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EX-32 - EX-32 - LEVI STRAUSS & COf54732exv32.htm
EX-12 - EX-12 - LEVI STRAUSS & COf54732exv12.htm
EX-21 - EX-21 - LEVI STRAUSS & COf54732exv21.htm
EX-31.2 - EX-31.2 - LEVI STRAUSS & COf54732exv31w2.htm
EX-31.1 - EX-31.1 - LEVI STRAUSS & COf54732exv31w1.htm
Table of Contents

 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
Form 10-K
 
 
 
 
     
(Mark One)    
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
or
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended November 29, 2009
 
Commission file number: 002-90139
 
 
 
 
LEVI STRAUSS & CO.
(Exact Name of Registrant as Specified in Its Charter)
 
 
 
 
     
DELAWARE   94-0905160
(State or Other Jurisdiction of
Incorporation or Organization)
  (I.R.S. Employer
Identification No.)
 
1155 BATTERY STREET, SAN FRANCISCO, CALIFORNIA 94111
(Address of Principal Executive Offices)
 
(415) 501-6000
(Registrant’s telephone number, including area code)
 
 
 
 
 
Securities registered pursuant to Section 12(b) of the Act: None
 
Securities registered pursuant to Section 12(g) of the Act: None
 
 
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes þ     No o
 
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 o     No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions 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 — 37,300,215 shares outstanding on February 4, 2010
 
Documents incorporated by reference: None
 


 

 
LEVI STRAUSS & CO.
 
TABLE OF CONTENTS TO FORM 10-K
 
FOR FISCAL YEAR ENDING NOVEMBER 29, 2009
 
                 
        Page
 
      Business     3  
      Risk Factors     10  
      Unresolved Staff Comments     19  
      Properties     19  
      Legal Proceedings     20  
      Submission of Matters to a Vote of Security Holders     20  
 
      Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     21  
      Selected Financial Data     22  
      Management’s Discussion and Analysis of Financial Condition and Results of Operations     23  
      Quantitative and Qualitative Disclosures About Market Risk     44  
      Financial Statements and Supplementary Data     47  
      Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     97  
      Controls and Procedures     97  
      Other Information     97  
 
      Directors and Executive Officers     98  
      Executive Compensation     101  
      Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     122  
      Certain Relationships and Related Transactions, and Director Independence     124  
      Principal Accounting Fees and Services     125  
 
      Exhibits, Financial Statement Schedules     126  
    130  
    132  
 EX-12
 EX-21
 EX-31.1
 EX-31.2
 EX-32


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PART I
 
Item 1.   BUSINESS
 
Overview
 
From our California Gold Rush beginnings, we have grown into one of the world’s largest brand-name apparel companies. A history of responsible business practices, rooted in our core values, has helped us build our brands and engender consumer trust around the world. Under our brand names, we design and market products that include jeans and jeans-related pants, casual and dress pants, tops, jackets, footwear, and related accessories for men, women and children. We also license our trademarks for a wide array of products, including accessories, pants, tops, footwear, home and other products.
 
An Authentic American Icon
 
Our Levi’s® brand has become one of the most widely recognized brands in the history of the apparel industry. Its broad distribution reflects the brand’s appeal across consumers of all ages and lifestyles. Its merchandising and marketing reflect the brand’s core attributes: original, definitive, honest, confident and youthful.
 
Our Dockers® brand was at the forefront of the business casual trend in the United States. It has since grown to be a global brand covering a wide range of wearing occasions for men and women with products rooted in the brand’s heritage of the essential khaki pant. We also bring style, authenticity and quality to value-seeking jeanswear consumers through our Signature by Levi Strauss & Co.tm brand.
 
Our Global Reach
 
We operate our business through three geographic regions: Americas, Europe and Asia Pacific. Each of our regions includes established markets, which we refer to as mature markets, such as the United States, Japan, and Western Europe, and developing markets, such as India, China, Brazil and Russia. Although our brands are recognized as authentically “American,” we derive approximately half of our net revenues from outside the United States. A summary of financial information for each geographical region, which comprise our three reporting segments, is found in Note 20 to our audited consolidated financial statements included in this report.
 
Our products are sold in approximately 55,000 retail locations in more than 110 countries. This includes approximately 1,900 retail stores dedicated to our brands, including both franchised and company-operated stores.
 
We support our brands through a global infrastructure, both 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 franchised stores outside of the United States. We also operate our own brand-dedicated retail network in all three regions. We distribute Signature by Levi Strauss & Co.tm brand products primarily through mass channel retailers in the United States and Canada and mass and other value-oriented retailers and franchised stores in Asia Pacific.
 
Levi Strauss & Co. was founded in San Francisco, California, in 1853 and incorporated in Delaware in 1971. We conduct our operations outside the United States through foreign subsidiaries owned directly or indirectly by Levi Strauss & Co. We manage our regional operations through headquarters in San Francisco, Brussels and Singapore. Our corporate offices are located at Levi’s Plaza, 1155 Battery Street, San Francisco, California 94111, and our main telephone number is (415) 501-6000.
 
Our common stock is primarily owned by descendants of the family of Levi Strauss and their relatives.
 
Our Website — www.levistrauss.com — contains additional and detailed information about our history, our products and our commitments. Financial news and reports and related information about our company can be found at http://www.levistrauss.com/Financials. Our Website and the information contained on our Website are not part of this annual report and are not incorporated by reference into this annual report.


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Our Business Strategies
 
Our management team is actively investing in strategies to grow our business, respond to marketplace dynamics and build on our competitive strengths. Our key strategies are:
 
  •  Build upon our brands’ leadership in jeans and khakis.  We intend to build upon our brand equity and our design and marketing expertise to expand the reach and appeal of our brands globally. We believe that our insights, innovation and market responsiveness enable us to create trend-right and trend-leading products and marketing programs that appeal to our existing consumer base, while also providing a solid foundation to enhance our appeal to under-served consumer segments such as women’s. We also seek to further extend our brands’ leadership in jeans and khakis into product and pricing categories that we believe offer attractive opportunities for growth.
 
  •  Diversify and transform our wholesale business.  We intend to develop new wholesale opportunities based on targeted consumer segments and seek to continue to strengthen our relationship with existing wholesale customers. We are focused on generating competitive economics and engaging in collaborative volume, inventory and marketing planning to achieve mutual commercial success with our customers. Our goal is to be central to our wholesale customers’ success by using our brands and our strengths in product development and marketing to drive consumer traffic and demand to their stores.
 
  •  Accelerate growth through dedicated retail stores.  We continue to strategically expand our dedicated store presence around the world. We believe dedicated full-price and outlet stores represent an attractive opportunity to establish incremental distribution and sales as well as to showcase the full breadth of our product offerings and to enhance our brands’ appeal. We aim to provide a compelling and brand-elevating consumer experience in our dedicated retail stores.
 
  •  Drive productivity to enable investment in initiatives intended to deliver sustained, incremental growth.  We are focused on deriving greater efficiencies in our operations by increasing cost effectiveness across our regions and support functions and undertaking projects to transform our supply chain and information systems. We intend to invest the benefits of these efforts into our businesses to drive growth and to continue to build sustainability and social responsibility into all aspects of our operations, including our global sourcing arrangements.
 
  •  Capitalize upon our global footprint.  Our global footprint is a key factor in the success of the above strategies. We intend to leverage our expansive global presence and local-market talent to drive growth globally and will focus on those markets that offer us the best opportunities for profitable growth, including an emphasis on fast-growing developing markets and their emerging middle-class consumers. We aim to identify global consumer trends, adapt successes from one market to another and drive growth across our brand portfolio, balancing the power of our global reach with local-market insight.
 
Our Brands and Products
 
We offer a broad range of products, including jeans, casual and dress pants, tops, skirts, jackets, footwear and related accessories. Across all of our brands, pants — including jeans, casual pants and dress pants — represented approximately 85%, 85% and 86% of our total units sold in each of fiscal years 2009, 2008 and 2007, respectively. Men’s products generated approximately 73%, 75% and 72% of our total net sales in each of fiscal years 2009, 2008 and 2007, respectively.
 
Levi’s® Brand
 
The Levi’s® brand epitomizes classic American style and effortless cool and is positioned as the original and definitive jeans brand. Since their inception in 1873, Levi’s® jeans have become one of the most recognizable garments in the world — reflecting the aspirations and earning the loyalty of people for generations. Consumers around the world instantly recognize the distinctive traits of Levi’s® jeans — the double arc of stitching, known as the Arcuate Stitching Design, and the red Tab Device, a fabric tab stitched into the back right pocket. Today, the Levi’s® brand continues to evolve, driven by its distinctive pioneering and innovative spirit. Our range of leading


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jeanswear and accessories for men, women and children is available in more than 110 countries, allowing individuals around the world to express their personal style.
 
The current Levi’s® product range includes:
 
  •  Levi’s® Red Tabtm Products.  These products are the foundation of the brand. They encompass a wide range of jeans and jeanswear offered in a variety of fits, fabrics, finishes, styles and price points intended to appeal to a broad spectrum of consumers. The line is anchored by the flagship 501® jean, the original and best-selling five-pocket jean in history. The Red Tabtm line also incorporates a full range of jeanswear fits and styles designed specifically for women. Sales of Red Tabtm products represented the majority of our Levi’s® brand net sales in all three of our regions in fiscal years 2009, 2008 and 2007.
 
  •  Premium Products.  In addition to Levi’s® Red Tabtm premium products available around the world, we offer an expanded range of high-end products. In 2009, we consolidated the management of our most premium Levi’s® jeanswear product lines under a new division based in Amsterdam. This division will oversee the marketing and development of two global product lines: our existing Levi’s® Vintage Clothing line, which showcases our most premium products by offering detailed replicas of our historical products, and Levi’s® Made & Crafted, a recently-launched line of premium apparel.
 
Our Levi’s® brand products accounted for approximately 79%, 76% and 73% of our total net sales in fiscal 2009, 2008 and 2007, respectively, approximately half of which were generated in our Americas region.
 
Dockers® Brand
 
First introduced in 1986 as an alternative between jeans and dress pants, the Dockers® brand is positioned as the khaki authority and aspires to be the world’s best and most-loved khakis. The Dockers® brand offers a full range of products rooted in the brand’s khaki heritage and appropriate for a wide-range of wearing occasions. We seek to renew the appeal of the casual pant category by dialing up khakis’ masculinity and swagger and reminding men what they love about the essential khaki pant. This positioning is reflected in the “Wear the Pants” campaign launched globally in December 2009. The brand also offers a complete range of khaki-inspired styles for women with products designed to flatter her figure and provide versatility for a wide range of wearing occasions.
 
Our Dockers® brand products accounted for approximately 16%, 18% and 21% of our total net sales in fiscal 2009, 2008 and 2007, respectively. Although the substantial majority of these net sales were in the Americas region, Dockers® brand products are sold in more than 50 countries.
 
Signature by Levi Strauss & Co.tm Brand
 
We seek to extend the style, authenticity and quality for which our company is recognized to more value-conscious consumers through our Signature by Levi Strauss & Co.tm brand. We offer products under this brand name through the mass retail channel in the United States and Canada and value-oriented retailers and franchised stores in Asia Pacific. We use these distribution channels to reach consumers who seek access to high-quality, affordable and fashionable jeanswear from a company they trust. The product portfolio includes denim jeans, casual pants, tops and jackets in a variety of fits, fabrics and finishes for men, women and kids.
 
Signature by Levi Strauss & Co.tm brand products accounted for approximately 5%, 6% and 6% of our total net sales in fiscal years 2009, 2008 and 2007, respectively. Although a substantial majority of these sales were in the United States, Signature by Levi Strauss & Co.tm brand products are sold in seven additional countries in our Americas and Asia Pacific regions.
 
Licensing
 
The appeal of our brands across consumer groups and our global reach enable us to license our Levi’s®, Dockers® and Signature by Levi Strauss & Co.tm trademarks for a variety of product categories in multiple markets including footwear, belts, wallets and bags, outerwear, eyewear, sweaters, dress shirts, kidswear, loungewear and sleepwear, hosiery and luggage.


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We have licensees for our Levi’s® and Dockers® brands in each of our regions and for our Signature by Levi Strauss & Co.tm brand in the Americas region. In addition, we enter into agreements with third parties to produce, market and distribute our products in several countries around the world, including various Latin American, Middle Eastern and Asia Pacific countries.
 
We enter into licensing agreements with our licensees covering royalty payments, product design and manufacturing standards, marketing and sale of licensed products, and protection of our trademarks. We require our licensees to comply with our code of conduct for contract manufacturing and engage independent monitors to perform regular on-site inspections and assessments of production facilities.
 
Sales, Distribution and Customers
 
We distribute our products through a wide variety of retail formats around the world, including chain and department stores, franchise stores dedicated to our brands, our own company-operated retail network, multi-brand specialty stores, mass channel retailers, and both company-operated and retailer websites.
 
Multi-brand Retailers
 
We seek to make our brands and products available where consumers shop, including offering products and assortments that are appropriately tailored for our wholesale customers and their retail consumers. Our products are also sold through authorized third-party Internet sites. Sales to our top ten wholesale customers accounted for approximately 36%, 37% and 42% of our total net revenues in fiscal years 2009, 2008 and 2007, respectively. No customer represented 10% or more of net revenues in any of these years, although our largest customer in 2009, Kohl’s Corporation, accounted for nearly 10% of net revenues in 2009, and our largest customer in 2008, J.C. Penney Company, Inc., accounted for nearly 8% of net revenues in 2008. The loss of one of these or any major customer could have a material adverse effect on one of our segments or on us and our subsidiaries as a whole.
 
Dedicated Stores
 
We believe retail stores dedicated to our brands are important for the growth, visibility, availability and commercial success of our brands, and they are an increasingly important part of our strategy for expanding distribution of our products in all three of our regions. Our brand-dedicated stores are either operated by us or by independent third parties such as franchisees and licensees. In addition to the dedicated stores, we maintain brand-dedicated websites that sell products directly to retail consumers.
 
Company-operated retail stores.  Our online stores and company-operated stores, including both full-price and outlet stores, generated approximately 11%, 8% and 6% of our net revenues in fiscal 2009, 2008 and 2007, respectively. As of November 29, 2009, we had 414 company-operated stores, predominantly Levi’s® stores, located in 26 countries across our three regions. We had 176 stores in the Americas, 153 stores in Europe and 85 stores in Asia Pacific. During 2009, we added 180 company-operated stores and closed 26 stores. These store counts reflect the impact of our acquisition of 73 U.S. Levi’s® and Dockers® outlets during the third quarter of 2009.
 
Franchised and other stores.  Franchised, licensed, or other forms of brand-dedicated stores operated by independent third parties sell Levi’s®, Dockers® and Signature by Levi Strauss & Co.tm products in markets outside the United States. There were approximately 1,500 of these stores as of November 29, 2009, and they are a key element of our international distribution. In addition to these stores, we consider our network of dedicated shop-in-shops located within department stores, which may be either operated directly by us or third parties, to be an important component of our retail distribution in international markets. Approximately 200 dedicated shop-in-shops were operated directly by us as of November 29, 2009.
 
Seasonality of Sales
 
We typically achieve our largest quarterly revenues in the fourth quarter, reflecting the “holiday” season, generally followed by the third quarter, reflecting the Fall or “back to school” season. In 2009, our net revenues in the first, second, third and fourth quarters represented 23%, 22%, 25% and 30%, respectively, of our total net


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revenues for the year. In 2008, our net revenues in the first, second, third and fourth quarters represented 25%, 21%, 25% and 29%, respectively, of our total net revenues for the 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 2009, 2008 and 2007 consisted of 13 weeks, with the exception of the fourth quarter of 2008, which consisted of 14 weeks.
 
Marketing and Promotion
 
We support our brands with a diverse mix of marketing initiatives to drive consumer demand.
 
We advertise around the world through a broad mix of media, including television, national publications, the Internet, cinema, billboards and other outdoor vehicles. We use other marketing vehicles, including event and music sponsorships, product placement in major motion pictures, television shows, music videos and leading fashion magazines, and alternative marketing techniques, including street-level events and similar targeted “viral” marketing activities.
 
We root our brand messages in globally consistent brand values that reflect the unique attributes of our brands: the Levi’s® brand as the original and definitive jeans brand and the Dockers® brand as world’s best and most loved khaki. We then tailor these programs to local markets in order to maximize relevance and effectiveness.
 
We also maintain the Websites www.levi.com and www.dockers.com which sell products directly to consumers in the United States and other countries. We operate these Websites, as well as www.levistrausssignature.com, as marketing vehicles to enhance consumer understanding of our brands and help consumers find and buy our products. This is consistent with our strategies of ensuring that our brands and products are available where consumers shop and that our product offerings and assortments are appropriately differentiated.
 
Sourcing and Logistics
 
Organization.  Our global sourcing and regional logistics organizations are responsible for taking a product from the design concept stage through production to delivery to our customers. Our objective is to leverage our global scale to achieve product development and sourcing efficiencies and reduce total delivered product cost across brands and regions while maintaining our focus on local service levels and working capital management.
 
Product procurement.  We source nearly all of our products through independent contract manufacturers, with the remainder sourced from our company-operated manufacturing and finishing plants, including facilities for our innovation and development efforts that provide us with the opportunity to develop new jean styles and finishes to distinguish our products from that of our competitors. See “Item 2 — Properties” for more information about those manufacturing facilities.
 
Sources and availability of raw materials.  The principal fabrics used in our business are cotton, blends, synthetics and wools. The prices we pay our suppliers for our products are dependent in part on the market price for raw materials — primarily cotton — used to produce them. The price and availability of cotton may fluctuate substantially, depending on a variety of factors, which might cause a decrease of our profitability or could impair our ability to meet our production requirements in a timely manner.
 
Sourcing locations.  We use numerous independent manufacturers located throughout the world for the production and finishing of our garments. We conduct assessments of political, social, economic, trade, labor and intellectual property protection conditions in the countries in which we source our products before we place production in those countries and on an ongoing basis.
 
In 2009, we sourced products from contractors located in approximately 45 countries around the world. We sourced products in North and South Asia, South and Central America (including Mexico and the Caribbean), Europe and Africa. We expect to increase our sourcing from contractors located in Asia. No single country accounted for more than 20% of our sourcing in 2009.


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Sourcing practices.  Our sourcing practices include these elements:
 
  •  We require all third-party contractors and subcontractors who manufacture or finish products for us to comply with our code of conduct relating to supplier working conditions as well as environmental and employment practices. We also require our licensees to ensure that their manufacturers comply with our requirements.
 
  •  Our code of conduct covers employment practices such as wages and benefits, working hours, health and safety, working age and discriminatory practices, environmental matters such as wastewater treatment and solid waste disposal, and ethical and legal conduct.
 
  •  We regularly assess manufacturing and finishing facilities through periodic on-site facility inspections and improvement activities, including use of independent monitors to supplement our internal staff. We integrate review and performance results into our sourcing decisions.
 
We disclose the names and locations of our contract manufacturers to encourage collaboration among apparel companies in factory monitoring and improvement. We regularly evaluate and refine our code of conduct processes.
 
Logistics.  We own and operate dedicated distribution centers in a number of countries. For more information, see “Item 2 — Properties.” Distribution center activities include receiving finished goods from our contractors and plants, inspecting those products, preparing them for presentation at retail, and shipping them to our customers and to our own stores. Our distribution centers maintain a combination of replenishment and seasonal inventory from which we ship to our stores and wholesale customers. In certain locations around the globe we have consolidated our distribution centers to service multiple countries and brands. Our inventory significantly builds during peaks in seasonal shipping periods. We are constantly monitoring our inventory levels and adjusting them as necessary to meet market demand. In addition, we outsource some of our logistics activities to third-party logistics providers.
 
Competition
 
The worldwide apparel industry is highly competitive and fragmented. It is characterized by low barriers to entry, brands targeted at specific consumer segments, many regional and local competitors, and an increasing number of global competitors. Principal competitive factors include:
 
  •  developing products with relevant fits, finishes, fabrics, style and performance features;
 
  •  maintaining favorable brand recognition and appeal through strong and effective marketing;
 
  •  anticipating and responding to changing consumer demands in a timely manner;
 
  •  providing sufficient retail distribution, visibility and availability, and presenting products effectively at retail;
 
  •  delivering compelling value for the price; and
 
  •  generating competitive economics for wholesale customers, including retailers, franchisees, and distributors.
 
We face competition from a broad range of competitors at the worldwide, regional and local levels in diverse channels across a wide range of retail price points. Worldwide, a few of our primary competitors include vertically integrated specialty stores operated by such companies such as Gap Inc. and Inditex; jeanswear brands such as those marketed by VF Corporation, a competitor in multiple channels and product lines; and athletic wear companies such as adidas Group and Nike, Inc. In addition, each region faces local or regional competition, such as G-Star and Diesel in Europe; Pepe in Spain; Brax in Germany; UNIQLO in Asia Pacific; Edwin in Japan; Apple/Texwood in China; and retailers’ private or exclusive labels such as those from Wal-Mart Stores, Inc. (Faded Glory brand); Target Corporation (Mossimo and Merona brands); JC Penney (Arizona brand) and Macy’s (INC. brand) in the Americas. For more information on the factors affecting our competitive position, see “Item 1A — Risk Factors.”


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Trademarks
 
We have more than 5,000 trademark registrations and pending applications in approximately 180 countries worldwide, and we create new trademarks on an ongoing basis. Substantially all of our global trademarks are owned by Levi Strauss & Co., the parent and U.S. operating company. We regard our trademarks as our most valuable assets and believe they have substantial value in the marketing of our products. The Levi’s®, Dockers® and 501® trademarks, the Arcuate Stitching Design, the Tab Device, the Two Horse® Design and the Wings and Anchor Design are among our core trademarks.
 
