10-Q 1 a2q2015form10-q.htm 2Q 2015 FORM 10-Q 2Q 2015 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 31, 2015
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 — 37,420,227 shares outstanding on July 6, 2015
 
 
 
 
 
 
 
 
 
 



LEVI STRAUSS & CO. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MAY 31, 2015
 
 
 
 
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 31,
2015
 
November 30,
2014
 
(Dollars in thousands)
ASSETS
Current Assets:
 
 
 
Cash and cash equivalents
$
284,634

 
$
298,255

Trade receivables, net of allowance for doubtful accounts of $11,696 and $12,704
325,715

 
481,981

Inventories:
 
 
 
Raw materials
3,729

 
4,501

Work-in-process
2,955

 
5,056

Finished goods
606,217

 
591,359

Total inventories
612,901

 
600,916

Deferred tax assets, net
171,356

 
178,015

Other current assets
104,709

 
99,347

Total current assets
1,499,315

 
1,658,514

Property, plant and equipment, net of accumulated depreciation of $786,714 and $784,493
370,332

 
392,062

Goodwill
235,471

 
238,921

Other intangible assets, net
44,450

 
45,898

Non-current deferred tax assets, net
474,340

 
488,398

Other non-current assets
115,121

 
100,280

Total assets
$
2,739,029

 
$
2,924,073

 
 
 
 
LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS’ EQUITY
Current Liabilities:
 
 
 
Short-term debt
$
140,304

 
$
131,524

Accounts payable
240,113

 
234,892

Accrued salaries, wages and employee benefits
145,384

 
178,470

Restructuring liabilities
32,472

 
57,817

Accrued interest payable
6,010

 
5,679

Accrued income taxes
6,406

 
9,432

Other accrued liabilities
214,450

 
263,182

Total current liabilities
785,139

 
880,996

Long-term debt
1,050,619

 
1,092,478

Long-term capital leases
12,485

 
11,619

Postretirement medical benefits
114,929

 
122,213

Pension liability
381,817

 
406,398

Long-term employee related benefits
71,021

 
80,066

Long-term income tax liabilities
31,070

 
35,821

Other long-term liabilities
55,082

 
62,363

Total liabilities
2,502,162

 
2,691,954

Commitments and contingencies


 


Temporary equity
73,162

 
77,664

 
 
 
 
Stockholders’ Equity:
 
 
 
Levi Strauss & Co. stockholders’ equity
 
 
 
Common stock — $.01 par value; 270,000,000 shares authorized; 37,420,227 shares and 37,430,283 shares issued and outstanding
374

 
374

Additional paid-in capital

 

Retained earnings
538,796

 
528,209

Accumulated other comprehensive loss
(376,247
)
 
(375,340
)
Total Levi Strauss & Co. stockholders’ equity
162,923

 
153,243

Noncontrolling interest
782

 
1,212

Total stockholders’ equity
163,705

 
154,455

Total liabilities, temporary equity and stockholders’ equity
$
2,739,029

 
$
2,924,073

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 31,
2015
 
May 25,
2014
 
May 31,
2015
 
May 25,
2014
 
(Dollars in thousands)
(Unaudited)
Net revenues
$
1,012,180

 
$
1,081,847

 
$
2,067,255

 
$
2,211,837

Cost of goods sold
511,949

 
551,542

 
1,029,959

 
1,105,179

Gross profit
500,231

 
530,305

 
1,037,296

 
1,106,658

Selling, general and administrative expenses
449,662

 
446,072

 
874,944

 
870,834

Restructuring, net
2,954

 
19,105

 
7,292

 
77,040

Operating income
47,615

 
65,128

 
155,060

 
158,784

Interest expense
(21,913
)
 
(31,310
)
 
(45,225
)
 
(63,139
)
Loss on early extinguishment of debt
(14,002
)
 
(11,151
)
 
(14,002
)
 
(11,151
)
Other income (expense), net
7,639

 
(6,122
)
 
(18,389
)
 
(1,939
)
Income before income taxes
19,339

 
16,545

 
77,444

 
82,555

Income tax expense
7,887

 
5,556

 
27,709

 
21,943

Net income
11,452

 
10,989

 
49,735

 
60,612

Net loss attributable to noncontrolling interest
239

 
469

 
348

 
817

Net income attributable to Levi Strauss & Co.
$
11,691

 
$
11,458

 
$
50,083

 
$
61,429






























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 31,
2015
 
May 25,
2014
 
May 31,
2015
 
May 25,
2014
 
(Dollars in thousands)
(Unaudited)
Net income
$
11,452

 
$
10,989

 
$
49,735

 
$
60,612

Other comprehensive income (loss), net of related income taxes:
 
 
 
 
 
 
 
Pension and postretirement benefits
2,730

 
2,216

 
6,829

 
4,518

Net investment hedge gains (losses)
3,234

 
658

 
3,321

 
(3,570
)
Foreign currency translation gains (losses)
169

 
4,175

 
(11,307
)
 
61

Unrealized gain on marketable securities
99

 
453

 
169

 
492

Total other comprehensive income (loss)
6,232

 
7,502

 
(988
)
 
1,501

Comprehensive income
17,684

 
18,491

 
48,747

 
62,113

Comprehensive loss attributable to noncontrolling interest
297

 
451

 
429

 
840

Comprehensive income attributable to Levi Strauss & Co.
$
17,981

 
$
18,942

 
$
49,176

 
$
62,953



































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 31,
2015
 
May 25,
2014
 
(Dollars in thousands)
(Unaudited)
Cash Flows from Operating Activities:
 
