10-K 1 f51209e10vk.htm FORM 10-K e10vk
Table of Contents

 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form 10-K
 
 
 
 
     
(Mark One)    
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
or
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended November 30, 2008
 
Commission file number: 002-90139
 
 
 
 
LEVI STRAUSS & CO.
(Exact Name of Registrant as Specified in Its Charter)
 
 
 
 
     
DELAWARE
(State or Other Jurisdiction of
Incorporation or Organization)
  94-0905160
(I.R.S. Employer
Identification No.)
 
1155 BATTERY STREET, SAN FRANCISCO, CALIFORNIA 94111
(Address of Principal Executive Offices)
 
(415) 501-6000
(Registrant’s telephone number, including area code)
 
 
 
 
 
Securities registered pursuant to Section 12(b) of the Act: None
 
Securities registered pursuant to Section 12(g) of the Act: None
 
 
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes þ     No o
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes o     No þ
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o Accelerated filer o Non-accelerated filer þ Smaller reporting company o
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No þ
 
The Company is privately held. Nearly all of its common equity is owned by members of the families of several descendants of the Company’s founder, Levi Strauss. 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 — 37,278,238 shares outstanding on February 5, 2009
 
Documents incorporated by reference: None
 


 

 
LEVI STRAUSS & CO.
 
TABLE OF CONTENTS TO FORM 10-K
 
FOR FISCAL YEAR ENDING NOVEMBER 30, 2008
 
                 
        Page
 
      Business     3  
      Risk Factors     9  
      Unresolved Staff Comments     18  
      Properties     19  
      Legal Proceedings     20  
      Submission of Matters to a Vote of Security Holders     21  
 
      Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     22  
      Selected Financial Data     23  
      Management’s Discussion and Analysis of Financial Condition and Results of Operations     24  
      Quantitative and Qualitative Disclosures About Market Risk     45  
      Financial Statements and Supplementary Data     48  
      Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     102  
      Controls and Procedures     102  
      Other Information     103  
 
      Directors and Executive Officers     104  
      Executive Compensation     108  
      Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     128  
      Certain Relationships and Related Transactions, and Director Independence     130  
      Principal Accounting Fees and Services     131  
 
      Exhibits, Financial Statement Schedules     132  
    136  
    138  
 EX-12
 EX-21
 EX-23
 EX-31.1
 EX-31.2
 EX-32


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PART I
 
Item 1.   BUSINESS
 
Overview
 
From our California Gold Rush beginnings, we have grown into one of the world’s largest brand-name apparel companies. A history of responsible business practices, rooted in our core values, has helped us build our brands and engender consumer trust around the world. Under our brand names, we design and market products that include jeans and jeans-related pants, casual and dress pants, tops, jackets, and related accessories for men, women and children. We also license our trademarks for a wide array of products, including accessories, pants, tops, footwear, home and other products.
 
An Authentic American Icon
 
Our Levi’s® brand has become one of the most widely recognized brands in the history of the apparel industry. Its broad distribution reflects the brand’s appeal across consumers of all ages and lifestyles. Its merchandising and marketing reflect the brand’s core attributes: original, definitive, confident and youthful.
 
Our Dockers® brand was at the forefront of the business casual trend in the United States. It has since grown to a global brand covering a wide range of wearing occasions for men and women with products that combine approachable style, relevant innovation and sustained quality. Our Signature by Levi Strauss & Co.tm brand focuses on bringing our style, authenticity and quality to value-seeking consumers.
 
Our Global Reach
 
We operate our business through three geographic regions: Americas, Europe and Asia Pacific. Each of our regions includes established markets, which we refer to as mature markets, such as the United States, Japan, Canada and France, and emerging markets, such as India, China, Brazil and Russia. Although our brands are recognized as authentically “American,” we derive approximately half of our net revenues from outside the United States.
 
Our products are sold in approximately 60,000 retail locations in more than 110 countries. This includes approximately 1,800 retail stores dedicated to our brands, including both franchised and company-operated stores.
 
We support our brands through a global infrastructure, both sourcing and marketing our products around the world. We distribute our Levi’s® and Dockers® products primarily through chain retailers and department stores in the United States and primarily through department stores, specialty retailers and franchised stores outside of the United States. We also distribute products under the Signature by Levi Strauss & Co.tm brand primarily through mass channel retailers in the United States and Canada and mass and other value-oriented retailers and franchised stores in Asia Pacific.
 
Levi Strauss & Co. was founded in San Francisco, California, in 1853 and incorporated in Delaware in 1971. We conduct our operations outside the United States through foreign subsidiaries owned directly or indirectly by Levi Strauss & Co. We manage our regional operations through headquarters in San Francisco, Brussels and Singapore. Our corporate offices are located at Levi’s Plaza, 1155 Battery Street, San Francisco, California 94111, and our main telephone number is (415) 501-6000.
 
Our common stock is primarily owned by descendants of the family of Levi Strauss and their relatives.
 
Our Website — www.levistrauss.com — contains additional and detailed information about our history, our products and our commitments. Financial news and reports and related information about our company can be found at http://www.levistrauss.com/Financials. Our Website and the information contained on our Website are not part of this annual report and are not incorporated by reference into this annual report.


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Our Business Strategies
 
Our management is pursuing strategies to develop our business, respond to marketplace dynamics and build on our competitive strengths. Our key strategies are:
 
  •  Build upon our brands’ leadership in jeans and khakis.  We intend to build upon our brand equity and our design and marketing expertise to expand our leadership position in the jeans and khakis categories. We believe that our innovation and market responsiveness will continue to enable us to create trend-right and trend-leading products and marketing programs that appeal to our various consumer segments. We will also further extend our brands in product categories that we believe offer attractive opportunities for growth.
 
  •  Capitalize upon our global footprint.  We intend to leverage our expansive global presence and local-market talent to drive growth globally, fortifying our mature markets and capitalizing on opportunities in our emerging markets. We aim to identify global consumer trends, adapt successes from one market to another and drive growth across our brand portfolio.
 
  •  Diversify and transform our wholesale business.  We will seek out new wholesale opportunities based on targeted consumer segments and seek to strengthen our relationship with, and presence in, our existing wholesale customers. We focus on generating competitive economics and engaging in collaborative assortment and marketing planning to achieve mutual commercial success with our customers. Our goal is to ensure that we are central to our wholesale customers’ success by using our brands and our strengths in product development and marketing to drive consumer traffic and demand to their stores.
 
  •  Accelerate growth through dedicated retail stores.  We continue to expand our dedicated store presence around the world. We believe dedicated retail stores represent an attractive opportunity to establish incremental distribution and sales as well as showcase the full breadth of our product offerings and strength of our brands’ appeal. We aim to provide a compelling and brand-elevating consumer experience in our dedicated retail stores.
 
  •  Drive productivity to enable reinvestment.  We are focused on deriving even greater efficiencies from our global scale through maximizing collaboration across our regions and functions. We intend to continue to reinvest benefits of increased productivity into our businesses. We will do this while continuing to build sustainability and social responsibility into our global sourcing arrangements.
 
Our Brands and Products
 
We offer a broad range of products, including jeans, casual and dress pants, tops, skirts, and jackets. Across all of our brands, pants — including jeans, casual pants and dress pants — represented approximately 85%, 86% and 87% of our total units sold in each of fiscal years 2008, 2007 and 2006, respectively. Men’s products generated approximately 75%, 72% and 72% of our total net sales in each of fiscal years 2008, 2007 and 2006, respectively.
 
Levi’s® Brand
 
The Levi’s® brand is positioned as the original and definitive jeans brand. Consumers around the world 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, are unique to Levi’s® jeans and are instantly recognizable by consumers. We offer an extensive selection of men’s, women’s and children’s products designed to appeal to a variety of consumer segments at a wide range of price points. Our Levi’s® brand products range from basic jeans to premium-priced styles, reflecting what we believe is the broad consumer appeal of the brand across ages, genders and lifestyles. In the United States, we continue to update our Red Tabtm jeans product and retail presence to shift to a more premium position with our chain and department store customers and penetrate new distribution. In Europe, Asia Pacific, and the rest of the Americas region, the Levi’s® brand is positioned mostly in the premium segment of the men’s and women’s markets.
 
The current Levi’s® product range includes:
 
  •  Levi’s® Red Tabtm Products.  These products are the foundation of the brand. They encompass a wide range of jeans and jeanswear offered in a variety of fits, fabrics, finishes, styles and price points intended to appeal


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  to a broad spectrum of consumers. The line is anchored by the flagship 501® jean, the best-selling five-pocket jean in history. The Red Tabtm line also incorporates a full range of jeanswear fits and styles designed specifically for women. Sales of Red Tabtm products represented the majority of our Levi’s® brand net sales in all three of our regions in fiscal years 2008, 2007 and 2006.
 
  •  Premium Products.  In addition to Levi’s® Red Tabtm premium products available around the world, we offer an expanded range of high-end products that reflects our premium positioning in international markets. These include the Levi’s Bluetm line in Europe and Levi’s® Lady Style in Asia Pacific. In the United States, to further differentiate our offer for consumers who seek more trend-forward and premium products, we offer our Levi’s® Capital E® products. Our Levi’s® Vintage Clothing line, offered in all of our regions, showcases our most premium products by offering detailed replicas of our historical products dating back to the 19th century.
 
Our Levi’s® brand products accounted for approximately 76%, 73% and 70% of our total net sales in fiscal 2008, 2007 and 2006, respectively, slightly less than half of which were generated in our Americas region. Our Levi’s® brand products are sold in more than 110 countries.
 
Dockers® Brand
 
First introduced in 1986 as an alternative between jeans and dress pants, the Dockers® brand has grown to include men’s and women’s apparel for a wide range of occasions. Marketed worldwide as “Dockers® San Francisco,” the Dockers® brand represents the casual, confident style of San Francisco with products rooted in the brand’s heritage as a khaki authority.
 
Our current Dockers® product offerings in the United States include:
 
  •  Dockers® for Men.  This line includes a broad range of stylish casual and dress products that cover the key wearing occasions for men: work, weekend, dress and golf. We complement these products with a variety of shirts and seasonal pants and shorts in a range of fits, fabrics, colors, styles and performance features.
 
  •  Dockers® for Women.  This line includes a range of pants, shorts, tops, skirts, sweaters and jackets in updated fits, fabrics and styles designed to provide women with a versatile head-to-toe, integrated separates offering with outfits that span the range of casual to dressy and work.
 
Our Dockers® brand products accounted for approximately 18%, 21% and 21% of our total net sales in fiscal 2008, 2007 and 2006, respectively. Although the substantial majority of these net sales were in the Americas region, Dockers® brand products are sold in more than 50 countries.
 
Signature by Levi Strauss & Co.tm Brand
 
Our Signature by Levi Strauss & Co.tm brand offers value-seeking consumers products with the style, authenticity and quality for which our company is recognized around the world. The product portfolio includes denim jeans, casual pants, tops and jackets in a variety of fits, fabrics and finishes for men, women and kids. The brand is distributed through the mass retail channel in North America and value-oriented retailers and franchised stores in Asia Pacific.
 
Signature by Levi Strauss & Co.tm brand products accounted for approximately 6%, 6% and 9% of our total net sales in fiscal years 2008, 2007 and 2006, respectively. Although a substantial majority of these sales were in the United States, Signature by Levi Strauss & Co.tm brand products are sold in seven additional countries in our Americas and Asia Pacific regions.
 
Licensing
 
The appeal of our brands across consumer groups and our global reach enable us to license our Levi’s®, Dockers® and Signature by Levi Strauss & Co.tm trademarks for a variety of product categories in multiple markets including footwear, belts, wallets and bags, outerwear, eyewear, sweaters, dress shirts, kidswear, loungewear and sleepwear, hosiery, luggage, and home bedding products.


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We have licensees for our Levi’s® and Dockers® brands in each of our regions and for our Signature by Levi Strauss & Co.tm brand in the Americas region. In addition, we enter into agreements with third parties to produce, market and distribute our products in several countries around the world, including various Latin American, Middle Eastern and Asia Pacific countries.
 
We enter into licensing agreements with our licensees covering royalty payments, product design and manufacturing standards, marketing and sale of licensed products, and protection of our trademarks. We require our licensees to comply with our code of conduct for contract manufacturing and engage independent monitors to perform regular on-site inspections and assessments of production facilities.
 
Sales, Distribution and Customers
 
We distribute our products through a wide variety of retail formats around the world, including chain and department stores, franchise and company-operated stores dedicated to our brands, multi-brand specialty stores, mass channel retailers, and both company-operated and retailer Websites.
 
Multi-brand Retailers
 
Our distribution strategy focuses on making our brands and products available where consumers shop, including offering products and assortments that are appropriately tailored for our wholesale customers and their retail consumers. Our products are also sold through authorized third-party Internet sites. Sales to our top ten wholesale customers accounted for approximately 37%, 42% and 42% of our total net revenues in fiscal years 2008, 2007 and 2006, respectively. No customer represented 10% or more of net revenues in any of these years.
 
Dedicated Stores
 
We believe retail stores dedicated to our brands are important for the growth, visibility, availability and commercial success of our brands, and they are an increasingly important part of our strategy for expanding distribution of our products in all three of our regions. Our brand-dedicated stores are either operated by us or by independent third parties such as franchisees and licensees. In addition to the dedicated stores, we maintain brand-dedicated Websites that sell products directly to retail consumers.
 
Company-operated retail stores.  Our online stores and company-operated stores generated approximately 8%, 6% and 4% of our net revenues in fiscal 2008, 2007 and 2006, respectively. As of November 30, 2008, we had 260 company-operated stores, predominantly Levi’s® stores, located in 24 countries across our three regions. We had 93 stores in the Americas, 92 stores in Europe and 75 stores in Asia Pacific. During 2008, we opened 70 company-operated stores and closed 10 stores.
 
Franchised and other stores.  Approximately 1,500 franchised, licensed, or other form of brand-dedicated stores sell Levi’s®, Dockers® and Signature by Levi Strauss & Co.tm products in markets outside the United States. These stores are a key element of our international distribution, and are operated by independent third parties. Additionally, we consider dedicated shop-in-shops located within department stores as an important component of our retail network in international markets; we operated approximately 200 dedicated shop-in-shops as of November 30, 2008. We also license third parties to operate outlet stores dedicated to our brands within and outside of the United States.
 
Seasonality of Sales
 
We typically achieve our largest quarterly revenues in the fourth quarter, reflecting the “holiday” season, generally followed by the third quarter, reflecting the Fall or “back to school” season. In 2008, our net revenues in the first, second, third and fourth quarters represented 25%, 21%, 25% and 29%, respectively, of our total net revenues for the year. In 2007, our net revenues in the first, second, third and fourth quarters represented 24%, 23%, 24% and 29%, respectively, of our total net revenues for the year.
 
Our fiscal year ends on the last Sunday of November in each year, except for certain foreign subsidiaries which are fixed at November 30 due to local statutory requirements. Apart from these subsidiaries, each quarter of fiscal


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years 2008, 2007 and 2006 consisted of 13 weeks, with the exception of the fourth quarter of 2008, which consisted of 14 weeks.
 
Marketing and Promotion
 
We support our brands with a diverse mix of marketing initiatives to drive consumer demand.
 
We advertise around the world through a broad mix of media, including television, national publications, the Internet, cinema, billboards and other outdoor vehicles. We use other marketing vehicles, including event and music sponsorships, product placement in major motion pictures, television shows, music videos and leading fashion magazines, and alternative marketing techniques, including street-level events and similar targeted “viral” marketing activities.
 
We root our brand messages in globally consistent brand values that reflect the unique attributes of our brands: the Levi’s® brand as the original and definitive jeans brand and the Dockers® brand as the khaki authority expressed in casual, confident San Francisco style. We then tailor these programs to local markets in order to maximize relevance and effectiveness. For example, in July 2008, the Levi’s® brand launched its first integrated global marketing campaign to celebrate the iconic Levi’s® 501® jean. The global campaign extends from television and print to “viral” videos, digital components and outdoor elements, some of which were used across our three regions and others which appeared only in local markets.
 
We also maintain the Websites www.levi.com and www.dockers.com which sell products directly to consumers in the United States and other countries. We operate these Websites, as well as www.levistrausssignature.com, as marketing vehicles to enhance consumer understanding of our brands and help consumers find and buy our products. This is consistent with our strategies of ensuring that our brands and products are available where consumers shop and that our product offerings and assortments are appropriately differentiated.
 
Sourcing and Logistics
 
Organization.  Our global sourcing and regional logistics organizations are responsible for taking a product from the design concept stage through production to delivery to our customers. Our objective is to leverage our global scale to achieve product development and sourcing efficiencies and reduce total delivered product cost across brands and regions while maintaining our focus on local service levels and working capital management.
 
Product procurement.  We source nearly all of our products through independent contract manufacturers, with the balance sourced from our company-operated manufacturing plants. See “Item 2 — Properties” for more information about those manufacturing facilities.
 
Sourcing locations.  We use numerous independent manufacturers located throughout the world for the production and finishing of our garments. We conduct assessments of political, social, economic, trade, labor and intellectual property protection conditions in the countries in which we source our products before we place production in those countries and on an ongoing basis.
 
In 2008, we sourced products from contractors located in approximately 45 countries around the world. We sourced products in Asia Pacific, South and Central America (including Mexico and the Caribbean), Europe, the Middle East, and Africa. We expect to increase our sourcing from contractors located in Asia. No single country accounted for more than 20% of our sourcing in 2008.
 
Sourcing practices.  Our sourcing practices include these elements:
 
  •  We require all third-party contractors and subcontractors who manufacture or finish products for us to comply with our code of conduct relating to supplier working conditions as well as environmental and employment practices. We also require our licensees to ensure that their manufacturers comply with our requirements.
 
  •  Our code of conduct covers employment practices such as wages and benefits, working hours, health and safety, working age and discriminatory practices, environmental matters such as wastewater treatment and solid waste disposal, and ethical and legal conduct.


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  •  We regularly assess manufacturing and finishing facilities through periodic on-site facility inspections and improvement activities, including use of independent monitors to supplement our internal staff. We integrate review and performance results into our sourcing decisions.
 
We disclose the names and locations of our contract manufacturers to encourage collaboration among apparel companies in factory monitoring and improvement. We regularly evaluate and refine our code of conduct processes.
 
Logistics.  We own and operate dedicated distribution centers in a number of countries, and we also outsource logistics activities to third-party logistics providers. Distribution center activities include receiving finished goods from our contractors and plants, inspecting those products, preparing them for presentation at retail, and shipping them to our customers and to our own stores. For more information, see “Item 2 — Properties.”
 
Competition
 
The worldwide apparel industry is highly competitive and fragmented. It is characterized by low barriers to entry, brands targeted at specific consumer segments, many regional and local competitors, and an increasing number of global competitors. Principal competitive factors include:
 
  •  developing products with relevant fits, finishes, fabrics, style and performance features;
 
  •  maintaining favorable brand recognition through strong and effective marketing;
 
  •  anticipating and responding to changing consumer demands in a timely manner;
 
  •  providing sufficient retail distribution, visibility and availability, and presenting products effectively at retail;
 
  •  delivering compelling value in our products for the price; and
 
  •  generating competitive economics for our wholesale customers.
 
We face competition from a broad range of competitors both at the worldwide and regional levels in diverse channels across a wide range of retail price points. Worldwide, a few of our primary competitors include vertically integrated specialty stores such as Gap Inc.; jeanswear brands such as those marketed by VF Corporation, a competitor in multiple channels and product lines; and athletic wear companies such as adidas Group and Nike, Inc. In addition, each region faces local or regional competition, such as G-Star and Diesel in Europe; Pepe in Spain; Brax in Germany; UNIQLO in Asia Pacific; Apple/Texwood in China; and retailers’ private or exclusive labels such as those from Wal-Mart Stores, Inc. (Faded Glory and George brands); Target Corporation (Mossimo and Cherokee brands); and Macy’s (INC. brand) in the Americas.
 
Trademarks
 
We have more than 5,000 trademark registrations and pending applications in approximately 180 countries worldwide, and we create new trademarks on an ongoing basis. Substantially all of our global trademarks are owned by Levi Strauss & Co., the parent and U.S. operating company. We regard our trademarks as our most valuable assets and believe they have substantial value in the marketing of our products. The Levi’s®, Dockers® and 501® trademarks, the Arcuate Stitching Design, the Tab Device and the Two Horse® Design are among our core trademarks.
 
We protect these trademarks by registering them with the U.S. Patent and Trademark Office and with governmental agencies in other countries, particularly where our products are manufactured or sold. We work vigorously to enforce and protect our trademark rights by engaging in regular market reviews, helping local law enforcement authorities detect and prosecute counterfeiters, issuing cease-and-desist letters against third parties infringing or denigrating our trademarks, opposing registration of infringing trademarks, and initiating litigation as necessary. We currently are pursuing approximately 800 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.


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Employees
 
As of November 30, 2008, we employed approximately 11,400 people, approximately 4,700 of whom were located in the Americas, 4,400 in Europe, and 2,300 in Asia Pacific. Approximately 3,600 of our employees were associated with manufacturing of our products, 2,100 worked in retail, 1,700 worked in distribution and 4,000 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.
 
Our Website — www.levistrauss.com — contains additional and detailed information about our history and corporate citizenship initiatives. Our Website and the information contained on our Website are not part of this annual report and are not incorporated by reference into this annual report.
 
Item 1A.  RISK FACTORS
 
Risks Relating to the Industry in Which We Compete
 
Our revenues are influenced by general economic conditions.
 
Apparel is a cyclical industry that is dependent upon the overall level of consumer spending. Our wholesale customers anticipate and respond to adverse changes in economic conditions and uncertainty by reducing inventories and canceling orders. Our brand-dedicated stores are also affected by these conditions which may lead to a decline in consumer traffic to and spending in these stores. As a result, factors that diminish consumer spending and confidence in any of the regions in which we compete, particularly deterioration in general economic conditions, increases in energy costs or interest rates, housing market downturns, 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 its impact to our wholesale customers as well as its direct impact on us. For example, the recent and ongoing global financial economic downturn has impacted consumer confidence and spending. Although the duration and full scope of the effects and consequences of the crisis are currently unknown, we have already seen several wholesale customers declare bankruptcy or otherwise


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exhibit signs of distress in this economic environment, and we do not anticipate significant improvements in consumer confidence and the retail environment for the remainder of 2009. These outcomes have and may continue to adversely affect our business and financial condition.
 
Intense competition in the worldwide apparel industry could lead to reduced sales and prices.
 
We face a variety of competitive challenges from jeanswear and casual apparel marketers, fashion-oriented apparel marketers, athletic and sportswear marketers, vertically integrated specialty stores, and retailers of private-label products. Some of these competitors have greater financial and marketing resources than we do and may be able to adapt to changes in consumer preferences or retail requirements more quickly, devote greater resources to the building and sustaining of their brand equity and the marketing and sale of their products, or adopt more aggressive pricing policies than we can. As a result, we may not be able to compete as effectively with them and may not be able to maintain or grow the equity of and demand for our brands. Increased competition in the worldwide apparel industry — including from international expansion of vertically integrated specialty stores, from department stores, chain stores and mass channel retailers developing exclusive labels, and from well-known and successful non-apparel brands (such as athletic wear marketers) expanding into jeans and casual apparel — could reduce our sales and adversely affect our business and financial condition.
 
The success of our business depends upon our ability to offer innovative and upgraded products at attractive price points.
 
The worldwide apparel industry is characterized by constant product innovation due to changing fashion trends and consumer preferences and by the rapid replication of new products by competitors. As a result, our success depends in large part on our ability to develop, market and deliver innovative and stylish products at a pace, intensity, and price competitive with other brands in our segments. In addition, we must create products at a range of price points that appeal to the consumers of both our wholesale customers and our dedicated retail stores. Failure on our part to regularly and rapidly develop innovative and stylish products and update core products could limit sales growth, adversely affect retail and consumer acceptance of our products, negatively impact the consumer traffic in our dedicated retail stores, leave us with a substantial amount of unsold inventory which we may be forced to sell at discounted prices, and impair the image of our brands. Moreover, our newer products may not produce as high a gross margin as our traditional products, which may have an adverse effect on our overall margins and profitability.
 
