10-K 1 a2013yeform10-k.htm 10-K 2013 YE Form 10-K
 
 
 
 
 
 
 
 
 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________
FORM 10-K
(Mark One)                 _____________________________
 þ
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
or
 ¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended November 24, 2013
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)
_____________________________
Securities registered pursuant to Section 12(b) of the Act: None 
Securities registered pursuant to Section 12(g) of the Act: None 
_____________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  þ
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  þ    No  ¨
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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 — 37,446,988 shares outstanding on February 6, 2014
Documents incorporated by reference: None
 
 
 
 
 
 
 
 
 
 



LEVI STRAUSS & CO.
TABLE OF CONTENTS TO FORM 10-K
FOR FISCAL YEAR ENDED NOVEMBER 24, 2013
 
 
 
 
Page
Number
 
 
 
 
Item 1.
 
Item 1A.
 
Item 1B.
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
 
 
 
 
Item 5.
 
Item 6.
 
Item 7.
 
Item 7A.
 
Item 8.
 
Item 9.
 
Item 9A.
 
Item 9B.
 
 
 
 
 
 
 
 
 
Item 10.
 
Item 11.
 
Item 12.
 
Item 13.
 
Item 14.
 
 
 
 
 
 
 
 
 
Item 15.
 
 
 



PART I 
Item 1.
BUSINESS
Overview
From our California Gold Rush beginnings, we have grown into one of the world's largest brand-name apparel companies. A history of responsible business practices, rooted in our core values, has helped us build our brands and engender consumer trust around the world. Under our Levi's®, Dockers®, Signature by Levi Strauss & Co.™ and Denizen® brands, 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.
An Authentic American Icon
Our Levi's® brand has become one of the most widely recognized brands in the history of the apparel industry. Its broad distribution reflects the brand's appeal across consumers of all ages and lifestyles. Its merchandising and marketing reflect the brand's core attributes: authentic, courageous, confident, effortless, connected and purposeful.
Our Dockers® brand was at the forefront of the business casual trend in the United States, offering an alternative to suit dressing and casual wear that led to the American staple – the khaki pant. The brand quickly planted its stake in the marketplace and today, the Dockers® brand has evolved around the world as a market leader in the casual pant category.
Our Global Reach
Our products are sold in more than 110 countries, grouped into three geographic regions: Americas, Europe and Asia Pacific. We support our brands throughout these regions through a global infrastructure, developing, sourcing and marketing our products around the world. Although our brands are recognized as authentically “American,” we derive approximately half of our net revenues from outside the United States. A summary of financial information for each geographical region, which comprise our three reporting segments, is found in Note 19 to our audited consolidated financial statements included in this report.
Our products are sold in approximately 50,000 retail locations worldwide, including approximately 2,800 retail stores, both franchised and company-operated, and shop-in-shops dedicated to our brands. 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, franchised or other brand-dedicated stores and shop-in-shops outside of the United States. Levi's® and Dockers® products are also sold through our brand-dedicated company-operated stores and through the e-commerce sites we operate, as well as the e-commerce sites operated by certain of our key wholesale customers and other third parties. We distribute Signature by Levi Strauss & Co.™ and Denizen® brand products primarily through mass channel retailers in the Americas.
Levi Strauss & Co. was founded in San Francisco, California, in 1853 and incorporated in Delaware in 1971. We conduct our operations outside the United States through foreign subsidiaries owned directly or indirectly by Levi Strauss & Co. We have headquarter offices in San Francisco, Brussels and Singapore. Our corporate offices are located at Levi's Plaza, 1155 Battery Street, San Francisco, California 94111, and our main telephone number is (415) 501-6000.
Our common stock is primarily owned by descendants of the family of Levi Strauss and their relatives.
Our website – www.levistrauss.com – contains additional and detailed information about our history, our products and our commitments. Financial news and reports and related information about our company can be found at http://levistrauss.com/investors/financial-news. Information contained on our website is not incorporated by reference into this Annual Report on Form 10-K.



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Our Business Strategies
Our goal is to generate and sustain profitable growth over the long term in order to significantly improve the value of the enterprise. The management team is focused on four key strategies to achieve this goal:
Drive the profitable core business. Our core businesses create the most value on a brand, geographic, customer or business-segment basis. These include our men's bottoms business for the Levi's® brand globally and the Dockers® brand in the United States, including our iconic 501® jean and Dockers® khaki pant. We also consider our key international markets of Mexico, Germany, France and the United Kingdom, as well as key wholesale accounts globally to be vital elements of our long-term growth strategies. Accordingly, we are focused on managing collaborative relationships with these accounts to focus on inventory levels, customer support and marketing planning, in order to achieve mutual commercial success.
Expand the reach of our brands and build a more balanced portfolio. We believe we have opportunities to grow our two largest brands through new or expanded product categories, consumer segments and geographic markets. We are building upon our iconic brands, our innovative design and marketing expertise to deepen our connection with consumers and expand the reach and appeal of our brands globally. For example, we believe we can better serve the female consumer, and that there are significant opportunities in tops, outerwear and accessories. We also believe opportunities remain to expand in emerging and underpenetrated geographic markets, including India, China, Russia and Brazil.
Become a world-class omni-channel retailer. We will continue to expand our consumer reach through brand-dedicated stores globally, including company-operated stores, dedicated e-commerce sites, franchisee and other dedicated store models. We believe these brand-dedicated stores represent an attractive opportunity to establish incremental distribution and sales as well as to showcase the full breadth of our product offerings and deliver a consistent brand experience to the consumer.
Leverage our global scale to develop a competitive cost structure.  We are focused on executional excellence: improving productivity, reducing our controllable cost structure and driving efficiencies through our global supply chain. We will balance our pursuit of improved organizational agility and marketplace responsiveness with our cost management efforts.
Our Brands and Products
We offer a broad range of products, including jeans, casual and dress pants, tops, shorts, skirts, jackets, footwear and related accessories. Across all of our brands, pants – including jeans, casual pants and dress pants – represented approximately 85%, 86% and 83% of our total units sold in each of fiscal years 2013, 2012 and 2011, respectively. Men's products generated approximately 78%, 75% and 72% of our total net sales in each of fiscal years 2013, 2012 and 2011, respectively.
Levi's® Brand
The Levi's® brand epitomizes classic American style and effortless cool and is positioned as the authentic, original and definitive jeans brand.  Since their inception in 1873, Levi's® jeans have become one of the most recognizable garments in the world – reflecting the aspirations and earning the loyalty of people for generations. Consumers around the world instantly recognize the distinctive traits of Levi's® jeans – the double arc of stitching, known as the Arcuate Stitching Design, and the Red Tab Device, a fabric tab stitched into the back right pocket. Today, the Levi's® brand continues to evolve, driven by its distinctive pioneering and innovative spirit. Our range of leading jeanswear and accessories for men, women and children is available in more than 110 countries, allowing individuals around the world to express their personal style.
The Levi's® brand encompasses a range of products. Levi's® Red Tab™ products are the foundation of the brand, consisting of a wide spectrum of jeans and jeanswear offered in a variety of fits, fabrics, finishes, styles and price points intended to appeal to a broad spectrum of consumers. The line includes the iconic 501® jean, the original and best-selling five-pocket jean of all-time. The line also incorporates a full range of jeanswear fits and styles designed specifically for women. Sales of Red Tab™ products represented the majority of our Levi's® brand net sales in all three of our regions in fiscal years 2013, 2012 and 2011. We also offer premium products around the world including a range of premium pants, tops, shorts, skirts, jackets, footwear, and related accessories.
Our Levi's® brand products accounted for approximately 84%, 84% and 83% of our total net sales in fiscal 2013, 2012 and 2011, respectively, approximately half of which were generated in our Americas region.


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Dockers® Brand
The Dockers® brand has embodied the spirit of khakis for more than 25 years. Since its introduction in 1986, the brand has been perfecting the khaki and the essential goods to go with them. The brand focuses on men, celebrating the re-emergence of khakis as the go-to versatile pant.
Our Dockers® brand products accounted for approximately 12% of our total net sales in each of fiscal 2013, 2012 and 2011. Although the substantial majority of these net sales were in the Americas region, Dockers® brand products are sold in more than 50 countries.
Signature by Levi Strauss & Co.™ Brand and Denizen® Brand
In addition to our Levi's® and Dockers® brands, we offer two brands focused on consumers who seek high-quality, affordable and fashionable jeanswear from a company they trust. We offer denim jeans, casual pants, tops and jackets in a variety of fits, fabrics and finishes for men, women and kids under the Signature by Levi Strauss & Co.™ brand through the mass retail channel in the United States and Canada. The Denizen® brand was introduced in Target stores in the United States starting in 2011, and includes a variety of jeans, tops and accessories to complement active lifestyles and to empower consumers to express their aspirations, individuality and attitudes at an affordable price point.
Signature by Levi Strauss & Co.™ brand and Denizen® brand products accounted for approximately 4%, 4% and 5% of our total net sales in fiscal years 2013, 2012 and 2011, respectively.
Licensing
The appeal of our brands across consumer groups and our global reach enable us to license our Levi's® and Dockers® trademarks for a variety of product categories in multiple markets in each of our regions, including footwear, belts, wallets and bags, outerwear, sweaters, dress shirts, kidswear, sleepwear and hosiery. We also license our Signature by Levi Strauss & Co.™ and our Denizen® trademarks in various markets for certain product categories.
In addition to product category licenses, we enter into regional license agreements with third parties to produce, market and distribute our products in several countries around the world, including various Latin American, Middle Eastern and Asia Pacific countries. Licensing accounted for approximately 2% of our total net revenues in each of fiscal years 2013, 2012 and 2011.
We enter into licensing agreements with our licensees covering royalty payments, product design and manufacturing standards, marketing and sale of licensed products, and protection of our trademarks. We require our licensees to comply with our code of conduct for contract manufacturing and engage independent monitors to perform regular on-site inspections and assessments of production facilities.
Sales, Distribution and Customers
We distribute our products through a wide variety of retail formats around the world, including chain and department stores, franchise stores dedicated to our brands, our own company-operated retail network, multi-brand specialty stores, mass channel retailers, and both company-operated and retailer e-commerce sites.
Multi-brand Retailers
We seek to make our products available where consumers shop, including offering products and related assortments that are appropriately tailored for our wholesale customers and their retail consumers. Our products are also sold through authorized third-party e-commerce sites. Sales to our top ten wholesale customers accounted for approximately 31%, 32% and 30% of our total net revenues in fiscal years 2013, 2012 and 2011, respectively. No customer represented 10% or more of net revenues in any of these years. The loss of any major wholesale customer could have a material adverse effect on one or more of our segments or on the company as a whole.
Dedicated Stores
We believe retail stores dedicated to our brands are important for the growth, visibility, availability and commercial success of our brands, and they are an increasingly important part of our strategy for expanding distribution of our products. Our brand-dedicated stores are either operated by us or by independent third parties such as franchisees. In addition to the dedicated stores, we maintain brand-dedicated e-commerce sites that sell products directly to retail consumers.


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Company-operated retail stores.  Our company-operated online and retail stores, including both mainline and outlet stores, generated approximately 22%, 21% and 18% of our net revenues in fiscal 2013, 2012 and 2011, respectively. As of November 24, 2013, we had 529 company-operated stores, predominantly Levi's® stores, located in 33 countries across our three regions. We had 208 stores in the Americas, 201 stores in Europe and 120 stores in Asia Pacific. During 2013, we added 49 company-operated stores and closed 31 stores.
Franchised and other stores.  Franchised, licensed, or other forms of brand-dedicated stores operated by independent third parties sell Levi's® and Dockers® products in markets outside the United States. There were approximately 1,400 of these stores as of November 24, 2013, and they are a key element of our international distribution. In addition to these stores, we consider our network of dedicated shop-in-shops located within department stores, which may be either operated directly by us or third parties, to be an important component of our retail distribution in international markets. Outside of the United States, approximately 400 dedicated shop-in-shops were operated directly by us and approximately 500 were operated by third parties as of November 24, 2013.
Seasonality of Sales
We typically achieve our largest quarterly revenues in the fourth quarter, reflecting the “holiday” season. In both 2013 and in 2012, our net revenues in the first, second, third and fourth quarters represented 25%, 23%, 24% and 28%, respectively, of our total net revenues for the year.
Our fiscal year ends on the last Sunday of November in each year, although the fiscal years of certain foreign subsidiaries end on November 30. Each quarter of fiscal years 2013, 2012 and 2011 consisted of 13 weeks.
Marketing and Promotion
We root our marketing in globally consistent brand messages that reflect the unique attributes of our brands, including the Levi's® brand as the authentic, original and definitive jeans brand and the Dockers® brand as world's best and most loved khaki. We support our brands with a diverse mix of marketing initiatives to drive consumer demand.
We also market through social media and digital and mobile outlets, event and music sponsorships, product placement in leading fashion magazines and with celebrities, personal sponsorships and endorsements, on-the-ground efforts such as street-level events and similar targeted “viral” marketing activities.
We also use our websites, www.levi.com, www.dockers.com, www.levistrausssignature.com, and www.denizen.com, in relevant markets to enhance consumer understanding of our brands and help consumers find and buy our products.
Sourcing and Logistics
Organization.  Our global sourcing and logistics organizations are responsible for taking a product from the design concept stage through production to delivery to our customers. Our objective is to leverage our global scale to achieve product development and sourcing efficiencies and reduce total product and distribution costs while maintaining our focus on local service levels and working capital management.
Product procurement.  We source nearly all of our products through independent contract manufacturers. The remainder are sourced from our company-operated manufacturing and finishing plants. See “Item 2 – Properties” for more information about those manufacturing facilities.
Sources and availability of raw materials.  The principal fabrics used in our business are cotton, blends, synthetics and wools. The prices we pay our suppliers for our products are dependent in part on the market price for raw materials used to produce them, primarily cotton. The price and availability of cotton may fluctuate substantially, depending on a variety of factors. The price fluctuations impact the cost of our products in future seasons given the lead time of our product development cycle. Fluctuations in product costs can cause a decrease in our profitability if product pricing actions taken in response were to be insufficient or if those actions were to cause our wholesale customers or retail consumers to reduce the volumes they purchase.
Sourcing locations.  We use numerous independent contract manufacturers located throughout the world for the production and finishing of our garments. We conduct assessments of political, social, economic, trade, labor and intellectual property protection conditions in the countries in which we source our products before placing production in those countries and on an ongoing basis.
In 2013, we sourced products from contractors located in more than 30 countries around the world. We sourced products in North and South Asia, South and Central America (including Mexico and the Caribbean), Europe and Africa. No single country accounted for more than 20% of our sourcing in 2013.


