10-K 1 d291321d10k.htm ANNUAL REPORT Annual Report
Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-K

 

 

(Mark One)

 

  þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

or

 

  ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended November 27, 2011

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)

(415) 501-6000

(Registrant’s Telephone Number, Including Area Code)

 

 

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨        No  þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  þ        No  ¨

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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 — 37,354,021 shares outstanding on February 2, 2012

Documents incorporated by reference: None

 

 

 


Table of Contents

LEVI STRAUSS & CO.

TABLE OF CONTENTS TO FORM 10-K

FOR FISCAL YEAR ENDED NOVEMBER 27, 2011

 

         Page
 
 

PART I

  
Item 1.  

Business

     1   
Item 1A.  

Risk Factors

     7   
Item 1B.  

Unresolved Staff Comments

     15   
Item 2.  

Properties

     15   
Item 3.  

Legal Proceedings

     16   
Item 4.  

Removed and Reserved

     16   
 

PART II

  
Item 5.  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     17   
Item 6.  

Selected Financial Data

     18   
Item 7.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     19   
Item 7A.  

Quantitative and Qualitative Disclosures About Market Risk

     38   
Item 8.  

Financial Statements and Supplementary Data

     41   
Item 9.  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     86   
Item 9A.  

Controls and Procedures

     86   
Item 9B.  

Other Information

     86   
 

PART III

  
Item 10.  

Directors and Executive Officers

     87   
Item 11.  

Executive Compensation

     91   
Item 12.  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     112   
Item 13.  

Certain Relationships and Related Transactions, and Director Independence

     114   
Item 14.  

Principal Accountant Fees and Services

     115   
 

PART IV

  
Item 15.  

Exhibits, Financial Statement Schedules

     116   
SIGNATURES      120   
Supplemental Information      121   


Table of Contents

PART I

 

Item 1. BUSINESS

Overview

From our California Gold Rush beginnings, we have grown into one of the world’s largest brand-name apparel companies. A history of responsible business practices, rooted in our core values, has helped us build our brands and engender consumer trust around the world. Under our brand names, we design, 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.

An Authentic American Icon

Our Levi’s® brand has become one of the most widely recognized brands in the history of the apparel industry. Its broad distribution reflects the brand’s appeal across consumers of all ages and lifestyles. Its merchandising and marketing reflect the brand’s core attributes: original, definitive, honest, confident and youthful.

Our Dockers® brand was at the forefront of the business casual trend in the United States, offering an alternative to suit dressing and casual wear that led to the American staple — the khaki pant. The brand quickly planted its stake in the marketplace and today, the Dockers® brand has evolved around the world as a market leader in the casual pant category. The Dockers® brand continues to strive to become the world’s most loved khaki brand, providing a variety of styles and fits for men and women.

We also bring style, authenticity and quality to a broader base of jeanswear consumers through our Signature by Levi Strauss & Co.™ and Denizen® brands.

Our Global Reach

Our products are sold in more than 110 countries, grouped into three geographic regions: Americas, Europe and Asia Pacific. We support our brands throughout these regions through a global infrastructure, developing, sourcing and marketing our products around the world. Although our brands are recognized as authentically “American,” we derive approximately half of our net revenues from outside the United States. A summary of financial information for each geographical region, which comprise our three reporting segments, is found in Note 19 to our audited consolidated financial statements included in this report.

Our products are sold in approximately 55,000 retail locations worldwide, including approximately 2,300 retail stores dedicated to our brands, both franchised and company-operated. We distribute our Levi’s® and Dockers® products primarily through chain retailers and department stores in the United States and primarily through department stores, specialty retailers and franchised stores outside of the United States. Levi’s® and Dockers® products are also sold through brand-dedicated online stores operated by us as well as the online stores of certain of our key wholesale customers and other third parties. We distribute Signature by Levi Strauss & Co.™ brand products primarily through mass channel retailers in the United States and Canada and franchised stores in Asia Pacific, and we distribute Denizen® products through mass channel retailers in the United States and Mexico and franchised stores in Asia Pacific.

Levi Strauss & Co. was founded in San Francisco, California, in 1853 and incorporated in Delaware in 1971. We conduct our operations outside the United States through foreign subsidiaries owned directly or indirectly by Levi Strauss & Co. We have headquarter offices in San Francisco, Brussels and Singapore. Our corporate offices are located at Levi’s Plaza, 1155 Battery Street, San Francisco, California 94111, and our main telephone number is (415) 501-6000.

Our common stock is primarily owned by descendants of the family of Levi Strauss and their relatives.

Our Website — www.levistrauss.com — contains additional and detailed information about our history, our products and our commitments. Financial news and reports and related information about our company can be

 

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found at http://www.levistrauss.com/investors/financial-news. Our Website and the information contained on our Website are not part of this annual report and are not incorporated by reference into this annual report.

Our Business Strategies

Our management team is focused on strategies to profitably grow our business, expand across consumer segments and price tiers, respond to marketplace dynamics and build on our competitive strengths. Our key long-term strategies are:

 

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Grow our global brands through product innovation and a sharp consumer focus.    We intend to build upon our brand equity and our design and marketing expertise to expand the reach and appeal of our brands globally. We believe that our insights, innovation and market responsiveness enable us to create trend-right and trend-leading products and marketing programs that appeal to our existing consumer base, while also providing a solid foundation to enhance our appeal to under-served consumer segments. We also seek to further extend our brands’ leadership in jeans and khakis into product and pricing categories that we believe offer attractive opportunities for growth.

 

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Strengthen our wholesale business.    We intend to strengthen our relationship with existing wholesale customers and develop new wholesale opportunities based on targeted consumer segments, including through e-commerce. We are focused on generating competitive economics and engaging in collaborative volume, inventory and marketing planning to achieve mutual commercial success with our customers. Our goal is to create a rewarding brand and service experience to drive consumer traffic and demand to our wholesale customers’ stores.

 

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Accelerate growth through dedicated retail channels.    We continue to seek opportunities for strategic expansion of our dedicated store and online presence around the world, including through franchisee and other dedicated store models. We believe mainline, outlet and online stores represent an attractive opportunity to establish incremental distribution and sales as well as to showcase the full breadth of our product offerings and to enhance our brands’ appeal. We aim to provide a compelling and brand-elevating consumer experience in our dedicated retail stores.

 

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Capitalize upon our global footprint.    Our global footprint is a key factor in the success of our long term growth. We intend to leverage our expansive global presence and local-market talent to drive growth globally and will focus on those markets that offer us the best opportunities for profitable growth, including an emphasis on fast-growing developing markets and their emerging middle-class consumers. We aim to identify global as well as local consumer trends, adapt successes from one market to another and drive growth across our brand portfolio, balancing the power of our global reach with local-market insight.

 

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Drive productivity to enable sustained, profitable growth.    We are focused on deriving greater efficiencies in our operations by increasing cost effectiveness across our brands and support functions. We intend to use the cost improvements to improve profitability as well as to invest in our brands to drive growth. We will continue to build sustainability and social responsibility into our operations, and refine our organizational structure to better support our operating model.

Our Brands and Products

We offer a broad range of products, including jeans, casual and dress pants, tops, shorts, skirts, jackets, footwear and related accessories. Across all of our brands, pants — including jeans, casual pants and dress pants — represented approximately 83%, 84% and 85% of our total units sold in each of fiscal years 2011, 2010 and 2009, respectively. Men’s products generated approximately 72%, 72% and 73% of our total net sales in each of fiscal years 2011, 2010 and 2009, respectively.

Levi’s® Brand

The Levi’s® brand epitomizes classic American style and effortless cool and is positioned as the original and definitive jeans brand. Since their inception in 1873, Levi’s® jeans have become one of the most

 

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recognizable garments in the world — reflecting the aspirations and earning the loyalty of people for generations. Consumers around the world instantly recognize the distinctive traits of Levi’s® jeans — the double arc of stitching, known as the Arcuate Stitching Design, and the Red Tab Device, a fabric tab stitched into the back right pocket. Today, the Levi’s® brand continues to evolve, driven by its distinctive pioneering and innovative spirit. Our range of leading jeanswear and accessories for men, women and children is available in more than 110 countries, allowing individuals around the world to express their personal style.

The Levi’s® brand encompasses a range of products. Levi’s® Red Tab™ products are the foundation of the brand, consisting of a wide spectrum of jeans and jeanswear offered in a variety of fits, fabrics, finishes, styles and price points intended to appeal to a broad spectrum of consumers. The line includes the flagship 501® jean, the original and best-selling five-pocket jean of all-time. The line also incorporates a full range of jeanswear fits and styles designed specifically for women. Sales of Red Tab™ products represented the majority of our Levi’s® brand net sales in all three of our regions in fiscal years 2011, 2010 and 2009. We also offer premium products around the world including a range of premium pants, tops, shorts, skirts, jackets, footwear, and related accessories.

Our Levi’s® brand products accounted for approximately 83%, 81% and 79% of our total net sales in fiscal 2011, 2010 and 2009, respectively, approximately half of which were generated in our Americas region.

Dockers® Brand

The Dockers® brand has embodied the spirit of khakis for more than 25 years. Since its introduction in 1986, the brand has been perfecting the khaki – and the essential goods to go with them — for consumers all over the world. The brand focuses on men, celebrating the re-emergence of khakis as the go-to versatile pant around the world. The brand also leverages its khaki expertise to deliver a range of women’s products targeted at consumers in selected key markets.

Our Dockers® brand products accounted for approximately 12%, 15% and 16% of our total net sales in fiscal 2011, 2010 and 2009, respectively. Although the substantial majority of these net sales were in the Americas region, Dockers® brand products are sold in more than 50 countries.

Signature by Levi Strauss & Co.™ Brand and Denizen® Brand

In addition to our Levi’s® and Dockers® brands, we offer two brands focused on consumers who seek high-quality, affordable and fashionable jeanswear from a company they trust. We offer denim jeans, casual pants, tops and jackets in a variety of fits, fabrics and finishes for men, women and kids under the Signature by Levi Strauss & Co.™ brand through the mass retail channel in the United States and Canada and franchised stores in Asia Pacific. The Denizen® brand launched in 2010 in Asia Pacific to reach emerging middle class consumers in developing markets who seek high-quality jeanswear and other fashion essentials at affordable prices. The brand was recently expanded to the United States at Target stores and Mexico at Coppel stores. The Denizen® product collection — including a variety of jeans, tops and accessories — complements active lifestyles and empowers consumers to express their aspirations, individuality and attitudes at an affordable price point.

Signature by Levi Strauss & Co.™ brand and Denizen® brand products accounted for approximately 5%, 4% and 5% of our total net sales in fiscal years 2011, 2010 and 2009, respectively.

Licensing

The appeal of our brands across consumer groups and our global reach enable us to license our Levi’s® and Dockers® trademarks for a variety of product categories in multiple markets in each of our regions, including footwear, belts, wallets and bags, outerwear, sweaters, dress shirts, kidswear, sleepwear and hosiery. We also license our Signature by Levi Strauss & Co.™ and our Denizen® trademarks in various markets for certain product categories.

In addition to product category licenses, we enter into regional license agreements with third parties to produce, market and distribute our products in several countries around the world, including various Latin American, Middle Eastern and Asia Pacific countries.

 

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We enter into licensing agreements with our licensees covering royalty payments, product design and manufacturing standards, marketing and sale of licensed products, and protection of our trademarks. We require our licensees to comply with our code of conduct for contract manufacturing and engage independent monitors to perform regular on-site inspections and assessments of production facilities.

Sales, Distribution and Customers

We distribute our products through a wide variety of retail formats around the world, including chain and department stores, franchise stores dedicated to our brands, our own company-operated retail network, multi-brand specialty stores, mass channel retailers, and both company-operated and retailer websites.

Multi-brand Retailers

We seek to make our brands and products available where consumers shop, including offering products and assortments that are appropriately tailored for our wholesale customers and their retail consumers. Our products are also sold through authorized third-party Internet sites. Sales to our top ten wholesale customers accounted for approximately 30%, 33% and 36% of our total net revenues in fiscal years 2011, 2010 and 2009, respectively. No customer represented 10% or more of net revenues in any of these years. The loss of any major customer could have a material adverse effect on one or more of our segments or on the company as a whole.

Dedicated Stores

We believe retail stores dedicated to our brands are important for the growth, visibility, availability and commercial success of our brands, and they are an increasingly important part of our strategy for expanding distribution of our products. Our brand-dedicated stores are either operated by us or by independent third parties such as franchisees. In addition to the dedicated stores, we maintain brand-dedicated websites that sell products directly to retail consumers.

Company-operated retail stores.    Our company-operated retail and online stores, including both mainline and outlet stores, generated approximately 18%, 15% and 11% of our net revenues in fiscal 2011, 2010 and 2009, respectively. As of November 27, 2011, we had 498 company-operated stores, predominantly Levi’s® stores, located in 32 countries across our three regions. We had 211 stores in the Americas, 178 stores in Europe and 109 stores in Asia Pacific. During 2011, we added 62 company-operated stores and closed 34 stores.

Franchised and other stores.    Franchised, licensed, or other forms of brand-dedicated stores operated by independent third parties sell Levi’s®, Dockers®, Signature by Levi Strauss & Co.™ and Denizen® products in markets outside the United States. There were approximately 1,800 of these stores as of November 27, 2011, and they are a key element of our international distribution. In addition to these stores, we consider our network of dedicated shop-in-shops located within department stores, which may be either operated directly by us or third parties, to be an important component of our retail distribution in international markets. Outside of the United States, approximately 330 dedicated shop-in-shops were operated directly by us as of November 27, 2011.

Seasonality of Sales

We typically achieve our largest quarterly revenues in the fourth quarter, reflecting the “holiday” season, generally followed by the third quarter, reflecting the Fall or “back to school” season. In 2011, our net revenues in the first, second, third and fourth quarters represented 24%, 23%, 25% and 28%, respectively, of our total net revenues for the year. In 2010, our net revenues in the first, second, third and fourth quarters represented 23%, 22%, 25% and 30%, respectively, of our total net revenues in the 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 2011, 2010 and 2009 consisted of 13 weeks.

 

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Marketing and Promotion

We root our marketing in globally consistent brand messages that reflect the unique attributes of our brands, including the Levi’s® brand as the original and definitive jeans brand and the Dockers® brand as world’s best and most loved khaki. We support our brands with a diverse mix of marketing initiatives to drive consumer demand.

We also market through social media and digital and mobile outlets, event and music sponsorships, product placement in leading fashion magazines and with celebrities, personal sponsorships and endorsements, on the ground efforts such as street-level events and similar targeted “viral” marketing activities.

We also use our websites, www.levi.com, www.dockers.com, www.levistrausssignature.com, and www.denizen.com, in relevant markets to enhance consumer understanding of our brands and help consumers find and buy our products.

Sourcing and Logistics

Organization.    Our global sourcing and logistics organizations are responsible for taking a product from the design concept stage through production to delivery to our customers. Our objective is to leverage our global scale to achieve product development and sourcing efficiencies and reduce total product and distribution costs while maintaining our focus on local service levels and working capital management.

Product procurement.    We source nearly all of our products through independent contract manufacturers. The remainder are sourced from our company-operated manufacturing and finishing plants, including facilities for our innovation and development efforts that provide us with the opportunity to develop new product styles and finishes. See “Item 2 — Properties” for more information about those manufacturing facilities.

Sources and availability of raw materials.    The principal fabrics used in our business are cotton, blends, synthetics and wools. The prices we pay our suppliers for our products are dependent in part on the market price for raw materials used to produce them, primarily cotton. The price and availability of cotton may fluctuate substantially, depending on a variety of factors. The price fluctuations impact the cost of our products in future seasons given the lead time of our product development cycle. We have already raised, and may continue to raise, product prices in an attempt to mitigate the impact of these fluctuating costs. Fluctuations in product costs have caused a decrease in our profitability and continued fluctuations in product costs may adversely affect our profitability in the future if our product pricing actions are insufficient or if those actions cause our wholesale customers or retail consumers to reduce the volumes they purchase.

Sourcing locations.    We use numerous independent contract manufacturers located throughout the world for the production and finishing of our garments. We conduct assessments of political, social, economic, trade, labor and intellectual property protection conditions in the countries in which we source our products before placing production in those countries and on an ongoing basis.

In 2011 we sourced products from contractors located in more than 30 countries around the world. We sourced products in North and South Asia, South and Central America (including Mexico and the Caribbean), Europe and Africa. No single country accounted for more than 20% of our sourcing in 2011.

Sourcing practices.    Our sourcing practices include these elements:

 

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We require all third-party contractors and subcontractors who manufacture or finish products for us to comply with our code of conduct relating to supplier working conditions as well as environmental and employment practices. We also require our licensees to ensure that their manufacturers comply with our requirements.

 

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Our code of conduct covers employment practices such as wages and benefits, working hours, health and safety, working age and discriminatory practices, environmental matters such as wastewater treatment and solid waste disposal, and ethical and legal conduct.

 

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We regularly assess manufacturing and finishing facilities through periodic on-site facility inspections and improvement activities, including use of independent monitors to supplement our internal staff. We integrate review and performance results into our sourcing decisions.

 

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We disclose the names and locations of our contract manufacturers to encourage collaboration among apparel companies in factory monitoring and improvement. We regularly evaluate and refine our code of conduct processes.

Logistics.    We own and operate dedicated distribution centers in a number of countries. For more information, see “Item 2 — Properties.” Distribution center activities include receiving finished goods from our contractors and plants, inspecting those products, preparing them for retail presentation, and shipping them to our customers and to our own stores. Our distribution centers maintain a combination of replenishment and seasonal inventory from which we ship to our stores and wholesale customers. In certain locations around the globe we have consolidated our distribution centers to service multiple countries and brands. Our inventory significantly builds during peaks in seasonal shipping periods. We are constantly monitoring our inventory levels and adjusting them as necessary to meet market demand. In addition, we outsource some of our logistics activities to third-party logistics providers.

Competition

The worldwide apparel industry is highly competitive and fragmented. It is characterized by low barriers to entry, brands targeted at specific consumer segments, many regional and local competitors, and an increasing number of global competitors. Principal competitive factors include:

 

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developing products with relevant fits, finishes, fabrics, style and performance features;

 

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maintaining favorable brand recognition and appeal through strong and effective marketing;

 

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anticipating and responding to changing consumer demands in a timely manner;

 

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securing desirable retail locations and presenting products effectively at retail;

 

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providing sufficient wholesale distribution, visibility and availability, and presenting products effectively at wholesale;

 

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delivering compelling value for the price; and

 

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generating competitive economics for wholesale customers, including retailers, franchisees, and distributors.