The worldwide apparel industry is subject to ongoing pricing pressure.
 
The apparel market is characterized by low barriers to entry for both suppliers and marketers, global sourcing through suppliers located throughout the world, trade liberalization, continuing movement of product sourcing to lower cost countries, and the ongoing emergence of new competitors with widely varying strategies and resources. These factors contribute to ongoing pricing pressure throughout the supply chain. This pressure has had and may continue to have the following effects:
 
  •  require us to introduce lower-priced products or provide new or enhanced products at the same prices;
 
  •  require us to reduce wholesale prices on existing products;
 
  •  result in reduced gross margins across our product lines;
 
  •  increase retailer demands for allowances, incentives and other forms of economic support; and
 
  •  increase pressure on us to reduce our production costs and our operating expenses.
 
Any of these factors could adversely affect our business and financial condition.
 
Increases in the price of raw materials or their reduced availability could increase our cost of goods and decrease our profitability.
 
The principal fabrics used in our business are cotton, blends, synthetics and wools. The prices we pay our suppliers for our products are dependent in part on the market price for raw materials — primarily cotton — used to produce them. The price and availability of cotton may fluctuate substantially, depending on a variety of factors,


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including demand, crop yields, weather, supply conditions, transportation costs, energy prices, work stoppages, government regulation, economic climates and other unpredictable factors. In 2008, such fluctuations did not materially affect our cost of goods compared to the prior year. However, increases in raw material costs in the future, together with other factors, might make it difficult for us to sustain the level of cost of goods savings we have achieved in recent years and result in a decrease of our profitability unless we are able to pass higher prices on to our customers. Moreover, any decrease in the availability of cotton could impair our ability to meet our production requirements in a timely manner.
 
Our business is subject to risks associated with sourcing and manufacturing overseas.
 
We import finished garments and raw materials into all of our operating regions. Our ability to import products in a timely and cost-effective manner may be affected by conditions at ports or issues that otherwise affect transportation and warehousing providers, such as port and shipping capacity, labor disputes and work stoppages, political unrest, severe weather, or homeland security requirements in the United States and other countries. These issues could delay importation of products or require us to locate alternative ports or warehousing providers to avoid disruption to our customers. These alternatives may not be available on short notice or could result in higher transit costs, which could have an adverse impact on our business and financial condition.
 
Substantially all of our import operations are subject to customs and tax requirements and to tariffs and quotas set by governments through mutual agreements or bilateral actions. In addition, the countries in which our products are manufactured or imported may from time to time impose additional quotas, duties, tariffs or other restrictions on our imports or adversely modify existing restrictions. Adverse changes in these import costs and restrictions, or our suppliers’ failure to comply with customs regulations or similar laws, could harm our business.
 
Our operations are also subject to the effects of international trade agreements and regulations such as the North American Free Trade Agreement, the Dominican-Republic Central America Free Trade Agreement, the Egypt Qualified Industrial Zone program, and the activities and regulations of the World Trade Organization. Although generally these trade agreements have positive effects on trade liberalization, sourcing flexibility and cost of goods by reducing or eliminating the duties and/or quotas assessed on products manufactured in a particular country, trade agreements can also impose requirements that adversely affect our business, such as setting quotas on products that may be imported from a particular country into our key markets such as the United States or the European Union.
 
Risks Relating to Our Business
 
Our net sales have not grown substantially for more than ten years, and actions we have taken, and may take in the future, to address these and other issues facing our business may not be successful over the long term.
 
Our net sales have declined from a peak of $7.1 billion in 1996 to $4.1 billion in 2003, and have grown only modestly since 2003. We face intense competition, customer financial hardship and consolidation, increased focus by retailers on private-label offerings, expansion of and growth in new distribution sales channels, declining sales of traditional core products and continuing pressure on both wholesale and retail pricing. Our ability to successfully compete is impaired by our debt and interest expense, which reduces our operating flexibility and limits our ability to respond to developments in the worldwide apparel industry as effectively as competitors that do not have comparable debt levels. In addition, the strategic, operations and management changes we have made in recent years to improve our business and drive future sales growth may not be successful over the long term.
 
We depend on a group of key customers for a significant portion of our revenues. A significant adverse change in a customer relationship or in a customer’s performance or financial position could harm our business and financial condition.
 
Net sales to our ten largest customers totaled approximately 37% and 42% of total net revenues in 2008 and 2007, respectively. Our largest customer, J.C. Penney Company, Inc., accounted for approximately 8% and 9% of net revenues in fiscal years 2008 and 2007, respectively. 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


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order-by-order basis, and the relationship, as well as particular orders, can generally be terminated by either party at any time. If any major customer decreases or ceases its purchases from us, reduces the floor space, assortments, fixtures or advertising for our products or changes its manner of doing business with us for any reason, such actions could adversely affect our business and financial condition.
 
For example, our wholesale customers are subject to the fluctuations in general economic cycles and the current global economic conditions which are impacting consumer spending, and our customers may also be affected by the tightening credit environment, which may impact their ability to access the credit necessary to operate their business. In 2008 specifically, several of our wholesale customers in the Americas region, including one of our ten largest customers, filed for bankruptcy which adversely impacted our results throughout the year. The performance and financial condition of a wholesale customer may cause us to alter our business terms or to cease doing business with that customer, which could in turn adversely affect our own business and financial condition.
 
In addition, the retail industry in the United States has experienced substantial consolidation in recent years, and further consolidation may occur. Consolidation in the retail industry typically results in store closures, centralized purchasing decisions, increased customer leverage over suppliers, greater exposure for suppliers to credit risk and an increased emphasis by retailers on inventory management and productivity, any of which can, and have, adversely impacted our margins and ability to operate efficiently.
 
We may be unable to maintain or increase our sales through our primary distribution channels.
 
In the United States, chain stores and department stores are the primary distribution channels for our Levi’s® and Dockers® products and the mass channel is the primary distribution channel for Signature products. We may be unable to 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 or reduce fixture spaces and purchases of brands that do not meet their strategic requirements.
 
  •  Other channels, including vertically integrated specialty stores and multi-brand specialty stores, account for a substantial portion of jeanswear and casual wear sales and have placed competitive pressure on the chain and department store channels in general.
 
Our ability to 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.
 
In Europe, department stores and independent jeanswear retailers are our primary distribution channels. These channels have experienced challenges competing against vertically integrated specialty stores. In both Europe and Asia Pacific, some of our mature markets are facing challenges evidenced by slower performance by some wholesale customers, especially when pressured by the recent downturn in general economic conditions in those areas. Further success by vertically integrated specialty stores in Europe and continued challenges in the mature markets of Europe and Asia Pacific may adversely affect the sales of our products in those regions.
 
Our inability to revitalize our business in certain markets or product lines could harm our financial results.
 
Given the global reach and nature of our business and the breadth of our product lines, we may experience business declines in certain markets even while experiencing growth in others. For example, recent declines in certain mature markets in our Europe and Asia Pacific regions impact our overall business performance despite growth in other areas such as emerging markets and our retail network, and the cumulative effect of these declines could adversely affect our results of operations. Although we have taken, and continue to take, product, marketing, distribution and organizational actions to reverse such declines, if our actions are not successful on a sustained basis, our results of operations and our ability to grow may be adversely affected.


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During the past several years, we have experienced significant changes in senior management and our board. The success of our business depends on our ability to attract and retain qualified and effective senior management and board leadership.
 
Our performance depends on the service of key management personnel and board members. We have had changes in our senior management team and board composition in 2008. Senior management departures included John Goodman, our President and Commercial General Manager of the U.S. Dockers® Brand, in March 2008; Hans Ploos van Amstel, Senior Vice President and Chief Financial Officer, in August 2008; and Alan Hed, Senior Vice President and President in our Asia Pacific region, in November 2008. We have filled and continue to seek to fill those key senior management positions that remain open. Changes to our board included Robert D. Haas, who stepped down as our Chairman of the Board and was replaced in that role by board member Gary Rogers in February 2008; and Warren Hellman, who retired from the Board of Directors in October 2008. Changes in our senior management group and board leadership, as well as our ability to attract and retain key personnel, could have an adverse effect on our ability to determine and implement our strategies, which in turn may adversely affect our business and results of operations.
 
Increasing the number of company-operated stores will require us to enhance our capabilities, increase our expenditures and will increasingly impact our financial performance.
 
Although our business is substantially a wholesale business, we currently operate 260 retail stores. As part of our objective to accelerate growth though dedicated retail stores, we plan to continue to strategically open company-operated retail stores, while taking into consideration the changing economic environment. The results from our retail network may be adversely impacted if we do not find ways to generate sufficient sales from our existing and new company-operated stores, which may be particularly challenging in light of the recent and ongoing global economic downturn. Like other retail operators, we regularly review store performance as part of our ongoing review of the fair value of long-lived assets, and as part of that review we may determine to close or impair the value of underperforming stores in the future.
 
Any increase in the number of company-operated stores will require us to further develop our retailing skills and capabilities. We will be required to enter into additional leases, increase our rental expenses and make capital expenditures for these stores. These commitments may be costly to terminate, and these investments may be difficult to recapture if we decide to close stores or change our strategy. We must also offer a broad product assortment (especially women’s and tops), appropriately manage retail inventory levels, install and operate effective retail systems, execute effective pricing strategies, and integrate our stores into our overall business mix. Finally, we will need to hire and train additional qualified employees and incur additional costs to operate these stores, which will increase our operating expenses. These factors, including those relating to securing retail space and management talent, are exacerbated by the fact that many of our competitors either have large company-operated retail operations today or are seeking to expand substantially their retail presence.
 
We must successfully maintain and/or upgrade our information technology systems.
 
We rely on various information technology systems to manage our operations. We are currently implementing modifications and upgrades to our systems, including making changes to legacy systems, replacing legacy systems with successor systems with new functionality and acquiring new systems with new functionality. These types of activities subject us to inherent costs and risks associated with replacing and changing these systems, including impairment of our ability to fulfill customer orders, potential disruption of our internal control structure, substantial capital expenditures, additional administration and operating expenses, retention of sufficiently skilled personnel to implement and operate the new systems, demands on management time, and other risks and costs of delays or difficulties in transitioning to new systems or of integrating new systems into our current systems. Our system implementations may not result in productivity improvements at a level that outweighs the costs of implementation, or at all. In addition, the implementation of new technology systems may cause disruptions in our business operations. For example, we implemented an enterprise resource planning (“ERP”) system in the United States in the second quarter of 2008. Due to issues encountered during the stabilization of the system, we temporarily suspended shipments to our customers in the United States in the beginning of the second quarter of 2008, resulting in decreased revenues and increased administration expenses. The ERP stabilization was substantially complete by


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November 30, 2008. Information technology system disruptions such as this could have a further adverse effect on our business and operations, if not anticipated and appropriately mitigated.
 
We rely on contract manufacturing of our products. Our inability to secure production sources meeting our quality, cost, working conditions and other requirements, or failures by our contractors to perform, could harm our sales, service levels and reputation.
 
We source approximately 95% of our products from independent contract manufacturers who purchase fabric and other raw materials 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. Over the past year, certain of our contractors have been unable to continue their business due to these pressures, and we may experience more difficulties with contractors in the future. In addition, we do not have material long-term contracts with any of our independent manufacturers, and these manufacturers generally may unilaterally terminate their relationship with us at any time. Finally, we may experience capability-building and infrastructure challenges as we expand our sourcing to new contractors throughout the world.
 
Our suppliers are subject to the fluctuations in general economic cycles, and the current global economic conditions have resulted in a tightening of trade finance. This may impact their ability to access the credit necessary to operate their business. In 2008, we experienced no specific cases of supplier bankruptcy which impacted our ability to deliver product or adversely impacted our business results. The performance and financial condition of a supplier may cause us to alter our business terms or to cease doing business with that supplier, which could in turn adversely affect our own business and financial condition.
 
Our dependence on contract manufacturing could subject us to difficulty in obtaining timely delivery of products of acceptable quality. A contractor’s failure to ship products to us in a timely manner or to meet our quality standards, or interference with our ability to receive shipments due to factors such as port or transportation conditions, could cause us to miss the delivery date requirements of our customers. Failing to make timely deliveries may cause our customers to cancel orders, refuse to accept deliveries, impose non-compliance charges through invoice deductions or other charge-backs, demand reduced prices, or reduce future orders, any of which could harm our sales and margins.
 
We require contractors to meet our standards in terms of working conditions, environmental protection, security and other matters before we are willing to place business with them. As such, we may not be able to obtain the lowest-cost production. In addition, the labor and business practices of apparel manufacturers have received increased attention from the media, non-governmental organizations, consumers and governmental agencies in recent years. Any failure by our independent manufacturers to adhere to labor or other laws or appropriate labor or business practices, and the potential litigation, negative publicity and political pressure relating to any of these events, could harm our business and reputation.
 
We are a global company with nearly half our revenues coming from our Europe and Asia Pacific businesses, which exposes us to political and economic risks as well as the impact of foreign currency fluctuations.
 
We generated approximately 44%, 41% and 39% of our net revenues from our Europe and Asia Pacific businesses in 2008, 2007 and 2006, respectively. A substantial amount of our products came from sources outside of the country of distribution. As a result, we are subject to the risks of doing business outside of the United States, including:
 
  •  currency fluctuations, which have impacted our results of operations significantly in recent years;
 
  •  changes in tariffs and taxes;
 
  •  regulatory restrictions on repatriating foreign funds back to the United States;


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  •  less protective foreign laws relating to intellectual property; and
 
  •  political, economic and social instability.
 
The functional currency for most of our foreign operations is the applicable local currency. As a result, fluctuations in foreign currency exchange rates affect the results of our operations and the value of our foreign assets, which in turn may benefit or adversely affect reported earnings 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 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. The recent global financial downturn has led to a high level of volatility in foreign currency exchange rates and that level of volatility may continue and thus adversely impact our business or financial conditions.
 
Furthermore, due to our global operations, we are subject to numerous domestic and foreign laws and regulations affecting our business, such as those related to labor, employment, worker health and safety, antitrust and competition, environmental protection, consumer protection, import/export, and anti-corruption, including but not limited to the Foreign Corrupt Practices Act which prohibits giving anything of value intended to influence the awarding of government contracts. Although we have put into place policies and procedures aimed at ensuring legal and regulatory compliance, our employees, subcontractors and agents could take actions that violate these requirements. Violations of these regulations could subject us to criminal or civil enforcement actions, any of which could have a material adverse effect on our business.
 
We have made changes in our logistics operations in recent years and continue to look for opportunities to increase efficiencies.
 
We have closed several of our distribution centers in recent years and continually work to identify additional opportunities to optimize our distribution network and reduce product cost. Changes in logistics and distribution activities could result in temporary shipping disruptions and expense as we bring new arrangements to full operation, which could have an adverse effect on our results of operations.
 
Most of the employees in our production and distribution facilities are covered by collective bargaining agreements, and any material job actions could negatively affect our results of operations.
 
In North America, most of our distribution employees are covered by various collective bargaining agreements, and outside North America, most of our production and distribution employees are covered by either industry-sponsored and/or state-sponsored collective bargaining mechanisms. Any work stoppages or other job actions by these employees could harm our business and reputation.
 
Our licensees may not comply with our product quality, manufacturing standards, marketing and other requirements.
 
We license our trademarks to third parties for manufacturing, marketing and distribution of various products. While we enter into comprehensive agreements with our licensees covering product design, product quality, sourcing, manufacturing, marketing and other requirements, our licensees may not comply fully with those agreements. Non-compliance could include marketing products under our brand names that do not meet our quality and other requirements or engaging in manufacturing practices that do not meet our supplier code of conduct. These activities could harm our brand equity, our reputation and our business.


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Our success depends on the continued protection of our trademarks and other proprietary intellectual property rights.
 
Our trademarks and other intellectual property rights are important to our success and competitive position, and the loss of or inability to enforce trademark and other proprietary intellectual property rights could harm our business. We devote substantial resources to the establishment and protection of our trademark and other proprietary intellectual property rights on a worldwide basis. Our efforts to establish and protect our trademark and other proprietary intellectual property rights may not be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products. Unauthorized copying of our products or unauthorized use of our trademarks or other proprietary rights may not only erode sales of our products but may also cause significant damage to our brand names and our ability to effectively represent ourselves to our customers, contractors, suppliers and/or licensees. Moreover, others may seek to assert rights in, or ownership of, our trademarks and other proprietary intellectual property, and we may not be able to successfully resolve those claims. In addition, the laws and enforcement mechanisms of some foreign countries may not allow us to protect our proprietary rights to the same extent as we are able to in the United States and other countries.
 
We have substantial liabilities and cash requirements associated with postretirement benefits, pension and deferred compensation plans, and our restructuring activities.
 
Our postretirement benefits, pension, and deferred compensation plans, and our restructuring activities 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. Changes in interest rates, mortality rates, health care costs, early retirement rates, investment returns, and 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. We expect our pension expense to increase by more the $30 million in 2009 as a result of the decline in the value of our pension plan assets in 2008. This increased pension expense may extend into future years if current market conditions persist. Plan liabilities may impair our liquidity, have an unfavorable impact on our ability to obtain financing and place us at a competitive disadvantage compared to some of our competitors who do not have such liabilities and cash requirements.
 
Earthquakes or other events outside of our control may damage our facilities or the facilities of third parties on which we depend.
 
Our corporate headquarters are located in California near major geologic faults that have experienced earthquakes in the past. An earthquake or other natural disaster could disrupt our operations. Additionally, the loss of electric power, such as the temporary loss of power caused by power shortages in the grid servicing our headquarters, could disrupt operations or impair critical systems. Any of these disruptions or other events outside of our control could affect our business negatively, harming our operating results. In addition, if any of our other facilities, including our manufacturing, finishing or distribution facilities or our company-operated or franchised stores, or the facilities of our suppliers or customers, is affected by earthquakes, power shortages, floods, monsoons, terrorism, epidemics or other events outside of our control, our business could suffer.
 
We are required to evaluate our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act. Failure to comply with the requirements of Section 404 or any adverse results from such evaluation could result in a loss of investor confidence in our financial reports and have an adverse effect on the credit ratings and trading price of our debt securities.
 
We are not currently an “accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended. As required by Section 404 of the Sarbanes-Oxley Act of 2002, we have provided an internal control report with this Annual Report, which includes management’s assessment of the effectiveness of our internal control over financial reporting as of the end of the fiscal year. Beginning with our Annual Report for the year ending November 28, 2010, our independent registered public accounting firm will also be required to issue a report


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on their evaluation of the effectiveness of our internal control over financial reporting. Our assessment requires us to make subjective judgments and our independent registered public accounting firm may not agree with our assessment. If we or our independent registered public accounting firm were unable to conclude that our internal control over financial reporting was effective as of the relevant period, investors could lose confidence in our reported financial information, which could have an adverse effect on the trading price of our debt securities, negatively affect our credit rating, and affect our ability to borrow funds on favorable terms.
 
Risks Relating to Our Debt
 
We have debt and interest payment requirements at a level that may restrict our future operations.
 
As of November 30, 2008, we had approximately $1.9 billion of debt, of which all but approximately $180 million was unsecured, and we had $315.8 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. It could also have important adverse consequences to holders of our securities. For example, it could:
 
  •  increase our vulnerability to general adverse economic and industry conditions;
 
  •  limit our flexibility in planning for or reacting to changes in our business and industry;
 
  •  place us at a competitive disadvantage compared to some of our competitors that have less debt; and
 
  •  limit our ability to obtain additional financing required to fund working capital and capital expenditures and for other general corporate purposes.
 
In addition, borrowings under our senior secured revolving credit facility are at variable rates of interest. Our unsecured term loan also bears interest at a variable rate. As a result, increases in market interest rates would require a greater portion of our cash flow to be used to pay interest, which could further hinder our operations and affect the trading price of our debt securities. Our ability to satisfy our obligations and to reduce our total debt depends on our future operating performance and on economic, financial, competitive and other factors, many of which are beyond our control.
 
The downturn in the economy and the volatility in the capital markets could limit our ability to access capital or could increase our costs of capital.
 
We have seen a dramatic downturn in the U.S. and global economy. The fair value of our long-term debt, as compared to its carrying value, has declined significantly in 2008, primarily due to changes in overall capital market conditions as demonstrated by lower liquidity in the markets, increases in credit spread, and decreases in bank lending activities, which result in investors moving from high yield securities to lower yield investment grade or U.S. Treasury securities in efforts to preserve capital.
 
Although we have had continued solid operating cash flow, the downturn and the disruption in the credit markets may reduce sources of liquidity available to us. We can provide no assurance that we will continue to meet our capital requirements from our cash resources, future cash flow and external sources of financing, particularly if current market or economic conditions continue or deteriorate further. We manage cash and cash equivalents in various institutions at levels beyond FDIC coverage limits, and we purchase investments not guaranteed by the FDIC. Accordingly, there may be a risk that we will not recover the full principal of our investments or that their liquidity may be diminished. We rely on multiple financial institutions to provide funding pursuant to existing credit agreements, and those institutions may not be able to meet their obligations to provide funding in a timely manner, or at all, when we require it. The cost of or lack of available credit could impact our ability to develop sufficient liquidity to maintain or grow our business, which in turn may adversely affect our business and results of operations.


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Restrictions in our notes indentures, unsecured term loan and senior secured revolving credit facility may limit our activities, including dividend payments, share repurchases and acquisitions.
 
The indentures relating to our senior unsecured notes, our Euro notes, our Yen-denominated Eurobonds, our unsecured term loan and our senior secured revolving credit facility contain restrictions, including covenants limiting our ability to incur additional debt, grant liens, make acquisitions and other investments, prepay specified debt, consolidate, merge or acquire other businesses, sell assets, pay dividends and other distributions, repurchase stock, and enter into transactions with affiliates. These restrictions, in combination with our leveraged condition, may make it more difficult for us to successfully execute our business strategy, grow our business or compete with companies not similarly restricted.
 
If our foreign subsidiaries are unable to distribute cash to us when needed, we may be unable to satisfy our obligations under our debt securities, which could force us to sell assets or use cash that we were planning to use elsewhere in our business.
 
We conduct our international operations through foreign subsidiaries, and therefore we depend upon funds from our foreign subsidiaries for a portion of the funds necessary to meet our debt service obligations. We only receive the cash that remains after our foreign subsidiaries satisfy their obligations. Any agreements our foreign subsidiaries enter into with other parties, as well as applicable laws and regulations limiting the right and ability of non-U.S. subsidiaries and affiliates to pay dividends and remit cash to affiliated companies, may restrict the ability of our foreign subsidiaries to pay dividends or make other distributions to us. If those subsidiaries are unable to pass on the amount of cash that we need, we will be unable to make payments on our debt obligations, which could force us to sell assets or use cash that we were planning on using elsewhere in our business, which could hinder our operations and affect the trading price of our debt securities.
 
Our approach to corporate governance may lead us to take actions that conflict with our creditors’ interests as holders of our debt securities.
 
All of our common stock is owned by a voting trust described under “Item 12 — Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.” Four voting trustees have the exclusive ability to elect and remove directors, amend our by-laws and take other actions which would normally be within the power of stockholders of a Delaware corporation. The voting trust agreement gives certain powers to the holders of two-thirds of the outstanding voting trust certificates, such as the power to remove trustees and terminate the voting trust. The ownership of two-thirds of the outstanding voting trust certificates is concentrated in the hands of a small group of holders (including three of the four voting trustees), providing the group the voting power to block stockholder action on matters for which the holders of the voting trust certificates are entitled to vote and direct the trustees under the voting trust agreement.
 
