10-Q 1 a3q2013form10-q.htm 10-Q 3Q 2013 Form 10-Q
 
 
 
 
 
 
 
 
 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
Form 10-Q
(Mark One)
 þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended August 25, 2013
or
 ¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 002-90139
_________________
LEVI STRAUSS & CO.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE
  
94-0905160
(State or Other Jurisdiction of
Incorporation or Organization)
  
(I.R.S. Employer
Identification No.)
1155 Battery Street, San Francisco, California 94111
(Address of Principal Executive Offices) (Zip Code)
(415) 501-6000
(Registrant’s Telephone Number, Including Area Code)
None
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
_________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See definition of “Large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
 
 
 
 
 
 
Large accelerated filer ¨
 
Accelerated filer ¨
 
Non-accelerated filer þ
 
Smaller reporting company ¨
 
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  þ
The Company is privately held. Nearly all of its common equity is owned by descendants of the family of the Company’s founder, Levi Strauss, and their relatives. There is no trading in the common equity and therefore an aggregate market value based on sales or bid and asked prices is not determinable.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock $.01 par value — 37,474,100 shares outstanding on October 1, 2013
 
 
 
 
 
 
 
 
 
 



LEVI STRAUSS & CO. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED AUGUST 25, 2013
 
 
 
 
Page
Number
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
 
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 3.
 
Item 4.
 
Item 5.
 
Item 6.
 
 



PART I — FINANCIAL INFORMATION

Item 1.
CONSOLIDATED FINANCIAL STATEMENTS
LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
(Unaudited)
 
 
 
August 25,
2013
 
November 25,
2012
 
(Dollars in thousands)
ASSETS
Current Assets:
 
 
 
Cash and cash equivalents
$
382,328

 
$
406,134

Trade receivables, net of allowance for doubtful accounts of $20,471 and $20,738
419,788

 
500,672

Inventories:
 
 
 
Raw materials
4,689

 
5,312

Work-in-process
6,583

 
9,558

Finished goods
613,359

 
503,990

Total inventories
624,631

 
518,860

Deferred tax assets, net
126,398

 
116,224

Other current assets
128,821

 
136,483

Total current assets
1,681,966

 
1,678,373

Property, plant and equipment, net of accumulated depreciation of $771,344 and $782,766
436,394

 
458,807

Goodwill
240,658

 
239,971

Other intangible assets, net
51,329

 
59,909

Non-current deferred tax assets, net
618,747

 
612,916

Other non-current assets
116,113

 
120,101

Total assets
$
3,145,207

 
$
3,170,077

 
 
 
 
LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current Liabilities:
 
 
 
Short-term debt
$
38,153

 
$
59,759

Current maturities of capital leases
843

 
1,760

Accounts payable
249,643

 
225,726

Other accrued liabilities
186,700

 
263,575

Accrued salaries, wages and employee benefits
186,883

 
223,850

Accrued interest payable
32,886

 
5,471

Accrued income taxes
72,700

 
16,739

Total current liabilities
767,808

 
796,880

Long-term debt
1,501,912

 
1,669,452

Long-term capital leases
10,274

 
262

Postretirement medical benefits
134,825

 
140,958

Pension liability
465,737

 
492,396

Long-term employee related benefits
67,804

 
62,529

Long-term income tax liabilities
34,252

 
40,356

Other long-term liabilities
58,390

 
60,869

Total liabilities
3,041,002

 
3,263,702

Commitments and contingencies


 


Temporary equity
29,429

 
7,883

 
 
 
 
Stockholders’ Equity (Deficit):
 
 
 
Levi Strauss & Co. stockholders’ equity (deficit)
 
 
 
Common stock — $.01 par value; 270,000,000 shares authorized; 37,467,935 shares and 37,392,343 shares issued and outstanding
375

 
374

Additional paid-in capital
17,566

 
33,365

Retained earnings
460,765

 
273,975

Accumulated other comprehensive loss
(407,699
)
 
(414,635
)
Total Levi Strauss & Co. stockholders’ equity (deficit)
71,007

 
(106,921
)
Noncontrolling interest
3,769

 
5,413

Total stockholders’ equity (deficit)
74,776

 
(101,508
)
Total liabilities, temporary equity and stockholders’ equity (deficit)
$
3,145,207

 
$
3,170,077

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


3


LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
 
 
Three Months Ended
 
Nine Months Ended
 
August 25,
2013
 
August 26,
2012
 
August 25,
2013
 
August 26,
2012
 
(Dollars in thousands)
(Unaudited)
Net revenues
$
1,141,284

 
$
1,100,856

 
$
3,386,860

 
$
3,312,974

Cost of goods sold
568,448

 
580,108

 
1,673,435

 
1,762,746

Gross profit
572,836

 
520,748

 
1,713,425

 
1,550,228

Selling, general and administrative expenses
454,750

 
433,961

 
1,314,247

 
1,307,600

Operating income
118,086

 
86,787

 
399,178

 
242,628

Interest expense
(30,903
)
 
(32,160
)
 
(95,943
)
 
(103,144
)
Loss on early extinguishment of debt

 

 
(689
)
 
(8,206
)
Other income (expense), net
(10,661
)
 
(5,747
)
 
(5,425
)
 
6,122

Income before income taxes
76,522

 
48,880

 
297,121

 
137,400

Income tax expense
20,077

 
23,802

 
85,592

 
49,782

Net income
56,445

 
25,078

 
211,529

 
87,618

Net loss attributable to noncontrolling interest
630

 
3,273

 
715

 
3,184

Net income attributable to Levi Strauss & Co.
$
57,075

 
$
28,351

 
$
212,244

 
$
90,802
































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


4


LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
Three Months Ended
 
Nine Months Ended
 
August 25,
2013
 
August 26,
2012
 
August 25,
2013
 
August 26,
2012
 
(Dollars in thousands)
(Unaudited)
Net income
$
56,445

 
$
25,078

 
$
211,529

 
$
87,618

Other comprehensive income, net of related income taxes:
 
 
 
 
 
 
 
Pension and postretirement benefits
3,718

 
474

 
10,826

 
1,091

Net investment hedge (losses) gains
(8,329
)
 
(1,006
)
 
(5,928
)
 
14,839

Foreign currency translation gains (losses)
9,823

 
4,040

 
1,650

 
(13,604
)
Unrealized (loss) gain on marketable securities
(171
)
 