We protect these trademarks by registering them with the U.S. Patent and Trademark Office and with governmental agencies in other countries, particularly where our products are manufactured or sold. We work vigorously to enforce and protect our trademark rights by engaging in regular market reviews, helping local law enforcement authorities detect and prosecute counterfeiters, issuing cease-and-desist letters against third parties infringing or denigrating our trademarks, opposing registration of infringing trademarks, and initiating litigation as necessary. We currently are pursuing approximately 427 infringement matters around the world. We also work with trade groups and industry participants seeking to strengthen laws relating to the protection of intellectual property rights in markets around the world.
 
Employees
 
As of November 29, 2009, we employed approximately 11,800 people, approximately 5,400 of whom were located in the Americas, 4,200 in Europe, and 2,200 in Asia Pacific. Approximately 3,000 of our employees were associated with manufacturing of our products, 3,600 worked in retail, 1,500 worked in distribution and 3,700 were other non-production employees.
 
History and Corporate Citizenship
 
Our history and longevity are unique in the apparel industry. Our commitment to quality, innovation and corporate citizenship began with our founder, Levi Strauss, who infused the business with the principle of responsible commercial success that has been embedded in our business practices throughout our more than 150-year history. This mixture of history, quality, innovation and corporate citizenship contributes to the iconic reputations of our brands.
 
In 1853, during the California Gold Rush, Mr. Strauss opened a wholesale dry goods business in San Francisco that became known as “Levi Strauss & Co.” Seeing a need for work pants that could hold up under rough conditions, he and Jacob Davis, a tailor, created the first jean. In 1873, they received a U.S. patent for “waist overalls” with metal rivets at points of strain. The first product line designated by the lot number “501” was created in 1890.
 
In the 19th and early 20th centuries, our work pants were worn primarily by cowboys, miners and other working men in the western United States. Then, in 1934, we introduced our first jeans for women, and after World War II, our jeans began to appeal to a wider market. By the 1960s they had become a symbol of American culture, representing a unique blend of history and youth. We opened our export and international businesses in the 1950s and 1960s. In 1986, we introduced the Dockers® brand of casual apparel which revolutionized the concept of business casual.
 
Throughout this long history, we upheld our strong belief that we can help shape society through civic engagement and community involvement, responsible labor and workplace practices, philanthropy, ethical conduct, environmental stewardship and transparency. We have engaged in a “profits through principles” business approach from the earliest years of the business. Among our milestone initiatives over the years, we integrated our factories two decades prior to the U.S. civil rights movement and federally mandated desegregation, we developed a comprehensive supplier code of conduct requiring safe and healthy working conditions among our suppliers (a first of its kind for a multinational apparel company), and we offered full medical benefits to domestic partners of employees prior to other companies of our size, a practice that is widely accepted today.
 
Our Website — www.levistrauss.com — contains additional and detailed information about our history and corporate citizenship initiatives. Our Website and the information contained on our Website are not part of this annual report and are not incorporated by reference into this annual report.


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Item 1A.   RISK FACTORS
 
Risks Relating to the Industry in Which We Compete
 
Our revenues are influenced by general economic conditions.
 
Apparel is a cyclical industry that is dependent upon the overall level of consumer spending. Our wholesale customers anticipate and respond to adverse changes in economic conditions and uncertainty by reducing inventories and canceling orders. Our brand-dedicated stores are also affected by these conditions which may lead to a decline in consumer traffic to and spending in these stores. As a result, factors that diminish consumer spending and confidence in any of the regions in which we compete, particularly deterioration in general economic conditions, high levels and fear of unemployment, increases in energy costs or interest rates, housing market downturns, fear about and impact of pandemic illness, and other factors such as acts of war, acts of nature or terrorist or political events that impact consumer confidence, could reduce our sales and adversely affect our business and financial condition through their impact on our wholesale customers as well as its direct impact on us. For example, the global financial economic downturn that began in 2008 has impacted consumer confidence and spending negatively. In this economic environment we saw several wholesale customers declare bankruptcy or otherwise exhibit signs of distress, and even if the economy rebounds we do not anticipate that our wholesale customers will return to carrying the levels of inventory in our products as that prior to the downturn. These outcomes and behaviors have and may continue to adversely affect our business and financial condition.
 
Intense competition in the worldwide apparel industry could lead to reduced sales and prices.
 
We face a variety of competitive challenges from jeanswear and casual apparel marketers, fashion-oriented apparel marketers, athletic and sportswear marketers, vertically integrated specialty stores, and retailers of private-label products. Some of these competitors have greater financial and marketing resources than we do and may be able to adapt to changes in consumer preferences or retail requirements more quickly, devote greater resources to the building and sustaining of their brand equity and the marketing and sale of their products, or adopt more aggressive pricing policies than we can. As a result, we may not be able to compete as effectively with them and may not be able to maintain or grow the equity of and demand for our brands. Increased competition in the worldwide apparel industry — including from international expansion of vertically integrated specialty stores, from department stores, chain stores and mass channel retailers developing exclusive labels, and from well-known and successful non-apparel brands (such as athletic wear marketers) expanding into jeans and casual apparel — could reduce our sales and adversely affect our business and financial condition.
 
The success of our business depends upon our ability to offer innovative and upgraded products at attractive price points.
 
The worldwide apparel industry is characterized by constant product innovation due to changing fashion trends and consumer preferences and by the rapid replication of new products by competitors. As a result, our success depends in large part on our ability to develop, market and deliver innovative and stylish products at a pace, intensity, and price competitive with other brands in our segments. We must also have the agility to respond to changes in consumer preference such as the consumer shift in Japan away from premium-priced brands to lower-priced fast-fashion products. In addition, we must create products at a range of price points that appeal to the consumers of both our wholesale customers and our dedicated retail stores. Failure on our part to regularly and rapidly develop innovative and stylish products and update core products could limit sales growth, adversely affect retail and consumer acceptance of our products, negatively impact the consumer traffic in our dedicated retail stores, leave us with a substantial amount of unsold inventory which we may be forced to sell at discounted prices, and impair the image of our brands. Moreover, our newer products may not produce as high a gross margin as our traditional products and thus may have an adverse effect on our overall margins and profitability.
 
The worldwide apparel industry is subject to ongoing pricing pressure.
 
The apparel market is characterized by low barriers to entry for both suppliers and marketers, global sourcing through suppliers located throughout the world, trade liberalization, continuing movement of product sourcing to


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lower cost countries, and the ongoing emergence of new competitors with widely varying strategies and resources. These factors contribute to ongoing pricing pressure throughout the supply chain. This pressure has had and may continue to have the following effects:
 
  •  require us to introduce lower-priced products or provide new or enhanced products at the same prices;
 
  •  require us to reduce wholesale prices on existing products;
 
  •  result in reduced gross margins across our product lines;
 
  •  increase retailer demands for allowances, incentives and other forms of economic support; and
 
  •  increase pressure on us to reduce our production costs and our operating expenses.
 
Any of these factors could adversely affect our business and financial condition.
 
Increases in the price of raw materials or their reduced availability could increase our cost of goods and decrease our profitability.
 
The principal fabrics used in our business are cotton, blends, synthetics and wools. The prices we pay our suppliers for our products are dependent in part on the market price for raw materials — primarily cotton — used to produce them. The price and availability of cotton may fluctuate substantially, depending on a variety of factors, including demand, crop yields, weather, supply conditions, transportation costs, energy prices, work stoppages, government regulation, economic climates and other unpredictable factors. Any and all of these factors may be exacerbated by global climate change. Fluctuations in the price and availability of raw materials have not materially affected our cost of goods in recent years. However, increases in raw material costs, together with other factors, might cause a decrease of our profitability unless we are able to pass higher prices on to our customers. Moreover, any decrease in the availability of cotton could impair our ability to meet our production requirements in a timely manner.
 
Our business is subject to risks associated with sourcing and manufacturing overseas.
 
We import finished garments and raw materials into all of our operating regions. Our ability to import products in a timely and cost-effective manner may be affected by conditions at ports or issues that otherwise affect transportation and warehousing providers, such as port and shipping capacity, labor disputes and work stoppages, political unrest, severe weather, or homeland security requirements in the United States and other countries. These issues could delay importation of products or require us to locate alternative ports or warehousing providers to avoid disruption to our customers. These alternatives may not be available on short notice or could result in higher transit costs, which could have an adverse impact on our business and financial condition.
 
Substantially all of our import operations are subject to customs and tax requirements and to tariffs and quotas set by governments through mutual agreements or bilateral actions. In addition, the countries in which our products are manufactured or imported may from time to time impose additional quotas, duties, tariffs or other restrictions on our imports or adversely modify existing restrictions. Adverse changes in these import costs and restrictions, or our suppliers’ failure to comply with customs regulations or similar laws, could harm our business.
 
Our operations are also subject to the effects of international trade agreements and regulations such as the North American Free Trade Agreement, the Dominican-Republic Central America Free Trade Agreement, the Egypt Qualified Industrial Zone program, and the activities and regulations of the World Trade Organization. Although generally these trade agreements have positive effects on trade liberalization, sourcing flexibility and cost of goods by reducing or eliminating the duties and/or quotas assessed on products manufactured in a particular country, trade agreements can also impose requirements that adversely affect our business, such as setting quotas on products that may be imported from a particular country into our key markets such as the United States or the European Union.


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Risks Relating to Our Business
 
Our net sales have not grown substantially for more than ten years, and actions we have taken, and may take in the future, to address these and other issues facing our business may not be successful over the long term.
 
Our net sales have declined from a peak of $7.1 billion in 1996 to $4.1 billion in 2003, with no growth through our fiscal year 2009. We face intense competition, customer financial hardship and consolidation, increased focus by retailers on private-label offerings, expansion of and growth in new distribution sales channels, declining sales of traditional core products and continuing pressure on both wholesale and retail pricing. Our ability to successfully compete could be impaired by our debt and interest payments, which reduces our operating flexibility and could limit our ability to respond to developments in the worldwide apparel industry as effectively as competitors that do not have comparable debt levels. In addition, the strategic, operations and management changes we have made in recent years, including in 2009 and that we will continue to make in 2010 and beyond, to improve our business and drive future sales growth may not be successful over the long term.
 
We depend on a group of key customers for a significant portion of our revenues. A significant adverse change in a customer relationship or in a customer’s performance or financial position could harm our business and financial condition.
 
Net sales to our ten largest customers totaled approximately 36% and 37% of total net revenues in 2009 and 2008, respectively. Our largest customer in 2009, Kohl’s Corporation, accounted for nearly 10% of net revenues in 2009, and our largest customer in 2008, J.C. Penney Company, Inc., accounted for nearly 8% of net revenues in 2008. While we have long-standing relationships with our wholesale customers, we do not have long-term contracts with them. As a result, purchases generally occur on an order-by-order basis, and the relationship, as well as particular orders, can generally be terminated by either party at any time. If any major customer decreases or ceases its purchases from us, reduces the floor space, assortments, fixtures or advertising for our products or changes its manner of doing business with us for any reason, such actions could adversely affect our business and financial condition.
 
For example, our wholesale customers are subject to the fluctuations in general economic cycles and the current global economic conditions which are impacting consumer spending, and our customers may also be affected by the credit environment, which may impact their ability to access the credit necessary to operate their business. The performance and financial condition of a wholesale customer may cause us to alter our business terms or to cease doing business with that customer, which could in turn adversely affect our own business and financial condition. In addition, our wholesale customers may change their apparel strategies or reduce fixture spaces and purchases of brands that do not meet their strategic requirements, leading to a loss of sales for our products at those customers.
 
In addition, the retail industry in the United States has experienced substantial consolidation in recent years, and further consolidation may occur. Consolidation in the retail industry typically results in store closures, centralized purchasing decisions, increased customer leverage over suppliers, greater exposure for suppliers to credit risk and an increased emphasis by retailers on inventory management and productivity, any of which can, and have, adversely impacted our net revenues, margins and ability to operate efficiently.
 
We may be unable to maintain or increase our sales through our primary distribution channels.
 
In the United States, chain stores and department stores are the primary distribution channels for our Levi’s® and Dockers® products, and the mass channel is the primary distribution channel for Signature products. Outside the United States, department stores, independent jeanswear retailers and national jeans chains have traditionally been our primary distribution channels.


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We may be unable to maintain or increase sales of our products through these distribution channels for several reasons, including the following:
 
  •  The retailers in these channels maintain — and seek to grow — substantial private-label and exclusive offerings as they strive to differentiate the brands and products they offer from those of their competitors.
 
  •  These retailers may also change their apparel strategies and reduce fixture spaces and purchases of brands misaligned with their strategic requirements.
 
  •  Other channels, including vertically integrated specialty stores, account for a substantial portion of jeanswear and casual wear sales. In some of our mature markets, these stores have already placed competitive pressure on our primary distribution channels, and many of these stores are now looking to our developing markets to grow their business.
 
Further success by retailer private-labels and vertically integrated specialty stores may continue to adversely affect the sales of our products across all channels, as well as the profitability of our brand-dedicated stores. Additionally, our ability to secure or maintain retail floor space, market share and sales in these channels depends on our ability to offer differentiated products and to increase retailer profitability on our products, which could have an adverse impact on our margins.
 
Our inability to revitalize our business in certain markets or product lines could harm our financial results.
 
Given the global reach and nature of our business and the breadth of our product lines, we may experience business declines in certain markets even while experiencing growth in others. For example, recent declines in certain mature markets in our Europe and Asia Pacific regions impact our overall business performance despite growth in other areas such as developing markets and our retail network, and the cumulative effect of these declines could adversely affect our results of operations. Although we have taken, and continue to take, product, marketing, distribution and organizational actions to reverse such declines, if our actions are not successful on a sustained basis, our results of operations and our ability to grow may be adversely affected.
 
During the past several years, we have experienced significant changes in senior management and our board. The success of our business depends on our ability to attract and retain qualified and effective senior management and board leadership.
 
Collective or individual changes in our senior management group or board membership could have an adverse effect on our ability to determine and implement our strategies, which in turn may adversely affect our business and results of operations. Recent changes in our senior management team include Aaron Boey, who became our Senior Vice President and President, Levi Strauss Asia Pacific on February 19, 2009, Blake Jorgensen, who became our Executive Vice President and Chief Financial Officer on July 1, 2009, and Jaime Cohen Szulc, who became our Senior Vice President and Chief Marketing Officer — Levi’s® on August 31, 2009. In addition, T. Gary Rogers, the Chairman of our Board of Directors, retired from our Board in December 2009, and Richard Kauffman subsequently became Chairman of the Board. Martin Coles joined our Board in February 2009 and resigned on January 11, 2010.
 
Increasing the number of company-operated stores will require us to enhance our capabilities and increase our expenditures and will increasingly impact our financial performance.
 
Although our business is substantially a wholesale business, we operated 414 retail stores as of November 29, 2009. As part of our objective to accelerate growth though dedicated retail stores, we plan to continue to strategically open company-operated retail stores, while taking into consideration the changing economic environment. The results from our retail network may be adversely impacted if we do not find ways to generate sufficient sales from our existing and new company-operated stores, which may be particularly challenging in light of the recent and ongoing global economic downturn. Like other retail operators, we regularly assess store performance and as part of that review we may determine to close or impair the value of underperforming stores in the future.


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Any increase in the number of company-operated stores will require us to further develop our retailing skills and capabilities. We will be required to enter into additional leases, which will cause an increase in our rental expenses and off-balance sheet rental obligations and our capital expenditures for retail locations. These commitments may be costly to terminate, and these investments may be difficult to recapture if we decide to close stores or change our strategy. We must also offer a broad product assortment (especially women’s and tops), appropriately manage retail inventory levels, install and operate effective retail systems, execute effective pricing strategies, and integrate our stores into our overall business mix. Finally, we will need to hire and train additional qualified employees and incur additional costs to operate these stores, which will increase our operating expenses. These factors, including those relating to securing retail space and management talent, are even more challenging considering that many of our competitors either have large company-operated retail operations today or are seeking to expand substantially their retail presence. If the actions we are taking to expand our retail network are not successful on a sustained basis, our margins, results of operations and ability to grow may be adversely affected.
 
We must successfully maintain and/or upgrade our information technology systems.
 
We rely on various information technology systems to manage our operations. We are currently implementing modifications and upgrades to our systems, including making changes to legacy systems, replacing legacy systems with successor systems with new functionality and acquiring new systems with new functionality. These types of activities subject us to inherent costs and risks associated with replacing and changing these systems, including impairment of our ability to fulfill customer orders, potential disruption of our internal control structure, substantial capital expenditures, additional administration and operating expenses, retention of sufficiently skilled personnel to implement and operate the new systems, demands on management time, and other risks and costs of delays or difficulties in transitioning to new systems or of integrating new systems into our current systems. Our system implementations may not result in productivity improvements at a level that outweighs the costs of implementation, or at all. In addition, the implementation of new technology systems may cause disruptions in our business operations and have an adverse effect on our business and operations, if not anticipated and appropriately mitigated.
 
We rely on contract manufacturing of our products. Our inability to secure production sources meeting our quality, cost, working conditions and other requirements, or failures by our contractors to perform, could harm our sales, service levels and reputation.
 
We source approximately 95% of our products from independent contract manufacturers who purchase fabric and make our products and may also provide us with design and development services. As a result, we must locate and secure production capacity. We depend on independent manufacturers to maintain adequate financial resources, including access to sufficient credit, secure a sufficient supply of raw materials, and maintain sufficient development and manufacturing capacity in an environment characterized by continuing cost pressure and demands for product innovation and speed-to-market. In addition, we do not have material long-term contracts with any of our independent manufacturers, and these manufacturers generally may unilaterally terminate their relationship with us at any time. Finally, we may experience capability-building and infrastructure challenges as we expand our sourcing to new contractors throughout the world.
 
Our suppliers are subject to the fluctuations in general economic cycles, and the global economic conditions may impact their ability to operate their business. The performance and financial condition of a supplier may cause us to alter our business terms or to cease doing business with that supplier, which could in turn adversely affect our own business and financial condition.
 
Our dependence on contract manufacturing could subject us to difficulty in obtaining timely delivery of products of acceptable quality. A contractor’s failure to ship products to us in a timely manner or to meet our quality standards, or interference with our ability to receive shipments due to factors such as port or transportation conditions, could cause us to miss the delivery date requirements of our customers. Failing to make timely deliveries may cause our customers to cancel orders, refuse to accept deliveries, impose non-compliance charges, demand reduced prices, or reduce future orders, any of which could harm our sales and margins.
 
We require contractors to meet our standards in terms of working conditions, environmental protection, security and other matters before we are willing to place business with them. As such, we may not be able to obtain


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the lowest-cost production. In addition, the labor and business practices of apparel manufacturers have received increased attention from the media, non-governmental organizations, consumers and governmental agencies in recent years. Any failure by our independent manufacturers to adhere to labor or other laws or appropriate labor or business practices, and the potential litigation, negative publicity and political pressure relating to any of these events, could harm our business and reputation.
 
We are a global company with nearly half our revenues coming from our Europe and Asia Pacific businesses, which exposes us to political and economic risks as well as the impact of foreign currency fluctuations.
 
We generated approximately 43%, 44% and 41% of our net revenues from our Europe and Asia Pacific businesses in 2009, 2008 and 2007, respectively. A substantial amount of our products came from sources outside of the country of distribution. As a result, we are subject to the risks of doing business outside of the United States, including:
 
  •  currency fluctuations, which have impacted our results of operations significantly in recent years;
 
  •  changes in tariffs and taxes;
 
  •  regulatory restrictions on repatriating foreign funds back to the United States;
 
  •  less protective foreign laws relating to intellectual property; and
 
  •  political, economic and social instability.
 
The functional currency for most of our foreign operations is the applicable local currency. As a result, fluctuations in foreign currency exchange rates affect the results of our operations and the value of our foreign assets and liabilities, including debt, which in turn may benefit or adversely affect reported earnings and cash flows and the comparability of period-to-period results of operations. In addition, we engage in hedging activities to manage our foreign currency exposures resulting from certain product sourcing activities, some intercompany sales, foreign subsidiaries’ royalty payments, earnings repatriations, net investment in foreign operations and funding activities. However, our earnings may be subject to volatility since we do not fully hedge our foreign currency exposures and we are required to record in income the changes in the market values of our exposure management instruments that we do not designate or that do not qualify for hedge accounting treatment. Changes in the value of the relevant currencies may affect the cost of certain items required in our operations as the majority of our sourcing activities are conducted in U.S. Dollars. Changes in currency exchange rates may also affect the relative prices at which we and foreign competitors sell products in the same market. Foreign policies and actions regarding currency valuation could result in actions by the United States and other countries to offset the effects of such fluctuations. Recently, there has been a high level of volatility in foreign currency exchange rates and that level of volatility may continue and thus adversely impact our business or financial conditions.
 
Furthermore, due to our global operations, we are subject to numerous domestic and foreign laws and regulations affecting our business, such as those related to labor, employment, worker health and safety, antitrust and competition, environmental protection, consumer protection, import/export, and anti-corruption, including but not limited to the Foreign Corrupt Practices Act which prohibits giving anything of value intended to influence the awarding of government contracts. Although we have put into place policies and procedures aimed at ensuring legal and regulatory compliance, our employees, subcontractors and agents could take actions that violate these requirements. Violations of these regulations could subject us to criminal or civil enforcement actions, any of which could have a material adverse effect on our business.
 