Our principal stockholders created the voting trust in part to ensure that we would continue to operate in a socially responsible manner while seeking the greatest long-term benefit for our stockholders, employees and other stakeholders and constituencies. As a result, we cannot assure that the voting trustees will cause us to be operated and managed in a manner that benefits our creditors or that the interests of the voting trustees or our principal equity holders will not diverge from our creditors.
 
Item 1B.   UNRESOLVED STAFF COMMENTS
 
Not applicable.


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Item 2.   PROPERTIES
 
We conduct manufacturing, distribution and administrative activities in owned and leased facilities. We operate four manufacturing-related facilities abroad and nine distribution-only centers around the world. We have renewal rights for most of our property leases. We anticipate that we will be able to extend these leases on terms satisfactory to us or, if necessary, locate substitute facilities on acceptable terms. We believe our facilities and equipment are in good condition and are suitable for our needs. Information about our key operating properties in use as of November 30, 2008, is summarized in the following table:
 
             
Location
 
Primary Use
 
Leased/Owned
 
Americas
           
Hebron, KY
  Distribution     Owned  
Canton, MS
  Distribution     Owned  
Henderson, NV
  Distribution     Owned  
Westlake, TX
  Data Center     Leased  
Etobicoke, Canada
  Distribution     Owned  
Naucalpan, Mexico
  Distribution     Leased  
Europe
           
Kiskunhalas, Hungary
  Manufacturing and Finishing     Owned  
Plock, Poland
  Manufacturing and Finishing     Leased(1)  
Northhampton, U.K
  Distribution     Owned  
Sabadell, Spain
  Distribution     Leased  
Corlu, Turkey
  Manufacturing, Finishing and Distribution     Owned  
Asia Pacific
           
Adelaide, Australia
  Distribution     Leased  
Cape Town, South Africa
  Manufacturing, Finishing and Distribution     Leased  
Hiratsuka Kanagawa, Japan
  Distribution     Owned(2)  
 
 
(1) Building and improvements are owned but subject to a ground lease.
 
(2) Owned by our 84%-owned Japanese subsidiary.
 
Our global headquarters and the headquarters of our Americas region are both located in leased premises in San Francisco, California. Our Europe and Asia Pacific headquarters are located in leased premises in Brussels, Belgium and Singapore, respectively. As of November 30, 2008, we also leased or owned 104 administrative and sales offices in 40 countries, as well as leased a small number of warehouses in three countries. We own or lease several facilities that are no longer in operation that we are working to sell or sublease.
 
In addition, as of November 30, 2008, we had 260 company-operated retail and outlet stores in leased premises in 24 countries. We had 93 stores in the Americas region, 92 stores in the Europe region and 75 stores in the Asia Pacific region. In 2008, we opened 70 company-operated stores and closed 10 stores.


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Item 3.   LEGAL PROCEEDINGS
 
Wrongful termination litigation.  On April 14, 2003, two former employees of our tax department filed a complaint in the Superior Court of the State of California for San Francisco County in which they allege that they were wrongfully terminated in December 2002. Plaintiffs allege, among other things, that Levi Strauss & Co. engaged in a variety of fraudulent tax-motivated transactions over several years, that we manipulated tax reserves to inflate reported income and that we fraudulently failed to set appropriate valuation allowances against deferred tax assets. They also allege that, as a result of these and other tax-related transactions, our financial statements for several years violated generally accepted accounting principles in the United States and Securities and Exchange Commission (“SEC”) regulations and are fraudulent and misleading, that reported net income for these years was overstated and that these various activities resulted in our paying excessive and improper bonuses to management for fiscal year 2002. Plaintiffs in this action further allege that they were instructed by us to withhold information concerning these matters from our independent registered public accounting firm and the Internal Revenue Service, that they refused to do so and, because of this refusal, they were wrongfully terminated. Plaintiffs seek a number of remedies, including compensatory and punitive damages, attorneys’ fees, restitution, injunctive relief and any other relief the court may find proper.
 
On March 12, 2004, plaintiffs filed a complaint in the U.S. District Court for the Northern District of California, San Jose Division, Case No. C-04-01026. In this complaint, in addition to restating the allegations contained in the state complaint, plaintiffs assert that we violated Sections 1541A et seq. of the Sarbanes-Oxley Act by taking adverse employment actions against plaintiffs in retaliation for plaintiffs’ lawful acts of compliance with the administrative reporting provisions of the Sarbanes-Oxley Act. Plaintiffs seek a number of remedies, including compensatory damages, interest lost on all earnings and benefits, reinstatement, litigation costs, attorneys’ fees and any other relief that the court may find proper. The district court has now related this case to the securities class action (described below) styled In re: Levi Strauss & Co. Securities Litigation.
 
On December 7, 2004, plaintiffs requested and we agreed to, a stay of their state court action in order to first proceed with their action in the U.S. District Court for the Northern District of California, San Jose Division, Case No. C-04-01026. Trial of plaintiffs’ Sarbanes-Oxley Act claim, plaintiffs’ defamation claim and our counter-claims was set for January 12, 2009. However, on November 3, 2008, the parties attended a court-ordered settlement conference and reached an agreement to settle all claims in this matter, including all state and federal claims. The amounts involved in the settlement are not material.
 
Class actions securities litigation.  On March 29, 2004, the United States District Court for the Northern District of California, San Jose Division, issued an order consolidating two putative bondholder class-actions (styled Orens v. Levi Strauss & Co., et al. and General Retirement System of the City of Detroit, et al. v. Levi Strauss & Co., et al.) against us, a former chief executive officer, a former chief financial officer, a former corporate controller, our former and current directors and financial institutions alleged to have acted as our underwriters in connection with our April 6, 2001, and June 16, 2003, registered bond offerings. Additionally, the court appointed a lead plaintiff and approved the selection of lead counsel. The consolidated action is styled In re Levi Strauss & Co., Securities Litigation, Case No. C-03-05605 RMW (class action).
 
The action purports to be brought on behalf of purchasers of our bonds who made purchases pursuant or traceable to our prospectuses dated March 8, 2001, or April 28, 2003, or who purchased our bonds in the open market from January 10, 2001, to October 9, 2003. The action makes claims under the federal securities laws, including Sections 11 and 15 of the Securities Act and Sections 10(b) and 20(a) of the Exchange Act, relating to our SEC filings and other public statements. Specifically, the action alleges that certain of our financial statements and other public statements during this period materially overstated our net income and other financial results and were otherwise false and misleading, and that our public disclosures omitted to state that we made reserve adjustments that plaintiffs allege were improper. Plaintiffs contend that these statements and omissions caused the trading price of our bonds to be artificially inflated. Plaintiffs seek compensatory damages as well as other relief.
 
On September 11, 2007, the court in this matter dismissed the Section 10(b) and 20(a) claims and dismissed the tax fraud aspects of the Section 11 and 15 claims. The court also limited the plaintiff class on the Section 11 and 15 claims by eliminating from the class those bondholders who purchased the bonds in private offerings and then exchanged them for registered bonds in the subsequent exchange offer.


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The parties entered into a settlement agreement on the remaining claims on July 12, 2008, and the court issued final approval of the settlement agreement on October 17, 2008. The amounts involved in the settlement are not material and the matter was fully concluded by the end of fiscal year 2008.
 
Other litigation.  In the ordinary course of business, we have various other pending cases involving contractual matters, employee-related matters, distribution questions, product liability claims, trademark infringement and other matters. We do not believe there are any of these pending legal proceedings that will have a material impact on our financial condition, results of operations or cash flows.
 
Item 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
In accordance with the terms of the Voting Trust Agreement, which governs the voting trust in which all of the Company’s common shares are held, the voting trustees appointed Stephen C. Neal to be the successor voting trustee to F. Warren Hellman who resigned his position as a voting trustee in connection with his retirement from the Board on October 10, 2008. No matters were submitted to a vote of our security holders during the fourth quarter of the fiscal year ended November 30, 2008.


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PART II
 
Item 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
All outstanding shares of our common stock are deposited in a voting trust, a legal arrangement that transfers the voting power of the shares to a trustee or group of trustees. The four voting trustees are Miriam L. Haas, Peter E. Haas Jr., Robert D. Haas and Stephen C. Neal, three of whom are also directors. The voting trustees have the exclusive ability to elect and remove directors, amend our by-laws and take certain other actions which would normally be within the power of stockholders of a Delaware corporation. Our equity holders, who, as a result of the voting trust, legally hold “voting trust certificates,” not stock, retain the right to direct the trustees on specified mergers and business combinations, liquidations, sales of substantially all of our assets and specified amendments to our certificate of incorporation.
 
The voting trust will last until April 2011, unless the trustees unanimously decide, or holders of at least two-thirds of the outstanding voting trust certificates decide, to terminate it earlier. If Robert D. Haas ceases to be a trustee for any reason, then the question of whether to continue the voting trust will be decided by the holders. The existing trustees will select the successors to the other trustees. The agreement among the stockholders and the trustees creating the voting trust contemplates that, in selecting successor trustees, the trustees will attempt to select individuals who share a common vision with the sponsors of the 1996 recapitalization transaction that gave rise to the voting trust, represent and reflect the financial and other interests of the equity holders and bring a balance of perspectives to the trustee group as a whole. A trustee may be removed if the other three trustees unanimously vote for removal or if holders of at least two-thirds of the outstanding voting trust certificates vote for removal.
 
Our common stock and the voting trust certificates are not publicly held or traded. All shares and the voting trust certificates are subject to a stockholders’ agreement. The agreement, which expires in April 2016, limits the transfer of shares and certificates to other holders, family members, specified charities and foundations and back to the Company. The agreement does not provide for registration rights or other contractual devices for forcing a public sale of shares or certificates, or other access to liquidity. The scheduled expiration date of the stockholders’ agreement is five years later than that of the voting trust agreement in order to permit an orderly transition from effective control by the voting trust trustees to direct control by the stockholders.
 
As of February 2, 2009, there were 187 record holders of voting trust certificates. Our shares are not registered on any national securities exchange, there is no established public trading market for our shares and none of our shares are convertible into shares of any other class of stock or other securities.
 
We paid a $50 million cash dividend on our common stock on April 16, 2008. Please see Note 16 to our audited consolidated financial statements included in this report for more information. We may elect to declare and pay cash dividends in the future at the discretion of our board of directors and depending upon our financial condition and compliance with the terms of our debt agreements. Our senior secured revolving credit facility and the indentures governing our senior unsecured notes limit our ability to pay dividends. For more detailed information about these limitations, see Note 5 to our audited consolidated financial statements included in this report.
 
We did not repurchase any of our common stock during the fourth quarter of the fiscal year ended November 30, 2008.


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Item 6.   SELECTED FINANCIAL DATA
 
The following table sets forth our selected historical consolidated financial data which are derived from our consolidated financial statements that have been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, for 2008 and 2007, and KPMG LLP, an independent registered public accounting firm, for 2006, 2005 and 2004. The financial data set forth below should be read in conjunction with, and are qualified by reference to, “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations”, our consolidated financial statements for 2008, 2007 and 2006 and the related notes to those consolidated financial statements, included elsewhere in this report.
 
                                         
    Year Ended
    Year Ended
    Year Ended
    Year Ended
    Year Ended
 
    November 30,
    November 25,
    November 26,
    November 27,
    November 28,
 
    2008     2007     2006     2005     2004  
    (Dollars in thousands)  
 
Statements of Income Data:
                                       
Net sales
  $ 4,303,075     $ 4,266,108     $ 4,106,572     $ 4,150,931     $ 4,093,615  
Licensing revenue
    97,839       94,821       86,375       73,879       57,117  
                                         
Net revenues
    4,400,914       4,360,929       4,192,947       4,224,810       4,150,732  
Cost of goods sold
    2,261,112       2,318,883       2,216,562       2,236,962       2,288,406  
                                         
Gross profit
    2,139,802       2,042,046       1,976,385       1,987,848       1,862,326  
Selling, general and administrative expenses
    1,606,482       1,386,547       1,348,577       1,381,955       1,367,604  
Restructuring charges, net
    8,248       14,458       14,149       16,633       133,623  
                                         
Operating income
    525,072       641,041       613,659       589,260       361,099  
Interest expense
    154,086       215,715       250,637       263,650       260,124  
Loss on early extinguishment of debt
    1,417       63,838       40,278       66,066        
Other (income) expense, net
    1,400       (14,138 )     (22,418 )     (23,057 )     5,450  
                                         
Income before taxes
    368,169       375,626       345,162       282,601       95,525  
Income tax expense (benefit)(1)
    138,884       (84,759 )     106,159       126,654       65,135  
                                         
Net income
  $ 229,285     $ 460,385     $ 239,003     $ 155,947     $ 30,390  
                                         
Statements of Cash Flow Data:
                                       
Net cash flows provided by (used for):
                                       
Operating activities
  $ 224,809     $ 302,271     $ 261,880     $ (43,777 )   $ 199,896  
Investing activities
    (26,815 )     (107,277 )     (69,597 )     (34,657 )     (12,930 )
Financing activities
    (135,460 )     (325,534 )     (155,228 )     23,072       (32,120 )
Balance Sheet Data:
                                       
Cash and cash equivalents
  $ 210,812     $ 155,914     $ 279,501     $ 239,584     $ 299,596  
Working capital
    713,644       647,256       805,976       657,374       609,072  
Total assets
    2,776,875       2,850,666       2,804,065       2,804,134       2,884,749  
Total debt, excluding capital leases
    1,853,207       1,960,406       2,217,412       2,326,699       2,323,888  
Total capital leases
    7,806       8,177       4,694       5,587       7,441  
Stockholders’ deficit(2)
    (349,517 )     (398,029 )     (994,047 )     (1,222,085 )     (1,370,924 )
Other Financial Data:
                                       
Depreciation and amortization
  $ 77,983     $ 67,514     $ 62,249     $ 59,423     $ 62,606  
Capital expenditures
    80,350       92,519       77,080       41,868       16,299  
Dividends paid
    49,953                          
 
 
(1) In the fourth quarter of 2007, as a result of improvements in business performance and recent positive developments in an ongoing IRS examination, we reversed valuation allowances against our deferred tax assets for foreign tax credit carryforwards, as we believed that it was more likely than not that these credits will be utilized prior to their expiration.
 
(2) Stockholders’ deficit primarily resulted from a 1996 recapitalization transaction in which our stockholders created new long-term governance arrangements for us, including the voting trust and stockholders’ agreement. Funding for cash payments in the recapitalization was provided in part by cash on hand and in part from approximately $3.3 billion in borrowings under bank credit facilities.


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Item 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Overview
 
Our Company
 
We design and market jeans, casual and dress pants, tops, jackets and related accessories for men, women and children under our Levi’s®, Dockers® and Signature by Levi Strauss & Co.tm (“Signature”) brands around the world. We also license our trademarks in many countries throughout the world for a wide array of products, including accessories, pants, tops, footwear, home and other products.
 
Our business is operated through three geographic regions: Americas, Europe and Asia Pacific. Our products are sold in approximately 60,000 retail locations in more than 110 countries. We support our brands through a global infrastructure, both sourcing and marketing our products around the world. We distribute our Levi’s® and Dockers® products primarily through chain retailers and department stores in the United States and primarily through department stores, specialty retailers and franchised stores outside of the United States. We distribute products under the Signature brand primarily through mass channel retailers in the United States and mass and other value-oriented retailers and franchised stores outside of the United States. We also distribute our Levi’s® and Dockers® products through our online stores, and 260 company-operated stores located in 24 countries, including the United States. These stores generated approximately 8% of our net revenues in 2008.
 
We derived nearly half of our net revenues and more than half of our regional operating income from our Europe and Asia Pacific businesses in 2008. Sales of Levi’s® brand products represented approximately 76% of our total net sales in 2008. Pants, including jeans, casual pants and dress pants, represented approximately 85% of our total units sold in 2008, and men’s products generated approximately 75% of our total net sales.
 
Trends Affecting our Business
 
We believe the key marketplace factors affecting us include the following:
 
  •  Increasing pressures in the U.S. and global economy related to the global economic downturn, the credit crisis, volatility in interest rates, investment returns, housing and energy prices, and other similar elements that impact consumer discretionary spending, are creating a highly challenging retail environment for us and our customers.
 
  •  Wholesaler/retailer dynamics are changing as the wholesale channel continues to consolidate and as our customers build competitive exclusive or private-label offerings. In addition, traditional wholesale distributors increasingly are investing in their own retail store distribution network.
 
  •  Apparel markets have matured in certain geographic locations such as the United States, Japan, Canada and France due in part to demographic shifts and the existence of appealing discretionary purchase alternatives. Opportunities for major brands are increasing in rapidly growing emerging markets such as India, China, Brazil and Russia.
 
  •  Brand and product proliferation continues around the world as companies compete with increased numbers of differentiated brands and products targeted for specific consumer and retail segments. In addition, the ways of marketing these brands are changing to new mediums, challenging the effectiveness of more mass-market approaches such as television advertising.
 
  •  More competitors are seeking growth globally and are raising the competitiveness of the international markets in which we already have an established presence.
 
  •  The global nature of our business exposes us to earnings volatility resulting from exchange rate fluctuations.
 
  •  Quality low-cost sourcing alternatives continue to emerge around the world, resulting in pricing pressure and minimal barriers to entry for new competitors. In addition, these sourcing alternatives enable competitors that attract consumers with a constant flow of competitively-priced new products that reflect the newest


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  styles and bring additional pressure on traditional wholesalers and retailers to shorten their lead-times and become more responsive to trends.
 
These factors contribute to a global market environment of intense competition, constant product innovation and continuing cost pressure throughout the supply chain, from manufacturer to consumer, and combine with the global economic downturn and credit crisis to create a highly challenging commercial and economic environment. We expect these factors to continue into the foreseeable future.
 
Our 2008 Results
 
Despite market conditions, our 2008 results reflect revenue stability, debt reduction, and continued investment in systems and in our business.
 
  •  Net revenues.  Our consolidated net revenues increased by 1% compared to 2007 on a reported basis, and decreased 1% on a constant currency basis. Net revenues increases, resulting primarily from increased sales from new and existing company-operated and franchisee stores reflecting strong performance of our Levis® brand, were offset by the impact of a challenging economy and a weak retail environment in the United States as well as in certain markets in our Europe and Asia Pacific regions, poor performance of our Dockers® brand, and issues encountered during the implementation and stabilization of our enterprise resource planning (“ERP”) system in the United States.
 
  •  Operating income.  Our consolidated operating margin declined in 2008 to 12% from 15% in 2007, and operating income decreased $116 million. An increase in gross margin was offset by additional SG&A expenses, reflecting the impact of a postretirement benefit plan curtailment gain recorded in 2007, and in 2008, the implementation and upgrade of our information technology systems, continued investment in the expansion of our retail network and our global Levi’s® 501® advertising campaign.
 
  •  Net income.  Net income decreased to $229 million in 2008 as compared to $460 million in the prior year primarily reflecting higher income tax expense, as in 2007 we recorded a tax benefit from a non-recurring, non-cash reversal of deferred tax asset valuation allowances totaling approximately $215 million. Net income in 2008 benefited as compared to prior year from lower interest expense and lower loss on early extinguishment of debt resulting from our debt refinancing activities in 2007.
 
  •  Cash flows.  Although $77 million lower than prior year, our operating activities provided strong cash flows of $225 million in 2008. The decrease as compared to 2007 was largely due to our lower operating income, but was partially offset by lower interest payments. Additionally, we paid a dividend of $50 million to our stockholders and reduced our debt by $95 million in 2008, while continuing to invest in systems and retail expansion.
 
Our Objectives
 
Our key objectives are to strengthen our brands globally in order to sustain profitable growth, continue to generate strong cash flow and further reduce debt. Critical strategies to achieve this include driving continued product and marketing innovation, driving sales growth through enhancing relationships with wholesale customers and expanding our dedicated store network, enhancing productivity through systems improvements, optimizing the cost of our products without sacrificing quality, and continuing our disciplined working capital management.
 
Financial Information Presentation
 
Fiscal year.  Our fiscal year ends on the last Sunday of November in each year, except for certain foreign subsidiaries which are fixed at November 30 due to local statutory requirements. Apart from these subsidiaries, each quarter of fiscal years 2008, 2007 and 2006 consisted of 13 weeks, with the exception of the fourth quarter of 2008, which consisted of 14 weeks.
 
Segments.  We revised our reporting segments effective as of the beginning of 2008 as follows: our Central and South American markets were combined with our North America region, which was renamed the Americas as a result of the change, and our Turkey, Middle East and North Africa markets were combined with our region in


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Europe; all of these markets were previously managed by our Asia Pacific region. Prior-period segment disclosures contained in this Form 10-K have been revised to conform to the new presentation.
 
Classification.  Our classification of certain significant revenues and expenses reflects the following:
 
  •  Net sales is primarily comprised of sales of products to wholesale customers, including franchised stores, and of direct sales to consumers at both our company-operated and online stores. It includes allowances for estimated returns, discounts, and promotions and incentives.
 
  •  Licensing revenue consists of royalties earned from the use of our trademarks by third-party licensees in connection with the manufacturing, advertising and distribution of trademarked products.
 
  •  Cost of goods sold is primarily comprised of cost of materials, labor and manufacturing overhead, and also includes the cost of inbound freight, internal transfers, receiving and inspection at manufacturing facilities, and depreciation expense on our manufacturing facilities.
 
  •  Selling costs include, among other things, all occupancy costs associated with company-operated stores.
 
  •  We reflect substantially all distribution costs in selling, general and administrative expenses, including costs related to receiving and inspection at distribution centers, warehousing, shipping, handling, and other activities associated with our distribution network.
 
Constant currency.  Constant currency comparisons are based on translating local currency amounts in both periods at the same foreign exchange rates. We routinely evaluate our constant currency financial performance in order to facilitate period-to-period comparisons without regard to the impact of changing foreign currency exchange rates.
 
Results of Operations
 
2008 compared to 2007
 
The following table summarizes, for the periods indicated, the consolidated statements of income, the changes in these items from period to period and these items expressed as a percentage of net revenues:
 
                                         
    Year Ended  
                      November 30,
    November 25,
 
                %
    2008
    2007
 
    November 30,
    November 25,
    Increase
    % of Net
    % of Net
 
    2008     2007     (Decrease)     Revenues     Revenues  
    (Dollars in millions)  
 
Net sales
  $ 4,303.1     $ 4,266.1       0.9 %     97.8 %     97.8 %
Licensing revenue
    97.8       94.8       3.2 %     2.2 %     2.2 %
                                         
Net revenues
    4,400.9       4,360.9       0.9 %     100.0 %     100.0 %
Cost of goods sold
    2,261.1       2,318.9       (2.5 )%     51.4 %     53.2 %
                                         
Gross profit
    2,139.8       2,042.0       4.8 %     48.6 %     46.8 %
Selling, general and administrative expenses
    1,606.5       1,386.5       15.9 %     36.5 %     31.8 %
Restructuring charges, net
    8.2       14.5       (43.0 )%     0.2 %     0.3 %
                                         
Operating income
    525.1       641.0       (18.1 )%     11.9 %     14.7 %
Interest expense
    154.1       215.7       (28.6 )%     3.5 %     4.9 %
Loss on early extinguishment of debt
    1.4       63.8       (97.8 )%           1.5 %
Other (income) expense, net
    1.4       (14.1 )     (109.9 )%           (0.3 )%
                                         
Income before income taxes
    368.2       375.6       (2.0 )%     8.4 %     8.6 %
Income tax expense (benefit)
    138.9       (84.8 )     (263.9 )%     3.2 %     (1.9 )%
                                         
Net income
  $ 229.3     $ 460.4       (50.2 )%     5.2 %     10.6 %
                                         


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Consolidated net revenues
 
The following table presents net revenues by reporting segment for the periods indicated and the changes in net revenues by reporting segment on both reported and constant currency bases from period to period:
 
                                 
    Year Ended  
                % Increase (Decrease)  
    November 30,
    November 25,
    As
    Constant
 
    2008     2007     Reported     Currency  
          (Dollars in millions)        
 
Net revenues:
                               
Americas
  $ 2,476.4     $ 2,581.3       (4.1 )%     (4.2 )%
Europe
    1,195.6       1,099.7       8.7 %     0.9 %
Asia Pacific
    728.9       681.1       7.0 %     4.9 %
Corporate
          (1.2 )            
                                 
Total net revenues
  $ 4,400.9     $ 4,360.9       0.9 %     (1.4 )%
                                 
 
Consolidated net revenues were stable on a reported basis and decreased on a constant currency basis for the year ended November 30, 2008, as compared to the prior year. Reported amounts were affected favorably by changes in foreign currency exchange rates, particularly in Europe.
 