We face competition from a broad range of competitors at the worldwide, regional and local levels in diverse channels across a wide range of retail price points. Worldwide, a few of our primary competitors include vertically integrated specialty stores operated by such companies such as Gap Inc. and Inditex; jeanswear brands such as those marketed by VF Corporation, a competitor in multiple channels and product lines including through their Wrangler, Lee and Seven for All Mankind brands; khakiwear brands such as Haggar; and athletic wear companies such as adidas Group and Nike, Inc. In addition, each region faces local or regional competition, such as G-Star and Diesel in Europe and UNIQLO in Asia Pacific; and retailers’ private or exclusive labels such as those from Wal-Mart Stores, Inc. (Faded Glory brand), Target Corporation (Mossimo and Merona brands) and JC Penney (Arizona brand) in the Americas. Many of our regional competitors are also seeking to expand globally through an expanded store footprint and the e-commerce channel. For more information on the factors affecting our competitive position, see “Item 1A — Risk Factors.”

Trademarks

We have more than 5,300 trademark registrations and pending applications in approximately 175 countries worldwide, and we acquire rights in new trademarks according to business needs. Substantially all of our global trademarks are owned by Levi Strauss & Co., the parent and U.S. operating company. We regard our trademarks as our most valuable assets and believe they have substantial value in the marketing of our products. The Levi’s®, Dockers® and 501® trademarks, the Arcuate Stitching Design, the Tab Device, the Two Horse® Design, the Housemark and the Wings and Anchor Design are among our core trademarks.

We protect these trademarks by registering them with the U.S. Patent and Trademark Office and with governmental agencies in other countries, particularly where our products are manufactured or sold. We work

 

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vigorously to enforce and protect our trademark rights by engaging in regular market reviews, helping local law enforcement authorities detect and prosecute counterfeiters, issuing cease-and-desist letters against third parties infringing or denigrating our trademarks, opposing registration of infringing trademarks, and initiating litigation as necessary. We currently are pursuing approximately 350 infringement matters around the world. We also work with trade groups and industry participants seeking to strengthen laws relating to the protection of intellectual property rights in markets around the world.

Employees

As of November 27, 2011, we employed approximately 17,000 people, approximately 9,600 of whom were located in the Americas, 4,800 in Europe, and 2,600 in Asia Pacific. Approximately 4,500 of our employees were associated with manufacturing of our products, 6,700 worked in retail, including seasonal employees, 1,600 worked in distribution and 4,200 were other non-production employees.

History and Corporate Citizenship

Our history and longevity are unique in the apparel industry. Our commitment to quality, innovation and corporate citizenship began with our founder, Levi Strauss, who infused the business with the principle of responsible commercial success that has been embedded in our business practices throughout our more than 150-year history. This mixture of history, quality, innovation and corporate citizenship contributes to the iconic reputations of our brands.

In 1853, during the California Gold Rush, Mr. Strauss opened a wholesale dry goods business in San Francisco that became known as “Levi Strauss & Co.” Seeing a need for work pants that could hold up under rough conditions, he and Jacob Davis, a tailor, created the first jean. In 1873, they received a U.S. patent for “waist overalls” with metal rivets at points of strain. The first product line designated by the lot number “501” was created in 1890.

In the 19th and early 20th centuries, our work pants were worn primarily by cowboys, miners and other working men in the western United States. Then, in 1934, we introduced our first jeans for women, and after World War II, our jeans began to appeal to a wider market. By the 1960s they had become a symbol of American culture, representing a unique blend of history and youth. We opened our export and international businesses in the 1950s and 1960s. In 1986, we introduced the Dockers® brand of casual apparel which revolutionized the concept of business casual.

Throughout this long history, we upheld our strong belief that we can help shape society through civic engagement and community involvement, responsible labor and workplace practices, philanthropy, ethical conduct, environmental stewardship and transparency. We have engaged in a “profits through principles” business approach from the earliest years of the business. Among our milestone initiatives over the years, we integrated our factories two decades prior to the U.S. civil rights movement and federally mandated desegregation, we developed a comprehensive supplier code of conduct requiring safe and healthy working conditions among our suppliers (a first of its kind for a multinational apparel company), and we offered full medical benefits to domestic partners of employees prior to other companies of our size, a practice that is widely accepted today.

Our website — www.levistrauss.com — contains additional and detailed information about our history and corporate citizenship initiatives. Our website and the information contained on our website are not part of this annual report and are not incorporated by reference into this annual report.

 

Item 1A. RISK FACTORS

Risks Relating to the Industry in Which We Compete

Our revenues are influenced by economic conditions that impact consumer spending.

Apparel is a cyclical industry that is dependent upon the overall level of consumer spending. Our wholesale customers anticipate and respond to adverse changes in economic conditions and uncertainty by reducing

 

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inventories and canceling orders. Our brand-dedicated stores are also affected by these conditions which may lead to a decline in consumer traffic to, and spending in, these stores. As a result, factors that diminish consumer spending and confidence in any of the markets in which we compete, particularly deterioration in general economic conditions, volatility in investment returns, high levels and fear of unemployment, increases in energy costs or interest rates, housing market downturns, fear about and impact of pandemic illness, and other factors such as acts of war, acts of nature or terrorist or political events that impact consumer confidence, could reduce our sales and adversely affect our business and financial condition through their impact on our wholesale customers as well as its direct impact on us. The global financial economic downturn that began in 2008 and that continued throughout 2011, particularly in Europe, has impacted consumer confidence and spending negatively. These outcomes and behaviors have, and may continue to, adversely affect our business and financial condition.

Intense competition in the worldwide apparel industry could lead to reduced sales and prices.

We face a variety of competitive challenges in the worldwide apparel industry from a variety of jeanswear and casual apparel marketers, and competition has increased over the years due to factors such as the international expansion and increased presence of vertically integrated specialty stores; expansion into e-commerce by existing and new competitors; the proliferation of private labels or exclusive labels offered by department stores, chain stores and mass channel retailers; the introduction of jeans and casual apparel by well-known and successful non-apparel brands (such as athletic wear marketers); and the movement of apparel companies who traditionally relied on wholesale distribution channels into their own retail distribution network. Some of these competitors have greater financial and marketing resources than we do and may be able to adapt to changes in consumer preferences or retail requirements more quickly, devote greater resources to the building and sustaining of their brand equity and the marketing and sale of their products. In addition, some of these competitors may not respond to changing sourcing conditions in the same manner we do, and may be able to achieve lower product costs or adopt more aggressive pricing policies than we can. As a result, we may not be able to compete as effectively with them and may not be able to maintain or grow the equity of and demand for our brands. These evolving competitive factors could reduce our sales and adversely affect our business and financial condition.

The success of our business depends upon our ability to offer innovative and updated products at attractive price points.

The worldwide apparel industry is characterized by constant product innovation due to changing fashion trends and consumer preferences and by the rapid replication of new products by competitors. As a result, our success depends in large part on our ability to develop, market and deliver innovative and stylish products at a pace, intensity, and price competitive with other brands in our segments. We must also have the agility to respond to changes in consumer preference such as a consumer shift in some markets away from premium-priced brands to lower-priced fast-fashion products. In addition, we must create products at a range of price points that appeal to the consumers of both our wholesale customers and our dedicated retail stores. Failure on our part to regularly and rapidly develop innovative and stylish products and update core products could limit sales growth, adversely affect retail and consumer acceptance of our products, negatively impact the consumer traffic in our dedicated retail stores, leave us with a substantial amount of unsold inventory which we may be forced to sell at discounted prices, and impair the image of our brands. Moreover, our newer products may not produce as high a gross margin as our traditional products and thus may have an adverse effect on our overall margins and profitability.

The worldwide apparel industry is subject to ongoing pricing pressure.

The apparel market is characterized by low barriers to entry for both suppliers and marketers, global sourcing through suppliers located throughout the world, trade liberalization, continuing movement of product sourcing to lower cost countries, and the ongoing emergence of new competitors with widely varying strategies and resources. These factors have contributed, and may continue to contribute, to ongoing pricing pressure and uncertainty throughout the supply chain. Pricing pressure has been exacerbated by the variability of raw material and energy costs in recent years. This pressure has had and may continue to have the following effects:

 

  Ÿ  

require us to raise wholesale prices on existing products resulting in decreased sales volume;

 

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  Ÿ  

result in reduced gross margins across our product lines;

 

  Ÿ  

increase retailer demands for allowances, incentives and other forms of economic support; and

 

  Ÿ  

increase pressure on us to reduce our production costs and our operating expenses.

Any of these factors could adversely affect our business and financial condition.

Increases in the price of raw materials could increase our cost of goods and negatively impact our financial results.

The principal materials used in our business are cotton, blends, synthetics and wools. The prices we pay our suppliers for our products are dependent in part on the market price for raw materials used to produce them, primarily cotton. The price and availability of cotton may fluctuate substantially, depending on a variety of factors, including demand, acreage devoted to cotton crops and crop yields, weather, supply conditions, transportation costs, energy prices, work stoppages, government regulation and government policy, economic climates, market speculation and other unpredictable factors. Any and all of these factors may be exacerbated by global climate change. Cotton prices suffered from unprecedented variability and uncertainty in 2010 and 2011. Increases in raw material costs, unless sufficiently offset with our pricing actions, have caused and may continue to cause a decrease in our profitability and impact our sales volume. These factors may also have an adverse impact on our cash and working capital needs as well as those of our suppliers.

Our business is subject to risks associated with sourcing and manufacturing overseas.

We import both raw materials and finished garments into all of our operating regions. Our ability to import products in a timely and cost-effective manner may be affected by conditions at ports or issues that otherwise affect transportation and warehousing providers, such as port and shipping capacity, labor disputes and work stoppages, political unrest, severe weather, or security requirements in the United States and other countries. These issues could delay importation of products or require us to locate alternative ports or warehousing providers to avoid disruption to our customers. These alternatives may not be available on short notice or could result in higher transportation costs, which could have an adverse impact on our business and financial condition.

Substantially all of our import operations are subject to customs and tax requirements and to tariffs and quotas set by governments through mutual agreements or bilateral actions. In addition, the countries in which our products are manufactured or imported may from time to time impose additional quotas, duties, tariffs or other restrictions on our imports or adversely modify existing restrictions. Adverse changes in these import costs and restrictions, or our suppliers’ failure to comply with customs regulations or similar laws, could harm our business.

Our operations are also subject to the effects of international trade agreements and regulations such as the North American Free Trade Agreement, the Dominican-Republic Central America Free Trade Agreement, the Egypt Qualified Industrial Zone program, and the activities and regulations of the World Trade Organization. Although generally these trade agreements have positive effects on trade liberalization, sourcing flexibility and cost of goods by reducing or eliminating the duties and/or quotas assessed on products manufactured in a particular country, trade agreements can also impose requirements that adversely affect our business, such as setting quotas on products that may be imported from a particular country into our key markets such as the United States or the European Union.

Risks Relating to Our Business

We depend on a group of key customers for a significant portion of our revenues. A significant adverse change in a customer relationship or in a customer’s performance or financial position could harm our business and financial condition.

Sales to our top ten wholesale customers accounted for approximately 30%, 33% and 36% of our total net revenues in fiscal years 2011, 2010 and 2009, respectively. No customer represented 10% or more of net revenues in any of these years. While we have long-standing relationships with our wholesale customers, we do

 

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not have long-term contracts with them. As a result, purchases generally occur on an order-by-order basis, and the relationship, as well as particular orders, can generally be terminated by either party at any time. If any major customer decreases or ceases its purchases from us, reduces the floor space, assortments, fixtures or advertising for our products or changes its manner of doing business with us for any reason, such actions could adversely affect our business and financial condition. In addition, a customer may revise its strategy to one that shifts its focus away from our typical consumer or that otherwise results in a reduction of its sales of our products generally, negatively impacting our sales through that channel. Also, the performance and financial condition of a wholesale customer may cause us to alter our business terms or to cease doing business with that customer, which could in turn adversely affect our own business and financial condition.

The retail industry in the United States has experienced substantial consolidation over the last decade, and further consolidation may occur. Consolidation in the retail industry typically results in store closures, centralized purchasing decisions, increased customer leverage over suppliers, greater exposure for suppliers to credit risk and an increased emphasis by retailers on inventory management and productivity, any of which can, and have, adversely impacted our net revenues, margins and ability to operate efficiently.

Our introduction and expansion of a new brand creates risks for us and may not be successful.

In August 2010, we launched the Denizen® brand in Asia Pacific to reach consumers in the emerging middle class in developing markets who seek high-quality jeanswear and other fashion essentials at affordable prices. The brand was expanded in Asia Pacific and also in the mass channel in the United States and Mexico in 2011. We face a number of risks with respect to this new offering. Growing a new brand involves considerable investments, which are initially made with limited information regarding actual consumer acceptance of the brand, as we are entering into a new business with limited history of performance and no guarantees of maintaining a successful response in the marketplace. Additionally, our relationships with our current customers may be adversely affected if they react negatively to our selling the brand through a distribution channel other than their own. Any of these risks could result in decreased sales, additional expenses and increased working capital requirements, which may adversely affect our business and financial condition.

We may be unable to maintain or increase our sales through our primary distribution channels.

In the United States, chain stores and department stores are the primary distribution channels for our Levi’s® and Dockers® products, and the mass channel is the primary distribution channel for Signature by Levi Strauss & Co.™ and Denizen® products. Outside the United States, department stores and independent jeanswear retailers have traditionally been our primary distribution channels.

We may be unable to maintain or increase sales of our products through these distribution channels for several reasons, including the following:

 

  Ÿ  

The retailers in these channels maintain — and seek to grow — substantial private-label and exclusive offerings as they strive to differentiate the brands and products they offer from those of their competitors.

 

  Ÿ  

These retailers may also change their apparel strategies and reduce fixture spaces and purchases of brands misaligned with their strategic requirements.

 

  Ÿ  

Other channels, including vertically integrated specialty stores, account for a substantial portion of jeanswear and casual wear sales. In some of our mature markets, these stores have already placed competitive pressure on our primary distribution channels, and many of these stores are now looking to our developing markets to grow their business.

Further success by retailer private-labels and vertically integrated specialty stores may continue to adversely affect the sales of our products across all channels, as well as the profitability of our brand-dedicated stores. Additionally, our ability to secure or maintain retail floor space, market share and sales in these channels depends on our ability to offer differentiated products and to increase retailer profitability on our products, which could have an adverse impact on our margins.

 

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During the past several years, we have experienced significant changes in senior management and our board. The success of our business depends on our ability to attract and retain qualified and effective senior management and board leadership.

The composition of our senior management team and the board has changed significantly in recent years. Recent changes in our senior management team include the transition to a new President and Chief Executive Officer, Charles V. Bergh, starting September 1, 2011, and the departure of Robert L. Hanson, Executive Vice President and President, Global Levi’s®. Our Board of Directors also appointed a new Chairman, Steven C. Neal, who has been a director since 2007. Collective or individual changes in our senior management group or board membership could have an adverse effect on our ability to determine and implement our strategies, which in turn may adversely affect our business and results of operations.

We must successfully maintain and/or upgrade our information technology systems.

We rely on various information technology systems to manage our operations. Over the last several years we have been and continue to implement modifications and upgrades to our systems, including making changes to legacy systems, replacing legacy systems with successor systems with new functionality and acquiring new systems with new functionality. These types of activities subject us to inherent costs and risks associated with replacing and changing these systems, including impairment of our ability to fulfill customer orders, potential disruption of our internal control structure, substantial capital expenditures, additional administration and operating expenses, retention of sufficiently skilled personnel to implement and operate the new systems, demands on management time, and other risks and costs of delays or difficulties in transitioning to new systems or of integrating new systems into our current systems. Our system implementations may not result in productivity improvements at a level that outweighs the costs of implementation, or at all. In addition, the difficulties with implementing new technology systems may cause disruptions in our business operations and have an adverse effect on our business and operations, if not anticipated and appropriately mitigated.

We currently rely on contract manufacturing of our products. Our inability to secure production sources meeting our quality, cost, working conditions and other requirements, or failures by our contractors to perform, could harm our sales, service levels and reputation.

We source approximately 95% of our products from independent contract manufacturers who purchase fabric and make our products and may also provide us with design and development services. As a result, we must locate and secure production capacity. We depend on independent manufacturers to maintain adequate financial resources, including access to sufficient credit, secure a sufficient supply of raw materials, and maintain sufficient development and manufacturing capacity in an environment characterized by continuing cost pressure and demands for product innovation and speed-to-market. In addition, we do not have material long-term contracts with any of our independent manufacturers, and these manufacturers generally may unilaterally terminate their relationship with us at any time. Finally, we may experience capability-building and infrastructure challenges as we expand our sourcing to new contractors throughout the world.

Our suppliers are subject to the fluctuations in general economic cycles, and the global economic conditions may impact their ability to operate their business. They may also be impacted by the increasing costs of raw materials, labor and distribution, resulting in demands for less attractive contract terms or an inability for them to meet our requirements or conduct their own businesses. The performance and financial condition of a supplier may cause us to alter our business terms or to cease doing business with a particular supplier, or change our sourcing practices generally, which could in turn adversely affect our own business and financial condition.

Our dependence on contract manufacturing could subject us to difficulty in obtaining timely delivery of products of acceptable quality. A contractor’s failure to ship products to us in a timely manner or to meet our quality standards, or interference with our ability to receive shipments due to factors such as port or transportation conditions, could cause us to miss the delivery date requirements of our customers. Failing to make timely deliveries may cause our customers to cancel orders, refuse to accept deliveries, impose non-compliance charges, demand reduced prices, or reduce future orders, any of which could harm our sales and margins.

 

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We require contractors to meet our standards in terms of working conditions, environmental protection, security and other matters before we are willing to place business with them. As such, we may not be able to obtain the lowest-cost production. In addition, the labor and business practices of apparel manufacturers have received increased attention from the media, non-governmental organizations, consumers and governmental agencies in recent years. Any failure by our independent manufacturers to adhere to labor or other laws or appropriate labor or business practices, and the potential litigation, negative publicity and political pressure relating to any of these events, could harm our business and reputation.

We are a global company with significant revenues coming from our Europe and Asia Pacific businesses, which exposes us to political and economic risks as well as the impact of foreign currency fluctuations.

We generated approximately 43%, 42% and 43% of our net revenues from our Europe and Asia Pacific businesses in 2011, 2010 and 2009, respectively. A substantial amount of our products came from sources outside of the country of distribution. As a result, we are subject to the risks of doing business outside of the United States, including:

 

  Ÿ  

currency fluctuations, which have impacted our results of operations significantly in recent years;

 

  Ÿ  

political, economic and social instability;

 

  Ÿ  

changes in tariffs and taxes;

 

  Ÿ  

regulatory restrictions on repatriating foreign funds back to the United States; and

 

  Ÿ  

less protective foreign laws relating to intellectual property.

