10-Q 1 a2q2014form10-q.htm 10-Q 2Q 2014 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 May 25, 2014
or
 ¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 002-90139
_________________
LEVI STRAUSS & CO.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE
  
94-0905160
(State or Other Jurisdiction of
Incorporation or Organization)
  
(I.R.S. Employer
Identification No.)
1155 Battery Street, San Francisco, California 94111
(Address of Principal Executive Offices) (Zip Code)
(415) 501-6000
(Registrant’s Telephone Number, Including Area Code)
None
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
_________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨    No  þ
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See definition of “Large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
 
 
 
 
 
 
Large accelerated filer ¨
 
Accelerated filer ¨
 
Non-accelerated filer þ
 
Smaller reporting company ¨
 
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  þ
The Company is privately held. Nearly all of its common equity is owned by descendants of the family of the Company’s founder, Levi Strauss, and their relatives. There is no trading in the common equity and therefore an aggregate market value based on sales or bid and asked prices is not determinable.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock $.01 par value — 37,401,518 shares outstanding on July 3, 2014
 
 
 
 
 
 
 
 
 
 



LEVI STRAUSS & CO. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MAY 25, 2014
 
 
 
 
Page
Number
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
 
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 3.
 
Item 4.
 
Item 5.
 
Item 6.
 
 



PART I — FINANCIAL INFORMATION

Item 1.
CONSOLIDATED FINANCIAL STATEMENTS
LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
(Unaudited)
 
 
 
May 25,
2014
 
November 24,
2013
 
(Dollars in thousands)
ASSETS
Current Assets:
 
 
 
Cash and cash equivalents
$
386,074

 
$
489,258

Trade receivables, net of allowance for doubtful accounts of $18,228 and $18,264
341,544

 
446,671

Inventories:
 
 
 
Raw materials
3,817

 
3,361

Work-in-process
6,541

 
6,597

Finished goods
676,610

 
593,909

Total inventories
686,968

 
603,867

Deferred tax assets, net
201,771

 
187,836

Other current assets
122,910

 
112,082

Total current assets
1,739,267

 
1,839,714

Property, plant and equipment, net of accumulated depreciation of $805,923 and $775,933
410,204

 
439,861

Goodwill
241,784

 
241,228

Other intangible assets, net
47,684

 
49,149

Non-current deferred tax assets, net
445,226

 
448,839

Other non-current assets
102,103

 
108,627

Total assets
$
2,986,268

 
$
3,127,418

 
 
 
 
LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS’ EQUITY
Current Liabilities:
 
 
 
Short-term debt
$
137,927

 
$
41,861

Accounts payable
239,087

 
254,516

Accrued salaries, wages and employee benefits
157,417

 
209,966

Restructuring liabilities
49,749

 

Accrued interest payable
5,054

 
5,346

Accrued income taxes
18,752

 
11,301

Other accrued liabilities
211,201

 
262,488

Total current liabilities
819,187

 
785,478

Long-term debt
1,303,412

 
1,504,016

Long-term capital leases
10,533

 
10,243

Postretirement medical benefits
119,036

 
122,248

Pension liability
330,550

 
326,767

Long-term employee related benefits
72,149

 
73,386

Long-term income tax liabilities
24,985

 
30,683

Other long-term liabilities
59,820

 
61,097

Total liabilities
2,739,672

 
2,913,918

Commitments and contingencies


 


Temporary equity
44,056

 
38,524

 
 
 
 
Stockholders’ Equity:
 
 
 
Levi Strauss & Co. stockholders’ equity
 
 
 
Common stock — $.01 par value; 270,000,000 shares authorized; 37,401,518 shares and 37,446,087 shares issued and outstanding
374

 
374

Additional paid-in capital
6,777

 
7,361

Retained earnings
503,424

 
475,960

Accumulated other comprehensive loss
(310,505
)
 
(312,029
)
Total Levi Strauss & Co. stockholders’ equity
200,070

 
171,666

Noncontrolling interest
2,470

 
3,310

Total stockholders’ equity
202,540

 
174,976

Total liabilities, temporary equity and stockholders’ equity
$
2,986,268

 
$
3,127,418

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


3


LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
 
 
Three Months Ended
 
Six Months Ended
 
May 25,
2014
 
May 26,
2013
 
May 25,
2014
 
May 26,
2013
 
(Dollars in thousands)
(Unaudited)
Net revenues
$
1,081,847

 
$
1,098,898

 
$
2,211,837

 
$
2,245,576

Cost of goods sold
551,542

 
550,187

 
1,105,179

 
1,104,987

Gross profit
530,305

 
548,711

 
1,106,658

 
1,140,589

Selling, general and administrative expenses
446,072

 
449,074

 
870,834

 
859,497

Restructuring
19,105

 

 
77,040

 

Operating income
65,128

 
99,637

 
158,784

 
281,092

Interest expense
(31,310
)
 
(32,883
)
 
(63,139
)
 
(65,040
)
Loss on early extinguishment of debt
(11,151
)
 
(575
)
 
(11,151
)
 
(689
)
Other income (expense), net
(6,122
)
 
(830
)
 
(1,939
)
 
5,236

Income before income taxes
16,545

 
65,349

 
82,555

 
220,599

Income tax expense
5,556

 
17,140

 
21,943

 
65,515

Net income
10,989

 
48,209

 
60,612

 
155,084

Net loss (income) attributable to noncontrolling interest
469

 
(60
)
 
817

 
85

Net income attributable to Levi Strauss & Co.
$
11,458

 
$
48,149

 
$
61,429

 
$
155,169






























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
 
Six Months Ended
 
May 25,
2014
 
May 26,
2013
 
May 25,
2014
 
May 26,
2013
 
(Dollars in thousands)
(Unaudited)
Net income
$
10,989

 
$
48,209

 
$
60,612

 
$
155,084

Other comprehensive income, net of related income taxes:
 
 
 
 
 
 
 
Pension and postretirement benefits
2,216

 
3,199

 
4,518

 
7,108

Net investment hedge gains (losses)
658

 
6,039

 
(3,570
)
 
2,401

Foreign currency translation gains (losses)
4,175

 
(5,076
)
 
