10-Q 1 a3q2014form10-q.htm 10-Q 3Q 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 August 24, 2014
or
 ¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 002-90139
_________________
LEVI STRAUSS & CO.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE
  
94-0905160
(State or Other Jurisdiction of
Incorporation or Organization)
  
(I.R.S. Employer
Identification No.)
1155 Battery Street, San Francisco, California 94111
(Address of Principal Executive Offices) (Zip Code)
(415) 501-6000
(Registrant’s Telephone Number, Including Area Code)
None
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
_________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨    No  þ
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See definition of “Large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
 
 
 
 
 
 
Large accelerated filer ¨
 
Accelerated filer ¨
 
Non-accelerated filer þ
 
Smaller reporting company ¨
 
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  þ
The Company is privately held. Nearly all of its common equity is owned by descendants of the family of the Company’s founder, Levi Strauss, and their relatives. There is no trading in the common equity and therefore an aggregate market value based on sales or bid and asked prices is not determinable.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock $.01 par value — 37,430,283 shares outstanding on October 1, 2014
 
 
 
 
 
 
 
 
 
 



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



PART I — FINANCIAL INFORMATION

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

 
$
489,258

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

 
446,671

Inventories:
 
 
 
Raw materials
4,229

 
3,361

Work-in-process
6,000

 
6,597

Finished goods
712,110

 
593,909

Total inventories
722,339

 
603,867

Deferred tax assets, net
213,055

 
187,836

Other current assets
111,814

 
112,082

Total current assets
1,855,731

 
1,839,714

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

 
439,861

Goodwill
240,944

 
241,228

Other intangible assets, net
46,823

 
49,149

Non-current deferred tax assets, net
416,504

 
448,839

Other non-current assets
101,550

 
108,627

Total assets
$
3,058,358

 
$
3,127,418

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

 
$
41,861

Accounts payable
262,385

 
254,516

Accrued salaries, wages and employee benefits
157,717

 
209,966

Restructuring liabilities
37,834

 

Accrued interest payable
28,092

 
5,346

Accrued income taxes
8,954

 
11,301

Other accrued liabilities
220,690

 
262,488

Total current liabilities
845,915

 
785,478

Long-term debt
1,296,608

 
1,504,016

Long-term capital leases
10,568

 
10,243

Postretirement medical benefits
117,093

 
122,248

Pension liability
326,047

 
326,767

Long-term employee related benefits
74,151

 
73,386

Long-term income tax liabilities
31,596

 
30,683

Other long-term liabilities
57,697

 
61,097

Total liabilities
2,759,675

 
2,913,918

Commitments and contingencies


 


Temporary equity
52,877

 
38,524

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

 
374

Additional paid-in capital
1,909

 
7,361

Retained earnings
554,021

 
475,960

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

 
171,666

Noncontrolling interest
1,597

 
3,310

Total stockholders’ equity
245,806

 
174,976

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

 
$
3,127,418

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


3


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

 
$
1,141,284

 
$
3,365,966

 
$
3,386,860

Cost of goods sold
591,926

 
568,448

 
1,697,105

 
1,673,435

Gross profit
562,203

 
572,836

 
1,668,861

 
1,713,425

Selling, general and administrative expenses
454,712

 
454,750

 
1,325,546

 
1,314,247

Restructuring, net
2,371

 

 
79,411

 

Operating income
105,120

 
118,086

 
263,904

 
399,178

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

 

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

 
76,522

 
154,891

 
297,121

Income tax expense
22,536

 
20,077

 
44,479

 
85,592

Net income
49,800

 
56,445

 
110,412

 
211,529

Net loss attributable to noncontrolling interest
820

 
630

 
1,637

 
715

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

 
$
57,075

 
$
112,049

 
$
212,244






























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


4


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

 
$
56,445

 
$
110,412

 
$
211,529

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

 
3,718

 
6,857

 
10,826

Net investment hedge gains (losses)
3,644

 
(8,329
)
 
74

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

 
(7,856
)
 
1,650

Unrealized gain (loss) on marketable securities
291

 
(171
)
 
783

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

 
(142
)
 
