LEVI STRAUSS & CO - FORM 10-Q - October 6, 2014

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
Form 10-Q
(Mark One)
 þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended August 24, 2014
or
 ¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 002-90139
_________________
LEVI STRAUSS & CO.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE
  
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) (Zip Code)
(415) 501-6000
(Registrant’s Telephone Number, Including Area Code)
None
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
_________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨    No  þ
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See definition of “Large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
 
 
 
 
 
 
Large accelerated filer ¨
 
Accelerated filer ¨
 
Non-accelerated filer þ
 
Smaller reporting company ¨
 
(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  ¨    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 — 37,430,283 shares outstanding on October 1, 2014
 
 
 
 
 
 
 
 
 
 


LEVI STRAUSS & CO. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED AUGUST 24, 2014
 
 
 
 
Page
Number
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
 
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 3.
 
Item 4.
 
Item 5.
 
Item 6.
 
 


PART I — FINANCIAL INFORMATION

Item 1.
CONSOLIDATED FINANCIAL STATEMENTS
LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
(Unaudited)
 
 
 
August 24,
2014
 
November 24,
2013
 
(Dollars in thousands)
ASSETS
Current Assets:
 
 
 
Cash and cash equivalents
$
367,360

 
$
489,258

Trade receivables, net of allowance for doubtful accounts of $15,659 and $18,264
441,163

 
446,671

Inventories:
 
 
 
Raw materials
4,229

 
3,361

Work-in-process
6,000

 
6,597

Finished goods
712,110

 
593,909

Total inventories
722,339

 
603,867

Deferred tax assets, net
213,055

 
187,836

Other current assets
111,814

 
112,082

Total current assets
1,855,731

 
1,839,714

Property, plant and equipment, net of accumulated depreciation of $785,017 and $775,933
396,806

 
439,861

Goodwill
240,944

 
241,228

Other intangible assets, net
46,823

 
49,149

Non-current deferred tax assets, net
416,504

 
448,839

Other non-current assets
101,550

 
108,627

Total assets
$
3,058,358

 
$
3,127,418

 
 
 
 
LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS’ EQUITY
Current Liabilities:
 
 
 
Short-term debt
$
130,243

 
$
41,861

Accounts payable
262,385

 
254,516

Accrued salaries, wages and employee benefits
157,717

 
209,966

Restructuring liabilities
37,834

 
—

Accrued interest payable
28,092

 
5,346

Accrued income taxes
8,954

 
11,301

Other accrued liabilities
220,690

 
262,488

Total current liabilities
845,915

 
785,478

Long-term debt
1,296,608

 
1,504,016

Long-term capital leases
10,568

 
10,243

Postretirement medical benefits
117,093

 
122,248

Pension liability
326,047

 
326,767

Long-term employee related benefits
74,151

 
73,386

Long-term income tax liabilities
31,596

 
30,683

Other long-term liabilities
57,697

 
61,097

Total liabilities
2,759,675

 
2,913,918

Commitments and contingencies


 


Temporary equity
52,877

 
38,524

 
 
 
 
Stockholders’ Equity:
 
 
 
Levi Strauss & Co. stockholders’ equity
 
 
 
Common stock — $.01 par value; 270,000,000 shares authorized; 37,428,224 shares and 37,446,087 shares issued and outstanding
374

 
374

Additional paid-in capital
1,909

 
7,361

Retained earnings
554,021

 
475,960

Accumulated other comprehensive loss
(312,095
)
 
(312,029
)
Total Levi Strauss & Co. stockholders’ equity
244,209

 
171,666

Noncontrolling interest
1,597

 
3,310

Total stockholders’ equity
245,806

 
174,976

Total liabilities, temporary equity and stockholders’ equity
$
3,058,358

 
$
3,127,418

The accompanying notes are an integral part of these consolidated financial statements.


3

LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
 
 
Three Months Ended
 
Nine Months Ended
 
August 24,
2014
 
August 25,
2013
 
August 24,
2014
 
August 25,
2013
 
(Dollars in thousands)
(Unaudited)
Net revenues
$
1,154,129

 
$
1,141,284

 
$
3,365,966

 
$
3,386,860

Cost of goods sold
591,926

 
568,448

 
1,697,105

 
1,673,435

Gross profit
562,203

 
572,836

 
1,668,861

 
1,713,425

Selling, general and administrative expenses
454,712

 
454,750

 
1,325,546

 
1,314,247

Restructuring, net
2,371

 
—

 
79,411

 
—

Operating income
105,120

 
118,086

 
263,904

 
399,178

Interest expense
(27,179
)
 
(30,903
)
 
(90,318
)
 
(95,943
)
Loss on early extinguishment of debt
—

 
—

 
(11,151
)
 
(689
)
Other expense, net
(5,605
)
 
(10,661
)
 
(7,544
)
 
(5,425
)
Income before income taxes
72,336

 
76,522

 
154,891

 
297,121

Income tax expense
22,536

 
20,077

 
44,479

 
85,592

Net income
49,800

 
56,445

 
110,412

 
211,529

Net loss attributable to noncontrolling interest
820

 
630

 
1,637

 
715

Net income attributable to Levi Strauss & Co.
$
50,620

 
$
57,075

 
$
112,049

 
$
212,244






























The accompanying notes are an integral part of these consolidated financial statements.


4

LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
Three Months Ended
 
Nine Months Ended
 
August 24,
2014
 
August 25,
2013
 
August 24,
2014
 
August 25,
2013
 
(Dollars in thousands)
(Unaudited)
Net income
$
49,800

 
$
56,445

 
$
110,412

 
$
211,529

Other comprehensive income (loss), net of related income taxes:
 
 
 
 
 
 
 
Pension and postretirement benefits
2,339

 
3,718

 
6,857

 
10,826

Net investment hedge gains (losses)
3,644

 
(8,329
)
 
74

 
(5,928
)
Foreign currency translation (losses) gains
(7,917
)
 
9,823

 
(7,856
)
 
1,650

Unrealized gain (loss) on marketable securities
291

 
(171
)
 
783

 
(541
)
Total other comprehensive (loss) income
(1,643
)
 
5,041

 
(142
)
 
6,007

Comprehensive income
48,157

 
61,486

 
110,270

 
217,536

Comprehensive loss attributable to noncontrolling interest
873

 
451

 
1,713

 
1,644

Comprehensive income attributable to Levi Strauss & Co.
$
49,030

 
$
61,937

 
$
111,983

 
$
219,180



































The accompanying notes are an integral part of these consolidated financial statements.


5

LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Nine Months Ended
 
August 24,
2014
 
August 25,
2013
 
(Dollars in thousands)
(Unaudited)
Cash Flows from Operating Activities:
 
 
 
Net income
$
110,412

 
$
211,529

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
81,119

 
86,600

Asset impairments
3,858

 
1,917

Gain on disposal of assets
(66
)
 
(2,120
)
Unrealized foreign exchange losses
5,906

 
323

Realized (gain) loss on settlement of forward foreign exchange contracts not designated for hedge accounting
(3,358
)
 
2,547

Employee benefit plans’ amortization from accumulated other comprehensive loss
11,192

 
17,478

Employee benefit plans’ curtailment gain, net
—

 
(815
)
Noncash restructuring charges
3,386

 
—

Noncash loss on extinguishment of debt
3,170

 
689

Amortization of deferred debt issuance costs
2,960

 
3,232

Stock-based compensation
9,305

 
6,303

Allowance for doubtful accounts
531

 
2,394

Change in operating assets and liabilities:
 
 
 
Trade receivables
4,190

 
95,373

Inventories
(119,209
)
 
(87,434
)
Other current assets
(5,895
)
 
6,989

Other non-current assets
(5,035
)
 
873

Accounts payable and other accrued liabilities
(7,631
)
 
(42,640
)
Restructuring liabilities
39,759

 
—

Income tax liabilities
10,590

 
37,660

Accrued salaries, wages and employee benefits and long-term employee related benefits
(61,358
)
 
(75,322
)
Other long-term liabilities
(1,435
)
 
8,845

Other, net
(1,102
)
 
(605
)
Net cash provided by operating activities
81,289

 
273,816

Cash Flows from Investing Activities:
 
 
 
Purchases of property, plant and equipment
(50,461
)
 
(63,002
)
Proceeds from sale of assets
1,471

 
2,168

Proceeds (payments) on settlement of forward foreign exchange contracts not designated for hedge accounting
3,358

 
(2,547
)
Acquisitions, net of cash acquired
(318
)
 
—

Net cash used for investing activities
(45,950
)
 
(63,381
)
Cash Flows from Financing Activities:
 
 
 
Proceeds from issuance of long-term debt
—

 
140,000

Repayments of long-term debt and capital leases
(207,789
)
 
(326,198
)
Proceeds from senior revolving credit facility
165,000

 
—

Repayments of senior revolving credit facility
(75,000
)
 
—

Proceeds from short-term credit facilities
18,776

 
42,694

Repayments of short-term credit facilities
(18,793
)
 
(50,409
)
Other short-term borrowings, net
(2,932
)
 
(6,100
)
Debt issuance costs
(2,684
)
 
(2,557
)
Restricted cash
617

 
123

Repurchase of common stock
(5,188
)
 
(365
)
Excess tax benefits from stock-based compensation
799

 
165

Dividend to stockholders
(30,003
)
 
(25,076
)
Net cash used for financing activities
(157,197
)
 
(227,723
)
Effect of exchange rate changes on cash and cash equivalents
(40
)
 
(6,518
)
Net decrease in cash and cash equivalents
(121,898
)
 
(23,806
)
Beginning cash and cash equivalents
489,258

 
406,134

Ending cash and cash equivalents
$
367,360

 
$
382,328

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
61,994

 
$
61,209

Income taxes
41,598

 
26,441

The accompanying notes are an integral part of these consolidated financial statements.