61

 
(8,173
)
Unrealized gain (loss) on marketable securities
453

 
592

 
492

 
(370
)
Total other comprehensive income
7,502

 
4,754

 
1,501

 
966

Comprehensive income
18,491

 
52,963

 
62,113

 
156,050

Comprehensive loss attributable to noncontrolling interest
451

 
387

 
840

 
1,193

Comprehensive income attributable to Levi Strauss & Co.
$
18,942

 
$
53,350

 
$
62,953

 
$
157,243



































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


5


LEVI STRAUSS & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Six Months Ended
 
May 25,
2014
 
May 26,
2013
 
(Dollars in thousands)
(Unaudited)
Cash Flows from Operating Activities:
 
 
 
Net income
$
60,612

 
$
155,084

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
53,399

 
57,263

Asset impairments
620

 
1,091

Gain on disposal of assets
(47
)
 
(144
)
Unrealized foreign exchange losses (gains)
3,866

 
(11,048
)
Realized (gain) loss on settlement of forward foreign exchange contracts not designated for hedge accounting
(6,769
)
 
6,197

Employee benefit plans’ amortization from accumulated other comprehensive loss
7,438

 
11,717

Employee benefit plans’ curtailment gain, net

 
(510
)
Noncash restructuring charges
5,176

 

Noncash loss on extinguishment of debt
3,170

 
689

Amortization of deferred debt issuance costs
2,092

 
2,143

Stock-based compensation
5,301

 
3,246

Allowance for doubtful accounts
927

 
2,367

Change in operating assets and liabilities:
 
 
 
Trade receivables
103,394

 
156,324

Inventories
(82,387
)
 
(20,949
)
Other current assets
(11,415
)
 
7,767

Other non-current assets
(4,389
)
 
(289
)
Accounts payable and other accrued liabilities
(56,529
)
 
(84,347
)
Restructuring liabilities
50,599

 

Income tax liabilities
(1,732
)
 
30,196

Accrued salaries, wages and employee benefits and long-term employee related benefits
(59,574
)
 
(72,422
)
Other long-term liabilities
(588
)
 
10,004

Other, net
(741
)
 
(180
)
Net cash provided by operating activities
72,423

 
254,199

Cash Flows from Investing Activities:
 
 
 
Purchases of property, plant and equipment
(35,320
)
 
(41,891
)
Proceeds from sale of assets
1,402

 
147

Proceeds (payments) on settlement of forward foreign exchange contracts not designated for hedge accounting
6,769

 
(6,197
)
Acquisitions, net of cash acquired
(75
)
 

Net cash used for investing activities
(27,224
)
 
(47,941
)
Cash Flows from Financing Activities:
 
 
 
Proceeds from issuance of long-term debt

 
140,000

Repayments of long-term debt and capital leases
(207,074
)
 
(325,820
)
Proceeds from senior revolving credit facility
100,000

 

Proceeds from short-term credit facilities
8,386

 
36,760

Repayments of short-term credit facilities
(6,417
)
 
(37,227
)
Other short-term borrowings, net
(8,535
)
 
(4,307
)
Debt issuance costs
(2,684
)
 
(2,412
)
Restricted cash
596

 
(65
)
Repurchase of common stock
(4,676
)
 
(365
)
Excess tax benefits from stock-based compensation
359

 

Dividend to stockholders
(30,003
)
 
(25,076
)
Net cash used for financing activities
(150,048
)
 
(218,512
)
Effect of exchange rate changes on cash and cash equivalents
1,665

 
(4,095
)
Net decrease in cash and cash equivalents
(103,184
)
 
(16,349
)
Beginning cash and cash equivalents
489,258

 
406,134

Ending cash and cash equivalents
$
386,074

 
$
389,785

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
59,759

 
$
58,520

Income taxes
30,639

 
13,948

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 MAY 25, 2014
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Levi Strauss & Co. (the “Company”) is one of the world’s leading branded apparel companies. The Company designs and markets jeans, casual and dress pants, tops, shorts, skirts, jackets, footwear and related accessories for men, women and children around the world under the Levi’s®, Dockers®, Signature by Levi Strauss & Co.™ and Denizen® brands. The Company operates its business through three geographic regions: Americas, Europe and Asia.
Basis of Presentation and Principles of Consolidation
The unaudited consolidated financial statements of the Company and its wholly-owned and majority-owned foreign and domestic subsidiaries are prepared in conformity with generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial information. In the opinion of management, all adjustments necessary for a fair statement of the financial position and the results of operations for the periods presented have been included. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended November 24, 2013, included in the Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission (“SEC”) on February 11, 2014.
The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions have been eliminated. Management believes the disclosures are adequate to make the information presented herein not misleading. The results of operations for the three and six months ended May 25, 2014, may not be indicative of the results to be expected for any other interim period or the year ending November 30, 2014.
The Company’s fiscal year ends on the last Sunday of November in each year, although the fiscal years of certain foreign subsidiaries end on November 30. Each quarter of both fiscal years 2014 and 2013 consists of 13 weeks, with the exception of the fourth quarter of 2014, which will consist of 14 weeks. All references to years relate to fiscal years rather than calendar years.
Subsequent events have been evaluated through the issuance date of these financial statements.
The financing section of the Company's consolidated statements of cash flows has been corrected to present the proceeds and repayments of short-term credit facility borrowings with terms greater than three months on a gross basis. Amounts were previously presented on a net basis. There was no change to the total financing cash flows, and the change was immaterial to the financial statements taken as a whole.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the related notes to the consolidated financial statements. Estimates are based upon historical factors, current circumstances and the experience and judgment of the Company’s management. Management evaluates its estimates and assumptions on an ongoing basis and may employ outside experts to assist in its evaluations. Changes in such estimates, based on more accurate future information, or different assumptions or conditions, may affect amounts reported in future periods.
Restructuring Liabilities
Upon approval of a restructuring plan, the Company records restructuring liabilities for employee severance and related termination benefits when they become probable and estimable for recurring arrangements. The Company records other costs associated with exit activities as they are incurred. The long-term portion of restructuring liabilities is included in “Other long-term liabilities” in the Company’s consolidated balance sheets.