 
 
Net income
$
49,735

 
$
60,612

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
50,471

 
53,399

Asset impairments
1,573

 
620

Gain on disposal of assets
(8,617
)
 
(47
)
Unrealized foreign exchange (gains) losses
(2,072
)
 
3,866

Realized loss (gain) on settlement of forward foreign exchange contracts not designated for hedge accounting
1,368

 
(6,769
)
Employee benefit plans’ amortization from accumulated other comprehensive loss
8,548

 
7,438

Noncash restructuring charges
387

 
5,176

Noncash loss on early extinguishment of debt
3,448

 
3,170

Amortization of deferred debt issuance costs
1,612

 
2,092

Stock-based compensation
7,848

 
5,301

Allowance for doubtful accounts
1,192

 
927

Change in operating assets and liabilities:
 
 
 
Trade receivables
173,660

 
103,394

Inventories
18,582

 
(82,387
)
Other current assets
(1,100
)
 
(11,415
)
Other non-current assets
(4,162
)
 
(4,389
)
Accounts payable and other accrued liabilities
(85,738
)
 
(56,529
)
Restructuring liabilities
(25,880
)
 
50,599

Income tax liabilities
(2,620
)
 
(1,732
)
Accrued salaries, wages and employee benefits and long-term employee related benefits
(72,301
)
 
(59,574
)
Other long-term liabilities
(13,853
)
 
(588
)
Other, net
483

 
(741
)
Net cash provided by operating activities
102,564

 
72,423

Cash Flows from Investing Activities:
 
 
 
Purchases of property, plant and equipment
(43,163
)
 
(35,320
)
Proceeds from sales of assets
8,785

 
1,402

(Payments) proceeds on settlement of forward foreign exchange contracts not designated for hedge accounting
(1,368
)
 
6,769

Acquisitions, net of cash acquired
(251
)
 
(75
)
Net cash used for investing activities
(35,997
)
 
(27,224
)
Cash Flows from Financing Activities:
 
 
 
Proceeds from issuance of long-term debt
500,000

 

Repayments of long-term debt and capital leases
(526,490
)
 
(207,074
)
Proceeds from senior revolving credit facility
265,000

 
100,000

Repayments of senior revolving credit facility
(255,000
)
 

Proceeds from short-term credit facilities
11,884

 
8,386

Repayments of short-term credit facilities
(8,407
)
 
(6,417
)
Other short-term borrowings, net
310

 
(8,535
)
Debt issuance costs
(3,937
)
 
(2,684
)
Restricted cash
1,110

 
596

Repurchase of common stock
(2,221
)
 
(4,676
)
Excess tax benefits from stock-based compensation
347

 
359

Dividend to stockholders
(50,000
)
 
(30,003
)
Net cash used for financing activities
(67,404
)
 
(150,048
)
Effect of exchange rate changes on cash and cash equivalents
(12,784
)
 
1,665

Net decrease in cash and cash equivalents
(13,621
)
 
(103,184
)
Beginning cash and cash equivalents
298,255

 
489,258

Ending cash and cash equivalents
$
284,634

 
$
386,074

 
 
 
 
Noncash Investing Activity:
 
 
 
Purchases of property, plant and equipment not yet paid at end of period
$
10,035

 
$
4,255

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest during the period
$
42,526

 
$
59,759

Cash paid for income taxes during the period, net of refunds
33,619

 
30,639

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 31, 2015
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Levi Strauss & Co. (the “Company”) is one of the world’s largest brand-name apparel companies. The Company designs, markets and sells – directly or through third parties and licensees – products that include jeans, casual and dress pants, tops, shorts, skirts, jackets, footwear and related accessories for men, women and children 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 30, 2014, included in the Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission (“SEC”) on February 12, 2015.
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 31, 2015, may not be indicative of the results to be expected for any other interim period or the year ending November 29, 2015.
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 2015 and 2014 consists of 13 weeks, with the exception of the fourth quarter of 2014, which consisted 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.
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.


7




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 31, 2015

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 2014 Annual Report on Form 10-K, except for the following, which will become effective for the Company in the first quarter of 2017:
In April 2015, the FASB issued Accounting Standards Update No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs," ("ASU 2015-03"). ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The Company is currently assessing the impact that adopting this new accounting guidance will have on its consolidated financial statements and footnote disclosures.
In April 2015, the FASB issued Accounting Standards Update No. 2015-04, "Compensation – Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer's Defined Benefit Obligation and Plan Assets," ("ASU 2015-04"). ASU 2015-04 provides the use of a practical expedient that permits the entity to measure defined benefit plans assets and obligations using the month-end that is closest to the entity's fiscal year-end and apply that practical expedient consistently from year to year. Further, if a contribution or significant event occurs between the month-end date used to measure defined benefit plan asset and obligations and an entity's fiscal year-end, the entity should adjust the measurement of defined plan assets and obligations to reflect of those contributions of significant events. However, an entity should not adjust the measurement of defined benefit plan asset and obligations for other events that occur between the month-end measurement and the entity's fiscal year-end that are not caused by the entity. The Company is currently assessing whether to adopt this standard. Should the Company elect to adopt this standard, it does not anticipate that the adoption of this standard will have a material impact on its consolidated financial statements and footnote disclosures.
In April 2015, the FASB issued Accounting Standards Update No. 2015-05, "Customer's Accounting for Fees Paid in a Cloud Computing Arrangement," ("ASU 2015-05"). ASU 2015-05 provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software license. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance will not change GAAP for a customer's accounting for service contracts. The Company is currently assessing the impact that adopting this new accounting guidance will have on its consolidated financial statements and footnote disclosures.
In June 2015, the FASB issued Accounting Standards Update No. 2015-10, "Technical Corrections and Improvements," ("ASU 2015-10"). ASU 2015-10 covers a wide range of Topics in the Codification. The amendments in this Update represent changes to clarify the Codification, correct unintended application of guidance, or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost on most entities. The Company does not anticipate that the adoption of this standard will have a material impact 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 31, 2015