6

LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIOD ENDED AUGUST 24, 2014
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Levi Strauss & Co. (the “Company”) is one of the world’s leading branded apparel companies. The Company designs and markets jeans, casual and dress pants, tops, shorts, skirts, jackets, footwear and related accessories for men, women and children around the world under the Levi’s®, Dockers®, Signature by Levi Strauss & Co.™ and Denizen® brands. The Company operates its business through three geographic regions: Americas, Europe and Asia.
Basis of Presentation and Principles of Consolidation
The unaudited consolidated financial statements of the Company and its wholly-owned and majority-owned foreign and domestic subsidiaries are prepared in conformity with generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial information. In the opinion of management, all adjustments necessary for a fair statement of the financial position and the results of operations for the periods presented have been included. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended November 24, 2013, included in the Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission (“SEC”) on February 11, 2014.
The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions have been eliminated. Management believes the disclosures are adequate to make the information presented herein not misleading. The results of operations for the three and nine months ended August 24, 2014, may not be indicative of the results to be expected for any other interim period or the year ending November 30, 2014.
The Company’s fiscal year ends on the last Sunday of November in each year, although the fiscal years of certain foreign subsidiaries end on November 30. Each quarter of both fiscal years 2014 and 2013 consists of 13 weeks, with the exception of the fourth quarter of 2014, which will consist of 14 weeks. All references to years relate to fiscal years rather than calendar years.
Subsequent events have been evaluated through the issuance date of these financial statements.
The financing section of the Company's consolidated statements of cash flows has been corrected for the prior year to present the proceeds and repayments of short-term credit facility borrowings with terms greater than three months on a gross basis. Amounts were previously presented on a net basis. There was no change to the total financing cash flows, and the change was immaterial to the financial statements taken as a whole.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the related notes to the consolidated financial statements. Estimates are based upon historical factors, current circumstances and the experience and judgment of the Company’s management. Management evaluates its estimates and assumptions on an ongoing basis and may employ outside experts to assist in its evaluations. Changes in such estimates, based on more accurate future information, or different assumptions or conditions, may affect amounts reported in future periods.
Restructuring Liabilities
Upon approval of a restructuring plan, the Company records restructuring liabilities for employee severance and related termination benefits when they become probable and estimable for recurring 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.


7



LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 24, 2014

Recently Issued Accounting Standards
There have been no developments to recently issued accounting standards, including the expected dates of adoption and estimated effects on the Company’s consolidated financial statements, from those disclosed in the Company’s 2013 Annual Report on Form 10-K, except for the following, which have been grouped by their effective dates for the Company:
First Quarter of 2017
•
In June 2014, the FASB issued Accounting Standards Update No. 2014-12, "Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide that a Performance Target Could be Achieved after the Requisite Service Period," ("ASU 2014-12"). ASU 2014-12 requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The Company does not anticipate that the adoption of this standard will have a material impact on its consolidated financial statements.
First Quarter of 2018
•
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers (Topic 606)," ("ASU 2014-09"). ASU 2014-09 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized. The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. The Company is currently assessing the impact that adopting this new accounting guidance will have on its consolidated financial statements and footnote disclosures.


8



LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 24, 2014

NOTE 2: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the Company’s financial instruments that are carried at fair value:
 
August 24, 2014
 
November 24, 2013
 
 
 
Fair Value Estimated
Using
 
 
 
Fair Value Estimated
Using
 
Fair Value
 
Level 1 Inputs(1)
 
Level 2 Inputs(2)
 
Fair Value
 
Level 1 Inputs(1)
 
Level 2 Inputs(2)
 
(Dollars in thousands)
Financial assets carried at fair value
 
 
 
 
 
 
 
 
 
 
 
Rabbi trust assets
$
25,544

 
$
25,544

 
$
—

 
$
23,752

 
$
23,752

 
$
—

Forward foreign exchange contracts, net(3)
3,661

 
—

 
3,661

 
7,145

 
—

 
7,145

Total
$
29,205

 
$
25,544

 
$
3,661

 
$
30,897

 
$
23,752

 
$
7,145

Financial liabilities carried at fair value
 
 
 
 
 
 
 
 
 
 
 
Forward foreign exchange contracts, net(3)
$
9,513

 
$
—

 
$
9,513

 
$
2,335

 
$
—

 
$
2,335

_____________
 
(1)
Fair values estimated using Level 1 inputs are inputs which consist of quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Rabbi trust assets consist of a diversified portfolio of equity, fixed income and other securities.

(2)
Fair values estimated using Level 2 inputs are inputs, other than quoted prices, that are observable for the asset or liability, either directly or indirectly and include among other things, quoted prices for similar assets or liabilities in markets that are active or inactive as well as inputs other than quoted prices that are observable. For forward foreign exchange contracts, inputs include foreign currency exchange and interest rates and, where applicable, credit default swap prices.

(3)
The Company’s over-the-counter forward foreign exchange contracts are subject to International Swaps and Derivatives Association, Inc. master agreements. These agreements permit the net-settlement of these contracts on a per-institution basis.
The following table presents the carrying value – including related accrued interest – and estimated fair value of the Company’s financial instruments that are carried at adjusted historical cost:
 
August 24, 2014
 
November 24, 2013
 
Carrying
Value
 
Estimated Fair Value(1)
 
Carrying
Value
 
Estimated Fair Value(1)
 
(Dollars in thousands)
Financial liabilities carried at adjusted historical cost
 
 
 
 
 
 
 
Senior revolving credit facility
$
90,070

 
$
90,070

 
$
—

 
$
—

4.25% Yen-denominated Eurobonds due 2016
39,045

 
40,706

 
39,659

 
38,523

7.75% Euro senior notes due 2018
203,577

 
212,890

 
405,304

 
432,098

7.625% senior notes due 2020
536,120

 
572,870

 
526,112

 
577,956

6.875% senior notes due 2022
545,320

 
591,368

 
537,447

 
588,275

Short-term borrowings
40,464

 
40,464

 
41,976

 
41,976

Total
$
1,454,596

 
$
1,548,368

 
$
1,550,498

 
$
1,678,828

_____________
 
(1)
Fair value estimate incorporates mid-market price quotes.



9



LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 24, 2014

NOTE 3: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
As of August 24, 2014, the Company had forward foreign exchange contracts to buy $538.4 million and to sell $369.5 million against various foreign currencies. These contracts are at various exchange rates and expire at various dates through February 2016.
The table below provides data about the carrying values of derivative instruments and non-derivative instruments: 
 
August 24, 2014
 
November 24, 2013
 
Assets
 
(Liabilities)
 
Derivative Net Carrying Value
 
Assets
 
(Liabilities)
 
Derivative Net Carrying Value
 
Carrying
Value
 
Carrying
Value
 
 
Carrying
Value
 
Carrying
Value
 
 
(Dollars in thousands)
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Forward foreign exchange contracts
$
4,127

 
$
(466
)
 
$
3,661

 
$
11,145

 
$
(4,000
)
 
$
7,145

Forward foreign exchange contracts
3,639

 
(13,152
)
 
(9,513
)
 
880

 
(3,215
)
 
(2,335
)
Total
$
7,766

 
$
(13,618
)
 
 
 
$
12,025

 
$
(7,215
)
 
 
Non-derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
4.25% Yen-denominated Eurobonds due 2016
$
—

 
$
(15,022
)
 
 
 
$
—

 
$
(20,564
)
 
 
7.75% Euro senior notes due 2018
—

 
(199,200
)
 
 
 
—

 
(404,430
)
 
 
Total
$
—

 
$
(214,222
)
 
 
 
$
—

 
$
(424,994
)
 
 
The Company's over-the-counter forward foreign exchange contracts are subject to International Swaps and Derivatives Association, Inc. master agreements. These agreements permit the net settlement of these contracts on a per-institution basis. The table below presents, by type of financial instrument, the gross amounts of the Company's derivative instruments, amounts offset due to master netting arrangements with the Company's various counterparties, and the net amounts recognized on the Company's consolidated balance sheets:
 
August 24, 2014
 
November 24, 2013
 
Gross Amounts of Recognized Assets / (Liabilities)
 
Gross Amounts Offset in the Statement of Financial Position
 
Net Amounts of Assets / (Liabilities) Presented in the Statement of Financial Position
 
Gross Amounts of Recognized Assets / (Liabilities)
 
Gross Amounts Offset in the Statement of Financial Position
 
Net Amounts of Assets / (Liabilities) Presented in the Statement of Financial Position
 
 
 
 
 
 
(Dollars in thousands)
Over-the-counter forward foreign exchange contracts
 
 
 
 
 
 
 
 
 
 
 
Financial assets
$
4,688

 
$
(4,105
)
 
$
583

 
$
8,600

 
$
(4,880
)
 
$
3,720

Financial liabilities
(11,078
)
 
4,105

 
(6,973
)
 
(5,855
)
 
4,880

 
(975
)
Total
 
 
 
 
$
(6,390
)
 
 
 
 
 
$
2,745

Embedded derivative contracts
 
 
 
 
 
 
 
 
 
 
 
Financial assets
$
3,078

 
$
—

 
$
3,078

 
$
3,425

 
$
—

 
$
3,425

Financial liabilities
(2,540
)
 
—

 
(2,540
)
 
(1,360
)
 
—

 
(1,360
)
Total
 
 
 
 
$
538

 
 
 
 
 
$
2,065




10



LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 24, 2014

The table below provides data about the amount of gains and losses related to derivative instruments and non-derivative instruments designated as net investment hedges included in “Accumulated other comprehensive loss” (“AOCI”) on the Company’s consolidated balance sheets, and in “Other expense, net” in the Company’s consolidated statements of income:
 
Gain or (Loss)
Recognized in AOCI
(Effective Portion)
 
Gain or (Loss) Recognized in Other
Expense, net (Ineffective
Portion and Amount Excluded from
Effectiveness Testing)
 
As of
 
As of
 
Three Months Ended
 
Nine Months Ended
August 24,
2014
November 24,
2013
August 24,
2014
 
August 25,
2013
 
August 24,
2014
 
August 25,
2013
 
(Dollars in thousands)
Forward foreign exchange contracts
$
4,637

 
$
4,637

 

 


 


 


4.25% Yen-denominated Eurobonds due 2016
(20,727
)
 
(21,161
)
 
$
490

 
$
(661
)
 
$
594

 
$
3,243

7.75% Euro senior notes due 2018
(27,676
)
 
(27,361
)
 
—

 
—

 
—

 
—

Cumulative income taxes
17,140

 
17,186

 
 
 
 
 
 
 
 
Total
$
(26,626
)
 
$
(26,699
)
 
 
 
 
 
 
 
 
The table below provides data about the amount of gains and losses related to derivatives not designated as hedging instruments included in “Other expense, net” in the Company’s consolidated statements of income:
 
Gain or (Loss)
 
Three Months Ended
 
Nine Months Ended
 
August 24,
2014
 
August 25,
2013
 
August 24,
2014
 
August 25,
2013
 
(Dollars in thousands)
Forward foreign exchange contracts:
 
 
 
 
 
 
 
Realized
$
(3,411
)
 