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Sourcing practices.  Our sourcing practices include these elements:
We require all third-party contractors and subcontractors who manufacture or finish products for us to comply with our code of conduct relating to supplier working conditions as well as environmental, employment and sourcing practices. We also require our licensees to ensure that their manufacturers comply with our requirements.
Our code of conduct covers employment practices such as wages and benefits, working hours, health and safety, working age and discriminatory practices, environmental matters such as wastewater treatment and solid waste disposal, and ethical and legal conduct.
We regularly assess manufacturing and finishing facilities through periodic on-site facility inspections and improvement activities, including use of independent monitors to supplement our internal staff. We integrate review and performance results into our sourcing decisions.
We disclose the names and locations of our contract manufacturers to encourage collaboration among apparel companies in factory monitoring and improvement. We regularly evaluate and refine our code of conduct processes.
Logistics.  We operate dedicated distribution centers in a number of countries. For more information, see “Item 2 – Properties.” Distribution center activities include receiving finished goods from our contractors and plants, inspecting those products, preparing them for retail presentation, and shipping them to our customers and to our own stores. Our distribution centers maintain a combination of replenishment and seasonal inventory from which we ship to our stores and wholesale customers. In certain locations around the globe we have consolidated our distribution centers to service multiple countries. In addition, we outsource some of our logistics activities to third-party logistics providers.
Competition
The global apparel industry is highly competitive and fragmented. It is characterized by low barriers to entry, brands targeted at specific consumer segments, many regional and local competitors, and an increasing number of global competitors. Principal competitive factors include:
developing products with relevant fits, finishes, fabrics, style and performance features;
maintaining favorable brand recognition and appeal through strong and effective marketing in diverse market segments;
anticipating and responding to changing consumer demands and apparel trends in a timely manner;
securing desirable retail locations and presenting products effectively at company-operated retail and franchised and other brand-dedicated stores;
ensuring product availability at wholesale and e-commerce channels, and at company-operated retail, franchised and other brand-dedicated stores;
optimizing supply chain cost efficiencies and product development cycle lead times;
delivering compelling value for the price in diverse market segments; and
generating competitive economics for wholesale customers, including retailers, franchisees, and distributors.
We face competition from a broad range of competitors at the global, regional and local levels in diverse channels across a wide range of retail price points. Globally, a few of our primary competitors include vertically integrated specialty stores operated by such companies such as The Gap, Inc. and The Inditex Group; jeanswear brands such as those marketed by VF Corporation, a competitor in multiple channels and product lines including through their Wrangler, Lee and Seven for All Mankind brands; khakiwear brands such as Haggar; and athletic wear companies such as adidas Group, NIKE, Inc. and lululemon athletica inc. In addition, each region faces local or regional competition; and in the Americas, retailers' private or exclusive labels such as those from Wal-Mart Stores, Inc. (Faded Glory brand), Target Corporation (Mossimo and Merona brands) and JC Penney (Arizona brand). Many of our regional competitors are also seeking to expand globally through an expanded store footprint and the e-commerce channel. For more information on the factors affecting our competitive position, see “Item 1A – Risk Factors.”
Trademarks
We have more than 5,000 trademark registrations and pending applications in approximately 180 jurisdictions worldwide, and we acquire rights in new trademarks according to business needs. Substantially all of our global trademarks are owned by Levi Strauss & Co., the parent and U.S. operating company. We regard our trademarks as our most valuable assets and believe they have substantial value in the marketing of our products. The Levi's®, Dockers® and 501® trademarks, the Arcuate Stitching Design, the Tab Device, the Two Horse® Design, the Housemark and the Wings and Anchor Design are among our core trademarks.


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We protect these trademarks by registering them with the U.S. Patent and Trademark Office and with governmental agencies in other countries, particularly where our products are manufactured or sold. We work vigorously to enforce and protect our trademark rights by engaging in regular market reviews, helping local law enforcement authorities detect and prosecute counterfeiters, issuing cease-and-desist letters against third parties infringing or denigrating our trademarks, opposing registration of infringing trademarks, and initiating litigation as necessary. We currently are pursuing approximately 400 infringement matters around the world. We also work with trade groups and industry participants seeking to strengthen laws relating to the protection of intellectual property rights in markets around the world.
Employees
As of November 24, 2013, we employed approximately 16,000 people, approximately 9,000 of whom were located in the Americas, 4,600 in Europe, and 2,400 in Asia Pacific. Approximately 4,200 of our employees were associated with the manufacturing and procurement of our products, 7,200 worked in retail, including seasonal employees, 1,600 worked in distribution and 3,000 were other non-production employees.
History and Corporate Citizenship
Our history and longevity are unique in the apparel industry. Our commitment to quality, innovation and corporate citizenship began with our founder, Levi Strauss, who infused the business with the principle of responsible commercial success that has been embedded in our business practices throughout our more than 150-year history. This mixture of history, quality, innovation and corporate citizenship contributes to the iconic reputations of our brands.
In 1853, during the California Gold Rush, Mr. Strauss opened a wholesale dry goods business in San Francisco that became known as “Levi Strauss & Co.” Seeing a need for work pants that could hold up under rough conditions, he and Jacob Davis, a tailor, created the first jean. In 1873, they received a U.S. patent for “waist overalls” with metal rivets at points of strain. The first product line designated by the lot number “501” was created in 1890.
In the 19th and early 20th centuries, our work pants were worn primarily by cowboys, miners and other working men in the western United States. Then, in 1934, we introduced our first jeans for women, and after World War II, our jeans began to appeal to a wider market. By the 1960s, they had become a symbol of American culture, representing a unique blend of history and youth. We opened our export and international businesses in the 1950s and 1960s. In 1986, we introduced the Dockers® brand of casual apparel which revolutionized the concept of business casual.
Throughout this long history, we upheld our strong belief that we can help shape society through civic engagement and community involvement, responsible labor and workplace practices, philanthropy, ethical conduct, environmental stewardship and transparency. We have engaged in a “profits through principles” business approach from the earliest years of the business. Among our milestone initiatives over the years, we integrated our factories two decades prior to the U.S. civil rights movement and federally mandated desegregation, we developed a comprehensive supplier code of conduct requiring safe and healthy working conditions among our suppliers (a first of its kind for a multinational apparel company), and we offered full medical benefits to domestic partners of employees prior to other companies of our size, a practice that is widely accepted today.
Item 1A.
RISK FACTORS
Risks Relating to the Industry in Which We Compete
Our revenues are influenced by economic conditions that impact consumer spending.
Apparel is a cyclical industry that is dependent upon the overall level of consumer spending. Our wholesale customers anticipate and respond to adverse changes in economic conditions and uncertainty by reducing inventories and canceling orders. Our brand-dedicated stores are also affected by these conditions which may lead to a decline in consumer traffic to, and spending in, these stores. As a result, factors that diminish consumer spending and confidence in any of the markets in which we compete, particularly deterioration in general economic conditions, volatility in investment returns, fear of unemployment, increases in energy costs or interest rates, housing market downturns, fear about and impact of pandemic illness, and other factors such as acts of war, acts of nature or terrorist or political events that impact consumer confidence, could reduce our sales and adversely affect our business and financial condition through their impact on our wholesale customers as well as its direct impact on us. These outcomes and behaviors have, and may continue to, adversely affect our business and financial condition.
Intense competition in the global apparel industry could lead to reduced sales and prices.
We face a variety of competitive challenges in the global apparel industry from a variety of jeanswear and casual apparel marketers, and competition has increased over the years due to factors such as the international expansion and increased presence


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of vertically integrated specialty stores; expansion into e-commerce by existing and new competitors; the proliferation of private labels or exclusive labels offered by department stores, chain stores and mass channel retailers; the introduction of jeans and casual apparel by well-known and successful athletic wear marketers; and the movement of apparel companies who traditionally relied on wholesale distribution channels into their own retail distribution network. Some of these competitors have greater financial and marketing resources than we do and may be able to adapt to changes in consumer preferences or retail requirements more quickly, devote greater resources to the building and sustaining of their brand equity and the marketing and sale of their products. In addition, some of these competitors may not respond to changing sourcing conditions in the same manner we do, and may be able to achieve lower product costs or adopt more aggressive pricing policies than we can. As a result, we may not be able to compete as effectively with them and may not be able to maintain or grow the demand for our products. These evolving competitive factors could reduce our sales and adversely affect our business and financial condition.
The success of our business depends upon our ability to offer innovative and updated products at attractive price points.
The global apparel industry is characterized by constant product innovation due to changing fashion trends and consumer preferences and by the rapid replication of new products by competitors. As a result, our success depends in large part on our ability to develop, market and deliver innovative and stylish products at a pace, intensity, and price competitive with other brands in the markets in which we sell our products. In addition, we must create products at a range of price points that appeal to the consumers of both our wholesale customers and our dedicated retail stores situated in each of our diverse geographic regions. Our development and production cycles take place prior to full visibility into all of these factors for the coming seasons. Failure on our part to forecast consumer demand and market conditions and to regularly and rapidly develop innovative and stylish products and update core products could limit sales growth, adversely affect retail and consumer acceptance of our products, negatively impact the consumer traffic in our dedicated retail stores, leave us with a substantial amount of unsold inventory which we may be forced to sell at discounted prices, all of which may adversely affect our gross margin, and impair the image of our brands on a local, regional and global level. Moreover, our newer products may not produce as high a gross margin as our traditional products and thus may have an adverse effect on our overall margins and profitability.
The global apparel industry is subject to ongoing pricing pressure.
The apparel market is characterized by low barriers to entry for both suppliers and marketers, global sourcing through suppliers located throughout the world, trade liberalization, continuing movement of product sourcing to lower cost countries, and the ongoing emergence of new competitors with widely varying strategies and resources. These factors have contributed, and may continue to contribute, to ongoing pricing pressure and uncertainty throughout the supply chain. Pricing pressure has been exacerbated by the variability of raw material and energy costs in recent years. This pressure could have the following effects:
require us to raise wholesale prices on existing products resulting in decreased sales volume;
result in reduced gross margins across our product lines;
increase retailer demands for allowances, incentives and other forms of economic support; and
increase pressure on us to reduce our production costs and our operating expenses.
Any of these factors could adversely affect our business and financial condition.
Increases in the price of raw materials could increase our cost of goods and negatively impact our financial results.
The principal materials used in our business are cotton, blends, synthetics and wools. The prices we pay our suppliers for our products are dependent in part on the market price for raw materials used to produce them, primarily cotton. The price and availability of cotton may fluctuate substantially, depending on a variety of factors, including demand, acreage devoted to cotton crops and crop yields, weather, supply conditions, transportation costs, energy prices, work stoppages, government regulation and government policy, economic climates, market speculation and other unpredictable factors. Any and all of these factors may be exacerbated by global climate change. Cotton prices suffered from unprecedented variability and uncertainty in the past several years and may fluctuate significantly again in the future. Increases in raw material costs, unless sufficiently offset with our pricing actions, may cause a decrease in our profitability and impact our sales volume. These factors may also have an adverse impact on our cash and working capital needs as well as those of our suppliers.
Our business is subject to risks associated with sourcing and manufacturing overseas.
We import both raw materials and finished garments into all of our operating regions. Our ability to import products in a timely and cost-effective manner may be affected by conditions at ports or issues that otherwise affect transportation and warehousing providers, such as port and shipping capacity, labor disputes and work stoppages, political unrest, severe weather, or security requirements in the United States and other countries. These issues could delay importation of products or require us to


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locate alternative ports or warehousing providers to avoid disruption to our customers. These alternatives may not be available on short notice or could result in higher transportation costs, which could have an adverse impact on our business and financial condition, specifically our gross margin and overall profitability.
Substantially all of our import operations are subject to customs and tax requirements as well as trade regulations, such as tariffs and quotas set by governments through mutual agreements or bilateral actions. In addition, the countries in which our products are manufactured or imported may from time to time impose additional quotas, duties, tariffs or other restrictions on our imports or adversely modify existing restrictions. Adverse changes in these import costs and restrictions, or our suppliers' failure to comply with customs regulations or similar laws, could harm our business.
Our operations are also subject to the effects of international trade agreements and regulations such as the North American Free Trade Agreement, the Dominican-Republic Central America Free Trade Agreement, the Egypt Qualified Industrial Zone program, and the activities and regulations of the World Trade Organization. Although generally these trade agreements have positive effects on trade liberalization, sourcing flexibility and cost of goods by reducing or eliminating the duties and/or quotas assessed on products manufactured in a particular country, trade agreements can also impose requirements that adversely affect our business, such as setting quotas on products that may be imported from a particular country into our key markets such as the United States or the European Union.
Risks Relating to Our Business
We depend on a group of key wholesale customers for a significant portion of our revenues. A significant adverse change in a customer relationship or in a customer's performance or financial position could harm our business and financial condition.
Sales to our top ten wholesale customers accounted for approximately 31%, 32% and 30% of our total net revenues in fiscal years 2013, 2012 and 2011, respectively. No customer represented 10% or more of net revenues in any of these years. While we have long-standing relationships with our wholesale customers, we do not have long-term contracts with them. As a result, purchases generally occur on an order-by-order basis, and the relationship, as well as particular orders, can generally be terminated by either party at any time. If any major wholesale customer decreases or ceases its purchases from us, reduces the floor space, assortments, fixtures or advertising for our products or changes its manner of doing business with us for any reason, such actions could adversely affect our business and financial condition. In addition, a wholesale customer may revise its strategy to one that shifts its focus away from our typical consumer or that otherwise results in a reduction of its sales of our products generally, negatively impacting our sales through that channel. Also, a decline in the performance or financial condition of a major wholesale customer – including bankruptcy – may cause us to alter our business terms or to cease doing business with that customer, which could in turn adversely affect our own business and financial condition.
The retail industry in the United States has experienced substantial consolidation over the last decade, and further consolidation may occur. Consolidation in the retail industry typically results in store closures, centralized purchasing decisions, increased customer leverage over suppliers, greater exposure for suppliers to credit risk and an increased emphasis by retailers on inventory management and productivity, any of which can, and have, adversely impacted our net revenues, margins and ability to operate efficiently.
We may be unable to maintain or increase our sales through our primary distribution channels.
In the United States, chain stores and department stores are the primary distribution channels for our Levi's® and Dockers® products. Outside the United States, department stores and independent jeanswear retailers have traditionally been our primary distribution channels.
We may be unable to maintain or increase sales of our products through these distribution channels for several reasons, including the following:
The retailers in these channels maintain – and seek to grow – substantial private-label and exclusive offerings as they strive to differentiate the brands and products they offer from those of their competitors.
These retailers may also change their apparel strategies and reduce fixture spaces and purchases of brands misaligned with their strategic requirements.
Other channels, including vertically integrated specialty stores, account for a substantial portion of jeanswear and casual wear sales. In some of our mature markets, these stores have already placed competitive pressure on our primary distribution channels, and many of these stores are now looking to our developing markets to grow their business.
Shrinking points of distribution, inclusive of fewer doors at our customer locations.


