States and Mexico.
 
Our Europe and Asia Pacific businesses, collectively, contributed approximately 44% of our net revenues and 46% of our regional operating income in the nine-month period in 2011. Sales of Levi’s® brand products represented approximately 83% of our total net sales in the nine-month period in 2011.
 
Trends Affecting Our Business
 
During the third quarter of 2011, we remained focused on our key long-term strategies: build upon our leadership position in the jean and khaki categories through product and marketing innovation, enhance relationships with wholesale customers and expand our dedicated store network to drive sales growth, capitalize on our global footprint, and increase our productivity.
 
During the quarter, most markets around the world continued to feel the impact of ongoing economic challenges. We expect continued cotton and other input cost pressures for the balance of 2011 and at least the first half of 2012. Our response to these conditions has included product price increases and enhanced support of our supply chain partners to maintain product availability. The conditions within our industry, combined with the challenging consumer environment, may impact our margins, working capital, and sales volumes.
 
Our Third Quarter 2011 Results
 
Our third quarter 2011 results reflect net revenue growth and the effects of the strategic investments we have made in line with our long-term strategies.
 
  •  Net revenues.  Consolidated net revenues increased by 9% compared to the third quarter of 2010, an increase of 4% on a constant-currency basis. Increased net revenues were primarily associated with our Levi’s® brand, through the expansion and performance of our store network globally.
 
  •  Operating income.  Consolidated operating income and operating margin declined compared to the third quarter of 2010, as the benefits from the increase in our net revenues were offset primarily by a lower gross margin, reflecting higher sales discounts and the higher cost of cotton, which our price increases did not fully cover.
 
  •  Cash flows.  Cash flows provided by operating activities were $17 million for the nine-month period in 2011 as compared to $96 million for the same period in 2010, primarily reflecting the increased cost of


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  inventory due primarily to higher cotton prices, our higher operating expenses and higher contribution to our pension plans in 2011.
 
Financial Information Presentation
 
Fiscal year.  Our fiscal year ends on the last Sunday of November in each year, although the fiscal years of certain foreign subsidiaries are fixed at November 30 due to local statutory requirements. Apart from these subsidiaries, each quarter of fiscal years 2011 and 2010 consisted of 13 weeks.
 
Segments.  We manage our business according to three regional segments: the Americas, Europe and Asia Pacific. In the first quarter of 2011, accountability for certain information technology, human resources, advertising and promotion, and marketing staff costs of a global nature, that in prior years were captured in our geographic regions, was centralized under corporate management in conjunction with our key strategy of driving productivity. Beginning in 2011, these costs have been classified as corporate expenses. These costs were not significant to any of our regional segments individually in any of the periods presented herein, and accordingly business segment information for prior years has not been revised.
 
Classification.  Our classification of certain significant revenues and expenses reflects the following:
 
  •  Net sales is primarily comprised of sales of products to wholesale customers, including franchised stores, and direct sales to consumers at our company-operated and online stores and at our company-operated shop-in-shops located within department stores. It includes discounts, allowances for estimated returns and incentives.
 
  •  Licensing revenue consists of royalties earned from the use of our trademarks by third-party licensees in connection with the manufacturing, advertising and distribution of trademarked products.
 
  •  Cost of goods sold is primarily comprised of product costs, labor and related overhead, sourcing costs, inbound freight, internal transfers, and the cost of operating our remaining manufacturing facilities, including the related depreciation expense.
 
  •  Selling costs include, among other things, all occupancy costs and depreciation associated with our company-operated stores and commission payments associated with our company-operated shop-in-shops.
 
  •  We reflect substantially all distribution costs in selling, general and administrative expenses, including costs related to receiving and inspection at distribution centers, warehousing, shipping to our customers, handling, and certain other activities associated with our distribution network.
 
Gross margins may not be comparable to those of other companies in our industry since some companies may include costs related to their distribution network and occupancy costs associated with company-operated stores in cost of goods sold.
 
Constant currency.  Constant-currency comparisons are based on translating local currency amounts in both periods at the foreign exchange rates used in the Company’s internal planning process for the current year. We routinely evaluate our financial performance on a constant-currency basis in order to facilitate period-to-period comparisons without regard to the impact of changing foreign currency exchange rates.