$
3,650

 
$
3,358

 
$
(2,547
)
Unrealized
1,882

 
2,664

 
(10,461
)
 
8,833

Total
$
(1,529
)
 
$
6,314

 
$
(7,103
)
 
$
6,286




11



LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 24, 2014

NOTE 4: DEBT 
 
 
August 24,
2014
 
November 24,
2013
 
 
 
(Dollars in thousands)
 
 
 
 
 
 
Long-term debt
 
 
 
 
 
Unsecured:
 
 
 
 
 
4.25% Yen-denominated Eurobonds due 2016
$
38,517

 
$
39,545

 
 
7.75% Euro senior notes due 2018
199,200

 
404,430

 
 
7.625% senior notes due 2020
525,000

 
525,000

 
 
6.875% senior notes due 2022
533,891

 
535,041

 
 
Total unsecured
1,296,608

 
1,504,016

 
 
Total long-term debt
$
1,296,608

 
$
1,504,016

 
 
Short-term debt
 
 
 
 
 
Secured:
 
 
 
 
 
Senior revolving credit facility
$
90,000

 
$
—

 
 
Unsecured:
 
 
 
 
 
Short-term borrowings
40,243

 
41,861

 
 
Total short-term debt
$
130,243

 
$
41,861

 
 
Total long-term and short-term debt
$
1,426,851

 
$
1,545,877

 
Senior Revolving Credit Facility
On March 21, 2014, the Company amended and restated its senior secured revolving credit facility to extend the term through March 2019, subject to shortening if obligations under the Company's 7.75% Euro senior notes due 2018 (the "2018 Euro Notes") are outstanding on February 13, 2018. The terms of the amended and restated credit facility are similar to the terms under the original credit facility, except that of the maximum availability of $850.0 million, $350.0 million is secured by the U.S. Levi's® trademarks, an increase from the $250.0 million in the original credit facility. The interest rate for borrowings under the credit facility was reduced from LIBOR plus 150 – 275 basis points to LIBOR plus 125 – 200 basis points, depending on borrowing base availability, and the range of the rate for undrawn availability was reduced from 37.5 – 50 basis points to 25 – 30 basis points (depending on the Company's credit ratings). All other terms of the original credit agreement, including, without limitation, guarantees and security, covenants, and events of default, have not been materially changed as a result of the amended and restated credit agreement and remain in full force and effect. During the nine months ended August 24, 2014, the Company recorded a loss of $1.0 million on early extinguishment of debt related to the write-off of unamortized debt issuance costs.
The Company’s unused availability under its senior secured revolving credit facility was $606.0 million at August 24, 2014, as the Company’s total availability of $667.0 million was reduced by $61.0 million of letters of credit and other credit usage allocated under the credit facility.
Redemption of Euro Senior Notes due 2018
On May 15, 2014, the Company redeemed €150.0 million in aggregate principal amount of its 2018 Euro Notes at a redemption price specified in the indenture governing the 2018 Euro Notes of 103.875% of the principal amount redeemed, plus accrued and unpaid interest to the date of redemption. The Company used borrowings of $100.0 million from its senior secured revolving credit facility and cash on hand to fund the redemption. During the nine months ended August 24, 2014, the Company recorded a loss of $10.2 million on early extinguishment of debt, which was comprised of redemption premiums of $8.0 million and the write-off of $2.2 million of unamortized debt issuance costs.


12



LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 24, 2014

Interest Rates on Borrowings
The Company’s weighted-average interest rate on average borrowings outstanding during the three and nine months ended August 24, 2014, was 7.40% and 7.74%, respectively, as compared to 7.75% and 7.44%, respectively, in the same periods of 2013.

NOTE 5: EMPLOYEE BENEFIT PLANS
The following table summarizes the components of net periodic benefit cost and the changes recognized in “Accumulated other comprehensive loss” for the Company’s defined benefit pension plans and postretirement benefit plans: 
 
 
 
 
 
 
 
 
 
Pension Benefits
 
Postretirement Benefits
 
Three Months Ended
 
Three Months Ended
 
August 24,
2014
 
August 25,
2013
 
August 24,
2014
 
August 25,
2013
 
(Dollars in thousands)
Net periodic benefit cost:
 
 
 
 
 
 
 
Service cost
$
2,106

 
$
2,052

 
$
63

 
$
94

Interest cost
13,775

 
12,918

 
1,292

 
1,239

Expected return on plan assets
(13,909
)
 
(14,105
)
 
—

 
—

Amortization of prior service benefit
—

 
(24
)
 
(1
)
 
(122
)
Amortization of actuarial loss
2,692

 
3,810

 
1,063

 
1,691

Curtailment gain
(1,790
)
 
(305
)
 
—

 
—

Net settlement loss
—

 
415

 
—

 
—

Net periodic benefit cost
2,874

 
4,761

 
2,417

 
2,902

Changes in accumulated other comprehensive loss:
 
 
 
 
 
 
 
Amortization of prior service benefit
—

 
24

 
1

 
122

Amortization of actuarial loss
(2,692
)
 
(3,810
)
 
(1,063
)
 
(1,691
)
Curtailment loss
(1
)
 
(12
)
 
—

 
—

Net settlement loss
—

 
(406
)
 
—

 
—

Total recognized in accumulated other comprehensive loss
(2,693
)
 
(4,204
)
 
(1,062
)
 
(1,569
)
Total recognized in net periodic benefit cost and accumulated other comprehensive loss
$
181

 
$
557

 
$
1,355

 
$
1,333



13



LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 24, 2014

 
Pension Benefits
 
Postretirement Benefits
 
Nine Months Ended
 
Nine Months Ended
 
August 24,
2014
 
August 25,
2013
 
August 24,
2014
 
August 25,
2013
 
(Dollars in thousands)
Net periodic benefit cost:
 
 
 
 
 
 
 
Service cost
$
6,431

 
$
6,548

 
$
192

 
$
282

Interest cost
41,312

 
38,978

 
3,907

 
3,718

Expected return on plan assets
(41,788
)
 
(42,065
)
 
—

 
—

Amortization of prior service benefit
(36
)
 
(61
)
 
(4
)
 
(366
)
Amortization of actuarial loss
8,097

 
12,241

 
3,139

 
5,074

Curtailment loss (gain)
2,653

 
(815
)
 
733

 
—

Net settlement (gain) loss
(73
)
 
1,044

 
—

 
—

Net periodic benefit cost
16,596

 
15,870

 
7,967

 
8,708

Changes in accumulated other comprehensive loss:
 
 
 
 
 
 
 
Amortization of prior service benefit
36

 
61

 
4

 
366

Amortization of actuarial loss
(8,097
)
 
(12,241
)
 
(3,139
)
 
(5,074
)
Curtailment gain
114

 
497

 
—

 
—

Net settlement gain (loss)
4

 
(590
)
 
—

 
—

Total recognized in accumulated other comprehensive loss
(7,943
)
 
(12,273
)
 
(3,135
)
 
(4,708
)
Total recognized in net periodic benefit cost and accumulated other comprehensive loss
$
8,653

 
$
3,597

 
$
4,832

 
$
4,000



14



LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 24, 2014

NOTE 6: RESTRUCTURING
On February 5, 2014, the Company's Board of Directors (the “Board”) endorsed a global productivity initiative designed to streamline operations and fuel long-term profitable growth. On March 26, 2014, the Company announced and began to implement the global productivity initiative, which will continue to be implemented through the end of 2015.
The first phase of the global productivity initiative included the elimination of approximately 800 positions within the Company’s global non-retail and non-manufacturing employee population, as well as initiating centrally-led cost-savings and productivity projects. The role eliminations reflect a reduction of management layers, an increase in spans of control, the removal of duplicative roles, a regrouping of country clusters and other structural changes. The elimination of positions was completed during the second and third quarters of 2014. Implementation of the global productivity initiative continued in the second and third quarters of 2014 with a focus on redesigning business processes and identifying opportunities to reduce costs, increase efficiencies and further streamline processes in supporting functions and supply chain.
For the three and nine months ended August 24, 2014, the Company recognized restructuring charges, net, of $2.4 million and $79.4 million, respectively, which were recorded in "Restructuring, net" in the Company's consolidated statements of income. Related charges of $7.5 million and $23.3 million for the three and nine months ended August 24, 2014, respectively, consist primarily of consulting fees for the Company's centrally-led cost-savings and productivity projects. These related charges represent costs incurred associated with ongoing operations to benefit future periods and were recorded in "Selling, general and administrative expenses" in the Company's consolidated statements of income. Cash payments for charges recognized to date are expected to be made primarily in 2014 through the first half of 2015.
The table below summarizes the components of charges included in “Restructuring, net” in the Company’s consolidated statements of income:
 
Three Months Ended
 
Nine Months Ended
 
August 24,
2014
 
August 25,
2013
 
August 24,
2014
 
August 25,
2013
 
(Dollars in thousands)
Restructuring, net:
 
 
 
 
 
 
 
Severance and employee-related benefits(1)
$
2,817

 
$
—

 
$
67,566

 
$
—

Adjustments to severance and employee-related benefits
(1,765
)
 
—

 
(4,810
)
 
—

Lease and other contract termination costs
—

 
—

 
—

 
—

Other(2)
3,108

 
—

 
13,269

 
—

Non-cash pension and postretirement curtailment (gains) losses(3)
(1,789
)
 
—

 
3,386

 
—

Total
$
2,371

 
$
—

 
$
79,411

 
$
—

_____________

(1)
Severance and employee-related benefits relate to items such as severance, based on separation benefits provided by Company policy or statutory benefit plans, out-placement services and career counseling for employees affected by the global productivity initiative.

(2)
Other restructuring costs are expensed as incurred and primarily relate to consulting fees and legal expenses associated with exit activities.

(3)
Non-cash pension and postretirement curtailment gains or losses resulting from the global productivity initiative are included in restructuring charges, with the associated liabilities included in "Pension liability" and "Postretirement medical benefit" in the Company's consolidated balance sheets.
The Company anticipates that it will incur additional restructuring charges in the fourth quarter of 2014 related to the next phase of the global productivity initiative. Cash payments for these additional charges are not expected to be made in the fourth quarter of 2014.
The Company is unable at this time to make a good faith determination of cost estimates, or ranges of cost estimates, for additional actions associated with the global productivity initiative. Final estimates for headcount, timing and charges in certain areas of the international business are subject to completion of applicable local works council and other consultative processes.