7




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 25, 2014

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


8




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 25, 2014

NOTE 2: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the Company’s financial instruments that are carried at fair value:
 
May 25, 2014
 
November 24, 2013
 
 
 
Fair Value Estimated
Using
 
 
 
Fair Value Estimated
Using
 
Fair Value
 
Level 1 Inputs(1)
 
Level 2 Inputs(2)
 
Fair Value
 
Level 1 Inputs(1)
 
Level 2 Inputs(2)
 
(Dollars in thousands)
Financial assets carried at fair value
 
 
 
 
 
 
 
 
 
 
 
Rabbi trust assets
$
24,861

 
$
24,861

 
$

 
$
23,752

 
$
23,752

 
$

Forward foreign exchange contracts, net(3)
4,324

 

 
4,324

 
7,145

 

 
7,145

Total
$
29,185

 
$
24,861

 
$
4,324

 
$
30,897

 
$
23,752

 
$
7,145

Financial liabilities carried at fair value
 
 
 
 
 
 
 
 
 
 
 
Forward foreign exchange contracts, net(3)
$
12,003

 
$

 
$
12,003

 
$
2,335

 
$

 
$
2,335

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

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

(3)
The Company’s over-the-counter forward foreign exchange contracts are subject to International Swaps and Derivatives Association, Inc. master agreements. These agreements permit the net-settlement of these contracts on a per-institution basis.
The following table presents the carrying value – including related accrued interest – and estimated fair value of the Company’s financial instruments that are carried at adjusted historical cost:
 
May 25, 2014
 
November 24, 2013
 
Carrying
Value
 
Estimated Fair Value(1)
 
Carrying
Value
 
Estimated Fair Value(1)
 
(Dollars in thousands)
Financial liabilities carried at adjusted historical cost
 
 
 
 
 
 
 
Senior revolving credit facility
$
100,078

 
$
99,578

 
$

 
$

4.25% Yen-denominated Eurobonds due 2016
39,435

 
41,352

 
39,659

 
38,523

7.75% Euro senior notes due 2018
205,315

 
213,252

 
405,304

 
432,098

7.625% senior notes due 2020
526,223

 
571,504

 
526,112

 
577,956

6.875% senior notes due 2022
536,773

 
594,207

 
537,447

 
588,275

Short-term borrowings
38,140

 
38,140

 
41,976

 
41,976

Total
$
1,445,964

 
$
1,558,033

 
$
1,550,498

 
$
1,678,828

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



9




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 25, 2014

NOTE 3: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
As of May 25, 2014, the Company had forward foreign exchange contracts to buy $570.7 million and to sell $450.1 million against various foreign currencies. These contracts are at various exchange rates and expire at various dates through November 2015.
The table below provides data about the carrying values of derivative instruments and non-derivative instruments: 
 
May 25, 2014
 
November 24, 2013
 
Assets
 
(Liabilities)
 
Derivative Net Carrying Value
 
Assets
 
(Liabilities)
 
Derivative Net Carrying Value
 
Carrying
Value
 
Carrying
Value
 
 
Carrying
Value
 
Carrying
Value
 
 
(Dollars in thousands)
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Forward foreign exchange contracts
$
4,380

 
$
(56
)
 
$
4,324

 
$
11,145

 
$
(4,000
)
 
$
7,145

Forward foreign exchange contracts
3,659

 
(15,662
)
 
(12,003
)
 
880

 
(3,215
)
 
(2,335
)
Total
$
8,039

 
$
(15,718
)
 
 
 
$
12,025

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

 
$
(18,087
)
 
 
 
$

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

 
(204,825
)
 
 
 

 
(404,430
)
 
 
Total
$

 
$
(222,912
)
 
 
 
$

 
$
(424,994
)
 
 
The Company's over-the-counter forward foreign exchange contracts are subject to International Swaps and Derivatives Association, Inc. master agreements. These agreements permit the net settlement of these contracts on a per-institution basis. The table below presents, by type of financial instrument, the gross amounts of the Company's derivative instruments, amounts offset due to master netting arrangements with the Company's various counterparties, and the net amounts recognized on the Company's consolidated balance sheets:
 
May 25, 2014
 
November 24, 2013
 
Gross Amounts of Recognized Assets / (Liabilities)
 
Gross Amounts Offset in the Statement of Financial Position
 
Net Amounts of Assets / (Liabilities) Presented in the Statement of Financial Position
 
Gross Amounts of Recognized Assets / (Liabilities)
 
Gross Amounts Offset in the Statement of Financial Position
 
Net Amounts of Assets / (Liabilities) Presented in the Statement of Financial Position
 
 
 
 
 
 
(Dollars in thousands)
Over-the-counter forward foreign exchange contracts
 
 
 
 
 
 
 
 
 
 
 
Financial assets
$
4,049

 
$
(3,715
)
 
$
334

 
$
8,600

 
$
(4,880
)
 
$
3,720

Financial liabilities
(13,017
)
 
3,715

 
(9,302
)
 
(5,855
)
 
4,880

 
(975
)
Total
 
 
 
 
$
(8,968
)
 
 
 
 
 
$
2,745

Embedded derivative contracts
 
 
 
 
 
 
 
 
 
 
 
Financial assets
$
3,990

 
$

 
$
3,990

 
$
3,425

 
$

 
$
3,425

Financial liabilities
(2,701
)
 

 
(2,701
)
 
(1,360
)
 

 
(1,360
)
Total
 
 
 
 
$
1,289

 
 
 
 
 
$
2,065




10




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 25, 2014

The table below provides data about the amount of gains and losses related to derivative instruments and non-derivative instruments designated as net investment hedges included in “Accumulated other comprehensive loss” (“AOCI”) on the Company’s consolidated balance sheets, and in “Other 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
 
Six Months Ended
May 25,
2014
November 24,
2013
May 25,
2014
 
May 26,
2013
 
May 25,
2014
 
May 26,
2013
 
(Dollars in thousands)
Forward foreign exchange contracts
$
4,637

 
$
4,637

 

 


 


 


4.25% Yen-denominated Eurobonds due 2016
(21,040
)
 
(21,161
)
 
$
(112
)
 
$
1,576

 
$
104

 
$
3,904

7.75% Euro senior notes due 2018
(33,301
)
 
(27,361
)
 

 

 

 

Cumulative income taxes
19,435

 
17,186

 
 
 
 
 
 
 
 
Total
$
(30,269
)
 
$
(26,699
)
 
 
 
 
 
 
 
 
The table below provides data about the amount of gains and losses related to derivatives not designated as hedging instruments included in “Other income (expense), net” in the Company’s consolidated statements of income:
 
Gain or (Loss)
 
Three Months Ended
 
Six Months Ended
 
May 25,
2014
 
May 26,
2013
 
May 25,
2014
 
May 26,
2013
 
(Dollars in thousands)
Forward foreign exchange contracts:
 
 
 
 
 
 
 
Realized
$
854

 
$
(3,487
)
 