NOTE 2: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the Company’s financial instruments that are carried at fair value:
 
May 31, 2015
 
November 30, 2014
 
 
 
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
$
26,604

 
$
26,604

 
$

 
$
25,891

 
$
25,891

 
$

Forward foreign exchange contracts, net(3)
27,770

 

 
27,770

 
10,511

 

 
10,511

Total
$
54,374

 
$
26,604

 
$
27,770

 
$
36,402

 
$
25,891

 
$
10,511

Financial liabilities carried at fair value
 
 
 
 
 
 
 
 
 
 
 
Forward foreign exchange contracts, net(3)
$
4,710

 
$

 
$
4,710

 
$
10,353

 
$

 
$
10,353

_____________
 
(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 31, 2015
 
November 30, 2014
 
Carrying
Value
 
Estimated Fair Value
 
Carrying
Value
 
Estimated Fair Value
 
(Dollars in thousands)
Financial liabilities carried at adjusted historical cost
 
 
 
 
 
 
 
Senior revolving credit facility
$
110,062

 
$
110,062

 
$
100,098

 
$
100,098

4.25% Yen-denominated Eurobonds due 2016(1)
31,902

 
32,975

 
34,108

 
35,383

7.625% senior notes due 2020(1)

 

 
526,779

 
556,967

6.875% senior notes due 2022(1)
535,770

 
585,051

 
536,501

 
583,848

5.00% senior notes due 2025(1)
488,434

 
487,826

 

 

Short-term borrowings
30,369

 
30,369

 
31,742

 
31,742

Total
$
1,196,537

 
$
1,246,283

 
$
1,229,228

 
$
1,308,038

_____________
 
(1)
Fair values are estimated using Level 1 inputs and incorporate mid-market price quotes. 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.



9




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 31, 2015

NOTE 3: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
As of May 31, 2015, the Company had forward foreign exchange contracts to buy $489.2 million and to sell $138.3 million against various foreign currencies. These contracts are at various exchange rates and expire at various dates through February 2017.
The table below provides data about the carrying values of derivative instruments and non-derivative instruments: 
 
May 31, 2015
 
November 30, 2014
 
Assets
 
(Liabilities)
 
Derivative Net Carrying Value
 
Assets
 
(Liabilities)
 
Derivative Net Carrying Value
 
Carrying
Value
 
Carrying
Value
 
 
Carrying
Value
 
Carrying
Value
 
 
(Dollars in thousands)
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Forward foreign exchange contracts(1)
$
30,902

 
$
(3,132
)
 
$
27,770

 
$
15,587

 
$
(5,076
)
 
$
10,511

Forward foreign exchange contracts(2)
64

 
(4,774
)
 
(4,710
)
 
1,833

 
(12,186
)
 
(10,353
)
Total
$
30,966

 
$
(7,906
)
 
 
 
$
17,420

 
$
(17,262
)
 
 
Non-derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Yen-denominated Eurobonds
$

 
$
(8,582
)
 
 
 
$

 
$
(10,195
)
 
 
_____________
 
(1)
Included in “Other current assets” or “Other non-current assets” on the Company’s consolidated balance sheets.
(2)
Included in “Other accrued liabilities” on the Company’s consolidated balance sheets.
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 31, 2015
 
November 30, 2014
 
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
$
27,506

 
$
(3,196
)
 
$
24,310

 
$
15,555

 
$
(6,908
)
 
$
8,647

Financial liabilities
(3,734
)
 
3,196

 
(538
)
 
(9,587
)
 
6,908

 
(2,679
)
Total
 
 
 
 
$
23,772

 
 
 
 
 
$
5,968

Embedded derivative contracts
 
 
 
 
 
 
 
 
 
 
 
Financial assets
$
3,460

 
$

 
$
3,460

 
$
1,865

 
$

 
$
1,865

Financial liabilities
(4,172
)
 

 
(4,172
)
 
(7,675
)
 

 
(7,675
)
Total
 
 
 
 
$
(712
)
 
 
 
 
 
$
(5,810
)



10




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 31, 2015

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 31,
2015
November 30,
2014
May 31,
2015
 
May 25,
2014
 
May 31,
2015
 
May 25,
2014
 
(Dollars in thousands)
Forward foreign exchange contracts
$
4,637

 
$
4,637

 

 


 


 


Yen-denominated Eurobonds
(18,763
)
 
(19,367
)
 
$
1,250

 
$
(112
)
 
$
1,596

 
$
104

Euro senior notes
(15,751
)
 
(15,751
)
 

 

 

 

Cumulative income taxes
11,477

 
8,760

 
 
 
 
 
 
 
 
Total
$
(18,400
)
 
$
(21,721
)
 
 
 
 
 
 
 
 
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 31,
2015
 
May 25,
2014
 
May 31,
2015
 
May 25,
2014
 
(Dollars in thousands)
Forward foreign exchange contracts:
 
 
 
 
 
 
 