Americas.  Net revenues in our Americas region decreased in 2008 on both reported and constant currency bases. Currency affected net revenues favorably by approximately $4 million in 2008.
 
Net revenue declines in the region reflected a weakening retail environment. Net sales in the region decreased due to lower demand and higher sales allowances and discounts for our U.S. Dockers® brand products, the bankruptcy filings of two U.S. customers and a decline in sales of our U.S. Signature brand. Additionally, net sales decreased due to issues encountered during stabilization of an ERP system we implemented in the United States, which impacted our ability to fulfill customer orders in the second quarter. The region’s net sales decreases were partially offset by increased sales from both the addition of new and continued growth at existing company-operated retail stores and strong performance of our Levis® brand.
 
Europe.  Net revenues in Europe increased on both reported and constant currency bases. Currency affected net revenues favorably by approximately $85 million.
 
Net sales increases, primarily from new company-operated stores, partially offset declines in our wholesale channels in certain markets. The increases related primarily to increased sales of our Levi’s® Red Tabtm products.
 
Asia Pacific.  Net revenues in Asia Pacific increased on both reported and constant currency bases. Currency affected net revenues favorably by approximately $14 million.
 
We had mixed performance across the region. Net sales increased primarily in our emerging markets, particularly China and India, through continued expansion of our dedicated store network and stronger consumer spending. These net sales increases were offset primarily by continuing weak performance in our mature markets, primarily Japan.


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Gross profit
 
The following table shows consolidated gross profit and gross margin for the periods indicated and the changes in these items from period to period:
 
                         
    Year Ended  
                %
 
    November 30,
    November 25,
    Increase
 
    2008     2007     (Decrease)  
    (Dollars in millions)  
 
Net revenues
  $ 4,400.9     $ 4,360.9       0.9 %
Cost of goods sold
    2,261.1       2,318.9       (2.5 )%
                         
Gross profit
  $ 2,139.8     $ 2,042.0       4.8 %
                         
Gross margin
    48.6 %     46.8 %        
 
Compared to prior year, gross profit increased in 2008 due to the favorable impact of foreign currency in our Europe region and an increase in consolidated gross margin, resulting from a more favorable sales mix, the increased contribution of net sales from company-operated stores, and lower sourcing costs. Gross margins increased for each of our regions.
 
Our gross margins may not be comparable to those of other companies in our industry, since some companies may include costs related to their distribution network and occupancy costs associated with company-operated stores in cost of goods sold.
 
Selling, general and administrative expenses
 
The following table shows our selling, general and administrative expenses (“SG&A”) for the periods indicated, the changes in these items from period to period and these items expressed as a percentage of net revenues:
 
                                         
    Year Ended  
                      November 30,
    November 25,
 
                %
    2008
    2007
 
    November 30,
    November 25,
    Increase
    % of Net
    % of Net
 
    2008     2007     (Decrease)     Revenues     Revenues  
    (Dollars in millions)  
 
Selling
  $ 438.9     $ 370.6       18.4 %     10.0 %     8.5 %
Advertising and promotion
    297.9       277.0       7.5 %     6.8 %     6.4 %
Administration
    370.2       302.0       22.6 %     8.4 %     6.9 %
Postretirement benefit plan curtailment gains
    (5.9 )     (52.8 )     (88.7 )%     (0.1 )%     (1.2 )%
Other
    505.4       489.7       3.2 %     11.5 %     11.2 %
                                         
Total SG&A
  $ 1,606.5     $ 1,386.5       15.9 %     36.5 %     31.8 %
                                         
 
Total SG&A expenses increased $220.0 million for the year ended November 30, 2008, as compared to the prior year. Currency contributed approximately $32 million to the increase in SG&A expenses.
 
Selling.  Selling expenses increased across all business segments, primarily reflecting higher selling costs associated with additional company-operated stores, and an impairment charge of $16.1 million in the fourth quarter of 2008 relating to the assets of certain underperforming company-operated stores.
 
Advertising and promotion.  The increase in advertising and promotion expenses primarily reflects our global Levi’s® 501® campaign in the second half of the year.
 
Administration.  Administration expenses include corporate expenses and other administrative charges. Administration expenses increased primarily due to the additional expenses associated with our U.S. ERP implementation and stabilization efforts, higher costs reflecting various corporate initiatives, and an increase in our bad debt expense reflecting the bankruptcy filings of two U.S. customers and overall market conditions.


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Postretirement benefit plan curtailment gains.  During 2008 we recorded postretirement benefit plan curtailment gains of $5.9 million primarily associated with the departure of the remaining employees who elected the voluntary separation and buyout program contained in the new labor agreement we entered into during the third quarter of 2007. During 2007, we recorded a gain of $27.5 million associated with this same voluntary separation and buyout program, as well as a $25.3 million gain associated with the closure of our Little Rock, Arkansas, distribution facility. For more information, see Notes 10 and 11 to our audited consolidated financial statements included in this report.
 
Other.  Other SG&A costs include distribution, information resources, and marketing costs, gain or loss on sale of assets and other operating income. These costs increased as compared to prior year primarily due to effects of currency.
 
Restructuring charges, net
 
Restructuring charges, net, decreased to $8.2 million for the year ended November 30, 2008, from $14.5 million for the prior year. The 2008 amount primarily consisted of severance and other charges of $4.5 million recorded in association with the planned closure of our manufacturing facility in the Philippines and our distribution facility in Italy and an additional asset impairment of $4.2 million recorded for our closed distribution center in Germany. The 2007 amount primarily consisted of asset impairment of $9.0 million and severance charges of $4.3 million recorded in association with the planned closure of our distribution center in Germany. For more information, see Note 10 to our audited consolidated financial statements included in this report.
 
Operating income
 
The following table shows operating income by reporting segment and certain components of corporate expense for the periods indicated, the changes in these items from period to period and these items expressed as a percentage of net revenues:
 
                                         
    Year Ended  
                      November 30,
    November 25,
 
                %
    2008
    2007
 
    November 30,
    November 25,
    Increase
    % of Net
    % of Net
 
    2008     2007     (Decrease)     Revenues     Revenues  
    (Dollars in millions)  
 
Operating income:
                                       
Americas
  $ 346.9     $ 403.2       (14.0 )%     14.0 %     15.6 %
Europe
    257.9       236.9       8.9 %     21.6 %     21.5 %
Asia Pacific
    99.5       95.3       4.5 %     13.7 %     14.0 %
                                         
Total regional operating income
    704.3       735.4       (4.2 )%     16.0 %*     16.9 %*
                                         
Corporate:
                                       
Restructuring charges, net
    8.2       14.5       (43.0 )%     0.2 %*     0.3 %*
Postretirement benefit plan curtailment gains
    (5.9 )     (52.8 )     (88.7 )%     (0.1 )%*     (1.2 )%*
Other corporate staff costs and expenses
    176.9       132.7       33.4 %     4.0 %*     3.0 %*
                                         
Total corporate
    179.2       94.4       89.9 %     4.1 %*     2.2 %*
                                         
Total operating income
  $ 525.1     $ 641.0       (18.1 )%     11.9 %*     14.7 %*
                                         
Operating margin
    11.9 %     14.7 %                        
 
 
* Percentage of consolidated net revenues


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Regional operating income.  The following describes the changes in operating income by reporting segment for the year ended November 30, 2008, as compared to the prior year:
 
  •  Americas.  Operating income decreased primarily due to a decline in operating margin, as well as the decline in net revenues. Operating margin decreased as the region’s gross margin improvement was more than offset by the increase in SG&A expenses, reflecting our continued investment in retail expansion, our U.S. ERP implementation and stabilization efforts, and increased advertising and promotion expenses.
 
  •  Europe.  The increase in the region’s operating income was due to the favorable impact of currency. The region’s net sales increase was offset by an increase in SG&A expenses, primarily reflecting our continued investment in retail expansion.
 
  •  Asia Pacific.  The region’s net sales increase and the favorable impact of currency drove the slight increase in operating income. These increases were partially offset by a slight decline in operating margin, reflecting the region’s continued investment in retail and infrastructure, particularly within our emerging markets, and increased advertising and promotion expenses.
 
Corporate.  Corporate expense is comprised of restructuring charges, net, postretirement benefit plan curtailment gains, and other corporate expenses, including corporate staff costs.
 
Other corporate staff costs and expenses increased as compared to prior year primarily due to higher costs, reflecting our global information technology investment and various other corporate initiatives, and the impairment charge related to our company-operated stores. A reduction in distribution expenses related to the separation and buyout costs of the voluntary termination of certain distribution center employees in North America was offset by a reduction in our workers’ compensation liability reversals.
 
Corporate expenses in 2008 and 2007 include amortization of prior service benefit of $41.4 million and $45.7 million, respectively, related to postretirement benefit plan amendments in 2004 and 2003, and workers’ compensation reversals of $4.3 million and $8.1 million, respectively. We will continue to amortize the prior service benefit in the future. We expect our pension expense to increase by more than $30 million in 2009 as a result of the decline in the value of our pension plan assets in 2008. This increased pension expense may extend into future years if current market conditions persist.
 
Interest expense
 
Interest expense decreased 28.6% to $154.1 million for the year ended November 30, 2008, from $215.7 million in the prior year. Lower average borrowing rates and lower debt levels in 2008, resulting primarily from our refinancing and debt reduction activities in 2007, caused the decrease.
 
The weighted-average interest rate on average borrowings outstanding for 2008 was 8.09% as compared to 9.59% for 2007.
 
Loss on early extinguishment of debt
 
For the year ended November 30, 2008, we recorded a loss of $1.4 million on early extinguishment of debt primarily as a result of our redemption of our remaining 12.25% senior notes due 2012. For the year ended November 25, 2007, we recorded a loss of $63.8 million on early extinguishment of debt primarily as a result of our redemption of our floating rate senior notes due 2012 during the second quarter of 2007 and our repurchase of $506.2 million of the then-outstanding $525.0 million of our 12.25% senior notes due 2012 during the fourth quarter of 2007. The 2007 losses were comprised of prepayment premiums, tender offer consideration, applicable consent payments and other fees and expenses of approximately $46.7 million and the write-off of approximately $17.1 million of unamortized capitalized costs and debt discount. For more information, see Note 5 to our audited consolidated financial statements included in this report.
 
Other (income) expense, net
 
Other (income) expense, net, primarily consists of foreign exchange management activities and transactions as well as interest income. For the year ended November 30, 2008, we recorded other expense of $1.4 million compared


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to other income of $14.1 million for the prior year. This primarily reflects foreign currency transaction losses in 2008 as compared to gains in 2007 resulting from the weakening of the U.S. Dollar against the Japanese Yen in the fourth quarter of 2008. These losses were partially offset by gains on our forward exchange and option contracts, resulting from the appreciation of the U.S. Dollar against the Euro in the second half of 2008.
 
Income tax expense (benefit)
 
Income tax expense was $138.9 million for the year ended November 30, 2008, compared to a benefit of $84.8 million for the prior year. The effective tax rate was 37.7% for the year ended November 30, 2008, compared to a 22.6% benefit for the prior year.
 
The increase in the effective tax rate for 2008 as compared to 2007 was mostly attributable to a $215.3 million tax benefit from a non-recurring, non-cash reversal during the fourth quarter of 2007 of valuation allowances against our deferred tax assets primarily for foreign tax credit carryforwards. This reversal was due to improvements in our business performance and positive developments in the IRS examination of the 2000-2002 U.S. federal corporate income tax returns.
 
Net income
 
Net income decreased to $229.3 million for the year ended November 30, 2008, from $460.4 million for the prior year primarily due to the $215.3 million tax benefit recorded during 2007. The decrease in our operating income offset lower interest expense and a lower loss on early extinguishment of debt as compared to the prior year.
 
2007 compared to 2006
 
The following table summarizes, for the periods indicated, the consolidated statements of income, the changes in these items from period to period and these items expressed as a percentage of net revenues:
 
                                         
    Year Ended  
                      November 25,
    November 26,
 
                %
    2007
    2006
 
    November 25,
    November 26,
    Increase
    % of Net
    % of Net
 
    2007     2006     (Decrease)     Revenues     Revenues  
    (Dollars in millions)  
 
Net sales
  $ 4,266.1     $ 4,106.5       3.9 %     97.8 %     97.9 %
Licensing revenue
    94.8       86.4       9.8 %     2.2 %     2.1 %
                                         
Net revenues
    4,360.9       4,192.9       4.0 %     100.0 %     100.0 %
Cost of goods sold
    2,318.9       2,216.5       4.6 %     53.2 %     52.9 %
                                         
Gross profit
    2,042.0       1,976.4       3.3 %     46.8 %     47.1 %
Selling, general and administrative expenses
    1,386.5       1,348.6       2.8 %     31.8 %     32.2 %
Restructuring charges, net of reversals
    14.5       14.1       2.2 %     0.3 %     0.3 %
                                         
Operating income
    641.0       613.7       4.5 %     14.7 %     14.6 %
Interest expense
    215.7       250.6       (13.9 )%     4.9 %     6.0 %
Loss on early extinguishment of debt
    63.8       40.3       58.5 %     1.5 %     1.0 %
Other income, net
    (14.1 )     (22.4 )     (36.9 )%     (0.3 )%     (0.5 )%
                                         
Income before income taxes
    375.6       345.2       8.8 %     8.6 %     8.2 %
Income tax (benefit) expense
    (84.8 )     106.2       (179.8 )%     (1.9 )%     2.5 %
                                         
Net income
  $ 460.4     $ 239.0       92.6 %     10.6 %     5.7 %
                                         


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Consolidated 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,
    November 26,
    As
    Constant
 
    2007     2006     Reported     Currency  
          (Dollars in millions)        
 
Net revenues:
                               
Americas
  $ 2,581.3     $ 2,570.1       0.4 %     0.1 %
Europe
    1,099.7       969.2       13.5 %     3.8 %
Asia Pacific
    681.1       653.6       4.2 %     2.9 %
Corporate
    (1.2 )                  
                                 
Total net revenues
  $ 4,360.9     $ 4,192.9       4.0 %     1.4 %
                                 
 
Consolidated net revenues increased on both reported and constant currency bases for the year ended November 25, 2007, as compared to the prior year. Reported amounts were affected favorably by changes in foreign currency exchange rates, particularly in Europe.
 
Americas.  On both reported and constant currency bases, net revenues in the Americas region were stable as compared to the prior year. Changes in foreign currency exchange rates did not affect net revenues significantly.
 
We faced a challenging retail environment in North America in 2007 as growth in the first half of the year was offset by declines in the second half. Net revenues increased for the U.S. Levi’s® brand, our largest business, primarily driven by growth in the men’s category, particularly Red Tabtm products, and increased sales in our retail network, primarily from new company-operated stores; these increases were partially offset by a decline in the women’s business. Net revenues for the U.S. Dockers® brand grew slightly due to higher sales of women’s products driven by favorable customer response to our seasonal and fashion products; the men’s business was stable with growth in the first half of the year partially offset by declines in the second half due to market conditions, particularly the impact of retail consolidation and the loss of a customer early in the year. Increases in both U.S. Levi’s® and U.S. Dockers® brands were partially offset by higher sales allowances and discounts as compared to the prior-year to clear seasonal inventories and to support our customers, including promotional programs. We also had continued net revenue declines for the U.S. Signature brand.
 
Europe.  Net revenues in Europe increased on both reported and constant currency bases. Changes in foreign currency exchange rates affected net revenues favorably by approximately $84 million.
 
Net revenues increased on a constant currency basis in both our retail and wholesale channels, led by increased sales in the Levi’s® brand, partially offset by the reduction in sales volume related to the withdrawal of Signature brand products in the second quarter of 2007. Increased sales in our dedicated store network, both from company-operated and franchised stores, and a higher proportion of premium-priced products, particularly Levi’s® Red Tabtm products, were key contributors to the net sales increase. We exited the Signature brand in Europe after the Spring 2007 season due to limited expansion opportunities in the value channel in Europe and to focus on our Levi’s® and Dockers® brands.
 
Asia Pacific.  Net revenues in Asia Pacific increased on both reported and constant currency bases. Changes in foreign currency exchange rates affected net revenues favorably by approximately $21 million.
 
Net revenues increased on a constant currency basis primarily due to growth in our Levi’s® brand. Dedicated stores continued to drive growth in the region with the addition of company-operated and franchised stores. Net sales were strong in most markets, with growth particularly concentrated in our emerging markets. Certain of our mature markets continue to be challenging, primarily due to the persistence of high inventories held by our wholesale customers that reduced their demand for additional Levi’s® products.


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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,
    November 26,
    Increase
 
    2007     2006     (Decrease)  
    (Dollars in millions)  
 
Net revenues
  $ 4,360.9     $ 4,192.9       4.0 %
Cost of goods sold
    2,318.9       2,216.5       4.6 %
                         
Gross profit
  $ 2,042.0     $ 1,976.4       3.3 %
                         
Gross margin
    46.8 %     47.1 %        
 
Our gross margin decreased slightly for the year ended November 25, 2007, as compared to the prior year. Gross margins declined in North America and Asia Pacific, and increased in Europe. In North America, gross margin was impacted primarily by higher sales allowances and discounts as described above. In Asia Pacific, gross margin was impacted primarily by higher inventory markdown activity and higher sales of closeout products due to high inventory at retail. In Europe, the increase in gross margin was primarily due to lower sourcing costs and the increase in net sales from company-operated stores. The increase in consolidated gross profit was primarily driven by changes in foreign currency exchange rates.
 
Our gross margins may not be comparable to those of other companies in our industry, since some companies may include costs related to their distribution network and occupancy costs associated with company-operated stores in cost of goods sold.
 
Selling, general and administrative expenses
 
The following table shows our selling, general and administrative expenses (“SG&A”) for the periods indicated, the changes in these items from period to period and these items expressed as a percentage of net revenues:
 
                                         
    Year Ended  
                      November 25,
    November 26,
 
                %
    2007
    2006
 
    November 25,
    November 26,
    Increase
    % of Net
    % of Net
 
    2007     2006     (Decrease)     Revenues     Revenues  
    (Dollars in millions)  
 
Selling
  $ 370.6     $ 303.2       22.2 %     8.5 %     7.2 %
Advertising and promotion
    277.0       285.3       (2.9 )%     6.4 %     6.8 %
Administration
    302.0       334.7       (9.8 )%     6.9 %     8.0 %
Postretirement benefit plan curtailment gains
    (52.8 )     (29.0 )     81.7 %     (1.2 )%     (0.7 )%
Other
    489.7       454.4       7.8 %     11.2 %     10.8 %
                                         
Total SG&A
  $ 1,386.5     $ 1,348.6       2.8 %     31.8 %     32.2 %
                                         
 
Total SG&A expenses increased $37.9 million for the year ended November 25, 2007, as compared to the prior year. Changes in foreign currency exchange rates contributed approximately $44 million to the increase in SG&A expenses.
 
Selling.  Selling expenses increased across all business segments, primarily reflecting higher selling costs associated with additional company-operated stores and our business growth in Asia Pacific.
 
Advertising and promotion.  The decrease in advertising and promotion expenses primarily reflects a decrease in spending, primarily television media, in North America, particularly in the fourth quarter, in line


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with the region’s net revenue declines in the second half of the year. This decrease was partially offset by an increase in media campaign spending in Europe.
 
Administration.  Administration expenses include corporate expenses and other administrative charges. These expenses decreased as compared to prior year due to a reduction in accruals for our annual and long-term incentive compensation programs due to business performance below our internally-set objectives. Additionally, administrative expenses decreased due to the accrual in 2006 of severance and transition expenses related to changes in senior management. These decreases were partially offset by increases in other administrative expenses, primarily certain severance costs in Asia Pacific and Europe and higher costs associated with planning for our ERP implementation in the United States and our global sourcing organization in 2008.
 
Postretirement benefit plan curtailment gains.  During the third quarter of 2006 and first quarter of 2007, we recorded postretirement benefit plan curtailment gains of $29.0 million and $25.3 million, respectively, associated with the closure of our Little Rock, Arkansas, distribution facility. During the second half of 2007, we recorded a postretirement benefit plan curtailment gain of $27.5 million associated with the voluntary termination of certain distribution center employees in North America resulting from the new labor agreement we entered into with the union that represents many of our distribution-related employees in North America. For more information, see Note 11 to our audited consolidated financial statements included in this report.
 
Other.  Other SG&A costs include distribution, information resources, and marketing costs, gain or loss on sale of assets and other operating income. These costs increased as compared to prior year primarily reflecting higher distribution costs related to the separation and buyout costs of the voluntary termination of certain distribution center employees in North America and the growth in net revenues in the period. These costs also increased due to higher marketing expenses in support of revenue growth.
 
Restructuring charges, net
 
Restructuring charges, net, increased to $14.5 million for the year ended November 25, 2007, from $14.1 million for the prior year. The 2007 amount primarily consisted of asset impairment of $9.0 million and severance charges of $4.3 million recorded in association with the planned closure of our distribution center in Germany. The 2006 amount primarily consisted of severance charges associated with the closure of our Little Rock, Arkansas, distribution center, headcount reductions in Europe and additional lease costs associated with exited facilities in the United States.


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Operating income
 
The following table shows operating income by reporting segment and the significant components of corporate expense for the periods indicated, the changes in these items from period to period and these items expressed as a percentage of net revenues:
 
                                                 
    Year Ended  
                      November 25,
    November 26,
       
                %
    2007
    2006
       
    November 25,
    November 26,
    Increase
    As% of Net
    As% of Net
       
    2007     2006     (Decrease)     Revenues     Revenues        
    (Dollars in millions)        
 
Operating income:
                                               
Americas
  $ 403.2     $ 412.7       (2.3 )%     15.6 %     16.1 %        
Europe
    236.9       214.2       10.6 %     21.5 %     22.1 %        
Asia Pacific
    95.3       110.0       (13.4 )%     14.0 %     16.8 %        
                                                 
Total regional operating income
    735.4       736.9       (0.2 )%     16.9 %*     17.6 %*        
                                                 
Corporate:
                                               
Restructuring charges, net
    14.5       14.1       2.2 %     0.3 %*     0.3 %*        
Postretirement benefit plan curtailment gains
    (52.8 )     (29.0 )     81.7 %     (1.2 )%*     (0.7 )%        
Other corporate staff costs and expenses
    132.7       138.1       (3.9 )%     3.0 %*     3.3 %*        
                                                 
Total corporate
    94.4       123.2       (23.4 )%     2.2 %*     2.9 %*        
                                                 
Total operating income
  $ 641.0     $ 613.7       4.5 %     14.7 %*     14.6 %*        
                                                 
Operating Margin
    14.7 %     14.6 %                                
 
 
* Percentage of consolidated net revenues
 
Regional operating income.  The following describes the changes in operating income by reporting segment for the year ended November 25, 2007, as compared to the prior year:
 
  •  Americas.  Operating income decreased primarily due to the region’s lower wholesale gross margin, which resulted primarily from higher sales allowances and discounts to clear seasonal inventories, and the decrease in net sales of our U.S. Signature brand. These decreases were partially offset by the increase in net sales of our U.S. Levi’s® brand, reflecting increased sales in our retail network, and a decrease in SG&A expenses as a percentage of net revenues, as the decrease in advertising spending more than offset increases reflecting our retail expansion and planning for our ERP implementation in 2008.
 