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Results of Operations for Three and Nine Months Ended August 28, 2011, as Compared to Same Periods in 2010
 
The following table summarizes, for the periods indicated, our consolidated statements of income, the changes in these items from period to period and these items expressed as a percentage of net revenues:
 
                                                                                 
    Three Months Ended     Nine Months Ended  
                      August 28,
    August 29,
                      August 28,
    August 29,
 
                %
    2011
    2010
                %
    2011
    2010
 
    August 28,
    August 29,
    Increase
    % of Net
    % of Net
    August 28,
    August 29,
    Increase
    % of Net
    % of Net
 
    2011     2010     (Decrease)     Revenues     Revenues     2011     2010     (Decrease)     Revenues     Revenues  
                            (Dollars in millions)                          
 
Net sales
  $ 1,183.9     $ 1,090.4       8.6 %     98.3 %     98.3 %   $ 3,358.2     $ 3,064.4       9.6 %     98.3 %     98.2 %
Licensing revenue
    20.1       18.6       8.5 %     1.7 %     1.7 %     59.4       56.3       5.6 %     1.7 %     1.8 %
                                                                                 
Net revenues
    1,204.0       1,109.0       8.6 %     100.0 %     100.0 %     3,417.6       3,120.7       9.5 %     100.0 %     100.0 %
Cost of goods sold
    634.6       565.4       12.2 %     52.7 %     51.0 %     1,749.5       1,544.7       13.3 %     51.2 %     49.5 %
                                                                                 
Gross profit
    569.4       543.6       4.8 %     47.3 %     49.0 %     1,668.1       1,576.0       5.8 %     48.8 %     50.5 %
Selling, general and administrative expenses
    488.5       457.3       6.8 %     40.6 %     41.2 %     1,423.4       1,313.2       8.4 %     41.6 %     42.1 %
                                                                                 
Operating income
    80.9       86.3       (6.3 )%     6.7 %     7.8 %     244.7       262.8       (6.9 )%     7.2 %     8.4 %
Interest expense
    (30.2 )     (31.7 )     (4.8 )%     (2.5 )%     (2.9 )%     (98.6 )     (100.3 )     (1.8 )%     (2.9 )%     (3.2 )%
Loss on early extinguishment of debt
                                        (16.6 )     (100.0 )%           (0.5 )%
Other income (expense), net
    (5.8 )     (7.7 )     (24.9 )%     (0.5 )%     (0.7 )%     (12.7 )     11.4       (211.2 )%     (0.4 )%     0.4 %
                                                                                 
Income before income taxes
    44.9       46.9       (4.2 )%     3.7 %     4.2 %     133.4       157.3       (15.2 )%     3.9 %     5.0 %
Income tax expense
    13.6       20.3       (32.8 )%     1.1 %     1.8 %     42.4       93.2       (54.5 )%     1.2 %     3.0 %
                                                                                 
Net income
    31.3       26.6       17.6 %     2.6 %     2.4 %     91.0       64.1       41.9 %     2.7 %     2.1 %
Net loss attributable to noncontrolling interest
    0.9       1.6       (42.6 )%     0.1 %     0.1 %     2.8       6.1       (52.7 )%     0.1 %     0.2 %
                                                                                 
Net income attributable to Levi Strauss & Co. 
  $ 32.2     $ 28.2       14.2 %     2.7 %     2.5 %   $ 93.8     $ 70.2       33.8 %     2.7 %     2.2 %
                                                                                 
 
Net revenues
 
The following table presents net revenues by reporting segment for the periods indicated and the changes in net revenues by reporting segment on both reported and constant-currency bases from period to period.
 
                                                                 
    Three Months Ended     Nine Months Ended  
                % Increase (Decrease)                 % Increase (Decrease)  
    August 28,
    August 29,
    As
    Constant
    August 28,
    August 29,
    As
    Constant
 
    2011     2010     Reported     Currency     2011     2010     Reported     Currency  
                      (Dollars in millions)                    
 
Net revenues:
                                                               
Americas
  $ 717.6     $ 673.4       6.6 %     5.7 %   $ 1,908.9     $ 1,776.6       7.4 %     6.7 %
Europe
    275.1       259.1       6.2 %     (4.1 )%     867.8       805.4       7.8 %     3.7 %
Asia Pacific
    211.3       176.5       19.7 %     11.3 %     640.9       538.7       19.0 %     11.9 %
                                                                 
Total net revenues
  $ 1,204.0     $ 1,109.0       8.6 %     4.2 %   $ 3,417.6     $ 3,120.7       9.5 %     6.8 %
                                                                 
 
Total net revenues increased on both reported and constant-currency bases for the three- and nine-month periods ended August 28, 2011, as compared to the same prior-year periods. Reported amounts were affected favorably by changes in foreign currency exchange rates across all regions.