$
6,769

 
$
(6,197
)
Unrealized
(10,864
)
 
6,277

 
(12,343
)
 
6,169

Total
$
(10,010
)
 
$
2,790

 
$
(5,574
)
 
$
(28
)



11




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 25, 2014

NOTE 4: DEBT 
 
 
May 25,
2014
 
November 24,
2013
 
 
 
(Dollars in thousands)
 
 
 
 
 
 
Long-term debt
 
 
 
 
 
Unsecured:
 
 
 
 
 
4.25% Yen-denominated Eurobonds due 2016
$
39,320

 
$
39,545

 
 
7.75% Euro senior notes due 2018
204,825

 
404,430

 
 
7.625% senior notes due 2020
525,000

 
525,000

 
 
6.875% senior notes due 2022
534,267

 
535,041

 
 
Total unsecured
1,303,412

 
1,504,016

 
 
Total long-term debt
$
1,303,412

 
$
1,504,016

 
 
Short-term debt
 
 
 
 
 
Secured:
 
 
 
 
 
Senior revolving credit facility
$
100,000

 
$

 
 
Unsecured:
 
 
 
 
 
Short-term borrowings
37,927

 
41,861

 
 
Total short-term debt
$
137,927

 
$
41,861

 
 
Total long-term and short-term debt
$
1,441,339

 
$
1,545,877

 
Senior Revolving Credit Facility
On March 21, 2014, the Company amended and restated its senior secured revolving credit facility to extend the term through March 2019, subject to shortening if obligations under the Company's 7.75% Euro senior notes due 2018 (the "2018 Euro Notes") are outstanding on February 13, 2018. The terms of the amended and restated credit facility are similar to the terms under the original credit facility, except that of the maximum availability of $850.0 million, $350.0 million is secured by the U.S. Levi's® trademarks, an increase from the $250.0 million in the original credit facility. The interest rate for borrowings under the credit facility was reduced from LIBOR plus 150275 basis points to LIBOR plus 125200 basis points, depending on borrowing base availability, and the range of the rate for undrawn availability was reduced from 37.550 basis points to 2530 basis points (depending on the Company's credit ratings). All other terms of the original credit agreement, including, without limitation, guarantees and security, covenants, events of default, have not been materially changed as a result of the amended and restated credit agreement and remain in full force and effect. During the three months ended May 25, 2014, the Company recorded a loss of $1.0 million on early extinguishment of debt related to the write-off of unamortized debt issuance costs.
The Company’s unused availability under its senior secured revolving credit facility was $625.3 million at May 25, 2014, as the Company’s total availability of $693.4 million was reduced by $68.1 million of letters of credit and other credit usage allocated under the credit facility.
Redemption of Euro Senior Notes due 2018
On May 15, 2014, the Company redeemed €150.0 million in aggregate principal amount of its 2018 Euro Notes at a redemption price specified in the indenture governing the 2018 Euro Notes of 103.875% of the principal amount redeemed, plus accrued and unpaid interest to the date of redemption. The Company used borrowings of $100.0 million from its senior secured revolving credit facility and cash on hand to fund the redemption. During the three months ended May 25, 2014, the Company recorded a loss of $10.2 million on early extinguishment of debt, which was comprised of redemption premiums of $8.0 million and the write-off of $2.2 million of unamortized debt issuance costs.


12




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 25, 2014

Interest Rates on Borrowings
The Company’s weighted-average interest rate on average borrowings outstanding during the three and six months ended May 25, 2014, was 7.93% and 7.89%, respectively, as compared to 7.70% and 7.29%, respectively, in the same periods of 2013.

NOTE 5: EMPLOYEE BENEFIT PLANS
The following table summarizes the components of net periodic benefit cost and the changes recognized in “Accumulated other comprehensive loss” for the Company’s defined benefit pension plans and postretirement benefit plans: 
 
 
 
 
 
 
 
 
 
Pension Benefits
 
Postretirement Benefits
 
Three Months Ended
 
Three Months Ended
 
May 25,
2014
 
May 26,
2013
 
May 25,
2014
 
May 26,
2013
 
(Dollars in thousands)
Net periodic benefit cost:
 
 
 
 
 
 
 
Service cost
$
2,166

 
$
2,215

 
$
61

 
$
94

Interest cost
13,776

 
12,994

 
1,277

 
1,240

Expected return on plan assets
(14,036
)
 
(13,946
)
 

 

Amortization of prior service benefit
(19
)
 
(17
)
 
(2
)
 
(122
)
Amortization of actuarial loss
2,709

 
4,213

 
1,087

 
1,692

Curtailment loss (gain)
4,211

 
(510
)
 
33

 

Net settlement (gain) loss
(133
)
 
584

 

 

Net periodic benefit cost
8,674

 
5,533

 
2,456

 
2,904

Changes in accumulated other comprehensive loss:
 
 
 
 
 
 
 
Amortization of prior service benefit
19

 
17

 
2

 
122

Amortization of actuarial loss
(2,709
)
 
(4,213
)
 
(1,087
)
 
(1,692
)
Curtailment gain
115

 
949

 

 

Net settlement gain (loss)
29

 
(184
)
 

 

Total recognized in accumulated other comprehensive loss
(2,546
)
 
(3,431
)
 
(1,085
)
 
(1,570
)
Total recognized in net periodic benefit cost and accumulated other comprehensive loss
$
6,128

 
$
2,102

 
$
1,371

 
$
1,334



13




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 25, 2014

 
Pension Benefits
 
Postretirement Benefits
 
Six Months Ended
 
Six Months Ended
 
May 25,
2014
 
May 26,
2013
 
May 25,
2014
 
May 26,
2013
 
(Dollars in thousands)
Net periodic benefit cost:
 
 
 
 
 
 
 
Service cost
$
4,325

 
$
4,496

 
$
129

 
$
188

Interest cost
27,537

 
26,060

 
2,615

 
2,479

Expected return on plan assets
(27,879
)
 
(27,960
)
 

 

Amortization of prior service benefit
(36
)
 
(37
)
 
(3
)
 
(244
)
Amortization of actuarial loss
5,405

 
8,431

 
2,076

 
3,383

Curtailment loss (gain)
4,443

 
(510
)
 
733

 

Net settlement (gain) loss
(73
)
 
629

 

 

Net periodic benefit cost
13,722

 
11,109

 
5,550

 
5,806

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

 
37

 
3

 
244

Amortization of actuarial loss
(5,405
)
 