As a global company, we are exposed to risks of doing business in foreign jurisdictions and risks relating to U.S. policy with respect to companies doing business in foreign jurisdictions. For example, on May 4, 2009, President Obama’s administration announced several proposals to reform U.S. tax laws, including a proposal to further limit foreign tax credits as compared to current law and a proposal to defer tax deductions allocable to non-U.S. earnings until the earnings are repatriated. At this time it is not known whether these proposed tax reforms will be enacted or, if enacted, what the scope of the reforms will be. The proposed legislation or other changes in the U.S. tax laws could increase our U.S. income tax liability and adversely affect our after-tax profitability.


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We have made changes in our logistics operations in recent years and continue to look for opportunities to increase efficiencies.
 
We have closed several of our distribution centers in recent years and continually work to identify additional opportunities to optimize our distribution network. Changes in logistics and distribution activities could result in temporary shipping disruptions and increased expense as we bring new arrangements to full operation, which could have an adverse effect on our results of operations.
 
Most of the employees in our production and distribution facilities are covered by collective bargaining agreements, and any material job actions could negatively affect our results of operations.
 
In North America, most of our distribution employees are covered by various collective bargaining agreements, and outside North America, most of our production and distribution employees are covered by either industry-sponsored and/or state-sponsored collective bargaining mechanisms. Any work stoppages or other job actions by these employees could harm our business and reputation.
 
Our licensees may not comply with our product quality, manufacturing standards, marketing and other requirements.
 
We license our trademarks to third parties for manufacturing, marketing and distribution of various products. While we enter into comprehensive agreements with our licensees covering product design, product quality, sourcing, manufacturing, marketing and other requirements, our licensees may not comply fully with those agreements. Non-compliance could include marketing products under our brand names that do not meet our quality and other requirements or engaging in manufacturing practices that do not meet our supplier code of conduct. These activities could harm our brand equity, our reputation and our business.
 
Our success depends on the continued protection of our trademarks and other proprietary intellectual property rights.
 
Our trademarks and other intellectual property rights are important to our success and competitive position, and the loss of or inability to enforce trademark and other proprietary intellectual property rights could harm our business. We devote substantial resources to the establishment and protection of our trademark and other proprietary intellectual property rights on a worldwide basis. Our efforts to establish and protect our trademark and other proprietary intellectual property rights may not be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products. Unauthorized copying of our products or unauthorized use of our trademarks or other proprietary rights may not only erode sales of our products but may also cause significant damage to our brand names and our ability to effectively represent ourselves to our customers, contractors, suppliers and/or licensees. Moreover, others may seek to assert rights in, or ownership of, our trademarks and other proprietary intellectual property, and we may not be able to successfully resolve those claims. In addition, the laws and enforcement mechanisms of some foreign countries may not allow us to protect our proprietary rights to the same extent as we are able to in the United States and other countries.
 
We have substantial liabilities and cash requirements associated with postretirement benefits, pension and our deferred compensation plans.
 
Our postretirement benefits, pension, and our deferred compensation plans result in substantial liabilities on our balance sheet. These plans and activities have and will generate substantial cash requirements for us, and these requirements may increase beyond our expectations in future years based on changing market conditions. The difference between plan obligations and assets, or the funded status of the plans, is a significant factor in determining the net periodic benefit costs of our pension plans and the ongoing funding requirements of those plans. Many variables, such as changes in interest rates, mortality rates, health care costs, early retirement rates, investment returns, and/or the market value of plan assets can affect the funded status of our defined benefit pension, other postretirement, and postemployment benefit plans and cause volatility in the net periodic benefit cost and future funding requirements of the plans. Our pension expense increased by more than $30 million in 2009 as a result of the decline in the value of our pension plan assets in 2008. Additionally, our current estimates indicate our


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future annual funding requirements may increase to as much as $140 million in 2011. While actual results may differ from these estimates, the increased pension expense and related funding may extend into future years if current market conditions persist. Plan liabilities may impair our liquidity, have an unfavorable impact on our ability to obtain financing and place us at a competitive disadvantage compared to some of our competitors who do not have such liabilities and cash requirements.
 
Earthquakes or other events outside of our control may damage our facilities or the facilities of third parties on which we depend.
 
Our corporate headquarters are located in California near major geologic faults that have experienced earthquakes in the past. An earthquake or other natural disaster or the loss of power caused by power shortages could disrupt operations or impair critical systems. Any of these disruptions or other events outside of our control could affect our business negatively, harming our operating results. In addition, if any of our other facilities, including our manufacturing, finishing or distribution facilities or our company-operated or franchised stores, or the facilities of our suppliers or customers, is affected by earthquakes, power shortages, floods, monsoons, terrorism, epidemics or other events outside of our control, our business could suffer.
 
We are required to evaluate our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act. Failure to comply with the requirements of Section 404 or any adverse results from such evaluation could result in a loss of investor confidence in our financial reports and have an adverse effect on the credit ratings and trading price of our debt securities.
 
We are not currently an “accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended. As required by Section 404 of the Sarbanes-Oxley Act of 2002, we have provided an internal control report with this Annual Report, which includes management’s assessment of the effectiveness of our internal control over financial reporting as of the end of the fiscal year. Beginning with our Annual Report for the year ending November 28, 2010, our independent registered public accounting firm will also be required to issue a report on their evaluation of the effectiveness of our internal control over financial reporting. Our assessment requires us to make subjective judgments and our independent registered public accounting firm may not agree with our assessment. If we or our independent registered public accounting firm were unable to conclude that our internal control over financial reporting was effective as of the relevant period, investors could lose confidence in our reported financial information, which could have an adverse effect on the trading price of our debt securities, negatively affect our credit rating, and affect our ability to borrow funds on favorable terms.
 
Risks Relating to Our Debt
 
We have debt and interest payment requirements at a level that may restrict our future operations.
 
As of November 29, 2009, we had approximately $1.9 billion of debt, of which all but approximately $108 million was unsecured, and we had $243.9 million of additional borrowing capacity under our senior secured revolving credit facility. Our next debt maturity occurs in 2012. Our debt requires us to dedicate a substantial portion of any cash flow from operations to the payment of interest and principal due under our debt, which will reduce funds available for other business purposes, and result in us having lower net income than we would otherwise have had. It could also have important adverse consequences to holders of our securities. Our ability to successfully compete could be impaired by our debt and interest expense; for example, our debt and interest levels could:
 
  •  increase our vulnerability to general adverse economic and industry conditions;
 
  •  limit our flexibility in planning for or reacting to changes in our business and industry;
 
  •  place us at a competitive disadvantage compared to some of our competitors that have less debt; and
 
  •  limit our ability to obtain additional financing required to fund working capital and capital expenditures and for other general corporate purposes.


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In addition, borrowings under our senior secured revolving credit facility and our unsecured term loan bear interest at variable rates of interest. As a result, increases in market interest rates would require a greater portion of our cash flow to be used to pay interest, which could further hinder our operations and affect the trading price of our debt securities. Our ability to satisfy our obligations and to reduce our total debt depends on our future operating performance and on economic, financial, competitive and other factors, many of which are beyond our control.
 
The downturn in the economy and the volatility in the capital markets could limit our ability to access capital or could increase our costs of capital.
 
We experienced a dramatic downturn in the U.S. and global economy and disruption in the credit markets, which began in 2008 and extended through 2009. Although we have had continued solid operating cash flow, any subsequent downturn and or disruption in the credit markets may reduce sources of liquidity available to us. We can provide no assurance that we will continue to meet our capital requirements from our cash resources, future cash flow and external sources of financing, particularly if current market or economic conditions continue or deteriorate further. We manage cash and cash equivalents in various institutions at levels beyond FDIC coverage limits, and we purchase investments not guaranteed by the FDIC. Accordingly, there may be a risk that we will not recover the full principal of our investments or that their liquidity may be diminished. We rely on multiple financial institutions to provide funding pursuant to existing credit agreements, and those institutions may not be able to meet their obligations to provide funding in a timely manner, or at all, when we require it. The cost of or lack of available credit could impact our ability to develop sufficient liquidity to maintain or grow our business, which in turn may adversely affect our business and results of operations.
 
Restrictions in our notes indentures, unsecured term loan and senior secured revolving credit facility may limit our activities, including dividend payments, share repurchases and acquisitions.
 
The indentures relating to our senior unsecured notes, our Euro notes, our Yen-denominated Eurobonds, our unsecured term loan and our senior secured revolving credit facility contain restrictions, including covenants limiting our ability to incur additional debt, grant liens, make acquisitions and other investments, prepay specified debt, consolidate, merge or acquire other businesses, sell assets, pay dividends and other distributions, repurchase stock, and enter into transactions with affiliates. These restrictions, in combination with our leveraged condition, may make it more difficult for us to successfully execute our business strategy, grow our business or compete with companies not similarly restricted.
 
If our foreign subsidiaries are unable to distribute cash to us when needed, we may be unable to satisfy our obligations under our debt securities, which could force us to sell assets or use cash that we were planning to use elsewhere in our business.
 
We conduct our international operations through foreign subsidiaries, and therefore we depend upon funds from our foreign subsidiaries for a portion of the funds necessary to meet our debt service obligations. We only receive the cash that remains after our foreign subsidiaries satisfy their obligations. Any agreements our foreign subsidiaries enter into with other parties, as well as applicable laws and regulations limiting the right and ability of non-U.S. subsidiaries and affiliates to pay dividends and remit cash to affiliated companies, may restrict the ability of our foreign subsidiaries to pay dividends or make other distributions to us. If those subsidiaries are unable to pass on the amount of cash that we need, we will be unable to make payments on our debt obligations, which could force us to sell assets or use cash that we were planning on using elsewhere in our business, which could hinder our operations and affect the trading price of our debt securities.
 
Our approach to corporate governance may lead us to take actions that conflict with our creditors’ interests as holders of our debt securities.
 
All of our common stock is owned by a voting trust described under “Item 12 — Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.” Four voting trustees have the exclusive ability to elect and remove directors, amend our by-laws and take other actions which would normally be within the power of stockholders of a Delaware corporation. The voting trust agreement gives certain powers to the holders of two-thirds of the outstanding voting trust certificates, such as the power to remove trustees and terminate


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the voting trust. The ownership of two-thirds of the outstanding voting trust certificates is concentrated in the hands of a small group of holders (including three of the four voting trustees), providing the group the voting power to block stockholder action on matters for which the holders of the voting trust certificates are entitled to vote and direct the trustees under the voting trust agreement.
 
Our principal stockholders created the voting trust in part to ensure that we would continue to operate in a socially responsible manner while seeking the greatest long-term benefit for our stockholders, employees and other stakeholders and constituencies. As a result, we cannot assure that the voting trustees will cause us to be operated and managed in a manner that benefits our creditors or that the interests of the voting trustees or our principal equity holders will not diverge from our creditors.
 
Item 1B.   UNRESOLVED STAFF COMMENTS
 
Not applicable.
 
Item 2.   PROPERTIES
 
We conduct manufacturing, distribution and administrative activities in owned and leased facilities. We operate three manufacturing-related facilities abroad and nine distribution-only centers around the world. We have renewal rights for most of our property leases. We anticipate that we will be able to extend these leases on terms satisfactory to us or, if necessary, locate substitute facilities on acceptable terms. We believe our facilities and equipment are in good condition and are suitable for our needs. Information about our key operating properties in use as of November 29, 2009, is summarized in the following table:
 
         
Location
 
Primary Use
  Leased/Owned
 
Americas
       
Hebron, KY
  Distribution   Owned
Canton, MS
  Distribution   Owned
Henderson, NV
  Distribution   Owned
Westlake, TX
  Data Center   Leased
Etobicoke, Canada
  Distribution   Owned
Naucalpan, Mexico
  Distribution   Leased
Europe
       
Plock, Poland
  Manufacturing and Finishing   Leased(1)
Northhampton, U.K
  Distribution   Owned
Sabadell, Spain
  Distribution   Leased
Corlu, Turkey
  Manufacturing, Finishing and Distribution   Owned
Asia Pacific
       
Adelaide, Australia
  Distribution   Leased
Cape Town, South Africa
  Manufacturing, Finishing and Distribution   Leased
Hiratsuka Kanagawa, Japan
  Distribution   Owned(2)
 
 
(1) Building and improvements are owned but subject to a ground lease.
 
(2) Owned by our 84%-owned Japanese subsidiary.
 
Our global headquarters and the headquarters of our Americas region are both located in leased premises in San Francisco, California. Our Europe and Asia Pacific headquarters are located in leased premises in Brussels, Belgium and Singapore, respectively. As of November 29, 2009, we also leased or owned 102 administrative and sales offices in 41 countries, as well as leased a small number of warehouses in three countries. We own or lease several facilities that are no longer in operation that we are working to sell or sublease.
 
In addition, as of November 29, 2009, we had 414 company-operated retail and outlet stores in leased premises in 26 countries. We had 176 stores in the Americas region, 153 stores in the Europe region and 85 stores in the Asia Pacific region.


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Item 3.   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 there are any of these pending legal proceedings that will have a material impact on our financial condition, results of operations or cash flows.
 
Item 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
No matters were submitted to a vote of our security holders during the fourth quarter of the fiscal year ended November 29, 2009.


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PART II
 
Item 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
All outstanding shares of our common stock are deposited in a voting trust, a legal arrangement that transfers the voting power of the shares to a trustee or group of trustees. The four voting trustees are Miriam L. Haas, Peter E. Haas Jr., Robert D. Haas and Stephen C. Neal, three of whom are also directors. The voting trustees have the exclusive ability to elect and remove directors, amend our by-laws and take certain other actions which would normally be within the power of stockholders of a Delaware corporation. Our equity holders, who, as a result of the voting trust, legally hold “voting trust certificates,” not stock, retain the right to direct the trustees on specified mergers and business combinations, liquidations, sales of substantially all of our assets and specified amendments to our certificate of incorporation.
 
The expiration date of the voting trust is April 15, 2011, unless the trustees unanimously decide, or holders of at least two-thirds of the outstanding voting trust certificates decide, to terminate it earlier. If Robert D. Haas ceases to be a trustee for any reason, then the question of whether to continue the voting trust will be decided by the holders. The existing trustees will select the successors to the other trustees. The agreement among the stockholders and the trustees creating the voting trust contemplates that, in selecting successor trustees, the trustees will attempt to select individuals who share a common vision with the sponsors of the 1996 recapitalization transaction that gave rise to the voting trust, represent and reflect the financial and other interests of the equity holders and bring a balance of perspectives to the trustee group as a whole. A trustee may be removed if the other three trustees unanimously vote for removal or if holders of at least two-thirds of the outstanding voting trust certificates vote for removal.
 
Our common stock and the voting trust certificates are not publicly held or traded. All shares and the voting trust certificates are subject to a stockholders’ agreement. The agreement, which expires in April 2016, limits the transfer of shares and certificates to other holders, family members, specified charities and foundations and back to the Company. The agreement does not provide for registration rights or other contractual devices for forcing a public sale of shares or certificates, or other access to liquidity. The scheduled expiration date of the stockholders’ agreement is five years later than that of the voting trust agreement in order to permit an orderly transition from effective control by the voting trust trustees to direct control by the stockholders.
 
As of February 1, 2010, there were 199 record holders of voting trust certificates. Our shares are not registered on any national securities exchange, there is no established public trading market for our shares and none of our shares are convertible into shares of any other class of stock or other securities.
 
We paid cash dividends of $20 million and $50 million on our common stock on May 6, 2009 and April 16, 2008, respectively. Please see Note 15 to our audited consolidated financial statements included in this report for more information. The Company will continue to review its ability to pay cash dividends at least annually, and dividends may be declared at the discretion of our board of directors and depending upon, among other factors, our financial condition and if the Company is in compliance with the terms of our debt agreements. Our senior secured revolving credit facility and the indentures governing our senior unsecured notes limit our ability to pay dividends. For more detailed information about these limitations, see Note 6 to our audited consolidated financial statements included in this report.
 
We did not repurchase any of our common stock during the fourth quarter of the fiscal year ended November 29, 2009.


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Item 6.   SELECTED FINANCIAL DATA
 
The following table sets forth our selected historical consolidated financial data which are derived from our consolidated financial statements that have been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, for 2009, 2008 and 2007, and KPMG LLP, an independent registered public accounting firm, for 2006 and 2005. The financial data set forth below should be read in conjunction with, and are qualified by reference to, “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our consolidated financial statements for 2009, 2008 and 2007 and the related notes to those consolidated financial statements, included elsewhere in this report.
 
                                         
    Year Ended
    Year Ended
    Year Ended
    Year Ended
    Year Ended
 
    November 29,
    November 30,
    November 25,
    November 26,
    November 27,
 
    2009     2008     2007     2006     2005  
    (Dollars in thousands)  
 
Statements of Income Data:
                                       
Net sales
  $ 4,022,854     $ 4,303,075     $ 4,266,108     $ 4,106,572     $ 4,150,931  
Licensing revenue
    82,912       97,839       94,821       86,375       73,879  
                                         
Net revenues
    4,105,766       4,400,914       4,360,929       4,192,947       4,224,810  
Cost of goods sold
    2,132,361       2,261,112       2,318,883       2,216,562       2,236,962  
                                         
Gross profit
    1,973,405       2,139,802       2,042,046       1,976,385       1,987,848  
Selling, general and administrative expenses
    1,590,093       1,606,482       1,386,547       1,348,577       1,381,955  
Restructuring charges, net
    5,224       8,248       14,458       14,149       16,633  
                                         
Operating income
    378,088       525,072       641,041       613,659       589,260  
Interest expense
    (148,718 )     (154,086 )     (215,715 )     (250,637 )     (263,650 )
Loss on early extinguishment of debt
          (1,417 )     (63,838 )     (40,278 )     (66,066 )
Other income (expense), net
    (38,282 )     (1,400 )     14,138       22,418       23,057  
                                         
Income before taxes
    191,088       368,169       375,626       345,162       282,601  
Income tax expense (benefit)(1)
    39,213       138,884       (84,759 )     106,159       126,654  
                                         
Net income
  $ 151,875     $ 229,285     $ 460,385     $ 239,003     $ 155,947  
                                         
Statements of Cash Flow Data:
                                       
Net cash flow provided by (used for):
                                       
Operating activities
  $ 388,783     $ 224,809     $ 302,271     $ 261,880     $ (43,777 )
Investing activities(2)
    (233,029 )     (26,815 )     (107,277 )     (69,597 )     (34,657 )
Financing activities(3)
    (97,155 )     (135,460 )     (325,534 )     (155,228 )     23,072  
Balance Sheet Data:
                                       
Cash and cash equivalents
  $ 270,804     $ 210,812     $ 155,914     $ 279,501     $ 239,584  
Working capital
    778,888       713,644       647,256       805,976       657,374  
Total assets
    2,989,381       2,776,875       2,850,666       2,804,065       2,804,134  
Total debt, excluding capital leases
    1,852,900       1,853,207       1,960,406       2,217,412       2,326,699  
Total capital leases
    7,365       7,806       8,177       4,694       5,587  
Stockholders’ deficit(4)
    (333,119 )     (349,517 )     (398,029 )     (994,047 )     (1,222,085 )
Other Financial Data:
                                       
Depreciation and amortization
  $ 84,603     $ 77,983     $ 67,514     $ 62,249     $ 59,423  
Capital expenditures
    82,938       80,350       92,519       77,080       41,868  
Dividends paid(5)
    20,001       49,953                    
 
 
(1) In the fourth quarter of 2007, as a result of improvements in business performance and recent positive developments in an ongoing IRS examination, we reversed valuation allowances against our deferred tax assets for foreign tax credit carryforwards, as we believed that it was more likely than not that these credits will be utilized prior to their expiration.
 
(2) Cash used for investing activities in 2009 reflects business acquisitions in our Americas and Europe regions. For more information, see Note 3 to our audited consolidated financial statements included in this report.
 
(3) Cash used for financing activities in 2007 reflects our refinancing actions, including the redemption of all of our floating rate notes due 2012 as well as the repurchase of over 95% of our outstanding 12.25% senior notes due 2012. For more information, see Note 6 to our audited consolidated financial statements included in this report.
 
(4) Stockholders’ deficit primarily resulted from a 1996 recapitalization transaction in which our stockholders created new long-term governance arrangements for us, including the voting trust and stockholders’ agreement. Funding for cash payments in the recapitalization was provided in part by cash on hand and in part from approximately $3.3 billion in borrowings under bank credit facilities.
 
(5) We will continue to review our ability to pay cash dividends at least annually, and we may elect to declare and pay cash dividends in the future at the discretion of our board of directors and depending upon, among other factors, our financial condition and compliance with the terms of our debt agreements.


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Item 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Overview
 
Our Company
 
We design and market jeans, casual and dress pants, tops, jackets, footwear and related accessories for men, women and children under our Levi’s®, Dockers® and Signature by Levi Strauss & Co.tm (“Signature”) 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, home 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, both 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 franchised stores outside of the United States. We also distribute our Levi’s® and Dockers® products through our online stores, and 414 company-operated stores located in 26 countries, including the United States. These stores generated approximately 11% of our net revenues in 2009. We distribute products under the Signature brand primarily through mass channel retailers in the United States and Canada and mass and other value-oriented retailers and franchised stores in Asia Pacific.
 
We derived 43% of our net revenues and 42% of our regional operating income from our Europe and Asia Pacific businesses in 2009. Sales of Levi’s® brand products represented approximately 79% of our total net sales in 2009. Pants, including jeans, casual pants and dress pants, represented approximately 85% of our total units sold in 2009, and men’s products generated approximately 73% of our total net sales.
 