8


Further success by retailer private-labels and vertically integrated specialty stores may continue to adversely affect the sales of our products across all channels, as well as the profitability of our brand-dedicated stores. Additionally, our ability to secure or maintain retail floor space, market share and sales in these channels depends on our ability to offer differentiated products and to increase retailer profitability on our products, which could have an adverse impact on our margins.
If we encounter problems with our distribution channels, our ability to deliver our products to market could be adversely affected.
We rely on company-owned and independently-operated distribution facilities to warehouse and ship products to our wholesale customers and e-commerce consumers. Our distribution system includes computer-controlled and automated equipment, which may be subject to a number of risks related to security or computer viruses, the proper operation of software and hardware, power interruptions or other system failures. While these risks cannot be completely eliminated, we have implemented various maintenance programs and contingency plans and also work with our suppliers to mitigate these risks at both our company-owned and independently operated distribution facilities.
We are focused on executional excellence, including improving productivity, reducing our controllable cost structure and driving efficiencies through our global supply chain.  As part of the pursuit for improved organizational agility and marketplace responsiveness, we may consolidate the number of distribution facilities we rely upon. As a potential consequence of such consolidation, our operations could also be interrupted by work stoppages, labor disputes, earthquakes, floods, fires or other natural disasters affecting our distribution centers. In addition, our distribution capacity is dependent on the timely performance of services by third parties, including the transportation of product to and from its distribution facilities. If we encounter problems with our distribution system, our ability to meet wholesale customer and e-commerce consumer expectations, manage inventory, complete sales and achieve operating efficiencies could be adversely affected.
The loss of members of the Company’s executive management and other key employees could harm our business.
Our future success depends in part on the continued service of our executive management team and other key employees. The unexpected loss of the services of any key individual could harm our business. Our future success depends, in part, on our ability to recruit, retain and motivate our employees sufficiently, both to maintain our current business and to execute our strategic initiatives. Competition for experienced and well-qualified employees in our industry is intense, and we may not be successful in attracting and retaining such personnel.
If we are unable to effectively execute our e-commerce business our reputation and operating results may be harmed.
While still comprising a small portion of our net revenues, e-commerce has been our fastest growing business over the last several years. The success of our e-commerce business depends, in part, on third parties and factors over which we have limited control, including changing consumer confidence, preferences and buying trends relating to e-commerce usage, both domestically and abroad, as well as promotional or other advertising initiatives employed by our wholesale customers or other third parties on their e-commerce sites.
We are also vulnerable to certain additional risks and uncertainties associated with our e-commerce sites, including: changes in required technology interfaces; website downtime and other technical failures; costs and technical issues as we upgrade our website software; computer viruses; and changes in applicable federal and state regulations. In addition, we must keep up to date with competitive technology trends, including the use of new or improved technology, creative user interfaces and other e-commerce marketing tools such as paid search and mobile applications, among others, which may increase our costs and which may not succeed in increasing sales or attracting consumers. Our competitors, some of whom have greater resources than us, may also be able to benefit from changes in e-commerce technologies, which could harm our competitive position. Our failure to successfully respond to these risks and uncertainties might adversely affect the sales in our e-commerce business, as well as damage our reputation and brands.
Additionally, the success of our e-commerce business and the satisfaction of our consumers  depends on their timely receipt of our products. The efficient flow of our products requires that our company-operated and third-party operated distribution facilities have adequate capacity to support the current level of e-commerce operations, and any anticipated increased levels that may follow from the growth of our e-commerce business. If we encounter difficulties with our distribution facilities or in our relationships with the third parties who operate the facilities, or if any facilities were to shut down for any reason, including as a result of fire or other natural disaster, we could face shortages of inventory, resulting in "out of stock" conditions in the e-commerce sites we operate, those operated by our wholesale customers or other third parties, incur significantly higher costs and longer lead times associated with distributing our products to our consumers and experience dissatisfaction from our consumers.  Any of these issues could have a material adverse effect on our business and harm our reputation.


9


Any major disruption or failure of our information technology systems could adversely affect our business and operations.
We rely on various information technology systems to manage our operations. Over the last several years, we have been and continue to implement modifications and upgrades to our systems, including making changes to legacy systems, replacing legacy systems with successor systems with new functionality and acquiring new systems with new functionality. These types of activities subject us to inherent costs and risks associated with replacing and changing these systems, including impairment of our ability to fulfill customer orders, potential disruption of our internal control structure, substantial capital expenditures, additional administration and operating expenses, retention of sufficiently skilled personnel to implement and operate the new systems, demands on management time, and other risks and costs of delays or difficulties in transitioning to new systems or of integrating new systems into our current systems. Our system implementations may not result in productivity improvements at a level that outweighs the costs of implementation, or at all. In addition, the difficulties with implementing new technology systems may cause disruptions in our business operations and have an adverse effect on our business and operations, if not anticipated and appropriately mitigated.
We face cybersecurity risks and may incur increasing costs in an effort to minimize those risks.
We utilize systems and websites that allow for the secure storage and transmission of proprietary or confidential information regarding our customers, employees, and others, including credit card information and personal identification information. A security breach may expose us to a risk of loss or misuse of this information, litigation, and potential liability. We may not have the resources or technical sophistication to anticipate or prevent rapidly-evolving types of cyber attacks. Attacks may be targeted at us, our customers, or others who have entrusted us with information. Actual or anticipated attacks may cause us to incur costs, including costs to deploy additional personnel and protection technologies, train employees, and engage third-party experts and consultants. Advances in computer capabilities, new technological discoveries, or other developments may result in the technology used by us to protect transaction or other data being breached or compromised. In addition, data and security breaches can also occur as a result of non-technical issues, including breach by us or by persons with whom we have commercial relationships that result in the unauthorized release of personal or confidential information. Any compromise or breach of our security could result in a violation of applicable privacy and other laws, significant legal and financial exposure, and a loss of confidence in our security measures, which could have an adverse effect on our results of operations and our reputation.
We currently rely on contract manufacturing of our products. Our inability to secure production sources meeting our quality, cost, working conditions and other requirements, or failures by our contractors to perform, could harm our sales, service levels and reputation.
We source approximately 95% of our products from independent contract manufacturers who purchase fabric and make our products and may also provide us with design and development services. As a result, we must locate and secure production capacity. We depend on independent manufacturers to maintain adequate financial resources, including access to sufficient credit, secure a sufficient supply of raw materials, and maintain sufficient development and manufacturing capacity in an environment characterized by continuing cost pressure and demands for product innovation and speed-to-market. In addition, we currently do not have any material long-term contracts with any of our independent manufacturers. Under our current arrangements with our independent manufacturers, these manufacturers generally may unilaterally terminate their relationship with us at any time. Finally, while we have historically worked with numerous manufacturers, in the past several years we have begun consolidating the number of independent manufacturers from which we source our products. Reliance on fewer numbers of independent manufacturers involves risk and any difficulties or failures to perform by our independent contract manufacturers could cause delays in product shipments or otherwise negatively affect our results of operations.
Our suppliers are subject to the fluctuations in general economic cycles, and the global economic conditions may impact their ability to operate their business. They may also be impacted by the increasing costs of raw materials, labor and distribution, resulting in demands for less attractive contract terms or an inability for them to meet our requirements or conduct their own businesses. The performance and financial condition of a supplier may cause us to alter our business terms or to cease doing business with a particular supplier, or change our sourcing practices generally, which could in turn adversely affect our own business and financial condition.
Our dependence on contract manufacturing could subject us to difficulty in obtaining timely delivery of products of acceptable quality. A contractor's failure to ship products to us in a timely manner or to meet our quality standards, or interference with our ability to receive shipments due to factors such as port or transportation conditions, could cause us to miss the delivery date requirements of our customers. Failing to make timely deliveries may cause our customers to cancel orders, refuse to accept deliveries, impose non-compliance charges, demand reduced prices, or reduce future orders, any of which could harm our sales and margins.
We require contractors to meet our standards in terms of working conditions, environmental protection, raw materials, security and other matters before we are willing to place business with them. As such, we may not be able to obtain the lowest-cost


10


production. In addition, the labor and business practices of apparel manufacturers have received increased attention from the media, non-governmental organizations, consumers and governmental agencies in recent years. Any failure by our independent manufacturers to adhere to labor or other laws or appropriate labor or business practices, and the potential litigation, negative publicity and political pressure relating to any of these events, could harm our business and reputation.
Regulatory developments such as the use of “conflict” minerals mined from the Democratic Republic of Congo and adjoining countries could affect the sourcing and availability of raw materials used by our suppliers in the manufacture of certain of our products. We may be subject to costs associated with new regulations, including for the diligence pertaining to the presence of any conflict minerals used in our products and the cost of remediation and other changes to products, processes, or sources of supply as a consequence of such verification activities. The impact of the regulations may result in a limited pool of suppliers who provide conflict free metals, and we cannot assure you that we will be able to obtain products in sufficient quantities or at competitive prices. Also, because our supply chain is complex, we may face reputational challenges with our consumers and other stakeholders if we are unable to sufficiently verify the origins for all metals used in the products that we sell.
We are a global company with significant revenues and earnings generated internationally, which exposes us to political and economic risks as well as the impact of foreign currency fluctuations.
In addition to our significant international revenues and earnings, a substantial amount of our products come from sources outside of the country of distribution. As a result, we are subject to the risks of doing business outside of the United States, including:
currency fluctuations, which have impacted our results of operations significantly in recent years;
political, economic and social instability;
changes in tariffs and taxes;
regulatory restrictions on repatriating foreign funds back to the United States; and
less protective foreign laws relating to intellectual property.
The functional currency for most of our foreign operations is the applicable local currency. As a result, fluctuations in foreign currency exchange rates affect the results of our operations and the value of our foreign assets and liabilities, including debt, which in turn may benefit or adversely affect results of operations and cash flows and the comparability of period-to-period results of operations. In addition, we engage in hedging activities to manage our foreign currency exposures resulting from certain product sourcing activities, some intercompany sales, foreign subsidiaries' royalty payments, earnings repatriations, net investment in foreign operations and funding activities. However, our earnings may be subject to volatility since we do not fully hedge our foreign currency exposures and we are required to record in income the changes in the market values of our exposure management instruments that we do not designate or that do not qualify for hedge accounting treatment. Changes in the value of the relevant currencies may affect the cost of certain items required in our operations as the majority of our sourcing activities are conducted in U.S. Dollars. Changes in currency exchange rates may also affect the relative prices at which we and foreign competitors sell products in the same market. Foreign policies and actions regarding currency valuation could result in actions by the United States and other countries to offset the effects of such fluctuations. Given the unpredictability and volatility of foreign currency exchange rates, ongoing or unusual volatility may adversely impact our business and financial conditions.
Furthermore, due to our global operations, we are subject to numerous domestic and foreign laws and regulations affecting our business, such as those related to labor, employment, worker health and safety, antitrust and competition, environmental protection, consumer protection, import/export, and anti-corruption, including but not limited to the Foreign Corrupt Practices Act which prohibits giving anything of value intended to influence the awarding of government contracts. Although we have put into place policies and procedures aimed at ensuring legal and regulatory compliance, our employees, subcontractors and agents could take actions that violate these requirements. Violations of these regulations could subject us to criminal or civil enforcement actions, any of which could have a material adverse effect on our business.
As a global company, we are exposed to risks of doing business in foreign jurisdictions and risks relating to U.S. policy with respect to companies doing business in foreign jurisdictions. Legislation or other changes in the U.S. tax laws could increase our U.S. income tax liability and adversely affect our after-tax profitability.
If one or more of our counterparty financial institutions default on their obligations to us, we may incur significant losses.
As part of our hedging activities, we enter into transactions involving derivative financial instruments, which may include forward contracts, commodity futures contracts, option contracts, collars and swaps, with various financial institutions. In addition, we have significant amounts of cash, cash equivalents and other investments on deposit or in accounts with banks or other financial institutions in the United States and abroad. As a result, we are exposed to the risk of default by or failure of counterparty financial institutions. The risk of counterparty default or failure may be heightened during economic downturns and periods of uncertainty