  •  Europe.  Operating income increased primarily due to the favorable impact of changes in foreign currency exchange rates and the region’s net revenue growth. Operating margin increased slightly as the region’s gross margin improvements were partially offset by an increase in SG&A expenses as a percentage of net revenues. This SG&A increase primarily reflected our continued investment in company-operated retail expansion and the increase in advertising.
 
  •  Asia Pacific.  Operating income decreased primarily due to the declines in net sales and gross margins in certain mature markets due primarily to higher inventory markdown activity and higher sales of closeout products. For the remainder of the region, operating income increases primarily due to increases in net sales were offset primarily by continued investment in the expansion of our dedicated store network.
 
Corporate.  Corporate expense is comprised of restructuring charges, net, postretirement benefit plan curtailment gains, and other corporate expenses, including corporate staff costs.
 
Postretirement benefit plan curtailment gain in both periods relates to the closure of our Little Rock, Arkansas, distribution center, and with respect to the 2007 period, the voluntary termination of certain distribution center


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employees in North America. For more information, see Note 11 to our audited consolidated financial statements included in this report.
 
Other corporate staff costs and expenses decreased as compared to prior year primarily due to reductions in long-term incentive compensation expense and executive severance and transition costs. These decreases were partially offset by certain severance costs in Asia Pacific and Europe, the accrual of distribution expenses related to the separation and buyout costs of the voluntary termination of certain distribution center employees in North America, increases in other corporate staff costs primarily associated with increased investment in our information technology systems, and a reduction in our workers’ compensation liability reversals.
 
Corporate expenses in 2007 and 2006 include amortization of prior service benefit of $45.7 million and $55.1 million, respectively, related to postretirement benefit plan amendments in 2004 and 2003, and workers’ compensation reversals of $8.1 million and $13.8 million, respectively. We will continue to amortize the prior service benefit; however, we do not expect material workers’ compensation reversals in the future.
 
Interest expense
 
Interest expense decreased 13.9% to $215.7 million for the year ended November 25, 2007, from $250.6 million in the prior year. Lower debt levels and lower average borrowing rates in 2007, which resulted primarily from our refinancing and debt reduction activities in 2007 and 2006, caused the decrease.
 
The weighted-average interest rate on average borrowings outstanding for 2007 was 9.59% as compared to 10.23% for 2006.
 
Loss on early extinguishment of debt
 
For the year ended November 25, 2007, we recorded a loss of $63.8 million on early extinguishment of debt primarily as a result of our redemption of our floating rate senior notes due 2012 during the second quarter of 2007 and our repurchase of $506.2 million of the outstanding $525.0 million of our 12.25% senior notes due 2012 during the fourth quarter of 2007. The 2007 losses were comprised of prepayment premiums, tender offer consideration, applicable consent payments and other fees and expenses of approximately $46.7 million and the write-off of approximately $17.1 million of unamortized capitalized costs and debt discount.
 
For the year ended November 26, 2006, we recorded losses of $40.3 million on early extinguishment of debt primarily as a result of our prepayment in March 2006 of the remaining balance of our term loan of approximately $488.8 million, the amendment in May 2006 of our senior secured revolving credit facility and open market repurchases of $50.0 million of our 2012 senior unsecured notes in November 2006. The 2006 losses were comprised of prepayment premiums and other fees and expenses of approximately $23.0 million and the write-off of approximately $17.3 million of unamortized capitalized costs. For more information, see Note 5 to our audited consolidated financial statements included in this report.
 
Other income, net
 
Other income, net, primarily consists of foreign exchange management activities and transactions as well as interest income. For the year ended November 25, 2007, other income, net decreased to $14.1 million from $22.4 million for the prior year. The decrease primarily reflects the impact of foreign currency fluctuation, primarily the weakening of the U.S. Dollar against major foreign currencies including the Euro, the Canadian Dollar and the Japanese Yen.
 
Income tax (benefit) expense
 
Income tax (benefit) expense was $(84.8) million for the year ended November 25, 2007, compared to $106.2 million for the prior year. The effective tax rate was (22.6)% for the year ended November 25, 2007, compared to 30.8% for the prior year. The decrease in the effective tax rate for 2007 as compared to 2006 was primarily driven by a reduction in tax expense of approximately $206.8 million due primarily to the tax benefit from a non-recurring, non-cash reversal of valuation allowances of $215.3 million during the fourth quarter of 2007 against our deferred tax assets for foreign tax credit carryforwards. As a result of improvements in business


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performance and recent positive developments in an ongoing IRS examination, we believe that it is more likely than not that these credits will be utilized prior to their expiration. The income tax expense of $106.2 million in 2006 included a tax benefit from a non-recurring, non-cash benefit of $31.5 million relating to a reduction in the overall residual U.S. tax expected to be imposed upon a repatriation of unremitted foreign earnings attributable to a change in the ownership structure of certain of our foreign affiliates.
 
Net income
 
Net income increased to $460.4 million for year ended November 25, 2007, from $239.0 million for the prior year primarily due to the $215.3 million tax benefit recorded during 2007. Lower interest expense and the higher postretirement benefit plan curtailment gain as compared to the prior year also contributed to the increase.
 
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.
 
In 2007, we amended and restated our senior secured revolving credit facility; the maximum availability is now $750 million secured by certain of our domestic assets and certain U.S. trademarks associated with the Levi’s® brand and other related intellectual property. The amended facility includes a $250 million term loan tranche and a $500 million revolving tranche. The revolving tranche increases as the term loan tranche is repaid, up to a maximum of $750 million when the term loan tranche is repaid in full. Upon repayment of the term loan tranche, the secured interest in the U.S. trademarks will be released.
 
As of November 30, 2008, we had borrowings of $179.1 million under the trademark tranche and no outstanding borrowings under the revolving tranche. Unused availability under the revolving tranche was $315.8 million, as the Company’s total availability of $410.3 million, based on collateral levels as defined by the agreement, was reduced by $94.5 million of other credit-related instruments such as documentary and standby letters of credit allocated under the facility.
 
Under the facility, we are required to meet a fixed charge coverage ratio as defined in the agreement of 1.0:1.0 when unused availability is less than $100 million. This covenant will be discontinued upon the repayment in full and termination of the trademark tranche described above and with the implementation of an unfunded availability reserve of $50 million, which implementation will reduce availability under our credit facility.
 
As of November 30, 2008, we had cash and cash equivalents totaling $210.8 million, resulting in a net liquidity position (unused availability and cash and cash equivalents) of $526.6 million.
 
Cash uses
 
Our principal cash requirements include working capital, capital expenditures, payments of principal and interest on our debt, payments of taxes, contributions to our pension plans and payments for postretirement health benefit plans. In addition, we regularly explore debt reduction alternatives, including through tender offers, redemptions, repurchases or otherwise, and we regularly evaluate our ability to pay dividends or repurchase stock, all consistent with the terms of our debt agreements.


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The following table presents selected cash uses in 2008 and the related projected cash requirements for these items in 2009:
 
                 
          Projected Cash
 
    Cash Used in
    Requirements in
 
    2008     2009  
    (Dollars in millions)  
 
Interest
  $ 154     $ 144  
Federal, foreign and state taxes (net of refunds)
    63       77  
Postretirement health benefit plans
    23       21  
Capital expenditures(1)
    80       88  
Pension plans
    18       16  
Dividend(2)
    50        
                 
Total selected cash requirements
  $ 388     $ 346  
                 
 
 
(1) Capital expenditures for 2008 consisted primarily of investment in company-operated retail stores in the Americas and Europe and costs associated with system investments including our ERP implementation. The increase in projected capital expenditures in 2009 primarily reflects costs associated with information technology systems.
 
(2) Dividend paid in the second quarter of 2008. We may elect to declare and pay cash dividends in the future at the discretion of our board of directors and depending upon our financial condition and compliance with the terms of our debt agreements.
 
The following table provides information about our significant cash contractual obligations and commitments as of November 30, 2008:
 
                                                         
    Payments Due or Projected by Period  
    Total     2009     2010     2011     2012     2013     Thereafter  
    (Dollars in millions)  
 
Contractual and Long-term Liabilities:
                                                       
Short-term and long-term debt obligations(1)
  $ 1,853     $ 91     $     $     $ 108     $ 325     $ 1,329  
Interest(2)
    818       144       129       131       130       109       175  
Capital lease obligations
    8       2       2       1       3              
Operating leases(3)
    506       96       94       87       73       43       113  
Purchase obligations(4)
    362       339       16       7                    
Postretirement obligations(5)
    158       21       20       19       18       17       63  
Pension obligations(6)
    480       16       25       92       95       54       198  
Long-term employee related benefits(7)
    114       27       17       22       17       16       15  
                                                         
Total
  $ 4,299     $ 736     $ 303     $ 359     $ 444     $ 564     $ 1,893  
                                                         
 
 
(1) The terms of the trademark tranche of our credit facility require amortization payments of $71 million for 2009 with the remaining balance due at maturity in 2012. Additionally, the 2009 amount includes short-term borrowings.
 
(2) Interest obligations are computed using constant interest rates until maturity. The LIBOR rate as of November 30, 2008, was used for variable-rate debt.
 
(3) Amounts reflect contractual obligations relating to our existing leased facilities as of November 30, 2008, and therefore do not reflect our planned future openings of company-operated retail stores. For more information, see “Item 2 — Properties.”
 
(4) Amounts reflect estimated commitments of $289 million for inventory purchases and $73 million for human resources, advertising, information technology and other professional services.
 
(5) The amounts presented in the table represent an estimate of our projected payments for the next ten years based on information provided by our plans’ actuaries. Our policy is to fund postretirement benefits as claims and premiums are paid. For more information, see Note 11 to our audited consolidated financial statements included in this report.
 
(6) The amounts presented in the table represent an estimate of our projected contributions to the plans for the next ten years based on information provided by our plans’ actuaries. For U.S qualified plans, these estimates comply with minimum funded status and minimum required contributions under the Pension Protection Act. The expected increase in 2011 and 2012 is due to the reduction of the fair value of plan assets in the Company’s U.S. pension plans at November 30, 2008, however actual contributions may differ from those presented based


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on factors including changes in interest rates and the valuation of pension assets. For more information, see Note 11 to our audited consolidated financial statements included in this report.
 
(7) Long-term employee-related benefits relate to the current and non-current portion of deferred compensation arrangements, liabilities for long-term incentive plans and workers’ compensation. We estimated these payments based on prior experience and forecasted activity for these items. For more information, see Note 15 to our audited consolidated financial statements included in this report.
 
This table does not include amounts related to our income tax liabilities associated with uncertain tax positions, as we are unable to make reasonable estimates for the periods in which these liabilities may become due. We do not anticipate a material effect on our liquidity as a result of payments in future periods of liabilities for uncertain tax positions.
 
Information in the two preceding tables reflects our estimates of future cash payments. These estimates and projections are based upon assumptions that are inherently subject to significant economic, competitive, legislative and other uncertainties and contingencies, many of which are beyond our control. Accordingly, our actual expenditures and liabilities may be materially higher or lower than the estimates and projections reflected in these tables. The inclusion of these projections and estimates should not be regarded as a representation by us that the estimates will prove to be correct.
 
Cash flows
 
The following table summarizes, for the periods indicated, selected items in our consolidated statements of cash flows:
 
                         
    Year Ended  
    November 30,
    November 25,
    November 26,
 
    2008     2007     2006  
    (Dollars in millions)  
 
Cash provided by operating activities
  $ 224.8     $ 302.3     $ 261.9  
Cash used for investing activities
    (26.8 )     (107.3 )     (69.6 )
Cash used for financing activities
    (135.5 )     (325.5 )     (155.2 )
Cash and cash equivalents
    210.8       155.9       279.5  
 
2008 as compared to 2007
 
Cash flows from operating activities
 
Cash provided by operating activities was $224.8 million for 2008, as compared to $302.3 million for 2007. The decrease, primarily due to our lower operating income, was partially offset by several factors including: lower interest payments; higher cash collections on receivables, reflecting later timing of sales in the fourth quarter of 2007 as compared to the fourth quarter of 2006; and lower incentive compensation payments. Additionally, we used more cash for inventory in 2008 due to commencing the year with a lower inventory base as compared to prior year.
 
Cash flows from investing activities
 
Cash used for investing activities was $26.8 million for 2008 compared to $107.3 million for 2007. Cash used in both periods primarily related to investments made in our company-operated retail stores and information technology systems associated with our global ERP installation. Additionally, in 2008 we realized gains on the settlement of our forward exchange contracts, reflecting the appreciation of the U.S. Dollar against the Euro in the second half of 2008, as compared to realized losses in 2007, reflecting the weakening of the U.S. Dollar against major foreign currencies including the Euro, the Canadian Dollar and the Japanese Yen.
 
Cash flows from financing activities
 
Cash used for financing activities was $135.5 million for 2008 compared to $325.5 million for 2007. Cash used for financing activities in 2008 primarily reflects $70.9 million of required payments on the term loan tranche of our senior secured revolving credit facility, our redemption in March 2008 of our remaining $18.8 million outstanding 12.25% senior notes due 2012 and our $50.0 million dividend payment to stockholders in the second quarter. Cash used for financing activities in 2007 primarily reflects our redemption in April 2007 of all of our floating rate notes


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due 2012 through borrowings under a new senior unsecured term loan and use of cash on hand, and the repurchase in October 2007 of over 95% of our outstanding 12.25% senior notes due 2012 through borrowings under an amended and restated senior secured revolving credit facility and use of cash on hand.
 
2007 as compared to 2006
 
Cash flows from operating activities
 
Cash provided by operating activities was $302.3 million for 2007, as compared to $261.9 million for 2006. The $40.4 million increase in the amount of cash provided by operating activities primarily reflects continued discipline in our working capital management. Cash use for inventories decreased — primarily in the fourth quarter of the year — driven by improved inventory management leading to leaner inventory levels and the later timing of inventory receipts for our Spring/Summer season as compared to prior year. Additionally, we reduced our pension plan funding and reduced income tax payments in foreign jurisdictions, while our October 2007 refinancing activities accelerated interest payments previously scheduled for the first quarter of 2008 into the fourth quarter of 2007.
 
Cash flows were also affected by a decrease in the amount of trade receivables collected during the first quarter of 2007, primarily due to: the earlier timing of sales recorded in the fourth quarter of 2006, as compared to the corresponding periods in prior year, when the later timing of sales recorded in the fourth quarter of 2005 led to the related collections during the first quarter of 2006; payments in 2007 for executive transition expenses accrued in 2006; and payments related to the separation and buyout costs of the voluntary termination in 2007 of certain distribution center employees in North America.
 
Cash flows from investing activities
 
Cash used for investing activities was $107.3 million for 2007 compared to $69.6 million for 2006. Cash used in both periods primarily related to investments made in our company-operated retail stores and information technology systems associated with the ERP installation in our Asia Pacific region and, with respect to the 2007 period, the United States and our global sourcing organization.
 
Cash flows from financing activities
 
Cash used for financing activities was $325.5 million for 2007 compared to $155.2 million for 2006. Cash used for financing activities in 2007 primarily reflects our redemption in April 2007 of all of our floating rate notes due 2012 through borrowings under a new senior unsecured term loan and use of cash on hand, and the repurchase in October 2007 of over 95% of our outstanding 12.25% senior notes due 2012 through borrowings under an amended and restated senior secured revolving credit facility and use of cash on hand. Cash used for financing activities in 2006 primarily reflects repayment of our prior term loan in March 2006 through issuance of our 2016 notes and additional 2013 Euro notes.
 
Indebtedness
 
We had fixed-rate debt of approximately $1.4 billion (73% of total debt) and variable-rate debt of approximately $0.5 billion (27% of total debt) as of November 30, 2008. The borrower of substantially all of our debt is Levi Strauss & Co., the parent and U.S. operating company. Our required aggregate debt payments are $91.2 million in 2009, $108.3 million in 2012, $324.5 million in 2013 and the remaining $1.3 billion in years after 2013.
 
Effective May 1, 2008, in order to mitigate a portion of our interest rate risk, we entered into a $100 million interest rate swap agreement to pay a fixed-rate interest of approximately 3.2% and receive 3-month LIBOR variable rate interest payments quarterly through May 2010.
 
Our long-term debt agreements contain customary covenants restricting our activities as well as those of our subsidiaries. Currently, we are in compliance with all of these covenants.


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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 7 to our audited consolidated financial statements included in this report. We have no other material non-cancelable guarantees or commitments, and no material special-purpose entities or other off-balance sheet debt obligations.
 
Indemnification agreements.  In the ordinary course of our business, we enter into agreements containing indemnification provisions under which we agree to indemnify the other party for specified claims and losses. For example, our trademark license agreements, real estate leases, consulting agreements, logistics outsourcing agreements, securities purchase agreements and credit agreements typically contain these provisions. This type of indemnification provision obligates us to pay certain amounts associated with claims brought against the other party as the result of trademark infringement, negligence or willful misconduct of our employees, breach of contract by us including inaccuracy of representations and warranties, specified lawsuits in which we and the other party are co-defendants, product claims and other matters. These amounts are generally not readily quantifiable: the maximum possible liability or amount of potential payments that could arise out of an indemnification claim depends entirely on the specific facts and circumstances associated with the claim. We have insurance coverage that minimizes the potential exposure to certain of these claims. We also believe that the likelihood of substantial payment obligations under these agreements to third parties is low and that any such amounts would be immaterial.
 
Critical Accounting Policies, Assumptions and Estimates
 
The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the related notes. We believe that the following discussion addresses our critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Changes in such estimates, based on newly available information, or different assumptions or conditions, may affect amounts reported in future periods.
 
We summarize our critical accounting policies below.
 
Revenue recognition.  Net sales is primarily comprised of sales of products to wholesale customers, including franchised stores, and direct sales to consumers at our company-operated stores. We recognize revenue on sale of product when the goods are shipped or delivered and title to the goods passes to the customer provided that: there are no uncertainties regarding customer acceptance; persuasive evidence of an arrangement exists; the sales price is fixed or determinable; and collectibility is reasonably assured. Revenue is recorded net of an allowance for estimated returns, discounts and retailer promotions and other similar incentives. Licensing revenues from the use of our trademarks in connection with the manufacturing, advertising, and distribution of trademarked products by third-party licensees are earned and recognized as products are sold by licensees based on royalty rates as set forth in the licensing agreements.
 
We recognize allowances for estimated returns in the period in which the related sale is recorded. We recognize allowances for estimated discounts, retailer promotions and other similar incentives at the later of the period in which the related sale is recorded or the period in which the sales incentive is offered to the customer. We estimate non-volume based allowances based on historical rates as well as customer and product-specific circumstances. Actual allowances may differ from estimates due to changes in sales volume based on retailer or consumer demand and changes in customer and product-specific circumstances. Sales and value-added taxes collected from customers and remitted to governmental authorities are presented on a net basis in the accompanying consolidated statements of income.


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Accounts receivable, net.  In the normal course of business, we extend credit to our wholesale and licensing customers that satisfy pre-defined credit criteria. Accounts receivable are recorded net of an allowance for doubtful accounts. We estimate the allowance for doubtful accounts based upon an analysis of the aging of accounts receivable at the date of the consolidated financial statements, assessments of collectibility based on historic trends and an evaluation of economic conditions.
 
Inventory valuation.  We value inventories at the lower of cost or market value. Inventory cost is generally determined using the first-in first-out method. We include materials, labor and manufacturing overhead in the cost of inventories. In determining inventory market values, substantial consideration is given to the expected product selling price. We estimate quantities of slow-moving and obsolete inventory by reviewing on-hand quantities, outstanding purchase obligations and forecasted sales. We then estimate expected selling prices based on our historical recovery rates for sale of slow-moving and obsolete inventory and other factors, such as market conditions, expected channel of disposition, and current consumer preferences. Estimates may differ from actual results due to the quantity, quality and mix of products in inventory, consumer and retailer preferences and economic conditions.
 
Income tax assets and liabilities.  We are subject to income taxes in both the U.S. and numerous foreign jurisdictions. We compute our provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. Significant judgments are required in order to determine the realizability of these deferred tax assets. In assessing the need for a valuation allowance, we evaluate all significant available positive and negative evidence, including historical operating results, estimates of future taxable income and the existence of prudent and feasible tax planning strategies. Changes in the expectations regarding the realization of deferred tax assets could materially impact income tax expense in future periods.
 
We provide for income taxes with respect to temporary differences between the book and tax bases of foreign investments that are expected to reverse in the foreseeable future. We do not provide for income taxes with respect to basis differences, consisting primarily of undistributed foreign earnings, related to investments in certain foreign subsidiaries, which are considered to be permanently reinvested and therefore are not expected to reverse in the foreseeable future, as we plan to utilize these earnings to finance the expansion and operating requirements of these subsidiaries.
 
We continuously review issues raised in connection with all ongoing examinations and open tax years to evaluate the adequacy of our liabilities. We evaluate uncertain tax positions under a two-step approach. The first step is to evaluate the uncertain tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon examination based on its technical merits. The second step is, for those positions that meet the recognition criteria, to measure the tax benefit as the largest amount that is more than fifty percent likely of being realized. We believe our recorded tax liabilities are adequate to cover all open tax years based on our assessment. This assessment relies on estimates and assumptions and involves significant judgments about future events. To the extent that our view as to the outcome of these matters changes, we will adjust income tax expense in the period in which such determination is made. We classify interest and penalties related to income taxes as income tax expense.
 
Derivative and foreign exchange management activities  We recognize all derivatives as assets and liabilities at their fair values. We may use derivatives and establish programs from time to time to manage foreign currency and interest rate exposures that are sensitive to changes in market conditions. The instruments that qualify for hedge accounting hedge our net investment position in certain of our foreign subsidiaries and through the first quarter of 2007 certain intercompany royalty cash flows. For these instruments, we document the hedge designation by identifying the hedging instrument, the nature of the risk being hedged and the approach for measuring hedge ineffectiveness. The ineffective portions of hedges are recorded in “Other (income) expense, net” in our consolidated statements of income. The gains and losses on the instruments that qualify for hedge accounting treatment are recorded in “Accumulated other comprehensive income (loss)” in our consolidated balance sheets until the underlying has been settled and is then reclassified to earnings. Changes in the fair values of the derivative


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instruments that do not qualify for hedge accounting are recorded in “Other (income) expense, net” or “Interest expense” in our consolidated statements of income to reflect the economic risk being mitigated.
 
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 (including 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.
 
We recognize either an asset or liability for any plan’s funded status in our consolidated balance sheets in accordance with Statement of Financial Accounting Standard (“SFAS”) 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R). (“SFAS 158”). We measure changes in funded status using actuarial models in accordance with SFAS 87, “Employers’ Accounting for Pension Plans,” and SFAS 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions”. These models use an attribution approach that generally spreads individual events over the estimated service lives of the employees in the plan. The attribution approach assumes that employees render service over their service lives on a relatively smooth basis and as such, presumes that the income statement effects of pension or postretirement benefit plans should follow the same pattern. Our policy is to fund our pension plans based upon actuarial recommendations and in accordance with applicable laws, income tax regulations and credit agreements.
 
Net pension and postretirement benefit income or expense is generally determined using assumptions which include expected long-term rates of return on plan assets, discount rates, compensation rate increases and medical trend rates. We use a mix of actual historical rates, expected rates and external data to determine the assumptions used in the actuarial models. For example, we utilized a bond pricing model that was tailored to the attributes of our pension and postretirement plans to determine the appropriate discount rate to use for our U.S. benefit plans. We utilized country-specific third-party bond indices to determine appropriate discount rates to use for benefit plans of our foreign subsidiaries.
 