Trends Affecting our Business
 
We believe the key business and marketplace factors affecting us include the following:
 
  •  Continuing pressures in the U.S. and global economy related to the global economic downturn, access to credit, volatility in investment returns, real estate market and employment concerns, and other similar elements that impact consumer discretionary spending, are creating a challenging retail environment for us and our customers. We and our customers are responding by adjusting business practices such as tightly managing inventories.
 
  •  Wholesaler/retailer dynamics are changing as the wholesale channels continue to consolidate and many of our wholesale customers face slowed growth prospects. As a result, many of our customers are building competitive exclusive or private-label offerings and desire increased returns on investment through increased margins and inventory turns. In response, many apparel wholesalers, including us, seek to strengthen relationships with customers through efforts such as investment in new products, marketing programs, fixtures and collaborative planning systems.
 
  •  Many apparel companies, including us, that have traditionally relied on wholesale distribution channels continue to invest in expanding their own retail store distribution network, which has raised competitiveness in the retail market. We have increased our investment in our retail network, and will continue to do so, which while benefiting revenue and gross profit, will likely increase selling expense and capital expenditures.
 
  •  Apparel markets have matured in certain geographic locations such as the United States, Japan, Western Europe and Canada, due in part to demographic shifts and the existence of appealing discretionary purchase alternatives and the increasing availability of on-trend lower-priced apparel offerings. Opportunities for major brands are increasing in rapidly growing developing markets such as India, China, Brazil and Russia.
 
  •  More competitors are seeking growth globally and are raising the competitiveness of the international markets in which we already have an established presence.


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  •  The global nature of our business exposes us to earnings volatility resulting from exchange rate fluctuations.
 
  •  Brand and product proliferation continues around the world as we and other companies compete through differentiated brands and products targeted for specific consumers, price-points and retail segments. In addition, the ways of marketing these brands are changing to new mediums, challenging the effectiveness of more mass-market approaches such as television advertising.
 
  •  Quality low-cost sourcing alternatives continue to emerge around the world, resulting in pricing pressure and minimal barriers to entry for new competitors. This proliferation of low-cost sourcing alternatives enables competitors to attract consumers with a constant flow of competitively-priced new products that reflect the newest styles, bringing additional pressure on us and other wholesalers and retailers to shorten lead-times and reduce costs. In response, we must continue to seek efficiencies throughout our global supply chain.
 
These factors contribute to a global market environment of intense competition, constant product innovation and continuing cost pressure throughout the supply chain, from manufacturer to consumer, and combine with the global economic downturn to create a challenging commercial and economic environment. We expect these factors to continue into the foreseeable future.
 
Our 2009 Results
 
Our 2009 results reflect the difficult economic conditions that continue to persist in most markets around the world. In response to these conditions, we focused on our inventory management and cost-cutting initiatives and sought opportunities to invest in initiatives to grow our business. We expanded our company-operated retail network by more than 150 stores, the majority of which we added through acquisitions that we completed during the year.
 
  •  Net revenues.  Our consolidated net revenues decreased by 7% compared to 2008, a decrease of 3% on a constant-currency basis. Increased sales from new company-operated and franchised stores, as well as growth in revenues associated with the Levi’s® brand, were more than offset by wholesale channel declines in Europe and declines in the net revenues of our Dockers® brand in the Americas.
 
  •  Operating income.  Our operating income decreased by $147 million, and our consolidated operating margin in 2009 declined to 9% as compared to 12% in 2008, driven by declines in our Europe region, primarily reflecting the unfavorable impact of currency, the wholesale channel declines and our continued investment in retail expansion. These declines were partially offset by our cost management initiatives as well as lower costs associated with our conversion to an enterprise resource planning (“ERP”) system in the United States.
 
  •  Cash flows.  Cash flows provided by operating activities were $389 million in 2009 as compared to $225 million in 2008. The impact on our operating cash flows from the decline in our net revenues was more than offset by our inventory management initiatives and lower operating expenses. Increased cash used for investing activities in 2009 reflects our business acquisitions in the Americas and Europe as well as our foreign exchange management activities.
 
Our Objectives
 
Our key long-term objectives are to strengthen our brands globally in order to deliver sustainable profitable growth, continue to generate strong cash flow and reduce our debt. Critical strategies to achieve these objectives include driving continued product and marketing innovation that builds upon our leadership position in the jean and khaki categories, driving sales growth through enhancing relationships with wholesale customers and expanding our dedicated store network, capitalizing on our global footprint to maximize opportunities in targeted growth markets, and continuously enhancing our productivity. Investments in initiatives in 2010 to support the execution of our strategies and achieve our long-term objectives will likely result in an increase in advertising and selling expenses, a lower operating margin, and higher capital expenditures during the 2010 fiscal year.
 
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


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subsidiaries, each quarter of fiscal years 2009, 2008 and 2007 consisted of 13 weeks, with the exception of the fourth quarter of 2008, which consisted of 14 weeks.
 
Segments.  We manage our business according to three regional segments: the Americas, Europe and Asia Pacific.
 
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 associated with our company-operated stores and 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.
 
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
 
2009 compared to 2008
 
The following table summarizes, for the periods indicated, the consolidated statements of income, the changes in these items from period to period and these items expressed as a percentage of net revenues:
 
                                         
    Year Ended  
                      November 29,
    November 30,
 
                %
    2009
    2008
 
    November 29,
    November 30,
    Increase
    % of Net
    % of Net
 
    2009     2008     (Decrease)     Revenues     Revenues  
    (Dollars in millions)  
 
Net sales
  $ 4,022.9     $ 4,303.1       (6.5 )%     98.0 %     97.8 %
Licensing revenue
    82.9       97.8       (15.3 )%     2.0 %     2.2 %
                                         
Net revenues
    4,105.8       4,400.9       (6.7 )%     100.0 %     100.0 %
Cost of goods sold
    2,132.4       2,261.1       (5.7 )%     51.9 %     51.4 %
                                         
Gross profit
    1,973.4       2,139.8       (7.8 )%     48.1 %     48.6 %
Selling, general and administrative expenses
    1,590.1       1,606.5       (1.0 )%     38.7 %     36.5 %
Restructuring charges, net
    5.2       8.2       (36.7 )%     0.1 %     0.2 %
                                         
Operating income
    378.1       525.1       (28.0 )%     9.2 %     11.9 %
Interest expense
    (148.7 )     (154.1 )     (3.5 )%     (3.6 )%     (3.5 )%
Loss on early extinguishment of debt
          (1.4 )     (100.0 )%            
Other expense, net
    (38.3 )     (1.4 )     2634.4 %     (0.9 )%      
                                         
Income before income taxes
    191.1       368.2       (48.1 )%     4.7 %     8.4 %
Income tax expense
    39.2       138.9       (71.8 )%     1.0 %     3.2 %
                                         
Net income
  $ 151.9     $ 229.3       (33.8 )%     3.7 %     5.2 %
                                         
 
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:
 
                                 
    Year Ended  
                % Increase (Decrease)  
    November 29,
    November 30,
    As
    Constant
 
    2009     2008     Reported     Currency  
    (Dollars in millions)  
 
Net revenues:
                               
Americas
  $ 2,357.7     $ 2,476.4       (4.8 )%     (3.2 )%
Europe
    1,042.1       1,195.6       (12.8 )%     (3.3 )%
Asia Pacific
    706.0       728.9       (3.2 )%     (0.9 )%
                                 
Total net revenues
  $ 4,105.8     $ 4,400.9       (6.7 )%     (2.9 )%
                                 
 
Total net revenues decreased on both reported and constant-currency bases for the year ended November 29, 2009, as compared to the prior year. Reported amounts were affected unfavorably by changes in foreign currency exchange rates across all regions, particularly in Europe.
 
Americas.  On both reported and constant-currency bases, net revenues in our Americas region decreased in 2009. Currency affected net revenues unfavorably by approximately $39 million.


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Net revenues decreased due to the weak economic environment, lower demand for our U.S. Dockers® brand products, and lower sales of Signature products. These declines were partially offset by increased Levi’s® brand revenues driven by strong performance of our men’s and boy’s products and growth in the Juniors business in our wholesale channel, and increased revenues from our retail network from our July 13, 2009, acquisition of the operating rights to 73 Levi’s® and Dockers® outlet stores from Anchor Blue Retail Group, Inc.
 
As compared to prior year, 2009 also reflects the loss of customers due to bankruptcy in the second and third quarters of 2008. In addition, 2008 was adversely impacted by issues we encountered during our stabilization of an ERP system in the United States in the beginning of the second quarter of 2008.
 
Europe.  Net revenues in Europe decreased on both reported and constant-currency bases. Currency affected net revenues unfavorably by approximately $118 million.
 
The region’s depressed retail environment drove net revenue declines across most markets, primarily due to lower sales in our wholesale channels. This was partially offset by the impact of our business acquisitions and our expanding company-operated retail network throughout the region.
 
Asia Pacific.  Net revenues in Asia Pacific decreased on both reported and constant-currency bases. Currency affected net revenues unfavorably by approximately $17 million.
 
Net revenues in the region decreased primarily due to lower sales in Japan. These declines were offset by strong performance in most other markets in the region, driven by product promotions and the continued expansion of our brand-dedicated store network.
 
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:
 
                         
    Year Ended  
                %
 
    November 29,
    November 30,
    Increase
 
    2009     2008     (Decrease)  
    (Dollars in millions)  
 
Net revenues
  $ 4,105.8     $ 4,400.9       (6.7 )%
Cost of goods sold
    2,132.4       2,261.1       (5.7 )%
                         
Gross profit
  $ 1,973.4     $ 2,139.8       (7.8 )%
                         
Gross margin
    48.1 %     48.6 %        
 
Compared to the prior year, gross profit declined in 2009 primarily due to the unfavorable impact of currency across all regions, which totaled approximately $128 million. Excluding the effects of currency, the impact of our lower net revenues to gross profit was partially offset by a slight improvement in gross margin, primarily driven by our Americas region, due to the strong performance of the Levi’s® brand, and the increased contribution from our company-operated retail network, which has a higher gross margin than our wholesale business.
 
Our 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.


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Selling, general and administrative expenses
 
The following table shows our selling, general and administrative expenses (“SG&A”) for the periods indicated, the changes in these items from period to period and these items expressed as a percentage of net revenues:
 
                                         
    Year Ended  
                      November 29,
    November 30,
 
                %
    2009
    2008
 
    November 29,
    November 30,
    Increase
    % of Net
    % of Net
 
    2009     2008     (Decrease)     Revenues     Revenues  
    (Dollars in millions)  
 
Selling
  $ 498.9     $ 438.9       13.6 %     12.1 %     10.0 %
Advertising and promotion
    266.1       297.9       (10.6 )%     6.5 %     6.8 %
Administration
    366.6       364.3       0.7 %     8.9 %     8.3 %
Other
    458.5       505.4       (9.3 )%     11.2 %     11.5 %
                                         
Total SG&A
  $ 1,590.1     $ 1,606.5       (1.0 )%     38.7 %     36.5 %
                                         
 
Compared to the prior year, total SG&A expenses declined in 2009 due to a favorable currency impact of approximately $62 million.
 
Selling.  Selling expenses increased across all business segments, primarily reflecting additional company-operated stores, partially offset by a favorable currency impact of $25 million in 2009.
 
Advertising and promotion.  The decrease in advertising and promotion expenses was attributable to the effects of currency and planned reduction of our advertising activities in most markets as compared to the prior year.
 
Administration.  Administration expenses include corporate expenses and other administrative charges. Currency favorably impacted these expenses by $13 million in 2009. Reflected in 2009 are increased pension expense of approximately $38 million and costs associated with our business acquisitions during the year, while 2008 included higher costs associated with our conversion to an ERP system in the United States as well as various other corporate initiatives.
 
Other.  Other SG&A costs include distribution, information resources, and marketing organization costs, gain or loss on sale of assets and other operating income. Currency favorably impacted these expenses by $14 million in 2009. The decrease in expenses was primarily due to lower distribution costs, resulting from actions we have taken in recent years to restructure our distribution center operations and the decline in sales volume, as well as lower marketing organization costs.


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Operating income
 
The following table shows operating income by reporting segment and certain components of corporate expense for the periods indicated, the changes in these items from period to period and these items expressed as a percentage of net revenues:
 
                                         
    Year Ended  
                      November 29,
    November 30,
 
                %
    2009
    2008
 
    November 29,
    November 30,
    Increase
    % of Net
    % of Net
 
    2009     2008     (Decrease)     Revenues     Revenues  
                (Dollars in millions)        
 
Operating income:
                                       
Americas
  $ 346.3     $ 346.9       (0.2 )%     14.7 %     14.0 %
Europe
    154.8       257.9       (40.0 )%     14.9 %     21.6 %
Asia Pacific
    91.0       99.5       (8.6 )%     12.9 %     13.7 %
                                         
Total regional operating income
    592.1       704.3       (15.9 )%     14.4 %*     16.0 %*
Corporate:
                                       
Restructuring charges, net
    5.2       8.2       (36.7 )%     0.1 %*     0.2 %*
Other corporate staff costs and expenses
    208.8       171.0       22.1 %     5.1 %*     3.9 %*
                                         
Corporate expenses
    214.0       179.2       19.4 %     5.2 %*     4.1 %*
                                         
Total operating income
  $ 378.1     $ 525.1       (28.0 )%     9.2 %*     11.9 %*
                                         
Operating margin
    9.2 %     11.9 %                        
 
 
* Percentage of consolidated net revenues
 
Currency unfavorably affected operating income by approximately $66 million in 2009.
 
Regional operating income.  The following describes the changes in operating income by segment for the year ended November 29, 2009, as compared to the prior year:
 
  •  Americas.  Operating income decreased due to the unfavorable impact of currency. Excluding currency, operating income increased due to an improved operating margin, driven by the improved gross margin and lower SG&A expenses in the region.
 
  •  Europe.  The decrease in the region’s operating income was due to the unfavorable impact of currency, as well as a decline in operating margin. The decline in operating margin is due to the sales decline in our wholesale channel and higher expenses from our retail network, which reflects our increasing investment in company-operated store expansion and acquisitions in 2009.
 
  •  Asia Pacific.  Operating income decreased due to the unfavorable impact of currency, as the decline in Japan’s operating income was substantially offset by the revenue growth and lower SG&A expenses in most other markets in the region.
 
Corporate.  Corporate expense is comprised of net restructuring charges and other corporate expenses, including corporate staff costs. Corporate expenses in 2009 reflect the higher pension expense, resulting from the decline in the fair value of our pension plan assets in 2008, higher severance costs for headcount reductions, and increased incentive compensation accruals, relating to greater achievement against our internally-set objectives. These increases were partially offset by a decline in corporate staff costs in 2009, reflecting our cost-cutting initiatives.
 
Corporate expenses in 2009 and 2008 include amortization of prior service benefit of $39.7 million and $41.4 million, respectively, related to postretirement benefit plan amendments in 2004 and 2003. We will continue to amortize the prior service benefit in the future; however, it will decline in 2010 by approximately $10 million, in relation to the expected service lives of the employees affected by these plan changes. We also expect the higher


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pension expenses to continue in 2010, despite a recovery in asset values, as changes in the financial markets during 2009, including a decrease in corporate bond yield indices, drove a reduction in the discount rates used to measure our benefit obligations. Higher pension expense may potentially extend into future periods should market conditions persist. For more information, see Note 8 to our audited consolidated financial statements included in this report.
 
 
Interest expense
 
Interest expense was $148.7 million for the year ended November 29, 2009, as compared to $154.1 million in the prior year. Lower average borrowing rates and lower debt levels in 2009, resulting primarily from our required payments on the trademark tranche of our senior secured revolving credit facility, caused the decrease.
 
The weighted-average interest rate on average borrowings outstanding for 2009 was 7.44% as compared to 8.09% for 2008.
 
 
Other expense, net
 
Other expense, net, primarily consists of foreign exchange management activities and transactions. For the year ended November 29, 2009, we recorded net expense of $38.3 million compared to $1.4 million for the prior year. The increase in expense primarily reflects losses in 2009 on foreign exchange derivatives which economically hedge future cash flow obligations of our foreign operations, partially offset by foreign currency transaction gains. During 2009, the U.S. Dollar depreciated relative to the rate included in many of our forward contracts, particularly the Euro and the Australian Dollar, negatively impacting the value of the related derivatives.
 
 
Income tax expense
 
Income tax expense was $39.2 million for the year ended November 29, 2009, compared to $138.9 million for the prior year. Our effective tax rate was 20.5% for the year ended November 29, 2009, compared to 37.7% for the prior year.
 
The decrease in income tax expense and effective tax rate was primarily driven by the reduction in income before income taxes and a $33.2 million tax benefit relating to the expected reversal of basis differences, consisting primarily of undistributed earnings in investments in certain foreign subsidiaries. During the fourth quarter of 2009, we adopted specific plans to remit the prior undistributed earnings of certain foreign subsidiaries, which were previously considered permanently reinvested. As a result of the planned distribution, we recognized a deferred tax asset and a corresponding tax benefit of $33.2 million, for the foreign tax credits in excess of the associated U.S. income tax liability that are expected to become available upon the planned distribution.


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2008 compared to 2007
 
The following table summarizes, for the periods indicated, the consolidated statements of income, the changes in these items from period to period and these items expressed as a percentage of net revenues:
 
                                         
    Year Ended  
                      November 30,
    November 25,
 
                %
    2008
    2007
 
    November 30,
    November 25,
    Increase
    % of Net
    % of Net
 
    2008     2007     (Decrease)     Revenues     Revenues  
          (Dollars in millions)        
 
Net sales
  $ 4,303.1     $ 4,266.1       0.9 %     97.8 %     97.8 %
Licensing revenue
    97.8       94.8       3.2 %     2.2 %     2.2 %
                                         
Net revenues
    4,400.9       4,360.9       0.9 %     100.0 %     100.0 %
Cost of goods sold
    2,261.1       2,318.9       (2.5 )%     51.4 %     53.2 %
                                         
Gross profit
    2,139.8       2,042.0       4.8 %     48.6 %     46.8 %
Selling, general and administrative expenses
    1,606.5       1,386.5       15.9 %     36.5 %     31.8 %
Restructuring charges, net
    8.2       14.5       (43.0 )%     0.2 %     0.3 %
                                         
Operating income
    525.1       641.0       (18.1 )%     11.9 %     14.7 %
Interest expense
    (154.1 )     (215.7 )     (28.6 )%     (3.5 )%     (4.9 )%
Loss on early extinguishment of debt
    (1.4 )     (63.8 )     (97.8 )%           (1.5 )%
Other income (expense), net
    (1.4 )     14.1       (109.9 )%           0.3 %
                                         
Income before income taxes
    368.2       375.6       (2.0 )%     8.4 %     8.6 %
Income tax (benefit) expense
    138.9       (84.8 )     (263.9 )%     3.2 %     (1.9 )%
                                         
Net income
  $ 229.3     $ 460.4       (50.2 )%     5.2 %     10.6 %
                                         
 
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:
 
                                 
    Year Ended  
                % Increase (Decrease)  
    November 30,
    November 25,
    As
    Constant
 
    2008     2007     Reported     Currency  
          (Dollars in millions)        
 
Net revenues:
                               
Americas
  $ 2,476.4     $ 2,581.3       (4.1 )%     (4.2 )%
Europe
    1,195.6       1,099.7       8.7 %     0.9 %
Asia Pacific
    728.9       681.1       7.0 %     4.9 %
Corporate
          (1.2 )            
                                 
Total net revenues
  $ 4,400.9     $ 4,360.9       0.9 %     (1.4 )%
                                 
 
Consolidated net revenues were stable on a reported basis and decreased on a constant-currency basis for the year ended November 30, 2008, as compared to the prior year. Reported amounts were affected favorably by changes in foreign currency exchange rates, particularly in Europe.


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Americas.  Net revenues in our Americas region decreased in 2008 on both reported and constant-currency bases. Currency affected net revenues favorably by approximately $4 million in 2008.
 
Net revenue declines in the region reflected a weakening retail environment. Net sales in the region decreased due to lower demand and higher sales allowances and discounts for our U.S. Dockers® brand products, the bankruptcy filings of two U.S. customers and a decline in sales of our U.S. Signature brand. Additionally, net sales decreased due to issues encountered during stabilization of an ERP system we implemented in the United States, which impacted our ability to fulfill customer orders in the second quarter. The region’s net sales decreases were partially offset by increased sales from both the addition of new and continued growth at existing company-operated retail stores and strong performance of our Levis® brand.
 
Europe.  Net revenues in Europe increased on both reported and constant-currency bases. Currency affected net revenues favorably by approximately $85 million.
 
Net sales increases, primarily from new company-operated stores, partially offset declines in our wholesale channels in certain markets. The increases related primarily to increased sales of our Levi’s® Red Tabtm products.
 
Asia Pacific.  Net revenues in Asia Pacific increased on both reported and constant-currency bases. Currency affected net revenues favorably by approximately $14 million.
 
We had mixed performance across the region. Net sales increased primarily in our developing markets, particularly China and India, through continued expansion of our dedicated store network and stronger consumer spending. These net sales increases were offset primarily by continuing weak performance in our mature markets, primarily Japan.
 
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:
 
                         
    Year Ended  
                %
 
    November 30,
    November 25,
    Increase
 
    2008     2007     (Decrease)  
    (Dollars in millions)  
 
Net revenues
  $ 4,400.9     $ 4,360.9       0.9 %
Cost of goods sold
    2,261.1       2,318.9       (2.5 )%
                         
Gross profit
  $ 2,139.8     $ 2,042.0       4.8 %
                         
Gross margin
    48.6 %     46.8 %        
 
Compared to prior year, gross profit increased in 2008 due to the favorable impact of foreign currency in our Europe region and an increase in consolidated gross margin, resulting from a more favorable sales mix, the increased contribution of net sales from company-operated stores, and lower sourcing costs. Gross margins increased for each of our regions.
 