677

 
(541
)
 
1,496

Total other comprehensive income
5,041

 
4,185

 
6,007

 
3,822

Comprehensive income
61,486

 
29,263

 
217,536

 
91,440

Comprehensive loss attributable to noncontrolling interest
(451
)
 
(3,152
)
 
(1,644
)
 
(3,353
)
Comprehensive income attributable to Levi Strauss & Co.
$
61,937

 
$
32,415

 
$
219,180

 
$
94,793



































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


5


LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Nine Months Ended
 
August 25,
2013
 
August 26,
2012
 
(Dollars in thousands)
(Unaudited)
Cash Flows from Operating Activities:
 
 
 
Net income
$
211,529

 
$
87,618

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
86,600

 
91,577

Asset impairments
1,917

 
19,413

Gain on disposal of assets
(2,120
)
 
(303
)
Unrealized foreign exchange losses (gains)
323

 
(14,666
)
Realized loss (gain) on settlement of forward foreign exchange contracts not designated for hedge accounting
2,547

 
(3,559
)
Employee benefit plans’ amortization from accumulated other comprehensive loss
17,478

 
1,175

Employee benefit plans’ curtailment gain, net
(815
)
 
(1,730
)
Noncash loss (gain) on extinguishment of debt
689

 
(3,643
)
Amortization of deferred debt issuance costs
3,232

 
3,268

Stock-based compensation
6,303

 
4,815

Allowance for doubtful accounts
2,394

 
5,243

Change in operating assets and liabilities:
 
 
 
Trade receivables
95,373

 
187,520

Inventories
(87,434
)
 
16,919

Other current assets
6,989

 
28,056

Other non-current assets
873

 
(3,554
)
Accounts payable and other accrued liabilities
(42,640
)
 
83,469

Income tax liabilities
37,660

 
11,287

Accrued salaries, wages and employee benefits and long-term employee related benefits
(75,322
)
 
(102,991
)
Other long-term liabilities
8,845

 
5,437

Other, net
(605
)
 
423

Net cash provided by operating activities
273,816

 
415,774

Cash Flows from Investing Activities:
 
 
 
Purchases of property, plant and equipment
(63,002
)
 
(54,308
)
Proceeds from sale of assets
2,168

 
519

(Payments) proceeds on settlement of forward foreign exchange contracts not designated for hedge accounting
(2,547
)
 
3,559

Net cash used for investing activities
(63,381
)
 
(50,230
)
Cash Flows from Financing Activities:
 
 
 
Proceeds from issuance of long-term debt
140,000

 
385,000

Repayments of long-term debt and capital leases
(326,198
)
 
(407,651
)
Proceeds from senior revolving credit facility

 
50,000

Repayments of senior revolving credit facility

 
(250,000
)
Short-term borrowings, net
(13,815
)
 
1,633

Debt issuance costs
(2,557
)
 
(7,368
)
Restricted cash
123

 
671

Repurchase of common stock
(365
)
 
(479
)
Excess tax benefits from stock-based compensation
165

 

Dividend to stockholders
(25,076
)
 
(20,036
)
Net cash used for financing activities
(227,723
)
 
(248,230
)
Effect of exchange rate changes on cash and cash equivalents
(6,518
)
 
(7,088
)
Net (decrease) increase in cash and cash equivalents
(23,806
)
 
110,226

Beginning cash and cash equivalents
406,134

 
204,542

Ending cash and cash equivalents
$
382,328

 
$
314,768

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
61,209

 
$
74,153

Income taxes
26,441

 
28,814

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


6


LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIOD ENDED AUGUST 25, 2013
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Levi Strauss & Co. (the “Company”) is one of the world’s leading branded apparel companies. The Company designs, markets and sells – directly or through third parties and licensees – products that include jeans, casual and dress pants, tops, shorts, skirts, jackets, footwear and related accessories for men, women and children under the Levi’s®, Dockers®, Signature by Levi Strauss & Co.™ and Denizen® brands. The Company operates its business through three geographic regions: Americas, Europe and Asia Pacific.
Basis of Presentation and Principles of Consolidation
The unaudited consolidated financial statements of the Company and its wholly-owned and majority-owned foreign and domestic subsidiaries are prepared in conformity with generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial information. In the opinion of management, all adjustments necessary for a fair statement of the financial position and the results of operations for the periods presented have been included. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended November 25, 2012, included in the Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission (“SEC”) on February 7, 2013.
The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions have been eliminated. Management believes the disclosures are adequate to make the information presented herein not misleading. The results of operations for the three and nine months ended August 25, 2013, may not be indicative of the results to be expected for any other interim period or the year ending November 24, 2013.
The Company’s fiscal year ends on the last Sunday of November in each year, although the fiscal years of certain foreign subsidiaries end on November 30. Each quarter of both fiscal years 2013 and 2012 consists of 13 weeks. All references to years relate to fiscal years rather than calendar years.
Subsequent events have been evaluated through the issuance date of these financial statements.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the related notes to the consolidated financial statements. Estimates are based upon historical factors, current circumstances and the experience and judgment of the Company’s management. Management evaluates its estimates and assumptions on an ongoing basis and may employ outside experts to assist in its evaluations. Changes in such estimates, based on more accurate future information, or different assumptions or conditions, may affect amounts reported in future periods.
Temporary Equity
Equity-classified stock-based compensation awards that may be settled in cash, at the option of the holder, are presented on the balance sheet outside permanent equity. Accordingly, “Temporary equity” on the face of the accompanying consolidated balance sheets includes the portion of the intrinsic value of these awards relating to the elapsed service period since the grant date as well as the fair value of common stock issued pursuant to the Company's 2006 Equity Incentive Plan ("EIP"). The increase in temporary equity from the year ended November 25, 2012, to August 25, 2013, was due to an increase in the fair value of the Company's common stock.


7




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 25, 2013

Recently Issued Accounting Standards
There have been no developments to recently issued accounting standards, including the expected dates of adoption and estimated effects on the Company’s consolidated financial statements, from those disclosed in the Company’s 2012 Annual Report on Form 10-K, except for the following, which will become effective for the Company in the first quarter of 2015:
In July 2013, the FASB issued Accounting Standards Update No. 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or Tax Credit Carryforward Exists," ("ASU 2013-11"). ASU 2013-11 requires entities to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward when settlement in this manner is available under the tax law. The Company does not anticipate that the adoption of this standard will have a material impact on its consolidated financial statements.