The functional currency for most of our foreign operations is the applicable local currency. As a result, fluctuations in foreign currency exchange rates affect the results of our operations and the value of our foreign assets and liabilities, including debt, which in turn may benefit or adversely affect results of operations and cash flows and the comparability of period-to-period results of operations. In addition, we engage in hedging activities to manage our foreign currency exposures resulting from certain product sourcing activities, some intercompany sales, foreign subsidiaries’ royalty payments, earnings repatriations, net investment in foreign operations and funding activities. However, our earnings may be subject to volatility since we do not fully hedge our foreign currency exposures and we are required to record in income the changes in the market values of our exposure management instruments that we do not designate or that do not qualify for hedge accounting treatment. Changes in the value of the relevant currencies may affect the cost of certain items required in our operations as the majority of our sourcing activities are conducted in U.S. Dollars. Changes in currency exchange rates may also affect the relative prices at which we and foreign competitors sell products in the same market. Foreign policies and actions regarding currency valuation could result in actions by the United States and other countries to offset the effects of such fluctuations. Recently, there has been a high level of volatility in foreign currency exchange rates and that level of volatility may continue and may adversely impact our business or financial conditions.

Furthermore, due to our global operations, we are subject to numerous domestic and foreign laws and regulations affecting our business, such as those related to labor, employment, worker health and safety, antitrust and competition, environmental protection, consumer protection, import/export, and anti-corruption, including but not limited to the Foreign Corrupt Practices Act which prohibits giving anything of value intended to influence the awarding of government contracts. Although we have put into place policies and procedures aimed at ensuring legal and regulatory compliance, our employees, subcontractors and agents could take actions that violate these requirements. Violations of these regulations could subject us to criminal or civil enforcement actions, any of which could have a material adverse effect on our business.

As a global company, we are exposed to risks of doing business in foreign jurisdictions and risks relating to U.S. policy with respect to companies doing business in foreign jurisdictions. Legislation or other changes in the U.S. tax laws could increase our U.S. income tax liability and adversely affect our after-tax profitability.

 

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Most of the employees in our production and distribution facilities are covered by collective bargaining agreements, and any material job actions could negatively affect our results of operations.

In North America, most of our distribution employees are covered by various collective bargaining agreements, and outside North America, most of our production and distribution employees are covered by either industry-sponsored and/or state-sponsored collective bargaining mechanisms. Any work stoppages or other job actions by these employees could harm our business and reputation.

Our licensees may not comply with our product quality, manufacturing standards, marketing and other requirements.

We license our trademarks to third parties for manufacturing, marketing and distribution of various products. While we enter into comprehensive agreements with our licensees covering product design, product quality, sourcing, manufacturing, marketing and other requirements, our licensees may not comply fully with those agreements. Non-compliance could include marketing products under our brand names that do not meet our quality and other requirements or engaging in manufacturing practices that do not meet our supplier code of conduct. These activities could harm our brand equity, our reputation and our business.

Our success depends on the continued protection of our trademarks and other proprietary intellectual property rights.

Our trademarks and other intellectual property rights are important to our success and competitive position, and the loss of or inability to enforce trademark and other proprietary intellectual property rights could harm our business. We devote substantial resources to the establishment and protection of our trademark and other proprietary intellectual property rights on a worldwide basis. Our efforts to establish and protect our trademark and other proprietary intellectual property rights may not be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products. Unauthorized copying of our products or unauthorized use of our trademarks or other proprietary rights may not only erode sales of our products but may also cause significant damage to our brand names and our ability to effectively represent ourselves to our customers, contractors, suppliers and/or licensees. Moreover, others may seek to assert rights in, or ownership of, our trademarks and other proprietary intellectual property, and we may not be able to successfully resolve those claims. In addition, the laws and enforcement mechanisms of some foreign countries may not allow us to protect our proprietary rights to the same extent as we are able to in the United States and other countries.

We have substantial liabilities and cash requirements associated with postretirement benefits, pension and our deferred compensation plans.

Our postretirement benefits, pension, and our deferred compensation plans result in substantial liabilities on our balance sheet. These plans and activities have and will generate substantial cash requirements for us, and these requirements may increase beyond our expectations in future years based on changing market conditions. The difference between plan obligations and assets, or the funded status of the plans, is a significant factor in determining the net periodic benefit costs of our pension plans and the ongoing funding requirements of those plans. Many variables, such as changes in interest rates, mortality rates, health care costs, investment returns, and/or the market value of plan assets can affect the funded status of our defined benefit pension, other postretirement, and postemployment benefit plans and cause volatility in the net periodic benefit cost and future funding requirements of the plans. Our current estimates indicate our future annual funding requirements may be approximately $65 million in 2012. Plan liabilities may impair our liquidity, have an unfavorable impact on our ability to obtain financing and place us at a competitive disadvantage compared to some of our competitors who do not have such liabilities and cash requirements.

Earthquakes or other events outside of our control may damage our facilities or the facilities of third parties on which we depend.

Our corporate headquarters are located in California near major geologic faults that have experienced earthquakes in the past. An earthquake or other natural disaster or the loss of power caused by power shortages could disrupt operations or impair critical systems. Any of these disruptions or other events outside of our control

 

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could affect our business negatively, harming our operating results. In addition, if any of our other facilities, including our manufacturing, finishing or distribution facilities or our company-operated or franchised stores, or the facilities of our suppliers or customers, is affected by earthquakes, tsunamis, power shortages, floods, monsoons, terrorism, epidemics or other events outside of our control, our business could suffer. The Company has plans in place to mitigate the impact of these types of events on its own facilities including the geographic diversity of our IT infrastructure, the duplication of headquarter locations, training and education of employees for such circumstances, and the capacity for many employees to work remotely. Oversight to these preparedness strategies is provided by several committees comprised of key functions representing the regions in which the company does business. However, we cannot assure that these mitigation plans will offset the impact of such events, and we cannot control the impact of such events on the operations of our suppliers or customers.

Risks Relating to Our Debt

We have debt and interest payment requirements at a level that may restrict our future operations.

As of November 27, 2011, we had approximately $2.0 billion of debt, of which all but approximately $200.0 million was unsecured, and we had $494.7 million of additional borrowing capacity under our senior secured revolving credit facility. We entered into our credit facility on September 30, 2011, refinancing our previous facility which would have matured in 2012. The new facility has a maturity date of September 30, 2016, which may be accelerated to December 26, 2013, if the Term Loan Agreement, dated as of March 27, 2007, among the Company, Bank of America, as administrative agent and the other lenders and financial institutions party thereto, is still outstanding on that date and we have not met certain other conditions. Upon the maturity date, all of the borrowings under the credit facility become due.

Our debt requires us to dedicate a substantial portion of any cash flow from operations to the payment of interest and principal due under our debt, which will reduce funds available for other business purposes, and result in us having lower net income than we would otherwise have had. This dedicated use of cash could impact our ability to successfully compete by, for example:

 

  Ÿ  

increasing our vulnerability to general adverse economic and industry conditions;

 

  Ÿ  

limiting our flexibility in planning for or reacting to changes in our business and industry;

 

  Ÿ  

placing us at a competitive disadvantage compared to some of our competitors that have less debt; and

 

  Ÿ  

limiting our ability to obtain additional financing required to fund working capital and capital expenditures and for other general corporate purposes.

In addition, borrowings under our senior secured revolving credit facility and our unsecured term loan bear interest at variable rates of interest. As a result, increases in market interest rates would require a greater portion of our cash flow to be used to pay interest, which could further hinder our operations. Increase in market interest rates may also affect the trading price of our debt securities that bear interest at a fixed rate. Our ability to satisfy our obligations and to reduce our total debt depends on our future operating performance and on economic, financial, competitive and other factors, many of which are beyond our control.

The downturn in the economy and the volatility in the capital markets could affect our ability to access capital or could increase our costs of capital.

The dramatic downturn in the U.S. and global economy and disruption in the credit markets, which began in 2008, has not fully abated. Further downturn or disruption in the credit markets may reduce sources of liquidity available to us or increase our costs of capital, which could impact our ability to maintain or grow our business, which in turn may adversely affect our business and results of operations.

Restrictions in our notes, indentures, unsecured term loan and senior secured revolving credit facility may limit our activities, including dividend payments, share repurchases and acquisitions.

The indentures relating to our senior unsecured notes, our Euro notes, our Yen-denominated Eurobonds, our unsecured term loan and our senior secured revolving credit facility contain restrictions, including covenants limiting our ability to incur additional debt, grant liens, make acquisitions and other investments, prepay

 

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specified debt, consolidate, merge or acquire other businesses, sell assets, pay dividends and other distributions, repurchase stock, and enter into transactions with affiliates. These restrictions, in combination with our leveraged condition, may make it more difficult for us to successfully execute our business strategy, grow our business or compete with companies not similarly restricted.

If our foreign subsidiaries are unable to distribute cash to us when needed, we may be unable to satisfy our obligations under our debt securities, which could force us to sell assets or use cash that we were planning to use elsewhere in our business.

We conduct our international operations through foreign subsidiaries, and therefore we depend upon funds from our foreign subsidiaries for a portion of the funds necessary to meet our debt service obligations. We only receive the cash that remains after our foreign subsidiaries satisfy their obligations. Any agreements our foreign subsidiaries enter into with other parties, as well as applicable laws and regulations limiting the right and ability of non-U.S. subsidiaries and affiliates to pay dividends and remit cash to affiliated companies, may restrict the ability of our foreign subsidiaries to pay dividends or make other distributions to us. If those subsidiaries are unable to pass on the amount of cash that we need, we will be unable to make payments on our debt obligations, which could force us to sell assets or use cash that we were planning on using elsewhere in our business, which could hinder our operations and affect the trading price of our debt securities.

 

Item 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

 

Item 2. PROPERTIES

We conduct manufacturing, distribution and administrative activities in owned and leased facilities. We operate four manufacturing-related facilities abroad and nine distribution centers around the world. We have renewal rights for most of our property leases. We anticipate that we will be able to extend these leases on terms satisfactory to us or, if necessary, locate substitute facilities on acceptable terms. We believe our facilities and equipment are in good condition and are suitable for our needs. Information about our key operating properties in use as of November 27, 2011, is summarized in the following table:

 

Location

  

Primary Use

           Leased/Owned        

Americas

     

Hebron, KY

   Distribution    Owned

Canton, MS

   Distribution    Owned

Henderson, NV

   Distribution    Owned

Westlake, TX

   Data Center    Leased

Etobicoke, Canada

   Distribution    Owned

Cuautitlan, Mexico

   Distribution    Leased

Europe

     

Plock, Poland

   Manufacturing and Finishing         Leased(1)

Northhampton, U.K

   Distribution    Owned

Sabadell, Spain

   Distribution    Leased

Corlu, Turkey

   Manufacturing, Finishing and Distribution    Owned

Asia Pacific

     

Adelaide, Australia

   Distribution    Leased

Cape Town, South Africa

   Manufacturing, Finishing and Distribution    Leased

Hiratsuka Kanagawa, Japan

   Distribution         Owned(2)

Ninh Binh, Vietnam

   Finishing    Leased

 

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(1) Building and improvements are owned but subject to a ground lease.

 

(2) Owned by our 84%-owned Japanese subsidiary.

Our global headquarters and the headquarters of our Americas region are both located in leased premises in San Francisco, California. Our Europe and Asia Pacific headquarters are located in leased premises in Brussels, Belgium and Singapore, respectively. In addition to the above, we operate a finance shared service center in Eugene, Oregon. As of November 27, 2011, we also leased or owned 110 administrative and sales offices in 41 countries, as well as leased 17 warehouses in nine countries. We own or lease several facilities that are no longer in operation that we are working to sell or sublease.

In addition, as of November 27, 2011, we had 498 company-operated retail and outlet stores in leased premises in 32 countries. We had 211 stores in the Americas region, 178 stores in the Europe region and 109 stores in the Asia Pacific region.

 

Item 3. LEGAL PROCEEDINGS

In the ordinary course of business, we have various pending cases involving contractual matters, facility- and employee-related matters, distribution questions, product liability claims, trademark infringement and other matters. We do not believe there are any of these pending legal proceedings that will have a material impact on our financial condition, results of operations or cash flows.

 

Item 4. REMOVED AND RESERVED

 

 

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PART II

 

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is primarily owned by descendants of the family of Levi Strauss and their relatives. From April 15, 1996 to April 15, 2011, all of our common stock was deposited in a voting trust which granted to four voting trustees the exclusive ability to elect and remove directors, amend our by-laws and take certain other actions which would normally be within the power of stockholders of a Delaware corporation. Following the expiration of the voting trust in 2011, the voting powers shifted back into the hands of all stockholders who may now engage in voting procedures directly.

Shares of our common stock are not publicly held or traded. All shares are subject to a stockholders’ agreement. The agreement, which expires in April 2016, limits the transfer of shares to other holders, family members, specified charities and foundations and back to the Company. The agreement does not provide for registration rights or other contractual devices for forcing a public sale of shares or certificates, or other access to liquidity.

As of February 2, 2012, there were 223 record holders of our common stock. Our shares are not registered on any national securities exchange, there is no established public trading market for our shares and none of our shares are convertible into shares of any other class of stock or other securities.

We paid cash dividends of $20 million on our common stock in the first quarter of 2011 and in the second quarters of 2010 and 2009. Please see Note 14 to our audited consolidated financial statements included in this report for more information. 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 our board of directors depending upon, among other factors, the income tax impact to the dividend recipients, our financial condition and compliance with the terms of our debt agreements. Our debt arrangements limit our ability to pay dividends. For more detailed information about these limitations, see Note 6 to our audited consolidated financial statements included in this report.

We repurchased a total of 11,853 shares of our common stock during the first and fourth quarters of the fiscal year ended November 27, 2011, in connection with the exercise of call rights under our 2006 Equity Incentive Plan. For more detailed information, see Note 11 to our audited consolidated financial statements included in this report.

 

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Item 6. SELECTED FINANCIAL DATA

The following table sets forth our selected historical consolidated financial data which are derived from our consolidated financial statements for 2011, 2010, 2009, 2008 and 2007. The financial data set forth below should be read in conjunction with, and are qualified by reference to, “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our audited consolidated financial statements for 2011, 2010 and 2009 and the related notes to those audited consolidated financial statements, included elsewhere in this report.

 

    Year Ended     Year Ended     Year Ended     Year Ended     Year Ended  
    November 27,     November 28,     November 29,     November 30,     November 25,  
    2011     2010     2009     2008     2007  
    (Dollars in thousands)  

Statements of Income Data:

         

Net sales

  $ 4,674,426     $ 4,325,908     $ 4,022,854     $ 4,303,075     $ 4,266,108  

Licensing revenue

    87,140       84,741       82,912       97,839       94,821  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenues

    4,761,566       4,410,649       4,105,766       4,400,914       4,360,929  

Cost of goods sold

    2,469,327       2,187,726       2,132,361       2,261,112       2,318,883  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    2,292,239       2,222,923       1,973,405       2,139,802       2,042,046  

Selling, general and administrative expenses

    1,955,846       1,841,562       1,595,317       1,614,730       1,401,005  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    336,393       381,361       378,088       525,072       641,041  

Interest expense

    (132,043     (135,823     (148,718     (154,086     (215,715

Loss on early extinguishment of debt

    (248     (16,587            (1,417     (63,838

Other income (expense), net

    (1,275     6,647       (39,445     (303     15,047  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before taxes

    202,827       235,598       189,925       369,266       376,535  

Income tax expense (benefit)(1)

    67,715       86,152       39,213       138,884       (84,759
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    135,112       149,446       150,712       230,382       461,294  

Net loss (income) attributable to noncontrolling interest

    2,841       7,057       1,163       (1,097     (909
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Levi Strauss & Co.

  $ 137,953     $ 156,503     $ 151,875     $ 229,285     $ 460,385  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Statements of Cash Flow Data:

         

Net cash flow provided by (used for):

         

Operating activities

  $ 1,848     $ 146,274     $ 388,783     $ 224,809     $ 302,271  

Investing activities

    (140,957     (181,781     (233,029     (26,815     (107,277

Financing activities

    77,707       32,313       (97,155     (135,460     (325,534

Balance Sheet Data:

         

Cash and cash equivalents

  $ 204,542     $ 269,726     $ 270,804     $ 210,812     $ 155,914  

Working capital

    870,960       891,607       778,888       713,644       647,256  

Total assets

    3,279,555       3,135,249       2,989,381       2,776,875       2,850,666  

Total debt, excluding capital leases

    1,972,372       1,863,146       1,852,900       1,853,207       1,960,406  

Total capital leases

    3,713       5,355       7,365       7,806       8,177  

Total Levi Strauss & Co. stockholders’ deficit

    (165,592     (219,609     (333,119     (349,517     (398,029

Other Financial Data:

         

Depreciation and amortization

  $ 117,793     $ 104,896     $ 84,603     $ 77,983     $ 67,514  

Capital expenditures

    130,580       154,632       82,938       80,350       92,519  

Dividends paid

    20,023       20,013       20,001       49,953         

 

(1) In the fourth quarter of 2007, as a result of improvements in business performance and positive developments in an ongoing IRS examination, we reversed valuation allowances against our deferred tax assets for foreign tax credit carryforwards, as we believed that it was more likely than not that these credits will be utilized prior to their expiration.

 

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Our Company

We design and market jeans, casual and dress pants, tops, shorts, skirts, jackets, footwear and related accessories for men, women and children under our Levi’s®, Dockers®, Signature by Levi Strauss & Co.™ (“Signature”) and Denizen® brands around the world. We also license our trademarks in many countries throughout the world for a wide array of products, including accessories, pants, tops, footwear and other products.

Our business is operated through three geographic regions: Americas, Europe and Asia Pacific. Our products are sold in approximately 55,000 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 nearly 1,800 franchised and other brand-dedicated stores outside of the United States. We also distribute our Levi’s® and Dockers® products through the online stores we operate, and 498 company-operated stores located in 32 countries, including the United States. These stores generated approximately 18% of our net revenues in 2011, as compared to 15% in 2010. 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 the Signature brand primarily through mass channel retailers in the United States and Canada and through franchised stores in Asia Pacific. We currently distribute our Denizen® products through mass channel retailers in the United States and Mexico and through franchised stores in Asia Pacific.

Our Europe and Asia Pacific businesses, collectively, contributed approximately 43% of our net revenues and 42% of our regional operating income in 2011. Sales of Levi’s® brand products represented approximately 83% of our total net sales in 2011. Pants, including jeans, casual pants and dress pants, represented approximately 83% of our total units sold in 2011, and men’s products generated approximately 72% of our total net sales.

Our Objectives

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 growing our global brands through product innovation and consumer focus, enhancing relationships with wholesale customers and expanding our dedicated retail channels to drive sales growth, capitalizing on our global footprint to maximize opportunities in targeted growth markets, and continuously increasing our productivity while refining our operating model and organizational structure.

Trends Affecting Our Business

We believe the key business and marketplace factors affecting us include the following:

 

  Ÿ  

Factors that impact consumer discretionary spending, which continues to be weak in many markets around the world, are creating a challenging retail environment for us and our customers. Such factors include continuing pressures in the U.S. and global economy related to the global economic downturn, volatility in investment returns, housing market downturns, high level and fear of unemployment, and other similar elements.