Realized
$
2,592

 
$
854

 
$
(1,368
)
 
$
6,769

Unrealized
11,355

 
(10,864
)
 
23,223

 
(12,343
)
Total
$
13,947

 
$
(10,010
)
 
$
21,855

 
$
(5,574
)



11




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 31, 2015

NOTE 4: DEBT 
 
May 31,
2015
 
November 30,
2014
 
(Dollars in thousands)
 
 
Long-term debt
 
 
 
Unsecured:
 
 
 
4.25% Yen-denominated Eurobonds due 2016
$
31,784

 
$
33,985

7.625% senior notes due 2020

 
525,000

6.875% senior notes due 2022
532,762

 
533,493

5.00% senior notes due 2025
486,073

 

Total unsecured
1,050,619

 
1,092,478

Total long-term debt
$
1,050,619

 
$
1,092,478

Short-term debt
 
 
 
Secured:
 
 
 
Senior revolving credit facility
$
110,000

 
$
100,000

Unsecured:
 
 
 
Short-term borrowings
30,304

 
31,524

Total short-term debt
$
140,304

 
$
131,524

Total long-term and short-term debt
$
1,190,923

 
$
1,224,002

Issuance of Senior Notes due 2025 and Tender and Redemption of Senior Notes due 2020

Senior Notes due 2025. On April 27, 2015, the Company issued $500.0 million in aggregate principal amount of 5.00% senior notes due 2025 (the “Senior Notes due 2025”) to qualified institutional buyers and to purchasers outside the United States in compliance with the Securities Act of 1933, as amended (the “Securities Act”). The notes are unsecured obligations that rank equally with all of the Company’s other existing and future unsecured and unsubordinated debt. The Senior Notes due 2025 will mature on May 1, 2025. Interest on the notes is payable semi-annually in arrears on May 1 and November 1, commencing on November 1, 2015. The Company may redeem some or all of the Senior Notes due 2025 prior to May 1, 2020, at a price equal to 100% of the principal amount, plus accrued and unpaid interest, if any, to the date of redemption, and a “make-whole” premium; on or after this date, the Company may redeem all or any portion of the notes, at once or over time, at redemption prices specified in the indenture governing the notes, plus accrued and unpaid interest, if any, to the date of redemption. In addition, at any time prior to May 1, 2018, the Company may redeem up to a maximum of 40% of the original aggregate principal amount of the Senior Notes due 2025 with the proceeds of certain equity offerings at a redemption price of 105.00% of the principal amount of the Senior Notes due 2025, plus accrued and unpaid interest, if any, to the date of redemption. The Company recorded a discount of $13.9 million in conjunction with the issuance of the Senior Notes due 2025, related to tender and redemption premiums paid to certain holders of the 7.625% Senior Notes due 2020 (the “Senior Notes due 2020”) who participated in the issuance of the Senior Notes due 2025, which will be amortized to interest expense over the term of the notes. Costs of approximately $6.9 million associated with the issuance of the notes, representing underwriting fees and other expenses, will be capitalized and amortized to interest expense over the term of the notes.

Exchange offer. The offering and sale of the Senior Notes due 2025 have not been registered under the Securities Act, or any state securities laws. The Company filed a registration statement, which was declared effective on June 16, 2015, to allow holders of the Senior Notes due 2025 to exchange the notes for the same principal amount of a new issue of notes with substantially identical terms, except that the exchange notes will generally be freely transferable under the Securities Act. The exchange offer expires 5:00 p.m., New York City time on July 15, 2015, unless extended by the Company.



12




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 31, 2015

Covenants. The indenture contains covenants that limit, among other things, the Company’s and certain of the Company’s subsidiaries’ ability to incur additional debt, make certain restricted payments, consummate specified asset sales, enter into transactions with affiliates, incur liens, impose restrictions on the ability of its subsidiaries to pay dividends or make payments to the Company and its restricted subsidiaries, merge or consolidate with another person, and dispose of all or substantially all of the Company’s assets. The indenture provides for customary events of default (subject in certain cases to customary grace and cure periods), which include nonpayment, breach of covenants in the indenture, payment defaults or acceleration of other indebtedness, a failure to pay certain judgments and certain events of bankruptcy and insolvency. Generally, if an event of default occurs, the trustee under the indenture or holders of at least 25% in principal amount of the then outstanding Senior Notes due 2025 may declare all the Senior Notes due 2025 to be due and payable immediately. Upon the occurrence of a change in control (as defined in the indenture), each holder of notes may require the Company to repurchase all or a portion of the notes in cash at a price equal to 101% of the principal amount of notes to be repurchased, plus accrued and unpaid interest, if any, thereon to the date of purchase.

Use of Proceeds and Loss on Early Extinguishment of Debt. On April 20, 2015, the Company commenced a cash tender offer for the outstanding amount of its Senior Notes due 2020. The tender offer expired April 24, 2015, and the Company redeemed all the remaining notes that were not tendered in the offer on May 27, 2015.

The tender offer and redemption, as well as underwriting fees associated with the new issuance, were primarily funded with the proceeds from the issuance of the Senior Notes due 2025, as well as borrowings under the Company's senior secured revolving credit facility. The Company recorded a $14.0 million loss on early extinguishment of debt, comprised of tender and redemption premiums of $7.5 million, the write-off of $3.5 million of unamortized debt issuance costs, and $3.0 million of other costs.
Senior Revolving Credit Facility
The Company’s unused availability under its senior secured revolving credit facility was $532.9 million at May 31, 2015, as the Company’s total availability of $599.1 million was reduced by $66.2 million of letters of credit and other credit usage allocated under the credit facility.
Interest Rates on Borrowings
The Company’s weighted-average interest rate on average borrowings outstanding during the three and six months ended May 31, 2015, was 6.91% and 7.22%, respectively, as compared to 7.93% and 7.89%, respectively, in the same periods of 2014.