Employee incentive compensation.  We maintain short-term and long-term employee incentive compensation plans. These plans are intended to reward eligible employees for their contributions to our short-term and long-term success. For our short-term plans, the amount of the cash bonus earned depends upon business unit and corporate financial results as measured against pre-established targets, and also depends upon the performance and job level of the individual. Our long-term plans are intended to reward management for its long-term impact on our total earnings performance. Performance is measured at the end of a three-year period based on our performance over the period measured against certain pre-established targets such as earnings before interest, taxes, depreciation and amortization (“EBITDA”) or compound annual growth rates over the periods. We accrue the related compensation expense over the period of the plan, and changes in the liabilities for these incentive plans generally correlate with our financial results and projected future financial performance and could have a material impact on our consolidated financial statements.
 
Recently Issued Accounting Standards
 
See Note 1 to our audited consolidated financial statements included in this report for recently issued accounting standards, including the expected dates of adoption and expected impact to our consolidated financial statements upon adoption.
 
FORWARD-LOOKING STATEMENTS
 
Certain matters discussed in this report, including (without limitation) statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contain forward-looking statements. Although we believe that, in making any such statements, our expectations are based on reasonable assumptions, any such statement may be influenced by factors that could cause actual outcomes and results to be materially different from those projected.


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These forward-looking statements include statements relating to our anticipated financial performance and business prospects and/or statements preceded by, followed by or that include the words “believe”, “anticipate”, “intend”, “estimate”, “expect”, “project”, “could”, “plans”, “seeks” and similar expressions. These forward-looking statements speak only as of the date stated and we do not undertake any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, even if experience or future events make it clear that any expected results expressed or implied by these forward-looking statements will not be realized. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these expectations may not prove to be correct or we may not achieve the financial results, savings or other benefits anticipated in the forward-looking statements. These forward-looking statements are necessarily estimates reflecting the best judgment of our senior management and involve a number of risks and uncertainties, some of which may be beyond our control, that could cause actual results to differ materially from those suggested by the forward-looking statements, including, without limitation:
 
  •  our ability to withstand challenges of the tightening credit environment and general economic conditions;
 
  •  our ability to increase the number of dedicated stores for our products, including through opening and profitably operating company-operated stores;
 
  •  changes in the level of consumer spending for apparel in view of general economic conditions;
 
  •  our ability to develop or sustain improvements in our emerging markets and retail channels and to address challenges in certain of our mature markets, our Dockers® brand and our Signature by Levi Strauss & Co.tm brand in the United States;
 
  •  our wholesale customers’ shift in product mix in all channels of distribution, including the mass channel;
 
  •  our dependence on key distribution channels, customers and suppliers;
 
  •  consequences of consolidations or disrupted business involving our wholesale customers, caused by factors such as tightening credit conditions, weak consumer confidence, and mergers and acquisitions;
 
  •  our ability to effectively shift to a more premium market position worldwide;
 
  •  our ability to implement, stabilize and optimize our ERP system throughout our business without further disruption or to mitigate any existing or new disruptions;
 
  •  our ability to respond to price, innovation and other competitive pressures in the apparel industry and on our key customers;
 
  •  our effectiveness in increasing efficiencies in our logistics operations;
 
  •  changing U.S. and international retail environments and fashion trends;
 
  •  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 or financial instability in countries where our products are manufactured.
 
Our actual results might differ materially from historical performance or current expectations. We do not undertake any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.


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


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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 30, 2008, we had U.S. dollar forward currency contracts to buy $559.8 million and to sell $179.4 million against various foreign currencies. We also had Euro forward currency contracts to sell 14.5 million Euros ($18.6 million equivalent) against the British Pound. These contracts are at various exchange rates and expire at various dates through March 2010.
 
As of November 25, 2007, we had U.S. dollar forward currency contracts to buy $622.1 million and to sell $293.6 million against various foreign currencies. We also had Euro forward currency contracts to buy 8.3 million Euros ($12.3 million equivalent) against the Norwegian Krone and Swedish Krona. These contracts were at various exchange rates and expired at various dates through December 2008.
 
The following table presents the currency, average forward exchange rate, notional amount and fair values for our outstanding forward and swap contracts as of November 30, 2008, and November 25, 2007. The average forward rate is the forward rate weighted by the total of the transacted amounts. The notional amount represents the total net position outstanding as of the stated date. A positive notional amount represents a long position in U.S. dollar versus the exposure currency, while a negative notional amount represents a short position in U.S. dollar versus the exposure currency. The net position is the sum of all buy transactions minus the sum of all sell transactions. All amounts are stated in U.S. dollar equivalents. All transactions will mature before the end of March 2010.
 
Outstanding Forward and Swap Transactions
 
                                                 
    As of November 30, 2008     As of November 25, 2007  
    Average Forward
    Notional
    Fair
    Average Forward
    Notional
    Fair
 
    Exchange Rate     Amount     Value     Exchange Rate     Amount     Value  
    (Dollars in thousands)  
 
Currency
                                               
Australian Dollar
    0.65     $ 37,576     $ (231 )     0.88     $ 45,271     $ 841  
Canadian Dollar
    1.18       63,065       2,352       0.99       51,533       (257 )
Swiss Franc
    1.20       (6,010 )     (4 )     1.10       (27,092 )     (338 )
Czech Koruna
    19.86       1,849       (26 )                  
Danish Krona
    5.81       21,586       (53 )     5.03       23,722       99  
Euro
    1.31       209,976       4,255       1.43       158,649       (4,710 )
British Pound
    1.63       4,305       2,289       2.01       48,165       (995 )
Hong Kong Dollar
    7.75       173             7.77       16        
Hungarian Forint
    202.76       (32,589 )     (970 )     175.46       (30,425 )     (33 )
Japanese Yen
    97.97       2,828       (3,134 )     110.42       (16,115 )     (1,417 )
Korean Won
    1,107.22       (5,123 )     (1,799 )     915.52       4,805       92  
Mexican Peso
    13.10       12,054       945       11.08       15,077       119  
Norwegian Krona
    6.84       20,422       329       5.45       25,254       113  
New Zealand Dollar
    0.54       (6,968 )     180       0.75       (8,510 )     210  
Polish Zloty
    2.85       (22,137 )     (638 )     2.52       (23,575 )     136  
Swedish Krona
    7.89       63,710       1,086       6.29       84,160       (41 )
Singapore Dollar
    1.46       (29,847 )     (758 )     1.44       (32,313 )     112  
Taiwan Dollar
    32.45       21,484       453       31.86       22,223       (184 )
South African Rand
    8.77       5,473       710                    
                                                 
Total
          $ 361,827     $ 4,986             $ 340,845     $ (6,253 )
                                                 


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Interest rate risk
 
We maintain a mix of medium and long-term fixed- and variable-rate debt. We currently manage a portion of our interest rate risk by holding a $100 million interest rate swap derivative to pay fixed rate interest of approximately 3.2% and receive 3-month LIBOR variable interest payments through May 2010.
 
The following table provides information about our financial instruments that are sensitive to changes in interest rates. The table presents principal (face amount) outstanding balances of our debt instruments and the related weighted-average interest rates for the years indicated based on expected maturity dates. The applicable floating rate index is included for variable-rate instruments. All amounts are stated in U.S. dollar equivalents.

 
                                                                 
    As of November 30, 2008     As of
 
    Expected Maturity Date           Fair
    November 25,
 
          2010-
                            Value
    2007
 
    2009(1)     2011     2012     2013     Thereafter     Total     2008(3)     Total  
    (Dollars in thousands)  
 
Debt Instruments
                                                               
Fixed Rate (US$)
  $     $     $     $     $ 796,210     $ 796,210     $ 477,583     $ 818,764  
Average Interest Rate
                            9.37 %     9.37 %                
Fixed Rate (Yen 20 billion)
                            209,886       209,886       86,788       184,689  
Average Interest Rate
                            4.25 %     4.25 %                
Fixed Rate (Euro 250 million)
                      321,625             321,625       151,900       370,375  
Average Interest Rate
                      8.63 %           8.63 %                
Variable Rate (US$)
    70,875             108,250             325,000       504,125       353,610       575,000  
Average Interest Rate(2)
    5.62 %           5.62 %           3.66 %     4.36 %                
Total Principal (face amount) of our debt instruments
  $ 70,875     $     $ 108,250     $ 321,625     $ 1,331,096     $ 1,831,846     $ 1,069,881     $ 1,948,828  
 
 
(1) Excludes short-term borrowings.
 
(2) Assumes no change in short-term interest rates. Expected maturities due 2009 and 2012 relate to the trademark tranche of our senior revolving credit facility. Amounts maturing thereafter relate to our Senior Term Loan due 2014.
 
(3) The fair value of our long-term debt, as compared to its carrying value, has declined significantly in 2008, primarily due to changes in overall capital market conditions as demonstrated by lower liquidity in the markets, increases in credit spread, and decreases in bank lending activities, which result in investors moving from high yield securities to lower yield investment grade or U.S. Treasury securities in efforts to preserve capital.


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Item 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
Report of Independent Registered Public Accounting Firm
 
 
The Board of Directors and Stockholders of
Levi Strauss & Co.:
 
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, stockholders’ deficit and comprehensive income, and cash flows present fairly, in all material respects, the financial position of Levi Strauss & Co. and its subsidiaries at November 30, 2008 and November 25, 2007, and the results of their operations and their cash flows for each of the two years in the period ended November 30, 2008, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the related financial statement schedule listed in the index appearing under Item 15(2) for each of the two years in the period ended November 30, 2008, presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
As discussed in Note 11 to the consolidated financial statements, the Company changed the manner in which it accounts for defined pension and other postretirement plans effective November 25, 2007. As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for uncertain tax positions in fiscal 2008.
 
PricewaterhouseCoopers LLP
 
San Francisco, CA
February 9, 2009


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Report of Independent Registered Public Accounting Firm
 
 
The Stockholders and Board of Directors
Levi Strauss & Co.:
 
We have audited the accompanying consolidated statements of income, stockholders’ deficit and comprehensive income, and cash flows of Levi Strauss & Co. and subsidiaries for year ended November 26, 2006. In connection with our audit of the consolidated financial statements, we have also audited the related financial statement Schedule II for the same period. These consolidated financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audit.
 
We conducted our audit in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Levi Strauss & Co. and subsidiaries for the year ended November 26, 2006, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement Schedule II for the year ended November 26, 2006, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
 
KPMG LLP
 
San Francisco, California
February 12, 2007, except as to the 2006
data in Note 20, which is as of February 9, 2009


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
 
                 
    November 30,
    November 25,
 
    2008     2007  
    (Dollars in thousands)  
 
ASSETS
Current Assets:
               
Cash and cash equivalents
  $ 210,812     $ 155,914  
Restricted cash
    2,664       1,871  
Trade receivables, net of allowance for doubtful accounts of $16,886 and $14,805
    546,474       607,035  
Inventories:
               
Raw materials
    15,895       17,784  
Work-in-process
    8,867       14,815  
Finished goods
    517,912       483,265  
                 
Total inventories
    542,674       515,864  
Deferred tax assets, net
    114,123       133,180  
Other current assets
    88,527       75,647  
                 
Total current assets
    1,505,274       1,489,511  
Property, plant and equipment, net of accumulated depreciation of $596,967 and $605,859
    411,908       447,340  
Goodwill
    204,663       206,486  
Other intangible assets, net
    42,774       42,775  
Non-current deferred tax assets, net
    526,069       511,128  
Other assets
    86,187       153,426  
                 
Total assets
  $ 2,776,875     $ 2,850,666  
                 
 
LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS’ DEFICIT
Current Liabilities:
               
Short-term borrowings
  $ 20,339     $ 10,339  
Current maturities of long-term debt
    70,875       70,875  
Current maturities of capital leases
    1,623       2,701  
Accounts payable
    203,207       243,630  
Restructuring liabilities
    2,428       8,783  
Other accrued liabilities
    251,720       248,159  
Accrued salaries, wages and employee benefits
    194,289       218,325  
Accrued interest payable
    29,240       30,023  
Accrued income taxes
    17,909       9,420  
                 
Total current liabilities
    791,630       842,255  
Long-term debt
    1,761,993       1,879,192  
Long-term capital leases
    6,183       5,476  
Postretirement medical benefits
    130,223       157,447  
Pension liability
    240,701       147,417  
Long-term employee related benefits
    87,704       113,710  
Long-term income tax liabilities
    42,794       35,122  
Other long-term liabilities
    46,590       48,123  
Minority interest
    17,982       15,833  
                 
Total liabilities
    3,125,800       3,244,575  
                 
Commitments and contingencies (Note 7)
               
Temporary equity
    592       4,120  
                 
Stockholders’ Deficit:
               
Common stock — $.01 par value; 270,000,000 shares authorized; 37,278,238 shares issued and outstanding
    373       373  
Additional paid-in capital
    53,057       92,650  
Accumulated deficit
    (275,032 )     (499,093 )
Accumulated other comprehensive income (loss)
    (127,915 )     8,041  
                 
Total stockholders’ deficit
    (349,517 )     (398,029 )
                 
Total liabilities, temporary equity and stockholders’ deficit
  $ 2,776,875     $ 2,850,666  
                 
 
The accompanying notes are an integral part of these consolidated financial statements.


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
 
                         
    Year Ended
    Year Ended
    Year Ended
 
    November 30,
    November 25,
    November 26,
 
    2008     2007     2006  
    (Dollars in thousands)  
 
Net sales
  $ 4,303,075     $ 4,266,108     $ 4,106,572  
Licensing revenue
    97,839       94,821       86,375  
                         
Net revenues
    4,400,914       4,360,929       4,192,947  
Cost of goods sold
    2,261,112       2,318,883       2,216,562  
                         
Gross profit
    2,139,802       2,042,046       1,976,385  
Selling, general and administrative expenses
    1,606,482       1,386,547       1,348,577  
Restructuring charges, net
    8,248       14,458       14,149  
                         
Operating income
    525,072       641,041       613,659  
Interest expense
    154,086       215,715       250,637  
Loss on early extinguishment of debt
    1,417       63,838       40,278  
Other (income) expense, net
    1,400       (14,138 )     (22,418 )
                         
Income before income taxes
    368,169       375,626       345,162  
Income tax expense (benefit)
    138,884       (84,759 )     106,159  
                         
Net income
  $ 229,285     $ 460,385     $ 239,003  
                         
 
The accompanying notes are an integral part of these consolidated financial statements.


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
 
                                         
                      Accumulated
       
          Additional
          Other
       
    Common
    Paid-in
    Accumulated
    Comprehensive
    Stockholders’
 
    Stock     Capital     Deficit     Income (Loss)     Deficit  
    (Dollars in thousands)  
 
Balance at November 27, 2005
  $ 373     $ 88,808     $ (1,198,481 )   $ (112,785 )   $ (1,222,085 )
                                         
Net income
                239,003             239,003  
Other comprehensive loss (net of tax) (Note 17)
                      (11,994 )     (11,994 )
                                         
Total comprehensive income
                            227,009  
                                         
Stock-based compensation (net of $1,956 temporary equity)
          1,029                   1,029  
                                         
Balance at November 26, 2006
    373       89,837       (959,478 )     (124,779 )     (994,047 )
                                         
Net income
                460,385             460,385  
Other comprehensive income (net of tax) (Note 17)
                      60,015       60,015  
                                         
Total comprehensive income
                            520,400  
                                         
Adjustment to initially apply FASB Statement No. 158
                      72,805       72,805  
Stock-based compensation (net of $4,120 temporary equity)
          2,813                   2,813  
                                         
Balance at November 25, 2007
    373       92,650       (499,093 )     8,041       (398,029 )
                                         
Net income
                229,285             229,285  
Other comprehensive loss (net of tax) (Note 17)
                      (135,956 )     (135,956 )
                                         
Total comprehensive income
                            93,329  
                                         
Cumulative impact of FASB Interpretation 48 adoption
                (5,224 )           (5,224 )
Stock-based compensation (net of $592 temporary equity)
          10,360                   10,360  
Cash dividend paid (Note 16)
          (49,953 )                 (49,953 )
                                         
Balance at November 30, 2008
  $ 373     $ 53,057     $ (275,032 )   $ (127,915 )   $ (349,517 )
                                         
 
The accompanying notes are an integral part of these consolidated financial statements.


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
 
                         
    Year Ended
    Year Ended
    Year Ended
 
    November 30,
    November 25,
    November 26,
 
    2008     2007     2006  
    (Dollars in thousands)  
 
Cash Flows from Operating Activities:
                       
Net income
  $ 229,285     $ 460,385     $ 239,003  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Depreciation and amortization
    77,983       67,514       62,249  
Asset impairments
    20,308       9,070        
Loss (gain) on disposal of property, plant and equipment
    40       444       (6,218 )
Unrealized foreign exchange losses (gains)
    50,736       (7,186 )     (16,826 )
Realized (gain) loss on settlement of foreign currency contracts not designated for hedge accounting
    (53,499 )     16,137        
Employee benefit plans’ amortization from accumulated other comprehensive loss
    (35,995 )            
Postretirement benefit plan curtailment gains
    (5,944 )     (52,763 )     (29,041 )
Write-off of unamortized costs associated with early extinguishment of debt
    394       17,166       17,264  
Amortization of deferred debt issuance costs
    4,007       5,192       8,254  
Stock-based compensation
    6,832       4,977       2,985  
Allowance for doubtful accounts
    10,376       615       (1,021 )
Deferred income taxes
    75,827       (150,079 )     39,452  
Change in operating assets and liabilities:
                       
Trade receivables
    61,707       (18,071 )     46,572  
Inventories
    (21,777 )     40,422       (6,095 )
Other current assets
    (25,400 )     19,235       (3,254 )
Other non-current assets
    (16,773 )     (10,598 )     1,730  
Accounts payable and other accrued liabilities
    (93,012 )     16,168       18,536  
Income tax liabilities
    3,923       9,527       (14,918 )
Restructuring liabilities
    (7,376 )     (8,134 )     (2,855 )
Accrued salaries, wages and employee benefits
    (29,784 )     (87,843 )     (41,433 )
Long-term employee related benefits
    (35,112 )     (32,634 )     (55,655 )
Other long-term liabilities
    6,922       1,973       3,847  
Other, net
    1,141       754       (696 )
                         
Net cash provided by operating activities
    224,809       302,271       261,880  
                         
Cash Flows from Investing Activities:
                       
Purchases of property, plant and equipment
    (80,350 )     (92,519 )     (77,080 )
Proceeds from sale of property, plant and equipment
    995       3,881       9,139  
Proceeds (payments) on settlement of foreign currency contracts not designated for hedge accounting
    53,499       (16,137 )      
Acquisition of retail stores
    (959 )     (2,502 )     (1,656 )
                         
Net cash used for investing activities
    (26,815 )     (107,277 )     (69,597 )
                         
Cash Flows from Financing Activities:
                       
Proceeds from issuance of long-term debt
          669,006       475,690  
Repayments of long-term debt and capital leases
    (94,904 )     (984,333 )     (620,146 )
Short-term borrowings, net
    12,181       (1,711 )     (63 )
Debt issuance costs
    (446 )     (5,297 )     (12,176 )
Restricted cash
    (1,224 )     (58 )     1,467  
Dividends to minority interest shareholders of Levi Strauss Japan K.K. 
    (1,114 )     (3,141 )      
Dividend to stockholders
    (49,953 )            
                         
Net cash used for financing activities
    (135,460 )     (325,534 )     (155,228 )
                         
Effect of exchange rate changes on cash and cash equivalents
    (7,636 )     6,953       2,862  
                         
Net increase (decrease) in cash and cash equivalents
    54,898       (123,587 )     39,917  
Beginning cash and cash equivalents
    155,914       279,501       239,584  
                         
Ending cash and cash equivalents
  $ 210,812     $ 155,914     $ 279,501  
                         
Supplemental disclosure of cash flow information:
                       
Cash paid during the period for:
                       
Interest
  $ 154,103     $ 237,017     $ 229,789  
Income taxes
    63,107       52,275       83,492  
 
The accompanying notes are an integral part of these consolidated financial statements.


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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED NOVEMBER 30, 2008, NOVEMBER 25, 2007, AND NOVEMBER 26, 2006
 
NOTE 1:   SIGNIFICANT ACCOUNTING POLICIES
 
Nature of Operations
 
Levi Strauss & Co. (“LS&CO.” or the “Company”) is one of the world’s leading branded apparel companies. The Company designs and markets jeans, casual and dress pants, tops, jackets and related accessories, for men, women and children under the Levi’s®, Dockers® and Signature by Levi Strauss & Co.tm brands. The Company markets its products in three geographic regions: Americas, Europe and Asia Pacific.
 
Basis of Presentation and Principles of Consolidation
 
The consolidated financial statements of LS&CO. and its wholly-owned and majority-owned foreign and domestic subsidiaries are prepared in conformity with generally accepted accounting principles in the United States. All significant intercompany balances and transactions have been eliminated. LS&CO. is privately held primarily by descendants of the family of its founder, Levi Strauss, and their relatives.
 
The Company’s fiscal year ends on the last Sunday of November in each year, except for certain foreign subsidiaries which are fixed at November 30 due to local statutory requirements. Apart from these subsidiaries, each quarter of fiscal years 2008, 2007 and 2006 consisted of 13 weeks, with the exception of the fourth quarter of 2008, which consisted of 14 weeks. All references to years relate to fiscal years rather than calendar years. Certain reclassifications have been made to prior year amounts to reflect the current year presentation due to the change in the Company’s reporting segments; for further information, see Note 20.
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the related notes to consolidated financial statements. Estimates are based upon historical factors, current circumstances and the experience and judgment of its management. Management evaluates its assumptions and estimates on an ongoing basis and may employ outside experts to assist in its evaluations. Changes in such estimates, based on more accurate future information, or different assumptions or conditions, may affect amounts reported in future periods.
 
Cash and Cash Equivalents
 
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash equivalents are stated at fair value.
 
Restricted Cash
 
Restricted cash primarily relates to required cash deposits for customs and rental guarantees to support the Company’s international operations.
 
Accounts Receivable, Net
 
In the normal course of business, the Company extends credit to its wholesale customers that satisfy pre-defined credit criteria. Accounts receivable, which includes receivables related to the Company’s net sales and licensing revenues, are recorded net of an allowance for doubtful accounts. The Company estimates the allowance for doubtful accounts based upon an analysis of the aging of accounts receivable at the date of the consolidated financial statements, assessments of collectibility based on historic trends, customer-specific circumstances, and an evaluation of economic conditions.


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
FOR THE YEARS ENDED NOVEMBER 30, 2008, NOVEMBER 25, 2007, AND NOVEMBER 26, 2006
 
Inventory Valuation
 
The Company values inventories at the lower of cost or market value. Inventory cost is generally determined using the first-in first-out method. The Company includes product costs, labor, sourcing costs, inbound freight, internal transfers, and receiving and inspection at manufacturing facilities in the cost of inventories. The Company estimates quantities of slow-moving and obsolete inventory, by reviewing on-hand quantities, outstanding purchase obligations and forecasted sales. The Company determines inventory market values by estimating expected selling prices based on the Company’s historical recovery rates for slow-moving and obsolete inventory and other factors, such as market conditions, expected channel of distribution and current consumer preferences.
 
Income Tax Assets and Liabilities
 
The Company is subject to income taxes in both the U.S. and numerous foreign jurisdictions. The Company computes its provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. Significant judgments are required in order to determine the realizability of these deferred tax assets. In assessing the need for a valuation allowance, the Company’s management evaluates all significant available positive and negative evidence, including historical operating results, estimates of future taxable income and the existence of prudent and feasible tax planning strategies. Changes in the expectations regarding the realization of deferred tax assets could materially impact income tax expense in future periods.
 
The Company provides for income taxes with respect to temporary differences between the book and tax bases of foreign investments that are expected to reverse in the foreseeable future. The Company does not provide for income taxes with respect to basis differences, consisting primarily of undistributed foreign earnings related to investments in certain foreign subsidiaries that are considered to be permanently reinvested and therefore are not expected to reverse in the foreseeable future, as the Company plans to utilize these earnings to finance the expansion and operating requirements of these subsidiaries.
 