6,007

Comprehensive income
48,157

 
61,486

 
110,270

 
217,536

Comprehensive loss attributable to noncontrolling interest
873

 
451

 
1,713

 
1,644

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

 
$
61,937

 
$
111,983

 
$
219,180



































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


5


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

 
$
211,529

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

 
86,600

Asset impairments
3,858

 
1,917

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

 
323

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

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

 
17,478

Employee benefit plans’ curtailment gain, net

 
(815
)
Noncash restructuring charges
3,386

 

Noncash loss on extinguishment of debt
3,170

 
689

Amortization of deferred debt issuance costs
2,960

 
3,232

Stock-based compensation
9,305

 
6,303

Allowance for doubtful accounts
531

 
2,394

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

 
95,373

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

Other non-current assets
(5,035
)
 
873

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

 

Income tax liabilities
10,590

 
37,660

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

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

 
273,816

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

 
2,168

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

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

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

 
140,000

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

 

Repayments of senior revolving credit facility
(75,000
)
 

Proceeds from short-term credit facilities
18,776

 
42,694

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

 
123

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

 
165

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

 
406,134

Ending cash and cash equivalents
$
367,360

 
$
382,328

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

 
$
61,209

Income taxes
41,598

 
26,441

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


6


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


7




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

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


8




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

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

 
$
25,544

 
$

 
$
23,752

 
$
23,752

 
$

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

 

 
3,661

 
7,145

 

 
7,145

Total
$
29,205

 
$
25,544

 
$
3,661

 
$
30,897

 
$
23,752

 
$
7,145

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

 
$

 
$
9,513

 
$
2,335

 
$

 
$
2,335

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

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

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

 
$
90,070

 
$

 
$

4.25% Yen-denominated Eurobonds due 2016
39,045

 
40,706

 
39,659

 
38,523

7.75% Euro senior notes due 2018
203,577

 
212,890

 
405,304

 
432,098

7.625% senior notes due 2020
536,120

 
572,870

 
526,112

 
577,956

6.875% senior notes due 2022
545,320

 
591,368

 
537,447

 
588,275

Short-term borrowings
40,464

 
40,464

 
41,976

 
41,976

Total
$
1,454,596

 
$
1,548,368

 
$
1,550,498

 
$
1,678,828

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



9




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

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

 
$
(466
)
 
$
3,661

 
$
11,145

 
$
(4,000
)
 
$
7,145

Forward foreign exchange contracts
3,639

 
(13,152
)
 
(9,513
)
 
880

 
(3,215
)
 
(2,335
)
Total
$
7,766

 
$
(13,618
)
 
 
 
$
12,025

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

 
$
(15,022
)
 
 
 
$

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

 
(199,200
)
 
 
 

 
(404,430
)
 
 
Total
$

 
$
(214,222
)
 
 
 
$

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

 
$
(4,105
)
 
$
583

 
$
8,600

 
$
(4,880
)
 
$
3,720

Financial liabilities
(11,078
)
 
4,105

 
(6,973
)
 
(5,855
)
 
4,880

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

Embedded derivative contracts
 
 
 
 
 
 
 
 
 
 
 
Financial assets
$
3,078

 
$

 
$
3,078

 
$
3,425

 
$

 
$
3,425

Financial liabilities
(2,540
)
 

 
(2,540
)
 
(1,360
)
 

 
(1,360
)
Total
 
 
 
 
$
538

 
 
 
 
 
$
2,065




10




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

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

 
$
4,637

 

 


 


 


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

 
$
(661
)
 
$
594

 
$
3,243

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

 

 

 

Cumulative income taxes
17,140

 
17,186

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

 
$
3,358

 
$
(2,547
)
Unrealized
1,882

 
2,664

 
(10,461
)
 
8,833

Total
$
(1,529
)
 
$
6,314

 
$
(7,103
)
 
$
6,286




11




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

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

 
$
39,545

 
 
7.75% Euro senior notes due 2018
199,200

 
404,430

 
 
7.625% senior notes due 2020
525,000

 
525,000

 
 
6.875% senior notes due 2022
533,891

 
535,041

 
 
Total unsecured
1,296,608

 
1,504,016

 
 
Total long-term debt
$
1,296,608

 
$
1,504,016

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

 
$

 
 
Unsecured:
 
 
 
 
 
Short-term borrowings
40,243

 
41,861

 
 