13




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 31, 2015

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 31,
2015
 
May 25,
2014
 
May 31,
2015
 
May 25,
2014
 
(Dollars in thousands)
Net periodic benefit cost:
 
 
 
 
 
 
 
Service cost
$
2,090

 
$
2,166

 
$
62

 
$
61

Interest cost
11,790

 
13,776

 
1,147

 
1,277

Expected return on plan assets
(12,716
)
 
(14,036
)
 

 

Amortization of prior service benefit
(15
)
 
(19
)
 

 
(2
)
Amortization of actuarial loss
3,163

 
2,709

 
1,128

 
1,087

Curtailment loss
52

 
4,211

 

 
33

Net settlement gain

 
(133
)
 

 

Net periodic benefit cost
4,364

 
8,674

 
2,337

 
2,456

Changes in accumulated other comprehensive loss:
 
 
 
 
 
 
 
Amortization of prior service benefit
15

 
19

 

 
2

Amortization of actuarial loss
(3,163
)
 
(2,709
)
 
(1,128
)
 
(1,087
)
Curtailment (loss) gain
(52
)
 
115

 

 

Net settlement gain

 
29

 

 

Total recognized in accumulated other comprehensive loss
(3,200
)
 
(2,546
)
 
(1,128
)
 
(1,085
)
Total recognized in net periodic benefit cost and accumulated other comprehensive loss
$
1,164

 
$
6,128

 
$
1,209

 
$
1,371



14




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 31, 2015

 
Pension Benefits
 
Postretirement Benefits
 
Six Months Ended
 
Six Months Ended
 
May 31,
2015
 
May 25,
2014
 
May 31,
2015
 
May 25,
2014
 
(Dollars in thousands)
Net periodic benefit cost:
 
 
 
 
 
 
 
Service cost
$
4,218

 
$
4,325

 
$
125

 
$
129

Interest cost
23,630

 
27,537

 
2,294

 
2,615

Expected return on plan assets
(25,433
)
 
(27,879
)
 

 

Amortization of prior service benefit
(31
)
 
(36
)
 

 
(3
)
Amortization of actuarial loss
6,323

 
5,405

 
2,256

 
2,076

Curtailment loss
387

 
4,443

 

 
733

Net settlement gain

 
(73
)
 

 

Net periodic benefit cost
9,094

 
13,722

 
4,675

 
5,550

Changes in accumulated other comprehensive loss:
 
 
 
 
 
 
 
Amortization of prior service benefit
31

 
36

 

 
3

Amortization of actuarial loss
(6,323
)
 
(5,405
)
 
(2,256
)
 
(2,076
)
Curtailment (loss) gain
(387
)
 
115

 

 

Net settlement gain

 
4

 

 

Total recognized in accumulated other comprehensive loss
(6,679
)
 
(5,250
)
 
(2,256
)
 
(2,073
)
Total recognized in net periodic benefit cost and accumulated other comprehensive loss
$
2,415

 
$
8,472

 
$
2,419

 
$
3,477



15




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 31, 2015

NOTE 6: RESTRUCTURING
In 2014, the Company announced and began to implement a global productivity initiative designed to streamline operations and fuel long-term profitable growth. The Company expects that the majority of the actions related to the global productivity initiative will be implemented by the end of 2016, with a focus on redesigning business processes and identifying opportunities to reduce costs, increase efficiencies and further streamline processes in supporting functions, supply chain and planning.
For the three and six months ended May 31, 2015, the Company recognized restructuring charges, net, of $3.0 million and $7.3 million, respectively, as compared to $19.1 million and $77.0 million for the same periods in 2014. These restructuring charges were recorded in "Restructuring, net" in the Company's consolidated statements of income. Related charges of $12.4 million and $20.4 million for the three and six months ended May 31, 2015, respectively, as compared to $9.3 million and $15.8 million for the same periods in 2014, consist primarily of consulting fees for the Company's centrally-led cost-savings and productivity projects, as well as transition costs associated with the Company's decision to outsource certain global business service activities. These related charges represent costs incurred associated with ongoing operations which will benefit future periods and thus 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 continue through 2016.
The table below summarizes the components of charges included in “Restructuring, net” in the Company’s consolidated statements of income:
 
Three Months Ended
 
Six Months Ended
 
May 31,
2015
 
May 25,
2014
 
May 31,
2015
 
May 25,
2014
 
(Dollars in thousands)
Restructuring, net:
 
 
 
 
 
 
 
Severance and employee-related benefits(1)
$
2,436

 
$
13,427

 
$
7,756

 
$
64,748

Adjustments to severance and employee-related benefits
(514
)
 
(3,045
)
 
(1,763
)
 
(3,045
)
Lease and other contract termination costs

 

 

 

Other(2)
965

 
4,504

 
1,379

 
10,161

Adjustments to other
15

 

 
(467
)
 

Noncash pension and postretirement curtailment losses, net(3)
52

 
4,219

 
387

 
5,176

Total
$
2,954

 
$
19,105

 
$
7,292

 
$
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 the execution of the restructuring initiative.

(3)
Noncash 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 benefits" in the Company's consolidated balance sheets.
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.