(8,431
)
 
(2,076
)
 
(3,383
)
Curtailment gain
115

 
509

 

 

Net settlement gain (loss)
4

 
(184
)
 

 

Total recognized in accumulated other comprehensive loss
(5,250
)
 
(8,069
)
 
(2,073
)
 
(3,139
)
Total recognized in net periodic benefit cost and accumulated other comprehensive loss
$
8,472

 
$
3,040

 
$
3,477

 
$
2,667



14




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 25, 2014

NOTE 6: RESTRUCTURING
On February 5, 2014, the Company's Board of Directors (the “Board”) endorsed a global productivity initiative designed to streamline operations and fuel long-term profitable growth. On March 26, 2014, the Company announced and began to implement the global productivity initiative, which will continue to be implemented in phases over the next nine to 15 months.
The first phase of the global productivity initiative includes the elimination of approximately 800 positions within the Company’s global non-retail and non-manufacturing employee population, as well as initiating centrally-led cost-savings and productivity projects. The role eliminations reflect a reduction of management layers, an increase in spans of control, the removal of duplicative roles, a regrouping of country clusters and other structural changes. The elimination of positions within the United States and Asia was completed during the second quarter of 2014. Implementation of the global productivity initiative continued in the second quarter of 2014 with a focus on redesigning business processes and identifying opportunities to reduce costs, increase efficiencies and further streamline processes in supporting functions and supply chain.
For the three and six months ended May 25, 2014, the Company recognized restructuring charges of $19.1 million and $77.0 million, respectively, which were recorded in "Restructuring" in the Company's consolidated statements of income. Related charges of $9.4 million and $15.8 million for the three and six months ended May 25, 2014, respectively, consist primarily of consulting fees for the Company's centrally-led cost-savings and productivity projects. These related charges represent costs incurred associated with ongoing operations to benefit future periods and were recorded in "Selling, general and administrative expenses" in the Company's consolidated statements of income.
The table below summarizes the components of charges included in “Restructuring” in the Company’s consolidated statements of income:
 
Three Months Ended
 
Six Months Ended
 
May 25,
2014
 
May 26,
2013
 
May 25,
2014
 
May 26,
2013
 
(Dollars in thousands)
Restructuring:
 
 
 
 
 
 
 
Severance and employee-related benefits(1)
$
13,427

 
$

 
$
64,748

 
$

Adjustments to severance and employee-related benefits
(3,045
)
 

 
(3,045
)
 

Lease and other contract termination costs

 

 

 

Other(2)
4,504

 

 
10,161

 

Non-cash pension and postretirement curtailment losses(3)
4,219

 

 
5,176

 

Total
$
19,105

 
$

 
$
77,040

 
$

_____________

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

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

(3)
Non-cash pension and postretirement curtailment losses resulting from the global productivity initiative are included in restructuring charges, with the associated liabilities included in "Pension liability" and "Postretirement medical benefit" in the Company's consolidated balance sheets.
The Company anticipates that it will incur future additional restructuring charges related to the actions taken in the first half of 2014 for the global productivity initiative. Final estimates for headcount, timing and charges in certain areas of the international business are subject to completion of applicable local works council and other consultative processes. Additionally, the Company is unable at this time to make a good faith determination of cost estimates, or ranges of cost estimates, associated with future phases of the global productivity initiative. Cash payments for charges recognized to date are expected to be made in 2014 through the first half of 2015.


15




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 25, 2014

The following table summarizes the activities associated with restructuring liabilities for the three and six months ended May 25, 2014, all of which are included in "Current liabilities" in the Company's consolidated balance sheets. In the table below, "Charges" represents the initial charge related to the restructuring activity. "Adjustments" includes revisions of estimates related to severance, employee-related benefits, lease and other contract termination costs, and other restructuring costs. "Payments" consists of cash payments for severance, employee-related benefits, lease and other contract termination costs, and other restructuring costs.
 
Three Months Ended May 25, 2014
 
Liabilities
 
 
 
Adjustments
 
 
 
Foreign Currency Fluctuation
 
Liabilities
 
February 23, 2014
 
Charges
 
 
Payments
 
 
May 25, 2014
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Severance and employee-related benefits
$
51,321

 
$
13,427

 
$
(3,045
)
 
$
(13,477
)
 
$
(850
)
 
$
47,376

Lease and other contract termination costs

 

 

 

 

 

Other
5,657

 
4,504

 

 
(7,788
)
 

 
2,373

Total
$
56,978

 
$
17,931

 
$
(3,045
)
 
$
(21,265
)
 
$
(850
)
 
$
49,749

 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended May 25, 2014
 
Liabilities
 
 
 
Adjustments
 
 
 
Foreign Currency Fluctuation
 
Liabilities
 
November 24, 2013
 
Charges
 
 
Payments
 
 
May 25, 2014
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Severance and employee-related benefits
$

 
$
64,748

 
$
(3,045
)
 
$
(13,477
)
 
$
(850
)
 
$
47,376

Lease and other contract termination costs

 

 

 

 

 

Other

 
10,161

 

 
(7,788
)
 

 
2,373

Total
$

 
$
74,909

 
$
(3,045
)
 
$
(21,265
)
 
$
(850
)
 
$
49,749


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

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.


16




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 25, 2014

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

NOTE 9: ACCUMULATED OTHER COMPREHENSIVE LOSS

The following is a summary of the components of “Accumulated other comprehensive loss,” net of related income taxes: 
 
 
May 25,
2014
 
November 24,
2013
 
 
 
(Dollars in thousands)
 
 
Pension and postretirement benefits
$
(222,254
)
 
$
(226,772
)
 
 
Net investment hedge losses
(30,269
)
 
(26,699
)
 
 
Foreign currency translation losses
(50,397
)
 
(50,458
)
 
 
Unrealized gain on marketable securities
1,758

 
1,266

 
 
Accumulated other comprehensive loss
(301,162
)
 
(302,663
)
 
 
Accumulated other comprehensive income attributable to noncontrolling interest
9,343

 
9,366

 
 
Accumulated other comprehensive loss attributable to Levi Strauss & Co.
$
(310,505
)
 
$
(312,029
)
 

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

NOTE 10: OTHER INCOME (EXPENSE), NET
The following table summarizes significant components of “Other income (expense), net”:
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
May 25,
2014
 
May 26,
2013
 
May 25,
2014
 
May 26,
2013
 
 
 
(Dollars in thousands)
 
 
Foreign exchange management (losses) gains(1)
$
(10,010
)
 
$
2,790

 
$
(5,574
)
 
$
(28
)
 
 
Foreign currency transaction gains (losses)
3,163

 
(4,915
)
 
925

 
(518
)
 
 
Interest income
401

 
390

 
1,028

 
781

 
 
Investment income

 

 
307

 
2,805

 
 
Other
324

 
905

 
1,375

 
2,196

 
 
Total other income (expense), net
$
(6,122
)
 
$
(830
)
 
$
(1,939
)
 
$
5,236

 
_____________
 
(1)
Gains and losses on forward foreign exchange contracts primarily result from currency fluctuations relative to negotiated contract rates. Losses in 2014 were primarily due to unfavorable currency fluctuations relative to negotiated contract rates of various currencies against the U.S. Dollar.
 