Total short-term debt
$
130,243

 
$
41,861

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

 
$
1,545,877

 
Senior Revolving Credit Facility
On March 21, 2014, the Company amended and restated its senior secured revolving credit facility to extend the term through March 2019, subject to shortening if obligations under the Company's 7.75% Euro senior notes due 2018 (the "2018 Euro Notes") are outstanding on February 13, 2018. The terms of the amended and restated credit facility are similar to the terms under the original credit facility, except that of the maximum availability of $850.0 million, $350.0 million is secured by the U.S. Levi's® trademarks, an increase from the $250.0 million in the original credit facility. The interest rate for borrowings under the credit facility was reduced from LIBOR plus 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, and events of default, have not been materially changed as a result of the amended and restated credit agreement and remain in full force and effect. During the nine months ended August 24, 2014, the Company recorded a loss of $1.0 million on early extinguishment of debt related to the write-off of unamortized debt issuance costs.
The Company’s unused availability under its senior secured revolving credit facility was $606.0 million at August 24, 2014, as the Company’s total availability of $667.0 million was reduced by $61.0 million of letters of credit and other credit usage allocated under the credit facility.
Redemption of Euro Senior Notes due 2018
On May 15, 2014, the Company redeemed €150.0 million in aggregate principal amount of its 2018 Euro Notes at a redemption price specified in the indenture governing the 2018 Euro Notes of 103.875% of the principal amount redeemed, plus accrued and unpaid interest to the date of redemption. The Company used borrowings of $100.0 million from its senior secured revolving credit facility and cash on hand to fund the redemption. During the nine months ended August 24, 2014, the Company recorded a loss of $10.2 million on early extinguishment of debt, which was comprised of redemption premiums of $8.0 million and the write-off of $2.2 million of unamortized debt issuance costs.


12




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

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

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

 
$
2,052

 
$
63

 
$
94

Interest cost
13,775

 
12,918

 
1,292

 
1,239

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

 

Amortization of prior service benefit

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

 
3,810

 
1,063

 
1,691

Curtailment gain
(1,790
)
 
(305
)
 

 

Net settlement loss

 
415

 

 

Net periodic benefit cost
2,874

 
4,761

 
2,417

 
2,902

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

 
24

 
1

 
122

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

 

Net settlement loss

 
(406
)
 

 

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

 
$
557

 
$
1,355

 
$
1,333



13




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

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

 
$
6,548

 
$
192

 
$
282

Interest cost
41,312

 
38,978

 
3,907

 
3,718

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

 

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

 
12,241

 
3,139

 
5,074

Curtailment loss (gain)
2,653

 
(815
)
 
733

 

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

 

 

Net periodic benefit cost
16,596

 
15,870

 
7,967

 
8,708

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

 
61

 
4

 
366

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

 
497

 

 

Net settlement gain (loss)
4

 
(590
)
 

 

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

 
$
3,597

 
$
4,832

 
$
4,000



14




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

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

 
$

 
$
67,566

 
$

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

 
(4,810
)
 

Lease and other contract termination costs

 

 

 

Other(2)
3,108

 

 
13,269

 

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

 
3,386

 

Total
$
2,371

 
$

 
$
79,411

 
$

_____________

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

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

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


15




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

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

 
$
2,817

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

Lease and other contract termination costs

 

 

 

 

 

Other
2,373

 
3,108

 

 
(2,865
)
 

 
2,616

Total
$
49,749

 
$
5,925

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

 
 
 
 
 
 
 
 
 
 
 
 
Current portion
$
49,749

 
 
 
 
 
 
 
 
 
$
37,834

Long-term portion

 
 
 
 
 
 
 
 
 
350

Total
$
49,749

 
 
 
 
 
 
 
 
 
$
38,184

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

 
$
67,566

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

Lease and other contract termination costs

 

 

 

 

 

Other

 
13,269

 

 
(10,653
)
 

 
2,616

Total
$

 
$
80,835

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

 
 
 
 
 
 
 
 
 
 
 
 
Current portion
$

 
 
 
 
 
 
 
 
 
$
37,834

Long-term portion

 
 
 
 
 
 
 
 
 
350

Total
$

 
 
 
 
 
 
 
 
 
$
38,184


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



16




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

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

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

NOTE 9: ACCUMULATED OTHER COMPREHENSIVE LOSS

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

 
1,266

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

 
9,366

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

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

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

 
$
(7,103
)
 
$
6,286

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

 
357

 
1,534

 
1,138

 
 