15



LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 24, 2014

The following table summarizes the activities associated with restructuring liabilities for the three and nine months ended August 24, 2014. In the table below, "Charges" represents the initial charge related to the restructuring activity. "Adjustments" includes revisions of estimates related to severance, employee-related benefits, lease and other contract termination costs, and other restructuring costs. "Payments" consists of cash payments for severance, employee-related benefits, lease and other contract termination costs, and other restructuring costs.
 
Three Months Ended August 24, 2014
 
Liabilities
 
 
 
Adjustments
 
 
 
Foreign Currency Fluctuation
 
Liabilities
 
May 25,
2014
 
Charges
 
 
Payments
 
 
August 24, 2014
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Severance and employee-related benefits
$
47,376

 
$
2,817

 
$
(1,765
)
 
$
(12,135
)
 
$
(725
)
 
$
35,568

Lease and other contract termination costs
—

 
—

 
—

 
—

 
—

 
—

Other
2,373

 
3,108

 
—

 
(2,865
)
 
—

 
2,616

Total
$
49,749

 
$
5,925

 
$
(1,765
)
 
$
(15,000
)
 
$
(725
)
 
$
38,184

 
 
 
 
 
 
 
 
 
 
 
 
Current portion
$
49,749

 
 
 
 
 
 
 
 
 
$
37,834

Long-term portion
—

 
 
 
 
 
 
 
 
 
350

Total
$
49,749

 
 
 
 
 
 
 
 
 
$
38,184

 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended August 24, 2014
 
Liabilities
 
 
 
Adjustments
 
 
 
Foreign Currency Fluctuation
 
Liabilities
 
November 24, 2013
 
Charges
 
 
Payments
 
 
August 24, 2014
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Severance and employee-related benefits
$
—

 
$
67,566

 
$
(4,810
)
 
$
(25,613
)
 
$
(1,575
)
 
$
35,568

Lease and other contract termination costs
—

 
—

 
—

 
—

 
—

 
—

Other
—

 
13,269

 
—

 
(10,653
)
 
—

 
2,616

Total
$
—

 
$
80,835

 
$
(4,810
)
 
$
(36,266
)
 
$
(1,575
)
 
$
38,184

 
 
 
 
 
 
 
 
 
 
 
 
Current portion
$
—

 
 
 
 
 
 
 
 
 
$
37,834

Long-term portion
—

 
 
 
 
 
 
 
 
 
350

Total
$
—

 
 
 
 
 
 
 
 
 
$
38,184


NOTE 7: COMMITMENTS AND CONTINGENCIES
Forward Foreign Exchange Contracts
The Company uses over-the-counter derivative instruments to manage its exposure to foreign currencies. The Company is exposed to credit loss in the event of nonperformance by the counterparties to the forward foreign exchange contracts. However, the Company believes that its exposures are appropriately diversified across counterparties and that these counterparties are creditworthy financial institutions. Please see Note 3 for additional information.
Other Contingencies
Litigation.  There have been no material developments with respect to the information previously reported in the Company’s 2013 Annual Report on Form 10-K related to legal proceedings.



16



LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 24, 2014

In the ordinary course of business, the Company has various pending cases involving contractual matters, facility and employee-related matters, distribution matters, product liability claims, trademark infringement and other matters. The Company does not believe any of these pending legal proceedings will have a material impact on its financial condition, results of operations or cash flows.

NOTE 8: DIVIDEND
The Company paid a cash dividend of $30.0 million in the second quarter of 2014. The Company does not have an established annual dividend policy. The Company will continue to review its ability to pay cash dividends at least annually, and dividends may be declared at the discretion of the Board depending upon, among other factors, the income tax impact to the dividend recipients, the Company's financial condition and compliance with the terms of the Company's debt agreements.

NOTE 9: ACCUMULATED OTHER COMPREHENSIVE LOSS

The following is a summary of the components of “Accumulated other comprehensive loss,” net of related income taxes: 
 
 
August 24,
2014
 
November 24,
2013
 
 
 
(Dollars in thousands)
 
 
Pension and postretirement benefits
$
(219,915
)
 
$
(226,772
)
 
 
Net investment hedge losses
(26,625
)
 
(26,699
)
 
 
Foreign currency translation losses
(58,314
)
 
(50,458
)
 
 
Unrealized gain on marketable securities
2,049

 
1,266

 
 
Accumulated other comprehensive loss
(302,805
)
 
(302,663
)
 
 
Accumulated other comprehensive income attributable to noncontrolling interest
9,290

 
9,366

 
 
Accumulated other comprehensive loss attributable to Levi Strauss & Co.
$
(312,095
)
 
$
(312,029
)
 

No amounts were reclassified out of "Accumulated other comprehensive loss" into net income other than those that pertain to the Company's pension and postretirement benefit plans. Please see Note 5 for additional information. These amounts are included in "Selling, general and administrative expenses" in the consolidated statements of income.

NOTE 10: OTHER EXPENSE, NET
The following table summarizes significant components of “Other expense, net”:
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
August 24,
2014
 
August 25,
2013
 
August 24,
2014
 
August 25,
2013
 
 
 
(Dollars in thousands)
 
 
Foreign exchange management (losses) gains
$
(1,529
)
 
$
6,314

 
$
(7,103
)
 
$
6,286

 
 
Foreign currency transaction losses(1)
(5,314
)
 
(18,210
)
 
(4,389
)
 
(18,728
)
 
 
Interest income
506

 
357

 
1,534

 
1,138

 
 
Investment income
255

 
214

 
562

 
3,019

 
 
Other
477

 
664

 
1,852

 
2,860

 
 
Total other expense, net
$
(5,605
)
 
$
(10,661
)
 
$
(7,544
)
 
$
(5,425
)
 
_____________
 
(1)
Foreign currency transaction gains and losses reflect the impact of foreign currency fluctuation on the Company's foreign currency denominated balances. Losses in 2013 were primarily due to the weakening of various currencies against the U.S. Dollar.


17



LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 24, 2014

NOTE 11: INCOME TAXES
The effective income tax rate was 28.7% for the nine months ended August 24, 2014, compared to 28.8% for the same period ended August 25, 2013. The decrease in the effective tax rate in 2014 was primarily due to a $3.7 million tax benefit that the Company recorded during the nine months ended August 24, 2014, as a result of reversing a deferred tax liability associated with undistributed foreign earnings, as well as a favorable change in the projected mix of earnings in jurisdictions with lower effective tax rates. Partially offsetting the rate decline was a $3.0 million correction that the Company recorded in the third quarter of 2014 associated with errors identified on previously-filed tax returns related to temporary differences.  The Company determined that the amounts were not material to its previously issued financial statements or to the current period and recorded a correcting entry in the third quarter of 2014. The correction had no effect on operating income or cash, but increased income tax expense and decreased net income in the third quarter of 2014 by $3.0 million. The 2013 effective tax rate benefited from the July 2013 finalization of the U.S. federal tax audit of tax years 2003 – 2008, which enabled the Company to record previously unrecognized tax benefits of $23.4 million during the three months ended August 25, 2013, of which $14.2 million reduced income tax expense for that period.
The Company historically planned to repatriate to the United States the undistributed earnings of its foreign subsidiaries, and accordingly, provided for a deferred tax liability totaling $3.7 million as of November 24, 2013. For the nine months ended August 24, 2014, management made an assertion that $75.0 million of undistributed foreign earnings in certain foreign subsidiaries are indefinitely reinvested. As such, the Company recorded a $3.7 million tax benefit resulting from a reversal of the previously recorded deferred tax liability on undistributed foreign earnings.

NOTE 12: RELATED PARTIES
Robert D. Haas, Chairman Emeritus of the Company and Peter E. Haas Jr., a director of the Company, are board members of the Levi Strauss Foundation, and Seth R. Jaffe, Senior Vice President and General Counsel, is Vice President of the Levi Strauss Foundation, which is not a consolidated entity of the Company. During the three- and nine-month periods ended August 24, 2014, the Company donated $0.2 million and $6.2 million, respectively, to the Levi Strauss Foundation as compared to $0.4 million and $3.9 million, respectively, for the same prior-year periods.
Peter E. Haas Jr. and Lisa Collier, Executive Vice President and President of Global Dockers® Brand, are President and board member, respectively, of the Red Tab Foundation, which is not a consolidated entity of the Company. During the three- and nine-month periods ended August 24, 2014, the Company donated $0.3 million and $0.8 million to the Red Tab Foundation.



18



LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 24, 2014

NOTE 13: BUSINESS SEGMENT INFORMATION
The Company manages its business according to three regional segments: the Americas, Europe and Asia. The Company considers its chief executive officer to be the Company’s chief operating decision maker. The Company’s management, including the chief operating decision maker, manages business operations, evaluates performance and allocates resources based on the regional segments’ net revenues and operating income.
Effective as of the beginning of 2014, the Company's reporting segments were revised to combine its Middle East and North Africa markets, previously managed by the Company's Europe region, with the Company's Asia Pacific region, which was renamed to Asia as a result of the change. Financial information attributable to these markets are not significant to any of the Company's regional segments individually in any of the periods presented herein, and accordingly, business segment information for the prior year has not been revised.
Business segment information for the Company is as follows: 
 
Three Months Ended
 
Nine Months Ended
 
August 24,
2014
 
August 25,
2013
 
August 24,
2014
 
August 25,
2013
 
(Dollars in thousands)
Net revenues:
 
 
 
 
 
 
 
Americas
$
697,467

 
$
710,212

 
$
1,969,030

 
$
2,023,253

Europe
285,983

 
275,211

 
847,403

 
824,915

Asia
170,679

 
155,861

 
549,533

 
538,692

Total net revenues
$
1,154,129

 
$
1,141,284

 
$
3,365,966

 
$
3,386,860

Operating income:
 
 
 
 
 
 
 
Americas
$
122,210

 
$
125,228

 
$
342,687

 
$
376,598

Europe
49,587

 
45,914

 
159,181

 
145,549

Asia
17,366

 
22,666

 
88,550

 
104,233

Regional operating income
189,163

 
193,808

 
590,418

 
626,380

Corporate:
 
 
 
 
 
 
 
Restructuring
2,371

 
—

 
79,411

 
—

Other corporate staff costs and expenses
81,672

 
75,722

 
247,103

 
227,202

Corporate expenses
84,043

 
75,722

 
326,514

 
227,202

Total operating income
105,120

 
118,086

 
263,904

 
399,178

Interest expense
(27,179
)
 
(30,903
)
 
(90,318
)
 
(95,943
)
Loss on early extinguishment of debt
—

 
—

 
(11,151
)
 