NOTE 2: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the Company’s financial instruments that are carried at fair value:
 
August 25, 2013
 
November 25, 2012
 
 
 
Fair Value Estimated
Using
 
 
 
Fair Value Estimated
Using
 
Fair Value
 
Level 1 Inputs(1)
 
Level 2 Inputs(2)
 
Fair Value
 
Level 1 Inputs(1)
 
Level 2 Inputs(2)
 
(Dollars in thousands)
Financial assets carried at fair value
 
 
 
 
 
 
 
 
 
 
 
Rabbi trust assets
$
22,458

 
$
22,458

 
$

 
$
20,322

 
$
20,322

 
$

Forward foreign exchange contracts, net(3)
13,641

 

 
13,641

 
5,792

 

 
5,792

Total
$
36,099

 
$
22,458

 
$
13,641

 
$
26,114

 
$
20,322

 
$
5,792

Financial liabilities carried at fair value
 
 
 
 
 
 
 
 
 
 
 
Forward foreign exchange contracts, net(3)
$
2,360

 
$

 
$
2,360

 
$
3,018

 
$

 
$
3,018

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

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

(3)
The Company’s over-the-counter forward foreign exchange contracts are subject to International Swaps and Derivatives Association, Inc. master agreements. These agreements permit the net-settlement of these contracts on a per-institution basis.


8




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 25, 2013

The following table presents the carrying value – including related accrued interest – and estimated fair value of the Company’s financial instruments that are carried at adjusted historical cost:
 
August 25, 2013
 
November 25, 2012
 
Carrying
Value
 
Estimated Fair Value(1)
 
Carrying
Value
 
Estimated Fair Value(1)
 
(Dollars in thousands)
Financial liabilities carried at adjusted historical cost
 
 
 
 
 
 
 
Senior term loan due 2014
$

 
$

 
$
324,890

 
$
324,484

4.25% Yen-denominated Eurobonds due 2016
41,335

 
40,112

 
48,656

 
47,201

7.75% Euro senior notes due 2018
409,256

 
437,303

 
387,433

 
416,422

7.625% senior notes due 2020
536,231

 
573,637

 
526,223

 
572,161

6.875% senior notes due 2022
546,975

 
581,110

 
386,838

 
404,163

Short-term borrowings
38,399

 
38,399

 
59,861

 
59,861

Total
$
1,572,196

 
$
1,670,561

 
$
1,733,901

 
$
1,824,292

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

NOTE 3: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
As of August 25, 2013, the Company had forward foreign exchange contracts to buy $637.2 million and to sell $412.9 million against various foreign currencies. These contracts are at various exchange rates and expire at various dates through January 2015.
The table below provides data about the carrying values of derivative instruments and non-derivative instruments: 
 
August 25, 2013
 
November 25, 2012
 
Assets
 
(Liabilities)
 
Derivative Net Carrying Value
 
Assets
 
(Liabilities)
 
Derivative Net Carrying Value
 
Carrying
Value
 
Carrying
Value
 
 
Carrying
Value
 
Carrying
Value
 
 
(Dollars in thousands)
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Forward foreign exchange contracts(1)
$
19,319

 
$
(5,678
)
 
$
13,641

 
$
7,131

 
$
(1,339
)
 
$
5,792

Forward foreign exchange contracts(2)
889

 
(3,249
)
 
(2,360
)
 
5,183

 
(8,201
)
 
(3,018
)
Total
$
20,208

 
$
(8,927
)
 
 
 
$
12,314

 
$
(9,540
)
 
 
Non-derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
4.25% Yen-denominated Eurobonds due 2016
$

 
$
(23,656
)
 
 
 
$

 
$
(28,135
)
 
 
7.75% Euro senior notes due 2018

 
(400,680
)
 
 
 

 
(386,520
)
 
 
Total
$

 
$
(424,336
)
 
 
 
$

 
$
(414,655
)
 
 
_____________
 
(1)
Included in “Other current assets” or “Other non-current assets” on the Company’s consolidated balance sheets.
(2)
Included in “Other accrued liabilities” on the Company’s consolidated balance sheets.



9




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 25, 2013

The table below provides data about the amount of gains and losses related to derivative instruments and non-derivative instruments designated as net investment hedges included in “Accumulated other comprehensive loss” (“AOCI”) on the Company’s consolidated balance sheets, and in “Other income (expense), net” in the Company’s consolidated statements of income:
 
Gain or (Loss)
Recognized in AOCI
(Effective Portion)
 
Gain or (Loss) Recognized in Other
Income (Expense), net (Ineffective
Portion and Amount Excluded from
Effectiveness Testing)
 
As of
 
As of
 
Three Months Ended
 
Nine Months Ended
August 25,
2013
November 25,
2012
August 25,
2013
 
August 26,
2012
 
August 25,
2013
 
August 26,
2012
 
(Dollars in thousands)
Forward foreign exchange contracts
$
4,637

 
$
4,637

 

 


 


 


4.25% Yen-denominated Eurobonds due 2016
(21,806
)
 
(26,285
)
 
$
(661
)
 
$
(79
)
 
$
3,243

 
$
2,444

7.75% Euro senior notes due 2018
(23,611
)
 
(9,451
)
 

 

 

 

Cumulative income taxes
15,999

 
12,246

 
 
 
 
 
 
 
 
Total
$
(24,781
)
 
$
(18,853
)
 
 
 
 
 
 
 
 
The table below provides data about the amount of gains and losses related to derivatives not designated as hedging instruments included in “Other income (expense), net” in the Company’s consolidated statements of income:
 
Gain or (Loss)
 
Three Months Ended
 
Nine Months Ended
 
August 25,
2013
 
August 26,
2012
 
August 25,
2013
 
August 26,
2012
 
(Dollars in thousands)
Forward foreign exchange contracts:
 
 
 
 
 
 
 
Realized
$
3,650

 
$
1,029

 
$
(2,547
)
 
$
3,559

Unrealized
2,664

 
(16,413
)
 
8,833

 
(12,862
)
Total
$
6,314

 
$
(15,384
)
 
$
6,286

 
$
(9,303
)



10




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 25, 2013

NOTE 4: DEBT 
 
 
August 25,
2013
 
November 25,
2012
 
 
 