 

  Ÿ  

Wholesaler/retailer dynamics are changing as the wholesale channels face slowed growth prospects as a result of consolidation in the industry, the increasing presence of vertically integrated specialty stores and e-commerce shopping. As a result, many of our customers desire increased returns on their investment with us through increased margins and inventory turns, and they continue to build competitive exclusive or private-label offerings. Many apparel wholesalers, including us, seek to strengthen relationships with customers as a result of these changes in the marketplace through efforts such as investment in new products, marketing programs, fixtures and collaborative planning systems.

 

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  Ÿ  

Many apparel companies that have traditionally relied on wholesale distribution channels have invested in expanding their own retail store distribution network, which has raised competitiveness in the retail market.

 

  Ÿ  

More competitors are seeking growth globally, thereby raising the competitiveness of the international markets. Some of these competitors are entering into markets where we already have a mature business such as the United States, Western Europe, Japan and Canada, and those new brands provide consumers discretionary purchase alternatives and lower-priced apparel offerings. Opportunities for major brands also are increasing in rapidly growing developing markets such as China, India, Russia and Brazil.

 

  Ÿ  

The increasingly global nature of our business exposes us to earnings volatility resulting from exchange rate fluctuations.

 

  Ÿ  

Brand and product proliferation continues around the world as we and other companies compete through differentiated brands and products targeted for specific consumers, price-points and retail segments. In addition, the ways of marketing these brands are changing to new mediums, challenging the effectiveness of more mass-market approaches such as television advertising.

 

  Ÿ  

Competition for, and price volatility of, resources throughout the supply chain have increased, causing us and other apparel manufacturers to continue to seek alternative sourcing channels and create new efficiencies in our global supply chain. Trends affecting the supply chain include:

 

  ¡    

the proliferation of low-cost sourcing alternatives around the world, which enables competitors to attract consumers with a constant flow of competitively-priced new products, resulting in reduced barriers to entry for new competitors.

 

  ¡    

the impact of fluctuating prices of labor and raw materials, such as cotton, which has contributed, and will continue to contribute, to ongoing pricing pressure throughout the supply chain. In particular, during the first half of 2011, the price of cotton increased as a result of various dynamics in the commodity markets.

Trends such as these bring additional pressure on us and other wholesalers and retailers to shorten lead-times, reduce costs and raise product prices. Raw materials costs may have an adverse impact on our cash and working capital needs as well as those of our suppliers.

These factors contribute to a global market environment of intense competition, constant product innovation and continuing cost pressure, and combine with the continuing global economic conditions to create a challenging commercial and economic environment. We expect these trends to continue into the foreseeable future. In addition, we will remain focused on our key strategies and will continue to incur costs related to investment in our retail and wholesale network and in our information technology infrastructure, as well as refining our organizational structure to enable sustained, profitable growth. We expect our operating margins will continue to be pressured by these factors in 2012, especially during the first half of the year. We anticipate that our 2012 gross margin will be in the high-40s.

Our 2011 Results

Our 2011 results reflect net revenue growth and the effects of the strategic investments we have made in line with our long-term strategies.

 

  Ÿ  

Net revenues.    Consolidated net revenues increased by 8% compared to 2010, an increase of 6% on a constant-currency basis, reflecting growth in each of our geographic regions. Increased net revenues were primarily associated with our Levi’s® brand, through the expansion and performance of our dedicated store network globally.

 

  Ÿ  

Operating income.    Consolidated operating income and operating margin declined compared to 2010, as the benefits from the increase in our net revenues were more than offset by a lower gross margin, reflecting higher sales in the discount channel and the higher cost of cotton, which our price increases did not fully cover.

 

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  Ÿ  

Cash flows.    Cash flows provided by operating activities were $2 million in 2011 as compared to $146 million in 2010, primarily reflecting the higher cost of cotton in our inventory and our higher operating expense in 2011.

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 2011, 2010 and 2009 consisted of 13 weeks.

Segments.    We manage our business according to three regional segments: the Americas, Europe and Asia Pacific. In each of 2010 and 2011, accountability for certain information technology, human resources, advertising and promotion, and marketing staff costs of a global nature, that in prior years were captured in our geographic regions, was centralized under corporate management in conjunction with our key strategy of driving productivity. Subsequent to these changes, these costs were classified as corporate expenses. These costs were not significant to any of our regional segments individually in any of the periods presented herein, and accordingly, business segment information for prior years has not been revised.

Classification.    Our classification of certain significant revenues and expenses reflects the following:

 

  Ÿ  

Net sales 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.

 

  Ÿ  

Licensing revenue consists of royalties earned from the use of our trademarks by third-party licensees in connection with the manufacturing, advertising and distribution of trademarked products.

 

  Ÿ  

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.

 

  Ÿ  

Selling costs include, among other things, all occupancy costs and depreciation associated with our company-operated stores and commission payments associated with our company-operated shop-in-shops.

 

  Ÿ  

We reflect substantially all distribution costs in selling, general and administrative expenses, including costs related to receiving and inspection at distribution centers, warehousing, shipping to our customers, handling, and certain other activities associated with our distribution network.

Gross margins may not be comparable to those of other companies in our industry since some companies may include costs related to their distribution network and occupancy costs associated with company-operated stores in cost of goods sold.

Constant currency.    Constant-currency comparisons are based on translating local currency amounts in both periods at the foreign exchange rates used in the Company’s internal planning process for the current year. We routinely evaluate our financial performance on a constant-currency basis in order to facilitate period-to-period comparisons without regard to the impact of changing foreign currency exchange rates.

 

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Results of Operations

2011 compared to 2010

The following table summarizes, for the periods indicated, the consolidated statements of income, the changes in these items from period to period and these items expressed as a percentage of net revenues:

 

    Year Ended  
                      November 27,     November 28,  
          %     2011     2010  
    November 27,     November 28,     Increase     % of Net     % of Net  
    2011     2010     (Decrease)     Revenues     Revenues  
    (Dollars in millions)  

Net sales

  $ 4,674.4     $ 4,325.9       8.1     98.2     98.1

Licensing revenue

    87.2       84.7       2.8     1.8     1.9
 

 

 

   

 

 

       

Net revenues

    4,761.6       4,410.6       8.0     100.0     100.0

Cost of goods sold

    2,469.4       2,187.7       12.9     51.9     49.6
 

 

 

   

 

 

       

Gross profit

    2,292.2       2,222.9       3.1     48.1     50.4

Selling, general and administrative expenses

    1,955.8       1,841.5       6.2     41.1     41.8
 

 

 

   

 

 

       

Operating income

    336.4       381.4       (11.8 )%      7.1     8.6

Interest expense

    (132.0     (135.8     (2.8 )%      (2.8 )%      (3.1 )% 

Loss on early extinguishment of debt

    (0.3     (16.6     (98.5 )%             (0.4 )% 

Other income (expense), net

    (1.3     6.6       (119.2 )%             0.2
 

 

 

   

 

 

       

Income before income taxes

    202.8       235.6       (13.9 )%      4.3     5.3

Income tax expense

    67.7       86.2       (21.4 )%      1.4     2.0
 

 

 

   

 

 

       

Net income

    135.1       149.4       (9.6 )%      2.8     3.4

Net loss attributable to noncontrolling interest

    2.9       7.1       (59.7 )%      0.1     0.2
 

 

 

   

 

 

       

Net income attributable to Levi Strauss & Co.

  $ 138.0     $ 156.5       (11.9 )%      2.9     3.5
 

 

 

   

 

 

       

Net revenues

The following table presents net revenues by reporting segment for the periods indicated and the changes in net revenues by reporting segment on both reported and constant-currency bases from period to period:

 

     Year Ended  
                   % Increase (Decrease)  
     November 27,      November 28,      As     Constant  
     2011      2010      Reported     Currency  
     (Dollars in millions)  

Net revenues:

          

Americas

   $ 2,715.9      $ 2,549.1        6.5     6.2

Europe

     1,174.2        1,105.2        6.2     3.2

Asia Pacific

     871.5        756.3        15.2     10.4
  

 

 

    

 

 

      

Total net revenues

   $ 4,761.6      $ 4,410.6        8.0     6.2
  

 

 

    

 

 

      

Total net revenues increased on both reported and constant-currency bases for the year ended November 27, 2011, as compared to the prior year. Reported amounts were affected favorably by changes in foreign currency exchange rates across all regions.

 

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Americas.    On both reported and constant-currency bases, net revenues in our Americas region increased in 2011. Currency affected net revenues favorably by approximately $9 million.

Levi’s® brand net revenues increased in our retail stores, primarily due to a higher volume of sales in our outlets, and in our wholesale channels, where the benefit of price increases we have implemented were partially offset by corresponding volume declines. The region’s increased net revenues also reflected the launch of our Denizen® brand products. Dockers® brand net sales declined as compared to the prior year, primarily in men’s long bottoms due to a higher price-sensitivity of the traditional Dockers® consumer.

Europe.    Net revenues in Europe increased on both reported and constant-currency bases. Currency affected net revenues favorably by approximately $33 million.

The increase in the region’s net revenues was due to the growth of our company-operated retail network, reflecting expansion and improved performance of our stores and the success of our Levi’s® brand women’s products throughout the region. This growth was partially offset by lower net sales to our wholesale customers, reflecting issues fulfilling customer orders during the implementation and stabilization of our enterprise resource planning system during second half of 2011 as well as the general economic downturn in Europe.

Asia Pacific.    Net revenues in Asia Pacific increased on both reported and constant-currency bases. Currency affected net revenues favorably by approximately $34 million.

The net revenues increase was primarily from our Levi’s® brand through the continued expansion of our brand-dedicated retail network in China and India as well as other of our emerging markets, partially offset by the continued decline of net revenues in Japan. Our Denizen® brand products also contributed incremental revenues.

Gross profit

The following table shows consolidated gross profit and gross margin for the periods indicated and the changes in these items from period to period:

 

     Year Ended  
     November 27,     November 28,     %  
     2011     2010     Increase  
     (Dollars in millions)  

Net revenues

   $ 4,761.6     $ 4,410.6       8.0

Cost of goods sold

     2,469.4       2,187.7       12.9
  

 

 

   

 

 

   

Gross profit

   $ 2,292.2     $ 2,222.9       3.1
  

 

 

   

 

 

   

Gross margin

     48.1     50.4  

As compared to the prior year, the gross profit increase in 2011 resulted from the increase in our net revenues and a favorable currency impact of approximately $53 million, partially offset by a decline in our gross margin. The gross margin decrease was primarily due to an increase in sales to lower-margin channels to manage inventory, and the higher cost of cotton, which our price increases did not fully cover. The gross margin decrease was partially offset by the increased revenue contribution from our company-operated retail network, which generally has a higher gross margin than our wholesale business.

 

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Selling, general and administrative expenses

The following table shows our selling, general and administrative expenses (“SG&A”) for the periods indicated, the changes in these items from period to period and these items expressed as a percentage of net revenues:

 

     Year Ended  
                         November 27,     November 28,  
            %     2011     2010  
     November 27,      November 28,      Increase     % of Net     % of Net  
     2011      2010      (Decrease)     Revenues     Revenues  
     (Dollars in millions)  

Selling

   $ 711.1      $ 636.8        11.7     14.9     14.4

Advertising and promotion

     313.8        327.8        (4.3 )%      6.6     7.4

Administration

     402.3        403.7        (0.3 )%      8.5     9.2

Other

     528.6        473.2        11.7     11.1     10.7
  

 

 

    

 

 

        

Total SG&A

   $ 1,955.8      $ 1,841.5        6.32     41.1     41.8
  

 

 

    

 

 

        

Currency contributed approximately $36 million of the $114 million increase in SG&A as compared to the prior year.

Selling.    Currency contributed approximately $15 million of the $74 million increase. Higher selling expenses across all business segments primarily reflected additional costs, such as rents and increased headcount, associated with the support and continued expansion of our company-operated store network. We had 28 more company-operated stores at the end of 2011 than we did at the end of 2010.

Advertising and promotion.    The $14 million decrease in advertising and promotion expenses was attributable to a reduction of our advertising activities in most markets as compared to the prior year.

Administration.    Administration expenses declined slightly, as a decrease in incentive compensation expense related to lower projected funding and a decline in pension expense primarily as a result of changes to the U.S. pension plans in the second quarter of 2011 were offset primarily by higher severance costs for headcount reductions and separation benefits related to the departure of executives.

Other.    Other SG&A includes distribution, information resources, and marketing organization costs. The $55 million increase in these costs was primarily due to our investment in global information technology systems and increased marketing project costs related to our strategic initiatives.

Operating income

The following table shows operating income by reporting segment and corporate expenses for the periods indicated, the changes in these items from period to period and these items expressed as a percentage of net revenues:

 

    Year Ended  
                      November 27,     November 28,  
          %     2011     2010  
    November 27,     November 28,     Increase     % of Net     % of Net  
    2011     2010     (Decrease)     Revenues     Revenues  
    (Dollars in millions)  

Operating income:

         

Americas

  $ 393.9     $ 402.5       (2.1 )%      14.5     15.8

Europe

    182.3       163.5       11.5     15.5     14.8

Asia Pacific

    108.1       86.3       25.3     12.4     11.4
 

 

 

   

 

 

       

Total regional operating income

    684.3       652.3       4.9     14.4 %*      14.8 %* 

Corporate expenses

    347.9       270.9       28.4     7.3 %*      6.1 %* 
 

 

 

   

 

 

       

Total operating income

  $ 336.4     $ 381.4       (11.8 )%      7.1 %*      8.6 %* 
 

 

 

   

 

 

       

Operating margin

    7.1     8.6      

 

* Percentage of consolidated net revenues

 

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The net $45 million decline in total operating income as compared to the prior year included a favorable currency effect of approximately $17 million.

Regional operating income.

 

  Ÿ  

Americas.    Operating margin declined due to the region’s decline in gross margin, the effects of which on operating income was partially offset by lower SG&A and the favorable impact of the region’s higher net revenues.

 

  Ÿ  

Europe.    The increase in operating income primarily reflected the favorable impact of currency as well as the region’s higher net revenues. The increase was partially offset by a decline in the region’s gross margin.

 

  Ÿ  

Asia Pacific.    The increase in operating margin and operating income reflected the region’s higher net revenues and the favorable impact of currency.

Corporate.    Corporate expenses are selling, general and administrative expenses that are not attributed to any of our regional operating segments. The $77 million increase in corporate expenses in 2011 reflected higher severance costs for headcount reductions and seperation benefits related to the departure of executives, as well as an increase in our investment in global information technology systems. Corporate expenses also increased due to the classification of marketing, advertising and promotion, information technology and human resources costs of a global nature that were centralized under corporate management during 2011. Such costs totaled approximately $29 million in our Americas region and were not significant to our Europe and Asia Pacific regions; prior period amounts have not been reclassified. These increases in corporate expenses were partially offset by a decrease in incentive compensation expense related to lower projected funding, and a decline in pension expense primarily as a result of changes to the U.S. pension plans in the second quarter of 2011.

Corporate expenses in 2011 and 2010 include amortization of prior service benefit of $28.9 million and $29.6 million, respectively, related to postretirement benefit plan amendments in 2004 and 2003. We will continue to amortize the prior service benefit in the future, although the amount will decline significantly beginning in 2012. For more information, see Note 8 to our audited consolidated financial statements included in this report.

Interest expense

Interest expense was $132.0 million for the year ended November 27, 2011, as compared to $135.8 million in the prior year.

The weighted-average interest rate on average borrowings outstanding for 2011 was 6.90% as compared to 7.05% for 2010.

Loss on early extinguishment of debt

For the year ended November 28, 2010, we recorded a $16.6 million loss on early extinguishment of debt as a result of our debt refinancing activities during the second quarter of 2010. The loss was comprised of tender premiums of $30.2 million and the write-off of $7.6 million of unamortized debt issuance costs, net of applicable premium, offset by a gain of $21.2 million related to the partial repurchase of Yen-denominated Eurobonds due 2016 at a discount to their par value.

Other income (expense), net

Other income (expense), net, primarily consists of foreign exchange management activities and transactions. For the year ended November 27, 2011, we recorded expense of $1.3 million compared to income of $6.6 million for the prior year.

The expense in 2011 primarily reflected losses on our foreign currency denominated balances. The income in 2010 primarily reflects transaction gains on our foreign currency denominated balances, partially offset by losses on foreign exchange derivatives which economically hedge future foreign currency cash flow obligations.

 

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Income tax expense

Income tax expense was $67.7 million for the year ended November 27, 2011, compared to $86.2 million for the prior year. Our effective tax rate was 33.4% for the year ended November 27, 2011, compared to 36.6% for the prior year.

The 3.2 percentage point decrease in our effective tax rate was primarily caused by an increase in the proportion of our 2011 earnings in foreign jurisdictions where we are subject to lower tax rates, as well as an unfavorable net impact of income tax charges recognized in 2010. In 2010, we recognized a $27.5 million tax charge for a valuation allowance to fully offset the amount of deferred tax assets in Japan and a $14.5 million tax charge for a reduction in deferred tax assets as a result of the enactment of the Patient Protection and Affordable Care Act. These charges in 2010 were partially offset by a $34.2 million tax benefit arising from our plan to repatriate the prior undistributed earnings of certain foreign subsidiaries.

2010 compared to 2009

The following table summarizes, for the periods indicated, the consolidated statements of income, the changes in these items from period to period and these items expressed as a percentage of net revenues:

 

     Year Ended  
                       November 28,     November 29,  
           %     2010     2009  
     November 28,     November 29,     Increase     % of Net     % of Net  
     2010     2009     (Decrease)     Revenues     Revenues  
     (Dollars in millions)  

Net sales

   $ 4,325.9     $ 4,022.9       7.5     98.1     98.0

Licensing revenue

     84.7       82.9       2.2     1.9     2.0
  

 

 

   

 

 

       

Net revenues

     4,410.6       4,105.8       7.4     100.0     100.0

Cost of goods sold

     2,187.7       2,132.4       2.6     49.6     51.9
  

 

 

   

 

 

       

Gross profit

     2,222.9       1,973.4       12.6     50.4     48.1

Selling, general and administrative expenses

     1,841.5       1,595.3       15.4     41.8     38.9
  

 

 

   

 

 

       

Operating income

     381.4       378.1       0.9     8.6     9.2

Interest expense

     (135.8     (148.7     (8.7 )%      (3.1 )%      (3.6 )% 

Loss on early extinguishment of debt

     (16.6                   (0.4 )%        

Other income (expense), net

     6.6       (39.5     (116.9 )%      0.2     (1.0 )% 
  

 

 

   

 

 

       

Income before income taxes

     235.6       189.9       24.0     5.3     4.6

Income tax expense

     86.2       39.2       119.7     2.0     1.0
  

 

 

   

 

 

       

Net income

     149.4       150.7       (0.8 )%      3.4     3.7

Net loss attributable to noncontrolling interest

     7.1       1.2       506.8     0.2       
  

 

 

   

 

 

       

Net income attributable to Levi Strauss & Co.