The Company continuously reviews issues raised in connection with all ongoing examinations and open tax years to evaluate the adequacy of its liabilities. Beginning in the first quarter of 2008, the Company evaluates uncertain tax positions under a two-step approach. The first step is to evaluate the uncertain tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon examination based on its technical merits. The second step, for those positions that meet the recognition criteria, is to measure the tax benefit as the largest amount that is more than fifty percent likely to be realized. The Company believes that its recorded tax liabilities are adequate to cover all open tax years based on its assessment. This assessment relies on estimates and assumptions and involves significant judgments about future events. To the extent that the Company’s view as to the outcome of these matters change, the Company will adjust income tax expense in the period in which such determination is made. The Company classifies interest and penalties related to income taxes as income tax expense.
 
Property, Plant and Equipment
 
Property, plant and equipment are carried at cost, less accumulated depreciation. The cost is depreciated on a straight-line basis over the estimated useful lives of the related assets. Buildings are depreciated over 20 to 40 years, and leasehold improvements are depreciated over the lesser of the life of the improvement or the initial lease term. Machinery and equipment includes furniture and fixtures, automobiles and trucks, and networking communication


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
FOR THE YEARS ENDED NOVEMBER 30, 2008, NOVEMBER 25, 2007, AND NOVEMBER 26, 2006
 
equipment, and is depreciated over a range from three to 20 years. Capitalized internal-use software is depreciated over periods ranging from three to seven years.
 
Goodwill and Other Intangible Assets
 
Goodwill resulted primarily from a 1985 acquisition of LS&CO. by Levi Strauss Associates Inc., a former parent company that was subsequently merged into the Company in 1996. Goodwill is not amortized and is subject to an annual impairment test which the Company performs in the fourth quarter of each fiscal year. Intangible assets are primarily comprised of owned trademarks with indefinite useful lives which are not being amortized, but which are subject to an annual impairment assessment. The Company’s remaining intangible asset, which is immaterial, is amortized over an estimated useful life of ten years.
 
Impairment
 
In the Company’s annual impairment tests of goodwill and other non-amortized intangible assets, the Company uses a two-step approach. In the first step, the Company compares the carrying value of the applicable reporting unit to its fair value, which the Company estimates using a combination of discounted cash flow analysis or comparison with the market values of companies that are publicly traded. If the carrying amount of the reporting unit exceeds its estimated fair value, the Company performs the second step, and determines the impairment loss, if any, as the excess of the carrying value of the goodwill or intangible asset over its fair value.
 
The Company reviews its other long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. If the carrying amount of an asset exceeds the expected future undiscounted cash flows, the Company measures and records an impairment loss for the excess of the carrying value of the asset over its fair value.
 
To determine the fair value of impaired assets, the Company utilizes the valuation technique or techniques deemed most appropriate based on the nature of the impaired asset, which may include the use of quoted market prices, prices for similar assets or other valuation techniques such as discounted future cash flows or earnings.
 
Debt Issuance Costs
 
The Company capitalizes debt issuance costs, which are included in “Other assets” in the Company’s consolidated balance sheets. These costs are amortized using the straight-line method of amortization for all debt issuances prior to 2005, which approximates the effective interest method. Costs associated with debt issuances in 2005 and later are amortized using the effective interest method. Amortization of debt issuance costs is included in “Interest expense” in the consolidated statements of income.
 
Restructuring Liabilities
 
Upon approval of a restructuring plan by management with the appropriate level of authority, the Company records restructuring liabilities in compliance with Statement of Financial Accounting Standard (“SFAS”) 112, “Employers’ Accounting for Postemployment Benefits,” and SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities,” resulting in the recognition of employee severance and related termination benefits for recurring arrangements when they become probable and estimable and on the accrual basis for one-time benefit arrangements. The Company records other costs associated with exit activities as they are incurred. The long-term portion of restructuring liabilities is included in “Other long-term liabilities” in the Company’s consolidated balance sheets.


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
FOR THE YEARS ENDED NOVEMBER 30, 2008, NOVEMBER 25, 2007, AND NOVEMBER 26, 2006
 
Deferred Rent
 
The Company is obligated under operating leases of property for manufacturing, finishing and distribution facilities, office space, retail stores and equipment. Rental expense relating to operating leases are recognized on a straight-line basis over the lease term after consideration of lease incentives and scheduled rent escalations beginning as of the date the Company takes physical possession or control of the property. Differences between rental expense and actual rental payments are recorded as deferred rent liabilities included in “Other accrued liabilities” and “Other long-term liabilities” on the consolidated balance sheets.
 
Fair Value of Financial Instruments
 
The fair values of the Company’s financial instruments reflect the amounts that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The fair value estimates presented in this report are based on information available to the Company as of November 30, 2008, and November 25, 2007.
 
The carrying values of cash and cash equivalents, trade receivables and short-term borrowings approximate fair value. The Company has estimated the fair value of its other financial instruments using the market and income approaches. Rabbi trust assets, foreign currency forward contracts and the interest rate swap contract are carried at their fair values. Notes, loans and borrowings under the Company’s credit facilities are carried at historical cost and adjusted for amortization of premiums or discounts, foreign currency fluctuations and principal payments.
 
Pension and Postretirement Benefits
 
The Company has several non-contributory defined benefit retirement plans covering eligible employees. The Company also provides certain health care benefits for U.S. employees who meet age, participation and length of service requirements at retirement. In addition, the Company sponsors other retirement or post-employment plans for its foreign employees in accordance with local government programs and requirements. The Company retains the right to amend, curtail or discontinue any aspect of the plans, subject to local regulations.
 
As of November 25, 2007, the Company adopted SFAS 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R).” SFAS 158 requires employers to fully recognize the obligations associated with single-employer defined benefit pension, retiree healthcare and other postretirement plans in the consolidated balance sheets. The Company measures changes in the funded status of both its plans using actuarial models in accordance with SFAS 87, “Employers’ Accounting for Pension Plans,” and SFAS 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” These models use an attribution approach that generally spreads individual events over the estimated service lives of the employees in the plan. The attribution approach assumes that employees render service over their service lives on a relatively smooth basis and as such, presumes that the income statement effects of pension or postretirement benefit plans should follow the same pattern. The Company’s policy is to fund its retirement plans based upon actuarial recommendations and in accordance with applicable laws, income tax regulations and credit agreements. Net pension and postretirement benefit income or expense is generally determined using assumptions which include expected long-term rates of return on plan assets, discount rates, compensation rate increases and medical trend rates. The Company considers several factors including actual historical rates, expected rates and external data to determine the assumptions used in the actuarial models.
 
Pension benefits are primarily paid through trusts funded by the Company. The Company pays postretirement benefits to the healthcare service providers on behalf of the plan’s participants. The Company’s postretirement benefit plan provides a benefit to retirees that is at least actuarially equivalent to the benefit provided by the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“Medicare Part D”) and thus, the


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
FOR THE YEARS ENDED NOVEMBER 30, 2008, NOVEMBER 25, 2007, AND NOVEMBER 26, 2006
 
U.S. government provides a federal subsidy to the plan. Accordingly, the net periodic postretirement benefit cost was reduced to reflect the impact of the federal subsidy.
 
Employee Incentive Compensation
 
The Company maintains short-term and long-term employee incentive compensation plans. These plans are intended to reward eligible employees for their contributions to the Company’s short-term and long-term success. Provisions for employee incentive compensation are recorded in “Accrued salaries, wages and employee benefits” and “Long-term employee related benefits” in the Company’s consolidated balance sheets. The Company accrues the related compensation expense over the period of the plan and changes in the liabilities for these incentive plans generally correlate with the Company’s financial results and projected future financial performance.
 
Stock-Based Compensation
 
The Company has incentive plans which reward certain employees and directors with cash or equity based on changes in the value of the Company’s common stock. In fiscal year 2006, the Company adopted SFAS 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”) and the four related FASB Staff Positions and the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) 107, “Share-Based Payment” applying the modified prospective transition method. The amount of compensation cost for share-based payments is measured based on the fair value on the grant date of the equity or liability instruments issued, based on the estimated number of awards that are expected to vest. No compensation cost is ultimately recognized for awards for which employees do not render the requisite service and are forfeited. Compensation cost for equity instruments is recognized on a straight-line basis over the period that an employee provides service for that award, which generally is the vesting period. Liability instruments are revalued at each reporting period and compensation expense adjusted. Changes in the fair value of unvested liability instruments during the requisite service period are recognized as compensation cost on a straight-line basis over that service period. Changes in the fair value of vested liability instruments after the service period are recognized as an adjustment to compensation cost in the period of the change in fair value.
 
The Company’s common stock is not listed on any established stock exchange. Accordingly, the stock’s fair market value is determined by the Board based upon a valuation performed by an independent third-party, Evercore Group LLC (“Evercore”). Determining the fair value of the Company’s stock requires complex and subjective judgments. The valuation process includes comparison of the Company’s historical financial results and growth prospects with selected publicly-traded companies, and application of an appropriate discount for the illiquidity of the stock to derive the fair value of the stock. The Company uses this valuation for, among other things, making determinations under its share-based compensation plans, such as grant date fair value of awards.
 
Under the provisions of SFAS 123R, the fair value of stock-based compensation is estimated on the date of grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model requires the input of highly subjective assumptions including volatility. Due to the fact that the Company’s common stock is not publicly traded, the computation of expected volatility is based on the average of the historical and implied volatilities, over the expected life of the awards, of comparable companies from a representative peer group of publicly traded entities, selected based on industry and financial attributes. Other assumptions include expected life, risk-free rate of interest and dividend yield. Expected life is computed using the simplified method permitted under SAB 110. The risk-free interest rate is based on zero coupon U.S. Treasury bond rates corresponding to the expected life of the awards. No dividends are assumed.
 
Due to the job function of the award recipients, the Company has included stock-based compensation cost in “Selling, general and administrative expenses” in the consolidated statements of income.


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
FOR THE YEARS ENDED NOVEMBER 30, 2008, NOVEMBER 25, 2007, AND NOVEMBER 26, 2006
 
Self-Insurance
 
The Company self-insures, up to certain limits, workers’ compensation risk and employee and eligible retiree medical health benefits. The Company carries insurance policies covering claim exposures which exceed predefined amounts, both per occurrence and in the aggregate, for all workers’ compensation claims and for the medical claims of active employees as well as those salaried retirees who retired after June 1, 2001. Accruals for losses are made based on the Company’s claims experience and actuarial assumptions followed in the insurance industry, including provisions for incurred but not reported losses.
 
Derivative Financial Instruments and Hedging Activities
 
The Company recognizes all derivatives as assets and liabilities at their fair values. The Company may use derivatives and establish programs from time to time to manage foreign currency and interest rate exposures that are sensitive to changes in market conditions. The instruments that qualify for hedge accounting hedge the Company’s net investment position in certain of its foreign subsidiaries and through the first quarter of 2007 certain intercompany royalty cash flows. For these instruments, the Company documents the hedge designation by identifying the hedging instrument, the nature of the risk being hedged and the approach for measuring hedge ineffectiveness. The ineffective portions of hedges are recorded in “Other (income) expense, net” in the Company’s consolidated statements of income. The gains and losses on the instruments that qualify for hedge accounting treatment are recorded in “Accumulated other comprehensive income (loss)” in the Company’s consolidated balance sheets until the underlying has been settled and is then reclassified to earnings. Changes in the fair values of the derivative instruments that do not qualify for hedge accounting are recorded in “Other (income) expense, net” or “Interest expense” in the Company’s consolidated statements of income to reflect the economic risk being mitigated.
 
Foreign Currency
 
The functional currency for most of the Company’s foreign operations is the applicable local currency. For those operations, assets and liabilities are translated into U.S. dollars using period-end exchange rates, income and expenses are translated at average monthly exchange rates, and equity accounts are translated at historical rates. Net changes resulting from such translations are recorded as a component of translation adjustments in “Accumulated other comprehensive income (loss)” in the Company’s consolidated balance sheets.
 
The U.S. dollar is the functional currency for foreign operations in countries with highly inflationary economies. The translation adjustments for these entities, as applicable, are included in “Other (income) expense, net” in the Company’s consolidated statements of income.
 
Foreign currency transactions are transactions denominated in a currency other than the entity’s functional currency. At each balance sheet date, each entity remeasures the recorded balances related to foreign-currency transactions using the current exchange rate. Gains or losses arising from the remeasurement of these balances are recorded in “Other (income) expense, net” in the Company’s consolidated statements of income. In addition, at the settlement date of foreign currency transactions, foreign currency gains and losses are recorded in “Other (income) expense, net” in the Company’s consolidated statements of income to reflect the difference between the rate effective at the settlement date and the historical rate at which the transaction was originally recorded or remeasured at the balance sheet date.
 
Minority Interest
 
Minority interest includes a 16.4% minority interest of third parties in Levi Strauss Japan K.K., the Company’s Japanese affiliate.


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
FOR THE YEARS ENDED NOVEMBER 30, 2008, NOVEMBER 25, 2007, AND NOVEMBER 26, 2006
 
Stockholders’ Deficit
 
The stockholders’ deficit primarily resulted from a 1996 recapitalization transaction in which the Company’s stockholders created new long-term governance arrangements, including a voting trust and stockholders’ agreement. As a result, shares of stock of a former parent company, Levi Strauss Associates Inc., including shares held under several employee benefit and compensation plans, were converted into the right to receive cash. The funding for the cash payments in this transaction was provided in part by cash on hand and in part from proceeds of approximately $3.3 billion of borrowings under bank credit facilities.
 
Revenue Recognition
 
Net sales is primarily comprised of sales of products to wholesale customers, including franchised stores, and direct sales to consumers at the Company’s company-operated stores. The Company recognizes revenue on sale of product when the goods are shipped or delivered and title to the goods passes to the customer provided that: there are no uncertainties regarding customer acceptance; persuasive evidence of an arrangement exists; the sales price is fixed or determinable; and collectibility is reasonably assured. The revenue is recorded net of an allowance for estimated returns, discounts and retailer promotions and other similar incentives. Licensing revenues from the use of the Company’s trademarks in connection with the manufacturing, advertising, and distribution of trademarked products by third-party licensees are earned and recognized as products are sold by licensees based on royalty rates as set forth in the licensing agreements.
 
The Company recognizes allowances for estimated returns in the period in which the related sale is recorded. The Company recognizes allowances for estimated discounts, retailer promotions and other similar incentives at the later of the period in which the related sale is recorded or the period in which the sales incentive is offered to the customer. The Company estimates non-volume based allowances based on historical rates as well as customer and product-specific circumstances. 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 consolidated statements of income.
 
Net sales to the Company’s ten largest customers totaled approximately 37%, 42% and 42% of net revenues for 2008, 2007 and 2006, respectively. No customer represented 10% or more of net revenues in any year.
 
Cost of Goods Sold
 
Cost of goods sold includes the expenses incurred to acquire and produce inventory for sale, including product costs, labor, sourcing costs, inbound freight, internal transfers, receiving and inspection at manufacturing facilities, and depreciation expense on the Company’s manufacturing facilities. Cost of goods sold excludes depreciation expense on the Company’s other facilities. Costs relating to the Company’s licensing activities are included in “Selling, general and administrative expenses” in the consolidated statements of income; such costs are insignificant.
 
Selling, General and Administrative Expenses
 
Selling, general and administrative expenses are primarily comprised of costs relating to advertising, marketing, selling, distribution, information technology and other corporate functions. Selling costs include all occupancy costs associated with company-operated stores. The Company expenses advertising costs as incurred. For 2008, 2007 and 2006, total advertising expense was $297.9 million, $277.0 million and $285.3 million, respectively. Distribution costs include costs related to receiving and inspection at distribution centers, warehousing, shipping, handling and certain other activities associated with the Company’s distribution network. These expenses totaled $215.8 million, $225.2 million and $204.6 million for 2008, 2007 and 2006, respectively.


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
FOR THE YEARS ENDED NOVEMBER 30, 2008, NOVEMBER 25, 2007, AND NOVEMBER 26, 2006
 
Recently Issued Accounting Standards
 
The following recently issued accounting standards have been grouped by their required effective dates for the Company:
 
First Quarter of 2009
 
  •  In September 2006, the FASB issued SFAS 157, “Fair Value Measurements.” The FASB amended SFAS 157 by issuing FSP FAS 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13,” and FSP FAS 157-2, “Effective Date of FASB Statement No. 157” and in October 2008, FSP FAS 157-3 “Determining the Fair value of a Financial Asset When the Market for That Asset Is Not Active” (collectively “SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements to require a three-level hierarchical classification of the inputs used in measuring fair value. The assignment within the hierarchy to Level 1, Level 2 or Level 3 depends on the level of observability and judgment associated with the inputs being used. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements, except those relating to lease classification, and accordingly does not require any new fair value measurements. SFAS 157 is effective for financial assets and financial liabilities in fiscal years beginning after November 15, 2007, and for nonfinancial assets and liabilities in fiscal years beginning after November 15, 2008. The Company adopted SFAS 157 for financial assets and liabilities in 2008 with no material impact to the consolidated financial statements but with additional required consolidated financial statement footnote disclosures. The Company does not anticipate the application of SFAS 157 to nonfinancial assets and nonfinancial liabilities will have a material impact on its consolidated financial statements.
 
  •  In March 2008 the FASB issued SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” (“SFAS 161”). SFAS 161 amends and expands the disclosure requirements of FASB Statement No. 133, requiring enhanced disclosures about the Company’s derivative and hedging activities. The Company is required to provide enhanced disclosures about (a) how and why it uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under FASB Statement No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect the Company’s financial position, results of operations, and cash flows. SFAS No. 161 is effective prospectively, with comparative disclosures of earlier periods encouraged upon initial adoption. The Company does not anticipate that the adoption of this statement will have a material impact on its consolidated financial statement footnote disclosures.
 
Second Quarter of 2009
 
  •  In December 2008, the FASB issued FASB Staff Position No. FAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities” (“FSP FAS 140-4 and FIN 46(R)-8”). FSP FAS 140-4 and FIN 46(R)-8 amends both FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities-a replacement of FASB Statement No. 125”, and FASB Interpretation No. 46(R), “Consolidation of Variable Interest Entities (revised December 2003) — an interpretation of ARB No. 51”, to require public entities to provide additional disclosures about transfers of financial assets and about their involvement with variable interest entities. The Company does not anticipate that the adoption of this statement will have a material impact on its consolidated financial statement footnote disclosures.


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
FOR THE YEARS ENDED NOVEMBER 30, 2008, NOVEMBER 25, 2007, AND NOVEMBER 26, 2006
 
First Quarter of 2010
 
  •  In December 2007 the FASB issued SFAS 141 (revised 2007) “Business Combinations” (“SFAS 141R”). SFAS 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. SFAS 141R also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The Company does not anticipate that the adoption of this statement will have a material impact on its consolidated financial statements, absent any material business combinations.
 
  •  In December 2007 the FASB issued SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements of SFAS 160 shall be applied prospectively. The Company is currently evaluating the impact the adoption of SFAS 160 will have on its consolidated financial statements.
 
  •  In December 2007 the FASB issued EITF Issue No. 07-1, “Accounting for Collaborative Arrangements” (“EITF 07-1”). EITF 07-1 defines collaborative arrangements and requires that transactions with third parties that do not participate in the arrangement be reported in the appropriate income statement line items pursuant to the guidance in EITF 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent.” Income statement classification of payments made between participants of a collaborative arrangement are to be based on other applicable authoritative accounting literature. If the payments are not within the scope or analogy of other authoritative accounting literature, a reasonable, rational and consistent accounting policy is to be elected. EITF 07-1 is to be applied retrospectively to all prior periods presented for all collaborative arrangements existing as of the effective date. The Company does not anticipate that the adoption of this statement will have a material impact on its consolidated financial statements.
 
  •  In April 2008 the FASB issued FASB Staff Position No. FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Asset. More specifically, FSP FAS 142-3 removes the requirement under paragraph 11 of SFAS 142 to consider whether an intangible asset can be renewed without substantial cost or material modifications to the existing terms and conditions and instead, requires an entity to consider its own historical experience in renewing similar arrangements. FSP FAS 142-3 also requires expanded disclosure related to the determination of intangible asset useful lives. The Company does not anticipate that the adoption of this statement will have a material impact on its consolidated financial statements.
 
  •  In June 2008 the FASB issued EITF Issue No. 08-3, “Accounting by Lessees for Nonrefundable Maintenance Deposits” (“EITF 08-3”). EITF 08-3 requires that nonrefundable maintenance deposits paid by a lessee under an arrangement accounted for as a lease be accounted for as a deposit asset until the underlying maintenance is performed. When the underlying maintenance is performed, the deposit may be expensed or capitalized in accordance with the lessee’s maintenance accounting policy. Upon adoption entities must recognize the effect of the change as a change in accounting principal. The Company does not anticipate that the adoption of this statement will have a material impact on its consolidated financial statements.


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
FOR THE YEARS ENDED NOVEMBER 30, 2008, NOVEMBER 25, 2007, AND NOVEMBER 26, 2006
 
 
  •  In November 2008, the FASB issued EITF Issue No. 08-7, “Accounting for Defensive Intangible Assets” (“EITF 08-7”). EITF 08-7 addresses the accounting for assets acquired in a business combination or asset acquisition that an entity does not intend to actively use, otherwise referred to as a ‘defensive asset.’ EITF 08-7 requires defensive intangible assets to be initially accounted for as a separate unit of accounting and not included as part of the cost of the acquirer’s existing intangible asset(s) because it is separately identifiable. EITF 08-7 also requires that defensive intangible assets be assigned a useful life in accordance with paragraph 11 of FASB Statement No. 142, “Goodwill and Other Intangible Assets”. The Company does not anticipate that the adoption of this statement will have a material impact on its consolidated financial statements.
 
Fourth Quarter of 2010
 
  •  In December 2008, the FASB issued FASB Staff Position No. FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (“FSP FAS 132(R)-1”). FSP FAS 132(R)-1 amends FASB Statement No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits”, (“FAS 132(R)”), to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The additional disclosure requirements under this FSP include expanded disclosures about an entity’s investment policies and strategies, the categories of plan assets, concentrations of credit risk and fair value measurements of plan assets. The Company anticipates that the adoption of this statement will have a material impact on its consolidated financial statement footnote disclosures.
 
NOTE 2:   INCOME TAXES
 
The Company’s income tax (benefit) expense was $138.9 million, $(84.8) million and $106.2 million for fiscal years 2008, 2007 and 2006, respectively. The Company’s effective tax rate was 37.7%, (22.6)% and 30.8% for fiscal years 2008, 2007 and 2006, respectively.
 
The increase in the effective tax rate for 2008 as compared to 2007 was mostly attributable to the recognition in 2007 of a tax benefit resulting from a non-recurring reversal of valuation allowances against the Company’s deferred tax assets for foreign tax credit carryforwards, primarily reflecting the Company’s expectations about future recoverability due to improvements in business performance and developments in the IRS examination of the 2000-2002 U.S. federal corporate income tax returns. In connection with the IRS examination, during the fourth quarter of 2007, the Company agreed to an adjustment relating to the prepayment of royalties from its European affiliates which, along with current year operating income, contributed to the full utilization of the Company’s U.S. federal net operating loss carryforward as of November 25, 2007. This net operating loss carryforward had been a significant piece of negative evidence that impaired the Company’s ability to utilize foreign tax credits in prior periods. As a result of these developments, during the fourth quarter of 2007, the Company concluded it was more likely than not its foreign tax credits will be utilized prior to expiration resulting in a non-recurring, non-cash reduction in tax expense of $215.3 million.
 
The decline in the effective tax rate from 2006 to 2007 was primarily due to the 2007 reversal of valuation allowances against the Company’s deferred tax assets for foreign tax credit carryforwards, as explained above.