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Americas.  On both reported and constant-currency bases, net revenues in our Americas region increased for the three- and nine-month periods, with currency affecting net revenues favorably by approximately $5 million and $13 million, respectively.
 
For both periods, the region’s increased net revenues primarily reflected a higher volume of Levi’s® brand sales in our retail stores, most prominently in our outlets, and the U.S. launch of our Denizentm brand products. Levi’s® brand sales in our wholesale channels increased, however the benefit of price increases we have implemented were substantially offset by related volume declines. Both periods also reflected continued declines of net sales from our U.S. Dockers® brand.
 
Europe.  Net revenues in Europe increased on a reported basis but decreased on a constant-currency basis for the three-month period, with currency affecting net revenues favorably by approximately $27 million. For the nine-month period, net revenues increased on both reported and constant-currency bases, with currency affecting net revenues favorably by approximately $32 million.
 
For both periods, net revenues of our company-operated retail network grew, reflecting expansion and improved performance of our stores and the success of our Levi’s® brand women’s products throughout the region. This growth was fully and partially offset during the three- and nine-month periods, respectively, by lower net sales to our wholesale customers, reflecting temporary issues fulfilling customer orders during the implementation and stabilization of our enterprise resource planning system in the region during the third quarter.
 
Asia Pacific.  Net revenues in Asia Pacific increased on both reported and constant-currency bases for the three- and nine-month periods, with currency affecting net revenues favorably by approximately $14 million and $36 million, respectively.
 
The net revenues increase in both periods was primarily from our Levi’s® brand through the continued expansion of our brand-dedicated retail network in China and India as well as other of our emerging markets, partially offset by the continued decline of net revenues in Japan. Sales of our Denizentm brand products were partially offset by corresponding declines in Signature brand sales as we transition the brand in the region.
 
Gross profit
 
The following table shows consolidated gross profit and gross margin for the periods indicated and the changes in these items from period to period:
 
                                                 
    Three Months Ended     Nine Months Ended  
                %
                %
 
    August 28,
    August 29,
    Increase
    August 28,
    August 29,
    Increase
 
    2011     2010     (Decrease)     2011     2010     (Decrease)  
    (Dollars in millions)  
 
Net revenues
  $ 1,204.0     $ 1,109.0       8.6 %   $ 3,417.6     $ 3,120.7       9.5 %
Cost of goods sold
    634.6       565.4       12.2 %     1,749.5       1,544.7       13.3 %
                                                 
Gross profit
  $ 569.4     $ 543.6       4.8 %   $ 1,668.1     $ 1,576.0       5.8 %
                                                 
Gross margin
    47.3 %     49.0 %             48.8 %     50.5 %        
 
As compared to the same prior-year periods, the gross profit increase for the three- and nine-month periods ended August 28, 2011, resulted from the increase in our net revenues and favorable currency impact of approximately $30 million and $52 million, respectively, partially offset by a decline in our gross margin. The gross margin decrease was primarily due to an increase in sales discounts, in both our Levi’s® and Dockers® brands, to drive sales and manage inventory, and the higher cost of cotton, which our price increases did not fully cover. The gross margin decrease was partially offset by the increased revenue contribution from our company-operated retail network, which generally has a higher gross margin than our wholesale business.