Our 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.


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Selling, general and administrative expenses
 
The following table shows our 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:
 
                                         
    Year Ended  
                      November 30,
    November 25,
 
                %
    2008
    2007
 
    November 30,
    November 25,
    Increase
    % of Net
    % of Net
 
    2008     2007     (Decrease)     Revenues     Revenues  
          (Dollars in millions)        
 
Selling
  $ 438.9     $ 370.6       18.4 %     10.0 %     8.5 %
Advertising and promotion
    297.9       277.0       7.5 %     6.8 %     6.4 %
Administration
    370.2       302.0       22.6 %     8.4 %     6.9 %
Postretirement benefit plan curtailment gains
    (5.9 )     (52.8 )     (88.7 )%     (0.1 )%     (1.2 )%
Other
    505.4       489.7       3.2 %     11.5 %     11.2 %
                                         
Total SG&A
  $ 1,606.5     $ 1,386.5       15.9 %     36.5 %     31.8 %
                                         
 
Total SG&A expenses increased $220.0 million for the year ended November 30, 2008, as compared to the prior year. Currency contributed approximately $32 million to the increase in SG&A expenses.
 
Selling.  Selling expenses increased across all business segments, primarily reflecting higher selling costs associated with additional company-operated stores, and an impairment charge of $16.1 million in the fourth quarter of 2008 relating to the assets of certain underperforming company-operated stores.
 
Advertising and promotion.  The increase in advertising and promotion expenses primarily reflects our global Levi’s® 501® campaign in the second half of the year.
 
Administration.  Administration expenses include corporate expenses and other administrative charges. Administration expenses increased primarily due to the additional expenses associated with our U.S. ERP implementation and stabilization efforts, higher costs reflecting various corporate initiatives, and an increase in our bad debt expense reflecting the bankruptcy filings of two U.S. customers and overall market conditions.
 
Postretirement benefit plan curtailment gains.  During 2008 we recorded postretirement benefit plan curtailment gains of $5.9 million primarily associated with the departure of the remaining employees who elected the voluntary separation and buyout program contained in the new labor agreement we entered into during the third quarter of 2007. During 2007, we recorded a gain of $27.5 million associated with this same voluntary separation and buyout program, as well as a $25.3 million gain associated with the closure of our Little Rock, Arkansas, distribution facility. For more information, see Notes 8 and 13 to our audited consolidated financial statements included in this report.
 
Other.  Other SG&A costs include distribution, information resources, and marketing costs, gain or loss on sale of assets and other operating income. These costs increased as compared to prior year primarily due to effects of currency.
 
Restructuring charges, net
 
Restructuring charges, net, decreased to $8.2 million for the year ended November 30, 2008, from $14.5 million for the prior year. The 2008 amount primarily consisted of severance and other charges of $4.5 million recorded in association with the planned closure of our manufacturing facility in the Philippines and our distribution facility in Italy and an additional asset impairment of $4.2 million recorded for our closed distribution center in Germany. The 2007 amount primarily consisted of asset impairment of $9.0 million and severance charges of $4.3 million recorded in association with the planned closure of our distribution center in Germany. For more information, see Note 13 to our audited consolidated financial statements included in this report.


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Operating income
 
The following table shows operating income by reporting segment and the significant components of corporate expense for the periods indicated, the changes in these items from period to period and these items expressed as a percentage of net revenues:
 
                                         
    Year Ended  
                      November 30,
    November 25,
 
                %
    2008
    2007
 
    November 30,
    November 25,
    Increase
    As% of Net
    As% of Net
 
    2008     2007     (Decrease)     Revenues     Revenues  
                (Dollars in millions)        
 
Operating income:
                                       
Americas
  $ 346.9     $ 403.2       (14.0 )%     14.0 %     15.6 %
Europe
    257.9       236.9       8.9 %     21.6 %     21.5 %
Asia Pacific
    99.5       95.3       4.5 %     13.7 %     14.0 %
                                         
Total regional operating income
    704.3       735.4       (4.2 )%     16.0 %*     16.9 %*
                                         
Corporate:
                                       
Restructuring charges, net
    8.2       14.5       (43.0 )%     0.2 %*     0.3 %*
Postretirement benefit plan curtailment gains
    (5.9 )     (52.8 )     (88.7 )%     (0.1 )%*     (1.2 )%
Other corporate staff costs and expenses
    176.9       132.7       33.4 %     4.0 %*     3.0 %*
                                         
Total corporate
    179.2       94.4       89.9 %     4.1 %*     2.2 %*
                                         
Total operating income
  $ 525.1     $ 641.0       (18.1 )%     11.9 %*     14.7 %*
                                         
Operating Margin
    11.9 %     14.7 %                        
 
 
* Percentage of consolidated net revenues
 
Regional operating income.  The following describes the changes in operating income by reporting segment for the year ended November 30, 2008, as compared to the prior year:
 
  •  Americas.  Operating income decreased primarily due to a decline in operating margin, as well as the decline in net revenues. Operating margin decreased as the region’s gross margin improvement was more than offset by the increase in SG&A expenses, reflecting our continued investment in retail expansion, our U.S. ERP implementation and stabilization efforts, and increased advertising and promotion expenses.
 
  •  Europe.  The increase in the region’s operating income was due to the favorable impact of currency. The region’s net sales increase was offset by an increase in SG&A expenses, primarily reflecting our continued investment in retail expansion.
 
  •  Asia Pacific.  The region’s net sales increase and the favorable impact of currency drove the slight increase in operating income. These increases were partially offset by a slight decline in operating margin, reflecting the region’s continued investment in retail and infrastructure, particularly within our developing markets, and increased advertising and promotion expenses.
 
Corporate.  Corporate expense is comprised of restructuring charges, net, postretirement benefit plan curtailment gains, and other corporate expenses, including corporate staff costs.
 
Other corporate staff costs and expenses increased as compared to prior year primarily due to higher costs, reflecting our global information technology investment and various other corporate initiatives, and the impairment charge related to our company-operated stores. A reduction in distribution expenses related to the separation and buyout costs of the voluntary termination of certain distribution center employees in North America was offset by a reduction in our workers’ compensation liability reversals.


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Corporate expenses in 2008 and 2007 include amortization of prior service benefit of $41.4 million and $45.7 million, respectively, related to postretirement benefit plan amendments in 2004 and 2003, and workers’ compensation reversals of $4.3 million and $8.1 million, respectively.
 
Interest expense
 
Interest expense decreased 28.6% to $154.1 million for the year ended November 30, 2008, from $215.7 million in the prior year. Lower average borrowing rates and lower debt levels in 2008, resulting primarily from our refinancing and debt reduction activities in 2007, caused the decrease.
 
The weighted-average interest rate on average borrowings outstanding for 2008 was 8.09% as compared to 9.59% for 2007.
 
Loss on early extinguishment of debt
 
For the year ended November 30, 2008, we recorded a loss of $1.4 million on early extinguishment of debt primarily as a result of our redemption of our remaining 12.25% senior notes due 2012. For the year ended November 25, 2007, we recorded a loss of $63.8 million on early extinguishment of debt primarily as a result of our redemption of our floating rate senior notes due 2012 during the second quarter of 2007 and our repurchase of $506.2 million of the then-outstanding $525.0 million of our 12.25% senior notes due 2012 during the fourth quarter of 2007. The 2007 losses were comprised of prepayment premiums, tender offer consideration, applicable consent payments and other fees and expenses of approximately $46.7 million and the write-off of approximately $17.1 million of unamortized capitalized costs and debt discount. For more information, see Note 6 to our audited consolidated financial statements included in this report.
 
Other income (expense), net
 
Other income (expense), net, primarily consists of foreign exchange management activities and transactions as well as interest income. For the year ended November 30, 2008, we recorded other expense of $1.4 million compared to other income of $14.1 million for the prior year. This primarily reflects foreign currency transaction losses in 2008 as compared to gains in 2007 resulting from the weakening of the U.S. Dollar against the Japanese Yen in the fourth quarter of 2008. These losses were partially offset by gains on our forward foreign exchange and option contracts, resulting from the appreciation of the U.S. Dollar against the Euro in the second half of 2008.
 
Income tax expense (benefit)
 
Income tax expense was $138.9 million for the year ended November 30, 2008, compared to a benefit of $84.8 million for the prior year. The effective tax rate was 37.7% for the year ended November 30, 2008, compared to a 22.6% benefit for the prior year.
 
The increase in the effective tax rate for 2008 as compared to 2007 was mostly attributable to a $215.3 million tax benefit from a reversal during the fourth quarter of 2007 of valuation allowances against our deferred tax assets primarily for foreign tax credit carryforwards. This reversal was due to improvements in our business performance and positive developments in the IRS examination of the 2000-2002 U.S. federal corporate income tax returns.
 
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,


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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.
 
We are borrowers under an amended and restated senior secured revolving credit facility. The maximum availability under the facility is $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 includes a $250 million trademark tranche and a $500 million revolving tranche. The revolving tranche increases as the trademark tranche is repaid, up to a maximum of $750 million when the trademark tranche is repaid in full. Upon repayment of the trademark tranche, the secured interest in the U.S. trademarks will be released. As of November 29, 2009, we had borrowings of $108.3 million under the trademark tranche and no outstanding borrowings under the revolving tranche. Unused availability under the revolving tranche was $243.9 million, as our total availability of $325.2 million, based on collateral levels as defined by the agreement, was reduced by $81.3 million of other credit-related instruments such as documentary and standby letters of credit allocated under the facility.
 
Under the facility, we are required to meet a fixed charge coverage ratio as defined in the agreement of 1.0:1.0 when unused availability is less than $100 million. This covenant will be discontinued upon the repayment in full and termination of the trademark tranche described above and with the implementation of an unfunded availability reserve of $50 million, which implementation will reduce availability under our credit facility.
 
As of November 29, 2009, we had cash and cash equivalents totaling $270.8 million, resulting in a net liquidity position (unused availability and cash and cash equivalents) of $514.7 million.
 
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.
 
The following table presents selected cash uses in 2009 and the related projected cash uses for these items in 2010:
 
                 
          Projected
 
    Cash Used in
    Cash Uses in
 
    2009     2010  
    (Dollars in millions)  
 
Interest
  $ 136     $ 130  
Federal, foreign and state taxes (net of refunds)
    57       68  
Postretirement health benefit plans
    19       22  
Capital expenditures(1)
    83       166  
Pension plans
    18       42  
Business acquisitions
    100        
Dividend(2)
    20       20  
                 
Total selected cash requirements
  $ 433     $ 448  
                 
 
 
(1) Capital expenditures for 2009 consisted primarily of investment in company-operated retail stores in the Americas and Europe that were not a part of the business acquisitions as well as costs associated with information technology systems.
 
The increase in projected capital expenditures in 2010 primarily reflects costs associated with information technology systems and costs associated with improvement of the Company’s headquarters. Our projection excludes approximately $16 million of tenant improvement allowances that will be paid directly by the landlord.
 
(2) Cash used reflects dividend paid in the second quarter of 2009. Amount projected in 2010 reflects management’s current estimate; however, the declaration, amount and payment of dividends are at the discretion of our board of directors and are dependent upon, among other factors, our financial condition and compliance with the terms of our debt agreements.


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The following table provides information about our significant cash contractual obligations and commitments as of November 29, 2009:
 
                                                         
    Payments Due or Projected by Period  
    Total     2010     2011     2012     2013     2014     Thereafter  
    (Dollars in millions)  
 
Contractual and Long-term Liabilities:
                                                       
Short-term and long-term debt obligations(1)
  $ 1,853     $ 19     $     $ 108     $ 375     $ 323     $ 1,028  
Interest(2)
    653       130       129       129       110       86       69  
Capital lease obligations
    8       2       2       3       1              
Operating leases(3)
    784       133       129       112       86       69       255  
Purchase obligations(4)
    319       311       8                          
Postretirement obligations(5)
    192       22       22       21       21       20       86  
Pension obligations(6)
    478       42       140       56       51       51       138  
Long-term employee related benefits(7)
    94       14       12       12       12       12       32  
                                                         
Total
  $ 4,381     $ 673     $ 442     $ 441     $ 656     $ 561     $ 1,608  
                                                         
 
 
(1) The terms of the trademark tranche of our credit facility require payments of the remaining balance at maturity in 2012. Additionally, the 2010 amount includes short-term borrowings.
 
(2) Interest obligations are computed using constant interest rates until maturity. The LIBOR rate as of November 29, 2009, was used for variable-rate debt.
 
(3) Amounts reflect contractual obligations relating to our existing leased facilities as of November 29, 2009, and therefore do not reflect our planned future openings of company-operated retail stores. For more information, see “Item 2 — Properties.”
 
(4) Amounts reflect estimated commitments of $279 million for inventory purchases and $40 million for human resources, advertising, information technology and other professional services.
 
(5) The amounts presented in the table represent an estimate for the next ten years of our projected payments, based on information provided by our plans’ actuaries, and have not been reduced by estimated Medicare subsidy receipts. Our policy is to fund postretirement benefits as claims and premiums are paid. For more information, see Note 8 to our audited consolidated financial statements included in this report.
 
(6) The amounts presented in the table represent an estimate of our projected contributions to the plans for the next ten years based on information provided by our plans’ actuaries. For U.S qualified plans, these estimates comply with minimum funded status and minimum required contributions under the Pension Protection Act. The expected increase in 2011 and 2012 is primarily due to the reduction of the fair value of plan assets in the Company’s U.S. pension plans at November 29, 2009, as compared to the related plan obligations, however actual contributions may differ from those presented based on factors including changes in discount rates and the valuation of pension assets. For more information, see Note 8 to our audited consolidated financial statements included in this report.
 
(7) Long-term employee-related benefits relate to the current and non-current portion of deferred compensation arrangements and workers’ compensation. We estimated these payments based on prior experience and forecasted activity for these items. For more information, see Note 12 to our audited consolidated financial statements included in this report.
 
This table does not include amounts related to our income tax liabilities associated with uncertain tax positions, as we are unable to make reasonable estimates for the periods in which these liabilities may become due. We do not anticipate a material effect on our liquidity as a result of payments in future periods of liabilities for uncertain tax positions.
 
Information in the two preceding tables reflects our estimates of future cash payments. These estimates and projections are based upon assumptions that are inherently subject to significant economic, competitive, legislative and other uncertainties and contingencies, many of which are beyond our control. Accordingly, our actual expenditures and liabilities may be materially higher or lower than the estimates and projections reflected in these tables. The inclusion of these projections and estimates should not be regarded as a representation by us that the estimates will prove to be correct.


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Cash flows
 
The following table summarizes, for the periods indicated, selected items in our consolidated statements of cash flows:
 
                         
    Year Ended
    November 29,
  November 30,
  November 25,
    2009   2008   2007
    (Dollars in millions)
 
Cash provided by operating activities
  $ 388.8     $ 224.8     $ 302.3  
Cash used for investing activities
    (233.0 )     (26.8 )     (107.3 )
Cash used for financing activities
    (97.2 )     (135.5 )     (325.5 )
Cash and cash equivalents
    270.8       210.8       155.9  
 
2009 as compared to 2008
 
Cash flows from operating activities
 
Cash provided by operating activities was $388.8 million for 2009, as compared to $224.8 million for 2008. As compared to the prior year, we used less cash for inventory, reflecting our focus on inventory management, and payments to vendors declined, reflecting our lower SG&A expenses. These results more than offset the decline in our cash collections, which was driven primarily by our lower net revenues as well as our lower beginning accounts receivable balance. Additionally, the increase in cash provided by operating activities reflected lower payments for incentive compensation and interest.
 
Cash flows from investing activities
 
Cash used for investing activities was $233.0 million for 2009 compared to $26.8 million for 2008. As compared to the prior year, the increase in cash used for investing activities primarily reflects business acquisitions in our Americas and Europe regions, as well as higher payments on settlement of forward foreign exchange contracts.
 
Cash flows from financing activities
 
Cash used for financing activities was $97.2 million for 2009 compared to $135.5 million for 2008. Cash used in both periods primarily related to required payments on the trademark tranche of our senior secured revolving credit facility and our dividend payments to stockholders. Cash used for financing activities in 2008 also reflects our redemption in March 2008 of our remaining $18.8 million outstanding 12.25% senior notes due 2012.
 
2008 as compared to 2007
 
Cash flows from operating activities
 
Cash provided by operating activities was $224.8 million for 2008, as compared to $302.3 million for 2007. The decrease, primarily due to our lower operating income, was partially offset by several factors including: lower interest payments; higher cash collections on receivables, reflecting later timing of sales in the fourth quarter of 2007 as compared to the fourth quarter of 2006; and lower incentive compensation payments. Additionally, we used more cash for inventory in 2008 due to commencing the year with a lower inventory base as compared to prior year.
 
Cash flows from investing activities
 
Cash used for investing activities was $26.8 million for 2008 compared to $107.3 million for 2007. Cash used in both periods primarily related to investments made in our company-operated retail stores and information technology systems associated with our global ERP installation. Additionally, in 2008 we realized gains and received the related proceeds on the settlement of our forward foreign exchange contracts, reflecting the appreciation of the U.S. Dollar against the Euro in the second half of 2008, as compared to realized losses in 2007,


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reflecting the weakening of the U.S. Dollar against major foreign currencies including the Euro, the Canadian Dollar and the Japanese Yen.
 
Cash flows from financing activities
 
Cash used for financing activities was $135.5 million for 2008 compared to $325.5 million for 2007. Cash used for financing activities in 2008 primarily reflects $70.9 million of required payments on the trademark tranche of our senior secured revolving credit facility, our redemption in March 2008 of our remaining $18.8 million outstanding 12.25% senior notes due 2012 and our $50.0 million dividend payment to stockholders in the second quarter. Cash used for financing activities in 2007 primarily reflects our redemption in April 2007 of all of our floating rate notes due 2012 through borrowings under a new senior unsecured term loan and use of cash on hand, and the repurchase in October 2007 of over 95% of our outstanding 12.25% senior notes due 2012 through borrowings under an amended and restated senior secured revolving credit facility and use of cash on hand.
 
Indebtedness
 
The borrower of substantially all of our debt is Levi Strauss & Co., the parent and U.S. operating company. Of our total debt of $1.9 billion, we had fixed-rate debt of approximately $1.4 billion (76% of total debt) and variable-rate debt of approximately $0.5 billion (24% of total debt) as of November 29, 2009. Our required aggregate debt principal payments, excluding short-term borrowings, are $108.3 million in 2012, $374.6 million in 2013, $323.3 million in 2014 and the remaining $1.0 billion in years after 2014. Short-term borrowings totaling $18.7 million as of November 29, 2009, are expected to be either paid over the next twelve months or refinanced at the end of their applicable terms.
 
Effective May 1, 2008, in order to mitigate a portion of our interest rate risk, we entered into a $100 million interest rate swap agreement to pay a fixed-rate interest of approximately 3.2% and receive 3-month LIBOR variable rate interest payments quarterly through May 2010.
 
Our long-term debt agreements contain customary covenants restricting our activities as well as those of our subsidiaries. Currently, we are in compliance with all of these covenants.
 
Effects of Inflation
 
We believe that inflation in the regions where most of our sales occur has not had a significant effect on our net revenues or profitability.
 
Off-Balance Sheet Arrangements, Guarantees and Other Contingent Obligations
 
Off-balance sheet arrangements and other.  We have contractual commitments for non-cancelable operating leases. For more information, see Note 14 to our audited consolidated financial statements included in this report. We have no other material non-cancelable guarantees or commitments, and no material special-purpose entities or other off-balance sheet debt obligations.
 
Indemnification agreements.  In the ordinary course of our business, we enter into agreements containing indemnification provisions under which we agree to indemnify the other party for specified claims and losses. For example, our trademark license agreements, real estate leases, consulting agreements, logistics outsourcing agreements, securities purchase agreements and credit agreements typically contain these provisions. This type of indemnification provision obligates us to pay certain amounts associated with claims brought against the other party as the result of trademark infringement, negligence or willful misconduct of our employees, breach of contract by us including inaccuracy of representations and warranties, specified lawsuits in which we and the other party are co-defendants, product claims and other matters. These amounts are generally not readily quantifiable: the maximum possible liability or amount of potential payments that could arise out of an indemnification claim depends entirely on the specific facts and circumstances associated with the claim. We have insurance coverage that minimizes the potential exposure to certain of these claims. We also believe that the likelihood of substantial payment obligations under these agreements to third parties is low and that any such amounts would be immaterial.


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Critical Accounting Policies, Assumptions 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. We believe that the following discussion addresses our critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Changes in such estimates, based on newly available information, or different assumptions or conditions, may affect amounts reported in future periods.
 
We summarize our critical accounting policies below.
 
Revenue recognition.  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. We recognize revenue on sale of product when the goods are shipped or delivered and title to the goods passes to the customer provided that: there are no uncertainties regarding customer acceptance; persuasive evidence of an arrangement exists; the sales price is fixed or determinable; and collectibility is reasonably assured. Revenue is recorded net of an allowance for estimated returns, discounts and retailer promotions and other similar incentives. Licensing revenues from the use of our trademarks in connection with the manufacturing, advertising, and distribution of trademarked products by third-party licensees are earned and recognized as products are sold by licensees based on royalty rates as set forth in the licensing agreements.
 
