LEVI STRAUSS & CO — Interim / Quarterly Report 2007

Jul 10, 2007

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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Form 10-Q

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(Mark One)
þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
	For the Quarterly Period Ended May 27, 2007
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission file number: 002-90139

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LEVI STRAUSS & CO.

(Exact Name of Registrant as Specified in Its Charter)

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Delaware	94-0905160
(State or Other Jurisdiction
of Incorporation or Organization)	(I.R.S. Employer Identification No.)

1155 Battery Street, San Francisco, California 94111

(Address of Principal Executive Offices) (Zip Code)

(415) 501-6000 (Registrant’s Telephone Number, Including Area Code)

None

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer o Accelerated Filer o Non-accelerated filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

The Company is privately held. Nearly all of its common equity is owned by members of the families of several descendants of the Company’s founder, Levi Strauss. 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 — 37,278,238 shares outstanding on July 5, 2007

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LEVI STRAUSS & CO. AND SUBSIDIARIES

INDEX TO FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MAY 27, 2007

	Number
PART I —
FINANCIAL INFORMATION
Item 1.	Consolidated
Financial Statements (unaudited):
	Consolidated Balance Sheets as of May 27, 2007, and November 26, 2006	3
	Consolidated Statements of Income for the Three and Six Months Ended May 27, 2007, and May 28, 2006	4
	Consolidated Statements of Cash Flows for the Six Months Ended May 27, 2007, and May 28, 2006	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s
Discussion and Analysis of Financial Condition and Results of
Operations	18
Item 3.	Quantitative and
Qualitative Disclosures About Market Risk	30
Item 4.	Controls and
Procedures	31
PART II —
OTHER INFORMATION
Item 1.	Legal
Proceedings	32
Item 1A.	Risk
Factors	32
Item 2.	Unregistered Sales
of Equity Securities and Use of Proceeds	32
Item 3.	Defaults Upon
Senior Securities	32
Item 4.	Submission of
Matters to a Vote of Security Holders	32
Item 5.	Other
Information	32
Item 6.	Exhibits	32
SIGNATURE		33
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

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PART I — FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

LEVI STRAUSS & CO. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	(Unaudited) — May 27,	November 26,
	2007	2006
	(Dollars in thousands)
ASSETS
Current Assets:
Cash and cash equivalents	$ 307,202	$	279,501
Restricted cash	1,641		1,616
Trade receivables, net of allowance
for doubtful accounts of $14,374 and $17,998	489,346		589,975
Inventories:
Raw materials	13,611		13,543
Work-in-process	14,776		13,479
Finished goods	513,669		523,041
Total inventories	542,056		550,063
Deferred tax assets, net	101,759		101,823
Other current assets	75,936		86,292
Total current assets	1,517,940		1,609,270
Property, plant and equipment, net
of accumulated depreciation of $565,718 and $530,413	400,645		404,429
Goodwill	206,227		203,989
Other intangible assets, net	42,803		42,815
Non-current deferred tax assets, net	464,850		457,105
Other assets	79,616		86,457
Total assets	$ 2,712,081	$	2,804,065
LIABILITIES, TEMPORARY EQUITY
AND STOCKHOLDERS’ DEFICIT
Current Liabilities:
Short-term borrowings	$ 10,536	$	11,089
Current maturities of capital leases	1,674		1,608
Accounts payable	198,065		245,629
Restructuring liabilities	13,125		13,080
Other accrued liabilities	172,190		194,601
Accrued salaries, wages and
employee benefits	192,376		261,234
Accrued interest payable	58,639		61,827
Accrued income taxes	53,258		14,226
Total current liabilities	699,863		803,294
Long-term debt	2,149,475		2,206,323
Long-term capital leases, less
current maturities	2,262		3,086
Postretirement medical benefits	326,411		379,188
Pension liability	190,077		184,090
Long-term employee related benefits	121,958		136,408
Long-term income tax liabilities	24,170		19,994
Other long-term liabilities	44,442		46,635
Minority interest	13,831		17,138
Total liabilities	3,572,489		3,796,156
Commitments and contingencies
(Note 5)
Temporary equity	4,841		1,956
Stockholders’ deficit:
Common stock —
$.01 par value; 270,000,000 shares authorized;
37,278,238 shares issued and outstanding	373		373
Additional paid-in capital	88,880		89,837
Accumulated deficit	(827,128	)	(959,478	)
Accumulated other comprehensive loss	(127,374	)	(124,779	)
Stockholders’ deficit	(865,249	)	(994,047	)
Total liabilities, temporary
equity and stockholders’ deficit	$ 2,712,081	$	2,804,065