11


in the financial markets. If one of our counterparties were to become insolvent or file for bankruptcy, our ability to recover losses incurred as a result of default or our assets that are deposited or held in accounts with such counterparty may be limited by the counterparty’s liquidity or the applicable laws governing the insolvency or bankruptcy proceedings. In the event of default or failure of one or more of our counterparties, we could incur significant losses, which could negatively impact our results of operations and financial condition.
Most of the employees in our production and distribution facilities are covered by collective bargaining agreements, and any material job actions could negatively affect our results of operations.
In North America, most of our distribution employees are covered by various collective bargaining agreements, and outside North America, most of our production and distribution employees are covered by either industry-sponsored and/or state-sponsored collective bargaining mechanisms. Any work stoppages or other job actions by these employees could harm our business and reputation.
Our licensees may not comply with our product quality, manufacturing standards, marketing and other requirements which could negatively affect our reputation and business.
We license our trademarks to third parties for manufacturing, marketing and distribution of various products. While we enter into comprehensive agreements with our licensees covering product design, product quality, sourcing, manufacturing, marketing and other requirements, our licensees may not comply fully with those agreements. Non-compliance could include marketing products under our brand names that do not meet our quality and other requirements or engaging in manufacturing practices that do not meet our supplier code of conduct. These activities could harm our brand equity, our reputation and our business.
Our success depends on the continued protection of our trademarks and other proprietary intellectual property rights.
Our trademarks and other intellectual property rights are important to our success and competitive position, and the loss of or inability to enforce trademark and other proprietary intellectual property rights could harm our business. We devote substantial resources to the establishment and protection of our trademark and other proprietary intellectual property rights on a global basis. Our efforts to establish and protect our trademark and other proprietary intellectual property rights may not be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products. Unauthorized copying of our products or unauthorized use of our trademarks or other proprietary rights may not only erode sales of our products but may also cause significant damage to our brand names and our ability to effectively represent ourselves to our customers, contractors, suppliers and/or licensees. Moreover, others may seek to assert rights in, or ownership of, our trademarks and other proprietary intellectual property, and we may not be able to successfully resolve those claims. In addition, the laws and enforcement mechanisms of some foreign countries may not allow us to protect our proprietary rights to the same extent as we are able to in the United States and other countries.
We have substantial liabilities and cash requirements associated with postretirement benefits, pension and our deferred compensation plans.
Our postretirement benefits, pension, and our deferred compensation plans result in substantial liabilities on our balance sheet. These plans and activities have and will generate substantial cash requirements for us, and these requirements may increase beyond our expectations in future years based on changing market conditions. The difference between plan obligations and assets, or the funded status of the plans, is a significant factor in determining the net periodic benefit costs of our pension plans and the ongoing funding requirements of those plans. Many variables, such as changes in interest rates, mortality rates, health care costs, investment returns, and/or the market value of plan assets can affect the funded status of our defined benefit pension, other postretirement, and postemployment benefit plans and cause volatility in the net periodic benefit cost and future funding requirements of the plans. Plan liabilities may impair our liquidity, have an unfavorable impact on our ability to obtain financing and place us at a competitive disadvantage compared to some of our competitors who do not have such liabilities and cash requirements.
Earthquakes or other events outside of our control may damage our facilities or the facilities of third parties on which we depend.
Our global headquarters and the headquarters of our Americas region are both located in California near major geologic faults that have experienced earthquakes in the past. An earthquake or other natural disaster or the loss of power caused by power shortages could disrupt operations or impair critical systems. Any of these disruptions or other events outside of our control could affect our business negatively, harming our operating results. In addition, if any of our other facilities, including our manufacturing, finishing or distribution facilities or our company-operated or franchised stores, or the facilities of our suppliers or customers, is affected by earthquakes, tsunamis, power shortages, floods, monsoons, terrorism, epidemics, political instability or conflict or


12


other events outside of our control, our business could suffer. The Company has plans in place to mitigate the impact of these types of events on its own facilities including the geographic diversity of our IT infrastructure, the duplication of headquarter locations, training and education of employees for such circumstances, and the capacity for many employees to work remotely. Oversight to these preparedness strategies is provided by several committees comprised of key functions representing the regions in which the company does business. However, we cannot assure that these mitigation plans will offset the impact of such events, and we cannot control the impact of such events on the operations of our suppliers or customers.
Risks Relating to Our Debt
We have debt and interest payment requirements at a level that may restrict our future operations.
As of November 24, 2013, we had approximately $1.5 billion of unsecured debt, and we had $635.3 million of additional borrowing capacity under our senior secured revolving credit facility. Our debt requires us to dedicate a substantial portion of any cash flow from operations to the payment of interest and principal due under our debt, which will reduce funds available for other business purposes, and result in us having lower net income than we would otherwise have had. This dedicated use of cash could impact our ability to successfully compete by, for example:
increasing our vulnerability to general adverse economic and industry conditions;
limiting our flexibility in planning for or reacting to changes in our business and industry;
placing us at a competitive disadvantage compared to some of our competitors that have less debt; and
limiting our ability to obtain additional financing required to fund working capital and capital expenditures and for other general corporate purposes.
In addition, borrowings under our senior secured revolving credit facility bears interest at variable rates. As a result, increases in market interest rates would require a greater portion of our cash flow to be used to pay interest, which could further hinder our operations. Increase in market interest rates may also affect the trading price of our debt securities that bear interest at a fixed rate. Our ability to satisfy our obligations and to reduce our total debt depends on our future operating performance and on economic, financial, competitive and other factors, many of which are beyond our control.
Volatility in the capital markets could affect our ability to access capital or could increase our costs of capital.
A downturn or disruption in the credit markets may reduce sources of liquidity available to us or increase our costs of capital, which could impact our ability to maintain or grow our business, which in turn may adversely affect our business and results of operations.
Restrictions in our notes, indentures and senior secured revolving credit facility may limit our activities, including dividend payments, share repurchases and acquisitions.
The indentures relating to our senior unsecured notes, our Euro notes, our Yen-denominated Eurobonds and our senior secured revolving credit facility contain restrictions, including covenants limiting our ability to incur additional debt, grant liens, make acquisitions and other investments, prepay specified debt, consolidate, merge or acquire other businesses, sell assets, pay dividends and other distributions, repurchase stock, and enter into transactions with affiliates. These restrictions, in combination with our leveraged condition, may make it more difficult for us to successfully execute our business strategy, grow our business or compete with companies not similarly restricted.
If our foreign subsidiaries are unable to distribute cash to us when needed, we may be unable to satisfy our obligations under our debt securities, which could force us to sell assets or use cash that we were planning to use elsewhere in our business.
We conduct our international operations through foreign subsidiaries, and therefore we depend upon funds from our foreign subsidiaries for a portion of the funds necessary to meet our debt service obligations. We only receive the cash that remains after our foreign subsidiaries satisfy their obligations. Any agreements our foreign subsidiaries enter into with other parties, as well as applicable laws and regulations limiting the right and ability of non-U.S. subsidiaries and affiliates to pay dividends and remit cash to affiliated companies, may restrict the ability of our foreign subsidiaries to pay dividends or make other distributions to us. If those subsidiaries are unable to pass on the amount of cash that we need, we will be unable to make payments on our debt obligations, which could force us to sell assets or use cash that we were planning on using elsewhere in our business, which could hinder our operations and affect the trading price of our debt securities.


13


Item 1B.
UNRESOLVED STAFF COMMENTS
Not applicable.
Item 2.
PROPERTIES
We conduct manufacturing, distribution and administrative activities in owned and leased facilities. We operate four manufacturing-related facilities abroad and eight distribution centers around the world. We have renewal rights for most of our property leases. We anticipate that we will be able to extend these leases on terms satisfactory to us or, if necessary, locate substitute facilities on acceptable terms. We believe our facilities and equipment are in good condition and are suitable for our needs. Information about our key operating properties in use as of November 24, 2013, is summarized in the following table:
 
Location
 
Primary Use
 
Leased/Owned
 
 
Americas
 
 
 
 
 
 
San Francisco, CA
 
Design and Product Development
 
Leased
 
 
Hebron, KY
 
Distribution
 
Owned
 
 
Canton, MS
 
Distribution
 
Owned
 
 
Henderson, NV
 
Distribution
 
Owned
 
 
Westlake, TX
 
Data Center
 
Leased
 
 
Etobicoke, Canada
 
Distribution
 
Owned
 
 
Cuautitlan, Mexico
 
Distribution
 
Leased
 
 
 
 
 
 
 
 
 
Europe
 
 
 
 
 
 
Plock, Poland
 
Manufacturing and Finishing
 
Leased(1)
 
 
Northhampton, U.K.
 
Distribution
 
Owned
 
 
Sabadell, Spain
 
Distribution
 
Leased
 
 
Corlu, Turkey
 
Finishing and Distribution
 
Owned
 
 
 
 
 
 
 
 
 
Asia Pacific
 
 
 
 
 
 
Adelaide, Australia
 
Distribution
 
Leased
 
 
Cape Town, South Africa
 
Manufacturing, Finishing and Distribution
 
Leased
 
 
Ninh Binh, Vietnam
 
Finishing
 
Leased
 
______________
(1)
Building and improvements are owned but subject to a ground lease.
Our global headquarters and the headquarters of our Americas region are both located in leased premises in San Francisco, California. Our Europe and Asia Pacific headquarters are located in leased premises in Brussels, Belgium and Singapore, respectively. In addition to the above, we operate finance shared service centers in Eugene, Oregon and Singapore. As of November 24, 2013, we also leased or owned 105 administrative and sales offices in 42 countries, as well as leased 18 warehouses in nine countries.
In addition, as of November 24, 2013, we had 529 company-operated retail and outlet stores in leased premises in 33 countries. We had 208 stores in the Americas region, 201 stores in the Europe region and 120 stores in the Asia Pacific region.
Item 3.
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 4.
MINE SAFETY DISCLOSURES
None. 


14


PART II
Item 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is primarily owned by descendants of the family of Levi Strauss and their relatives. Shares of our common stock are not publicly held or traded. All shares are subject to a stockholders' agreement. The agreement, which expires in April 2016, limits the transfer of shares to other holders, family members, specified charities and foundations and back to the Company. The agreement does not provide for registration rights or other contractual devices for forcing a public sale of shares or certificates, or other access to liquidity.
As of February 6, 2014, there were 281 record holders of our common stock. Our shares are not registered on any national securities exchange, there is no established public trading market for our shares and none of our shares are convertible into shares of any other class of stock or other securities.
We paid a cash dividend of $25.1 million on our common stock in the first quarter of 2013, and cash dividends of $20.0 million in the first half of each of 2012 and 2011. Subsequent to the fiscal year-end, on February 5, 2014, our Board of Directors declared a cash dividend of $30.0 million. Please see Note 14 to our audited consolidated financial statements included in this report for more information. 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 our board of directors depending upon, among other factors, the income tax impact to the dividend recipients, our financial condition and compliance with the terms of our debt agreements. Our debt arrangements limit our ability to pay dividends. For more detailed information about these limitations, see Note 6 to our audited consolidated financial statements included in this report.
We repurchased a total of 8,018 shares of our common stock during the fourth quarter of the fiscal year ended November 24, 2013, in connection with the exercise of call rights under our 2006 Equity Incentive Plan. For more detailed information, see Note 11 to our audited consolidated financial statements included in this report.



15


Item 6.
SELECTED FINANCIAL DATA
The following table sets forth our selected historical consolidated financial data which are derived from our audited consolidated financial statements for 2013, 2012, 2011, 2010 and 2009. The financial data set forth below should be read in conjunction with, and are qualified by reference to, “Item 7 – Management's Discussion and Analysis of Financial Condition and Results of Operations,” our audited consolidated financial statements for 2013, 2012 and 2011 and the related notes to those audited consolidated financial statements, included elsewhere in this report.
 
Year Ended November 24, 2013
 
Year Ended November 25, 2012
 
Year Ended November 27, 2011
 
Year Ended November 28, 2010
 
Year Ended November 29, 2009
 
(Dollars in thousands)
Statements of Income Data:
 
 
 
 
 
 
 
 
 
Net revenues
$
4,681,691

 
$
4,610,193

 
$
4,761,566

 
$
4,410,649

 
$
4,105,766

Cost of goods sold
2,331,219

 
2,410,862

 
2,469,327

 
2,187,726

 
2,132,361

Gross profit
2,350,472

 
2,199,331

 
2,292,239

 
2,222,923

 
1,973,405

Selling, general and administrative expenses
1,884,965

 
1,865,352

 
1,955,846

 
1,841,562

 
1,595,317

Operating income
465,507

 
333,979

 
336,393

 
381,361

 
378,088

Interest expense
(129,024
)
 
(134,694
)
 
(132,043
)
 
(135,823
)
 
(148,718
)
Loss on early extinguishment of debt
(689
)
 
(8,206
)
 
(248
)
 
(16,587
)
 

Other income (expense), net
(13,181
)
 
4,802

 
(1,275
)
 
6,647

 
(39,445
)
Income before taxes
322,613

 
195,881

 
202,827

 
235,598

 
189,925

Income tax expense
94,477

 
54,922

 
67,715

 
86,152

 
39,213

Net income
228,136

 
140,959

 
135,112

 
149,446

 
150,712

Net loss attributable to noncontrolling interest
1,057

 
2,891

 
2,841

 
7,057

 
1,163

Net income attributable to Levi Strauss & Co.
$
229,193

 
$
143,850

 
$
137,953

 
$
156,503

 
$
151,875

 
 
 
 
 
 
 
 
 
 
Statements of Cash Flow Data:
 
 
 
 
 
 
 
 
 
Net cash flow provided by (used for):
 
 
 
 
 
 
 
 
 
Operating activities
$
411,268

 
$
530,976

 
$
1,848

 
$
146,274

 
$
388,783

Investing activities
(92,798
)
 
(75,198
)
 
(140,957
)
 
(181,781
)
 
(233,029
)
Financing activities
(230,509
)
 
(250,939
)
 