(Dollars in thousands)
 
 
 
 
 
 
Long-term debt
 
 
 
 
 
Unsecured:
 
 
 
 
 
Senior term loan due 2014
$

 
$
324,424

 
 
4.25% Yen-denominated Eurobonds due 2016
40,786

 
48,508

 
 
7.75% Euro senior notes due 2018
400,680

 
386,520

 
 
7.625% senior notes due 2020
525,000

 
525,000

 
 
6.875% senior notes due 2022
535,446

 
385,000

 
 
Total unsecured
1,501,912

 
1,669,452

 
 
Total long-term debt
$
1,501,912

 
$
1,669,452

 
 
Short-term debt
 
 
 
 
 
Short-term borrowings
$
38,153

 
$
59,759

 
 
Total short-term debt
$
38,153

 
$
59,759

 
 
Total long-term and short-term debt
$
1,540,065

 
$
1,729,211

 
Senior Term Loan due 2014
During the nine months ended August 25, 2013, the Company repaid in full the remaining balance of its Senior Term Loan due 2014 with the proceeds of the notes issued on March 14, 2013, and cash on hand. See “Additional Issuance of Senior Notes due 2022” below.
Additional Issuance of Senior Notes due 2022
Additional Senior Notes due 2022. On March 14, 2013, the Company issued an additional $140.0 million in 6.875% senior notes due 2022 (the “Additional Senior Notes due 2022”) to qualified institutional buyers in compliance with the Securities Act of 1933, as amended (the “Securities Act”). The Additional Senior Notes due 2022 have the same terms and are part of the same series as the $385.0 million aggregate principal amount of 6.875% senior notes due 2022 the Company issued in May 2012 (the “Existing Senior Notes due 2022”). The Additional Senior Notes due 2022 were offered at a premium of $11.2 million, which will be amortized as a reduction to interest expense over the term of the notes. Costs of approximately $2.6 million associated with the issuance of the notes, representing underwriting fees and other expenses, will also be amortized to interest expense over the term of the notes.
Exchange offer. In accordance with a registration rights agreement, the Company conducted an exchange offer to allow holders of the Additional Senior Notes due 2022 to exchange the Additional Senior Notes due 2022 for new notes in the same principal amount with substantially identical terms ("Exchange Notes"), except that the Exchange Notes were registered under the Securities Act. All of the Additional Senior Notes due 2022 were exchanged in the exchange offer.
Covenants. The Exchange Notes and the Existing Senior Notes due 2022 will be treated as a single class for all purposes under the indenture governing the Company's Existing Senior Notes due 2022, including without limitation, the covenants, events of default, asset sale, change of control, covenant suspension and other terms.
Use of Proceeds. The Company used the net proceeds from the offering, together with cash on hand, to prepay in full its Senior Term Loan due 2014. The Company recorded a $0.7 million loss on the early extinguishment of debt, which was comprised of the write-off of the remaining unamortized discount and unamortized debt issuance costs.


11




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 25, 2013

Senior Revolving Credit Facility
The Company’s unused availability under its senior secured revolving credit facility was $521.6 million at August 25, 2013, as the Company’s total availability of $587.8 million was reduced by $66.2 million of letters of credit and other credit usage allocated under the facility.
Interest Rates on Borrowings
The Company’s weighted-average interest rate on average borrowings outstanding during the three and nine months ended August 25, 2013, was 7.75% and 7.44%, respectively, as compared to 6.95% and 7.05%, respectively, in each of the same periods of 2012.

NOTE 5: EMPLOYEE BENEFIT PLANS
The following table summarizes the components of net periodic benefit cost (income) and the changes recognized in “Accumulated other comprehensive loss” for the Company’s defined benefit pension plans and postretirement benefit plans: 
 
 
 
 
 
 
 
 
 
Pension Benefits
 
Postretirement Benefits
 
Three Months Ended
 
Three Months Ended
 
August 25,
2013
 
August 26,
2012
 
August 25,
2013
 
August 26,
2012
 
(Dollars in thousands)
Net periodic benefit cost (income):
 
 
 
 
 
 
 
Service cost
$
2,052

 
$
2,215

 
$
94

 
$
99

Interest cost
12,918

 
14,364

 
1,239

 
1,658

Expected return on plan assets
(14,105
)
 
(12,901
)
 

 

Amortization of prior service benefit
(24
)
 
(20
)
 
(122
)
 
(4,089
)
Amortization of actuarial loss
3,810

 
3,154

 
1,691

 
1,290

Curtailment gain
(305
)
 
(735
)
 

 

Net settlement loss
415

 

 

 

Net periodic benefit cost (income)
4,761

 
6,077

 
2,902

 
(1,042
)
Changes in accumulated other comprehensive loss:
 
 
 
 
 
 
 
Actuarial gain

 
(451
)
 

 

Amortization of prior service benefit
24

 
20

 
122

 
4,089

Amortization of actuarial loss
(3,810
)
 
(3,154
)
 
(1,691
)
 
(1,290
)
Curtailment (loss) gain
(12
)
 
192

 

 

Net settlement (loss) gain
(406
)
 
18

 

 

Total recognized in accumulated other comprehensive loss
(4,204
)
 
(3,375
)
 
(1,569
)
 
2,799

Total recognized in net periodic benefit cost (income) and accumulated other comprehensive loss
$
557

 
$
2,702

 
$
1,333

 
$
1,757



12




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 25, 2013

 
Pension Benefits
 
Postretirement Benefits
 
Nine Months Ended
 
Nine Months Ended
 
August 25,
2013
 
August 26,
2012
 
August 25,
2013
 
August 26,
2012
 
(Dollars in thousands)
Net periodic benefit cost (income):
 
 
 
 
 
 
 
Service cost
$
6,548

 
$
6,709

 
$
282

 
$
298

Interest cost
38,978

 
43,212

 
3,718

 
4,975

Expected return on plan assets
(42,065
)
 
(39,018
)
 

 

Amortization of prior service benefit
(61
)
 
(61
)
 
(366
)
 
(12,267
)
Amortization of actuarial loss
12,241

 
9,457

 
5,074

 
3,868

Curtailment gain
(815
)
 
(1,730
)
 

 

Net settlement loss
1,044

 
417

 

 