(689
)
Other expense, net
(5,605
)
 
(10,661
)
 
(7,544
)
 
(5,425
)
Income before income taxes
$
72,336

 
$
76,522

 
$
154,891

 
$
297,121




19

Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
Overview
We design, market and sell – directly or through third parties and licensees – products that include jeans, casual and dress pants, tops, shorts, skirts, jackets, footwear and related accessories for men, women and children around the world under our Levi’s®, Dockers®, Signature by Levi Strauss & Co.™ (“Signature”) and Denizen® brands.
Our business is operated through three geographic regions: Americas, Europe and Asia. Our products are sold in approximately 50,000 retail locations in more than 110 countries. We support our brands through a global infrastructure, developing, sourcing and marketing our products around the world. We distribute our Levi’s® and Dockers® products primarily through chain retailers and department stores in the United States and primarily through department stores, specialty retailers and approximately 2,100 franchised or other brand-dedicated stores and shop-in-shops outside of the United States. We also distribute our Levi’s® and Dockers® products through 548 company-operated stores located in 32 countries, including the United States, and through the online stores we operate. Our company-operated and online stores generated approximately 25% of our net revenues in the first nine months of 2014, as compared to 23% in the same period in 2013, with our online stores representing approximately 11% of this revenue. In addition, we distribute our Levi’s® and Dockers® products through online stores operated by certain of our key wholesale customers and other third parties. We distribute products under our Signature and Denizen® brands primarily through mass channel retailers in the Americas.
Our Europe and Asia businesses, collectively, contributed approximately 42% of both our net revenues and our regional operating income in the nine-month period in 2014, as compared to 40% of both our net revenues and our regional operating income in the same period in 2013. Sales of Levi’s® brand products represented approximately 84% of our total net sales in each of the nine-month periods in 2014 and in 2013.
Global Productivity Initiative
On February 5, 2014, our Board of Directors (“Board”) endorsed a global productivity initiative designed to streamline operations and fuel long-term profitable growth. On March 26, 2014, we announced and began to implement the global productivity initiative, which will continue to be implemented through the end of 2015. We expect that this initiative will generate net annualized cost savings of $175 – $200 million.
The first phase of the global productivity initiative included the elimination of approximately 800 positions within our global non-retail and non-manufacturing employee population. The elimination of positions was completed during the second and third fiscal quarters of 2014. Implementation of the global productivity initiative continued in the second and third quarters of 2014 with a focus on redesigning business processes and identifying opportunities to reduce costs, increase efficiencies and further streamline processes in supporting functions and supply chain. Approximately $2 million and $79 million were recorded as restructuring charges in the three and nine months ended August 24, 2014, respectively, and consist primarily of severance benefits, consulting fees and non-cash pension and postretirement curtailment gains or losses. Related charges of approximately $8 million and $23 million for the three and nine months ended August 24, 2014, respectively, consisting primarily of consulting fees for centrally-led cost-savings and productivity projects, were recorded in selling, general and administrative expense ("SG&A"). Cash payments for charges recorded to date are expected to be made primarily in 2014 through the first half of 2015. Actions taken in the first nine months of 2014 for the global productivity initiative are expected to deliver approximately $100 – $125 million in net annualized savings.
We anticipate that we will incur additional restructuring charges in the fourth quarter of 2014 related to the next phase of the global productivity initiative. Cash payments for these additional charges are not expected to be made in the fourth quarter of 2014.
We are unable at this time to make a good faith determination of cost estimates, or ranges of cost estimates, for additional actions associated with the global productivity initiative. Final estimates for headcount, timing and charges in certain areas of the international business are subject to completion of applicable local works council and other consultative processes.
We expect additional savings in future periods to come from streamlining our product development, planning and go-to-market strategies, implementing efficiencies across our supply chain and distribution network, adopting lower-cost service-delivery models and continuing to pursue improved procurement practices. Additional restructuring charges will be recorded for these efforts as they become estimable and probable.


20

Trends Affecting Our Business
Our key long-term objectives are to strengthen our brands globally in order to deliver sustainable profitable growth, generate strong cash flow and reduce our debt. Critical strategies to achieve these objectives include driving our profitable core business; expanding the reach of our global brands and building a more balanced product portfolio; elevating the performance of our retail channel, including e-commerce; and leveraging our global scale to develop a competitive cost structure.
During the first nine months of 2014, soft retail market conditions persisted, particularly within the denim category of the apparel industry, impacting performance in many markets around the world. We and several of our wholesale customers continued to experience traffic declines, partially driven by lingering high unemployment, slow real-wage growth, a shift in consumer spending to interest-rate sensitive durable goods, and political instability in certain regions.  Weak traffic resulted in elevated sales promotions as retailers sought to clear merchandise, pressuring merchandise margins across the apparel industry. While we believe these trends are transient, we anticipate they will continue in the near term. Global competition remains an ongoing challenge, as domestic and multi-national competitors continue to leverage brick-and-mortar retail and e-commerce to extend their international reach.
Our Third Quarter 2014 Results
 
•
Net revenues. Compared to the third quarter of 2013, consolidated net revenues increased on both reported and constant-currency bases by 1%, primarily reflecting increased sales from our global retail network, partially offset by lower sales at wholesale in the Americas.
•
Operating income. Compared to the third quarter of 2013, consolidated operating income decreased by 11% and operating margin declined to 9%, primarily reflecting lower gross margin in 2014. Higher advertising investment and the charges associated with the global productivity initiative were partially offset by savings realized from the initiative.
•
Cash flows. Cash flows provided by operating activities were approximately $81 million for the nine-month period in 2014 as compared to $274 million for the same period in 2013; the decrease reflected our lower beginning accounts receivable balance, our higher inventory levels, lower net revenues, and payments related to our global productivity initiative.
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 end on November 30. Each quarter of fiscal years 2014 and 2013 consists of 13 weeks, with the exception of the fourth quarter of 2014, which will consist of 14 weeks.
Segments.    We manage our business according to three regional segments: the Americas, Europe and Asia. Effective as of the beginning of 2014, our reporting segments were revised to combine our Middle East and North Africa markets, previously managed by our Europe region, with our Asia Pacific region, which was renamed to Asia as a result of the change. Financial information attributable to these markets are not significant to any of the Company's regional segments individually in any of the periods presented herein, and accordingly, business segment information for the prior year has not been revised.
Classification.    Our classification of certain significant revenues and expenses reflects the following:
 
•
Net revenues 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. Net revenues also includes royalties earned from the use of our trademarks by third-party licensees in connection with the manufacturing, advertising and distribution of trademarked products.
•
Cost of goods sold is primarily comprised of product costs, labor and related overhead, sourcing costs, inbound freight, internal transfers, and the cost of operating our remaining manufacturing facilities, including the related depreciation expense.
•
Selling costs include, among other things, all occupancy costs and depreciation associated with our company-operated stores and commissions associated with our company-operated shop-in-shops.
•
We reflect substantially all distribution costs in selling, general and administrative expenses, including costs related to receiving and inspection at distribution centers, warehousing, shipping to our customers, handling, and certain other activities associated with our distribution network.
Gross margins may not be comparable to those of other companies in our industry since some companies may include costs related to their distribution network and occupancy costs associated with company-operated stores in cost of goods sold.


21

Constant currency.    Effective as of the beginning of 2014, constant-currency comparisons are based on translating local currency amounts in the prior-year period at actual foreign exchange rates for the current year. Prior to 2014, local currency amounts were translated utilizing foreign exchange rates used in our internal planning process. There was no significant impact to our constant-currency comparisons as a result of this change. 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.
Results of Operations for Three and Nine Months Ended August 24, 2014, as Compared to Same Periods in 2013
The following table summarizes, for the periods indicated, our consolidated statements of income, the changes in these items from period to period and these items expressed as a percentage of net revenues:
 
 
Three Months Ended
 
Nine Months Ended
 
August 24,
2014
 
August 25,
2013
 
%
Increase
(Decrease)
 
August 24,
2014
 
August 25,
2013
 
August 24,
2014
 
August 25,
2013
 
%
Increase
(Decrease)
 
August 24,
2014
 
August 25,
2013
 
 
 
% of Net
Revenues
 
% of Net
Revenues
 
 
 
% of Net
Revenues
 
% of Net
Revenues
 
(Dollars in millions)
Net revenues
$
1,154.1

 
$
1,141.3

 
1.1
 %
 
100.0
 %
 
100.0
 %
 
$
3,366.0

 
$
3,386.9

 
(0.6
)%
 
100.0
 %
 
100.0
 %
Cost of goods sold
591.9

 
568.5

 
4.1
 %
 
51.3
 %
 
49.8
 %
 
1,697.1

 
1,673.5

 
1.4
 %
 
50.4
 %
 
49.4
 %
Gross profit
562.2

 
572.8

 
(1.9
)%
 
48.7
 %
 
50.2
 %
 
1,668.9

 
1,713.4

 
(2.6
)%
 
49.6
 %
 
50.6
 %
Selling, general and administrative expenses
454.7

 
454.7

 
—

 
39.4
 %
 
39.8
 %
 
1,325.6

 
1,314.2

 
0.9
 %
 
39.4
 %
 
38.8
 %
Restructuring, net
2.4

 
—

 
—

 
0.2
 %
 
—

 
79.4

 
—

 
—

 
2.4
 %
 
—

Operating income
105.1

 
118.1

 
(11.0
)%
 
9.1
 %
 
10.3
 %
 
263.9

 
399.2

 
(33.9
)%
 
7.8
 %
 
11.8
 %
Interest expense
(27.2
)
 
(30.9
)
 
(12.1
)%
 
(2.4
)%
 
(2.7
)%
 
(90.3
)
 
(96.0
)
 
(5.9
)%
 
(2.7
)%
 
(2.8
)%
Loss on early extinguishment of debt
—

 
—

 
—

 
—

 
—

 
(11.2
)
 
(0.7
)
 
1,518.4
 %
 
(0.3
)%
 
—

Other expense, net
(5.6
)
 
(10.7
)
 
(47.4
)%
 
(0.5
)%
 
(0.9
)%
 
(7.5
)
 
(5.4
)
 