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
FOR THE YEARS ENDED NOVEMBER 30, 2008, NOVEMBER 25, 2007, AND NOVEMBER 26, 2006
 
The U.S. and foreign components of income before taxes were as follows:
 
                         
    Year Ended  
    November 30,
    November 25,
    November 26,
 
    2008     2007     2006  
    (Dollars in thousands)  
 
Domestic
  $ 196,879     $ 210,770     $ 160,761  
Foreign
    171,290       164,856       184,401  
                         
Total income before taxes
  $ 368,169     $ 375,626     $ 345,162  
                         
 
Income tax expense (benefit) consisted of the following:
 
                         
    Year Ended  
    November 30,
    November 25,
    November 26,
 
    2008     2007     2006  
    (Dollars in thousands)  
 
U.S. Federal
                       
Current
  $ 10,333     $ 15,292     $ 21,471  
Deferred
    77,706       (156,647 )     69,128  
                         
      88,039       (141,355 )     90,599  
                         
U.S. State
                       
Current
    2,322       3,676       20  
Deferred
    6,507       745       (12,905 )
                         
      8,829       4,421       (12,885 )
                         
Foreign
                       
Current
    50,402       46,352       45,216  
Deferred
    (8,386 )     5,823       (16,771 )
                         
      42,016       52,175       28,445  
                         
Consolidated
                       
Current
    63,057       65,320       66,707  
Deferred
    75,827       (150,079 )     39,452  
                         
Total income tax (benefit) expense
  $ 138,884     $ (84,759 )   $ 106,159  
                         


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
FOR THE YEARS ENDED NOVEMBER 30, 2008, NOVEMBER 25, 2007, AND NOVEMBER 26, 2006
 
The Company’s income tax (benefit) expense differed from the amount computed by applying the U.S. federal statutory income tax rate of 35% to income before taxes as follows:
 
                                                 
    Year Ended  
    November 30,
    November 25,
    November 26,
 
    2008     2007     2006  
    (Dollars in thousands)  
 
Income tax expense at U.S. federal statutory rate
  $ 128,859       35.0 %   $ 131,470       35.0 %   $ 120,807       35.0 %
State income taxes, net of U.S. federal impact
    6,248       1.7 %     2,354       0.6 %     7,433       2.2 %
Change in valuation allowance
    (1,768 )     (0.5 )%     (206,830 )     (55.1 )%     (28,729 )     (8.3 )%
Impact of foreign operations
    3,647       1.0 %     (21,946 )     (5.8 )%     7,899       2.3 %
Reassessment of tax liabilities due to change in estimate
    1,533       0.4 %     10,813       2.9 %     (1,649 )     (0.5 )%
Other, including non-deductible expenses
    365       0.1 %     (620 )     (0.2 )%     398       0.1 %
                                                 
Total
  $ 138,884       37.7 %   $ (84,759 )     (22.6 )%   $ 106,159       30.8 %
                                                 
 
State income taxes, net of U.S. federal impact.  This item primarily reflects the current and deferred state income tax expense, net of related federal benefit. The impact of this item on the annual effective tax rate increased in 2008 from 2007 primarily due to the recognition in 2007 of a non-recurring, non-cash tax benefit of $6.3 million resulting from the Company’s election to change the filing methodology of its California state income tax return.
 
Change in valuation allowance.  This item relates to changes in the Company’s expectations regarding its ability to realize certain deferred tax assets. The Company evaluates all significant available positive and negative evidence, including the existence of losses in recent years and its forecast of future taxable income, in assessing the need for a valuation allowance. The underlying assumptions the Company uses in forecasting future taxable income require significant judgment and take into account the Company’s recent performance.
 
The following table details the changes in valuation allowance during the year ended November 30, 2008:
 
                                 
    Valuation
                Valuation
 
    Allowance at
    Changes in Related
          Allowance at
 
    November 25,
    Gross Deferred Tax
    Charge /
    November 30,
 
    2007     Asset     (Release)     2008  
    (Dollars in thousands)  
 
U.S. state net operating loss carryforwards
  $ 1,130     $ 707     $     $ 1,837  
Foreign net operating loss carrryforwards and other foreign deferred tax assets
    72,466       (13,842 )     (1,768 )     56,856  
                                 
    $ 73,596     $ (13,135 )   $ (1,768 )   $ 58,693  
                                 
 
The $14.9 million net decrease in the total valuation allowance during 2008 includes a $13.1 million net decrease relating primarily to changes in underlying gross foreign deferred taxes, and a $1.8 million release in valuation allowance primarily due to changes in judgment regarding the recoverability of certain foreign deferred tax assets in future periods as a result of business improvements in certain jurisdictions outside the United States.
 
In 2007, the $206.8 million net release of valuation allowance was driven by a reversal of $215.3 million relating to foreign tax credit carryforwards, partially offset by a net charge of $8.5 million primarily relating to foreign net operating loss carryforwards and other foreign deferred tax assets.


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
FOR THE YEARS ENDED NOVEMBER 30, 2008, NOVEMBER 25, 2007, AND NOVEMBER 26, 2006
 
In 2006, the $28.7 million net release of valuation allowance primarily related to benefits associated with state net operating loss carryforwards in the United States and to certain foreign net operating loss carryforwards.
 
Impact of foreign operations.  The $3.6 million expense in 2008 primarily reflects the impact of the taxation of foreign profits in jurisdictions with rates that differ from the U.S. federal statutory rate and additional U.S. income tax imposed upon distributions of foreign earnings. In 2008, the Company’s effective income tax rate was not materially impacted by the Company’s foreign operations due to the Company’s ability to utilize foreign tax credits.
 
In 2007, the $21.9 million benefit arose as the 2007 foreign profits were subject to an average rate of tax below the U.S. statutory rate of 35%; primarily due to a change in the Company’s expectation regarding its ability to utilize foreign tax credit carryforwards prior to expiration, no additional U.S. tax expense was incurred relating to the expected future repatriation of these earnings.
 
The $7.9 million expense in 2006 primarily reflected an accrual for additional U.S. residual income tax due to 2006 operating results, partially offset by a non-recurring, non-cash benefit of $31.5 million relating to a modification of the ownership structure of certain foreign subsidiaries.
 
Reassessment of liabilities due to change in estimate.  In 2008, the $1.5 million net expense primarily relates to changes in the Company’s estimate of its prior year uncertain tax positions as a result of additional information obtained from transfer pricing studies conducted during the year. In 2007, the $10.8 million expense is attributable to revision of both current and prior year contingent tax liabilities, comprised of a net increase in foreign contingent tax liabilities of $7.5 million primarily relating to transfer pricing issues and a net increase in U.S. federal and state contingent tax liabilities of $3.3 million. In 2006, the $1.6 million net benefit includes benefits primarily relating to favorable state audit settlements, partially offset by additional tax expense resulting from a net increase in foreign contingent tax liabilities.


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
FOR THE YEARS ENDED NOVEMBER 30, 2008, NOVEMBER 25, 2007, AND NOVEMBER 26, 2006
 
The Company’s deferred tax assets and deferred tax liabilities were as follows:
 
                 
    November 30,
    November 25,
 
    2008     2007  
    (Dollars in thousands)  
 
Deferred tax assets (liabilities):
               
Additional U.S. tax on unremitted foreign earnings
  $     $ (4,372 )
Foreign tax credit carryforwards
    246,021       284,412  
State net operating loss carryforwards
    14,296       17,441  
Foreign net operating loss carryforwards
    77,705       89,176  
Employee compensation and benefit plans
    238,939       183,900  
Restructuring and special charges
    14,370       15,614  
Sales returns and allowances
    34,494       37,997  
Inventory
    4,680       18,025  
Property, plant and equipment
    13,562       11,769  
Unrealized gains/losses on investments
    10,058       24,875  
Other
    44,760       39,067  
                 
Total gross deferred tax assets
    698,885       717,904  
Less: Valuation allowance
    (58,693 )     (73,596 )
                 
Total net deferred tax assets
  $ 640,192     $ 644,308  
                 
Current
               
Deferred tax assets
  $ 115,954     $ 136,778  
Valuation allowance
    (1,831 )     (3,598 )
                 
Total current deferred tax assets
  $ 114,123     $ 133,180  
                 
Long-term
               
Deferred tax assets
  $ 582,931     $ 581,126  
Valuation allowance
    (56,862 )     (69,998 )
                 
Total long-term deferred tax assets
  $ 526,069     $ 511,128  
                 
 
Additional U.S. tax on unremitted foreign earnings.  The Company provides for income taxes with respect to temporary differences between the book and tax bases of foreign investments that are expected to reverse in the foreseeable future, but at November 30, 2008, the Company had no net deferred tax liability for the expected repatriation of unremitted foreign earnings, as sufficient foreign tax credits are expected to become available with these future repatriations to eliminate any resulting U.S. federal income tax liability.
 
The Company does not provide for income taxes with respect to differences between the book and tax bases of investments in foreign subsidiaries that are not expected to reverse in the foreseeable future. As of November 30, 2008, income taxes were not provided on excess book over tax bases in investments in foreign subsidiaries of approximately $209.4 million. The Company plans to utilize these unremitted earnings to finance expansion and operating requirements of non-U.S. subsidiaries. These earnings could become subject to U.S. federal income tax if distributed as dividends, loaned to a U.S. affiliate, or if the Company sells its interests in these subsidiaries. If these earnings were distributed, sufficient foreign tax credits would become available under current law to eliminate any resulting U.S. federal income tax liability.


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
FOR THE YEARS ENDED NOVEMBER 30, 2008, NOVEMBER 25, 2007, AND NOVEMBER 26, 2006
 
Foreign tax credit carryforwards.  At November 30, 2008, the Company had a gross deferred tax asset for foreign tax credit carryforwards of $246.0 million. This asset decreased from $284.4 million in the prior year period primarily due to the utilization of foreign tax credits in the 2008 U.S. federal income tax return. The foreign tax credit carryforwards of $246.0 million existing at November 30, 2008, is subject to expiration from 2010 to 2017, if not utilized.
 
State net operating loss carryforwards.  At November 30, 2008, the Company had a gross deferred tax asset of $14.3 million for state net operating loss carryforwards of approximately $304.6 million, partially offset by a valuation allowance of $1.8 million to reduce this gross asset to the amount that will more likely than not be realized. These loss carryforwards are subject to expiration from 2009 to 2028, if not utilized.
 
Foreign net operating loss carryforwards.  At November 30, 2008, cumulative foreign operating losses of $270.2 million generated by the Company were available to reduce future taxable income. Approximately $129.3 million of these operating losses expire between the years 2009 and 2019. The remaining $140.9 million are available as indefinite carryforwards under applicable tax law. The gross deferred tax asset for the cumulative foreign operating losses of $77.7 million is partially offset by a valuation allowance of $57.0 million to reduce this gross asset to the amount that will more likely than not be realized.
 
Uncertain income tax positions.  In June 2006, the FASB issued Interpretation 48, “Accounting for Uncertainty in Income Taxes, an interpretation of SFAS 109” (“FIN 48”). FIN 48 clarifies the accounting and reporting for income taxes where interpretation of the tax law on the Company’s tax positions may be uncertain. FIN 48 also prescribes a comprehensive model for the financial statement recognition, derecognition, measurement, presentation and disclosure of income tax uncertainties with respect to positions taken or expected to be taken in income tax returns. The Company adopted the provisions of FIN 48 on the first day of fiscal 2008 and recognized a cumulative-effect adjustment of $5.2 million, which increased the 2008 beginning balance of accumulated deficit.
 
At the date of adoption, the Company’s total amount of unrecognized tax benefits was $178.4 million, of which $116.5 million would impact the Company’s effective tax rate, if recognized. As of November 30, 2008, the Company’s total amount of unrecognized tax benefits was $167.2 million, of which $104.6 million would impact the Company’s effective tax rate, if recognized. The following table reflects the changes to the Company’s unrecognized tax benefits for the year ended November 30, 2008:
 
         
    (Dollars in millions)  
 
Gross unrecognized tax benefits as of November 26, 2007 (FIN 48 adoption date)
  $ 178.4  
Increases related to current year tax positions
    7.5  
Increases related to tax positions from prior years
    4.2  
Decreases related to tax positions from prior years
    (10.5 )
Settlement with tax authorities
    (1.3 )
Lapses of statutes of limitation
    (2.9 )
Other, including foreign currency translation
    (8.2 )
         
Gross unrecognized tax benefits as of November 30, 2008
  $ 167.2  
         
 
The Company believes that it is reasonably possible that unrecognized tax benefits could decrease by as much as $89.7 million within the next twelve months, due primarily to the potential resolution of a refund claim with the State of California. However, at this point it is not possible to estimate whether the Company will realize any significant income tax benefit upon the resolution of this claim.
 
As of the date of adoption and November 30, 2008, accrued interest and penalties primarily relating to non-U.S. jurisdictions were $13.2 million and $15.6 million, respectively.


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
FOR THE YEARS ENDED NOVEMBER 30, 2008, NOVEMBER 25, 2007, AND NOVEMBER 26, 2006
 
The Company’s income tax returns are subject to examination in the U.S. federal and state jurisdictions and numerous foreign jurisdictions. During the three months ended February 24, 2008, the Company reached a settlement with the IRS concluding the examination of the Company’s 2000-2002 U.S. federal income tax returns. As a result of this settlement, the Company recognized a non-cash, non-recurring tax benefit of $3.5 million related to additional foreign tax credit carryforwards available. The Company’s total amount of unrecognized tax benefits were not significantly impacted by the settlement. During the three months ended November 30, 2008, the IRS began an examination of the Company’s 2003-2005 U.S. federal income tax returns. The following table summarizes the tax years that are either currently under audit or remain open and subject to examination by the tax authorities in the major jurisdictions in which the Company operates:
 
         
Jurisdiction
  Open Tax Years  
 
U.S. federal
    2003-2008  
California
    1986-2008  
Belgium
    2006-2008  
United Kingdom
    2006-2008  
Spain
    2004-2008  
Mexico
    2002-2008  
Canada
    2003-2008  
Hong Kong
    2002-2008  
Italy
    2003-2008  
France
    2005-2008  
Turkey
    2003-2008  
Japan
    2003-2008  
 
NOTE 3:   PROPERTY, PLANT AND EQUIPMENT
 
The components of property, plant and equipment (“PP&E”) were as follows:
 
                 
    November 30,
    November 25,
 
    2008     2007  
    (Dollars in thousands)  
 
Land
  $ 27,864     $ 28,659  
Buildings and leasehold improvements
    357,203       363,379  
Machinery and equipment
    473,456       513,272  
Capitalized internal-use software
    133,593       83,370  
Construction in progress
    16,759       64,519  
                 
Subtotal
    1,008,875       1,053,199  
Accumulated depreciation
    (596,967 )     (605,859 )
                 
PP&E, net
  $ 411,908     $ 447,340  
                 
 
Depreciation expense for the years ended November 30, 2008, November 25, 2007, and November 26, 2006, was $78.0 million, $67.5 million and $62.2 million, respectively.
 
Construction in progress at November 30, 2008, and November 25, 2007, primarily related to the installation of various information technology systems in the United States and Asia.
 
During the fourth quarter of 2008, the Company recorded impairment charges of $16.1 million to reduce the carrying value of certain long-lived assets, primarily leasehold improvements in company-operated stores in the United States, to their estimated fair value, as determined using the expected present value of estimated future cash flows. The impairment charges primarily resulted from lower-than-expected operating cash flow performance for


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
FOR THE YEARS ENDED NOVEMBER 30, 2008, NOVEMBER 25, 2007, AND NOVEMBER 26, 2006
 
certain stores that, along with projections of future performance, indicated that the carrying values of the related long-lived assets were not recoverable. The charges were recorded as “Selling, general and administrative expenses” in the Company’s consolidated statements of income.
 
Also during 2008, the Company recorded an impairment charge of $4.2 million reflecting the write-down of its closed distribution center in Heusenstamm, Germany, to its estimated fair value of $9.0 million as of November 30, 2008, as determined using an expected present value technique. Impairment charges for this facility were $9.0 million in 2007. These charges were recorded to “Restructuring charges, net” in the Company’s consolidated statements of income.
 
NOTE 4:   GOODWILL AND OTHER INTANGIBLE ASSETS
 
The changes in the carrying amount of goodwill by business segment for the years ended November 30, 2008, and November 25, 2007, were as follows:
 
                                 
                Asia
       
    Americas     Europe     Pacific     Total  
    (Dollars in thousands)  
 
Balance, November 26, 2006
  $ 199,905     $ 3,814     $ 270     $ 203,989  
Additions
                2,175       2,175  
Foreign currency fluctuation
          249       73       322  
                                 
Balance, November 25, 2007
  $ 199,905     $ 4,063     $ 2,518     $ 206,486  
Foreign currency fluctuation
          (1,025 )     (798 )     (1,823 )
                                 
Balance, November 30, 2008
  $ 199,905     $ 3,038     $ 1,720     $ 204,663  
                                 
 
Additions to goodwill in 2007 resulted from acquisitions in connection with expansion of the Company’s retail network.
 
As of November 30, 2008, there was no impairment to the carrying value of the Company’s goodwill or indefinite lived intangible assets.


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
FOR THE YEARS ENDED NOVEMBER 30, 2008, NOVEMBER 25, 2007, AND NOVEMBER 26, 2006
 
NOTE 5:   DEBT
 
                 
    November 30,
    November 25,
 
    2008     2007  
    (Dollars in thousands)  
 
Long-term debt
               
Secured:
               
Senior revolving credit facility
  $ 179,125     $ 250,000  
Notes payable, at various rates
    99       131  
                 
Total secured
    179,224       250,131  
                 
Unsecured:
               
12.25% senior notes due 2012
          18,702  
8.625% Euro senior notes due 2013
    324,520       373,808  
Senior term loan due 2014
    323,028       322,737  
9.75% senior notes due 2015
    446,210       450,000  
8.875% senior notes due 2016
    350,000       350,000  
4.25% Yen-denominated Eurobonds due 2016
    209,886       184,689  
                 
Total unsecured
    1,653,644       1,699,936  
Less: current maturities
    (70,875 )     (70,875 )
                 
Total long-term debt
  $ 1,761,993     $ 1,879,192  
                 
Short-term debt
               
Short-term borrowings
  $ 20,339     $ 10,339  
Current maturities of long-term debt
    70,875       70,875  
                 
Total short-term debt
  $ 91,214     $ 81,214  
                 
Total long-term and short-term debt
  $ 1,853,207     $ 1,960,406  
                 
 
Senior Secured Revolving Credit Facility
 
On May 18, 2006, and October 11, 2007, the Company amended and restated its senior secured revolving credit facility, which it initially entered into on September 29, 2003. The facility is an asset-based facility, in which the borrowing availability varies according to the levels of the Company’s domestic accounts receivable, inventory and cash and investment securities deposited in secured accounts with the administrative agent or other lenders. Subject to the level of this borrowing base, the Company may make and repay borrowings from time to time until the maturity of the facility. The Company may make voluntary prepayments of borrowings at any time and must make mandatory prepayments if certain events occur, such as asset sales. Other material terms of the credit facility are discussed below.
 
Availability, interest and maturity.  The maximum availability under the credit facility is $750.0 million, including a $250.0 million trademark tranche. The trademark tranche amortizes on a quarterly basis based on a straight line two-year amortization schedule to a residual value of 25% of the net orderly liquidation value of the trademarks with no additional repayments required until maturity so long as the remaining amount of the tranche does not exceed such 25% valuation. The trademark tranche will be borrowed on a first dollar drawn basis. As the trademark tranche is repaid, the revolving tranche increases, up to a maximum of $750 million when the trademark tranche is repaid in full. The revolving portion of the credit facility initially bears an interest rate of LIBOR plus 150 basis points or base rate plus 25 basis points subject to subsequent adjustments based on availability. The trademark tranche bears an interest rate of LIBOR plus 250 basis points or base rate plus 125 basis points. The credit facility matures on October 11, 2012.


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
FOR THE YEARS ENDED NOVEMBER 30, 2008, NOVEMBER 25, 2007, AND NOVEMBER 26, 2006
 
Guarantees and security.  The Company’s obligations under the senior secured revolving credit facility are guaranteed by the Company’s domestic subsidiaries. The senior secured revolving credit facility is collateralized by a first-priority lien on domestic inventory and accounts receivable, patents, certain U.S. trademarks associated with the Levi’s® brand, and other related intellectual property, 100% of the equity interests in all domestic subsidiaries and other assets. The aggregate carrying value of the collateralized assets exceeds the total availability under the senior secured revolving credit facility. The lien on the trademarks, but not the other assets, will be released upon the full repayment of the trademark tranche. In addition, the Company has the ability to deposit cash or certain investment securities with the administrative agent for the facility to secure the Company’s reimbursement and other obligations with respect to letters of credit. Such cash-collateralized letters of credit are subject to lower letter of credit fees.
 
Covenants.  The senior secured revolving credit facility contains customary covenants restricting the Company’s activities as well as those of the Company’s subsidiaries, including limitations on the Company’s, and the Company’s domestic subsidiaries’, ability to sell assets; engage in mergers; enter into capital leases or certain leases not in the ordinary course of business; enter into transactions involving related parties or derivatives; incur or prepay indebtedness or grant liens or negative pledges on the Company’s assets; make loans or other investments; pay dividends or repurchase stock or other securities; guaranty third-party obligations; and make changes in the Company’s corporate structure. Some of these covenants are suspended if unused availability exceeds certain minimum thresholds. In addition, a minimum fixed charge coverage ratio of 1.0:1.0 arises when unused availability under the Credit Agreement is less than $100.0 million. As of November 30, 2008, the Company had sufficient unused availability under the Credit Agreement to exceed all applicable minimum thresholds. This financial covenant will be discontinued upon repayment in full and termination of the trademark tranche described above and the implementation of an unfunded availability reserve of $50 million.
 
Events of default.  The senior secured revolving credit facility contains customary events of default, including payment failures; failure to comply with covenants; failure to satisfy other obligations under the credit agreements or related documents; defaults in respect of other indebtedness; bankruptcy, insolvency and inability to pay debts when due; material judgments; pension plan terminations or specified underfunding; substantial voting trust certificate or stock ownership changes; specified changes in the composition of the Company’s board of directors; and invalidity of the guaranty or security agreements. The cross-default provisions in the senior secured revolving credit facility apply if a default occurs on other indebtedness in excess of $25.0 million and the applicable grace period in respect of the indebtedness has expired, such that the lenders of or trustee for the defaulted indebtedness have the right to accelerate. If an event of default occurs under the senior secured revolving credit facility, the Company’s lenders may terminate their commitments, declare immediately payable all borrowings under the credit facility and foreclose on the collateral.
 
Use of proceeds — Tender offer and redemption of the 2012 notes.  As discussed below, in October 2007, the Company borrowed $346.4 million (including all $250.0 million of the trademark tranche) under the amended credit facility and used the proceeds plus $220.5 million of cash on hand to prepay $506.2 million of its senior notes due 2012 plus accrued and unpaid interest, prepayment premiums, tender offer consideration, applicable consent payments and other fees and expenses. At November 25, 2007, there were no borrowings outstanding under the revolving tranche of the amended credit facility as the $96.4 million used above was repaid.
 
Senior Notes due 2012
 
On November 17, 2006, the Company repurchased in the open market $50.0 million of its outstanding $575.0 million aggregate principal amount of its 12.25% senior notes due 2012 with the Company’s existing cash and cash equivalents.


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LEVI STRAUSS & CO. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
FOR THE YEARS ENDED NOVEMBER 30, 2008, NOVEMBER 25, 2007, AND NOVEMBER 26, 2006
 
On September 19, 2007, the Company commenced a cash tender offer for its remaining $525.0 million aggregate principal amount of the notes. On October 18, 2007, the Company repurchased $506.2 million, or 96.4%, of the aggregate principal amount of the notes outstanding for a total cash consideratio