77,707

 
32,313

 
(97,155
)
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
489,258

 
$
406,134

 
$
204,542

 
$
269,726

 
$
270,804

Working capital
1,054,236

 
881,493

 
870,960

 
891,607

 
778,888

Total assets
3,127,418

 
3,170,077

 
3,279,555

 
3,135,249

 
2,989,381

Total debt, excluding capital leases
1,545,877

 
1,729,211

 
1,972,372

 
1,863,146

 
1,852,900

Total capital leases
10,833

 
2,022

 
3,713

 
5,355

 
7,365

Total Levi Strauss & Co. stockholders' equity (deficit)
171,666

 
(106,921
)
 
(165,592
)
 
(219,609
)
 
(333,119
)
Other Financial Data:
 
 
 
 
 
 
 
 
 
Depreciation and amortization
$
115,720

 
$
122,608

 
$
117,793

 
$
104,896

 
$
84,603

Capital expenditures
91,771

 
83,855

 
130,580

 
154,632

 
82,938

Cash dividends paid
25,076

 
20,036

 
20,023

 
20,013

 
20,001




16


Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
Overview
Our Company
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 Pacific. 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 2,300 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 529 company-operated stores located in 33 countries, including the United States, and through the online stores we operate. Our company-operated and online stores generated approximately 22% of our net revenues in 2013, as compared to 21% in the same period in 2012, 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 Pacific businesses, collectively, contributed approximately 39% of our net revenues and 36% of our regional operating income in 2013. Sales of Levi’s® brand products represented approximately 84% of our total net sales in 2013. Pants represented approximately 85% of our total units sold in 2013, and men's products generated approximately 78% of our total net sales.
Our Objectives
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 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.
For 2014, our objective is to grow full-year revenues as compared to 2013.  Full-year gross margin in 2014 is projected to be approximately 50%.  With respect to our cost structure, we are identifying opportunities to globally streamline processes, eliminate redundant work, take advantage of lower-cost service delivery options and overhaul our procurement practices.  This initiative will be implemented in phases as we move through 2014 and will result in up-front charges.
Trends Affecting Our Business
We believe the key business and marketplace factors that we are managing include the following:
Factors that impact consumer discretionary spending, which continues to be weak in certain markets around the world, have created a challenging retail environment for us and our customers, characterized by inconsistent traffic patterns and consequently in part leading to a more promotional environment. Such factors include continuing pressures in the U.S. and international economies related to the lingering high unemployment rates, slow real wage increase, muted growth in emerging markets, a shift in spending to non-apparel categories such as housing and other interest-rate sensitive durables, and other similar macroeconomic elements.
Wholesaler/retailer dynamics and wholesale channels remain challenged by slowed growth prospects due to consolidation in the industry, increased competition from vertically-integrated specialty stores, fast-fashion retail, and e-commerce shopping, and pricing transparency enabled by proliferation of online technologies. As a result, many of our customers desire increased returns on their investment with us through increased margins and inventory turns, and they continue to build competitive exclusive or private-label offerings. Many apparel wholesalers, including us, seek to strengthen relationships with customers as a result of these changes in the marketplace through efforts such as investment in new products, marketing programs, fixtures and collaborative planning systems.
Many apparel companies that have traditionally relied on wholesale distribution channels have invested in expanding their own retail store and e-commerce distribution and consumer-facing technologies, which has raised competitiveness in the retail market.


17


More competitors are seeking growth globally, thereby raising the competitiveness of international markets. Some of these competitors are entering into markets where we already have a mature business such as the United States, Western Europe and Japan, and those new brands may provide consumers discretionary purchase alternatives or lower-priced apparel offerings.
Competition for, and price volatility of, resources throughout the supply chain have increased, causing us and other apparel manufacturers to continue to seek alternative sourcing channels and create new efficiencies in our global supply chain. Trends affecting the supply chain include the proliferation of lower-cost sourcing alternatives, resulting in reduced barriers to entry for new competitors, and the impact of fluctuating prices of labor and raw materials. Trends such as these can bring additional pressure on us and other wholesalers and retailers to shorten lead-times, reduce costs and raise product prices.
These factors contribute to a global market environment of intense competition, constant product innovation and continuing cost pressure, and combine with the continuing global economic conditions to create a challenging commercial and economic environment. We evaluate these factors as we develop and execute our strategies.
Our 2013 Results
Our 2013 results reflect net revenues and net income growth despite the ongoing challenging conditions in Europe and Asia.
 
Net revenues.  On both reported and constant-currency bases, consolidated net revenues increased by 2% compared to 2012. The increase primarily reflected higher sales in the Americas, both at our company-operated retail network and to certain wholesale customers.
Operating income.  Compared to 2012, operating margin rose to nearly 10%, primarily due to a higher gross margin, reflecting the benefit from the lower cost of cotton. Consolidated operating income increased by 39% compared to 2012, primarily due to charges that we took in the second half of 2012 related to strategic choices in our Asia Pacific region. The increase in operating income was partially offset by higher selling, general and administrative expenses ("SG&A") in 2013.
Cash flows.  Cash and cash equivalents increased $83 million to $489 million while long-term debt decreased $165 million to $1.5 billion. Cash flows provided by operating activities were $411 million for 2013 as compared to $531 million for 2012, primarily reflecting our higher inventory levels and higher payments to vendors.
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 2013 and 2012 consisted of 13 weeks.
Segments.  We manage our business according to three regional segments: the Americas, Europe and Asia Pacific.
Classification.  Our classification of certain significant revenues and expenses reflects the following:
Net 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, 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 SG&A, including costs related to receiving and inspection at distribution centers, warehousing, shipping to our customers, handling, and certain other activities associated with our distribution network.
Gross margins may not be comparable to those of other companies in our industry since some companies may include costs related to their distribution network and occupancy costs associated with company-operated stores in cost of goods sold.
Constant currency.  Constant-currency comparisons are based on translating local currency amounts in both periods at the foreign exchange rates used in the Company’s internal planning process for the current year. We routinely evaluate our financial


18


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
2013 compared to 2012
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:
 
Year Ended
 
November 24,
2013
 
November 25,
2012
 
%
Increase
(Decrease)
 
November 24,
2013
 
November 25,
2012
 
 
 
% of Net
Revenues
 
% of Net
Revenues
 
(Dollars in millions)
Net revenues
$
4,681.7

 
$
4,610.2

 
1.6
 %
 
100.0
 %
 
100.0
 %
Cost of goods sold
2,331.2

 
2,410.9

 
(3.3
)%
 
49.8
 %
 
52.3
 %
Gross profit
2,350.5

 
2,199.3

 
6.9
 %
 
50.2
 %
 
47.7
 %
Selling, general and administrative expenses
1,885.0

 
1,865.3

 
1.1
 %
 
40.3
 %
 
40.5
 %
Operating income
465.5

 
334.0

 
39.4
 %
 
9.9
 %
 
7.2
 %
Interest expense
(129.0
)
 
(134.7
)
 
(4.2
)%
 
(2.8
)%
 
(2.9
)%
Loss on early extinguishment of debt
(0.7
)
 
(8.2
)
 
(91.6
)%
 

 
(0.2
)%
Other income (expense), net
(13.2
)
 
4.8

 
(374.5
)%
 
(0.3
)%
 
0.1
 %
Income before income taxes
322.6

 
195.9

 
64.7
 %
 
6.9
 %
 
4.2
 %
Income tax expense
94.5

 
54.9

 
72.0
 %
 
2.0
 %
 
1.2
 %
Net income
228.1

 
141.0

 
61.8
 %
 
4.9
 %
 
3.1
 %
Net loss attributable to noncontrolling interest
1.1

 
2.9

 
(63.4
)%
 

 
0.1
 %
Net income attributable to Levi Strauss & Co.
$
229.2

 
$
143.9

 
59.3
 %
 
4.9
 %
 
3.1
 %


19


Net revenues
The following table presents net revenues by reporting segment for the periods indicated and the changes in net revenues by reporting segment on both reported and constant-currency bases from period to period:
 
 
Year Ended
 
 
 
 
 
 
 
% Increase
(Decrease)
 
 
 
November 24,
2013
 
November 25,
2012
 
As
Reported
 
Constant
Currency
 
 
 
(Dollars in millions)
 
 
Net revenues:
 
 
 
 
 
 
 
 
 
Americas
$
2,851.0

 
$
2,749.3

 
3.7
 %
 
3.7
 %
 
 
Europe
1,103.5

 
1,103.2

 

 
(2.1
)%
 
 
Asia Pacific
727.2

 
757.7

 
(4.0
)%
 
0.4
 %
 
 
Total net revenues
$
4,681.7

 
$
4,610.2

 
1.6
 %
 
1.8
 %
 
As compared to the same period in the prior year, total net revenues were affected unfavorably by changes in foreign currency exchange rates.
Americas.  Net revenues in our Americas region increased on both reported and constant-currency bases.
Net revenues increased in our retail channel at our outlet and online stores primarily due to improved performance. Levi's® and Dockers® brand wholesale revenues increased due to strong sales to certain key customers. Partially offsetting the higher wholesale revenues was our decision in the third quarter of 2012 to license the Levi's® brand boys business, whereby we now recognize a royalty rate on the licensee's sales of these products, in lieu of recognizing the full wholesale revenues and related costs. During the fourth quarter, increased sales of Levi's® men's products through all channels offset declines in sales of women's products at wholesale.
Europe.  Net revenues in Europe were flat on a reported basis but decreased on a constant-currency basis, with currency affecting net revenues favorably by approximately $23 million.
Net revenues decreased in our traditional wholesale channels throughout the region, most notably during the fourth quarter, and to our franchisees in Southern Europe. This decline was partially offset by net revenue growth from the performance and expansion of our company-operated retail network, particularly at our outlet stores and in Russia.
Asia Pacific.  Net revenues in Asia Pacific decreased on a reported basis but increased slightly on a constant-currency basis, with currency affecting net revenues unfavorably by approximately $33 million.
The increase in constant-currency net revenues reflects our decision to phase out the Denizen® brand in the third quarter of 2012. Revenues were negatively impacted in the second half of 2012 due to support we provided to our customers in conjunction with exiting the brand.
Excluding the Denizen® impact, net revenues decreased in 2013 reflecting lower Levi's® brand sales at our wholesale and retail channels due to ongoing challenging conditions in most markets in the region, which also led to declining franchisee performance and selective closure of unproductive stores. Partially offsetting these declines was a slight improvement in our performance in Levi's® brand sales in India.


20


Gross profit
The following table shows consolidated gross profit and gross margin for the periods indicated and the changes in these items from period to period: 
 
 
Year Ended
 
 
 
November 24,
2013
 
November 25,
2012
 
%
Increase
(Decrease)
 
 
 
(Dollars in millions)
 
 
Net revenues
$
4,681.7

 
$
4,610.2

 
1.6
 %
 
 
Cost of goods sold
2,331.2

 
2,410.9

 
(3.3
)%
 
 
Gross profit
$
2,350.5

 
$
2,199.3

 
6.9
 %
 
 
Gross margin
50.2
%
 
47.7
%
 
 
 
Currency affected gross profit favorably by approximately $25 million. Gross margin improved primarily due to the benefit of the lower cost of cotton in the products we sold in the first half of 2013. Gross margin also improved due to the unfavorable impact in 2012 of the $32 million in customer support and markdown charges taken to exit the Denizen® brand in Asia Pacific. This was partially offset by a decline in margin in the fourth quarter reflecting higher discounts and inventory markdown, particularly in the women’s business.
Selling, general and administrative expenses
The following table shows our SG&A for the periods indicated, the changes in these items from period to period and these items expressed as a percentage of net revenues:
 
 
Year Ended
 
 
 
November 24,
2013
 
November 25,
2012
 
%
Increase
(Decrease)
 
November 24,
2013
 
November 25,
2012
 
 
 
 
 
% of Net
Revenues
 
% of Net
Revenues
 
 
 
(Dollars in millions)
 
 
Selling
$
719.2

 
$
717.0

 
0.3
 %
 
15.4
%
 
15.6
%
 
 
Advertising and promotion
274.0

 
260.4

 
5.2
 %
 
5.9
%
 
5.6
%
 
 
Administration
399.8

 
376.2

 
6.3
 %
 
8.5
%
 
8.2
%
 
 
Other
492.0

 
511.7

 
(3.8
)%
 
10.5
%
 
11.1
%
 
 
Total SG&A
$
1,885.0

 
$
1,865.3

 
1.1
 %
 
40.3
%
 
40.5
%
 
Currency affected SG&A favorably by approximately $6 million as compared to the prior year.
Selling.  We had 18 more company-operated stores at the end of 2013 than we did at the end of 2012. Higher expenses associated with the performance and expansion of our company-operated store network were offset by savings in our wholesale sales organization.
Advertising and promotion.  The increase as a percentage of net revenues reflected increased advertising campaigns in our fourth quarter as compared to the prior-year period.
Administration.  Incentive compensation expense increased more than $30 million, reflecting improved achievement against our internally-set objectives in 2013 as compared to 2012; additionally, postretirement benefit plan costs increased, as the favorable impact of past plan amendments had been substantially recognized by the end of fiscal 2012. These increases were partially offset by lower severance expenses in 2013.
Other.  Other SG&A includes distribution, information resources, and marketing organization costs. Lower costs primarily reflected a third-quarter 2012 impairment charge of $19 million recorded in conjunction with our decision to outsource distribution in Japan to a third-party and close our owned distribution center in that country.