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Selling, general and administrative expenses
 
The following table shows our selling, general and administrative (“SG&A”) expenses for the periods indicated, the changes in these items from period to period and these items expressed as a percentage of net revenues:
 
                                                                                 
    Three Months Ended     Nine Months Ended  
                      August 28,
    August 29,
                      August 28,
    August 29,
 
                %
    2011
    2010
                %
    2011
    2010
 
    August 28,
    August 29,
    Increase
    % of Net
    % of Net
    August 28,
    August 29,
    Increase
    % of Net
    % of Net
 
    2011     2010     (Decrease)     Revenues     Revenues     2011     2010     (Decrease)     Revenues     Revenues  
                      (Dollars in millions)                          
 
Selling
  $ 176.0     $ 154.1       14.2 %     14.6 %     13.9 %   $ 525.2     $ 458.0       14.7 %     15.4 %     14.7 %
Advertising and promotion
    78.7       93.0       (15.4 )%     6.5 %     8.4 %     213.2       222.6       (4.3 )%     6.2 %     7.1 %
Administration
    98.7       95.4       3.5 %     8.2 %     8.6 %     306.1       288.9       6.0 %     9.0 %     9.3 %
Other
    135.1       114.8       17.7 %     11.2 %     10.3 %     378.9       343.7       10.2 %     11.1 %     11.0 %
                                                                                 
Total SG&A
  $ 488.5     $ 457.3       6.8 %     40.6 %     41.2 %   $ 1,423.4     $ 1,313.2       8.4 %     41.6 %     42.1 %
                                                                                 
 
Currency contributed approximately $21 million and $36 million of the increase in SG&A expenses for the three- and nine-month periods ended August 28, 2011, respectively, as compared to the same prior-year periods.
 
Selling.  Currency contributed approximately $9 million and $16 million of the increase for the three- and nine-month periods, respectively. Higher selling expenses across all business segments primarily reflected additional costs, such as rents and increased headcount, associated with the support and continued expansion of our company-operated store network. We had 43 more company-operated stores at the end of the third quarter of 2011 than we did at the end of the third quarter of 2010.
 
Advertising and promotion.  For both periods, the decrease in advertising and promotion expenses was attributable to a reduction of our advertising activities in most markets as compared to the prior year.
 
Administration.  Higher administration expenses in both periods included separation benefits related to the retirement of our former chief executive officer, and with respect to the nine-month period, an increase in incentive compensation expense related to higher projected funding. These costs were partially offset by a decline in pension expense primarily as a result of changes to the U.S. pension plans in the second quarter of 2011.
 
Other.  Other SG&A expenses include distribution, information resources, and marketing organization costs. These costs increased primarily due to our investment in global information technology systems, increased marketing project costs related to our strategic initiatives, and currency, which contributed approximately $5 million and $8 million of the increase for the three- and nine-month periods, respectively.


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Operating income
 
The following table shows operating income by reporting segment and corporate expenses for the periods indicated, the changes in these items from period to period and these items expressed as a percentage of net revenues:
 
                                                                                 
    Three Months Ended     Nine Months Ended  
                      August 28,
    August 29,
                      August 28,
    August 29,
 
                %
    2011
    2010
                %
    2011
    2010
 
    August 28,
    August 29,
    Increase
    % of Net
    % of Net
    August 28,
    August 29,
    Increase
    % of Net
    % of Net
 
    2011     2010     (Decrease)     Revenues     Revenues     2011     2010     (Decrease)     Revenues     Revenues  
                            (Dollars in millions)                          
 
Operating income:
                                                                               
Americas
  $ 111.5     $ 102.9       8.3 %     15.5 %     15.3 %   $ 269.1     $ 263.9       2.0 %     14.1 %     14.9 %
Europe
    31.3       34.4       (9.0 )%     11.4 %     13.3 %     140.1       132.4       5.9 %     16.1 %     16.4 %
Asia Pacific
    26.5       15.4       72.4 %     12.5 %     8.7 %     89.3       62.9       41.9 %     13.9 %     11.7 %
                                                                                 
Total regional operating income
    169.3       152.7       10.9 %     14.1 %*     13.8 %*     498.5       459.2       8.6 %     14.6 %*     14.7 %*
Corporate expenses
    88.4       66.4       33.1 %     7.3 %*     6.0 %*     253.8       196.4       29.2 %     7.4 %*     6.3 %*
                                                                                 
Total operating income
  $ 80.9     $ 86.3       (6.3 )%     6.7 %*     7.8 %*   $ 244.7     $ 262.8       (6.9 )%     7.2 %*     8.4 %*
                                                                                 
Operating margin
    6.7 %     7.8 %                             7.2 %     8.4 %                        
 
 
* Percentage of consolidated net revenues
 
Currency favorably affected total operating income by approximately $9 million and $16 million for the three- and nine-month periods, respectively.
 
Regional operating income.
 