Net periodic benefit cost (income)
15,870

 
18,986

 
8,708

 
(3,126
)
Changes in accumulated other comprehensive loss:
 
 
 
 
 
 
 
Actuarial gain

 
(381
)
 

 

Amortization of prior service benefit
61

 
61

 
366

 
12,267

Amortization of actuarial loss
(12,241
)
 
(9,457
)
 
(5,074
)
 
(3,868
)
Curtailment gain
497

 
191

 

 

Net settlement loss
(590
)
 
(178
)
 

 

Total recognized in accumulated other comprehensive loss
(12,273
)
 
(9,764
)
 
(4,708
)
 
8,399

Total recognized in net periodic benefit cost (income) and accumulated other comprehensive loss
$
3,597

 
$
9,222

 
$
4,000

 
$
5,273


NOTE 6: COMMITMENTS AND CONTINGENCIES
Forward Foreign Exchange Contracts
The Company uses over-the-counter derivative instruments to manage its exposure to foreign currencies. The Company is exposed to credit loss in the event of nonperformance by the counterparties to the forward foreign exchange contracts. However, the Company believes that its exposures are appropriately diversified across counterparties and that these counterparties are creditworthy financial institutions. Please see Note 3 for additional information.
Other Contingencies
Litigation.    There have been no material developments with respect to the information previously reported in the Company’s 2012 Annual Report on Form 10-K related to legal proceedings.

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



13




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 25, 2013

NOTE 7: DIVIDEND PAYMENT
The Company paid a cash dividend of $25.1 million in the first quarter of 2013. The Company does not have an established annual dividend policy. The Company will continue to review its ability to pay cash dividends at least annually, and dividends may be declared at the discretion of the Company's Board of Directors depending upon, among other factors, the income tax impact to the dividend recipients, the Company's financial condition and compliance with the terms of the Company's debt agreements.

NOTE 8: ACCUMULATED OTHER COMPREHENSIVE LOSS

The following is a summary of the components of “Accumulated other comprehensive loss,” net of related income taxes: 
 
 
August 25,
2013
 
November 25,
2012
 
 
 
(Dollars in thousands)
 
 
Pension and postretirement benefits
$
(320,135
)
 
$
(330,961
)
 
 
Net investment hedge losses
(24,781
)
 
(18,853
)
 
 
Foreign currency translation losses
(53,773
)
 
(55,423
)
 
 
Unrealized gain on marketable securities
473

 
1,014

 
 
Accumulated other comprehensive loss
(398,216
)
 
(404,223
)
 
 
Accumulated other comprehensive income attributable to noncontrolling interest
9,483

 
10,412

 
 
Accumulated other comprehensive loss attributable to Levi Strauss & Co.
$
(407,699
)
 
$
(414,635
)
 

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



14




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 25, 2013

NOTE 9: OTHER INCOME (EXPENSE), NET
The following table summarizes significant components of “Other income (expense), net”:
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
August 25,
2013
 
August 26,
2012
 
August 25,
2013
 
August 26,
2012
 
 
 
(Dollars in thousands)
 
 
Foreign exchange management gains (losses)(1)
$
6,314

 
$
(15,384
)
 
$
6,286

 
$
(9,303
)
 
 
Foreign currency transaction (losses) gains(2)
(18,210
)
 
8,518

 
(18,728
)
 
11,722

 
 
Interest income
357

 
345

 
1,138

 
1,153

 
 
Investment income
214

 
99

 
3,019

 
326

 
 
Other
664

 
675

 
2,860

 
2,224

 
 
Total other income (expense), net
$
(10,661
)
 
$
(5,747
)
 
$
(5,425
)
 
$
6,122

 
_____________
 
(1)
Gains and losses on forward foreign exchange contracts primarily resulted from currency fluctuations relative to negotiated contract rates. Losses on forward foreign exchange contracts in 2012 primarily resulted from unfavorable currency fluctuations relative to negotiated contract rates on positions to sell the Swedish Krona, Mexican Peso, and Australian Dollar.
(2)
Foreign currency transaction gains and losses reflect the impact of foreign currency fluctuation on the Company's foreign currency denominated balances. Losses in 2013 were primarily due to the weakening of various currencies against the U.S. Dollar.

NOTE 10: INCOME TAXES
The effective income tax rate was 28.8% for the nine months ended August 25, 2013, compared to 36.2% for the same period ended August 26, 2012. The decrease in the effective tax rate in 2013 was due to two factors. The rate declined due to a reduction, as a percentage of pre-tax profits, in the proportion of losses in jurisdictions where the Company cannot record a tax benefit. The 2013 effective tax rate also benefited from the July 2013 finalization of the U.S. federal tax audit of tax years 2003 – 2008, which enabled the Company to record previously unrecognized tax benefits of $23.4 million during the three months ended August 25, 2013, of which $14.2 million reduced income tax expense.

NOTE 11: RELATED PARTIES
Robert D. Haas, a director and Chairman Emeritus of the Company, is the President of the Levi Strauss Foundation, which is not a consolidated entity of the Company. During the three- and nine-month periods ended August 25, 2013, the Company donated $0.4 million and $3.9 million, respectively, to the Levi Strauss Foundation as compared to $0.5 million and $2.4 million, respectively, for the same prior-year periods.



15




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED AUGUST 25, 2013

NOTE 12: BUSINESS SEGMENT INFORMATION
The Company manages its business according to three regional segments, the Americas, Europe and Asia Pacific. The Company considers its chief executive officer to be the Company’s chief operating decision maker. The Company’s management, including the chief operating decision maker, manages business operations, evaluates performance and allocates resources based on the regional segments’ net revenues and operating income.