16




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 31, 2015

The following table summarizes the activities associated with restructuring liabilities for the three and six months ended May 31, 2015, and May 25, 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 May 31, 2015
 
Liabilities
 
 
 
Adjustments
 
 
 
Foreign Currency Fluctuation
 
Liabilities
 
March 1, 2015
 
Charges
 
 
Payments
 
 
May 31, 2015
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Severance and employee-related benefits
$
43,615

 
$
2,436

 
$
(514
)
 
$
(11,792
)
 
$
(618
)
 
$
33,127

Lease and other contract termination costs

 

 

 

 

 

Other
1

 
965

 
15

 
(981
)
 

 

Total
$
43,616

 
$
3,401

 
$
(499
)
 
$
(12,773
)
 
$
(618
)
 
$
33,127

 
 
 
 
 
 
 
 
 
 
 
 
Current portion
$
42,596

 
 
 
 
 
 
 
 
 
$
32,472

Long-term portion
1,020

 
 
 
 
 
 
 
 
 
655

Total
$
43,616

 
 
 
 
 
 
 
 
 
$
33,127

 
 
 
 
 
 
 
 
 
 
 
 
 
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

 
 
 
 
 
 
 
 
 
 
 
 
Current portion
$
56,978

 
 
 
 
 
 
 
 
 
$
49,749

Long-term portion

 
 
 
 
 
 
 
 
 

Total
$
56,978

 
 
 
 
 
 
 
 
 
$
49,749



17




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 31, 2015

 
Six Months Ended May 31, 2015
 
Liabilities
 
 
 
Adjustments
 
 
 
Foreign Currency Fluctuation
 
Liabilities
 
November 30, 2014
 
Charges
 
 
Payments
 
 
May 31, 2015
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Severance and employee-related benefits
$
56,963

 
$
7,756

 
$
(1,763
)
 
$
(25,473
)
 
$
(4,356
)
 
$
33,127

Lease and other contract termination costs

 

 

 

 

 

Other
6,400

 
1,379

 
(467
)
 
(7,312
)
 

 

Total
$
63,363

 
$
9,135

 
$
(2,230
)
 
$
(32,785
)
 
$
(4,356
)
 
$
33,127

 
 
 
 
 
 
 
 
 
 
 
 
Current portion
$
57,817

 
 
 
 
 
 
 
 
 
$
32,472

Long-term portion
5,546

 
 
 
 
 
 
 
 
 
655

Total
$
63,363

 
 
 
 
 
 
 
 
 
$
33,127

 
 
 
 
 
 
 
 
 
 
 
 
 
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

 
 
 
 
 
 
 
 
 
 
 
 
Current portion
$

 
 
 
 
 
 
 
 
 
$
49,749

Long-term portion

 
 
 
 
 
 
 
 
 

Total
$

 
 
 
 
 
 
 
 
 
$
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 2014 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.



18




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 31, 2015

NOTE 8: DIVIDEND
The Company paid a cash dividend of $50.0 million in the second quarter of 2015. The Company does not have an established annual dividend policy. The Company will continue to review its ability to pay cash dividends at least annually, and dividends may be declared at the discretion of the Company's Board of Directors depending upon, among other factors, the 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 31,
2015
 
November 30,
2014
 
(Dollars in thousands)
Pension and postretirement benefits
$
(254,625
)
 
$
(261,454
)
Net investment hedge losses
(18,400
)
 
(21,721
)
Foreign currency translation losses
(96,669
)
 
(85,362
)
Unrealized gain on marketable securities
2,403

 
2,234

Accumulated other comprehensive loss
(367,291
)
 
(366,303
)
Accumulated other comprehensive income attributable to noncontrolling interest
8,956

 
9,037

Accumulated other comprehensive loss attributable to Levi Strauss & Co.
$
(376,247
)
 
$
(375,340
)

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 31,
2015
 
May 25,
2014
 
May 31,
2015
 
May 25,
2014
 
(Dollars in thousands)
Foreign exchange management gains (losses)(1)
$
13,947

 
$
(10,010
)
 
$
21,855

 
$
(5,574
)
Foreign currency transaction (losses) gains(2)
(7,325
)
 
3,163

 
(43,284
)
 
925

Interest income
199

 
401

 
659

 
1,028

Investment income

 

 
439

 
307

Other
818

 
324

 
1,942

 
1,375

Total other income (expense), net
$
7,639

 
$
(6,122
)
 
$
(18,389
)
 
$
(1,939
)
_____________
 
(1)
Gains and losses on forward foreign exchange contracts primarily result from currency fluctuations relative to negotiated contract rates. Gains in 2015 were primarily due to favorable currency fluctuations on embedded foreign currency derivatives in certain of the Company's operating leases in Russia, as well as favorable currency fluctuations relative to negotiated contract rates on positions to sell the Mexican Peso and Japanese Yen. Losses in 2014 were primarily due to unfavorable currency fluctuations relative to negotiated contract rates of various currencies against the U.S. Dollar.

(2)
Foreign currency transaction gains and losses reflect the impact of foreign currency fluctuation on the Company's foreign currency denominated balances. Losses in 2015 were primarily due to the weakening of various foreign currencies, particularly the Euro, against the U.S. Dollar.
  


19




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 31, 2015

NOTE 11: INCOME TAXES
The effective income tax rate was 35.8% for the six months ended May 31, 2015, compared to 26.6% for the same period ended May 25, 2014.
The effective tax rate in 2014 included a tax benefit that the Company recorded as a result of reversing a deferred tax liability associated with the change in assertion during the period to indefinitely reinvest certain undistributed foreign earnings. The effective tax rate in 2015 reflected a lower proportion of earnings in foreign jurisdictions where the Company is subject to lower tax rates.