  •  Americas.  The increase in operating income in both periods primarily reflected net revenue growth in the region. For the nine-month period, the increase was partially offset by a decrease in operating margin, primarily reflecting the region’s decline in gross margin.
 
  •  Europe.  For the three- and nine-month periods, the operating margin decreased due to the region’s decline in gross margin, the effects of which on operating income were offset partially and fully, respectively, by the favorable impact of currency, and with respect to the nine-month period, the region’s higher net revenues.
 
  •  Asia Pacific.  The increases in operating margin and operating income for the three-month period primarily reflected the region’s lower SG&A expenses; the increases for the nine-month period primarily reflected the region’s improved gross margin and higher net revenues. In both periods, the region benefitted from the favorable impact of currency.
 
Corporate.  Corporate expenses are selling, general and administrative expenses that are not attributed to any of our regional operating segments. Higher corporate expenses in both periods reflected an increase in our investment in global information technology systems and separation benefits related to the retirement of our former chief executive officer, and with respect to the nine-month period, an increase in incentive compensation expense related to higher projected funding. Corporate expenses for the three- and nine-month periods also increased over the same prior-year period due to the classification of certain marketing, advertising and promotion, information technology and human resources costs of a global nature centralized under corporate management beginning in the first quarter of 2011. Such costs totaled approximately $7 million and $20 million, respectively, in our Americas region and were not significant to our Europe and Asia Pacific regions; prior period amounts have not been reclassified. These increases were partially offset by a decline in pension expense primarily as a result of changes to the U.S. pension plans in the second quarter of 2011.


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Interest expense
 
Interest expense decreased to $30.2 million and $98.6 million for the three- and nine-month periods ended August 28, 2011, respectively, from $31.7 million and $100.3 million for the same periods in 2010.
 
The weighted-average interest rate on average borrowings outstanding for the three- and nine-month periods ended August 28, 2011, was 6.74% and 6.81%, respectively, as compared to 6.74% and 7.27%, respectively, for each of the same periods in 2010.
 
Other income (expense), net
 
Other income (expense), net, primarily consists of foreign exchange management activities and transactions. For the three- and nine-month periods ended August 28, 2011, we recorded expense of $5.8 million and $12.7 million, respectively, as compared to expense of $7.7 million and income of $11.5 million, respectively, for the same prior-year periods.
 
The net expense in both periods in 2011 primarily reflected losses on our foreign currency denominated balances. The expense in the three-month period in 2010 primarily reflected losses on foreign exchange derivatives which generally economically hedge future cash flow obligations of our foreign operations. The income in the nine-month period in 2010 primarily reflected gains on our foreign currency denominated balances and foreign exchange derivatives.
 
Income tax expense
 
Our effective income tax rate was 31.8% for the nine months ended August 28, 2011, compared to 59.3% for the same period ended August 29, 2010. The reduction in our effective tax rate was primarily caused by two significant discrete income tax charges recognized in the second quarter of 2010, described below, as well as an increase in 2011 of the proportion of our earnings in foreign jurisdictions where we are subject to lower tax rates.
 
During the second quarter of 2010, we recorded a discrete tax expense of $14.2 million to recognize a valuation allowance to fully offset the amount of deferred tax assets in Japan and another discrete tax expense of $14.0 million to recognize the reduction in deferred tax assets as a result of the enactment of the Patient Protection and Affordable Care Act.
 
Liquidity and Capital Resources
 
Liquidity outlook
 
We believe we will have adequate liquidity over the next twelve months to operate our business and to meet our cash requirements.
 
Cash sources
 
We are a privately-held corporation. We have historically relied primarily on cash flows from operations, borrowings under credit facilities, issuances of notes and other forms of debt financing. We regularly explore financing and debt reduction alternatives, including new credit agreements, unsecured and secured note issuances, equity financing, equipment and real estate financing, securitizations and asset sales. Key sources of cash include earnings from operations and borrowing availability under our revolving credit facility.
 
During the quarter and prior to the below-referenced refinancing, we were borrowers under an amended and restated senior secured revolving credit facility that had a maximum availability of $750 million, secured by certain of our domestic assets and certain U.S. trademarks associated with the Levi’s® brand and other related intellectual property. The facility included a $250 million trademark tranche and a $500 million revolving tranche. As of August 28, 2011, we had borrowings of $70.0 million under the revolving tranche, which was the full amount we borrowed during the quarter, and $108.3 million under the trademark tranche. Unused availability under the revolving tranche was $336.7 million at quarter end, as our total availability of $421.0 million, based on collateral levels as defined by the agreement, was reduced by $84.3 million of other credit-related instruments such as documentary and standby letters of credit allocated under the facility.