39.1
 %
 
(0.2
)%
 
(0.2
)%
Income before income taxes
72.3

 
76.5

 
(5.5
)%
 
6.3
 %
 
6.7
 %
 
154.9

 
297.1

 
(47.9
)%
 
4.6
 %
 
8.8
 %
Income tax expense
22.5

 
20.1

 
12.2
 %
 
2.0
 %
 
1.8
 %
 
44.5

 
85.6

 
(48.0
)%
 
1.3
 %
 
2.5
 %
Net income
49.8

 
56.4

 
(11.8
)%
 
4.3
 %
 
4.9
 %
 
110.4

 
211.5

 
(47.8
)%
 
3.3
 %
 
6.2
 %
Net loss attributable to noncontrolling interest
0.8

 
0.7

 
30.2
 %
 
0.1
 %
 
0.1
 %
 
1.6

 
0.7

 
129.0
 %
 
—

 
—

Net income attributable to Levi Strauss & Co.
$
50.6

 
$
57.1

 
(11.3
)%
 
4.4
 %
 
5.0
 %
 
$
112.0

 
$
212.2

 
(47.2
)%
 
3.3
 %
 
6.3
 %


22

Net revenues
The following table presents net revenues by reporting segment for the periods indicated and the changes in net revenues by reporting segment on both reported and constant-currency bases from period to period.
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
 
 
% Increase
(Decrease)
 
 
 
 
 
% Increase
(Decrease)
 
August 24,
2014
 
August 25,
2013
 
As
Reported
 
Constant
Currency
 
August 24,
2014
 
August 25,
2013
 
As
Reported
 
Constant
Currency
 
(Dollars in millions)
Net revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Americas
$
697.5

 
$
710.2

 
(1.8
)%
 
(1.5
)%
 
$
1,969.0

 
$
2,023.3

 
(2.7
)%
 
(2.1
)%
Europe
286.0

 
275.2

 
3.9
 %
 
2.3
 %
 
847.4

 
824.9

 
2.7
 %
 
1.0
 %
Asia
170.7

 
155.9

 
9.5
 %
 
10.9
 %
 
549.6

 
538.7

 
2.0
 %
 
6.3
 %
Total net revenues
$
1,154.2

 
$
1,141.3

 
1.1
 %
 
1.1
 %
 
$
3,366.0

 
$
3,386.9

 
(0.6
)%
 
(0.1
)%
Total net revenues increased on both reported and constant-currency bases for the three-month period ended August 24, 2014, but decreased for the nine-month period ended August 24, 2014, as compared to the same prior-year periods.
Americas.    Net revenues in our Americas region decreased on both reported and constant-currency bases for the three- and nine-month periods ended August 24, 2014, with currency affecting net revenues unfavorably by approximately $2 million and $12 million, respectively.
For both periods, the decline in wholesale net revenues, primarily due to lower sales of women's products, was partially offset by a higher volume of sales at our outlet and online stores on increased promotional activity.
Europe.    Net revenues in Europe increased on both reported and constant-currency bases for the three- and nine-month periods ended August 24, 2014, with currency affecting net revenues favorably by approximately $4 million and $14 million, respectively.
For both periods, net revenues increased from the performance and expansion of our company-operated retail network, particularly in the U.K. and Russia markets. For the nine-month period, this improvement was partially offset by lower sales in our traditional wholesale channels. 
Asia.    Net revenues in Asia increased on both reported and constant-currency bases for the three- and nine-month periods ended August 24, 2014, with currency affecting net revenues unfavorably by approximately $2 million and $22 million, respectively.
For both periods, the increase in constant-currency net revenues was primarily due to higher promotional activity across the region, and with respect to the nine-month period, improved product availability during the Chinese New Year sales season in the first quarter.


23

Gross profit
The following table shows consolidated gross profit and gross margin for the periods indicated and the changes in these items from period to period: 
 
Three Months Ended
 
Nine Months Ended
 
August 24,
2014
 
August 25,
2013
 
%
Increase
(Decrease)
 
August 24,
2014
 
August 25,
2013
 
%
Increase
(Decrease)
 
(Dollars in millions)
Net revenues
$
1,154.1

 
$
1,141.3

 
1.1
 %
 
$
3,366.0

 
$
3,386.9

 
(0.6
)%
Cost of goods sold
591.9

 
568.5

 
4.1
 %
 
1,697.1

 
1,673.5

 
1.4
 %
Gross profit
$
562.2

 
$
572.8

 
(1.9
)%
 
$
1,668.9

 
$
1,713.4

 
(2.6
)%
Gross margin
48.7
%
 
50.2
%
 
 
 
49.6
%
 
50.6
%
 
 
As compared to the same prior-year periods, the gross profit decrease for the three- and nine-month periods ended August 24, 2014, primarily resulted from a decline in our gross margin. Currency had no significant impact on gross profit for the three-month period ended August 24, 2014, but had an unfavorable impact of approximately $7 million for the nine-month period ended August 24, 2014. Gross margin declined primarily due to higher discounted sales across channels, reflecting our efforts to manage our higher inventory levels in the current retail market, as well as product investment costs. The decline was partially offset by increased contribution from our company-operated retail network, which generally has a higher gross margin than our wholesale business.
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:
 
 
Three Months Ended
 
Nine Months Ended
 
August 24,
2014
 
August 25,
2013
 
%
Increase
(Decrease)
 
August 24,
2014
 
August 25,
2013
 
August 24,
2014
 
August 25,
2013
 
%
Increase
(Decrease)
 
August 24,
2014
 
August 25,
2013
 
 
 
% of Net
Revenues
 
% of Net
Revenues
 
 
 
% of Net
Revenues
 
% of Net
Revenues
 
(Dollars in millions)
Selling
$
176.2

 
$
172.5

 
2.1
 %
 
15.3
%
 
15.1
%
 
$
534.4

 
$
523.3

 
2.1
 %
 
15.9
%
 
15.5
%
Advertising and promotion
71.6

 
60.6

 
18.2
 %
 
6.2
%
 
5.3
%
 
157.1

 
148.5

 
5.8
 %
 
4.7
%
 
4.4
%
Administration
96.5

 
101.1

 
(4.6
)%
 
8.4
%
 
8.9
%
 
290.0

 
291.3

 
(0.5
)%
 
8.6
%
 
8.6
%
Other
110.4

 
120.5

 
(8.4
)%
 
9.6
%
 
10.6
%
 
344.1

 
351.1

 
(2.0
)%
 
10.2
%
 
10.4
%
Total SG&A
$
454.7

 
$
454.7

 
—

 
39.4
%
 
39.8
%
 
$
1,325.6

 
$
1,314.2

 
0.9
 %
 
39.4
%
 
38.8
%

Currency impacted SG&A unfavorably by approximately $1 million for the three-month period ended August 24, 2014, as compared to the same prior-year period. Currency impacted SG&A favorably by approximately $3 million for the nine-month period ended August 24, 2014, as compared to the same prior-year period.
Selling.   We had 35 more company-operated stores at the end of the third quarter of 2014 than we did at the end of the third quarter of 2013. Higher expenses associated with the expansion of our company-operated store network were partially offset by savings resulting from our global productivity initiative.
Advertising and promotion.   The increase in advertising and promotion expenses for the three- and nine-month periods ended August 24, 2014, primarily reflected a difference in the timing of our campaigns.
Administration.   Administration expenses in both periods reflected a decline in incentive compensation expense related to higher achievement in the prior year against our internally-set objectives, as well as savings in the current year resulting from our global productivity initiative. Administration expenses in both periods included charges of approximately $8 million and $23 million in the three and nine months ended August 24, 2014, respectively, consisting primarily of consulting fees incurred for our centrally-led cost-savings and productivity projects.


24

Other.   Other SG&A includes distribution, information resources, and marketing organization costs. Lower costs for both periods primarily reflected information resources and marketing organization savings resulting from our global productivity initiative.
Operating income
The following table shows operating income by reporting segment and corporate expenses for the periods indicated, the changes in these items from period to period and these items expressed as a percentage of net revenues:
 
 
Three Months Ended
 
Nine Months Ended
 
 
August 24,
2014
 
August 25,
2013
 
%
Increase
(Decrease)
 
August 24,
2014
 
August 25,
2013
 
August 24,
2014
 
August 25,
2013
 
%
Increase
(Decrease)
 
August 24,
2014
 
August 25,
2013
 
 
 
 
% of Net
Revenues
 
% of Net
Revenues
 
 
 
% of Net
Revenues
 
% of Net
Revenues
 
 
(Dollars in millions)
 
Operating income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Americas
$
122.2

 
$
125.2

 
(2.4
)%
 
17.5
%
 
17.6
%
 
$
342.7

 
$
376.6

 
(9.0
)%
 
17.4
%
 
18.6
%
 
Europe
49.6

 
45.9

 
8.0
 %
 
17.3
%
 
16.7
%
 
159.2

 
145.6

 
9.4
 %
 
18.8
%
 
17.6
%
 
Asia
17.4

 
22.7

 
(23.4
)%
 
10.2
%
 
14.5
%
 
88.5

 
104.2

 
(15.0
)%
 
16.1
%
 
19.3
%
 
Total regional operating income
189.2

 
193.8

 
(2.4
)%
 
16.4
%
*
17.0
%
*
590.4

 
626.4

 
(5.7
)%
 
17.5
%
*
18.5
%
*
Corporate expenses
84.1

 
75.7

 
11.0
 %
 
7.3
%
*
6.6
%
*
326.5

 
227.2

 
43.7
 %
 
9.7
%
*
6.7
%
*
Total operating income
$
105.1

 
$
118.1

 
(11.0
)%
 
9.1
%
*
10.3
%
*
$
263.9

 
$
399.2

 
(33.9
)%
 
7.8
%
*
11.8
%
*
Operating margin
9.1
%
 
10.3
%
 
 
 
 
 
 
 
7.8
%
 
11.8
%
 
 
 
 
 
 
 
______________
 * Percentage of consolidated net revenues
Currency unfavorably affected total operating income by approximately $1 million and $4 million for the three- and nine-month periods ended August 24, 2014, respectively.
Regional operating income.    
•
Americas. For the three-month period, the decline in operating income reflected the region's lower net revenues, as a decline in the region's gross margin was fully offset by lower SG&A in the region. For the nine-month period, the decrease in operating income and operating margin primarily reflected the region's lower gross margin, partially offset by the region's lower SG&A.
•
Europe. For both periods, operating income and operating margin increased primarily due to the region's higher gross margin, which was driven by higher retail revenues.
•
Asia. For both periods, the decrease in operating income and operating margin primarily reflected the region's lower gross margin.    
Corporate.    Corporate expenses include SG&A that are not attributed to any of our regional operating segments. As compared to the same prior-year periods, higher corporate expenses in the three- and nine-month periods ended August 24, 2014, reflected our restructuring charges of $2.4 million and $79.4 million, respectively, as well as consulting fees incurred for our centrally-led cost-savings and productivity projects. These higher costs were partially offset by the lower incentive compensation expense and savings resulting from our global productivity initiative.
Corporate expenses include settlement charges related to our pension plans. We anticipate recording a non-cash pension settlement charge of approximately $25 million in the fourth quarter relating to an early pension settlement.