We recognize allowances for estimated returns in the period in which the related sale is recorded. We recognize allowances for estimated discounts, retailer promotions and other similar incentives at the later of the period in which the related sale is recorded or the period in which the sales incentive is offered to the customer. We estimate non-volume based allowances based on historical rates as well as customer and product-specific circumstances. Actual allowances may differ from estimates due to changes in sales volume based on retailer or consumer demand and changes in customer and product-specific circumstances. Sales and value-added taxes collected from customers and remitted to governmental authorities are presented on a net basis in the accompanying consolidated statements of income.
 
Accounts receivable, net.  In the normal course of business, we extend credit to our wholesale and licensing customers that satisfy pre-defined credit criteria. Accounts receivable are recorded net of an allowance for doubtful accounts. We estimate the allowance for doubtful accounts based upon an analysis of the aging of accounts receivable at the date of the consolidated financial statements, assessments of collectibility based on historic trends, customer-specific circumstances, and an evaluation of economic conditions.
 
Inventory valuation.  We value inventories at the lower of cost or market value. Inventory cost is generally determined using the first-in first-out method. We include 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, in the cost of inventories. In determining inventory market values, substantial consideration is given to the expected product selling price. We estimate quantities of slow-moving and obsolete inventory by reviewing on-hand quantities, outstanding purchase obligations and forecasted sales. We then estimate expected selling prices based on our historical recovery rates for sale of slow-moving and obsolete inventory and other factors, such as market conditions, expected channel of disposition, and current consumer preferences. Estimates may differ from actual results due to the quantity, quality and mix of products in inventory, consumer and retailer preferences and economic conditions.
 
Impairment.  We review our goodwill and other non-amortized intangible assets for impairment annually in the fourth quarter of our fiscal year, or more frequently as warranted by events or changes in circumstances which indicate that the carrying amount may not be recoverable. In our impairment tests, we use a two-step approach. In the first step, we compare the carrying value of the applicable asset or reporting unit to its fair value, which we estimate using a discounted cash flow analysis or by comparison to the market values of similar assets. If the carrying amount of the asset or reporting unit exceeds its estimated fair value, we perform the second step, and


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determine the impairment loss, if any, as the excess of the carrying value of the goodwill or intangible asset over its fair value.
 
We review our other long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. If the carrying amount of an other long-lived asset exceeds the expected future undiscounted cash flows, we measure and record an impairment loss for the excess of the carrying value of the asset over its fair value.
 
To determine the fair value of impaired assets, we utilize the valuation technique or techniques deemed most appropriate based on the nature of the impaired asset and the data available, which may include the use of quoted market prices, prices for similar assets or other valuation techniques such as discounted future cash flows or earnings.
 
Income tax assets and liabilities.  We are subject to income taxes in both the U.S. and numerous foreign jurisdictions. We compute our provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. Significant judgments are required in order to determine the realizability of these deferred tax assets. In assessing the need for a valuation allowance, we evaluate all significant available positive and negative evidence, including historical operating results, estimates of future taxable income and the existence of prudent and feasible tax planning strategies. Changes in the expectations regarding the realization of deferred tax assets could materially impact income tax expense in future periods.
 
We do not recognize deferred taxes with respect to temporary differences between the book and tax bases in our investments in foreign subsidiaries, unless it becomes apparent that these temporary differences will reverse in the foreseeable future.
 
We continuously review issues raised in connection with all ongoing examinations and open tax years to evaluate the adequacy of our liabilities. We evaluate uncertain tax positions under a two-step approach. The first step is to evaluate the uncertain tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon examination based on its technical merits. The second step is, for those positions that meet the recognition criteria, to measure the tax benefit as the largest amount that is more than fifty percent likely of being realized. We believe our recorded tax liabilities are adequate to cover all open tax years based on our assessment. This assessment relies on estimates and assumptions and involves significant judgments about future events. To the extent that our view as to the outcome of these matters changes, we will adjust income tax expense in the period in which such determination is made. We classify interest and penalties related to income taxes as income tax expense.
 
Derivative and foreign exchange management activities.  We recognize all derivatives as assets and liabilities at their fair values. We may use derivatives and establish programs from time to time to manage foreign currency and interest rate exposures that are sensitive to changes in market conditions. The instruments that we designate and that qualify for hedge accounting treatment hedge our net investment position in certain of our foreign subsidiaries and, through the first quarter of 2007, certain intercompany royalty cash flows. For these instruments, we document the hedge designation by identifying the hedging instrument, the nature of the risk being hedged and the approach for measuring hedge ineffectiveness. The ineffective portions of hedges are recorded in “Other income (expense), net” in our consolidated statements of income. The gains and losses on the instruments that we designate and that qualify for hedge accounting treatment are recorded in “Accumulated other comprehensive income (loss)” in our consolidated balance sheets until the underlying has been settled and is then reclassified to earnings. Changes in the fair values of the derivative instruments that we do not designate or that do not qualify for hedge accounting are recorded in “Other income (expense), net” or “Interest expense” in our consolidated statements of income to reflect the economic risk being mitigated.


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Employee benefits and incentive compensation
 
Pension and postretirement benefits.  We have several non-contributory defined benefit retirement plans covering eligible employees. We also provide certain health care benefits for U.S. employees who meet age, participation and length of service requirements at retirement. In addition, we sponsor other retirement or post-employment plans for our foreign employees in accordance with local government programs and requirements. We retain the right to amend, curtail or discontinue any aspect of the plans, subject to local regulations. Any of these actions, either individually or in combination, could have a material impact on our consolidated financial statements and on our future financial performance.
 
We recognize either an asset or liability for any plan’s funded status in our consolidated balance. We measure changes in funded status using actuarial models which use an attribution approach that generally spreads individual events over the estimated service lives of the employees in the plan. The attribution approach assumes that employees render service over their service lives on a relatively smooth basis and as such, presumes that the income statement effects of pension or postretirement benefit plans should follow the same pattern. Our policy is to fund our pension 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 and medical trend rates. We use a mix of actual historical rates, expected rates and external data to determine the assumptions used in the actuarial models. For example, in 2009 we utilized a yield curve constructed from a portfolio of high-quality corporate bonds with various maturities to determine the appropriate discount rate to use for our U.S. benefit plans. Under this model, each year’s expected future benefit payments are discounted to their present value at the appropriate yield curve rate, thereby generating the overall discount rate. We utilized country-specific third-party bond indices to determine appropriate discount rates to use for benefit plans of our foreign subsidiaries. Changes in actuarial assumptions and estimates, either individually or in combination, could have a material impact on our consolidated financial statements and on our future financial performance.
 
Employee incentive compensation.  We maintain short-term and long-term employee incentive compensation plans. These plans are intended to reward eligible employees for their contributions to our short-term and long-term success. For our short-term plans, the amount of the cash bonus earned depends upon business unit and corporate financial results as measured against pre-established targets, and also depends upon the performance and job level of the individual. Our long-term plans are intended to reward management for its long-term impact on our total earnings performance. Performance is measured at the end of a three-year period based on our performance over the period measured against certain pre-established targets such as earnings before interest, taxes, depreciation and amortization (“EBITDA”) or compound annual growth rates over the periods. We accrue the related compensation expense over the period of the plan, and changes in the liabilities for these incentive plans generally correlate with our financial results and projected future financial performance and could have a material impact on our consolidated financial statements.
 
Recently Issued Accounting Standards
 
See Note 1 to our audited consolidated financial statements included in this report for recently issued accounting standards, including the expected dates of adoption and expected impact to our consolidated financial statements upon adoption.
 
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.


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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-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, that could cause actual results to differ materially from those suggested by the forward-looking statements and include, without limitation:
 
  •  changes in the level of consumer spending for apparel in view of general economic conditions, and our ability to plan for and withstand the impact of those changes;
 
  •  consequences of impacts to the businesses of our wholesale customers caused by factors such as lower consumer spending, general economic conditions, changing consumer preferences and consolidations through mergers and acquisitions;
 
  •  our ability to increase the number of dedicated stores for our products, including through opening and profitably operating company-operated stores;
 
  •  our dependence on key distribution channels, customers and suppliers;
 
  •  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 withstand the impacts of foreign currency exchange rate fluctuations;
 
  •  our ability to revitalize our Dockers® brand and our mass-channel offering in the United States;
 
  •  our wholesale customers’ shift in product mix in all channels of distribution, including the mass channel;
 
  •  our ability to implement, stabilize and optimize our ERP system throughout our business without disruption or to mitigate such disruptions;
 
  •  our ability to respond to price, innovation and other competitive pressures in the apparel industry and on our key customers;
 
  •  our effectiveness in increasing productivity and efficiency in our operations;
 
  •  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 or economic instability in countries where we do business.
 
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.


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Item 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Investment and Credit Availability Risk
 
We manage cash and cash equivalents in various institutions at levels beyond FDIC coverage limits, and we purchase investments not guaranteed by the FDIC. Accordingly, there may be a risk that we will not recover the full principal of our investments or that their liquidity may be diminished. To mitigate this risk, our investment policy emphasizes preservation of principal and liquidity.
 
Multiple financial institutions are committed to provide loans and other credit instruments under our secured revolving credit facility. There may be a risk that some of these institutions cannot deliver against these obligations in a timely manner, or at all.
 
Derivative Financial Instruments
 
We are exposed to market risk primarily related to foreign currencies. We actively manage foreign currency risks with the objective of mitigating the potential impact of currency fluctuations while maximizing the U.S. Dollar value of cash flows.
 
We are exposed to credit loss in the event of nonperformance by the counterparties to the forward foreign exchange and interest rate swap contracts. However, we believe that our exposures are appropriately diversified across counterparties and that these counterparties are creditworthy financial institutions. We monitor the creditworthiness of our counterparties in accordance with our foreign exchange and investment policies. In addition, we have International Swaps and Derivatives Association, Inc. (“ISDA”) master agreements in place with our counterparties to mitigate the credit risk related to the outstanding derivatives. These agreements provide the legal basis for over-the-counter transactions in many of the world’s commodity and financial markets.
 
Foreign Exchange Risk
 
The global scope of our business operations exposes us to the risk of fluctuations in foreign currency markets. This exposure is the result of certain product sourcing activities, some intercompany sales, foreign subsidiaries’ royalty payments, interest payments, earnings repatriations, net investment in foreign operations and funding activities. Our foreign currency management objective is to mitigate the potential impact of currency fluctuations on the value of our U.S. Dollar cash flows and to reduce the variability of certain cash flows at the subsidiary level. We actively manage forecasted exposures.
 
We use a centralized currency management operation to take advantage of potential opportunities to naturally offset exposures against each other. For any residual exposures under management, we may enter into various financial instruments including forward exchange and option contracts to hedge certain forecasted transactions as well as certain firm commitments, including third-party and intercompany transactions. We manage the currency risk associated with certain cash flows periodically and only partially manage the timing mismatch between our forecasted exposures and the related financial instruments used to mitigate the currency risk.
 
Our foreign exchange risk management activities are governed by a foreign exchange risk management policy approved by our board of directors. Members of our foreign exchange committee, comprised of a group of our senior financial executives, review our foreign exchange activities to ensure compliance with our policies. The operating policies and guidelines outlined in the foreign exchange risk management policy provide a framework that allows for an active approach to the management of currency exposures while ensuring the activities are conducted within established parameters. Our policy includes guidelines for the organizational structure of our risk management function and for internal controls over foreign exchange risk management activities, including various measurements for monitoring compliance. We monitor foreign exchange risk and related derivatives using different techniques including a review of market value, sensitivity analysis and a value-at-risk model. We use the market approach to estimate the fair value of our foreign exchange derivative contracts.
 
We use derivative instruments to manage certain but not all exposures to foreign currencies. Our approach to managing foreign currency exposures is consistent with that applied in previous years. As of November 29, 2009,


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we had forward foreign exchange contracts to buy $523.5 million and to sell $175.1 million against various foreign currencies. These contracts are at various exchange rates and expire at various dates through December 2010.
 
As of November 30, 2008, we had forward foreign exchange currency contracts to buy $559.8 million and to sell $179.4 million against various foreign currencies. We also had Euro forward currency contracts to sell 14.5 million Euros ($18.6 million equivalent) against the British Pound. These contracts are at various exchange rates and expire at various dates through March 2010.
 
The following table presents the currency, average forward exchange rate, notional amount and fair values for our outstanding forward and swap contracts as of November 29, 2009, and November 30, 2008. The average forward rate is the forward rate weighted by the total of the transacted amounts. The notional amount represents the total net position outstanding as of the stated date. A positive notional amount represents a long position in U.S. Dollar versus the exposure currency, while a negative notional amount represents a short position in U.S. Dollar versus the exposure currency. The net position is the sum of all buy transactions minus the sum of all sell transactions. All amounts are stated in U.S. Dollar equivalents. All transactions will mature before the end of December 2010.
 
Outstanding Forward and Swap Transactions
 
                                                 
    As of November 29, 2009     As of November 30, 2008  
    Average Forward
    Notional
    Fair
    Average Forward
    Notional
    Fair
 
    Exchange Rate     Amount     Value     Exchange Rate     Amount     Value  
    (Dollars in thousands)  
 
Currency
                                               
Australian Dollar
    0.84     $ 53,061     $ (2,420 )     0.65     $ 37,576     $ (231 )
Brazilian Real
    1.96       626       (23 )                  
Canadian Dollar
    1.09       52,946       (1,972 )     1.18       63,065       2,352  
Swiss Franc
    1.00       (15,246 )     (125 )     1.20       (6,010 )     (4 )
Czech Koruna
    17.36       2,689       62       19.86       1,849       (26 )
Danish Krona
    0.20       26,684       245       5.81       21,586       (53 )
Euro(1)
    1.46       70,472       (1,192 )     1.31       209,976       4,255  
British Pound
    0.62       34,414       (497 )     1.63       4,305       2,289  
Hong Kong Dollar
    7.75       (14 )           7.75       173        
Hungarian Forint
    200.87       (5,887 )     (392 )     202.76       (32,589 )     (970 )
Japanese Yen
    93.67       37,704       (3,228 )     97.97       2,828       (3,134 )
Korean Won
    1,224.91       16,745       (824 )     1,107.22       (5,123 )     (1,799 )
Mexican Peso
    13.94       30,588       (1,623 )     13.10       12,054       945  
Norwegian Krona
    0.17       8,878       (464 )     6.84       20,422       329  
New Zealand Dollar
    1.38       (9,581 )     (270 )     0.54       (6,968 )     180  
Polish Zloty
    2.85       (52,830 )     224       2.85       (22,137 )     (638 )
Swedish Krona
    6.97       73,272       635       7.89       63,710       1,086  
Singapore Dollar
    1.40       (28,734 )     167       1.46       (29,847 )     (758 )
Taiwan Dollar
    1.40       29,678       487       32.45       21,484       453  
South African Rand
    31.70       22,961       (2,588 )     8.77       5,473       710  
                                                 
Total
          $ 348,426     $ (13,798 )           $ 361,827     $ 4,986  
                                                 
 
 
(1) The decrease in the notional amount of Euro contracts outstanding as compared to prior year reflects our reduced exposure under management due to our 2009 prepayment of royalties related to our operations in Europe. For more information see Notes 5 and 18 to our audited consolidated financial statements included in this report.


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Interest rate risk
 
We maintain a mix of medium and long-term fixed- and variable-rate debt. We currently manage a portion of our interest rate risk by holding a $100 million interest rate swap derivative to pay fixed rate interest of approximately 3.2% and receive 3-month LIBOR variable interest payments through May 2010.
 
The following table provides information about our financial instruments that are sensitive to changes in interest rates. The table presents principal (face amount) outstanding balances of our debt instruments and the related weighted-average interest rates for the years indicated based on expected maturity dates. The applicable floating rate index is included for variable-rate instruments. All amounts are stated in U.S. Dollar equivalents.
 
                                                                 
    As of November 29, 2009     As of
 
    Expected Maturity Date           Fair
    November 30,
 
    2010(1)-
                                  Value
    2008
 
    2011     2012     2013     2014     Thereafter     Total     2009     Total  
    (Dollars in thousands)  
 
Debt Instruments
                                                               
Fixed Rate (US$)
  $     $     $     $     $ 796,210     $ 796,210     $ 852,067     $ 796,210  
Average Interest Rate
                            9.37 %     9.37 %                
Fixed Rate (Yen 20 billion)
                            231,709       231,709       197,448       209,886  
Average Interest Rate
                            4.25 %     4.25 %                
Fixed Rate (Euro 250 million)
                372,325                   372,325       379,935       321,625  
Average Interest Rate
                8.63 %                 8.63 %                
Variable Rate (US$)
          108,250             325,000             433,250       394,781       504,125  
Average Interest Rate(2)
          2.74 %           2.50 %           2.56 %                
Total Principal (face amount) of our debt instruments
  $     $ 108,250     $ 372,325     $ 325,000     $ 1,027,919     $ 1,833,494     $ 1,824,231     $ 1,831,846  
 
 
(1) Excludes short-term borrowings.
 
(2) Assumes no change in short-term interest rates. Expected maturities due 2012 relate to the trademark tranche of our senior revolving credit facility. Amounts maturing thereafter relate to our Senior Term Loan due 2014.


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Item 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
Report of Independent Registered Public Accounting Firm
 
The Board of Directors and Stockholders of
Levi Strauss & Co.:
 
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, stockholders’ deficit and comprehensive income, and cash flows present fairly, in all material respects, the financial position of Levi Strauss & Co. and its subsidiaries at November 29, 2009 and November 30, 2008, and the results of their operations and their cash flows for each of the three years in the period ended November 29, 2009, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the related financial statement schedule listed in the index appearing under Item 15(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
As discussed in Note 16 to the consolidated financial statements, the Company changed the manner in which it accounts for defined pension and other postretirement plans effective November 25, 2007. As discussed in Note 18 to the consolidated financial statements, the Company changed the manner in which it accounts for uncertain tax positions in fiscal 2008.
 
PricewaterhouseCoopers LLP
 
San Francisco, CA
February 9, 2010


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
 
                 
    November 29,
    November 30,
 
    2009     2008  
    (Dollars in thousands)  
 
ASSETS
Current Assets:
               
Cash and cash equivalents
  $ 270,804     $ 210,812  
Restricted cash
    3,684       2,664  
Trade receivables, net of allowance for doubtful accounts of $22,523 and $16,886
    552,252       546,474  
Inventories:
               
Raw materials
    6,818       15,895  
Work-in-process
    10,908       8,867  
Finished goods
    433,546       517,912  
                 
Total inventories
    451,272       542,674  
Deferred tax assets, net
    135,508       114,123  
Other current assets
    92,344       88,527  
                 
Total current assets
    1,505,864       1,505,274  
Property, plant and equipment, net of accumulated depreciation of $664,891 and $596,967
    430,070       411,908  
Goodwill
    241,768       204,663  
Other intangible assets, net
    103,198       42,774  
Non-current deferred tax assets, net
    601,526       526,069  
Other assets
    106,955       86,187  
                 
Total assets
  $ 2,989,381     $ 2,776,875  
                 
 
LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS’ DEFICIT
Current Liabilities:
               
Short-term borrowings
  $ 18,749     $ 20,339  
Current maturities of long-term debt
          70,875  
Current maturities of capital leases
    1,852       1,623  
Accounts payable
    198,220       203,207  
Restructuring liabilities
    1,410       2,428  
Other accrued liabilities
    269,609       251,720  
Accrued salaries, wages and employee benefits
    195,434       194,289  
Accrued interest payable
    28,709       29,240  
Accrued income taxes
    12,993       17,909  
                 
Total current liabilities
    726,976       791,630  
Long-term debt
    1,834,151       1,761,993  
Long-term capital leases
    5,513       6,183  
Postretirement medical benefits
    156,834       130,223  
Pension liability
    382,503       240,701  
Long-term employee related benefits
    97,508       87,704  
Long-term income tax liabilities
    55,862       42,794  
Other long-term liabilities
    43,480       46,590  
Minority interest
    17,735       17,982  
                 
Total liabilities
    3,320,562       3,125,800  
                 
Commitments and contingencies (Note 14)
               
Temporary equity
    1,938       592  
                 
Stockholders’ Deficit:
               
Common stock — $.01 par value; 270,000,000 shares authorized; 37,284,741
               
shares and 37,278,238 shares issued and outstanding
    373       373  
Additional paid-in capital
    39,532       53,057  
Accumulated deficit
    (123,157 )     (275,032 )
Accumulated other comprehensive loss
    (249,867 )     (127,915 )
                 
Total stockholders’ deficit
    (333,119 )     (349,517 )
                 
Total liabilities, temporary equity and stockholders’ deficit
  $ 2,989,381     $ 2,776,875  
                 
 
The accompanying notes are an integral part of these consolidated financial statements.


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
 
                         
    Year Ended
    Year Ended
    Year Ended
 
    November 29,
    November 30,
    November 25,
 
    2009     2008     2007  
    (Dollars in thousands)  
 
Net sales
  $ 4,022,854     $ 4,303,075     $ 4,266,108  
Licensing revenue
    82,912       97,839       94,821  
                         
Net revenues
    4,105,766       4,400,914       4,360,929  
Cost of goods sold
    2,132,361       2,261,112       2,318,883  
                         
Gross profit
    1,973,405       2,139,802       2,042,046  
Selling, general and administrative expenses
    1,590,093       1,606,482       1,386,547  
Restructuring charges, net
    5,224       8,248       14,458  
                         
Operating income
    378,088       525,072       641,041  
Interest expense
    (148,718 )     (154,086 )     (215,715 )
Loss on early extinguishment of debt
          (1,417 )     (63,838 )
Other income (expense), net
    (38,282 )     (1,400 )     14,138  
                         
Income before income taxes
    191,088       368,169       375,626  
Income tax expense (benefit)
    39,213       138,884       (84,759 )
                         
Net income
  $ 151,875     $ 229,285     $ 460,385  
                         
 
The accompanying notes are an integral part of these consolidated financial statements.