21


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:
 
Year Ended
 
 
November 24,
2013
 
November 25,
2012
 
%
Increase
(Decrease)
 
November 24,
2013
 
 
November 25,
2012
 
 
 
 
% of Net
Revenues
 
 
% of Net
Revenues
 
 
(Dollars in millions)
 
Operating income:
 
 
 
 
 
 
 
 
 
 
 
Americas
$
510.5

 
$
431.6

 
18.3
 %
 
17.9
%
 
 
15.7
%
 
Europe
167.6

 
178.3

 
(6.0
)%
 
15.2
%
 
 
16.2
%
 
Asia Pacific
123.7

 
66.8

 
85.1
 %
 
17.0
%
 
 
8.8
%
 
Total regional operating income
801.8

 
676.7

 
18.5
 %
 
17.1
%
*
 
14.7
%
*
Corporate expenses
336.3

 
342.7

 
(1.9
)%
 
7.2
%
*
 
7.4
%
*
Total operating income
$
465.5

 
$
334.0

 
39.4
 %
 
9.9
%
*
 
7.2
%
*
Operating margin
9.9
%
 
7.2
%
 
 
 
 
 
 
 
 
______________
* Percentage of consolidated net revenues
Currency favorably affected total operating income by approximately $31 million.
Regional operating income.    
Americas.  The increase in operating income and operating margin primarily reflected the region's improved gross margin.
Europe.  The decrease in operating income reflected the region's lower net revenues and higher expenses related to our company-operated stores as well as advertising.
Asia Pacific.  The increase in operating income and operating margin reflected the charges recorded in 2012 in connection with our decision to phase out the Denizen® brand in the region, as well as the region's improved gross margin.
Corporate.  Corporate expenses are SG&A that are not attributed to any of our regional operating segments. As compared to the prior year, corporate expenses in 2013 included lower severance expenses and lower distribution expenses, reflecting the third-quarter 2012 impairment charge of $19 million recorded for our distribution center in Japan. These declines were partially offset by higher incentive compensation expense and higher postretirement benefit plan costs.
Interest expense
Interest expense was $129.0 million for the year ended November 24, 2013, as compared to $134.7 million in the prior year. The decrease in 2013 was due to lower debt balances, which resulted from our debt refinancing activities during the second quarters of 2012 and 2013, partially offset by higher interest expense on our deferred compensation plans.
The weighted-average interest rate on average borrowings outstanding for the 2013 was 7.52%, as compared to 7.05% for 2012.
Loss on early extinguishment of debt
For the year ended November 24, 2013, we recorded a loss on early extinguishment of debt as a result of our debt refinancing activities during the second quarter of 2013. The loss was comprised of the write-off of the remaining unamortized discount and unamortized debt issuance costs.


22


For the year ended November 25, 2012, we recorded an $8.2 million net loss on early extinguishment of debt as a result of our debt refinancing activities during the second quarter of 2012. The loss was primarily comprised of a tender premium of $11.4 million and the write-off of $4.0 million of unamortized debt issuance costs, partially offset by a gain of $7.6 million related to the partial repurchase of Yen-denominated Eurobonds due 2016 at a discount to their par value. For more information, see Note 6 to our audited consolidated financial statements included in this report.
Other income (expense), net
Other income (expense), net, primarily consists of foreign exchange management activities and transactions. For the year ended November 24, 2013, we recorded expense of $13.2 million as compared to income of $4.8 million for the prior year. The expense in 2013 primarily reflected losses on our foreign currency denominated balances. The income in 2012 primarily reflected gains on our foreign currency denominated balances.
Income tax expense
Income tax expense was $94.5 million for the year ended November 24, 2013, compared to $54.9 million for the prior year. Our effective income tax rate was 29.3% for the year ended November 24, 2013, compared to 28.0% for the prior year.
The increase in income tax expense in 2013 as compared to 2012 is primarily due to an increase in pre-tax income. The effective tax rate in 2013 reflects a $15.2 million discrete tax benefit attributable to the finalization in July 2013 of the U.S. federal tax audit of tax years 2003 – 2008, and a beneficial change in the impact of foreign operations as compared to 2012. The effective tax rate in 2012 reflected a net tax benefit of $27.0 million recognized in 2012, resulting from a definitive agreement with the State of California on state tax refund claims involving tax years 1986 – 2004.
2012 compared to 2011
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:
 
Year Ended
 
November 25,
2012
 
November 27,
2011
 
%
Increase
(Decrease)
 
November 25,
2012
 
November 27,
2011
 
 
 
% of Net
Revenues
 
% of Net
Revenues
 
(Dollars in millions)
Net revenues
$
4,610.2

 
$
4,761.6

 
(3.2
)%
 
100.0
 %
 
100.0
 %
Cost of goods sold
2,410.9

 
2,469.4

 
(2.4
)%
 
52.3
 %
 
51.9
 %
Gross profit
2,199.3

 
2,292.2

 
(4.1
)%
 
47.7
 %
 
48.1
 %
Selling, general and administrative expenses
1,865.3

 
1,955.8

 
(4.6
)%
 
40.5
 %
 
41.1
 %
Operating income
334.0

 
336.4

 
(0.7
)%
 
7.2
 %
 
7.1
 %
Interest expense
(134.7
)
 
(132.0
)
 
2.0
 %
 
(2.9
)%
 
(2.8
)%
Loss on early extinguishment of debt
(8.2
)
 
(0.3
)
 
3,208.9
 %
 
(0.2
)%
 

Other income (expense), net
4.8

 
(1.3
)
 
(476.6
)%
 
0.1
 %
 

Income before income taxes
195.9

 
202.8

 
(3.4
)%
 
4.2
 %
 
4.3
 %
Income tax expense
54.9

 
67.7

 
(18.9
)%
 
1.2
 %
 
1.4
 %
Net income
141.0

 
135.1

 
4.3
 %
 
3.1
 %
 
2.8
 %
Net loss attributable to noncontrolling interest
2.9

 
2.9

 
1.8
 %
 
0.1
 %
 
0.1
 %
Net income attributable to Levi Strauss & Co.
$
143.9

 
$
138.0

 
4.3
 %
 
3.1
 %
 
2.9
 %


23


Net revenues
The following table presents net revenues by reporting segment for the periods indicated and the changes in net revenues by reporting segment on both reported and constant-currency bases from period to period:
 
 
Year Ended
 
 
 
 
 
 
 
% Increase
(Decrease)
 
 
 
November 25,
2012
 
November 27,
2011
 
As
Reported
 
Constant
Currency
 
 
 
(Dollars in millions)
 
 
Net revenues:
 
 
 
 
 
 
 
 
 
Americas
$
2,749.3

 
$
2,715.9

 
1.2
 %
 
1.9
 %
 
 
Europe
1,103.2

 
1,174.2

 
(6.0
)%
 
1.9
 %
 
 
Asia Pacific
757.7

 
871.5

 
(13.1
)%
 
(10.9
)%
 
 
Total net revenues
$
4,610.2

 
$
4,761.6

 
(3.2
)%
 
(0.4
)%
 
As compared to the same periods in the prior year, net revenues were affected unfavorably by changes in foreign currency exchange rates across all regions.
Americas.  On both reported and constant-currency bases, net revenues in our Americas region increased, with currency affecting net revenues unfavorably by approximately $18 million.
Net revenues increased in our retail stores in the region, primarily in the outlet channel, due to the price increases we have implemented and the mix of higher-priced products sold as compared to prior year. At wholesale, net revenues declined in the region, primarily reflecting a decline in Levi's® and Dockers® brand sales to lower-margin channels, although Levi's® brand net revenues benefited from the price increases we have implemented. The decline in wholesale net revenues also reflected our strategic decision to license the Levi's® brand boys business beginning in our third quarter, whereby we now recognize a royalty rate on the licensee's sales of these products, in lieu of recognizing the full wholesale revenues and related costs. Sales of our Signature and Denizen® brand products increased, reflecting the expansion of product lines at existing customers during the second half of the prior year.
Europe. Net revenues in Europe declined on a reported basis but increased on a constant-currency basis, with currency affecting net revenues unfavorably by approximately $93 million.
Net revenues of our company-operated retail network grew, reflecting the expansion and improved performance of our stores. Sales in our traditional wholesale channels declined, reflecting the ongoing depressed retail environment, most notably in southern Europe. Higher constant-currency revenues in 2012 also reflected the temporary issues we experienced during the third quarter of 2011 in fulfilling customer orders during the implementation and stabilization of our enterprise resource planning system.
Asia Pacific. Net revenues in Asia Pacific declined on both reported and constant-currency bases, with currency affecting net revenues unfavorably by approximately $20 million.
The net revenues decline primarily reflected a drop in wholesale revenues, including franchisees, due to the economic slowdown faced by most markets in the region during the second half of the year, particularly India. Additionally, our decision to phase out the Denizen® brand in the region negatively impacted revenues due to support we are providing to our customers.


24


Gross profit
The following table shows consolidated gross profit and gross margin for the periods indicated and the changes in these items from period to period:
 
 
Year Ended
 
 
 
November 25,
2012
 
November 27,
2011
 
%
Increase
(Decrease)
 
 
 
(Dollars in millions)
 
 
Net revenues
$
4,610.2

 
$
4,761.6

 
(3.2
)%
 
 
Cost of goods sold
2,410.9

 
2,469.4

 
(2.4
)%
 
 
Gross profit
$
2,199.3

 
$
2,292.2

 
(4.1
)%
 
 
Gross margin
47.7
%
 
48.1
%
 
 
 
As compared to prior year, the gross profit decline primarily resulted from unfavorable currency effects of approximately $97 million, and, due to our decision to phase out the Denizen® brand in Asia Pacific, an unfavorable impact of approximately $32 million inclusive of customer support and the markdown of our remaining inventory in that region. Excluding these factors, gross margin improved due to the increased revenue contribution from our company-operated retail network, the decline in sales to lower-margin channels and the benefit of the lower cost of cotton. Additionally, gross margin benefited from our decision to license the Levi’s® brand boys business in our Americas region, as that business generally had a lower gross margin than our other businesses.
Selling, general and administrative expenses
The following table shows our SG&A for the periods indicated, the changes in these items from period to period and these items expressed as a percentage of net revenues:
 
 
Year Ended
 
 
 
November 25,
2012
 
November 27,
2011
 
%
Increase
(Decrease)
 
November 25,
2012
 
November 27,
2011
 
 
 
 
 
% of Net
Revenues
 
% of Net
Revenues
 
 
 
(Dollars in millions)
 
 
Selling
$
717.0

 
$
711.1

 
0.8
 %
 
15.6
%
 
14.9
%
 
 
Advertising and promotion
260.4

 
313.8

 
(17.0
)%
 
5.6
%
 
6.6
%
 
 
Administration
376.2

 
402.3

 
(6.5
)%
 
8.2
%
 
8.5
%
 
 
Other
511.7

 
528.6

 
(3.2
)%
 
11.1
%
 
11.1
%
 
 
Total SG&A
$
1,865.3

 
$
1,955.8

 
(4.6
)%
 
40.5
%
 
41.1
%
 
Currency contributed approximately $50 million of the decline in SG&A as compared to the prior year.
Selling.  Currency favorably impacted selling expenses by approximately $22 million as compared to prior year. We had 13 more company-operated stores at the end of 2012 than we did at the end of 2011. Higher selling expenses also reflect severance costs for headcount reductions in our commercial sales organization.
Advertising and promotion.  The decline in advertising and promotion expenses primarily reflected a reduction of our advertising activities in some markets, and constituted the primary driver of our overall decline in SG&A in 2012. For the fourth quarter of 2012, the increase in advertising and promotion expenses as a percentage of net revenues reflected a difference in the timing of our campaigns as compared to the prior year.
Administration.  Currency favorably impacted administration expenses by approximately $9 million as compared to prior year. The remaining decline in administration expenses was primarily due to higher separation benefits in 2011 related to the departure of executives.
Other.  Other SG&A includes distribution, information resources, and marketing organization costs, all of which declined during the year. Currency favorably impacted other SG&A by approximately $10 million. Offsetting these declines was a $19 million impairment charge we recorded related to a decision we took in the third quarter to outsource distribution in Japan to a third-party and close our owned distribution center in that country.


25


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:
 
Year Ended
 
 
November 25,
2012
 
November 27,
2011
 
%
Increase
(Decrease)
 
November 25,
2012
 
 
November 27,
2011
 
 
 
 
% of Net
Revenues
 
 
% of Net
Revenues
 
 
(Dollars in millions)
 
Operating income:
 
 
 
 
 
 
 
 
 
 
 
Americas
$
431.6

 
$
393.9

 
9.6
 %
 
15.7
%
 
 
14.5
%
 
Europe
178.3

 
182.3

 
(2.2
)%
 
16.2
%
 
 
15.5
%
 
Asia Pacific
66.8

 
108.1

 
(38.1
)%
 
8.8
%
 
 
12.4
%
 
Total regional operating income
676.7

 
684.3

 
(1.1
)%
 
14.7
%
*
 
14.4
%
*
Corporate expenses
342.7

 
347.9

 
(1.5
)%
 
7.4
%
*
 
7.3
%
*
Total operating income
$
334.0

 
$
336.4

 
(0.7
)%
 
7.2
%
*
 
7.1
%
*
Operating margin
7.2
%
 
7.1
%
 
 
 
 
 
 
 
 
______________
* Percentage of consolidated net revenues
Currency unfavorably affected total operating income by approximately $47 million.
Regional operating income.    
Americas.  The increase in operating income and operating margin reflected the region's improved gross margin.
Europe.  Excluding unfavorable currency effects, operating income increased, reflecting the region's lower advertising and promotion expenses.
Asia Pacific.  The decline in operating income and operating margin primarily reflected our decision to phase out the Denizen® brand in the region, as well as the region's lower net revenues.
Corporate.  Corporate expenses are selling, general and administrative expenses that are not attributed to any of our regional operating segments. Corporate expenses in 2012 reflect the $19 million impairment charge recorded for our distribution center in Japan and include severance charges for headcount reductions across the organization primarily during the second half of the year; corporate expenses in 2011 included higher separation benefits related to the departure of executives.
Corporate expenses in 2012 and 2011 include amortization of prior service benefit of $16.4 million and $28.9 million, respectively, related to postretirement benefit plan amendments in 2004 and 2003. For more information, see Note 8 to our audited consolidated financial statements included in this report.
Interest expense
Interest expense was $134.7 million for the year ended November 25, 2012, as compared to $132.0 million in the prior year. The increase in 2012 was due to higher interest expense on our deferred compensation plans, partially offset by a decline in interest expense resulting from our second quarter 2012 debt refinancing activity.
The weighted-average interest rate on average borrowings outstanding for the 2012 was 7.05%, as compared to 6.90% for 2011.
Loss on early extinguishment of debt
For the year ended November 25, 2012, we recorded an $8.2 million net loss on early extinguishment of debt as a result of our debt refinancing activities during the second quarter of 2012. The loss was primarily comprised of a tender premium of $11.4 million and the write-off of $4.0 million of unamortized debt issuance costs, partially offset by a gain of $7.6 million related to the partial repurchase of Yen-denominated Eurobonds due 2016 at a discount to their par value. For more information, see Note 6 to our audited consolidated financial statements included in this report.