NOTE 12: RELATED PARTIES
Robert D. Haas, Chairman Emeritus of the Company, Charles V. Bergh, President and Chief Executive Officer, Peter E. Haas Jr., a director of the Company, and Kelly McGinnis, Senior Vice President of Corporate Affairs and Chief Communications Officer, are board members of the Levi Strauss Foundation, which is not a consolidated entity of the Company. Seth R. Jaffe, Senior Vice President and General Counsel, is Vice President of the Levi Strauss Foundation. During the three- and six-month periods ended May 31, 2015, the Company donated $0.5 million and $6.4 million, respectively, to the Levi Strauss Foundation as compared to $0.1 million and $5.3 million, respectively, for the same prior-year periods.



20




LEVI STRAUSS & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
FOR THE QUARTERLY PERIOD ENDED MAY 31, 2015

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 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 2015, the Company's regional licensing revenue, previously recorded centrally in the Company's Americas region, was revised to be recorded in the Company's respective regions. Regional licensing revenues 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 periods have not been revised.
Business segment information for the Company is as follows: 
 
Three Months Ended
 
Six Months Ended
 
May 31,
2015
 
May 25,
2014
 
May 31,
2015
 
May 25,
2014
 
(Dollars in thousands)
Net revenues:
 
 
 
 
 
 
 
Americas
$
621,776

 
$
644,727

 
$
1,195,863

 
$
1,271,563

Europe
222,150

 
260,994

 
499,638

 
561,420

Asia
168,254

 
176,126

 
371,754

 
378,854

Total net revenues
$
1,012,180

 
$
1,081,847

 
$
2,067,255

 
$
2,211,837

Operating income:
 
 
 
 
 
 
 
Americas
$
103,326

 
$
109,425

 
$
205,618

 
$
220,477

Europe(1)
33,482

 
38,188

 
91,671

 
109,594

Asia
15,031

 
24,282

 
62,371

 
71,184

Regional operating income
151,839

 
171,895

 
359,660

 
401,255

Corporate:
 
 
 
 
 
 
 
Restructuring, net
2,954

 
19,105

 
7,292

 
77,040

Restructuring-related charges
12,366

 
9,312

 
20,373

 
15,753

Other corporate staff costs and expenses
88,904

 
78,350

 
176,935

 
149,678

Corporate expenses
104,224

 
106,767

 
204,600

 
242,471

Total operating income
47,615

 
65,128

 
155,060

 
158,784

Interest expense
(21,913
)
 
(31,310
)
 
(45,225
)
 
(63,139
)
Loss on early extinguishment of debt
(14,002
)
 
(11,151
)
 
(14,002
)
 
(11,151
)
Other income (expense), net
7,639

 
(6,122
)
 
(18,389
)
 
(1,939
)
Income before income taxes
$
19,339

 
$
16,545

 
$
77,444

 
$
82,555

_____________
 
(1)
Included in Europe's operating income for the three- and six-month periods ended May 31, 2015, is a gain of $7.5 million related to the sale of the Company's finishing and distribution facility in Turkey in the second quarter of 2015.



21


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 596 company-operated stores located in 32 countries, including the United States, and through the ecommerce sites we operate. Our company-operated stores and ecommerce sites generated approximately 27% of our net revenues in the first half of 2015, as compared to 26% in the same period in 2014, with our ecommerce sites representing approximately 13% of this revenue in 2015, as compared to 12% in the same period in 2014. In addition, we distribute our Levi’s® and Dockers® products through ecommerce sites 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 our net revenues and 43% of our regional operating income in the six-month period in 2015, as compared to 43% of our net revenues and 45% of our regional operating income in the same period in 2014. Sales of Levi’s® brand products represented approximately 84% of our total net sales in each of the six-month periods in 2015 and in 2014.
Global Productivity Initiative
In 2014, we announced and began to implement a global productivity initiative designed to streamline operations and fuel long-term profitable growth. We expect that the majority of the actions related to our global productivity initiative will be implemented by the end of 2016, with a focus on redesigning business processes and identifying opportunities to reduce costs, increase efficiencies and further streamline processes in supporting functions, supply chain and planning. We believe that this initiative, when completed, will generate net annualized benefits of $175 – $200 million, relative to the cost structure and profitability of the Company and foreign currency exchange rates prior to the commencement of this initiative.
For the three and six months ended May 31, 2015, we recognized restructuring charges, net, of $3.0 million and $7.3 million, respectively, as compared to $19.1 million and $77.0 million for the same periods in 2014, which consist primarily of severance benefits, consulting fees and noncash pension and postretirement curtailment gains or losses. Related charges of $12.4 million and $20.4 million, for the three and six months ended May 31, 2015, respectively, as compared to $9.3 million and $15.8 million for the same periods in 2014, consist primarily of consulting fees for our centrally-led cost-savings and productivity projects, as well as transition costs associated with our decision to outsource certain global business service activities. These related charges represent costs incurred associated with ongoing operations which will benefit future periods and thus were recorded in selling, general and administrative expenses ("SG&A"). Cash payments for charges recognized to date are expected to continue through 2016. Actions taken to date for the global productivity initiative are expected to deliver approximately $125 – $150 million in net annualized savings, relative to the cost structure of the Company and foreign currency exchange rates prior to the commencement of this initiative.
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 planning and go-to-market strategies, implementing efficiencies across our retail, supply chain and distribution network, and continuing to pursue improved procurement practices. Additional restructuring charges will be recorded for these efforts as they become estimable and probable.
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 ecommerce; and leveraging our global scale to improve our cost structure.