25

Interest expense
Interest expense was $27.2 million and $90.3 million for the three- and nine-month periods ended August 24, 2014, respectively, as compared to $30.9 million and $96.0 million for the same periods in 2013. The decrease in interest expense was primarily due to lower average debt balances in 2014, partially offset in the nine-month period by higher average borrowing rates. For the nine-month period, interest expense also decreased due to lower interest expense on our deferred compensation plans.
The weighted-average interest rate on average borrowings outstanding for the three- and nine-month periods ended August 24, 2014, was 7.40% and 7.74%, respectively, as compared to 7.75% and 7.44%, respectively, for each of the same periods in 2013. The weighted-average interest rate decreased for the three-month period, but increased for the nine-month period, as a result of our debt refinancing activities during the second quarter of 2014 and of 2013, respectively.
Loss on early extinguishment of debt
During the nine months ended August 24, 2014, we recorded a loss of $11.2 million on early extinguishment of debt as a result of our debt refinancing activities during the period. The loss was comprised of redemption premiums of $8.0 million and the write-off of $3.2 million of unamortized debt issuance costs.
Income tax expense
Our effective income tax rate was 28.7% for the nine months ended August 24, 2014, compared to 28.8% for the same period ended August 25, 2013. The decrease in the effective tax rate in 2014 was primarily due to a $3.7 million tax benefit that we recorded during the nine months ended August 24, 2014, as a result of reversing a deferred tax liability associated with undistributed foreign earnings, as well as a favorable change in the projected mix of earnings in jurisdictions with lower effective tax rates. Partially offsetting the rate decline was a $3.0 million correction that we recorded in the third quarter of 2014 associated with errors identified on previously-filed tax returns related to temporary differences.  We determined that the amounts were not material to our previously issued financial statements or to the current period and recorded a correcting entry in the third quarter of 2014. The correction had no effect on operating income or cash, but increased income tax expense and decreased net income in the third quarter of 2014 by $3.0 million. The 2013 effective tax rate reflects a $14.2 million discrete tax benefit recorded in the third quarter of 2013 attributable to the finalization in July 2013 of the U.S. federal tax audit of tax years 2003 – 2008.
The Company historically planned to repatriate to the United States the undistributed earnings of its foreign subsidiaries, and accordingly, provided for a deferred tax liability totaling $3.7 million as of November 24, 2013. For the nine months ended August 24, 2014, management made an assertion that $75.0 million of undistributed foreign earnings in certain foreign subsidiaries are indefinitely reinvested. As such, the Company recorded a $3.7 million tax benefit resulting from a reversal of the previously recorded deferred tax liability on undistributed foreign earnings, decreasing the effective tax rate in 2014.
Liquidity and Capital Resources
Liquidity outlook
We believe we will have adequate liquidity over the next twelve months to operate our business and to meet our cash requirements.
Cash sources
We are a privately-held corporation. We have historically relied primarily on cash flows from operations, borrowings under credit facilities, issuances of notes and other forms of debt financing. We regularly explore financing and debt reduction alternatives, including new credit agreements, unsecured and secured note issuances, equity financing, equipment and real estate financing, securitizations and asset sales. Key sources of cash include earnings from operations and borrowing availability under our revolving credit facility.
We are borrowers under a senior secured revolving credit facility. The credit facility, which was amended and restated on March 21, 2014, as further described below, is an asset-based facility, in which the borrowing availability is primarily based on the value of our U.S. Levi’s® trademarks and the levels of accounts receivable and inventory in the United States and Canada. The maximum availability under the facility is $850 million, of which $800 million is available to us for revolving loans in U.S. Dollars and $50 million is available to us for revolving loans either in U.S. Dollars or Canadian Dollars.


26

On March 21, 2014, we amended and restated our senior secured revolving credit facility to extend the term through March 2019, subject to shortening if obligations under our 2018 Euro Notes are outstanding on February 13, 2018. The terms of the amended and restated credit facility are similar to the terms under the original credit facility, except that of the maximum availability of $850.0 million, $350.0 million is secured by our U.S. Levi's® trademarks, an increase from the $250.0 million in the original credit facility. The interest rate for borrowings under the credit facility was reduced from LIBOR plus 150 – 275 basis points to LIBOR plus 125 – 200 basis points, depending on borrowing base availability, and the range of the rate for undrawn availability was reduced from 37.5 – 50 basis points to 25 – 30 basis points (depending on the Company's credit ratings). All other terms of the original credit agreement, including, without limitation, guarantees and security, covenants, and events of default, have not been materially changed as a result of the amended and restated credit agreement and remain in full force and effect.
As of August 24, 2014, we had borrowings of $90.0 million under the credit facility, all of which is classified as short-term debt. Unused availability under the credit facility was $606.0 million, as our total availability of $667.0 million, based on collateral levels as defined by the agreement, was reduced by $61.0 million of other credit-related instruments.
As of August 24, 2014, we had cash and cash equivalents totaling approximately $367.4 million, resulting in a total liquidity position (unused availability and cash and cash equivalents) of approximately $1.0 billion.
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, settlement of shares issued under our 2006 Equity Incentive Plan, as amended and restated to date, and, if market conditions warrant, occasional investments in, or acquisitions of, business ventures in our line of business. In addition, we regularly evaluate our ability to pay dividends or repurchase stock, all consistent with the terms of our debt agreements.
There have been no material changes to our estimated cash requirements for 2014 from those disclosed in our 2013 Annual Report on Form 10-K, except for our capital expenditures for 2014, which we now estimate will be in the range of $80 – $90 million.
Cash flows
The following table summarizes, for the periods indicated, selected items in our consolidated statements of cash flows:
 
 
 
Nine Months Ended
 
 
 
August 24,
2014
 
August 25,
2013
 
 
 
(Dollars in millions)
 
 
Cash provided by operating activities
$
81.3

 
$
273.8

 
 
Cash used for investing activities
(46.0
)
 
(63.4
)
 
 
Cash used for financing activities
(157.2
)
 
(227.7
)
 
 
Cash and cash equivalents
367.4

 
382.3

 
Cash flows from operating activities
Cash provided by operating activities was $81.3 million for the nine-month period in 2014, as compared to $273.8 million for the same period in 2013. Cash provided by operating activities decreased compared to the prior year due to a decrease in cash received from customers, reflecting our lower beginning accounts receivable balance and lower net revenues, and an increase in cash used for inventory, reflecting our higher inventory levels as a result of increased product purchases and lower-than-anticipated sales. Cash provided by operating activities in 2014 also declined due to cash payments for our global productivity initiative.
Cash flows from investing activities
Cash used for investing activities was $46.0 million for the nine-month period in 2014, as compared to $63.4 million for the same period in 2013. The decrease in cash used for investing activities as compared to the prior year primarily reflects lower spend on facilities, partially offset by increased investment in information technology projects.
Cash flows from financing activities
Cash used for financing activities was $157.2 million for the nine-month period in 2014, as compared to $227.7 million for the same period in 2013. Cash used in both periods primarily related to our refinancing activities and debt reduction in each year.


27

Indebtedness
The borrower of substantially all of our debt is Levi Strauss & Co., the parent and U.S. operating company. In March 2014, we amended and restated our senior secured revolving credit facility. In May 2014, we redeemed €150.0 million in aggregate principal amount of our 2018 Euro Notes. We used borrowings of $100.0 million from our senior secured revolving credit facility and cash on hand to fund the redemption, reducing our total gross debt balance.
We have fixed-rate debt of $1.3 billion (93% of total debt) and variable-rate debt of approximately $0.1 billion (7% of total debt) as of August 24, 2014. As of August 24, 2014, our required aggregate debt principal payments on our unsecured long-term debt were $38.5 million in 2016, $199.2 million in 2018, and the remaining $1.1 billion in years after 2018. Short-term debt of $90.0 million borrowed under our senior secured revolving credit facility was expected to be repaid over the next twelve months, and short-term borrowings of $40.2 million at various foreign subsidiaries were expected to be either paid over the next twelve months or refinanced at the end of their applicable terms.
Our long-term debt agreements contain customary covenants restricting our activities as well as those of our subsidiaries. Currently, we are in compliance with all of these covenants.
Off-Balance Sheet Arrangements, Guarantees and Other Contingent Obligations
There have been no significant changes to our off-balance sheet arrangements or contractual commitments from those disclosed in our 2013 Annual Report on Form 10-K.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the related notes. There have been no significant changes to our critical accounting policies from those disclosed in our 2013 Annual Report on Form 10-K.
Recently Issued Accounting Standards
See Note 1 to our unaudited consolidated financial statements included in this report for recently issued accounting standards, including the expected dates of adoption and estimated effects on our consolidated financial statements.
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this report, including (without limitation) statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contain forward-looking statements. Although we believe that, in making any such statements, our expectations are based on reasonable assumptions, any such statement may be influenced by factors that could cause actual outcomes and results to be materially different from those projected.
These forward-looking statements include statements relating to our anticipated financial performance and business prospects and/or statements preceded by, followed by or that include the words “believe”, “anticipate”, “intend”, “estimate”, “expect”, “project”, “could”, “plans”, “seeks” and similar expressions, including but not limited to statements related to: estimated 2014 capital expenditures in the range of $80 – $90 million; anticipated net annualized savings of $100 – $125 million associated with actions taken through the first nine months of 2014 for the Company's global productivity initiative; additional restructuring charges in the fourth quarter of 2014 related to the global productivity initiative; and related expected additional savings in future periods and the origin thereof. 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. These risks and uncertainties, including those disclosed under “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended November 24, 2013, and this report on Form 10-Q for the fiscal quarter ended August 24, 2014, and our other filings with the Securities and Exchange Commission, could cause actual results to differ materially from those suggested by the forward-looking statements and include, without limitation:
 
•
changes in general economic and financial conditions, and the resulting impact on the level of discretionary consumer spending for apparel and pricing trend fluctuations, and our ability to plan for and respond to the impact of those changes;