26


Other income (expense), net
Other income (expense), net, primarily consists of foreign exchange management activities and transactions. For the year ended November 25, 2012, we recorded income of $4.8 million as compared to expense of $1.3 million for the prior year. The income in 2012 primarily reflected gains on our foreign currency denominated balances. The net expense in 2011 primarily reflected losses on our foreign currency denominated balances.
Income tax expense
Income tax expense was $54.9 million for the year ended November 25, 2012, compared to $67.7 million for the prior year. Our effective income tax rate was 28.0% for the year ended November 25, 2012, compared to 33.4% for the prior year.
The reduction in our income tax expense and effective income tax rate in 2012 was primarily due to a net tax benefit of $27.0 million recognized in 2012, resulting from a definitive agreement with the State of California on state tax refund claims involving tax years 1986 – 2004, partially offset by a $9.1 million write-off of domestic deferred tax assets and an unfavorable shift in the mix of foreign earnings to jurisdictions with higher effective tax rates.
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 facility 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.
As of November 24, 2013, we had no borrowings under the facility, and unused availability under the facility was $635.3 million, as our total availability of $701.5 million, based on collateral levels as defined by the agreement, was reduced by $66.2 million of other credit-related instruments.
As of November 24, 2013, we had cash and cash equivalents totaling approximately $489.3 million, resulting in a total liquidity position (unused availability and cash and cash equivalents) of $1.1 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 (“EIP”) 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.


27


The following table presents selected cash uses in 2013 and the related projected cash uses for these items in 2014 as of November 24, 2013:
 
 
 
 
 
 
 
 
 
 
Cash Used in
 
Projected
Cash Uses in
 
 
 
 
2013
 
2014
 
 
 
 
(Dollars in millions)
 
 
Capital expenditures(1)
 
$
92

 
$
110

 
 
Interest
 
122

 
114

 
 
Federal, foreign and state taxes (net of refunds)
 
47

 
67

 
 
Pension plans(2)
 
36

 
19

 
 
Postretirement health benefit plans
 
15

 
16

 
 
Dividend(3)
 
25

 
30

 
 
Total selected cash requirements
 
$
337

 
$
356

 
______________
(1)
Capital expenditures consist primarily of costs associated with information technology systems and investment in company-operated retail stores.
(2)
The 2014 pension contribution amounts will be recalculated at the end of the plans' fiscal years, which for our U.S. pension plan is at the beginning of the Company's third fiscal quarter. Accordingly, actual contributions may differ materially from those presented here, based on factors such as changes in discount rates and the valuation of pension assets.
(3)
Subsequent to the fiscal year-end, our Board of Directors declared a cash dividend of approximately $30 million.


28


The following table provides information about our significant cash contractual obligations and commitments as of November 24, 2013:
 
Payments due or projected by period
 
Total
 
2014
 
2015
 
2016
 
2017
 
2018
 
Thereafter
 
(Dollars in millions)
Contractual and Long-term Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term and long-term debt obligations
$
1,546

 
$
42

 
$

 
$
40

 
$

 
$
404

 
$
1,060

Interest(1)
720

 
114

 
112

 
111

 
106

 
91

 
186

Capital lease obligations
39

 
4

 
4

 
4

 
4

 
4

 
19

Operating leases(2)
649

 
155

 
123

 
97

 
77

 
60

 
137

Purchase obligations(3)
832

 
561

 
48

 
19

 
10

 
10

 
184

Postretirement obligations(4)
135

 
16

 
15

 
15

 
14

 
14

 
61

Pension obligations(5)
330

 
19

 
38

 
41

 
46

 
48

 
138

Long-term employee related benefits(6)
87

 
15

 
10

 
14

 
8

 
7

 
33

Total
$
4,338

 
$
926

 
$
350

 
$
341

 
$
265

 
$
638

 
$
1,818

______________
(1)
Interest obligations are computed using constant interest rates until maturity.
(2)
Amounts reflect contractual obligations relating to our existing leased facilities as of November 24, 2013, and therefore do not reflect our planned future openings of company-operated retail stores. For more information, see “Item 2 – Properties.”
(3)
Amounts reflect estimated commitments of $501 million for inventory purchases, $101 million for human resources, advertising, information technology and other professional services. In May 2013, we entered into an agreement for sponsorship, naming rights and related benefits with respect to the Levi's® Stadium in Santa Clara, California, future home of the San Francisco 49ers. The term of the agreement is 20 years, over which we will make payments on a semi-annual basis.
(4)
The amounts presented in the table represent an estimate for the next ten years of our projected payments, based on information provided by our plans' actuaries, and have not been reduced by estimated Medicare subsidy receipts, the amounts of which are not material. Our policy is to fund postretirement benefits as claims and premiums are paid. For more information, see Note 8 to our audited consolidated financial statements included in this report.
(5)
The amounts presented in the table represent an estimate of our projected contributions to the plans for the next ten years based on information provided by our plans' actuaries. For U.S. qualified plans, these estimates comply with minimum funded status and minimum required contributions under the Pension Protection Act. The 2014 contribution amounts will be recalculated at the end of the plans' fiscal years, which for our U.S. pension plan is at the beginning of the Company's third fiscal quarter. Accordingly, actual contributions may differ materially from those presented here, based on factors such as changes in discount rates and the valuation of pension assets. For more information, see Note 8 to our audited consolidated financial statements included in this report.
(6)
Long-term employee-related benefits relate to the current and non-current portion of deferred compensation arrangements and workers' compensation. We estimated these payments based on prior experience and forecasted activity for these items. For more information, see Note 12 to our audited consolidated financial statements included in this report.
This table does not include amounts related to our uncertain tax positions of $37.8 million. We do not anticipate a material effect on our liquidity as a result of payments in future periods of liabilities for uncertain tax positions. The table also does not include amounts related to potential cash settlement of stock appreciation rights (“SARs”) put to the Company under the terms of our EIP. Such payments may range up to $35 million in 2014 and $45 million thereafter, based on the number of shares exercisable and shares expected to vest, respectively, and the fair value of the Company's stock price as of November 24, 2013.
Information in the two preceding tables reflects our estimates of future cash payments. These estimates and projections are based upon assumptions that are inherently subject to significant economic, competitive, legislative and other uncertainties and contingencies, many of which are beyond our control. Accordingly, our actual expenditures and liabilities may be materially higher or lower than the estimates and projections reflected in these tables. The inclusion of these projections and estimates should not be regarded as a representation by us that the estimates will prove to be correct.


29


Cash flows
The following table summarizes, for the periods indicated, selected items in our consolidated statements of cash flows:
 
 
Year Ended
 
 
 
November 24,
2013
 
November 25,
2012
 
November 27,
2011
 
 
 
(Dollars in millions)
 
 
Cash provided by operating activities
$
411.3

 
$
531.0

 
$
1.8

 
 
Cash used for investing activities
(92.8
)
 
(75.2
)
 
(141.0
)
 
 
Cash (used for) provided by financing activities
(230.5
)
 
(250.9
)
 
77.7

 
 
Cash and cash equivalents
489.3

 
406.1

 
204.5

 
2013 as compared to 2012
Cash flows from operating activities
Cash provided by operating activities was $411.3 million for 2013, as compared to $531.0 million for 2012. Cash provided by operating activities decreased compared to the prior year due to an increase in cash used for inventory, reflecting our higher inventory build, and higher payments to vendors, reflecting our higher SG&A.
Cash flows from investing activities
Cash used for investing activities was $92.8 million for 2013, as compared to $75.2 million for 2012. The increase in cash used for investing activities as compared to the prior year primarily reflects higher spend on facilities improvements and our company-operated retail stores, partially offset by lower cash used toward information technology projects.
Cash flows from financing activities
Cash used for financing activities was $230.5 million for 2013, as compared to $250.9 million for 2012. Cash used in both periods primarily related to our refinancing activities and debt reduction in each year.
2012 as compared to 2011
Cash flows from operating activities
Cash provided by operating activities was $531.0 million for 2012, as compared to $1.8 million for 2011. Cash provided by operating activities increased compared to the prior year due to less cash used for inventory, reflecting the lower cost of cotton and a reduction in our inventory levels, and a decline in payments to vendors, reflecting our lower SG&A. Also, cash received from customers increased, reflecting our higher beginning accounts receivable balance.
Cash flows from investing activities
Cash used for investing activities was $75.2 million for 2012, as compared to $141.0 million for 2011. The reduction in cash used for investing activities as compared to the prior year primarily reflects the higher information technology costs in 2011 associated with the installation of our global enterprise resource planning system.
Cash flows from financing activities
Cash used by financing activities was $250.9 million for 2012, as compared to cash provided of $77.7 million for 2011. Net cash used in 2012 and net cash provided in 2011 primarily related to net repayments and proceeds, respectively, of our senior revolving credit facility. Cash used in both years include dividend payments to stockholders of $20.0 million.
Indebtedness
The borrower of substantially all of our debt is Levi Strauss & Co., the parent and U.S. operating company. Substantially all of our debt as of November 24, 2013, was fixed-rate. As of November 24, 2013, our required aggregate debt principal payments on our unsecured long-term debt were $39.5 million in 2016, $404.4 million in 2018 and the remaining $1.1 billion in years after 2018. Short-term borrowings of $41.9 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. As of November 24, 2013, we were in compliance with all of these covenants.


30


Effects of Inflation
We believe that inflation in the regions where most of our sales occur has not had a significant effect on our net revenues or profitability.
Off-Balance Sheet Arrangements, Guarantees and Other Contingent Obligations
Off-balance sheet arrangements and other. We have contractual commitments for non-cancelable operating leases; for more information, see Note 13 to our audited consolidated financial statements included in this report. We participate in a multiemployer pension plan; however, our exposure to risks arising from participation in the plan and the extent to which we can be liable to the plan for other participating employers' obligations are not material. We have no other material non-cancelable guarantees or commitments, and no material special-purpose entities or other off-balance sheet debt obligations.
Indemnification agreements.  In the ordinary course of our business, we enter into agreements containing indemnification provisions under which we agree to indemnify the other party for specified claims and losses. For example, our trademark license agreements, real estate leases, consulting agreements, logistics outsourcing agreements, securities purchase agreements and credit agreements typically contain these provisions. This type of indemnification provision obligates us to pay certain amounts associated with claims brought against the other party as the result of trademark infringement, negligence or willful misconduct of our employees, breach of contract by us including inaccuracy of representations and warranties, specified lawsuits in which we and the other party are co-defendants, product claims and other matters. These amounts are generally not readily quantifiable: the maximum possible liability or amount of potential payments that could arise out of an indemnification claim depends entirely on the specific facts and circumstances associated with the claim. We have insurance coverage that minimizes the potential exposure to certain of these claims. We also believe that the likelihood of substantial payment obligations under these agreements to third parties is low and that any such amounts would be immaterial.
Critical Accounting Policies, Estimates and Assumptions
The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the related notes. We believe that the following discussion addresses our critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require management's most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Changes in such estimates, based on newly available information, or different assumptions or conditions, may affect amounts reported in future periods.
We summarize our critical accounting policies below.
Revenue recognition.  Net sales is primarily comprised of sales of products to wholesale customers, including franchised stores, and direct sales to consumers at our company-operated and online stores and at our company-operated shop-in-shops located within department stores. We recognize revenue on sale of product when the goods are shipped or delivered and title to the goods passes to the customer provided that: there are no uncertainties regarding customer acceptance; persuasive evidence of an arrangement exists; the sales price is fixed or determinable; and collectability is reasonably assured. Revenue is recorded net of an allowance for estimated returns, discounts and retailer promotions and other similar incentives. Licensing revenues from the use of our trademarks in connection with the manufacturing, advertising, and distribution of trademarked products by third-party licensees are earned and recognized as products are sold by licensees based on royalty rates as set forth in the licensing agreements.
We recognize allowances for estimated returns in the period in which the related sale is recorded. We recognize allowances for estimated discounts, retailer promotions and other similar incentives at the later of the period in which the related sale is recorded or the period in which the sales incentive is offered to the customer. We estimate non-volume based allowances based on historical rates as well as customer and product-specific circumstances. Actual allowances may differ from estimates due to changes in sales volume based on retailer or consumer demand and changes in customer and product-specific circumstances. Sales and value-added taxes collected from customers and remitted to governmental authorities are presented on a net basis in the accompanying consolidated statements of income.
Inventory valuation.  We value inventories at the lower of cost or market value. Inventory cost is generally determined using the first-in first-out method. We include product costs, labor and related overhead, sourcing costs, inbound freight, internal transfers, and the cost of operating our remaining manufacturing facilities, including the related depreciation expense, in the cost of inventories. We estimate quantities of slow-moving and obsolete inventory by reviewing on-hand quantities, outstanding purchase obligations and forecasted sales. In determining inventory market values, substantial consideration is given to the expected product selling price. We estimate expected selling prices based on our historical recovery rates for sale of slow-moving and obsolete inventory and other factors, such as market conditions, expected channel of disposition, and current consumer preferences. Estimates