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As of August 28, 2011, we had cash and cash equivalents totaling approximately $230.8 million, resulting in a total liquidity position (unused availability and cash and cash equivalents) of $567.5 million.
 
On September 30, 2011, we entered into a new senior secured revolving credit facility. The new facility is an asset-based facility, in which the borrowing availability varies according to the levels of accounts receivable, inventory and cash and investment securities deposited in secured accounts with the administrative agent or other lenders. The maximum availability under the new facility is $850 million, of which $800 million is available to us for revolving loans in U.S. dollars and $50 million is available to us for revolving loans either in U.S. dollars or Canadian dollars. Upon entering into the new facility, we borrowed $215 million and used the proceeds to repay the borrowings outstanding under the previous senior secured revolving credit facility, which we then terminated.
 
Cash uses
 
Our principal cash requirements include working capital, capital expenditures, payments of principal and interest on our debt, payments of taxes, contributions to our pension plans and payments for postretirement health benefit plans, and, if market conditions warrant, occasional investments in, or acquisitions of, business ventures in our line of business. In addition, we regularly evaluate our ability to pay dividends or repurchase stock, all consistent with the terms of our debt agreements.
 
There have been no material changes to our estimated cash requirements for 2011 from those disclosed in our 2010 Annual Report on Form 10-K, except for our projected pension plan contributions. Based on changes in discount rates and the updated valuation of our pension assets, as well as our current evaluation of alternative methods available to us for measuring our pension funding obligation, we now expect our required contribution amount in 2011 to be approximately $70 million.
 
Cash flows
 
The following table summarizes, for the periods indicated, selected items in our consolidated statements of cash flows:
 
                 
    Nine Months Ended  
    August 28,
    August 29,
 
    2011     2010  
    (Dollars in millions)  
 
Cash provided by operating activities
  $ 17.3     $ 95.8  
Cash used for investing activities
    (114.6 )     (127.3 )
Cash provided by financing activities
    52.3       25.3  
Cash and cash equivalents
    230.8       261.2  
 
Cash flows from operating activities
 
Cash provided by operating activities was $17.3 million for the nine-month period in 2011, as compared to $95.8 million for the same period in 2010. Cash provided by operating activities declined compared to the prior year due to higher cash used for inventory, our pension plan contribution in the first quarter of 2011, and higher payments to vendors, reflecting the increase in our SG&A expenses. This decline was partially offset by an increase in customer collections, reflecting our higher net revenues, and a decrease in interest payments as a result of our refinancing activities in May 2010.
 
Cash flows from investing activities
 
Cash used for investing activities was $114.6 million for the nine-month period in 2011, as compared to $127.3 million for the same period in 2010. The decrease in cash used for investing activities as compared to the prior year primarily reflects higher costs in 2010 associated with the remodeling of the Company’s headquarters and the final payment for a 2009 acquisition. This was partially offset by an increase in 2011 in information technology costs associated with the installation of our global enterprise resource planning system.


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Cash flows from financing activities
 
Cash provided by financing activities was $52.3 million for the nine-month period in 2011, compared to $25.3 million for the same period in 2010. Net cash provided in 2011 primarily related to proceeds of $70.0 million borrowed under our senior revolving credit facility. Net cash provided in 2010 reflected our May 2010 refinancing activities.
 
Indebtedness
 
We had fixed-rate debt of approximately $1.5 billion (74% of total debt) and variable-rate debt of approximately $0.5 billion (26% of total debt) as of August 28, 2011. The borrower of substantially all of our debt is Levi Strauss & Co., the parent and U.S. operating company. Required aggregate principal payments on our August 28, 2011, long-term debt, adjusted to reflect the impact of the new credit facility, are $323.9 million in 2014 and the remaining $1.5 billion in years after 2015. Our quarter-end balance of $70.0 million of short-term debt borrowed under our senior secured revolving credit facility is expected to be repaid over the next twelve months; unsecured short-term borrowings of $59.0 million are expected to be either paid over the next twelve months or refinanced at the end of their applicable terms.
 