Investment income
255

 
214

 
562

 
3,019

 
 
Other
477

 
664

 
1,852

 
2,860

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


17




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

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

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



18




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

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

 
$
710,212

 
$
1,969,030

 
$
2,023,253

Europe
285,983

 
275,211

 
847,403

 
824,915

Asia
170,679

 
155,861

 
549,533

 
538,692

Total net revenues
$
1,154,129

 
$
1,141,284

 
$
3,365,966

 
$
3,386,860

Operating income:
 
 
 
 
 
 
 
Americas
$
122,210

 
$
125,228

 
$
342,687

 
$
376,598

Europe
49,587

 
45,914

 
159,181

 
145,549

Asia
17,366

 
22,666

 
88,550

 
104,233

Regional operating income
189,163

 
193,808

 
590,418

 
626,380

Corporate:
 
 
 
 
 
 
 
Restructuring
2,371

 

 
79,411

 

Other corporate staff costs and expenses
81,672

 
75,722

 
247,103

 
227,202

Corporate expenses
84,043

 
75,722

 
326,514

 
227,202

Total operating income
105,120

 
118,086

 
263,904

 
399,178

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

 

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

 
$
76,522

 
$
154,891

 
$
297,121




19


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


20


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


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Constant currency.    Effective as of the beginning of 2014, constant-currency comparisons are based on translating local currency amounts in the prior-year period at actual foreign exchange rates for the current year. Prior to 2014, local currency amounts were translated utilizing foreign exchange rates used in our internal planning process. There was no significant impact to our constant-currency comparisons as a result of this change. We routinely evaluate our financial performance on a constant-currency basis in order to facilitate period-to-period comparisons without regard to the impact of changing foreign currency exchange rates.
Results of Operations for Three and Nine Months Ended August 24, 2014, as Compared to Same Periods in 2013
The following table summarizes, for the periods indicated, our consolidated statements of income, the changes in these items from period to period and these items expressed as a percentage of net revenues:
 
 
Three Months Ended
 
Nine Months Ended
 
August 24,
2014
 
August 25,
2013
 
%
Increase
(Decrease)
 
August 24,
2014
 
August 25,
2013
 
August 24,
2014
 
August 25,
2013
 
%
Increase
(Decrease)
 
August 24,
2014
 
August 25,
2013
 
 
 
% of Net
Revenues
 
% of Net
Revenues
 
 
 
% of Net
Revenues
 
% of Net
Revenues
 
(Dollars in millions)
Net revenues
$
1,154.1

 
$
1,141.3

 
1.1
 %
 
100.0
 %
 
100.0
 %
 
$
3,366.0

 
$
3,386.9

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

 
568.5

 
4.1
 %
 
51.3
 %
 
49.8
 %
 
1,697.1

 
1,673.5

 
1.4
 %
 
50.4
 %
 
49.4
 %
Gross profit
562.2

 
572.8

 
(1.9
)%
 
48.7
 %
 
50.2
 %
 
1,668.9

 
1,713.4

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

 
454.7

 

 
39.4
 %
 
39.8
 %
 
1,325.6

 
1,314.2

 
0.9
 %
 
39.4
 %
 
38.8
 %
Restructuring, net
2.4

 

 

 
0.2
 %
 

 
79.4

 

 

 
2.4
 %
 

Operating income
105.1

 
118.1

 
(11.0
)%
 
9.1
 %
 
10.3
 %
 
263.9

 
399.2

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

 

 

 

 

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

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

 
76.5

 
(5.5
)%
 
6.3
 %
 
6.7
 %
 
154.9

 
297.1

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

 
20.1

 
12.2
 %
 
2.0
 %
 
1.8
 %
 
44.5

 
85.6

 
(48.0
)%
 
1.3
 %
 
2.5
 %
Net income
49.8

 
56.4

 
(11.8
)%
 
4.3
 %
 
4.9
 %
 
110.4

 
211.5

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

 
0.7

 
30.2
 %
 
0.1
 %
 
0.1
 %
 
1.6

 
0.7

 
129.0
 %
 

 

Net income attributable to Levi Strauss & Co.
$
50.6

 
$
57.1

 
(11.3
)%
 
4.4
 %
 
5.0
 %
 
$
112.0

 
$
212.2

 
(47.2
)%
 
3.3
 %
 
6.3
 %


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