31


may differ from actual results due to changes in resale or market value, avenues of disposition, consumer and retailer preferences and economic conditions.
Impairment. We review our goodwill and other non-amortized intangible assets for impairment annually in the fourth quarter of our fiscal year, or more frequently as warranted by events or changes in circumstances which indicate that the carrying amount may not be recoverable. We qualitatively assess goodwill impairment for certain reporting units and impairment for other non-amortized intangible assets to determine whether it is more likely than not that the fair value of a reporting unit or other non-amortized intangible asset is less than its carrying amount. The reporting units and non-amortized intangibles selected for the qualitative assessment approach have fair values that are significantly higher than their carrying values and remote risk of impairment. For goodwill and other non-amortized intangible assets not qualitatively assessed, a two-step quantitative approach is utilized. In the first step, we compare the carrying value of the reporting unit or applicable asset to its fair value, which we estimate using a discounted cash flow analysis or by comparison to the market values of similar assets. If the carrying amount of the reporting unit or asset exceeds its estimated fair value, we perform the second step, and determine the impairment loss, if any, as the excess of the carrying value of the goodwill or intangible asset over its fair value. The assumptions used in such valuations are subject to volatility and may differ from actual results; however, based on the carrying value of our goodwill and other non-amortized intangible assets as of November 24, 2013, relative to their estimated fair values, we do not anticipate any material impairment charges in the near-term.
We review our other long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. If the carrying amount of an other long-lived asset exceeds the expected future undiscounted cash flows, we measure and record an impairment loss for the excess of the carrying value of the asset over its fair value.
To determine the fair value of impaired assets, we utilize the valuation technique or techniques deemed most appropriate based on the nature of the impaired asset and the data available, which may include the use of quoted market prices, prices for similar assets or other valuation techniques such as discounted future cash flows or earnings.
Income tax assets and liabilities.  The future effective tax rate will ultimately depend on the mix of earnings between domestic and foreign operations, management assertion on whether certain foreign earnings will be indefinitely reinvested, changes in tax laws and regulations and potential resolutions on tax examinations, refund claims and litigation. Significant judgment is required in determining our worldwide income tax provision. In the ordinary course of a global business, there are many transactions and calculations where the ultimate tax outcome is uncertain. Some of these uncertainties arise from examinations in various jurisdictions and assumptions and estimates used in evaluating the need for valuation allowance.
We are subject to income taxes in both the United States and numerous foreign jurisdictions. We compute our provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. Significant judgments are required in order to determine the realizability of these deferred tax assets. In assessing the need for a valuation allowance, we evaluate all significant available positive and negative evidence, including historical operating results, estimates of future taxable income and the existence of prudent and feasible tax planning strategies. Changes in the expectations regarding the realization of deferred tax assets could materially impact income tax expense in future periods.
We continuously review issues raised in connection with all ongoing examinations and open tax years to evaluate the adequacy of our tax liabilities. We evaluate uncertain tax positions under a two-step approach. The first step is to evaluate the uncertain tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon examination based on its technical merits. The second step is, for those positions that meet the recognition criteria, to measure the tax benefit as the largest amount that is more than fifty percent likely of being realized. We believe our recorded tax liabilities are adequate to cover all open tax years based on our assessment. This assessment relies on estimates and assumptions and involves significant judgments about future events. To the extent that our view as to the outcome of these matters changes, we will adjust income tax expense in the period in which such determination is made. We classify interest and penalties related to income taxes as income tax expense.
Employee benefits and incentive compensation
Pension and postretirement benefits.  We have several non-contributory defined benefit retirement plans covering eligible employees. We also provide certain health care benefits for U.S. employees who meet age, participation and length of service requirements at retirement. In addition, we sponsor other retirement or post-employment plans for our foreign employees in accordance with local government programs and requirements. We retain the right to amend, curtail or discontinue any aspect of the plans, subject to local regulations. Any of these actions, either individually or in combination, could have a material impact on our consolidated financial statements and on our future financial performance.


32


We recognize either an asset or liability for any plan's funded status in our consolidated balance sheets. We measure changes in funded status using actuarial models which utilize an attribution approach that generally spreads individual events either over the estimated service lives of the remaining employees in the plan, or, for plans where participants will not earn additional benefits by rendering future service, over the plan participants' estimated remaining lives. The attribution approach assumes that employees render service over their service lives on a relatively smooth basis and as such, presumes that the income statement effects of pension or postretirement benefit plans should follow the same pattern. Our policy is to fund our pension plans based upon actuarial recommendations and in accordance with applicable laws, income tax regulations and credit agreements.
Net pension and postretirement benefit income or expense is generally determined using assumptions which include expected long-term rates of return on plan assets, discount rates, compensation rate increases and medical trend rates. We use a mix of actual historical rates, expected rates and external data to determine the assumptions used in the actuarial models. For example, we utilized a yield curve constructed from a portfolio of high-quality corporate bonds with various maturities to determine the appropriate discount rate to use for our U.S. benefit plans. Under this model, each year's expected future benefit payments are discounted to their present value at the appropriate yield curve rate, thereby generating the overall discount rate. We utilized country-specific third-party bond indices to determine appropriate discount rates to use for benefit plans of our foreign subsidiaries. Changes in actuarial assumptions and estimates, either individually or in combination, could have a material impact on our consolidated financial statements and on our future financial performance. For example, as of November 24, 2013, a twenty-five basis-point change in the discount rate would yield an approximately three-percent change in the projected benefit obligation and annual service cost of our pension and postretirement benefit plans.
Employee incentive compensation.  We maintain short-term and long-term employee incentive compensation plans. For our short-term plans, the amount of the cash bonus earned depends upon business unit and corporate financial results as measured against pre-established targets, and also depends upon the performance and job level of the individual. Our long-term plans are intended to reward certain levels of management for its long-term impact on our total earnings performance. Performance is measured at the end of a three-year period based on our performance over the period measured against certain pre-established targets such as the compound annual growth rates over the periods for net revenues and average margin of net earnings adjusted for certain items such as interest and taxes. We accrue the related compensation expense over the period of the plan, and changes in our projected future financial performance could have a material impact on our accruals.
Recently Issued Accounting Standards
See Note 1 to our audited consolidated financial statements included in this report for recently issued accounting standards, including the expected dates of adoption and expected impact to our consolidated financial statements upon adoption.
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this report, including (without limitation) statements under “Management's Discussion and Analysis of Financial Condition and Results of Operations” contain forward-looking statements. Although we believe that, in making any such statements, our expectations are based on reasonable assumptions, any such statement may be influenced by factors that could cause actual outcomes and results to be materially different from those projected.
These forward-looking statements include statements relating to our anticipated financial performance and business prospects and/or statements preceded by, followed by or that include the words “believe”, “anticipate”, “intend”, “estimate”, “expect”, “project”, “could”, “plans”, “seeks” and similar expressions. These forward-looking statements speak only as of the date stated and we do not undertake any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, even if experience or future events make it clear that any expected results expressed or implied by these forward-looking statements will not be realized. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these expectations may not prove to be correct or we may not achieve the financial results, savings or other benefits anticipated in the forward-looking statements. These forward-looking statements are necessarily estimates reflecting the best judgment of our senior management and involve a number of risks and uncertainties, some of which may be beyond our control, that could cause actual results to differ materially from those suggested by the forward-looking statements and include, without limitation:
changes in general economic and financial conditions, and the resulting impact on the level of consumer spending for apparel and pricing trend fluctuations, and our ability to plan for and respond to the impact of those changes;
consequences of impacts to the businesses of our wholesale customers caused by factors such as decreased consumer spending, 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;


33


our effectiveness in increasing productivity and efficiency in our operations and our ability to implement organizational and distribution changes intended to optimize operations without business disruption or mitigation to such disruptions;
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 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.
 


34


Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Investment and Credit Availability Risk
We manage cash and cash equivalents in various institutions at levels beyond FDIC coverage limits, and we purchase investments not guaranteed by the FDIC. Accordingly, there may be a risk that we will not recover the full principal of our investments or that their liquidity may be diminished. To mitigate this risk, our investment policy emphasizes preservation of principal and liquidity.
Multiple financial institutions are committed to provide loans and other credit instruments under our secured revolving credit facility. There may be a risk that some of these institutions cannot deliver against these obligations in a timely manner, or at all.
Foreign Exchange Risk
The global scope of our business operations exposes us to the risk of fluctuations in foreign currency markets. This exposure is the result of certain product sourcing activities, some intercompany sales, foreign subsidiaries' royalty payments, interest payments, earnings repatriations, net investment in foreign operations and funding activities. Our foreign currency management objective is to minimize the effect of fluctuations in foreign exchange rates on nonfunctional currency cash flows of the Company and its subsidiaries and selected assets or liabilities of the Company and its subsidiaries without exposing the Company to additional risk associated with transactions that could be regarded as speculative.
We use a centralized currency management operation to take advantage of potential opportunities to naturally offset exposures against each other. For any residual exposures under management, we may enter into various financial instruments including forward exchange contracts to hedge certain forecasted transactions as well as certain firm commitments, including third-party and intercompany transactions.
Our foreign exchange risk management activities are governed by a foreign exchange risk management policy approved by our Treasury committee. Members of our Treasury committee, comprised of a group of our senior financial executives, review our foreign exchange activities to monitor compliance with our policies. The operating policies and guidelines outlined in the foreign exchange risk management policy provide a framework that allows for a managed approach to the management of currency exposures while ensuring the activities are conducted within established parameters. Our policy includes guidelines for the organizational structure of our treasury risk management function and for internal controls over foreign exchange risk management activities, including various measurements for monitoring compliance. We monitor foreign exchange risk and related derivatives using different techniques including a review of market value, sensitivity analysis and a value-at-risk model. We use the market approach to estimate the fair value of our foreign exchange derivative contracts.
We use derivative instruments to manage certain but not all exposures to foreign currencies. Our approach to managing foreign currency exposures is consistent with that applied in previous years. As of November 24, 2013, we had forward foreign exchange contracts to buy $519.5 million and to sell $233.9 million against various foreign currencies. These contracts are at various exchange rates and expire at various dates through January 2015.
As of November 25, 2012, we had forward foreign exchange contracts to buy $795.1 million and to sell $422.3 million against various foreign currencies. These contracts were at various exchange rates and expired at various dates through January 2014.
Derivative Financial Instruments
We are exposed to market risk primarily related to foreign currencies. We manage foreign currency risks with the objective to minimize the effect of fluctuations in foreign exchange rates on nonfunctional currency cash flows of the Company and its subsidiaries and selected assets or liabilities of the Company and its subsidiaries without exposing the Company to additional risk associated with transactions that could be regarded as speculative.
We are exposed to credit loss in the event of nonperformance by the counterparties to the over-the-counter forward foreign exchange contracts. However, we believe that our exposures are appropriately diversified across counterparties and that these counterparties are creditworthy financial institutions. We monitor the creditworthiness of our counterparties in accordance with our foreign exchange and investment policies. In addition, we have International Swaps and Derivatives Association, Inc. (“ISDA”) master agreements in place with our counterparties to mitigate the credit risk related to the outstanding derivatives. These agreements provide the legal basis for over-the-counter transactions in many of the world's commodity and financial markets.


35


The following table presents the currency, average forward exchange rate, notional amount and fair values for our outstanding forward contracts as of November 24, 2013, and November 25, 2012. The average forward exchange rate is the weighted average of the forward rates of the contracts for the indicated currency. The notional amount represents the U.S. Dollar equivalent amount of the foreign currency at the inception of the contracts, and is the net sum of all buy and sell transactions for the indicated currency. A net positive notional amount represents a position to buy the U.S. Dollar versus the exposure currency, while a net negative notional amount represents a position to sell the U.S. Dollar versus the exposure currency. All transactions will mature before the end of January 2015.
 
As of November 24, 2013
 
As of November 25, 2012
 
Average Forward Exchange Rate
 
Notional Amount
 
Fair Value
 
Average Forward Exchange Rate
 
Notional Amount
 
Fair Value
 
(Dollars in thousands)
Currency
 
 
 
 
 
 
 
 
 
 
 
Australian Dollar
0.95

 
$
23,954

 
$
1,045

 
1.02

 
$
41,316

 
$
(558
)
Brazilian Real
2.53

 
7,526

 
(417
)
 
2.08

 
16,339

 
746

Canadian Dollar
1.04

 
22,506

 
449

 
1.01

 
21,376

 
(183
)
Swiss Franc
0.89

 
973

 
18

 
0.94

 
3,218

 
(15
)
Czech Koruna

 

 

 
19.26

 
2,786

 
43

Danish Krone
5.41

 
(555
)
 
(11
)
 
5.75

 
(565
)
 
(2
)
Euro
1.36

 
77,318

 
445

 
1.29

 
70,697

 
(1,243
)
British Pound Sterling
1.61

 
(31,148
)
 
45

 
1.60

 
(10,106
)
 
(45
)
Hong Kong Dollar
7.75

 
878

 
(1
)
 
7.75

 
(2,707
)
 
(1
)
Hungarian Forint

 

 

 
223.06

 
(7,150
)
 
135

Indonesian Rupiah
11,769.10

 
12,689

 
261

 
9,838.63

 
11,919

 
1

Indian Rupee
69.40

 
5,905

 
(348
)
 
56.30

 
15,985

 
(72
)
Japanese Yen
94.48

 
35,668

 
2,356

 
79.08

 
30,894

 
1,229

South Korean Won
1,102.82

 
21,329

 
(968
)
 
1,129.48

 
26,464

 
(871
)
Mexican Peso
13.20

 
54,199

 
11

 
13.54

 
81,269

 
(2,020
)
Malaysian Ringgit
3.24

 
18,231

 
(18
)
 
3.11

 
14,730

 
(72
)
Norwegian Krone
6.03

 
1,827

 
(7
)
 
5.76

 
(161
)
 

New Zealand Dollar
0.82

 
(2,635
)
 
(25
)
 
0.82

 
(11,702
)
 
(33
)
Philippine Peso
43.47

 
10,321

 
53

 
42.08

 
6,986

 
(302
)
Polish Zloty
3.08

 
(3,325
)
 
(198
)
 
3.25

 
1,475

 
(133
)
Russian Ruble
32.41

 
3,165

 
119

 
31.26

 
6,719

 
56

Swedish Krona
6.54

 
1,647

 
2

 
6.70

 
(152
)
 
392

Singapore Dollar
1.24

 
256

 
2

 
1.22

 
396

 
(3
)