Business segment information for the Company is as follows:
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
August 25,
2013
 
August 26,
2012
 
August 25,
2013
 
August 26,
2012
 
 
 
(Dollars in thousands)
 
 
Net revenues:
 
 
 
 
 
 
 
 
 
Americas
$
710,212

 
$
679,098

 
$
2,023,253

 
$
1,931,561

 
 
Europe
275,211

 
265,922

 
824,915

 
809,271

 
 
Asia Pacific
155,861

 
155,836

 
538,692

 
572,142

 
 
Total net revenues
$
1,141,284

 
$
1,100,856

 
$
3,386,860

 
$
3,312,974

 
 
Operating income:
 
 
 
 
 
 
 
 
 
Americas
$
125,228

 
$
136,509

 
$
376,598

 
$
287,470

 
 
Europe
45,914

 
48,152

 
145,549

 
129,781

 
 
Asia Pacific
22,666

 
(4,719
)
 
104,233

 
55,193

 
 
Regional operating income
193,808

 
179,942

 
626,380

 
472,444

 
 
Corporate expenses(1)
75,722

 
93,155

 
227,202

 
229,816

 
 
Total operating income
118,086

 
86,787

 
399,178

 
242,628

 
 
Interest expense
(30,903
)
 
(32,160
)
 
(95,943
)
 
(103,144
)
 
 
Loss on early extinguishment of debt

 

 
(689
)
 
(8,206
)
 
 
Other income (expense), net
(10,661
)
 
(5,747
)
 
(5,425
)
 
6,122

 
 
Income before income taxes
$
76,522

 
$
48,880

 
$
297,121

 
$
137,400

 
_____________
 
(1)
Included in corporate expenses for the three- and nine-month periods ended August 26, 2012, is an $18.8 million impairment charge related to the Company's decision in the third quarter of 2012 to outsource distribution in Japan to a third-party and close its owned distribution center in that country.



16


Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
Overview
We design, market and sell – directly or through third parties and licensees – products that include jeans, casual and dress pants, tops, shorts, skirts, jackets, footwear and related accessories for men, women and children under our Levi’s®, Dockers®, Signature by Levi Strauss & Co.™ (“Signature”) and Denizen® brands around the world.
Our business is operated through three geographic regions: Americas, Europe and Asia Pacific. Our products are sold in approximately 50,000 retail locations in more than 110 countries. We support our brands through a global infrastructure, developing, sourcing and marketing our products around the world. We distribute our Levi’s® and Dockers® products primarily through chain retailers and department stores in the United States and primarily through department stores, specialty retailers and approximately 2,300 franchised or other brand-dedicated stores and shop-in-shops outside of the United States. We also distribute our Levi’s® and Dockers® products through 513 company-operated stores located in 33 countries, including the United States, and through the online stores we operate. Our company-operated and online stores generated approximately 23% of our net revenues in the first nine months of 2013, as compared to 21% in the same period in 2012, with our online stores representing approximately 11% of this revenue. In addition, we distribute our Levi’s® and Dockers® products through online stores operated by certain of our key wholesale customers and other third parties. We distribute products under our Signature and Denizen® brands primarily through mass channel retailers in the Americas.
Our Europe and Asia Pacific businesses, collectively, contributed approximately 40% of both our net revenues and our regional operating income in the nine-month period in 2013. Sales of Levi’s® brand products represented approximately 84% of our total net sales in the nine-month period in 2013.
Trends Affecting Our Business
Our key long-term objectives are to strengthen our brands globally in order to deliver sustainable profitable growth, generate strong cash flow and reduce our debt. Critical strategies to achieve these objectives include driving our profitable core business; expanding the reach of our global brands in product categories, consumer segments and geographic markets; elevating the performance of our retail channel; and leveraging our global scale to develop a competitive cost structure.
During the third quarter of 2013, economic challenges and market conditions continued to impact retail performance in many markets around the world, including key markets in Asia Pacific and an increasing number of markets in Europe. The industry trend towards vertically-integrated retailers is reflected in an increasingly competitive environment in Asia Pacific. Input costs for our products such as cotton and labor are subject to volatility and can have a significant impact on our business.
Our Third Quarter 2013 Results
 
Net revenues. Compared to the third quarter of 2012, consolidated net revenues increased on a reported and constant-currency basis by 4% and 3%, respectively. The increase primarily reflected higher sales in the Americas, both at our company-operated retail network and to certain wholesale customers.
Operating income. Compared to the third quarter of 2012, consolidated operating income increased by 36% and operating margin rose to 10%, primarily reflecting charges of approximately $44 million that we took in the third quarter of 2012 related to strategic choices relating to operations in our Asia Pacific region. The increase in operating income was partially offset by higher SG&A in 2013.
Cash flows. Cash flows provided by operating activities were $274 million for the nine-month period in 2013 as compared to $416 million for the same period in 2012; the decrease reflected higher payments to vendors, our higher inventory levels and our lower beginning accounts receivable balance.




17



Financial Information Presentation
Fiscal year.    Our fiscal year ends on the last Sunday of November in each year, although the fiscal years of certain foreign subsidiaries end on November 30. Each quarter of fiscal years 2013 and 2012 consisted of 13 weeks.
Segments.    We manage our business according to three regional segments: the Americas, Europe and Asia Pacific.
Classification.    Our classification of certain significant revenues and expenses reflects the following:
 
Net revenues is primarily comprised of sales of products to wholesale customers, including franchised stores, and direct sales to consumers at our company-operated and online stores and at our company-operated shop-in-shops located within department stores. It includes discounts, allowances for estimated returns and incentives. Net revenues also includes royalties earned from the use of our trademarks by third-party licensees in connection with the manufacturing, advertising and distribution of trademarked products.
Cost of goods sold is primarily comprised of product costs, labor and related overhead, sourcing costs, inbound freight, internal transfers, and the cost of operating our remaining manufacturing facilities, including the related depreciation expense.
Selling costs include, among other things, all occupancy costs and depreciation associated with our company-operated stores and commissions associated with our company-operated shop-in-shops.
We reflect substantially all distribution costs in selling, general and administrative expenses, including costs related to receiving and inspection at distribution centers, warehousing, shipping to our customers, handling, and certain other activities associated with our distribution network.
Gross margins may not be comparable to those of other companies in our industry since some companies may include costs related to their distribution network and occupancy costs associated with company-operated stores in cost of goods sold.
Constant currency.    Constant-currency comparisons are based on translating local currency amounts in both periods at the foreign exchange rates used in the Company’s internal planning process for the current year. We routinely evaluate our financial performance on a constant-currency basis in order to facilitate period-to-period comparisons without regard to the impact of changing foreign currency exchange rates.