28

•
our ability to timely and effectively implement organizational cost-saving initiatives as planned that are intended to increase productivity and efficiency in our global operations, take advantage of lower-cost service delivery options in our distribution practices and overhaul our procurement practices in order to globally streamline our operations without business disruption or mitigation to such disruptions;
•
consequences of impacts to the businesses of our wholesale customers, including a sudden decline in a wholesale customer's financial condition, leading to restructuring actions, bankruptcies, liquidations or other unfavorable events for our wholesale customers, caused by factors such as inability to secure financing, decreased discretionary consumer spending, inconsistent traffic patterns and an increase in promotional activity as a result of decreased traffic, pricing fluctuations, general economic and financial conditions and changing consumer preferences;
•
our and our wholesale customers' decisions to modify strategies and adjust product mix and pricing, and our ability to manage any resulting product transition costs;
•
availability of quality raw materials and our ability to mitigate the variability of costs related to manufacturing, sourcing, and raw materials supply and to manage consumer response to such mitigating actions;
•
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, as well as in-store and online shopping experiences;
•
our ability to respond to price, innovation and other competitive pressures in the global apparel industry, on and from our key customers and in our key markets;
•
our ability to increase the number of dedicated stores for our products, including through opening and profitably operating company-operated stores;
•
consequences of foreign currency exchange rate fluctuations;
•
the impact of the variables that affect the net periodic benefit cost and future funding requirements of our postretirement benefits and pension plans;
•
our dependence on key distribution channels, customers and suppliers;
•
our ability to utilize our tax credits and net operating loss carryforwards;
•
ongoing or future litigation matters and disputes and regulatory developments;
•
changes in or application of trade and tax laws; and
•
political, social and economic instability in countries where we and our customers 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. 
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our primary market risk exposures or how those exposures are managed from the information disclosed in our 2013 Annual Report on Form 10-K.



29

Item 4.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934) that are designed to provide reasonable assurance that information required to be disclosed in the reports we file or submit to the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
We have evaluated, under the supervision and with the participation of management, including our chief executive officer and our chief financial officer, the effectiveness of the design and operation of our disclosure controls and procedures as of August 24, 2014. Based on that evaluation, our chief executive officer and our chief financial officer concluded that as of August 24, 2014, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Controls
We maintain a system of internal control over financial reporting that is designed to provide reasonable assurance that our books and records accurately reflect our transactions and that our established policies and procedures are followed. There were no changes to our internal control over financial reporting during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


30

PART II — OTHER INFORMATION
 
Item 1.
LEGAL PROCEEDINGS
Litigation.    There have been no material developments with respect to the information previously reported in our 2013 Annual Report on Form 10-K related to legal proceedings.
In the ordinary course of business, we have various pending cases involving contractual matters, facility and employee-related matters, distribution matters, product liability claims, trademark infringement and other matters. We do not believe any of these pending legal proceedings will have a material impact on our financial condition, results of operations or cash flows.

Item 1A.
RISK FACTORS
There have been no material changes in our risk factors from those disclosed in our 2013 Annual Report on Form 10-K, except for the following:
We face risks arising from the restructuring of our operations and uncertainty with respect to our ability to achieve the estimated cost savings.
In March 2014, we announced our global productivity initiative, the first phase of which entails, among other things:
•
eliminating approximately 800 positions within our global non-retail and non-manufacturing employee population; and
•
initiating centrally-led cost-savings and productivity projects.
Commencing in the first nine months of fiscal 2014, we have incurred and expect to incur additional charges related to the global productivity initiative during the balance of fiscal 2014 and into fiscal 2015, which may harm our profitability in the periods incurred. If we incur unexpected charges related to the global productivity initiative, or in connection with any potential future restructuring program, our financial condition and results of operations may further suffer.
Implementation of the global productivity initiative, or any potential future restructuring program, presents a number of significant risks, including:
•
actual or perceived disruption of service or reduction in service standards to wholesale customers;
•
the failure to preserve adequate internal controls as we restructure our general and administrative functions;
•
the failure to preserve supplier, distribution, sales and other important relationships and to resolve conflicts that may arise;
•
diversion of management attention from ongoing business activities; and
•
the failure to maintain employee morale and retain key employees.
Because of these and other factors, we cannot predict whether we will realize the purpose and anticipated benefits of these measures and, if we do not, our business and results of operations may be adversely affected.
Additionally, there may be delays in implementing the global productivity initiative or a failure to achieve the anticipated levels of cost savings and efficiency as a result of the global productivity initiative, each of which could materially and adversely impact our business and results of operations. Further, if we experience additional adverse changes to our business, further restructuring or reorganization activities may be required in the future.


31

Item 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On July 10, 2014, our Board of Directors (the “Board”) approved the award of restricted stock units (“RSUs”) representing an aggregate of 18,140 shares of our common stock to our non-employee directors. The RSUs were granted as a part of the standard annual compensation provided to our non-employee directors. This award was made under our 2006 Equity Incentive Plan, as amended and restated (the “Plan”).
RSUs are units, representing beneficial ownership interests, corresponding in number and value to a specified number of underlying shares of stock. The RSUs vest in three equal installments after 13, 24 and 36 months following the grant date. However, if the recipient's continuous service terminates for reason other than cause after the first vesting installment, but prior to full vesting, then the remaining unvested portion of the award becomes fully vested as of the date of such termination. Each recipient's initial grant of RSUs is subject to a mandatory deferral feature, by which the RSU will be converted to a share of common stock six months after discontinuation of service with the Company for each fully vested RSU held at that date. For subsequent grants, recipients of the RSUs have the opportunity to make deferral elections regarding when shares of our common stock are to be delivered in settlement of vested RSUs. If the recipient does not elect to defer the receipt of common stock, then the RSUs are immediately converted into shares upon vesting. The RSUs additionally have “dividend equivalent rights”, of which dividends paid by the Company on its common stock are credited by the equivalent addition of RSUs.
Also on July 10, 2014, our Board approved the award of stock appreciation rights (“SARs”) representing an aggregate of 58,497 shares of our common stock to certain of our executives. These awards were made under our Plan.
SARs are granted with an exercise price equal to the fair market value of our common stock, as determined under the Plan, on the date of grant. The SARs were granted in two groups and are identical except as described below:
•
35,098 of the SARs, referred to as service-vested SARs, were granted with the following vesting schedule: 25% percent of the SAR grant vests on the day prior to the one-year anniversary of the date of grant, with the remaining 75% balance vesting monthly over 36 months commencing on such anniversary, at a rate of 2.08% per month;
•
23,399 of the SARs, referred to as performance-based SARs, were granted with the following vesting schedule: 50% of the performance-based SARs will vest to the extent that the Company has achieved certain goals based on the Company's (i) average earnings before interest and taxes margin percentage and (ii) the compound annual growth rate of the Company's net revenues, each over fiscal years 2014, 2015 and 2016, and the remaining 50% of the performance-based SARs will vest based on the Company's performance against a three-year market-related relative total shareholder return goal. Our Board will determine the extent to which the goals under the performance-based SARs have been satisfied on or before March 1, 2017.
Upon the exercise of a SAR, the recipient will be entitled to receive common stock with an aggregate fair market value equal to the excess of the per share fair market value of the Company's common stock on the date of exercise over the exercise price, multiplied by the number of SARs exercised.
We will not receive any proceeds from the issuance or vesting of RSUs or SARs. The RSUs and SARs were granted under Section 4(a)(2) of the Securities Act of 1933, as amended. Section 4(a)(2) generally provides an exemption from registration for transactions by an issuer not involving any public offering.
We are a privately-held corporation; there is no public trading of our common stock. As of October 1, 2014, we had 37,430,283 shares outstanding.

Item 3.
DEFAULTS UPON SENIOR SECURITIES
None.
 
Item 4.
MINE SAFETY DISCLOSURES
None.
 
Item 5.
OTHER INFORMATION
On September 30, 2014, the Board of Directors (the “Board”) of Levi Strauss & Co. (the “Company”) elected Jenny Ming as a new member of the Board, effective immediately. Ms. Ming will serve as a Class II director. Ms. Ming will receive compensation as a non-employee director in accordance with the Company’s non-employee director compensation practices described under the


32

heading “Director Compensation” of the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 11, 2014, as amended from time to time.
There is no understanding or arrangement between Ms. Ming and any other person or persons with respect to her election as director and there are no family relationships between Ms. Ming and any other director or executive officer or person nominated or chosen by the Company to become a director or executive officer. Ms. Ming will be a party to the Company's standard form Director Indemnification Agreement. There have been no transactions, nor are there any currently proposed transactions, to which the Company was or is to be a party in which Ms. Ming or any member of her immediate family had, or will have, a direct or indirect material interest.
A copy of the press release announcing the election of Ms. Ming is attached as Exhibit 99.1 hereto.

Item 6.
EXHIBITS
 
10.1
 
Annual Incentive Plan, effective November 25, 2013, as amended. Filed herewith.*
 
 
 
31.1
  
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
 
 
 
31.2
  
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
 
 
 
32
  
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith.
 
 
 
99.1
 
Press release, dated October 6, 2014, announcing the election of Jenny Ming to the Board.
 
 
 
101.INS
  
XBRL Instance Document. Filed herewith.
 
 
 
101.SCH
  
XBRL Taxonomy Extension Schema Document. Filed herewith.
 
 
 
101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase Document. Filed herewith.
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document. Filed herewith.
 
 
 
101.LAB
  
XBRL Taxonomy Extension Label Linkbase Document. Filed herewith.
 
 
 
101.PRE
  
XBRL Taxonomy Extension Presentation Linkbase Document. Filed herewith.
 
 
 
* Management contract, compensatory plan or arrangement.

 



33

SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
Date:
October 6, 2014
 
LEVI STRAUSS & Co.
 
 
 
(Registrant)
 
 
 
 
 
 
 
 
 
 
By:
/s/    WADE W. WEBSTER
 
 
 
Wade W. Webster
Vice President and Controller
(Principal Accounting Officer)



34

EXHIBIT INDEX
 

10.1
 
Annual Incentive Plan, effective November 25, 2013, as amended. Filed herewith.*
 
 
 
31.1
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
 
 
 
31.2
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
 
 
 
32
 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith.
 
 
 
99.1
 
Press release, dated October 6, 2014, announcing the election of Jenny Ming to the Board.
 
 
 
101.INS
 
XBRL Instance Document. Filed herewith.
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document. Filed herewith.
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document. Filed herewith.
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document. Filed herewith.
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document. Filed herewith.
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document. Filed herewith.
 
 
 
* Management contract, compensatory plan or arrangement.

  



35

LEVI STRAUSS & CO Reports