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
 
                                         
                      Accumulated
       
          Additional
          Other
       
    Common
    Paid-in
    Accumulated
    Comprehensive
    Stockholders’
 
    Stock     Capital     Deficit     Income (Loss)     Deficit  
    (Dollars in thousands)  
 
Balance at November 26, 2006
  $ 373     $ 89,837     $ (959,478 )   $ (124,779 )   $ (994,047 )
                                         
Net income
                460,385             460,385  
Other comprehensive income (net of tax)
                      60,015       60,015  
                                         
Total comprehensive income
                            520,400  
                                         
Adjustment to initially apply ASC Topic No. 715-20
                      72,805       72,805  
Stock-based compensation (net of $4,120 temporary equity)
          2,813                   2,813  
                                         
Balance at November 25, 2007
    373       92,650       (499,093 )     8,041       (398,029 )
                                         
Net income
                229,285             229,285  
Other comprehensive loss (net of tax)
                      (135,956 )     (135,956 )
                                         
Total comprehensive income
                            93,329  
                                         
Cumulative impact of ASC Topic No. 740-10-25
                (5,224 )           (5,224 )
Stock-based compensation (net of $592 temporary equity)
          10,360                   10,360  
Cash dividend paid
          (49,953 )                 (49,953 )
                                         
Balance at November 30, 2008
    373       53,057       (275,032 )     (127,915 )     (349,517 )
                                         
Net income
                151,875             151,875  
Other comprehensive loss (net of tax)
                      (121,952 )     (121,952 )
                                         
Total comprehensive income
                            29,923  
                                         
Stock-based compensation (net of $1,938 temporary equity)
          6,476                   6,476  
Cash dividend paid
          (20,001 )                 (20,001 )
                                         
Balance at November 29, 2009
  $ 373     $ 39,532     $ (123,157 )   $ (249,867 )   $ (333,119 )
                                         
 
The accompanying notes are an integral part of these consolidated financial statements.


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
 
                         
    Year Ended
    Year Ended
    Year Ended
 
    November 29,
    November 30,
    November 25,
 
    2009     2008     2007  
    (Dollars in thousands)  
 
Cash Flows from Operating Activities:
                       
Net income
  $ 151,875     $ 229,285     $ 460,385  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Depreciation and amortization
    84,603       77,983       67,514  
Asset impairments
    16,814       20,308       9,070  
(Gain) loss on disposal of property, plant and equipment
    (175 )     40       444  
Unrealized foreign exchange losses (gains)
    14,657       50,736       (7,186 )
Realized loss (gain) on settlement of forward foreign exchange contracts not designated for hedge accounting
    50,760       (53,499 )     16,137  
Employee benefit plans’ amortization from accumulated other comprehensive loss
    (19,730 )     (35,995 )      
Employee benefit plans’ curtailment loss (gain), net
    1,643       (5,162 )     (51,575 )
Write-off of unamortized costs associated with early extinguishment of debt
          394       17,166  
Amortization of deferred debt issuance costs
    4,344       4,007       5,192  
Stock-based compensation
    7,822       6,832       4,977  
Allowance for doubtful accounts
    7,246       10,376       615  
Deferred income taxes
    (5,128 )     75,827       (150,079 )
Change in operating assets and liabilities (excluding assets and liabilities acquired):
                       
Trade receivables
    27,568       61,707       (18,071 )
Inventories
    113,014       (21,777 )     40,422  
Other current assets
    5,626       (25,400 )     19,235  
Other non-current assets
    (11,757 )     (16,773 )     (10,598 )
Accounts payable and other accrued liabilities
    (55,649 )     (93,012 )     16,168  
Income tax liabilities
    (3,377 )     3,923       9,527  
Restructuring liabilities
    (2,536 )     (7,376 )     (8,134 )
Accrued salaries, wages and employee benefits
    (20,082 )     (30,566 )     (89,031 )
Long-term employee related benefits
    26,871       (35,112 )     (32,634 )
Other long-term liabilities
    (4,452 )     6,922       1,973  
Other, net
    (1,174 )     1,141       754  
                         
Net cash provided by operating activities
    388,783       224,809       302,271  
                         
Cash Flows from Investing Activities:
                       
Purchases of property, plant and equipment
    (82,938 )     (80,350 )     (92,519 )
Proceeds from sale of property, plant and equipment
    939       995       3,881  
(Payments) proceeds on settlement of forward foreign exchange contracts not designated for hedge accounting
    (50,760 )     53,499       (16,137 )
Acquisitions, net of cash acquired
    (100,270 )     (959 )     (2,502 )
                         
Net cash used for investing activities
    (233,029 )     (26,815 )     (107,277 )
                         
Cash Flows from Financing Activities:
                       
Proceeds from issuance of long-term debt
                669,006  
Repayments of long-term debt and capital leases
    (72,870 )     (94,904 )     (984,333 )
Short-term borrowings, net
    (2,704 )     12,181       (1,711 )
Debt issuance costs
          (446 )     (5,297 )
Restricted cash
    (602 )     (1,224 )     (58 )
Dividends to minority interest shareholders of Levi Strauss Japan K.K. 
    (978 )     (1,114 )     (3,141 )
Dividend to stockholders
    (20,001 )     (49,953 )      
                         
Net cash used for financing activities
    (97,155 )     (135,460 )     (325,534 )
                         
Effect of exchange rate changes on cash and cash equivalents
    1,393       (7,636 )     6,953  
                         
Net increase (decrease) in cash and cash equivalents
    59,992       54,898       (123,587 )
Beginning cash and cash equivalents
    210,812       155,914       279,501  
                         
Ending cash and cash equivalents
  $ 270,804     $ 210,812     $ 155,914  
                         
Supplemental disclosure of cash flow information:
                       
Cash paid during the period for:
                       
Interest
  $ 135,576     $ 154,103     $ 237,017  
Income taxes
    56,922       63,107       52,275  
 
The accompanying notes are an integral part of these consolidated financial statements.


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
 
 
NOTE 1:   SIGNIFICANT ACCOUNTING POLICIES
 
Nature of Operations
 
Levi Strauss & Co. (“LS&Co.” or the “Company”) is one of the world’s leading branded apparel companies. The Company designs and markets jeans, casual and dress pants, tops, jackets, footwear and related accessories, for men, women and children under the Levi’s®, Dockers® and Signature by Levi Strauss & Co.tm brands. The Company markets its products in three geographic regions: Americas, Europe and Asia Pacific.
 
Basis of Presentation and Principles of Consolidation
 
The consolidated financial statements of LS&Co. 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.”). All significant intercompany balances and transactions have been eliminated. LS&Co. is privately held primarily by descendants of the family of its founder, Levi Strauss, and their relatives.
 
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 fiscal years 2009, 2008 and 2007 consists of 13 weeks, with the exception of the fourth quarter of 2008, which consisted of 14 weeks. All references to years relate to fiscal years rather than calendar years.
 
Subsequent events have been evaluated through the date these financial statements were issued, February 9, 2010.
 
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 assumptions and estimates 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.
 
Cash and Cash Equivalents
 
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash equivalents are stated at fair value.
 
Restricted Cash
 
Restricted cash primarily relates to required cash deposits for customs and rental guarantees to support the Company’s international operations.
 
Accounts Receivable, Net
 
In the normal course of business, the Company extends credit to its wholesale customers that satisfy pre-defined credit criteria. Accounts receivable, which includes receivables related to the Company’s net sales and licensing revenues, are recorded net of an allowance for doubtful accounts. The Company estimates the allowance for doubtful accounts based upon an analysis of the aging of accounts receivable at the date of the consolidated financial statements, assessments of collectibility based on historic trends, customer-specific circumstances, and an evaluation of economic conditions.


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
FOR THE YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER 25, 2007
 
Inventory Valuation
 
The Company values inventories at the lower of cost or market value. Inventory cost is determined using the first-in first-out method. The Company includes product costs, labor and related overhead, sourcing costs, inbound freight, internal transfers, and the cost of operating its remaining manufacturing facilities, including the related depreciation expense, in the cost of inventories. The Company estimates quantities of slow-moving and obsolete inventory, by reviewing on-hand quantities, outstanding purchase obligations and forecasted sales. The Company determines inventory market values by estimating expected selling prices based on the Company’s historical recovery rates for slow-moving and obsolete inventory and other factors, such as market conditions, expected channel of distribution and current consumer preferences.
 
Income Tax Assets and Liabilities
 
The Company is subject to income taxes in both the U.S. and numerous foreign jurisdictions. The Company computes its provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. Significant judgments are required in order to determine the realizability of these deferred tax assets. In assessing the need for a valuation allowance, the Company’s management evaluates all significant available positive and negative evidence, including historical operating results, estimates of future taxable income and the existence of prudent and feasible tax planning strategies.
 
The Company does not recognize deferred taxes with respect to temporary differences between the book and tax bases in its investments in foreign subsidiaries, unless it becomes apparent that these temporary differences will reverse in the foreseeable future.
 
The Company continuously reviews issues raised in connection with all ongoing examinations and open tax years to evaluate the adequacy of its liabilities. Beginning in the first quarter of 2008, the Company evaluates uncertain tax positions under a two-step approach. The first step is to evaluate the uncertain tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon examination based on its technical merits. The second step, for those positions that meet the recognition criteria, is to measure the tax benefit as the largest amount that is more than fifty percent likely to be realized. The Company believes that its recorded tax liabilities are adequate to cover all open tax years based on its assessment. This assessment relies on estimates and assumptions and involves significant judgments about future events. To the extent that the Company’s view as to the outcome of these matters change, the Company will adjust income tax expense in the period in which such determination is made. The Company classifies interest and penalties related to income taxes as income tax expense.
 
Property, Plant and Equipment
 
Property, plant and equipment are carried at cost, less accumulated depreciation. The cost is depreciated on a straight-line basis over the estimated useful lives of the related assets. Buildings are depreciated over 20 to 40 years, and leasehold improvements are depreciated over the lesser of the life of the improvement or the initial lease term. Machinery and equipment includes furniture and fixtures, automobiles and trucks, and networking communication equipment, and is depreciated over a range from three to 20 years. Capitalized internal-use software is depreciated over periods ranging from three to seven years.


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
FOR THE YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER 25, 2007
 
Goodwill and Other Intangible Assets
 
Goodwill resulted primarily from a 1985 acquisition of LS&Co. by Levi Strauss Associates Inc., a former parent company that was subsequently merged into the Company in 1996, and the Company’s recent acquisitions. Goodwill is not amortized and is subject to an annual impairment test which the Company performs in the fourth quarter of each fiscal year. Intangible assets are comprised of owned trademarks with indefinite useful lives which are not being amortized and acquired contractual rights and customers lists with finite lives which are being amortized over periods ranging from two to eight years.
 
Impairment
 
The Company reviews its goodwill and other non-amortized intangible assets for impairment annually in the fourth quarter of its fiscal year, or more frequently as warranted by events or changes in circumstances which indicate that the carrying amount may not be recoverable. In the Company’s impairment tests, the Company uses a two-step approach. In the first step, the Company compares the carrying value of the applicable asset or reporting unit to its fair value, which the Company estimates using a discounted cash flow analysis or by comparison with the market values of similar assets. If the carrying amount of the asset or reporting unit exceeds its estimated fair value, the Company performs the second step, and determines the impairment loss, if any, as the excess of the carrying value of the goodwill or intangible asset over its fair value.
 
The Company reviews its other long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. If the carrying amount of an asset exceeds the expected future undiscounted cash flows, the Company measures and records an impairment loss for the excess of the carrying value of the asset over its fair value.
 
To determine the fair value of impaired assets, the Company utilizes the valuation technique or techniques deemed most appropriate based on the nature of the impaired asset and the data available, which may include the use of quoted market prices, prices for similar assets or other valuation techniques such as discounted future cash flows or earnings.
 
Debt Issuance Costs
 
The Company capitalizes debt issuance costs, which are included in “Other assets” in the Company’s consolidated balance sheets. These costs are amortized using the straight-line method of amortization for all debt issuances prior to 2005, which approximates the effective interest method. Costs associated with debt issuances in 2005 and later are amortized using the effective interest method. Amortization of debt issuance costs is included in “Interest expense” in the consolidated statements of income.
 
Restructuring Liabilities
 
Upon approval of a restructuring plan by management, the Company records restructuring liabilities for employee severance and related termination benefits when they become probable and estimable for recurring arrangements and on the accrual basis for one-time benefit arrangements. The Company records other costs associated with exit activities as they are incurred. The long-term portion of restructuring liabilities is included in “Other long-term liabilities” in the Company’s consolidated balance sheets.
 
Deferred Rent
 
The Company is obligated under operating leases of property for manufacturing, finishing and distribution facilities, office space, retail stores and equipment. Rental expense relating to operating leases are recognized on a straight-line basis over the lease term after consideration of lease incentives and scheduled rent escalations


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
FOR THE YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER 25, 2007
 
beginning as of the date the Company takes physical possession or control of the property. Differences between rental expense and actual rental payments are recorded as deferred rent liabilities included in “Other accrued liabilities” and “Other long-term liabilities” on the consolidated balance sheets.
 
Fair Value of Financial Instruments
 
The fair values of the Company’s financial instruments reflect the amounts that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The fair value estimates presented in this report are based on information available to the Company as of November 29, 2009, and November 30, 2008.
 
The carrying values of cash and cash equivalents, trade receivables and short-term borrowings approximate fair value. The Company has estimated the fair value of its other financial instruments using the market and income approaches. Rabbi trust assets, forward foreign exchange contracts and the interest rate swap contract are carried at their fair values. Notes, loans and borrowings under the Company’s credit facilities are carried at historical cost and adjusted for amortization of premiums or discounts, foreign currency fluctuations and principal payments.
 
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.
 
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 use an attribution approach that generally spreads individual events over the estimated service lives of the employees in the plan. The attribution approach assumes that employees render service over their service lives on a relatively smooth basis and as such, presumes that the income statement effects of pension or postretirement benefit plans should follow the same pattern. 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 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. The Company’s postretirement benefit plan provides a benefit to retirees that is at least actuarially equivalent to the benefit provided by the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“Medicare Part D”) and thus, the U.S. government provides a federal subsidy to the plan. Accordingly, the net periodic postretirement benefit cost is reduced to reflect the impact of the federal subsidy.
 
Employee Incentive Compensation
 
The Company maintains short-term and long-term employee incentive compensation plans. These plans are intended to reward eligible employees for their contributions to the Company’s short-term and long-term success. Provisions for employee incentive compensation are recorded in “Accrued salaries, wages and employee benefits” and “Long-term employee related benefits” in the Company’s consolidated balance sheets. The Company accrues


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
FOR THE YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER 25, 2007
 
the related compensation expense over the period of the plan and changes in the liabilities for these incentive plans generally correlate with the Company’s financial results and projected future financial performance.
 
Stock-Based Compensation
 
The Company has incentive plans which reward certain employees and directors with cash or equity. The amount of compensation cost for share-based payments is measured based on the fair value on the grant date of the equity or liability instruments issued, based on the estimated number of awards that are expected to vest. No compensation cost is ultimately recognized for awards for which employees do not render the requisite service and are forfeited. Compensation cost for equity instruments is recognized on a straight-line basis over the period that an employee provides service for that award, which generally is the vesting period. Liability instruments are revalued at each reporting period and compensation expense adjusted. Changes in the fair value of unvested liability instruments during the requisite service period are recognized as compensation cost on a straight-line basis over that service period. Changes in the fair value of vested liability instruments after the service period are recognized as an adjustment to compensation cost in the period of the change in fair value.
 
The Company’s common stock is not listed on any established stock exchange. Accordingly, the stock’s fair market value is determined by the Board based upon a valuation performed by an independent third-party, Evercore Group LLC (“Evercore”). Determining the fair value of the Company’s stock requires complex and subjective judgments. The valuation process includes comparison of the Company’s historical and estimated future financial results with selected publicly-traded companies, and application of an appropriate discount for the illiquidity of the stock to derive the fair value of the stock. The Company uses this valuation for, among other things, making determinations under its share-based compensation plans, such as grant date fair value of awards.
 
The fair value of stock-based compensation is estimated on the date of grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model requires the input of highly subjective assumptions including volatility. Due to the fact that the Company’s common stock is not publicly traded, the computation of expected volatility is based on the average of the historical and implied volatilities, over the expected life of the awards, of comparable companies from a representative peer group of publicly traded entities, selected based on industry and financial attributes. Other assumptions include expected life, risk-free rate of interest and dividend yield. Expected life is computed using the simplified method. The risk-free interest rate is based on zero coupon U.S. Treasury bond rates corresponding to the expected life of the awards. Dividend assumptions are based on historical experience.
 
Due to the job function of the award recipients, the Company has included stock-based compensation cost in “Selling, general and administrative expenses” in the consolidated statements of income.
 
Self-Insurance
 
The Company self-insures, up to certain limits, workers’ compensation risk and employee and eligible retiree medical health benefits. The Company carries insurance policies covering claim exposures which exceed predefined amounts, both per occurrence and in the aggregate, for all workers’ compensation claims and for the medical claims of active employees as well as those salaried retirees who retired after June 1, 2001. Accruals for losses are made based on the Company’s claims experience and actuarial assumptions followed in the insurance industry, including provisions for incurred but not reported losses.
 
Derivative Financial Instruments and Hedging Activities
 
The Company recognizes all derivatives as assets and liabilities at their fair values. The Company may use derivatives and establish programs from time to time to manage foreign currency and interest rate exposures that are sensitive to changes in market conditions. The instruments that we designate or that qualify for hedge accounting


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
FOR THE YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER 25, 2007
 
treatment hedge the Company’s net investment position in certain of its foreign subsidiaries and, through the first quarter of 2007, certain intercompany royalty cash flows. For these instruments, the Company documents the hedge designation by identifying the hedging instrument, the nature of the risk being hedged and the approach for measuring hedge ineffectiveness. The ineffective portions of hedges are recorded in “Other income (expense), net” in the Company’s consolidated statements of income. The gains and losses on the instruments that we designate and that qualify for hedge accounting treatment are recorded in “Accumulated other comprehensive income (loss)” in the Company’s consolidated balance sheets until the underlying has been settled and is then reclassified to earnings. Changes in the fair values of the derivative instruments that we do not designate or that do not qualify for hedge accounting are recorded in “Other income (expense), net” or “Interest expense” in the Company’s consolidated statements of income to reflect the economic risk being mitigated.
 
Foreign Currency
 
The functional currency for most of the Company’s foreign operations is the applicable local currency. For those operations, assets and liabilities are translated into U.S. Dollars using period-end exchange rates, income and expenses are translated at average monthly exchange rates, and equity accounts are translated at historical rates. Net changes resulting from such translations are recorded as a component of translation adjustments in “Accumulated other comprehensive income (loss)” in the Company’s consolidated balance sheets.
 
The U.S. Dollar is the functional currency for foreign operations in countries with highly inflationary economies. The translation adjustments for these entities, as applicable, are included in “Other income (expense), net” in the Company’s consolidated statements of income.
 
Foreign currency transactions are transactions denominated in a currency other than the entity’s functional currency. At each balance sheet date, each entity remeasures the recorded balances related to foreign-currency transactions using the period-end exchange rate. Gains or losses arising from the remeasurement of these balances are recorded in “Other income expense, net” in the Company’s consolidated statements of income. In addition, at the settlement date of foreign currency transactions, foreign currency gains and losses are recorded in “Other income (expense), net” in the Company’s consolidated statements of income to reflect the difference between the rate effective at the settlement date and the historical rate at which the transaction was originally recorded or remeasured at the balance sheet date.
 
Minority Interest
 
Minority interest includes a 16.4% minority interest of third parties in Levi Strauss Japan K.K., the Company’s Japanese affiliate.
 
Stockholders’ Deficit
 
The stockholders’ deficit primarily resulted from a 1996 recapitalization transaction in which the Company’s stockholders created new long-term governance arrangements, including a voting trust and stockholders’ agreement. As a result, shares of stock of a former parent company, Levi Strauss Associates Inc., including shares held under several employee benefit and compensation plans, were converted into the right to receive cash. The funding for the cash payments in this transaction was provided in part by cash on hand and in part from proceeds of approximately $3.3 billion of borrowings under bank credit facilities.
 
Revenue Recognition
 
Net sales is primarily comprised of sales of products to wholesale customers, including franchised stores, and direct sales to consumers at the Company’s company-operated and online stores and at the Company’s company-operated shop-in-shops located within department stores. The Company recognizes revenue on sale of product


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
FOR THE YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER 25, 2007
 
when the goods are shipped or delivered and title to the goods passes to the customer provided that: there are no uncertainties regarding customer acceptance; persuasive evidence of an arrangement exists; the sales price is fixed or determinable; and collectibility is reasonably assured. The revenue is recorded net of an allowance for estimated returns, discounts and retailer promotions and other similar incentives. Licensing revenues from the use of the Company’s trademarks in connection with the manufacturing, advertising, and distribution of trademarked products by third-party licensees are earned and recognized as products are sold by licensees based on royalty rates as set forth in the licensing agreements.
 
The Company recognizes allowances for estimated returns in the period in which the related sale is recorded. The Company recognizes allowances for estimated discounts, retailer promotions and other similar incentives at the later of the period in which the related sale is recorded or the period in which the sales incentive is offered to the customer. The Company estimates non-volume based allowances based on historical rates as well as customer and product-specific circumstances. Sales and value-added taxes collected from customers and remitted to governmental authorities are presented on a net basis in the consolidated statements of income.
 