17




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 25, 2014

NOTE 11: INCOME TAXES
The effective income tax rate was 26.6% for the six months ended May 25, 2014, compared to 29.7% for the same period ended May 26, 2013. The decrease in the effective tax rate in 2014 was primarily due to a $3.7 million tax benefit that the Company recorded during the six months ended May 25, 2014, as a result of reversing a deferred tax liability associated with undistributed foreign earnings.
The Company historically planned to repatriate to the United States the undistributed earnings of its foreign subsidiaries, and accordingly, provided for a deferred tax liability totaling $3.7 million as of November 24, 2013. For the six months ended May 25, 2014, management made an assertion that $75.0 million of undistributed foreign earnings in certain foreign subsidiaries are indefinitely reinvested. As such, the Company recorded a $3.7 million tax benefit resulting from a reversal of the previously recorded deferred tax liability on undistributed foreign earnings.

NOTE 12: RELATED PARTIES
Robert D. Haas, Chairman Emeritus of the Company and Peter E. Haas Jr., a director of the Company, are board members of the Levi Strauss Foundation, and Seth R. Jaffe, Senior Vice President and General Counsel, is Vice President of the Levi Strauss Foundation, which is not a consolidated entity of the Company. During the three- and six-month periods ended May 25, 2014, the Company donated $0.1 million and $5.3 million, respectively, to the Levi Strauss Foundation as compared to $0.4 million and $3.5 million, respectively, for the same prior-year periods.
Peter E. Haas Jr. and Lisa Collier, Executive Vice President and President of Global Dockers® Brand, are President and board member, respectively, of the Red Tab Foundation, which is not a consolidated entity of the Company. During the three- and six-month periods ended May 25, 2014, the Company donated $0.5 million to the Red Tab Foundation.



18




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 25, 2014

NOTE 13: BUSINESS SEGMENT INFORMATION
The Company manages its business according to three regional segments: the Americas, Europe and Asia. The Company considers its chief executive officer to be the Company’s chief operating decision maker. The Company’s management, including the chief operating decision maker, manages business operations, evaluates performance and allocates resources based on the regional segments’ net revenues and operating income.
Effective as of the beginning of 2014, the Company's reporting segments were revised to combine its Middle East and North Africa markets, previously managed by the Company's Europe region, with the Company's Asia Pacific region, which was renamed to Asia as a result of the change. Financial information attributable to these markets are not significant to any of the Company's regional segments individually in any of the periods presented herein, and accordingly, business segment information for the prior year has not been revised.
Business segment information for the Company is as follows: 
 
Three Months Ended
 
Six Months Ended
 
May 25,
2014
 
May 26,
2013
 
May 25,
2014
 
May 26,
2013
 
(Dollars in thousands)
Net revenues:
 
 
 
 
 
 
 
Americas
$
644,727

 
$
665,914

 
$
1,271,563

 
$
1,313,041

Europe
260,994

 
253,117

 
561,420

 
549,704

Asia
176,126

 
179,867

 
378,854

 
382,831

Total net revenues
$
1,081,847

 
$
1,098,898

 
$
2,211,837

 
$
2,245,576

Operating income:
 
 
 
 
 
 
 
Americas
$
109,425

 
$
118,907

 
$
220,477

 
$
251,370

Europe
38,188

 
36,709

 
109,594

 
99,635

Asia
24,282

 
32,602

 
71,184

 
81,567

Regional operating income
171,895

 
188,218

 
401,255

 
432,572

Corporate:
 
 
 
 
 
 
 
Restructuring
19,105

 

 
77,040

 

Other corporate staff costs and expenses
87,662

 
88,581

 
165,431

 
151,480

Corporate expenses
106,767

 
88,581

 
242,471

 
151,480

Total operating income
65,128

 
99,637

 
158,784

 
281,092

Interest expense
(31,310
)
 
(32,883
)
 
(63,139
)
 
(65,040
)
Loss on early extinguishment of debt
(11,151
)
 
(575
)
 
(11,151
)
 
(689
)
Other income (expense), net
(6,122
)
 
(830
)
 
(1,939
)
 