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

	Three Months Ended — May 27,	May 28,		May 27,		May 28,
	2007	2006		2007		2006
	(Dollars in thousands)
	(Unaudited)
Net sales	$ 997,323	$	944,464	$	2,013,622	$	1,892,338
Licensing revenue	19,037		16,347		40,143		36,114
Net revenues	1,016,360		960,811		2,053,765		1,928,452
Cost of goods sold	553,233		515,071		1,093,023		1,017,593
Gross profit	463,127		445,740		960,742		910,859
Selling, general and
administrative expenses	344,792		323,621		640,354		614,916
Restructuring charges, net	66		7,262		12,881		10,449
Operating income	118,269		114,857		307,507		285,494
Interest expense	55,777		61,791		113,502		128,088
Loss on early extinguishment of
debt	14,299		32,951		14,329		32,958
Other income, net	(4,306	)	(3,429	)	(17,894	)	(4,577	)
Income before income taxes	52,499		23,544		197,570		129,025
Income tax expense (benefit)	6,784		(16,658	)	65,220		35,009
Net income	$ 45,715	$	40,202	$	132,350	$	94,016

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

	Six Months Ended — May 27,	May 28,
	2007	2006
	(Dollars in thousands)
	(Unaudited)
Cash Flows from Operating
Activities:
Net income	$ 132,350	$	94,016
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization	33,614		31,083
Asset impairments	7,318		—
Loss (gain) on disposal of
property, plant and equipment	238		(1,169	)
Unrealized foreign exchange gains	(7,150	)	(949	)
Realized loss on foreign currency
contracts not designated for hedge accounting	3,036		—
Postretirement benefit plan
curtailment gain	(25,321	)	—
Write-off of unamortized costs
associated with early extinguishment of debt	6,570		16,051
Amortization of deferred debt
issuance costs	2,816		5,281
Stock-based compensation	1,928		—
Allowance for doubtful accounts	(387	)	(1,041	)
Change in operating assets and
liabilities:
Trade receivables	96,719		166,370
Inventories	809		28,396
Other current assets	12,735		(9,175	)
Other non-current assets	(7,144	)	(31,449	)
Accounts payable and other accrued
liabilities	(67,022	)	(40,366	)
Income tax liabilities	42,764		23,860
Restructuring liabilities	(2,046	)	1,585
Accrued salaries, wages and
employee benefits	(85,617	)	(63,595	)
Long-term employee related benefits	(18,538	)	(16,223	)
Other long-term liabilities	(1,838	)	(456	)
Other, net	582		(1,665	)
Net cash provided by operating
activities	126,416		200,554
Cash Flows from Investing
Activities:
Purchases of property, plant and
equipment	(30,200	)	(27,492	)
Proceeds from sale of property,
plant and equipment	500		1,804
Acquisition of retail stores	(2,502	)	(1,213	)
Foreign currency contracts not
designated for hedge accounting	(3,036	)	—
Net cash used for investing
activities	(35,238	)	(26,901	)
Cash Flows from Financing
Activities:
Proceeds from issuance of long-term
debt	322,563		475,690
Repayments of long-term debt	(380,845	)	(491,875	)
Net decrease in short-term
borrowings	(1,832	)	(2,544	)
Debt issuance costs	(1,219	)	(11,916	)
Restricted cash	(8	)	1,514
Dividends to minority interest
shareholders of Levi Strauss Japan K.K.	(3,141	)	—
Net cash used for financing
activities	(64,482	)	(29,131	)
Effect of exchange rate changes on
cash	1,005		2,849
Net increase in cash and cash
equivalents	27,701		147,371
Beginning cash and cash equivalents	279,501		239,584
Ending cash and cash
equivalents	$ 307,202	$	386,955
Supplemental disclosure of cash
flow information:
Cash paid during the period for:
Interest	$ 108,227	$	112,534
Income taxes	19,352		42,753

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 QUARTERLY PERIOD ENDED MAY 27, 2007

NOTE 1: SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Levi Strauss & Co. (“LS&CO.” or the “Company”) is one of the world’s leading branded apparel companies. The Company designs and markets jeans and jeans-related pants, casual and dress pants, tops, jackets and related accessories, for men, women and children under the Levi’s ® , Dockers ® and Levi Strauss Signature ® brands. The Company markets its products in three geographic regions: North America, Europe and Asia Pacific.