   $ 156.5     $ 151.9       3.0     3.5     3.7
  

 

 

   

 

 

       

 

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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:

 

     Year Ended  
                   % Increase (Decrease)  
     November 28,      November 29,      As     Constant  
     2010      2009      Reported     Currency  
     (Dollars in millions)  

Net revenues:

          

Americas

   $ 2,549.1      $ 2,357.7        8.1     7.1

Europe

     1,105.2        1,042.1        6.1     7.5

Asia Pacific

     756.3        706.0        7.1     0.3
  

 

 

    

 

 

      

Total net revenues

   $ 4,410.6      $ 4,105.8        7.4     6.0
  

 

 

    

 

 

      

Total net revenues increased on both reported and constant-currency bases for the year ended November 28, 2010, as compared to the prior year. Changes in foreign currency exchange rates affected our consolidated reported amounts favorably by approximately $53 million.

Americas.    On both reported and constant-currency bases, net revenues in our Americas region increased in 2010. Currency affected net revenues favorably by approximately $23 million.

Levi’s® brand net revenues increased, driven by the outlet stores we acquired in July 2009, as well as strong performance of our men’s and juniors’ products in the wholesale channel. The improved Levi’s® brand performance was partially offset by declines of net sales from our Signature and U.S. Dockers® brands as compared to 2009, although for the fourth quarter, Dockers® brand net sales increased as compared to the prior year, primarily driven by men’s long bottoms.

Europe.     Net revenues in our Europe region increased on both reported and constant-currency bases. Currency affected net revenues unfavorably by approximately $18 million.

The increase was driven by the positive impact of our Levi’s® brand, including our 2009 footwear and accessories business acquisition and our expanding company-operated retail network throughout the region, and was partially offset by continued sales declines in our traditional wholesale channels, reflecting the region’s ongoing depressed economic environment.

Asia Pacific.     Net revenues in Asia Pacific increased on both reported and constant-currency bases. Currency affected net revenues favorably by approximately $48 million.

Net revenues in the region increased primarily due to the continued expansion of our brand-dedicated retail network in our emerging markets of China and India, offset by continued net revenue declines due to the weak performance of our business in Japan.

Gross profit

The following table shows consolidated gross profit and gross margin for the periods indicated and the changes in these items from period to period:

 

     Year Ended  
                 %  
     November 28,     November 29,     Increase  
     2010     2009     (Decrease)  
     (Dollars in millions)  

Net revenues

   $ 4,410.6     $ 4,105.8       7.4

Cost of goods sold

     2,187.7       2,132.4       2.6
  

 

 

   

 

 

   

Gross profit

   $ 2,222.9     $ 1,973.4       12.6
  

 

 

   

 

 

   

Gross margin

     50.4     48.1  

 

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Compared to the prior year, gross profit increased in 2010 primarily due to the increase in our constant-currency net revenues, improved gross margins in each of our regions, and a favorable currency impact of approximately $47 million. The improvement in our gross margin primarily reflected the increased contribution from our company-operated retail network, which generally has a higher gross margin than our wholesale business.

Selling, general and administrative expenses

The following table shows our selling, general and administrative expenses (“SG&A”) for the periods indicated, the changes in these items from period to period and these items expressed as a percentage of net revenues:

 

     Year Ended  
                         November 28,     November 29,  
            %     2010     2009  
     November 28,      November 29,      Increase     % of Net     % of Net  
     2010      2009      (Decrease)     Revenues     Revenues  
     (Dollars in millions)  

Selling

   $ 636.8      $ 498.9        27.7     14.4     12.1

Advertising and promotion

     327.8        266.1        23.2     7.4     6.5

Administration

     403.7        371.8        8.6     9.2     9.1

Other

     473.2        458.5        3.2     10.7     11.2
  

 

 

    

 

 

        

Total SG&A

   $ 1,841.5      $ 1,595.3        15.4     41.8     38.9
  

 

 

    

 

 

        

Currency contributed approximately $12 million of the $246 million increase in SG&A as compared to the prior year.

Selling.    The $138 million increase in selling expenses was across all business segments, primarily reflecting higher costs, such as rents and increased headcount, associated with the continued expansion of our company-operated store network.

Advertising and promotion.    The $62 million increase in advertising and promotion expenses was attributable to the planned increase in support of our U.S. Levi’s® and U.S. Dockers® brands, as well as our global launch of our Levi’s® Curve ID jeans for women and the launch of our Denizen® brand in the Asia Pacific region.

Administration.    The $32 million increase in administration expenses reflects higher costs associated with our pension and postretirement benefit plans, as well as higher costs related to various corporate initiatives, including costs in the third quarter of 2010 associated with executive separations.

Other.    Other SG&A includes distribution, information technology, and marketing organization costs. The $15 million increase in expenses was primarily due to increased marketing project costs related to our strategic initiatives.

Operating income

The following table shows operating income by reporting segment and certain components of corporate expense for the periods indicated, the changes in these items from period to period and these items expressed as a percentage of net revenues:

 

    Year Ended  
                      November 28,     November 29,  
                %     2010     2009  
    November 28,     November 29,     Increase     % of Net     % of Net  
    2010     2009     (Decrease)     Revenues     Revenues  
    (Dollars in millions)  

Operating income:

         

Americas

  $ 402.5     $ 346.3       16.2     15.8     14.7

Europe

    163.5       154.8       5.6     14.8     14.9

Asia Pacific

    86.3       91.0       (5.2 )%      11.4     12.9
 

 

 

   

 

 

       

Total regional operating income

    652.3       592.1       10.2     14.8 %*      14.4 %* 

Corporate expenses

    270.9       214.0       26.6     6.1 %*      5.2 %* 
 

 

 

   

 

 

       

Total operating income

  $ 381.4     $ 378.1       0.9     8.6 %*      9.2 %* 
 

 

 

   

 

 

       

Operating margin

    8.6     9.2      

 

* Percentage of consolidated net revenues

 

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The net $3 million increase in total operating income as compared to the prior year included a favorable currency effect of approximately $35 million.

Regional operating income.

 

  Ÿ  

Americas.    Operating income and operating margin reflected the region’s improvement in gross margin and higher constant-currency net revenues, the effects of which were partially offset by the increased selling and advertising expenses.

 

  Ÿ  

Europe.    The increase in the region’s operating income was primarily due to the favorable impact of currency. The region’s higher constant-currency net revenues and gross margin improvement were more than offset by higher expenses reflecting our retail expansion.

 

  Ÿ  

Asia Pacific.    Despite the favorable impact of currency and improved gross margin, the region’s operating income decreased due to the net sales declines in Japan as well as the region’s retail expansion and increased advertising.

Corporate.    Corporate expenses are selling, general and administrative expenses that are not attributed to any of our regional operating segments. Corporate expenses for 2010 increased $57 million due to higher costs associated with our pension and postretirement benefit plans and higher costs related to various corporate initiatives, including costs in the third quarter of 2010 associated with executive separations, as well as the increased marketing costs. Corporate expenses also increased due to the classification of information technology and marketing staff costs of a global nature that were centralized under corporate management beginning in 2010; these costs were not significant to any of our regional segments individually or to prior periods, and as such, prior period amounts were not reclassified.

Corporate expenses in 2010 and 2009 include amortization of prior service benefit of $29.6 million and $39.7 million, respectively, related to postretirement benefit plan amendments in 2004 and 2003. We will continue to amortize the prior service benefit in the future. For more information, see Note 8 to our audited consolidated financial statements included in this report.

Interest expense

Interest expense was $135.8 million for the year ended November 28, 2010, as compared to $148.7 million in the prior year. The decrease in interest expense was driven primarily by lower average borrowing rates in 2010, resulting from our debt refinancing activity that occurred in the second quarter of 2010, and lower interest expense on our deferred compensation plans in 2010.

The weighted-average interest rate on average borrowings outstanding for 2010 was 7.05% as compared to 7.44% for 2009.

Loss on early extinguishment of debt

For the year ended November 28, 2010, we recorded a $16.6 million loss on early extinguishment of debt as a result of our debt refinancing activities during the second quarter of 2010. The loss was comprised of tender premiums of $30.2 million and the write-off of $7.6 million of unamortized debt issuance costs net of applicable premium, offset by a gain of $21.2 million related to the partial repurchase of Yen-denominated Eurobonds due 2016 at a discount to their par value.

Other income (expense), net

Other income (expense), net, primarily consists of foreign exchange management activities and transactions. For the year ended November 28, 2010, we recorded net income of $6.6 million compared to net expense of $39.5 million for the prior year.

The income in 2010 primarily reflects transaction gains on our foreign currency denominated balances, partially offset by losses on foreign exchange derivatives which economically hedge future cash flow obligations of our foreign operations. The expense in 2009 reflected losses on foreign exchange derivatives.

 

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Income tax expense

Income tax expense was $86.2 million for the year ended November 28, 2010, compared to $39.2 million for the prior year. Our effective tax rate was 36.6% for the year ended November 28, 2010, compared to 20.6% for the prior year.

The 16.0 percentage point increase in our effective tax rate was primarily driven by the recognition in 2010 of a $27.5 million tax charge for a valuation allowance to fully offset the amount of deferred tax assets in Japan and a $14.5 million tax charge for a reduction in deferred tax assets as a result of the enactment of the Patient Protection and Affordable Care Act. The $47.0 million increase in our income tax expense was primarily attributed to the same factors coupled with an increase in income before income taxes.

Liquidity and Capital Resources

Liquidity outlook

We believe we will have adequate liquidity over the next twelve months to operate our business and to meet our cash requirements.

Cash sources

We are a privately-held corporation. We have historically relied primarily on cash flows from operations, borrowings under credit facilities, issuances of notes and other forms of debt financing. We regularly explore financing and debt reduction alternatives, including new credit agreements, unsecured and secured note issuances, equity financing, equipment and real estate financing, securitizations and asset sales. Key sources of cash include earnings from operations and borrowing availability under our revolving credit facility.

Prior to the below-referenced refinancing, we were borrowers under an amended and restated senior secured revolving credit facility that had a maximum availability of $750 million, secured by certain of our domestic assets and certain U.S. trademarks associated with the Levi’s® brand and other related intellectual property. The facility included a $250 million trademark tranche and a $500 million revolving tranche.

On September 30, 2011, we entered into a new senior secured revolving credit facility. The new facility is an asset-based facility, in which the borrowing availability is primarily based on the value of our U.S. Levi’s® trademarks and the levels of accounts receivable and inventory in the United States and Canada. The maximum availability under the new facility is $850 million, of which $800 million is available to us for revolving loans in U.S. Dollars and $50 million is available to us for revolving loans either in U.S. Dollars or Canadian Dollars. Upon entering into the new facility, we borrowed $215 million and used the proceeds to repay the borrowings outstanding under the previous senior secured revolving credit facility, including the $108 million outstanding under the trademark tranche. We then terminated the previous facility.

As of November 27, 2011, we had borrowings of $200.0 million under the facility, $100.0 million of which is classified as short-term debt. The increase in borrowings as compared to prior year reflected the additional cash needed to support our inventory build during 2011, due to the higher cost of cotton. Unused availability under the facility was $494.7 million, as our total availability of $577.8 million, based on collateral levels as defined by the agreement, was reduced by $83.1 million of other credit-related instruments.

As of November 27, 2011, we had cash and cash equivalents totaling $204.5 million, resulting in a net liquidity position (unused availability and cash and cash equivalents) of $699.2 million.

During the first quarter of 2012, we repaid $100 million of the borrowings outstanding under our senior secured revolving credit facility.

Cash uses

Our principal cash requirements include working capital, capital expenditures, payments of principal and interest on our debt, payments of taxes, contributions to our pension plans and payments for postretirement health benefit plans, and, if market conditions warrant, occasional investments in, or acquisitions of, business ventures in our line of business. In addition, we regularly evaluate our ability to pay dividends or repurchase stock, all consistent with the terms of our debt agreements.

 

 

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The following table presents selected cash uses in 2011 and the related projected cash uses for these items in 2012 as of November 27, 2011:

 

            Projected  
     Cash Used in      Cash Uses in  
     2011      2012  
     (Dollars in millions)  

Capital expenditures(1)

   $ 131      $ 100  

Interest

     129        125  

Federal, foreign and state taxes (net of refunds)

     56        68  

Pension plans(2)

     68        65  

Postretirement health benefit plans

     19        19  

Dividend

     20        20  
  

 

 

    

 

 

 

Total selected cash requirements

   $ 423      $ 397  
  

 

 

    

 

 

 

 

(1) Capital expenditures consist primarily of costs associated with information technology systems and investment in company-operated retail stores.

 

(2) The 2012 pension contribution amounts will be recalculated at the end of the plans’ fiscal years, which for our U.S. pension plan is at the beginning of the Company’s third fiscal quarter. Accordingly, actual contributions may differ materially from those presented here, based on factors such as changes in discount rates and the valuation of pension assets, as well as alternative methods that may be available to us for measuring our funding obligation.

The following table provides information about our significant cash contractual obligations and commitments as of November 27, 2011:

 

     Payments due or projected by period  
     Total      2012      2013      2014      2015      2016      Thereafter  
     (Dollars in millions)  

Contractual and Long-term Liabilities:

                    

Short-term and long-term debt obligations

   $ 1,972      $ 155      $       $ 324      $       $ 568      $ 925  

Interest(1)

     747        125        121        114        112        90        185  

Capital lease obligations

     4        2        2                                  

Operating leases(2)

     690        149        117        91        75        64        194  

Purchase obligations(3)

     526        476        33        14        3                  

Postretirement obligations(4)

     164        19        18        18        17        17        75  

Pension obligations(5)

     450        65        65        57        67        57        139  

Long-term employee related benefits(6)

     84        14        8        9        9        9        35  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,637      $ 1,005      $ 364      $ 627      $ 283      $ 805      $ 1,553  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Interest obligations are computed using constant interest rates until maturity. The LIBOR rate as of November 27, 2011, was used for variable-rate debt.

 

(2) Amounts reflect contractual obligations relating to our existing leased facilities as of November 27, 2011, and therefore do not reflect our planned future openings of company-operated retail stores. For more information, see “Item 2 — Properties.”

 

(3) Amounts reflect estimated commitments of $407 million for inventory purchases and $119 million for human resources, advertising, information technology and other professional services.

 

(4) The amounts presented in the table represent an estimate for the next ten years of our projected payments, based on information provided by our plans’ actuaries, and have not been reduced by estimated Medicare subsidy receipts, the amounts of which are not material. Our policy is to fund postretirement benefits as claims and premiums are paid. For more information, see Note 8 to our audited consolidated financial statements included in this report.

 

(5)

The amounts presented in the table represent an estimate of our projected contributions to the plans for the next ten years based on information provided by our plans’ actuaries. For U.S qualified plans, these estimates comply with minimum funded status and minimum required contributions under the Pension Protection Act. The 2012 contribution amounts will be recalculated at the end of the plans’ fiscal years, which for our U.S. pension plan is at the beginning of the Company’s third fiscal quarter. Accordingly, actual contributions may differ materially from those presented here, based on factors such as changes in discount rates and the valuation of pension assets, as well

 

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  as alternative methods that may be available to us for measuring our funding obligation. For more information, see Note 8 to our audited consolidated financial statements included in this report.

 

(6) Long-term employee-related benefits relate to the current and non-current portion of deferred compensation arrangements and workers’ compensation. We estimated these payments based on prior experience and forecasted activity for these items. For more information, see Note 12 to our audited consolidated financial statements included in this report.

This table does not include amounts related to our income tax liabilities associated with uncertain tax positions of $143.4 million, as we are unable to make reasonable estimates for the periods in which these liabilities may become due. We do not anticipate a material effect on our liquidity as a result of payments in future periods of liabilities for uncertain tax positions.

Information in the two preceding tables reflects our estimates of future cash payments. These estimates and projections are based upon assumptions that are inherently subject to significant economic, competitive, legislative and other uncertainties and contingencies, many of which are beyond our control. Accordingly, our actual expenditures and liabilities may be materially higher or lower than the estimates and projections reflected in these tables. The inclusion of these projections and estimates should not be regarded as a representation by us that the estimates will prove to be correct.

Cash flows

The following table summarizes, for the periods indicated, selected items in our consolidated statements of cash flows:

 

     Year Ended  
     November 27,     November 28,     November 29,  
     2011     2010     2009  
     (Dollars in millions)  

Cash provided by operating activities

   $ 1.8     $ 146.3     $ 388.8  

Cash used for investing activities

     (141.0     (181.8     (233.0

Cash provided by (used for) financing activities

     77.7       32.3       (97.2

Cash and cash equivalents

     204.5       269.7       270.8  

2011 as compared to 2010

Cash flows from operating activities

Cash provided by operating activities was $1.8 million for 2011, as compared to $146.3 million for 2010. Cash provided by operating activities declined compared to the prior year due to higher cash used for inventory as a result of higher cotton costs, and higher payments to vendors, reflecting the increase in our SG&A. This decline was partially offset by an increase in customer collections, reflecting our higher net revenues.

Cash flows from investing activities

Cash used for investing activities was $141.0 million for 2011 compared to $181.8 million for 2010. The decrease in cash used for investing activities as compared to the prior year primarily reflects higher costs in 2010 associated with the remodeling of the Company’s headquarters and the final payment for a 2009 acquisition. This was partially offset by an increase in 2011 in information technology costs associated with the installation of our global enterprise resource planning system.

Cash flows from financing activities

Cash provided by financing activities was $77.7 million for 2011 compared to $32.3 million for 2010. Net cash provided in 2011 primarily related to proceeds borrowed under our senior revolving credit facility. Net cash provided in 2010 reflected our May 2010 refinancing activities.

 

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2010 as compared to 2009

Cash flows from operating activities

Cash provided by operating activities was $146.3 million for 2010, as compared to $388.8 million for 2009. Operating cash declined compared to the prior year due to higher payments to vendors, reflecting our retail expansion and increased advertising as well as higher cash used for inventory, in support of our business growth. This decline was partially offset by an increase in cash collected from customers, reflecting our higher net revenues.

Cash flows from investing activities

Cash used for investing activities was $181.8 million for 2010 compared to $233.0 million for 2009. As compared to the prior year, the decrease in cash used for investing activities primarily reflects less cash used for acquisitions and lower payments on the settlement of our forward foreign exchange contracts, partially offset by more cash used towards the remodeling of the Company’s headquarters as well as our information technology systems associated with the installation of our global enterprise resource planning system and our company-operated retail stores.

Cash flows from financing activities

Cash provided by financing activities was $32.3 million for 2010 compared to cash used of $97.2 million for 2009. Net cash provided in 2010 reflected our May 2010 refinancing activities. Cash used in 2009 primarily related to required payments on the trademark tranche of our senior secured revolving credit facility; no such payment was required in 2010.