18


Results of Operations for Three and Nine Months Ended August 25, 2013, as Compared to Same Periods in 2012
The following table summarizes, for the periods indicated, our consolidated statements of income, the changes in these items from period to period and these items expressed as a percentage of net revenues:
 
 
Three Months Ended
 
Nine Months Ended
 
August 25,
2013
 
August 26,
2012
 
%
Increase
(Decrease)
 
August 25,
2013
 
August 26,
2012
 
August 25,
2013
 
August 26,
2012
 
%
Increase
(Decrease)
 
August 25,
2013
 
August 26,
2012
 
 
 
% of Net
Revenues
 
% of Net
Revenues
 
 
 
% of Net
Revenues
 
% of Net
Revenues
 
(Dollars in millions)
Net revenues
$
1,141.3

 
$
1,100.9

 
3.7
 %
 
100.0
 %
 
100.0
 %
 
$
3,386.9

 
$
3,313.0

 
2.2
 %
 
100.0
 %
 
100.0
 %
Cost of goods sold
568.5

 
580.2

 
(2.0
)%
 
49.8
 %
 
52.7
 %
 
1,673.5

 
1,762.8

 
(5.1
)%
 
49.4
 %
 
53.2
 %
Gross profit
572.8

 
520.7

 
10.0
 %
 
50.2
 %
 
47.3
 %
 
1,713.4

 
1,550.2

 
10.5
 %
 
50.6
 %
 
46.8
 %
Selling, general and administrative expenses
454.7

 
433.9

 
4.8
 %
 
39.8
 %
 
39.4
 %
 
1,314.2

 
1,307.6

 
0.5
 %
 
38.8
 %
 
39.5
 %
Operating income
118.1

 
86.8

 
36.1
 %
 
10.3
 %
 
7.9
 %
 
399.2

 
242.6

 
64.5
 %
 
11.8
 %
 
7.3
 %
Interest expense
(30.9
)
 
(32.2
)
 
(3.9
)%
 
(2.7
)%
 
(2.9
)%
 
(96.0
)
 
(103.1
)
 
(7.0
)%
 
(2.8
)%
 
(3.1
)%
Loss on early extinguishment of debt

 

 

 

 

 
(0.7
)
 
(8.2
)
 
(91.6
)%
 

 
(0.2
)%
Other income (expense), net
(10.7
)
 
(5.7
)
 
85.5
 %
 
(0.9
)%
 
(0.5
)%
 
(5.4
)
 
6.1

 
(188.6
)%
 
(0.2
)%
 
0.2
 %
Income before income taxes
76.5

 
48.9

 
56.6
 %
 
6.7
 %
 
4.4
 %
 
297.1

 
137.4

 
116.2
 %
 
8.8
 %
 
4.1
 %
Income tax expense
20.1

 
23.8

 
(15.6
)%
 
1.8
 %
 
2.2
 %
 
85.6

 
49.8

 
71.9
 %
 
2.5
 %
 
1.5
 %
Net income
56.4

 
25.1

 
125.1
 %
 
4.9
 %
 
2.3
 %
 
211.5

 
87.6

 
141.4
 %
 
6.2
 %
 
2.6
 %
Net loss attributable to noncontrolling interest
0.7

 
3.3

 
(80.8
)%
 
0.1
 %
 
0.3
 %
 
0.7

 
3.2

 
(77.5
)%
 

 
0.1
 %
Net income attributable to Levi Strauss & Co.
$
57.1

 
$
28.4

 
101.3
 %
 
5.0
 %
 
2.6
 %
 
$
212.2

 
$
90.8

 
133.7
 %
 
6.3
 %
 
2.7
 %


19


Net revenues
The following table presents net revenues by reporting segment for the periods indicated and the changes in net revenues by reporting segment on both reported and constant-currency bases from period to period.
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
 
 
% Increase
(Decrease)
 
 
 
 
 
% Increase
(Decrease)
 
August 25,
2013
 
August 26,
2012
 
As
Reported
 
Constant
Currency
 
August 25,
2013
 
August 26,
2012
 
As
Reported
 
Constant
Currency
 
(Dollars in millions)
Net revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Americas
$
710.2

 
$
679.1

 
4.6
%
 
4.4
 %
 
$
2,023.3

 
$
1,931.6

 
4.7
 %
 
4.6
 %
Europe
275.2

 
265.9

 
3.5
%
 
(1.2
)%
 
824.9

 
809.3

 
1.9
 %
 
0.1
 %
Asia Pacific
155.9

 
155.9

 

 
6.0
 %
 
538.7

 
572.1

 
(5.8
)%
 
(2.4
)%
Total net revenues
$
1,141.3

 
$
1,100.9

 
3.7
%
 
3.3
 %
 
$
3,386.9

 
$
3,313.0

 
2.2
 %
 
2.3
 %
Total net revenues increased on both reported and constant-currency bases for the three- and nine-month periods ended August 25, 2013, as compared to the same prior-year periods.
Americas.    For the three- and nine-month periods, net revenues in our Americas region increased on both reported and constant-currency bases, with currency affecting net revenues favorably by approximately $1 million and $4 million, respectively.
For both periods, sales increased in our retail channel at our outlet and online stores. Levi's® and Dockers® brand wholesale revenues increased in both periods, due to strong sales to certain key customers. For the three-month period, sales of our Signature brand products increased, reflecting an expanded presence at existing customers. For the nine-month period, our decision to license the Levi's® brand boys business beginning in the third quarter of 2012 partially offset the higher wholesale revenues.
Europe.    Net revenues in Europe increased on a reported basis for the three- and nine-month periods, with currency affecting net revenues favorably by approximately $13 million and $15 million, respectively.
For both periods, net revenues from the performance and expansion of our company-operated retail network grew, particularly in Russia. For the three-month period, this growth was offset by lower sales to our franchisees, most notably in Southern Europe. For the nine-month period, company-operated retail growth was offset by lower sales in our traditional wholesale channels throughout the region. 
Asia Pacific.    Currency affected net revenues unfavorably for the three- and nine-month periods by approximately $9 million and $20 million, respectively.
The increase in constant-currency net revenues for the three-month period reflects our decision to phase out the Denizen® brand in the third quarter of 2012. Revenues were negatively impacted in that period due to support we provided to our customers in conjunction with exiting the brand.
Excluding the Denizen® impact, net revenues declined for both the three- and nine-month periods, reflecting lower Levi's® brand sales at our wholesale and retail channels due to ongoing challenging conditions in most markets in the region. The declines were partially offset by a slight improvement in our performance in Levi's® brand sales in India.