22


Consumer discretionary spending, which remains mixed globally, continues to result in a challenging retail environment for us and our customers, characterized by inconsistent traffic patterns and contributing to a generally promotional environment.  Slow real wage growth in developed economies and a shift in consumer spending to interest-rate sensitive durable goods and other non-apparel categories also continue to pressure global discretionary spending.  Given consumers’ increasing focus on value pricing amid the slowly recovering economy, the off-price retail channel remains strong, partially to the detriment of traditional broadline retailers, particularly at the mid-tier.  Both our wholesale and retail channels continue to face competition from vertically-integrated specialty stores, fast-fashion retailers, and, increasingly, ecommerce shopping enabled by the proliferation of online technologies, which constitutes an increasing proportion of global apparel sales, particularly around key selling seasons.  Our domestic and multi-national competitors also continue to expand their global footprints in both brick-and-mortar retail and online.  While currency values are in constant flux, the recent appreciation of the U.S. Dollar against various foreign currencies, particularly the Euro, will continue to impact our financial results in the near-term, affecting translation, margins, as well as traffic in stores located in or near major tourist attractions.
Our Second Quarter 2015 Results
 
Net revenues. Compared to the second quarter of 2014, consolidated net revenues decreased on a reported basis by 6% but increased on a constant-currency basis by 1%, primarily reflecting increased sales from our retail network in Europe and Asia, partially offset by lower sales at wholesale in the Americas.
Operating income. Compared to the second quarter of 2014, consolidated operating income decreased by 27% and operating margin declined to 5%, primarily reflecting our investment in retail, the timing of our advertising spend, and the effects of currency, partially offset by an improvement in our constant-currency gross margin and lower restructuring charges in 2015.
Cash flows. Cash flows provided by operating activities were approximately $103 million for the six-month period in 2015 as compared to $72 million for the same period in 2014; the increase reflected lower inventory levels and higher trade receivable collections, partially offset by higher payments to vendors.
Balance sheet. In the second quarter of 2015, we issued $500.0 million in aggregate principal amount of 5.00% senior notes due 2025. We used the proceeds from the issuance along with borrowings of $110.0 million from our senior secured revolving credit facility to fund the tender offer and redemption of the outstanding amount of our 7.625% senior notes due 2020, extending the maturity profile of our debt while securing a low weighted-average cost of borrowing.
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 2015 and 2014 consists of 13 weeks, with the exception of the fourth quarter of 2014, which consisted of 14 weeks. Due to our fiscal calendar, the first quarter of fiscal year 2014 included the last calendar week of November 2013, while the first quarter of fiscal year 2015 included the last calendar week of February 2015.
Segments.    We manage our business according to three regional segments: the Americas, Europe and Asia. Effective as of the beginning of 2015, our regional licensing revenue, previously recorded centrally in our Americas region, was revised to be recorded in our respective regions. Regional licensing revenues are not significant to any of our regional segments individually in any of the periods presented herein, and accordingly, business segment information for the prior-year period 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 ecommerce 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, as well as costs associated with our ecommerce operations.


23


We reflect substantially all distribution costs in selling, general and administrative expenses, including costs related to receiving and inspection at distribution centers, warehousing, shipping to our customers, handling, and certain other activities associated with our distribution network.
Gross margins may not be comparable to those of other companies in our industry since some companies may include costs related to their distribution network and occupancy costs associated with company-operated stores in cost of goods sold.
Constant currency.    Constant-currency comparisons are based on translating local currency amounts in the prior-year period at actual foreign exchange rates for the current year. We routinely evaluate our financial performance on a constant-currency basis in order to facilitate period-to-period comparisons without regard to the impact of changing foreign currency exchange rates.
Results of Operations for Three and Six Months Ended May 31, 2015, as Compared to Same Periods in 2014
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 31,
2015
 
May 25,
2014
 
%
Increase
(Decrease)
 
May 31,
2015
 
May 25,
2014
 
May 31,
2015
 
May 25,
2014
 
%
Increase
(Decrease)
 
May 31,
2015
 
May 25,
2014
 
 
 
% of Net
Revenues
 
% of Net
Revenues
 
 
 
% of Net
Revenues
 
% of Net
Revenues
 
(Dollars in millions)
Net revenues
$
1,012.2

 
$
1,081.8

 
(6.4
)%
 
100.0
 %
 
100.0
 %
 
$
2,067.3

 
$
2,211.8

 
(6.5
)%
 
100.0
 %
 
100.0
 %
Cost of goods sold
512.0

 
551.5

 
(7.2
)%
 
50.6
 %
 
51.0
 %
 
1,030.0

 
1,105.1

 
(6.8
)%
 
49.8
 %
 
50.0
 %
Gross profit
500.2

 
530.3

 
(5.7
)%
 
49.4
 %
 
49.0
 %
 
1,037.3

 
1,106.7

 
(6.3
)%
 
50.2
 %
 
50.0
 %
Selling, general and administrative expenses
449.6

 
446.1

 
0.8
 %
 
44.4
 %
 
41.2
 %
 
874.9

 
870.9

 
0.5
 %
 
42.3
 %
 
39.4
 %
Restructuring, net
3.0

 
19.1

 
(84.5
)%
 
0.3