Indebtedness

The borrower of substantially all of our debt is Levi Strauss & Co., the parent and U.S. operating company. Of our total debt of $2.0 billion as of November 27, 2011, we had fixed-rate debt of approximately $1.5 billion (73% of total debt) and variable-rate debt of approximately $0.5 billion (27% of total debt). Required aggregate debt principal payments on our long-term debt were $324.0 million in 2014, $568.2 million in 2016, and the remaining $925.4 million in years after 2016. Short-term debt of $100.0 million borrowed under our senior secured revolving credit facility was expected to be repaid over the next twelve months; short-term borrowings of $54.7 million at various foreign subsidiaries were expected to be either paid over the next twelve months or refinanced at the end of their applicable terms.

Our long-term debt agreements contain customary covenants restricting our activities as well as those of our subsidiaries. Currently, we are in compliance with all of these covenants.

Effects of Inflation

We believe that inflation in the regions where most of our sales occur has not had a significant effect on our net revenues or profitability.

Off-Balance Sheet Arrangements, Guarantees and Other Contingent Obligations

Off-balance sheet arrangements and other.    We have contractual commitments for non-cancelable operating leases; for more information, see Note 13 to our audited consolidated financial statements included in this report. We participate in a multiemployer pension plan, however our exposure to risks arising from participation in the plan and the extent to which we can be liable to the plan for other participating employers’ obligations are not material in the near-term. We have no other material non-cancelable guarantees or commitments, and no material special-purpose entities or other off-balance sheet debt obligations.

Indemnification agreements.    In the ordinary course of our business, we enter into agreements containing indemnification provisions under which we agree to indemnify the other party for specified claims and losses. For example, our trademark license agreements, real estate leases, consulting agreements, logistics outsourcing

 

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agreements, securities purchase agreements and credit agreements typically contain these provisions. This type of indemnification provision obligates us to pay certain amounts associated with claims brought against the other party as the result of trademark infringement, negligence or willful misconduct of our employees, breach of contract by us including inaccuracy of representations and warranties, specified lawsuits in which we and the other party are co-defendants, product claims and other matters. These amounts are generally not readily quantifiable: the maximum possible liability or amount of potential payments that could arise out of an indemnification claim depends entirely on the specific facts and circumstances associated with the claim. We have insurance coverage that minimizes the potential exposure to certain of these claims. We also believe that the likelihood of substantial payment obligations under these agreements to third parties is low and that any such amounts would be immaterial.

Critical Accounting Policies, Assumptions and Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the related notes. We believe that the following discussion addresses our critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Changes in such estimates, based on newly available information, or different assumptions or conditions, may affect amounts reported in future periods.

We summarize our critical accounting policies below.

Revenue recognition.    Net sales is primarily comprised of sales of products to wholesale customers, including franchised stores, and direct sales to consumers at our company-operated and online stores and at our company-operated shop-in-shops located within department stores. We recognize revenue on sale of product when the goods are shipped or delivered and title to the goods passes to the customer provided that: there are no uncertainties regarding customer acceptance; persuasive evidence of an arrangement exists; the sales price is fixed or determinable; and collectability is reasonably assured. Revenue is recorded net of an allowance for estimated returns, discounts and retailer promotions and other similar incentives. Licensing revenues from the use of our trademarks in connection with the manufacturing, advertising, and distribution of trademarked products by third-party licensees are earned and recognized as products are sold by licensees based on royalty rates as set forth in the licensing agreements.

We recognize allowances for estimated returns in the period in which the related sale is recorded. We recognize allowances for estimated discounts, retailer promotions and other similar incentives at the later of the period in which the related sale is recorded or the period in which the sales incentive is offered to the customer. We estimate non-volume based allowances based on historical rates as well as customer and product-specific circumstances. Actual allowances may differ from estimates due to changes in sales volume based on retailer or consumer demand and changes in customer and product-specific circumstances. Sales and value-added taxes collected from customers and remitted to governmental authorities are presented on a net basis in the accompanying consolidated statements of income.

Accounts receivable, net.    We extend credit to our wholesale and licensing customers that satisfy pre-defined credit criteria. Accounts receivable are recorded net of an allowance for doubtful accounts. We estimate the allowance for doubtful accounts based upon an analysis of the aging of accounts receivable at the date of the consolidated financial statements, assessments of collectability based on historic trends, customer-specific circumstances, and an evaluation of economic conditions. Actual write-off of receivables may differ from estimates due to changes in customer and economic circumstances.

Inventory valuation.    We value inventories at the lower of cost or market value. Inventory cost is generally determined using the first-in first-out method. We include 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, in the cost of inventories. In determining inventory market values, substantial consideration is given to the expected product selling price. We estimate quantities of slow-moving and obsolete inventory by reviewing on-hand quantities, outstanding purchase obligations and forecasted sales.

 

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We then estimate expected selling prices based on our historical recovery rates for sale of slow-moving and obsolete inventory and other factors, such as market conditions, expected channel of disposition, and current consumer preferences. Estimates may differ from actual results due to changes in resale or market value, avenues of disposition, consumer and retailer preferences and economic conditions.

Impairment.    We review our goodwill and other non-amortized intangible assets for impairment annually in the fourth quarter of our fiscal year, or more frequently as warranted by events or changes in circumstances which indicate that the carrying amount may not be recoverable. Beginning in the fourth quarter of 2011, for certain reporting units, we elected to early adopt the option to qualitatively assess goodwill impairment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. For goodwill not qualitatively assessed and for other non-amortized intangible assets, a two-step quantitative approach is utilized. In the first step, we compare the carrying value of the reporting unit or applicable asset to its fair value, which we estimate using a discounted cash flow analysis or by comparison to the market values of similar assets. If the carrying amount of the reporting unit or asset exceeds its estimated fair value, we perform the second step, and determine the impairment loss, if any, as the excess of the carrying value of the goodwill or intangible asset over its fair value. The assumptions used in such valuations are subject to volatility and may differ from actual results; however, based on the carrying value of our goodwill and other non-amortized intangible assets as of November 27, 2011, relative to their estimated fair values, we do not anticipate any material impairment charges in the near-term.

We review our other long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. If the carrying amount of an other long-lived asset exceeds the expected future undiscounted cash flows, we measure and record an impairment loss for the excess of the carrying value of the asset over its fair value.

To determine the fair value of impaired assets, we utilize the valuation technique or techniques deemed most appropriate based on the nature of the impaired asset and the data available, which may include the use of quoted market prices, prices for similar assets or other valuation techniques such as discounted future cash flows or earnings.

Income tax assets and liabilities.    We are subject to income taxes in both the United States and numerous foreign jurisdictions. We compute our provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. Significant judgments are required in order to determine the realizability of these deferred tax assets. In assessing the need for a valuation allowance, we evaluate all significant available positive and negative evidence, including historical operating results, estimates of future taxable income and the existence of prudent and feasible tax planning strategies. Changes in the expectations regarding the realization of deferred tax assets could materially impact income tax expense in future periods.

We do not recognize deferred taxes with respect to temporary differences between the book and tax bases in our investments in foreign subsidiaries, unless it becomes apparent that these temporary differences will reverse in the foreseeable future.

We continuously review issues raised in connection with all ongoing examinations and open tax years to evaluate the adequacy of our liabilities. We evaluate uncertain tax positions under a two-step approach. The first step is to evaluate the uncertain tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon examination based on its technical merits. The second step is, for those positions that meet the recognition criteria, to measure the tax benefit as the largest amount that is more than fifty percent likely of being realized. We believe our recorded tax liabilities are adequate to cover all open tax years based on our assessment. This assessment relies on estimates and assumptions and involves significant judgments about future events. To the extent that our view as to the outcome of these matters changes, we will adjust income tax expense in the period in which such determination is made. We classify interest and penalties related to income taxes as income tax expense.

 

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Employee benefits and incentive compensation

Pension and postretirement benefits.    We have several non-contributory defined benefit retirement plans covering eligible employees. We also provide certain health care benefits for U.S. employees who meet age, participation and length of service requirements at retirement. In addition, we sponsor other retirement or post-employment plans for our foreign employees in accordance with local government programs and requirements. We retain the right to amend, curtail or discontinue any aspect of the plans, subject to local regulations. Any of these actions, either individually or in combination, could have a material impact on our consolidated financial statements and on our future financial performance.

We recognize either an asset or liability for any plan’s funded status in our consolidated balance sheets. We measure changes in funded status using actuarial models which utilize an attribution approach that generally spreads individual events either over the estimated service lives of the remaining employees in the plan, or, for plans where participants will not earn additional benefits by rendering future service, over the plan participants’ estimated remaining lives. The attribution approach assumes that employees render service over their service lives on a relatively smooth basis and as such, presumes that the income statement effects of pension or postretirement benefit plans should follow the same pattern. Our policy is to fund our pension plans based upon actuarial recommendations and in accordance with applicable laws, income tax regulations and credit agreements.

Net pension and postretirement benefit income or expense is generally determined using assumptions which include expected long-term rates of return on plan assets, discount rates, compensation rate increases and medical trend rates. We use a mix of actual historical rates, expected rates and external data to determine the assumptions used in the actuarial models. For example, we utilized a yield curve constructed from a portfolio of high-quality corporate bonds with various maturities to determine the appropriate discount rate to use for our U.S. benefit plans. Under this model, each year’s expected future benefit payments are discounted to their present value at the appropriate yield curve rate, thereby generating the overall discount rate. We utilized country-specific third-party bond indices to determine appropriate discount rates to use for benefit plans of our foreign subsidiaries. Changes in actuarial assumptions and estimates, either individually or in combination, could have a material impact on our consolidated financial statements and on our future financial performance. For example, as of November 27, 2011, a twenty-five basis-point change in the discount rate would yield an approximately three-percent change in the projected benefit obligation and annual service cost of our pension and postretirement benefit plans.

Employee incentive compensation.     We maintain short-term and long-term employee incentive compensation plans. These plans are intended to reward eligible employees for their contributions to our short-term and long-term success. For our short-term plans, the amount of the cash bonus earned depends upon business unit and corporate financial results as measured against pre-established targets, and also depends upon the performance and job level of the individual. Our long-term plans are intended to reward management for its long-term impact on our total earnings performance. Performance is measured at the end of a three-year period based on our performance over the period measured against certain pre-established targets such as the compound annual growth rates over the periods for net revenues and earnings adjusted for certain items such as interest and taxes. We accrue the related compensation expense over the period of the plan, and changes in our projected future financial performance could have a material impact on our accruals.

Recently Issued Accounting Standards

See Note 1 to our audited consolidated financial statements included in this report for recently issued accounting standards, including the expected dates of adoption and expected impact to our consolidated financial statements upon adoption.

FORWARD-LOOKING STATEMENTS

Certain matters discussed in this report, including (without limitation) statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contain forward-looking statements. Although we believe that, in making any such statements, our expectations are based on reasonable assumptions,

 

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any such statement may be influenced by factors that could cause actual outcomes and results to be materially different from those projected.

These forward-looking statements include statements relating to our anticipated financial performance and business prospects and/or statements preceded by, followed by or that include the words “believe”, “anticipate”, “intend”, “estimate”, “expect”, “project”, “could”, “plans”, “seeks” and similar expressions. These forward-looking statements speak only as of the date stated and we do not undertake any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, even if experience or future events make it clear that any expected results expressed or implied by these forward-looking statements will not be realized. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these expectations may not prove to be correct or we may not achieve the financial results, savings or other benefits anticipated in the forward-looking statements. These forward-looking statements are necessarily estimates reflecting the best judgment of our senior management and involve a number of risks and uncertainties, some of which may be beyond our control, that could cause actual results to differ materially from those suggested by the forward-looking statements and include, without limitation:

 

  Ÿ  

changes in the level of consumer spending for apparel in view of general economic and environmental conditions and pricing trends, and our ability to plan for and respond to the impact of those changes;

 

  Ÿ  

consequences of impacts to the businesses of our wholesale customers caused by factors such as lower consumer spending, pricing changes, general economic conditions and changing consumer preferences;

 

  Ÿ  

our ability to mitigate the variability of costs related to manufacturing, sourcing, and raw materials supply, such as cotton, and to manage consumer response to such mitigating actions;

 

  Ÿ  

consequences of the actions we take to support our supply chain partners as a response to the fluctuating costs of manufacturing, sourcing, and raw materials supply;

 

  Ÿ  

our ability to expand our Denizen® brand into new markets and channels;

 

  Ÿ  

our and our wholesale customers’ decisions to modify strategies and adjust product mix, and our ability to manage any resulting product transition costs;

 

  Ÿ  

our ability to gauge and adapt to changing U.S. and international retail environments and fashion trends and changing consumer preferences in product, price-points and shopping experiences;

 

  Ÿ  

our ability to respond to price, innovation and other competitive pressures in the apparel industry and on our key customers;

 

  Ÿ  

our ability to increase the number of dedicated stores for our products, including through opening and profitably operating company-operated stores;

 

  Ÿ  

our effectiveness in increasing productivity and efficiency in our operations;

 

  Ÿ  

our ability to implement, stabilize and optimize our enterprise resource planning system throughout our business without disruption or to mitigate such disruptions;

 

  Ÿ  

consequences of foreign currency exchange rate fluctuations;

 

  Ÿ  

the impact of the variables that affect the net periodic benefit cost and future funding requirements of our postretirement benefits and pension plans;

 

  Ÿ  

our dependence on key distribution channels, customers and suppliers;

 

  Ÿ  

our ability to utilize our tax credits and net operating loss carryforwards;

 

  Ÿ  

ongoing or future litigation matters and disputes and regulatory developments;

 

  Ÿ  

changes in or application of trade and tax laws; and

 

  Ÿ  

political, social and economic instability in countries where we do business.

Our actual results might differ materially from historical performance or current expectations. We do not undertake any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

 

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Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Investment and Credit Availability Risk

We manage cash and cash equivalents in various institutions at levels beyond FDIC coverage limits, and we purchase investments not guaranteed by the FDIC. Accordingly, there may be a risk that we will not recover the full principal of our investments or that their liquidity may be diminished. To mitigate this risk, our investment policy emphasizes preservation of principal and liquidity.

Multiple financial institutions are committed to provide loans and other credit instruments under our secured revolving credit facility. There may be a risk that some of these institutions cannot deliver against these obligations in a timely manner, or at all.

Derivative Financial Instruments

We are exposed to market risk primarily related to foreign currencies. We manage foreign currency risks with the objective to minimize the effect of fluctuations in foreign exchange rates on nonfunctional currency cash flows of the Company and its subsidiaries and selected assets or liabilities of the Company and its subsidiaries without exposing the Company to additional risk associated with transactions that could be regarded as speculative.

We are exposed to credit loss in the event of nonperformance by the counterparties to the over-the-counter forward foreign exchange contracts. However, we believe that our exposures are appropriately diversified across counterparties and that these counterparties are creditworthy financial institutions. We monitor the creditworthiness of our counterparties in accordance with our foreign exchange and investment policies. In addition, we have International Swaps and Derivatives Association, Inc. (“ISDA”) master agreements in place with our counterparties to mitigate the credit risk related to the outstanding derivatives. These agreements provide the legal basis for over-the-counter transactions in many of the world’s commodity and financial markets.

Foreign Exchange Risk

The global scope of our business operations exposes us to the risk of fluctuations in foreign currency markets. This exposure is the result of certain product sourcing activities, some intercompany sales, foreign subsidiaries’ royalty payments, interest payments, earnings repatriations, net investment in foreign operations and funding activities. Our foreign currency management objective is to minimize the effect of fluctuations in foreign exchange rates on nonfunctional currency cash flows of the Company and its subsidiaries and selected assets or liabilities of the Company and its subsidiaries without exposing the Company to additional risk associated with transactions that could be regarded as speculative. We manage these forecasted foreign currency exposures.

We use a centralized currency management operation to take advantage of potential opportunities to naturally offset exposures against each other. For any residual exposures under management, we may enter into various financial instruments including forward exchange contracts to hedge certain forecasted transactions as well as certain firm commitments, including third-party and intercompany transactions.

Our foreign exchange risk management activities are governed by a foreign exchange risk management policy approved by our Treasury committee. Members of our Treasury committee, comprised of a group of our senior financial executives, review our foreign exchange activities to ensure compliance with our policies. The operating policies and guidelines outlined in the foreign exchange risk management policy provide a framework that allows for a managed approach to the management of currency exposures while ensuring the activities are conducted within established parameters. Our policy includes guidelines for the organizational structure of our risk management function and for internal controls over foreign exchange risk management activities, including various measurements for monitoring compliance. We monitor foreign exchange risk and related derivatives using different techniques including a review of market value, sensitivity analysis and a value-at-risk model. We use the market approach to estimate the fair value of our foreign exchange derivative contracts.

We use derivative instruments to manage certain but not all exposures to foreign currencies. Our approach to managing foreign currency exposures is consistent with that applied in previous years. As of November 27, 2011,

 

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we had forward foreign exchange contracts to buy $875.6 million and to sell $415.8 million against various foreign currencies. These contracts are at various exchange rates and expire at various dates through November 2012.

As of November 28, 2010, we had forward foreign exchange contracts to buy $623.7 million and to sell $392.5 million against various foreign currencies. These contracts are at various exchange rates and expire at various dates through February 2012.

The following table presents the currency, average forward exchange rate, notional amount and fair values for our outstanding forward and swap contracts as of November 27, 2011, and November 28, 2010. The average forward rate is the forward rate weighted by the total of the transacted amounts. The notional amount represents the U.S. Dollar equivalent amount of the foreign currency at the inception of the contracts. A positive notional amount represents a long position in U.S. Dollar versus the exposure currency, while a negative notional amount represents a short position in U.S. Dollar versus the exposure currency. The net position is the sum of all buy transactions and the sum of all sell transactions. All amounts are stated in U.S. Dollar equivalents. All transactions will mature before the end of November 2012.

 

     As of November 27, 2011     As of November 28, 2010  
     Average Forward      Notional     Fair     Average Forward      Notional     Fair  
     Exchange Rate      Amount     Value     Exchange Rate      Amount     Value  
     (Dollars in thousands)  

Currency

  

Australian Dollar

     1.00      $ 39,204     $ 1,433       0.96      $ 29,475     $ (203

Brazilian Real

     1.81        18,021       1,262       1.87        656       (3

Canadian Dollar

     1.00        42,106       2,082       1.02        30,126       (30

Swiss Franc

     1.09        (16,542     (73     1.02        (35,178     (781

Czech Koruna

     18.84        2,323       60       17.96        2,799       156  

Danish Krone

     0.18        24,517       352       0.18        24,406       897  

Euro

     1.37        65,826       2,107       1.31        (72,842     (3,273

British Pound Sterling

     0.64        38,738       700       0.63        37,447       626  

Hong Kong Dollar

     7.77        (6,806     (19                      

Hungarian Forint

     227.83        (7,537     (334     201.26        (5,423     (392

Indian Rupee

     49.64        28,234       1,994                        

Indonesian Rupiah

     9,090.91        15,659       592                        

Japanese Yen

     78.33        38,768       215       81.72        65,123       1,229  

South Korean Won

     1,127.96        35,125       1,259       1,133.51        21,244       576  

Mexican Peso

     13.30        70,807       5,412       12.72        57,854       (433

Malaysian Ringgit

     3.21        10,838       2                        

Norwegian Krone

     0.17        17,899       458       0.17        10,709       630  

New Zealand Dollar

     1.30        442       389       1.31        (1,963     (430

Philippine Peso

     43.71        2,542       (5                      

Polish Zloty

     3.28        (41,531     (2,480     2.87        (45,139     (2,999

Russian Ruble

     32.69        13,548       (117     31.24        13,804       388  

Swedish Krona

     6.79        72,462       2,030       6.84        73,945       1,869  

Singapore Dollar

     1.25        (34,659     (1,741     1.29        (30,140     (428

Turkish Lira

     1.83        (16,432     (379                      

New Taiwan Dollar

     29.45        23,198       725       30.28        27,209       (172

South African Rand

     7.76        23,049       2,744       7.13        27,102       500  
     

 

 

   

 

 

      

 

 

   

 

 

 

Total

      $ 459,799     $ 18,668        $ 231,214     $ (2,273
     

 

 

   

 

 

      

 

 

   

 

 

 

 

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Interest rate risk

We maintain a mix of short- and long-term fixed- and variable-rate debt.