20


Gross profit
The following table shows consolidated gross profit and gross margin for the periods indicated and the changes in these items from period to period: 
 
Three Months Ended
 
Nine Months Ended
 
August 25,
2013
 
August 26,
2012
 
%
Increase
(Decrease)
 
August 25,
2013
 
August 26,
2012
 
%
Increase
(Decrease)
 
(Dollars in millions)
Net revenues
$
1,141.3

 
$
1,100.9

 
3.7
 %
 
$
3,386.9

 
$
3,313.0

 
2.2
 %
Cost of goods sold
568.5

 
580.2

 
(2.0
)%
 
1,673.5

 
1,762.8

 
(5.1
)%
Gross profit
$
572.8

 
$
520.7

 
10.0
 %
 
$
1,713.4

 
$
1,550.2

 
10.5
 %
Gross margin
50.2
%
 
47.3
%
 
 
 
50.6
%
 
46.8
%
 
 
For the three-month period, gross margin improved primarily due to our decision in the third quarter of 2012 to phase out the Denizen® brand in Asia Pacific; gross margin was unfavorably impacted in that period by approximately $25 million of customer support and markdown of the remaining inventory in the region. For the nine-month period, gross margin improved primarily due to the benefit of the lower cost of cotton in the products we sold in the first half of 2013. Currency affected gross profit favorably by approximately $14 million and $26 million for the three- and nine-month periods ended August 25, 2013, respectively, as compared to the same prior-year periods. We expect our full-year 2013 gross margin will be above 50%.
Selling, general and administrative expenses
The following table shows our selling, general and administrative expenses (“SG&A”) for the periods indicated, the changes in these items from period to period and these items expressed as a percentage of net revenues:
 
 
Three Months Ended
 
Nine Months Ended
 
August 25,
2013
 
August 26,
2012
 
%
Increase
(Decrease)
 
August 25,
2013
 
August 26,
2012
 
August 25,
2013
 
August 26,
2012
 
%
Increase
(Decrease)
 
August 25,
2013
 
August 26,
2012
 
 
 
% of Net
Revenues
 
% of Net
Revenues
 
 
 
% of Net
Revenues
 
% of Net
Revenues
 
(Dollars in millions)
Selling
$
172.5

 
$
166.0

 
3.9
 %
 
15.1
%
 
15.1
%
 
$
523.3

 
$
516.4

 
1.3
 %
 
15.5
%
 
15.6
%
Advertising and promotion
60.6

 
51.9

 
16.7
 %
 
5.3
%
 
4.7
%
 
148.5

 
144.5

 
2.7
 %
 
4.4
%
 
4.4
%
Administration
101.1

 
79.1

 
27.8
 %
 
8.9
%
 
7.2
%
 
291.3

 
272.9

 
6.7
 %
 
8.6
%
 
8.2
%
Other
120.5

 
136.9

 
(12.0
)%
 
10.6
%
 
12.4
%
 
351.1

 
373.8

 
(6.1
)%
 
10.4
%
 
11.3
%
Total SG&A
$
454.7

 
$
433.9

 
4.8
 %
 
39.8
%
 
39.4
%
 
$
1,314.2

 
$
1,307.6

 
0.5
 %
 
38.8
%
 
39.5
%

As compared to the same prior-year periods, currency had no significant impact on SG&A for the three-month period ended August 25, 2013, but had a favorable impact of approximately $4 million for the nine-month period ended August 25, 2013.
Selling.   We had 11 more company-operated stores at the end of the third quarter of 2013 than we did at the end of the third quarter of 2012. Higher expenses were associated with the performance and expansion of our company-operated store network.
Advertising and promotion.   The increase in advertising and promotion expenses for the three- and nine-month periods primarily reflected new advertising campaigns launched during the third quarter of 2013. We expect our full-year 2013 advertising and promotion expenses as a percentage of revenues will be in-line with full-year 2012.
Administration.   For both periods, incentive compensation expense increased more than $30 million, reflecting improved achievement against our internally-set objectives in the first nine months of 2013 as compared to the same period in 2012; the increase was partially offset in both periods by lower severance expenses. For the nine-month period, postretirement benefit plan costs increased, as the favorable impact of past plan amendments had been substantially recognized by the end of fiscal 2012.
Other.   Other SG&A includes distribution, information resources, and marketing organization costs. Lower costs for both periods primarily reflected a third-quarter 2012 impairment charge of $19 million recorded in conjunction with our decision to outsource distribution in Japan to a third-party and close our owned distribution center in that country.


21


Operating income
The following table shows operating income by reporting segment and corporate expenses for the periods indicated, the changes in these items from period to period and these items expressed as a percentage of net revenues:
 
 
Three Months Ended
 
 
Nine Months Ended
 
 
August 25,
2013
 
August 26,
2012
 
%
Increase
(Decrease)
 
August 25,
2013
 
August 26,
2012
 
 
August 25,
2013
 
August 26,
2012
 
%
Increase
(Decrease)
 
August 25,
2013
 
August 26,
2012
 
 
 
 
% of Net
Revenues
 
% of Net
Revenues
 
 
 
 
% of Net
Revenues
 
% of Net
Revenues
 
 
(Dollars in millions)
 
Operating income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Americas
$
125.2

 
$
136.5

 
(8.3
)%
 
17.6
%
 
20.1
 %
 
 
$
376.6

 
$
287.4

 
31.0
 %
 
18.6
%
 
14.9
%
 
Europe
45.9

 
48.1

 
(4.6
)%
 
16.7
%
 
18.1
 %
 
 
145.6

 
129.8

 
12.1
 %
 
17.6
%
 
16.0
%
 
Asia Pacific
22.7

 
(4.7
)
 
580.3
 %
 
14.5
%
 
(3.0
)%
 
 
104.2

 
55.2

 
88.9
 %
 
19.3
%
 
9.6
%
 
Total regional operating income
193.8

 
179.9

 
7.7
 %
 
17.0
%
*
16.3
 %
*
 
626.4

 
472.4

 
32.6
 %
 
18.5
%
*
14.3
%
*
Corporate expenses
75.7

 
93.1

 
(18.7
)%
 
6.6
%
*
8.5
 %
*
 
227.2

 
229.8

 
(1.1
)%
 
6.7
%
*
6.9
%
*
Total operating income
$
118.1

 
$
86.8

 
36.1
 %
 
10.3
%
*
7.9
 %
*
 
$
399.2

 
$
242.6

 
64.5
 %
 
11.8
%
*
7.3
%
*