Our long-term debt agreements contain customary covenants restricting our activities as well as those of our subsidiaries. We are in compliance with all of these covenants.
 
Off-Balance Sheet Arrangements, Guarantees and Other Contingent Obligations
 
There have been no significant changes to our off-balance sheet arrangements or contractual commitments from those disclosed in our 2010 Annual Report on Form 10-K.
 
Critical Accounting Policies and Estimates
 
The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the related notes. There have been no significant changes to our critical accounting policies from those disclosed in our 2010 Annual Report on Form 10-K except for the following:
 
  •  We no longer consider our accounting policy on derivative and foreign exchange management activities to be critical; and
 
  •  We measure changes in the funded status of our pension and postretirement benefits plans using actuarial models which utilize an attribution approach that generally spreads individual events either over the estimated service lives of the remaining employees in the plan, or, for plans where participants will not earn additional benefits by rendering future service, over the plan participants’ estimated remaining lives.
 
Recently Issued Accounting Standards
 
See Note 1 to our unaudited consolidated financial statements included in this report for recently issued accounting standards, including the expected dates of adoption and estimated effects on our consolidated financial statements.
 
FORWARD-LOOKING STATEMENTS
 
Certain matters discussed in this report, including (without limitation) statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contain forward-looking statements. Although we believe that, in making any such statements, our expectations are based on reasonable assumptions, any such statement may be influenced by factors that could cause actual outcomes and results to be materially different from those projected.
 
These forward-looking statements include statements relating to our anticipated financial performance and business prospects and/or statements preceded by, followed by or that include the words “believe”, “anticipate”, “intend”, “estimate”, “expect”, “project”, “could”, “plans”, “seeks” and similar expressions. These forward-


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looking statements speak only as of the date stated and 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, even if experience or future events make it clear that any expected results expressed or implied by these forward-looking statements will not be realized. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these expectations may not prove to be correct or we may not achieve the financial results, savings or other benefits anticipated in the forward-looking statements. These forward-looking statements are necessarily estimates reflecting the best judgment of our senior management and involve a number of risks and uncertainties, some of which may be beyond our control. These risks and uncertainties, including those disclosed under “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended November 28, 2010, and our other filings with the Securities and Exchange Commission, could cause actual results to differ materially from those suggested by the forward-looking statements and include, without limitation:
 
  •  consequences of impacts to the businesses of our wholesale customers caused by factors such as lower consumer spending, pricing changes and general economic conditions and changing consumer preferences;
 
  •  changes in the level of consumer spending for apparel in view of general economic and environmental conditions and pricing trends, and our ability to plan for and respond to the impact of those changes;
 
  •  our ability to mitigate costs related to manufacturing, sourcing, and raw materials supply, such as cotton, and to manage consumer response to such mitigating actions;
 
  •  consequences of the actions we take to support our supply chain partners as a response to the rising costs of manufacturing, sourcing, and raw materials supply;
 
  •  our ability to mitigate the impact of a slowdown in the Japanese economy due to the natural disasters and related events in that country;
 
  •  our adjustment to organizational changes including the continued globalization of our brand management and the introduction of a new chief executive officer;
 
  •  our ability to grow our Dockers® brand and to expand our Denizentm brand into new markets and channels;
 
  •  our and our wholesale customers’ decisions to modify strategies and adjust product mix, and our ability to manage any resulting product transition costs;
 
  •  our ability to gauge and adapt to changing U.S. and international retail environments and fashion trends and changing consumer preferences in product, price-points and shopping experiences;
 
  •  our ability to respond to price, innovation and other competitive pressures in the apparel industry and on our key customers;
 
  •  our ability to increase the number of dedicated stores for our products, including through opening and profitably operating company-operated stores;
 
  •  our effectiveness in increasing productivity and efficiency in our operations;
 
  •  our ability to implement, stabilize and optimize our enterprise resource planning system throughout our business without disruption or to mitigate such disruptions;
 
  •  consequences of foreign currency exchange rate fluctuations;
 
  •  the impact of the variables that affect the net periodic benefit cost and future funding requirements of our postretirement benefits and pension plans;
 
  •  our dependence on key distribution channels, customers and suppliers;
 
  •  our ability to utilize our tax credits and net operating loss carryforwards;
 
  •  ongoing or future litigation matters and disputes and regulatory developments;
 
  •  changes in or application of trade and tax laws; and
 
  •  political, social and economic instability in countries where we do business.