The following table provides information about our financial instruments that are sensitive to changes in interest rates. The table presents principal (face amount) outstanding balances of our debt instruments and the related weighted-average interest rates for the years indicated based on expected maturity dates. The applicable floating rate index is included for variable-rate instruments. All amounts are stated in U.S. Dollar equivalents.

 

                                              As of  
    As of November 27, 2011     November 28,  
    Expected Maturity Date           2010  
    2012     2013     2014     2015     2016     Thereafter     Total     Total  
    (Dollars in thousands)        

Debt Instruments

               

Fixed Rate (US$)

  $      $      $      $      $ 350,000     $ 525,000     $ 875,000     $ 875,000  

Average Interest Rate

                                8.88     7.63     8.13  

Fixed Rate (Yen 9.1 billion)

                                118,243              118,243       109,062  

Average Interest Rate

                                4.25            4.25  

Fixed Rate (Euro 300 million)

                                       400,350       400,350       400,740  

Average Interest Rate

                                       7.75     7.75  

Variable Rate (US$)(1)

    100,000              325,000              100,000              525,000       433,250  

Average Interest Rate(2)

    2.03            2.51            2.03            2.33  

Total Principal (face amount) of our debt instruments(3)

  $ 100,000     $      $ 325,000     $      $ 568,243     $ 925,350     $ 1,918,593     $ 1,818,052  

 

(1) Expected maturities in 2012 and 2016 relate to the short- and long-term portions, respectively, of our senior secured revolving credit facility.

 

(2) Assumes no change in short-term interest rates.

 

(3) Amounts presented in this table exclude our other short-term borrowings of $54.7 million as of November 27, 2011, consisting of term loans and revolving credit facilities at various foreign subsidiaries which we expect to either pay over the next twelve months or refinance at the end of their applicable terms. Of the $54.7 million, $46.1 million was fixed-rate debt and $8.6 million was variable-rate debt.

 

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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of

Levi Strauss & Co.:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, stockholders’ deficit and comprehensive income, and of cash flows present fairly, in all material respects, the financial position of Levi Strauss & Co. and its subsidiaries at November 27, 2011 and November 28, 2010, and the results of their operations and their cash flows for each of the three years in the period ended November 27, 2011, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the related financial statement schedule listed in the index appearing under Item 15(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

San Francisco, CA

February 7, 2012

 

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LEVI STRAUSS & CO. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

     November 27,
2011
    November 28,
2010
 
     (Dollars in thousands)  
ASSETS   

Current Assets:

    

Cash and cash equivalents

   $ 204,542     $ 269,726  

Trade receivables, net of allowance for doubtful accounts of $22,684 and $24,617

     654,903       553,385  

Inventories:

    

Raw materials

     7,086       6,770  

Work-in-process

     9,833       9,405  

Finished goods

     594,483       563,728  
  

 

 

   

 

 

 

Total inventories

     611,402       579,903  

Deferred tax assets, net

     99,544       137,892  

Other current assets

     172,830       110,226  
  

 

 

   

 

 

 

Total current assets

     1,743,221       1,651,132  

Property, plant and equipment, net of accumulated depreciation of $731,859 and $683,258

     502,388       488,603  

Goodwill

     240,970       241,472  

Other intangible assets, net

     71,818       84,652  

Non-current deferred tax assets, net

     613,161       559,053  

Other non-current assets

     107,997       110,337  
  

 

 

   

 

 

 

Total assets

   $ 3,279,555     $ 3,135,249  
  

 

 

   

 

 

 
LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS’ DEFICIT   

Current Liabilities:

    

Short-term debt

   $ 154,747     $ 46,418  

Current maturities of capital leases

     1,714       1,777  

Accounts payable

     204,897       212,935  

Other accrued liabilities

     256,316       275,443  

Accrued salaries, wages and employee benefits

     235,530       196,152  

Accrued interest payable

     9,679       9,685  

Accrued income taxes

     9,378       17,115  
  

 

 

   

 

 

 

Total current liabilities

     872,261       759,525  

Long-term debt

     1,817,625       1,816,728  

Long-term capital leases

     1,999       3,578  

Postretirement medical benefits

     140,108       147,065  

Pension liability

     427,422       400,584  

Long-term employee related benefits

     75,520       102,764  

Long-term income tax liabilities

     42,991       50,552  

Other long-term liabilities

     51,458       54,281  
  

 

 

   

 

 

 

Total liabilities

     3,429,384       3,335,077  
  

 

 

   

 

 

 

Commitments and contingencies

    

Temporary equity

     7,002       8,973  
  

 

 

   

 

 

 

Stockholders’ Deficit:

    

Levi Strauss & Co. stockholders’ deficit

    

Common stock — $.01 par value; 270,000,000 shares authorized; 37,354,021 shares and 37,322,358 shares issued and outstanding

     374       373  

Additional paid-in capital

     29,266       18,840  

Retained earnings

     150,770       33,346  

Accumulated other comprehensive loss

     (346,002     (272,168
  

 

 

   

 

 

 

Total Levi Strauss & Co. stockholders’ deficit

     (165,592     (219,609

Noncontrolling interest

     8,761       10,808  
  

 

 

   

 

 

 

Total stockholders’ deficit

     (156,831     (208,801
  

 

 

   

 

 

 

Total liabilities, temporary equity and stockholders’ deficit

   $ 3,279,555     $ 3,135,249  
  

 

 

   

 

 

 

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

 

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LEVI STRAUSS & CO. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

 

     Year Ended     Year Ended     Year Ended  
     November 27,
2011
    November 28,
2010
    November 29,
2009
 
     (Dollars in thousands)  

Net sales

   $ 4,674,426     $ 4,325,908     $ 4,022,854  

Licensing revenue

     87,140       84,741       82,912  
  

 

 

   

 

 

   

 

 

 

Net revenues

     4,761,566       4,410,649       4,105,766  

Cost of goods sold

     2,469,327       2,187,726       2,132,361  
  

 

 

   

 

 

   

 

 

 

Gross profit

     2,292,239       2,222,923       1,973,405  

Selling, general and administrative expenses

     1,955,846       1,841,562       1,595,317  
  

 

 

   

 

 

   

 

 

 

Operating income

     336,393       381,361       378,088  

Interest expense

     (132,043     (135,823     (148,718

Loss on early extinguishment of debt

     (248     (16,587       

Other income (expense), net

     (1,275     6,647       (39,445
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     202,827       235,598       189,925  

Income tax expense

     67,715       86,152       39,213  
  

 

 

   

 

 

   

 

 

 

Net income

     135,112       149,446       150,712  

Net loss attributable to noncontrolling interest

     2,841       7,057       1,163  
  

 

 

   

 

 

   

 

 

 

Net income attributable to Levi Strauss & Co.

   $ 137,953     $ 156,503     $ 151,875  
  

 

 

   

 

 

   

 

 

 

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

 

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LEVI STRAUSS & CO. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT AND COMPREHENSIVE INCOME

 

     Levi Strauss & Co. Stockholders              
     Common
Stock
    Additional
Paid-In
Capital
    Accumulated
Earnings
(Deficit)
    Accumulated
Other
Comprehensive
Loss
    Noncontrolling
Interest
    Total
Stockholders’
Deficit
 
     (Dollars in thousands)  

Balance at November 30, 2008

   $ 373     $ 53,057     $ (275,032   $ (127,915   $ 17,982     $ (331,535
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

                   151,875              (1,163     150,712  

Other comprehensive (loss) income (net of tax)

                          (121,952     1,894       (120,058
            

 

 

 

Total comprehensive income

               30,654  
            

 

 

 

Stock-based compensation and dividends, net

            6,476                            6,476  

Cash dividend paid

            (20,001                   (978     (20,979
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at November 29, 2009

     373       39,532       (123,157     (249,867     17,735       (315,384
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

                   156,503              (7,057     149,446  

Other comprehensive (loss) income (net of tax)

                          (22,301     130       (22,171
            

 

 

 

Total comprehensive income

               127,275  
            

 

 

 

Stock-based compensation and dividends, net

            (601                          (601

Repurchase of common stock

            (78                          (78

Cash dividend paid

            (20,013                          (20,013
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at November 28, 2010

     373       18,840       33,346       (272,168     10,808       (208,801
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

                   137,953              (2,841     135,112  

Other comprehensive (loss) income (net of tax)

                          (73,834     794       (73,040
            

 

 

 

Total comprehensive income

               62,072  
            

 

 

 

Stock-based compensation and dividends, net

     1       10,436       (27                   10,410  

Repurchase of common stock

            (10     (479                   (489

Cash dividend paid

                   (20,023                   (20,023
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at November 27, 2011

   $ 374     $ 29,266     $ 150,770     $ (346,002   $ 8,761     $ (156,831
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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LEVI STRAUSS & CO. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Year Ended     Year Ended     Year Ended  
     November 27,
2011
    November 28,
2010
    November 29,
2009
 
     (Dollars in thousands)  

Cash Flows from Operating Activities:

      

Net income

   $ 135,112     $ 149,446     $ 150,712  

Adjustments to reconcile net income to net cash provided by operating activities:

      

Depreciation and amortization

     117,793       104,896       84,603  

Asset impairments

     5,777       6,865       16,814  

Gain on disposal of property, plant and equipment

     (2     (248     (175

Unrealized foreign exchange (gains) losses

     (5,932     (17,662     14,657  

Realized loss on settlement of forward foreign exchange contracts not designated for hedge accounting

     9,548       16,342       50,760  

Employee benefit plans’ amortization from accumulated other comprehensive loss

     (8,627     3,580       (19,730

Employee benefit plans’ curtailment loss, net

     129       106       1,643  

Noncash loss (gain) on extinguishment of debt, net of write-off of unamortized debt issuance costs

     226       (13,647       

Amortization of deferred debt issuance costs

     4,345       4,332       4,344  

Stock-based compensation

     8,439       6,438       7,822  

Allowance for doubtful accounts

     4,634       7,536       7,246  

Deferred income taxes

     16,153       31,113       (5,128

Change in operating assets and liabilities:

      

Trade receivables

     (116,003     (30,259     27,568  

Inventories

     (6,848     (148,533     113,014  

Other current assets

     (39,231     (20,131     5,626  

Other non-current assets

     4,780       (7,160     (11,757

Accounts payable and other accrued liabilities

     (55,300     39,886       (58,185

Income tax liabilities

     (15,242     6,330       (3,377

Accrued salaries, wages and employee benefits and long-term employee related benefits

     (55,846     (12,128     6,789  

Other long-term liabilities

     (2,358     19,120       (4,452

Other, net

     301       52       (11
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     1,848       146,274       388,783  
  

 

 

   

 

 

   

 

 

 

Cash Flows from Investing Activities:

      

Purchases of property, plant and equipment

     (130,580     (154,632     (82,938

Proceeds from sale of property, plant and equipment

     171       1,549       939  

Payments on settlement of forward foreign exchange contracts not designated for hedge accounting

     (9,548     (16,342     (50,760

Acquisitions, net of cash acquired

            (12,242     (100,270

Other

     (1,000     (114       
  

 

 

   

 

 

   

 

 

 

Net cash used for investing activities

     (140,957     (181,781     (233,029
  

 

 

   

 

 

   

 

 

 

Cash Flows from Financing Activities:

      

Proceeds from issuance of long-term debt

            909,390         

Repayments of long-term debt and capital leases

     (1,848     (866,051     (72,870

Proceeds from senior revolving credit facility

     305,000                

Repayments of senior revolving credit facility

     (213,250              

Short-term borrowings, net

     19,427       27,311       (2,704

Debt issuance costs

     (7,307     (17,546       

Restricted cash

     (3,803     (700     (602

Repurchase of common stock

     (489     (78       

Dividends to noncontrolling interest shareholders

                   (978

Dividend to stockholders

     (20,023     (20,013     (20,001
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used for) financing activities

     77,707       32,313       (97,155
  

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (3,782     2,116       1,393  
  

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (65,184     (1,078     59,992  

Beginning cash and cash equivalents

     269,726       270,804       210,812  
  

 

 

   

 

 

   

 

 

 

Ending cash and cash equivalents

   $ 204,542     $ 269,726     $ 270,804  
  

 

 

   

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

      

Cash paid during the period for:

      

Interest

   $ 129,079     $ 147,237     $ 135,576  

Income taxes

     56,229       52,912       56,922  

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

 

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED NOVEMBER 27, 2011, NOVEMBER 28, 2010, AND NOVEMBER 29, 2009

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 under the Levi’s®, Dockers®, Signature by Levi Strauss & Co.™ and Denizen® brands. The Company markets its products in three geographic regions: Americas, Europe and Asia Pacific.

Basis of Presentation and Principles of Consolidation

The consolidated financial statements of 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”). All significant intercompany balances and transactions have been eliminated. The Company is privately held primarily by descendants of the family of its founder, Levi Strauss, and their relatives.

The Company’s fiscal year ends on the last Sunday of November in each year, although the fiscal years of certain foreign subsidiaries end on November 30. Each quarter of fiscal years 2011, 2010 and 2009 consists of 13 weeks. All references to years relate to fiscal years rather than calendar years.

Subsequent events have been evaluated through the issuance date of these financial statements.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the related notes to consolidated financial statements. Estimates are based upon historical factors, current circumstances and the experience and judgment of the Company’s management. Management evaluates its assumptions and estimates on an ongoing basis and may employ outside experts to assist in its evaluations. Changes in such estimates, based on more accurate future information, or different assumptions or conditions, may affect amounts reported in future periods.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash equivalents are stated at fair value.

Restricted Cash

Restricted cash primarily relates to required cash deposits for customs and rental guarantees to support the Company’s international operations. Restricted cash is included in “Other current assets” and “Other non-current assets” on the consolidated balance sheets.

Accounts Receivable, Net

The Company extends credit to its wholesale customers that satisfy pre-defined credit criteria. Accounts receivable, which include receivables related to the Company’s net sales and licensing revenues, are recorded net of an allowance for doubtful accounts. The Company estimates the allowance for doubtful accounts based upon an analysis of the aging of accounts receivable at the date of the consolidated financial statements, assessments of collectability based on historic trends, customer-specific circumstances, and an evaluation of economic conditions. Actual write-off of receivables may differ from estimates due to changes in customer and economic circumstances.

 

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

FOR THE YEARS ENDED NOVEMBER 27, 2011, NOVEMBER 28, 2010, AND NOVEMBER 29, 2009

 

Inventory Valuation

The Company values inventories at the lower of cost or market value. Inventory cost is determined using the first-in first-out method. The Company includes product costs, labor and related overhead, sourcing costs, inbound freight, internal transfers, and the cost of operating its remaining manufacturing facilities, including the related depreciation expense, in the cost of inventories. The Company estimates quantities of slow-moving and obsolete inventory, by reviewing on-hand quantities, outstanding purchase obligations and forecasted sales. The Company determines inventory market values by estimating expected selling prices based on the Company’s historical recovery rates for slow-moving and obsolete inventory and other factors, such as market conditions, expected channel of distribution and current consumer preferences.

Income Tax Assets and Liabilities

The Company is subject to income taxes in both the United States and numerous foreign jurisdictions. The Company computes its provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. Significant judgments are required in order to determine the realizability of these deferred tax assets. In assessing the need for a valuation allowance, the Company’s management evaluates all significant available positive and negative evidence, including historical operating results, estimates of future taxable income and the existence of prudent and feasible tax planning strategies.

The Company does not recognize deferred taxes with respect to temporary differences between the book and tax bases in its investments in foreign subsidiaries, unless it becomes apparent that these temporary differences will reverse in the foreseeable future.

The Company continuously reviews issues raised in connection with all ongoing examinations and open tax years to evaluate the adequacy of its liabilities. The Company evaluates uncertain tax positions under a two-step approach. The first step is to evaluate the uncertain tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon examination based on its technical merits. The second step, for those positions that meet the recognition criteria, is to measure the tax benefit as the largest amount that is more than fifty percent likely to be realized. The Company believes that its recorded tax liabilities are adequate to cover all open tax years based on its assessment. This assessment relies on estimates and assumptions and involves significant judgments about future events. To the extent that the Company’s view as to the outcome of these matters change, the Company will adjust income tax expense in the period in which such determination is made. The Company classifies interest and penalties related to income taxes as income tax expense.

Property, Plant and Equipment

Property, plant and equipment are carried at cost, less accumulated depreciation. The cost is depreciated on a straight-line basis over the estimated useful lives of the related assets. Certain costs relating to internal-use software development are capitalized when incurred during the application development phase. Buildings are depreciated over 20 to 40 years, and leasehold improvements are depreciated over the lesser of the life of the improvement or the initial lease term. Machinery and equipment includes furniture and fixtures, automobiles and trucks, and networking communication equipment, and is depreciated over a range from three to 20 years. Capitalized internal-use software is depreciated over periods ranging from three to seven years.

 

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

FOR THE YEARS ENDED NOVEMBER 27, 2011, NOVEMBER 28, 2010, AND NOVEMBER 29, 2009

 

Goodwill and Other Intangible Assets

Goodwill resulted primarily from a 1985 acquisition of the Company by Levi Strauss Associates Inc., a former parent company that was subsequently merged into the Company in 1996, and the Company’s 2009 acquisitions. Goodwill is not amortized; intangible assets are comprised of owned trademarks with indefinite useful lives which are not being amortized and acquired contractual rights and customers lists with finite lives which are being amortized over periods ranging from four to eight years.

Impairment

The Company reviews its goodwill and other non-amortized intangible assets for impairment annually in the fourth quarter of its fiscal year, or more frequently as warranted by events or changes in circumstances which indicate that the carrying amount may not be recoverable. Beginning in the fourth quarter of 2011, for certain reporting units, the Company elected to early adopt the option to qualitatively assess goodwill impairment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. For goodwill not qualitatively assessed and for other non-amortized intangible assets, a two-step quantitative approach is utilized. In the first step, the Company compares the carrying value of the reporting unit or applicable asset to its fair value, which the Company estimates using a discounted cash flow analysis or by comparison with the market values of similar assets. If the carrying amount of the reporting unit or asset exceeds its estimated fair value, the Company performs the second step, and determines the impairment loss, if any, as the excess of the carrying value of the goodwill or intangible asset over its fair value.