5,236

Income before income taxes
$
16,545

 
$
65,349

 
$
82,555

 
$
220,599




19


Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
Overview
We design, market and sell – directly or through third parties and licensees – products that include jeans, casual and dress pants, tops, shorts, skirts, jackets, footwear and related accessories for men, women and children around the world under our Levi’s®, Dockers®, Signature by Levi Strauss & Co.™ (“Signature”) and Denizen® brands.
Our business is operated through three geographic regions: Americas, Europe and Asia. Our products are sold in approximately 50,000 retail locations in more than 110 countries. We support our brands through a global infrastructure, developing, sourcing and marketing our products around the world. We distribute our Levi’s® and Dockers® products primarily through chain retailers and department stores in the United States and primarily through department stores, specialty retailers and approximately 2,100 franchised or other brand-dedicated stores and shop-in-shops outside of the United States. We also distribute our Levi’s® and Dockers® products through 544 company-operated stores located in 32 countries, including the United States, and through the online stores we operate. Our company-operated and online stores generated approximately 26% of our net revenues in the first half of 2014, as compared to 24% in the same period in 2013, with our online stores representing approximately 12% of this revenue. In addition, we distribute our Levi’s® and Dockers® products through online stores operated by certain of our key wholesale customers and other third parties. We distribute products under our Signature and Denizen® brands primarily through mass channel retailers in the Americas.
Our Europe and Asia businesses, collectively, contributed approximately 43% of our net revenues and 45% of our regional operating income in the six-month period in 2014, as compared to 42% of both our net revenues and our regional operating income in the same period in 2013. Sales of Levi’s® brand products represented approximately 84% of our total net sales in each of the six-month periods in 2014 and in 2013.
Global Productivity Initiative
On February 5, 2014, our Board of Directors (“Board”) endorsed a global productivity initiative designed to streamline operations and fuel long-term profitable growth. On March 26, 2014, we announced and began to implement the global productivity initiative, which will continue to be implemented in phases over the next nine to 15 months. We expect that this initiative will generate annualized cost savings of $175 – $200 million.
The first phase of the global productivity initiative includes the elimination of approximately 800 positions within our global non-retail and non-manufacturing employee population. The elimination of positions within the United States and Asia was completed during the second fiscal quarter of 2014. Implementation of the global productivity initiative continued in the second quarter of 2014 with a focus on redesigning business processes and identifying opportunities to reduce costs, increase efficiencies and further streamline processes in supporting functions and supply chain. Approximately $19 million and $77 million were recorded as restructuring charges in the three and six months ended May 25, 2014, respectively, and consist primarily of severance benefits, consulting fees and non-cash pension and postretirement curtailment losses. Related charges of approximately $9 million and $16 million for the three and six months ended May 25, 2014, respectively, consisting primarily of consulting fees for centrally-led cost-savings and productivity projects, were recorded in selling, general and administrative expense ("SG&A"). Actions taken in the first half of 2014 for the global productivity initiative are expected to deliver approximately $100 – $125 million in annualized savings.
We anticipate that we will incur future additional restructuring charges related to the actions taken in the first half of 2014 for the global productivity initiative. Final estimates for headcount, timing and charges in certain areas of the international business are subject to completion of applicable local works council and other consultative processes. Additionally, we are unable at this time to make a good faith determination of cost estimates, or ranges of cost estimates, associated with future phases of the global productivity initiative. Cash payments for charges recorded to date are expected to be made in 2014 through the first half of 2015.
We expect additional savings in future periods to come from streamlining our product development, planning and go-to-market strategies, implementing efficiencies across our supply chain and distribution network, adopting lower-cost service-delivery models and continuing to pursue more disciplined procurement practices. Additional restructuring charges will be recorded for these efforts as they become estimable and probable.


20


Trends Affecting Our Business
Our key long-term objectives are to strengthen our brands globally in order to deliver sustainable profitable growth, generate strong cash flow and reduce our debt. Critical strategies to achieve these objectives include driving our profitable core business; expanding the reach of our global brands and building a more balanced product portfolio; elevating the performance of our retail channel, including e-commerce; and leveraging our global scale to develop a competitive cost structure.
During the first half of 2014, soft retail market conditions persisted, specifically within the denim category of the apparel industry, impacting our performance in many markets around the world, particularly in our U.S. businesses. We and several of our wholesale customers continued to experience traffic declines partially driven by lingering high unemployment, slow real wage growth and a shift in consumer spending to interest-rate sensitive durable goods.  The weak traffic continued to result in heavy sales promotions as retailers sought to clear merchandise, pressuring merchandise margins across the apparel industry. We anticipate these trends to continue in the near term. Global competition remains an ongoing challenge, particularly in our international regions, where domestic and multi-national competitors continue their channel expansion in brick-and-mortar retail and e-commerce.
Our Second Quarter 2014 Results
 
Net revenues. Compared to the second quarter of 2013, consolidated net revenues decreased on a reported and constant-currency basis by 2% and 1%, respectively, primarily reflecting lower sales at wholesale in the Americas, partially offset by improved performance in Europe and Asia.
Operating income. Compared to the second quarter of 2013, consolidated operating income decreased by 35% and operating margin declined to 6%, primarily reflecting restructuring charges and lower gross margin in 2014.
Cash flows. Cash flows provided by operating activities were approximately $72 million for the six-month period in 2014 as compared to $254 million for the same period in 2013; the decrease reflected our lower beginning accounts receivable balance, lower net revenues and our higher inventory levels.
Balance sheet. In March 2014, we amended and restated our senior secured revolving credit facility. In May 2014, we redeemed €150.0 million in aggregate principal amount of our 7.75% Euro senior notes due 2018 (the "2018 Euro Notes"). We used borrowings of $100.0 million from our senior secured revolving credit facility and cash on hand to fund the redemption, reducing our total gross debt balance.
Financial Information Presentation
Fiscal year.    Our fiscal year ends on the last Sunday of November in each year, although the fiscal years of certain foreign subsidiaries end on November 30. Each quarter of fiscal years 2014 and 2013 consists of 13 weeks, with the exception of the fourth quarter of 2014, which will consist of 14 weeks.
Segments.    We manage our business according to three regional segments: the Americas, Europe and Asia. Effective as of the beginning of 2014, our reporting segments were revised to combine our Middle East and North Africa markets, previously managed by our Europe region, with our Asia Pacific region, which was renamed to Asia as a result of the change. Financial information attributable to these markets are not significant to any of the Company's regional segments individually in any of the periods presented herein, and accordingly, business segment information for the prior year has not been revised.
Classification.    Our classification of certain significant revenues and expenses reflects the following:
 
Net revenues is primarily comprised of sales of products to wholesale customers, including franchised stores, and direct sales to consumers at our company-operated and online stores and at our company-operated shop-in-shops located within department stores. It includes discounts, allowances for estimated returns and incentives. Net revenues also includes royalties earned from the use of our trademarks by third-party licensees in connection with the manufacturing, advertising and distribution of trademarked products.
Cost of goods sold is primarily comprised of product costs, labor and related overhead, sourcing costs, inbound freight, internal transfers, and the cost of operating our remaining manufacturing facilities, including the related depreciation expense.
Selling costs include, among other things, all occupancy costs and depreciation associated with our company-operated stores and commissions associated with our company-operated shop-in-shops.
We reflect substantially all distribution costs in selling, general and administrative expenses, including costs related to receiving and inspection at distribution centers, warehousing, shipping to our customers, handling, and certain other activities associated with our distribution network.