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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.
 
Item 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
There have been no material changes in our primary market risk exposures or how those exposures are managed from the information disclosed in our 2010 Annual Report on Form 10-K.
 
Item 4.   CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
As of August 28, 2011, we updated our evaluation of the effectiveness of the design and operation of our disclosure controls and procedures for purposes of filing reports under the Securities and Exchange Act of 1934 (the “Exchange Act”). This controls evaluation was done under the supervision and with the participation of management, including our chief executive officer and our chief financial officer. Our chief executive officer and our chief financial officer concluded that at August 28, 2011, our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) are effective to provide reasonable assurance that information that we are required to disclose in the reports that we file or submit to the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our disclosure controls and procedures are designed to provide reasonable assurance that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
 
Changes in Internal Controls
 
We maintain a system of internal control over financial reporting that is designed to provide reasonable assurance that our books and records accurately reflect our transactions and that our established policies and procedures are followed. We have been implementing an enterprise resource planning (“ERP”) system on a staged basis in our subsidiaries around the world. We began the implementation of the ERP system in Europe during our last fiscal quarter, and this resulted in a change to our system of internal control over financial reporting.


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PART II — OTHER INFORMATION
 
Item 1.   LEGAL PROCEEDINGS
 
Litigation.  There have been no material developments with respect to the information previously reported in our 2010 Annual Report on Form 10-K related to legal proceedings.
 
In the ordinary course of business, we have various pending cases involving contractual matters, employee-related matters, distribution questions, product liability claims, trademark infringement and other matters. We do not believe any of these pending legal proceedings will have a material impact on our financial condition or results of operations or cash flows.
 
Item 1A.   RISK FACTORS
 
There have been no material changes in our risk factors from those disclosed in our 2010 Annual Report on Form 10-K.
 
Item 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
None.
 
Item 3.   DEFAULTS UPON SENIOR SECURITIES
 
None.
 
Item 4.   REMOVED AND RESERVED
 
Item 5.   OTHER INFORMATION
 
None.
 
Item 6.   EXHIBITS
 
         
  10 .1   Employment Agreement between the Company and Charles V. Bergh, dated June 9, 2011. Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Commission on June 16, 2011.
  10 .2   Transition Services, Separation Agreement and Release of All Claims between John Anderson and the Company, dated June 16, 2011. Incorporated by reference to Exhibit 10.2 to Registrant’s Current Report on Form 8-K filed with the Commission on June 16, 2011.
  31 .1   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
  31 .2   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
  32     Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith.
  101 .INS   XBRL Instance Document. Furnished herewith.
  101 .SCH   XBRL Taxonomy Extension Schema Document. Furnished herewith.
  101 .CAL   XBRL Taxonomy Extension Calculation Linkbase Document. Furnished herewith.
  101 .LAB   XBRL Taxonomy Extension Label Linkbase Document. Furnished herewith.
  101 .PRE   XBRL Taxonomy Extension Presentation Linkbase Document. Furnished herewith.


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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 & Co.
(Registrant)
 
  By: 
/s/  Heidi L. Manes
Heidi L. Manes
Vice President and Controller
(Principal Accounting Officer)
 
Date: October 11, 2011


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EXHIBIT INDEX
 
         
  10 .1   Employment Agreement between the Company and Charles V. Bergh, dated June 9, 2011. Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Commission on June 16, 2011.
  10 .2   Transition Services, Separation Agreement and Release of All Claims between John Anderson and the Company, dated June 16, 2011. Incorporated by reference to Exhibit 10.2 to Registrant’s Current Report on Form 8-K filed with the Commission on June 16, 2011.
  31 .1   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
  31 .2   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
  32     Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith.
  101 .INS   XBRL Instance Document. Furnished herewith.
  101 .SCH   XBRL Taxonomy Extension Schema Document. Furnished herewith.
  101 .CAL   XBRL Taxonomy Extension Calculation Linkbase Document. Furnished herewith.
  101 .LAB   XBRL Taxonomy Extension Label Linkbase Document. Furnished herewith.
  101 .PRE   XBRL Taxonomy Extension Presentation Linkbase Document. Furnished herewith.