Net sales to the Company’s ten largest customers totaled approximately 36%, 37% and 42% of net revenues for 2009, 2008 and 2007, respectively. No customer represented 10% or more of net revenues in any year.
 
Cost of Goods Sold
 
Cost of goods sold includes the expenses incurred to acquire and produce inventory for sale, including product costs, labor and related overhead, sourcing costs, inbound freight, internal transfers, and the cost of operating the Company’s remaining manufacturing facilities, including the related depreciation expense. Cost of goods sold excludes depreciation expense on the Company’s other facilities. Costs relating to the Company’s licensing activities are included in “Selling, general and administrative expenses” in the consolidated statements of income.
 
Selling, General and Administrative Expenses
 
Selling, general and administrative expenses are primarily comprised of costs relating to advertising, marketing, selling, distribution, information technology and other corporate functions. Selling costs include all occupancy costs associated with company-operated stores and with the Company’s company-operated shop-in-shops located within department stores. The Company expenses advertising costs as incurred. For 2009, 2008 and 2007, total advertising expense was $266.1 million, $297.9 million and $277.0 million, respectively. Distribution costs include costs related to receiving and inspection at distribution centers, warehousing, shipping to the Company’s customers, handling and certain other activities associated with the Company’s distribution network. These expenses totaled $185.7 million, $215.8 million and $225.2 million for 2009, 2008 and 2007, respectively.
 
Recently Issued Accounting Standards
 
The following recently issued accounting standards have been grouped by their required effective dates for the Company:
 
First Quarter of 2010
 
  •  In December 2007 the FASB issued SFAS 141 (revised 2007), “Business Combinations” and in April 2009, the FASB issued FASB Staff Position No. FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies,” both of which were subsequently codified by the FASB under ASC Topic 805 (“Topic 805”). This guidance establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired and liabilities assumed (including those arising from contingencies) and any


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
FOR THE YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER 25, 2007
 
  noncontrolling interest in the acquiree. Topic 805 requires assets acquired, liabilities assumed and any noncontrolling interest in the acquiree to be measured at their acquisition-date fair value (with limited exceptions). If such items are contingent upon future events, Topic 805 requires measurement at acquisition-date fair value only if it can be determined during the prescribed measurement period. If it cannot be determined during the measurement period, the asset acquired or liability assumed may only be recognized if certain criteria are met. The Company does not anticipate that the adoption of this statement will have a material impact on its consolidated financial statements, absent any material business combinations.
 
  •  In December 2007 the FASB issued SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51,” which was subsequently codified by the FASB under ASC Subtopic 810-10. In January 2010 the FASB Issued Accounting Standards Update No. 2010-02 “Consolidation,” to amend Subtopic 810-10. Subtopic 810-10 as amended establishes accounting and reporting standards for the noncontrolling interest (previously referred to as “minority interest”) in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. Subtopic 810-10 also provides guidance on the accounting and reporting to be applied by an entity that experiences a decrease in ownership in a subsidiary that is a business or nonprofit activity, and provides amendments that affect the accounting and reporting by an entity that exchanges a group of assets that constitutes a business or nonprofit for an equity interest in another entity. This new guidance requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements of this standard shall be applied prospectively. The Company does not anticipate that the adoption of this statement will have a material impact on its consolidated financial statements.
 
  •  In December 2007 the FASB issued EITF Issue No. 07-1, “Accounting for Collaborative Arrangements,” which was subsequently codified by the FASB under ASC Topic 808-10 (“Topic 808-10”). Topic 808-10 defines collaborative arrangements and requires that transactions with third parties that do not participate in the arrangement be reported in the appropriate income statement line items pursuant to the guidance in EITF 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent.” Income statement classification of payments made between participants of a collaborative arrangement are to be based on other applicable authoritative accounting literature. If the payments are not within the scope or analogy of other authoritative accounting literature, a reasonable, rational and consistent accounting policy is to be elected. This new guidance is to be applied retrospectively to all prior periods presented for all collaborative arrangements existing as of the effective date. The Company does not anticipate that the adoption of this statement will have a material impact on its consolidated financial statements.
 
  •  In April 2008 the FASB issued FASB Staff Position No. FAS 142-3, “Determination of the Useful Life of Intangible Assets,” which was subsequently codified by the FASB under ASC Topic 350-30 (“Topic 350”). This new guidance amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets.” More specifically, it removes the requirement under paragraph 11 of SFAS 142 to consider whether an intangible asset can be renewed without substantial cost or material modifications to the existing terms and conditions and instead, requires an entity to consider its own historical experience in renewing similar arrangements. This standard also requires expanded disclosure related to the determination of intangible asset useful lives. The Company does not anticipate that the adoption of this statement will have a material impact on its consolidated financial statements.
 
  •  In June 2009 the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140,” which was subsequently codified by the FASB under ASC Topic 860 (“Topic 860”). Topic 860 seeks to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
FOR THE YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER 25, 2007
 
  financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. Specifically, Topic 860 eliminates the concept of a qualifying special-purpose entity, creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies other sale-accounting criteria, and changes the initial measurement of a transferor’s interest in transferred financial assets. The Company does not anticipate that the adoption of this statement will have a material impact on its consolidated financial statements.
 
  •  In June 2009 the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R),” which was subsequently codified by the FASB as ASC Topic 810 (“Topic 810-10”). Topic 810 amends FASB Interpretation No. 46(R), “Variable Interest Entities” for determining whether an entity is a variable interest entity (“VIE”) and requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a VIE. Under Topic 810, an enterprise has a controlling financial interest when it has (a) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance, and (b) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. Topic 810 also requires an enterprise to assess whether it has an implicit financial responsibility to ensure that a VIE operates as designed when determining whether it has power to direct the activities of the VIE that most significantly impact the entity’s economic performance. Topic 810 also requires ongoing assessments of whether an enterprise is the primary beneficiary of a VIE, requires enhanced disclosures and eliminates the scope exclusion for qualifying special-purpose entities. The Company does not anticipate that the adoption of this statement will have a material impact on its consolidated financial statements.
 
Second Quarter of 2010
 
  •  In January 2010 the FASB issued Accounting Standards Update No. 2010-06, “Fair Value Measurements Disclosures,” which amends Subtopic 820-10 of the FASB Accounting Standards Codification to require new disclosures for fair value measurements and provides clarification for existing disclosures requirements. More specifically, this update will require (a) an entity to disclose separately the amounts of significant transfers in and out of Levels 1 and 2 fair value measurements and to describe the reasons for the transfers; and (b) information about purchases, sales, issuances and settlements to be presented separately (i.e. present the activity on a gross basis rather than net) in the reconciliation for fair value measurements using significant unobservable inputs (Level 3 inputs). This update clarifies existing disclosure requirements for the level of disaggregation used for classes of assets and liabilities measured at fair value and requires disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements using Level 2 and Level 3 inputs. The Company does not anticipate that the adoption of this statement will materially expand its consolidated financial statement footnote disclosures.
 
Fourth Quarter of 2010
 
  •  In December 2008 the FASB issued FASB Staff Position No. FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets,” which was subsequently codified by the FASB under ASC Topic 715-20-65 (“Topic 715-20-65”). This standard amends FASB Statement No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” (“FAS 132(R)”) to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The additional disclosure requirements under this FSP include expanded disclosures about an entity’s investment policies and strategies, the categories of plan assets, concentrations of credit risk and fair value methodologies and measurements of plan assets. The Company anticipates that the adoption of this statement will materially expand its consolidated financial statement footnote disclosures.


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
FOR THE YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER 25, 2007
 
 
First Quarter of 2011
 
  •  In September 2009 the FASB issued Accounting Standards Update 2009-13, “Revenue Recognition (Topic 605): Multiple Deliverable Revenue Arrangements (a consensus of the FASB Emerging Issues Task Force),” (“ASU 2009-13”). ASU 2009-13 provides principles and application guidance on whether multiple deliverables exist, how the arrangement should be separated and the consideration allocation. Additionally, ASU 2009-13 requires an entity to allocate revenue in an arrangement using estimated selling prices of deliverables if a vendor does not have vendor-specific objective evidence or third-party evidence of selling price, eliminates the residual method and requires an entity to allocate revenue using the relative selling price method. ASU 2009-13 may be applied retrospectively or prospectively for new or materially modified arrangements and early adoption is permitted. The Company does not anticipate that the adoption of this statement will have a material impact on its consolidated financial statements.
 
NOTE 2:   PROPERTY, PLANT AND EQUIPMENT
 
The components of property, plant and equipment (“PP&E”) were as follows:
 
                 
    November 29,
    November 30,
 
    2009     2008  
    (Dollars in thousands)  
 
Land
  $ 30,118     $ 27,864  
Buildings and leasehold improvements
    380,601       357,203  
Machinery and equipment
    493,152       473,456  
Capitalized internal-use software
    158,630       133,593  
Construction in progress
    32,460       16,759  
                 
Subtotal
    1,094,961       1,008,875  
Accumulated depreciation
    (664,891 )     (596,967 )
                 
PP&E, net
  $ 430,070     $ 411,908  
                 
 
Depreciation expense for the years ended November 29, 2009, November 30, 2008, and November 25, 2007, was $76.8 million, $78.0 million and $67.5 million, respectively.
 
Construction in progress at November 29, 2009, and November 30, 2008, primarily related to the installation of various information technology systems and leasehold improvements.
 
The Company recorded impairment charges of $11.5 million and $16.1 million, in 2009 and 2008, respectively, to reduce the carrying values of certain long-lived assets, primarily in the Americas for leasehold improvements in company-operated stores, to their estimated fair values. The remaining fair values of the impaired stores are not material. The impairment charges were recorded as “Selling, general and administrative expenses” in the Company’s consolidated statements of income.
 
NOTE 3:   BUSINESS ACQUISITIONS
 
The impact of the Company’s acquisitions during 2009 on the Company’s results of operations, as if the acquisitions had been completed as of the beginning of the periods presented, is not significant.


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
FOR THE YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER 25, 2007
 
The changes in the carrying amount of goodwill by business segment for the years ended November 29, 2009, and November 30, 2008, were as follows:
 
                                 
                Asia
       
    Americas     Europe     Pacific     Total  
    (Dollars in thousands)  
 
Balance, November 25, 2007
  $ 199,905     $ 4,063     $ 2,518     $ 206,486  
Foreign currency fluctuation
          (1,025 )     (798 )     (1,823 )
                                 
Balance, November 30, 2008
  $ 199,905     $ 3,038     $ 1,720     $ 204,663  
Additions
    7,513       24,427             31,940  
Foreign currency fluctuation
    5       4,615       545       5,165  
                                 
Balance, November 29, 2009
  $ 207,423     $ 32,080     $ 2,265     $ 241,768  
                                 
 
The increase in goodwill in Europe primarily resulted from the Company’s acquisition of a former distributor, which distributes and markets Levi’s® products within the Russian Federation. The Company acquired a 51% ownership interest in the business venture in December 2008, and acquired the remaining 49% in September 2009. Total purchase consideration for the acquisition was approximately $32 million. The Company preliminarily allocated the purchase price to the fair values of the tangible assets and intangible contractual rights acquired and the liabilities assumed at the acquisition date, with the difference of approximately $20 million recorded as goodwill. Cash paid for the acquisition, net of cash acquired, was $20 million.
 
The increase in goodwill in Europe also reflects the Company’s July 1, 2009, acquisition of a former licensee for a base purchase price of $21 million, plus a purchase price adjustment for the acquired net asset value based on the final balance sheet of the acquired business, estimated at $16 million. The Company preliminarily allocated the purchase price to the fair values of the tangible assets, intangible customer lists and contractual rights acquired, and the liabilities assumed at the acquisition date, with the difference of approximately $4 million recorded as goodwill. During 2009, the Company made payments totaling $16 million, net of cash acquired, in partial payment for this acquisition. The liability for the remaining purchase consideration, which is expected to be paid in the second quarter of 2010, is included in “Other accrued liabilities” on the Company’s consolidated balance sheet.
 
The increase in goodwill in the Americas resulted from the Company’s July 13, 2009, acquisition of the operating rights to 73 Levi’s® and Dockers® outlet stores from Anchor Blue Retail Group, Inc., who previously operated the stores under a license agreement with the Company. The Company preliminarily allocated the $62 million cost of the acquisition to the fair values of the tangible assets and intangible contractual rights acquired and the liabilities assumed at the acquisition date, with the difference of approximately $7 million recorded as goodwill.
 
Other intangible assets, net, were as follows:
 
                                                 
    November 29, 2009     November 30, 2008  
    Gross
                Gross
             
    Carrying
    Accumulated
          Carrying
    Accumulated
       
    Value     Amortization     Total     Value     Amortization     Total  
    (Dollars in thousands)  
 
Unamortized intangible assets:
                                               
Trademarks
  $ 42,743     $     $ 42,743     $ 42,771     $     $ 42,771  
Amortized intangible assets:
                                               
Acquired contractual rights
    46,529       (6,019 )     40,510       142       (139 )     3  
Customer lists
    22,340       (2,395 )     19,945                    
                                                 
    $ 111,612     $ (8,414 )   $ 103,198     $ 42,913     $ (139 )   $ 42,774  
                                                 


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
FOR THE YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER 25, 2007
 
The estimated useful lives of the Company’s amortized intangible assets range from two to eight years. For the year ended November 29, 2009, amortization of these intangible assets was $7.8 million. The estimated amortization of these intangible assets, which is included in “Selling, general and administrative expenses” in the Company’s consolidated statements of income, in each of the five succeeding fiscal years is approximately $16 million in 2010, $13 million in 2011, $13 million in 2012, $11 million in 2013, and $3 million in 2014.
 
As of November 29, 2009, there was no impairment to the carrying value of the Company’s goodwill or indefinite lived intangible assets.
 
NOTE 4:   FAIR VALUE OF FINANCIAL INSTRUMENTS
 
The following table presents the Company’s financial instruments that are carried at fair value.
 
                                                 
    November 29, 2009     November 30, 2008  
          Fair Value Estimated Using           Fair Value Estimated Using  
          Level 1
    Level 2
          Level 1
    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
  $ 16,855     $ 16,855     $     $ 13,465     $ 13,465     $  
Forward foreign exchange contracts, net(3)
    721             721       10,211             10,211  
                                                 
Total financial assets carried at fair value
  $ 17,576     $ 16,855     $ 721     $ 23,676     $ 13,465     $ 10,211  
                                                 
Financial liabilities carried at fair value
                                               
Forward foreign exchange contracts, net(3)
  $ 14,519     $     $ 14,519     $ 5,225     $     $ 5,225  
Interest rate swap, net
    1,451             1,451       1,454             1,454  
                                                 
Total financial liabilities carried at fair value
  $ 15,970     $     $ 15,970     $ 6,679     $     $ 6,679  
                                                 
 
 
(1) Fair values estimated using Level 1 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. See Note 12 for more information on rabbi trust assets.
 
(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 credit default swap prices. For the interest rate swap, for which the Company’s fair value estimate incorporates discounted future cash flows using a forward curve mid-market pricing convention, inputs include LIBOR forward rates and credit default swap prices.
 
(3) The Company’s forward foreign exchange contracts are subject to International Swaps and Derivatives Association, Inc. (“ISDA”) master agreements. These agreements are signed between the Company and each respective financial institution, and permit the net-settlement of forward foreign exchange contracts on a per institution basis.


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
FOR THE YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER 25, 2007
 
 
The following table presents the carrying value — including accrued interest as applicable — and estimated fair value of the Company’s financial instruments that are carried at adjusted historical cost.
 
                                 
    November 29, 2009     November 30, 2008  
    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
  $ 108,489     $ 103,618     $ 179,992     $ 149,541  
U.S. dollar notes
    817,824       852,067       818,029       477,583  
Euro senior notes
    379,935       379,935       329,169       151,900  
Senior term loan
    323,497       291,163       323,589       204,069  
Yen-denominated Eurobonds
    232,494       197,448       210,621       86,788  
Short-term and other borrowings
    19,027       19,027       20,943       20,943  
                                 
Total financial liabilities carried at adjusted historical cost
  $ 1,881,266     $ 1,843,258     $ 1,882,343     $ 1,090,824  
                                 
 
 
(1) Fair value estimate incorporates mid-market price quotes.
 
As of November 30, 2008, the decline in fair value of the Company’s long-term debt as compared to its carrying value is primarily due to changes in overall capital market conditions as demonstrated by lower liquidity in the markets, increases in credit spread, and decreases in bank lending activities, which generally resulted in investors moving from high yield securities to lower yield investment grade or U.S. Treasury securities in efforts to preserve capital.
 
The overall increase in fair value of the Company’s long-term debt as of November 29, 2009, as compared to November 30, 2008, is primarily due to improvements in the capital markets during 2009.
 
NOTE 5:   DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
 
The Company is exposed to certain risks relating to its ongoing business operations. The primary risks managed by using derivative instruments are foreign currency risk and interest rate risk. Forward exchange contracts on various currencies are entered into to manage foreign currency exposures associated with certain product sourcing activities, some intercompany sales, foreign subsidiaries’ royalty payments, interest payments, earnings repatriations, net investment in foreign operations and funding activities. The Company designates its outstanding Euro senior notes and a portion of its outstanding Yen-denominated Eurobonds as net investment hedges to manage foreign currency exposures in its foreign operations. Interest rate swaps are entered into to manage interest rate risk associated with the Company’s variable-rate borrowings. The Company does not currently apply hedge accounting to its derivative transactions.
 
The Company’s foreign currency management objective is to mitigate the potential impact of currency fluctuations on the value of its U.S. Dollar cash flows and to reduce the variability of certain cash flows at the subsidiary level. The Company actively manages certain forecasted foreign currency exposures and uses a centralized currency management operation to take advantage of potential opportunities to naturally offset foreign currency exposures against each other. The Company manages the currency risk associated with certain forecasted cash flows periodically and only partially manages the timing mismatch between its forecasted exposures and the related financial instruments used to mitigate the currency risk. As of November 29, 2009, the Company had forward foreign exchange contracts to buy $523.5 million and to sell $175.1 million against various foreign currencies. These contracts are at various exchange rates and expire at various dates through December 2010.


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
FOR THE YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER 25, 2007
 
The table below provides data about the carrying values of derivative and non-derivative instruments:
 
                                                 
    November 29, 2009     November 30, 2008  
    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)
  $ 1,189     $ (468 )   $ 721     $ 13,522     $ (3,311 )   $ 10,211  
Forward foreign exchange contracts(2)
    5,675       (20,194 )     (14,519 )     2,766       (7,991 )     (5,225 )
Interest rate contracts(2)
          (1,451 )     (1,451 )           (1,454 )     (1,454 )
                                                 
Total derivatives not designated as hedging instruments
  $ 6,864     $ (22,113 )           $ 16,288     $ (12,756 )        
                                                 
Non-derivatives designated as hedging instruments
                                               
Euro senior notes
  $     $ (374,641 )           $     $ (324,520 )        
Yen-denominated Eurobonds(3)
          (92,684 )                   (83,954 )        
                                                 
Total non-derivatives designated as hedging instruments
  $     $ (467,325 )           $     $ (408,474 )        
                                                 
 
 
(1) Included in “Other current assets” on the Company’s consolidated balance sheets.
 
(2) Included in “Other accrued liabilities” on the Company’s consolidated balance sheets.
 
(3) Represents the portion of the Yen-denominated Eurobonds that have been designated as a net investment hedge.
 
The table below provides data about the amount of gains and losses related to derivative and non-derivative instruments designated as net investment hedges included in the “Accumulated other comprehensive income (loss)” (“AOCI”) section of “Stockholders’ deficit” on the Company’s consolidated balance sheets, and in “Other income (expense), net” in the Company’s consolidated statements of income:
 
                                         
                Gain or (Loss)
 
    Gain or (Loss)
    Recognized in Other Income (Expense), net
 
    Recognized in AOCI
    (Ineffective Portion and Amount
 
    (Effective Portion)     Excluded from Effectiveness Testing)  
    As of
    As of
    Year Ended  
    November 29,
    November 30,
    November 29,
    November 30,
    November 25,
 
    2009     2008     2009     2008     2007  
    (Dollars in thousands)  
 
Forward foreign exchange contracts(1)
  $ 4,637     $ 4,637     $     $     $  
Euro senior notes
    (61,570 )     (10,870 )                  
Yen-denominated Eurobonds
    (23,621 )     (14,892 )     (13,094 )     (14,815 )     (6,981 )
Cumulative income taxes
    31,237       8,828                          
                                         
Total
  $ (49,317 )   $ (12,297 )                        
                                         
 
 
(1) Realized gains on settled foreign exchange derivatives designated as net investment hedges.


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
FOR THE YEARS ENDED NOVEMBER 29, 2009, NOVEMBER 30, 2008, AND NOVEMBER 25, 2007
 
 
The table below provides data about the amount of gains and losses recognized in income on derivative instruments not designated as hedging instruments:
 
                         
    Gain or (Loss) During  
    Year Ended  
    November 29,
    November 30,
    November 25,
 
    2009     2008     2007  
    (Dollars in thousands)  
 
Forward foreign exchange contracts(1):
                       
Realized
  $ (50,760 )   $ 53,499     $ (16,137 )
Unrealized
    (18,794 )     10,944       (5,934 )
                         
Total
  $ (69,554 )   $ 64,443     $ (22,071 )