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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.    Effective as of the beginning of 2014, constant-currency comparisons are based on translating local currency amounts in the prior-year period at actual foreign exchange rates for the current year. Prior to 2014, local currency amounts were translated utilizing foreign exchange rates used in our internal planning process. There was no significant impact to our constant-currency comparisons as a result of this change. We routinely evaluate our financial performance on a constant-currency basis in order to facilitate period-to-period comparisons without regard to the impact of changing foreign currency exchange rates.
Results of Operations for Three and Six Months Ended May 25, 2014, as Compared to Same Periods in 2013
The following table summarizes, for the periods indicated, our consolidated statements of income, the changes in these items from period to period and these items expressed as a percentage of net revenues:
 
 
Three Months Ended
 
Six Months Ended
 
May 25,
2014
 
May 26,
2013
 
%
Increase
(Decrease)
 
May 25,
2014
 
May 26,
2013
 
May 25,
2014
 
May 26,
2013
 
%
Increase
(Decrease)
 
May 25,
2014
 
May 26,
2013
 
 
 
% of Net
Revenues
 
% of Net
Revenues
 
 
 
% of Net
Revenues
 
% of Net
Revenues
 
(Dollars in millions)
Net revenues
$
1,081.8

 
$
1,098.9

 
(1.6
)%
 
100.0
 %
 
100.0
 %
 
$
2,211.8

 
$
2,245.6

 
(1.5
)%
 
100.0
 %
 
100.0
 %
Cost of goods sold
551.5

 
550.2

 
0.2
 %
 
51.0
 %
 
50.1
 %
 
1,105.1

 
1,105.0

 

 
50.0
 %
 
49.2
 %
Gross profit
530.3

 
548.7

 
(3.4
)%
 
49.0
 %
 
49.9
 %
 
1,106.7

 
1,140.6

 
(3.0
)%
 
50.0
 %
 
50.8
 %
Selling, general and administrative expenses
446.1

 
449.1

 
(0.7
)%
 
41.2
 %
 
40.9
 %
 
870.9

 
859.5

 
1.3
 %
 
39.4
 %
 
38.3
 %
Restructuring
19.1

 

 

 
1.8
 %
 

 
77.0

 

 

 
3.5
 %
 

Operating income
65.1

 
99.6

 
(34.6
)%
 
6.0
 %
 
9.1
 %
 
158.8

 
281.1

 
(43.5
)%
 
7.2
 %
 
12.5
 %
Interest expense
(31.3
)
 
(32.9
)
 
(4.8
)%
 
(2.9
)%
 
(3.0
)%
 
(63.1
)
 
(65.0
)
 
(2.9
)%
 
(2.9
)%
 
(2.9
)%
Loss on early extinguishment of debt
(11.2
)
 
(0.6
)
 
1,839.3
 %
 
(1.0
)%
 
(0.1
)%
 
(11.2
)
 
(0.7
)
 
1,518.4
 %
 
(0.5
)%
 

Other income (expense), net
(6.1
)
 
(0.8
)
 
637.6
 %
 
(0.6
)%
 
(0.1
)%
 
(1.9
)
 
5.2

 
(137.0
)%
 
(0.1
)%
 
0.2
 %
Income before income taxes
16.5

 
65.3

 
(74.7
)%
 
1.5
 %
 
5.9
 %
 
82.6

 
220.6

 
(62.6
)%
 
3.7
 %
 
9.8
 %
Income tax expense
5.5

 
17.1

 
(67.6
)%
 
0.5
 %
 
1.6
 %
 
22.0

 
65.5

 
(66.5
)%
 
1.0
 %
 
2.9
 %
Net income
11.0

 
48.2

 
(77.2
)%
 
1.0
 %
 
4.4
 %
 
60.6

 
155.1

 
(60.9
)%
 
2.7
 %
 
6.9
 %
Net loss (income) attributable to noncontrolling interest
0.5

 
(0.1
)
 
(881.7
)%
 

 

 
0.8

 
0.1

 
861.2
 %
 

 

Net income attributable to Levi Strauss & Co.
$
11.5

 
$
48.1

 
(76.2
)%
 
1.1
 %
 
4.4
 %
 
$
61.4

 
$
155.2

 
(60.4
)%
 
2.8
 %
 
6.9
 %


22


Net revenues
The following table presents net revenues by reporting segment for the periods indicated and the changes in net revenues by reporting segment on both reported and constant-currency bases from period to period.
 
 
Three Months Ended
 
Six Months Ended
 
 
 
 
 
% Increase
(Decrease)
 
 
 
 
 
% Increase
(Decrease)
 
May 25,
2014
 
May 26,
2013
 
As
Reported
 
Constant
Currency
 
May 25,
2014
 
May 26,
2013
 
As
Reported
 
Constant
Currency
 
(Dollars in millions)
Net revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Americas
$
644.7

 
$
665.9

 
(3.2
)%
 
(2.3
)%
 
$
1,271.6

 
$
1,313.1

 
(3.2
)%
 
(2.4
)%
Europe
261.0

 
253.1

 
3.1
 %
 
0.3
 %
 
561.4

 
549.7

 
2.1
 %
 
0.3
 %
Asia
176.1

 
179.9

 
(2.1
)%
 
2.1
 %
 
378.8

 
382.8

 
(1.0
)%
 
4.4
 %
Total net revenues
$
1,081.8

 
$
1,098.9

 
(1.6
)%
 
(1.0
)%
 
$
2,211.8

 
$
2,245.6

 
(1.5
)%
 
(0.6
)%
Total net revenues decreased on both reported and constant-currency bases for the three- and six-month periods ended May 25, 2014, as compared to the same prior-year periods.
Americas.    Net revenues in our Americas region decreased on both reported and constant-currency bases for the three- and six-month periods, with currency affecting net revenues unfavorably by approximately $6 million and $10 million, respectively.
Wholesale net revenues declined for both periods primarily due to lower sales of women's products. For the three-month period, retail net revenues decreased as sharper traffic declines and increased promotional activity were partially offset by higher volumes. For the six-month period, retail net revenues increased due to the inclusion of the Black Friday sales week in the first quarter of 2014.
Europe.    Net revenues in Europe increased on both reported and constant-currency bases for the three- and six-month periods, with currency affecting net revenues favorably by approximately $7 million and $10 million, respectively.
For both periods, net revenues increased from the performance and expansion of our company-operated retail network, particularly in the U.K. and Russia markets. This improvement was partially offset by lower sales in our traditional wholesale channels. 
Asia.    Net revenues in Asia decreased on a reported basis but increased on a constant-currency basis. Currency affected net revenues unfavorably for the three- and six-month periods by approximately $8 million and $20 million, respectively.
For both periods, the increase in constant-currency net revenues was primarily due to higher promotional activity across the region, and with respect to the six-month period, improved product availability during the Chinese New Ye