The Company reviews its other long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. If the carrying amount of an asset exceeds the expected future undiscounted cash flows, the Company measures and records an impairment loss for the excess of the carrying value of the asset over its fair value.

To determine the fair value of impaired assets, the Company utilizes the valuation technique or techniques deemed most appropriate based on the nature of the impaired asset and the data available, which may include the use of quoted market prices, prices for similar assets or other valuation techniques such as discounted future cash flows or earnings.

Debt Issuance Costs

The Company capitalizes debt issuance costs, which are included in “Other non-current assets” in the Company’s consolidated balance sheets. Bond issuance costs are generally amortized utilizing the effective interest method whereas revolving credit facility issuance costs are amortized utilizing the straight-line method. Amortization of debt issuance costs is included in “Interest expense” in the consolidated statements of income.

Deferred Rent

The Company is obligated under operating leases of property for manufacturing, finishing and distribution facilities, office space, retail stores and equipment. Rental expense relating to operating leases are recognized on a straight-line basis over the lease term after consideration of lease incentives and scheduled rent escalations beginning as of the date the Company takes physical possession or control of the property. Differences between rental expense and actual rental payments are recorded as deferred rent liabilities included in “Other accrued liabilities” and “Other long-term liabilities” on the consolidated balance sheets.

Fair Value of Financial Instruments

The fair values of the Company’s financial instruments reflect the amounts that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date

 

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

FOR THE YEARS ENDED NOVEMBER 27, 2011, NOVEMBER 28, 2010, AND NOVEMBER 29, 2009

 

(exit price). The fair value estimates presented in this report are based on information available to the Company as of November 27, 2011, and November 28, 2010.

The carrying values of cash and cash equivalents, trade receivables and short-term borrowings approximate fair value. The Company has estimated the fair value of its other financial instruments using the market and income approaches. Rabbi trust assets and forward foreign exchange contracts are carried at their fair values. The Company’s debt instruments are carried at historical cost and adjusted for amortization of premiums or discounts, foreign currency fluctuations and principal payments.

Pension and Postretirement Benefits

The Company has several non-contributory defined benefit retirement plans covering eligible employees. The Company also provides certain health care benefits for U.S. employees who meet age, participation and length of service requirements at retirement. In addition, the Company sponsors other retirement or post-employment plans for its foreign employees in accordance with local government programs and requirements. The Company retains the right to amend, curtail or discontinue any aspect of the plans, subject to local regulations.

The Company recognizes either an asset or a liability for any plan’s funded status in its consolidated balance sheets. The Company measures changes in funded status using actuarial models which utilize an attribution approach that generally spreads individual events either over the estimated service lives of the remaining employees in the plan, or, for plans where participants will not earn additional benefits by rendering future service — which, beginning in the second quarter of 2011, includes the Company’s U.S. plans — over the plan participants’ estimated remaining lives. The Company’s policy is to fund its retirement plans based upon actuarial recommendations and in accordance with applicable laws, income tax regulations and credit agreements. Net pension and postretirement benefit income or expense is generally determined using assumptions which include expected long-term rates of return on plan assets, discount rates, compensation rate increases and medical trend rates. The Company considers several factors including actual historical rates, expected rates and external data to determine the assumptions used in the actuarial models.

Pension benefits are primarily paid through trusts funded by the Company. The Company pays postretirement benefits to the healthcare service providers on behalf of the plan’s participants.

Employee Incentive Compensation

The Company maintains short-term and long-term employee incentive compensation plans. These plans are intended to reward eligible employees for their contributions to the Company’s short-term and long-term success. Provisions for employee incentive compensation are recorded in “Accrued salaries, wages and employee benefits” and “Long-term employee related benefits” in the Company’s consolidated balance sheets. The Company accrues the related compensation expense over the period of the plan and changes in the liabilities for these incentive plans generally correlate with the Company’s financial results and projected future financial performance.

Stock-Based Compensation

The Company has stock-based incentive plans which reward certain employees and directors with cash or equity. Compensation cost for these awards is estimated based on the number of awards that are expected to vest. Compensation cost for equity awards is measured based on the fair value at the grant date, while liability award expense is measured and adjusted based on the fair value at the end of each quarter. No compensation cost is ultimately recognized for awards which are unvested and forfeited at an employees’ termination date or for liability awards which are out-of-the-money at the award expiration date. Compensation cost is recognized on a straight-line basis over the period that an employee provides service for that award, which generally is the vesting period.

 

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

FOR THE YEARS ENDED NOVEMBER 27, 2011, NOVEMBER 28, 2010, AND NOVEMBER 29, 2009

 

The Company’s common stock is not listed on any established stock exchange. Accordingly, the stock’s fair market value is determined by the Board based upon a valuation performed by an independent third-party, Evercore Group LLC (“Evercore”). Determining the fair value of the Company’s stock requires complex judgments. The valuation process includes comparison of the Company’s historical and estimated future financial results with selected publicly-traded companies and application of an appropriate discount for the illiquidity of the stock to derive the fair value of the stock. The Company uses this valuation for, among other things, making determinations under its stock-based compensation plans, such as the grant date fair value of awards.

The fair value of equity awards granted to employees is estimated on the date of grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model requires the input of highly subjective assumptions including volatility. Due to the fact that the Company’s common stock is not publicly traded, the computation of expected volatility is based on the average of the historical and implied volatilities, over the expected life of the awards, of comparable companies from a representative peer group of publicly-traded entities, selected based on industry and financial attributes. Other assumptions include expected life, risk-free rate of interest and dividend yield. Expected life is computed using the simplified method. The risk-free interest rate is based on zero coupon U.S. Treasury bond rates corresponding to the expected life of the awards. Dividend assumptions are based on historical experience.

The fair value of equity awards granted to directors is based on the fair value of the common stock at the date of grant. The fair value of liability awards granted to employees is also based on the Black-Scholes option pricing model and is calculated based on the common stock value and assumptions at each quarter end.

Due to the job function of the award recipients, the Company has included stock-based compensation cost in “Selling, general and administrative expenses” in the consolidated statements of income.

Self-Insurance

The Company self-insures, up to certain limits, workers’ compensation risk and employee and eligible retiree medical health benefits. The Company carries insurance policies covering claim exposures which exceed predefined amounts, per occurrence and/or in the aggregate, for workers’ compensation claims and for the medical claims of active employees as well as those salaried retirees who retired after June 1, 2001. Accruals for losses are made based on the Company’s claims experience and actuarial assumptions followed in the insurance industry, including provisions for incurred but not reported losses.

Derivative Financial Instruments and Hedging Activities

The Company recognizes all derivatives as assets and liabilities at their fair values. The Company uses derivatives to manage exposures that are sensitive to changes in market conditions, such as foreign currency risk. Additionally, some of the Company’s contracts contain provisions that are accounted for as embedded derivative instruments. The Company does not designate its derivative instruments for hedge accounting; changes in the fair values of these instruments are recorded in “Other income (expense), net” in the Company’s consolidated statements of income.

In the second quarter of 2011, the Company identified that certain of its leases contained embedded foreign currency derivatives that had not been accounted for in prior periods. The Company determined that the effect of not accounting for these embedded derivatives in its previously issued financial statements was not material and recorded a correcting entry in the second quarter of 2011. The correction had the effect of increasing the fair value of the Company’s derivative net assets and of recognizing other income. The correction had no effect on operating income or cash flows, and increased income before income taxes and net income in the second quarter of 2011 by $6.5 million and $4.7 million, respectively.

 

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

FOR THE YEARS ENDED NOVEMBER 27, 2011, NOVEMBER 28, 2010, AND NOVEMBER 29, 2009

 

The non-derivative instruments the Company designates and that qualify for hedge accounting treatment hedge the Company’s net investment position in certain of its foreign subsidiaries. For these instruments, the Company documents the hedge designation by identifying the hedging instrument, the nature of the risk being hedged and the approach for measuring hedge effectiveness. The ineffective portions of these hedges are recorded in “Other income (expense), net” in the Company’s consolidated statements of income. The effective portions of these hedges are recorded in “Accumulated other comprehensive loss” in the Company’s consolidated balance sheets and are not reclassified to earnings until the related net investment position has been liquidated.

Foreign Currency

The functional currency for most of the Company’s foreign operations is the applicable local currency. For those operations, assets and liabilities are translated into U.S. Dollars using period-end exchange rates, income and expenses are translated at average monthly exchange rates, and equity accounts are translated at historical rates. Net changes resulting from such translations are recorded as a component of translation adjustments in “Accumulated other comprehensive income (loss)” in the Company’s consolidated balance sheets.

Foreign currency transactions are transactions denominated in a currency other than the entity’s functional currency. At each balance sheet date, each entity remeasures the recorded balances related to foreign-currency transactions using the period-end exchange rate. Gains or losses arising from the remeasurement of these balances are recorded in “Other income (expense), net” in the Company’s consolidated statements of income. In addition, at the settlement date of foreign currency transactions, foreign currency gains and losses are recorded in “Other income (expense), net” in the Company’s consolidated statements of income to reflect the difference between the rate effective at the settlement date and the historical rate at which the transaction was originally recorded.

Noncontrolling Interest

Noncontrolling interest includes a 16.4% minority interest of third parties in Levi Strauss Japan K.K., the Company’s Japanese subsidiary.

Stockholders’ Deficit

The accumulated deficit component of stockholders’ deficit at November 29, 2009, and prior, primarily resulted from a 1996 recapitalization transaction in which the Company’s stockholders created new long-term governance arrangements, including a voting trust and stockholders’ agreement. As a result, shares of stock of a former parent company, Levi Strauss Associates Inc., including shares held under several employee benefit and compensation plans, were converted into the right to receive cash. The funding for the cash payments in this transaction was provided in part by cash on hand and in part from proceeds of approximately $3.3 billion of borrowings under bank credit facilities.

Revenue Recognition

Net sales is primarily comprised of sales of products to wholesale customers, including franchised stores, and direct sales to consumers at the Company’s company-operated and online stores and at the Company’s company-operated shop-in-shops located within department stores. The Company recognizes revenue on sale of product when the goods are shipped or delivered and title to the goods passes to the customer provided that: there are no uncertainties regarding customer acceptance; persuasive evidence of an arrangement exists; the sales price is fixed or determinable; and collectability is reasonably assured. The revenue is recorded net of an allowance for estimated returns, discounts and retailer promotions and other similar incentives. Licensing revenues from the use of the Company’s trademarks in connection with the manufacturing, advertising, and distribution of trademarked products by third-party licensees are earned and recognized as products are sold by licensees based on royalty rates set forth in the licensing agreements.

 

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

FOR THE YEARS ENDED NOVEMBER 27, 2011, NOVEMBER 28, 2010, AND NOVEMBER 29, 2009

 

The Company recognizes allowances for estimated returns in the period in which the related sale is recorded. The Company recognizes allowances for estimated discounts, retailer promotions and other similar incentives at the later of the period in which the related sale is recorded or the period in which the sales incentive is offered to the customer. The Company estimates non-volume based allowances based on historical rates as well as customer and product-specific circumstances. Sales and value-added taxes collected from customers and remitted to governmental authorities are presented on a net basis in the consolidated statements of income.

Net sales to the Company’s ten largest customers totaled approximately 30%, 33% and 36% of net revenues for 2011, 2010 and 2009, respectively. No customer represented 10% or more of net revenues in any of these years.

Cost of Goods Sold

Cost of goods sold includes the expenses incurred to acquire and produce inventory for sale, including product costs, labor and related overhead, sourcing costs, inbound freight, internal transfers, and the cost of operating the Company’s remaining manufacturing facilities, including the related depreciation expense. Costs relating to the Company’s licensing activities are included in “Selling, general and administrative expenses” in the consolidated statements of income.

Selling, General and Administrative Expenses

Selling, general and administrative expenses are primarily comprised of costs relating to advertising, marketing, selling, distribution, information technology and other corporate functions. Selling costs include all occupancy costs associated with company-operated stores and with the Company’s company-operated shop-in-shops located within department stores. The Company expenses advertising costs as incurred. For 2011, 2010 and 2009, total advertising expense was $313.8 million, $327.8 million and $266.1 million, respectively. Distribution costs include costs related to receiving and inspection at distribution centers, warehousing, shipping to the Company’s customers, handling and certain other activities associated with the Company’s distribution network. These expenses totaled $183.9 million, $185.1 million and $185.7 million for 2011, 2010 and 2009, respectively.

Recently Issued Accounting Standards

The following recently issued accounting standards have been grouped by their required effective dates for the Company:

Second Quarter of 2012

 

  Ÿ  

In May 2011, the FASB issued Accounting Standards Update No. 2011-04, “Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” (“ASU 2011-04”). ASU 2011-04 changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to ensure consistency between U.S. GAAP and IFRS. ASU 2011-04 also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This new guidance is to be applied prospectively. The Company anticipates that the adoption of this standard will not materially change its consolidated financial statement footnote disclosures.

Fourth Quarter of 2012

 

  Ÿ  

In September 2011, the FASB issued Accounting Standards Update No. 2011-09, “Compensation — Retirement Benefits — Multiemployer Plans (Subtopic 715-80),” (“ASU 2011-09”). ASU 2011-09 requires that employers provide additional separate disclosures for multiemployer pension plans and

 

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

FOR THE YEARS ENDED NOVEMBER 27, 2011, NOVEMBER 28, 2010, AND NOVEMBER 29, 2009

 

 

multiemployer other postretirement benefit plans. The additional quantitative and qualitative disclosures will provide users with more detailed information about an employer’s involvement in multiemployer pension plans. This new guidance is to be applied retrospectively. The Company anticipates that the adoption of this standard will expand its consolidated financial statement footnote disclosures.

First Quarter of 2013

 

  Ÿ  

In June 2011, the FASB issued Accounting Standards Update No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income,” (“ASU 2011-05”). ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in equity. ASU 2011-05 requires that all nonowner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. In December 2011, the FASB issued Accounting Standards Update No. 2011-12 (“ASU 2011-12”) which defers certain requirements within ASU 2011-05. These amendments are being made to allow the FASB time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income in all periods presented. This new guidance is to be applied retrospectively. The Company anticipates that the adoption of this standard may materially change the presentation of its consolidated financial statements.

First Quarter of 2014

 

  Ÿ  

In December 2011, the FASB issued Accounting Standards Update No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities,” (“ASU 2011-11”). ASU 2011-11 enhances disclosures regarding financial instruments and derivative instruments. Entities are required to provide both net information and gross information for these assets and liabilities in order to enhance comparability between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements on the basis of IFRS. This new guidance is to be applied retrospectively. The Company anticipates that the adoption of this standard will expand its consolidated financial statement footnote disclosures.

NOTE 2:    PROPERTY, PLANT AND EQUIPMENT

The components of property, plant and equipment (“PP&E”) were as follows:

 

     November 27,
2011
    November 28,
2010
 
     (Dollars in thousands)  

Land

   $ 30,236     $ 29,728  

Buildings and leasehold improvements

     422,020       406,644  

Machinery and equipment

     477,895       493,325  

Capitalized internal-use software

     286,662       186,905  

Construction in progress

     17,434       55,259  
  

 

 

   

 

 

 

Subtotal

     1,234,247       1,171,861  

Accumulated depreciation

     (731,859     (683,258
  

 

 

   

 

 

 

PP&E, net

   $ 502,388     $ 488,603  
  

 

 

   

 

 

 

 

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

FOR THE YEARS ENDED NOVEMBER 27, 2011, NOVEMBER 28, 2010, AND NOVEMBER 29, 2009

 

Depreciation expense for the years ended November 27, 2011, November 28, 2010, and November 29, 2009, was $104.8 million, $88.9 million and $76.8 million, respectively.

Capitalized internal-use software at November 27, 2011, and November 28, 2010, primarily related to the implementation of the Company’s enterprise resource planning system and various information technology systems. Construction in progress at November 27, 2011, and November 28, 2010, primarily related to the installation of various information technology systems and leasehold improvements.

NOTE 3:    GOODWILL AND OTHER INTANGIBLE ASSETS

The changes in the carrying amount of goodwill by business segment for the years ended November 27, 2011, and November 28, 2010, were as follows:

 

     Americas     Europe     Asia
Pacific
    Total  
     (Dollars in thousands)  

Balance, November 29, 2009

   $ 207,423     $ 32,080     $ 2,265     $ 241,768  

Additions

            2,115              2,115  

Foreign currency fluctuation

     4       (2,592     177       (2,411
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, November 28, 2010

   $ 207,427     $ 31,603     $ 2,442     $ 241,472  

Foreign currency fluctuation

     (9     (80     (413     (502
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, November 27, 2011

   $ 207,418     $ 31,523     $ 2,029     $ 240,970  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other intangible assets, net, were as follows:

 

     November 27, 2011      November 28, 2010  
     Gross
Carrying Value
     Accumulated
Amortization
    Total      Gross
Carrying Value
     Accumulated
Amortization
    Total  
     (Dollars in thousands)  

Non-amortized intangible assets:

               

Trademarks

   $ 42,743      $      $ 42,743      $ 42,743      $      $ 42,743  

Amortized intangible assets:

               

Acquired contractual rights

     41,667        (23,051     18,616        45,712        (17,765     27,947  

Customer lists

     20,018        (9,559     10,459        20,037        (6,075     13,962  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 104,428      $ (32,610   $ 71,818      $ 108,492      $ (23,840   $ 84,652  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

For the years ended November 27, 2011, and November 28, 2010, amortization of these intangible assets were $12.1 million and $14.8 million, respectively. The amortization of these intangible assets, which is included in “Selling, general and administrative expenses” in the Company’s consolidated statements of income, in the succeeding fiscal years is approximately $12.2 million in 2012, $11.0 million in 2013, and immaterial thereafter.

As of November 27, 2011, there was no impairment to the carrying value of the Company’s goodwill or non-amortized intangible assets.

 

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

FOR THE YEARS ENDED NOVEMBER 27, 2011, NOVEMBER 28, 2010, AND NOVEMBER 29, 2009

 

NOTE 4:     FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table presents the Company’s financial instruments that are carried at fair value.

 

     November 27, 2011      November 28, 2010  
            Fair Value Estimated
Using
            Fair Value  Estimated
Using
 
     Fair Value      Leve1 1
Inputs(1)
     Level 2
Inputs(2)
     Fair Value      Leve1 1
Inputs(1)
     Level 2
Inputs(2)
 
     (Dollars in thousands)  

Financial assets carried at fair value

                 

Rabbi trust assets

   $ 18,064      $ 18,064      $       $ 18,316      $ 18,316      $   

Forward foreign exchange contracts, net(3)

     25,992                25,992        1,385                1,385  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 44,056      $ 18,064  <