Basis of Presentation and Principles of Consolidation

The unaudited consolidated financial statements of LS&CO. and its wholly-owned and majority-owned foreign and domestic subsidiaries (the “Company”) are prepared in conformity with generally accepted accounting principles in the United States (“U.S.”) for interim financial information. In the opinion of management, all adjustments necessary for a fair statement of the financial position and the results of operations for the periods presented have been included. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended November 26, 2006, included in the Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission on February 13, 2007.

The unaudited consolidated financial statements include the accounts of LS&CO. and its subsidiaries. All significant intercompany transactions have been eliminated. Management believes the disclosures are adequate to make the information presented herein not misleading. Certain prior-year amounts have been reclassified to conform to the current presentation. The results of operations for the three months and six months ended May 27, 2007, may not be indicative of the results to be expected for any other interim period or the year ending November 25, 2007.

The Company’s fiscal year consists of 52 or 53 weeks, ending on the last Sunday of November in each year. Both the 2007 and 2006 fiscal years consist of 52 weeks ending on November 25, 2007, and November 26, 2006, respectively. Each quarter of both fiscal years 2007 and 2006 consists of 13 weeks. The fiscal year end for certain foreign subsidiaries is fixed at November 30 due to local statutory requirements. All references to years relate to fiscal years rather than calendar years.

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 management. Management evaluates its estimates and assumptions on an ongoing basis and may employ outside experts to assist in its evaluations. Changes in such estimates, based on more accurate future information, or different assumptions or conditions, may affect amounts reported in future periods.

Recently Issued Accounting Standards

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

Fourth Quarter of 2007

• In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106 and 132(R)”

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FOR THE QUARTERLY PERIOD ENDED MAY 27, 2007

(“SFAS 158”). SFAS 158 requires employers to (a) recognize in their statement of financial position the funded status of a benefit plan measured as the difference between the fair value of plan assets and the benefit obligation, (b) recognize net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost pursuant to SFAS No. 87, “Employer’s Accounting for Pensions” or SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” (c) measure defined benefit plan assets and obligations as of the date of the employer’s statement of financial position and (d) disclose additional information in the notes to the financial statements about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset or obligation. The requirements of SFAS 158 are to be applied prospectively upon adoption, which is fiscal year end 2007 for the Company. The Company has pension and other postretirement plans which will be affected by the adoption of SFAS 158. Based on third-party actuarial estimates of plan assets and obligations as of November 26, 2006, the Company estimates that had the Company been required to adopt the provisions of SFAS 158 at that date, the adoption would have resulted in a net decrease to total liabilities of approximately $172 million, with corresponding decreases to stockholder’s deficit of $106 million and to deferred tax assets of $66 million. The actual impact of the adoption of SFAS 158 will depend on the valuation of plan assets and obligations at November 25, 2007.

First Quarter of 2008

| • | In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), which is an interpretation of
SFAS No. 109, “Accounting for Income
Taxes” (“SFAS 109”). FIN 48
clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in
accordance with SFAS 109 and prescribes a recognition
threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected
to be taken in a tax return. FIN 48 also provides guidance
on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition.
FIN 48 is effective for fiscal years beginning after
December 15, 2006. The Company is currently in the process
of assessing the impact the adoption of FIN 48 will have on
its financial statements. |
| --- | --- |
| • | In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair
value, establishes a framework for measuring fair value and
expands disclosure of fair value measurements. SFAS 157
applies under other accounting pronouncements that require or
permit fair value measurements and, accordingly, does not
require any new fair value measurements. SFAS 157 is effective
for financial statements issued for fiscal years beginning after
November 15, 2007. The Company is currently in the process
of assessing the impact the adoption of SFAS 157 will have
on its financial statements. |
| • | In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities” (“SFAS 159”).
SFAS 159 permits entities to choose to measure certain
financial assets and liabilities and other eligible items at
fair value, which are not otherwise currently required to be
measured at fair value. Under SFAS 159, the decision to
measure items at fair value is made at specified election dates
on an irrevocable instrument-by-instrument basis. Entities electing the fair value option would be required
to recognize changes in fair value in earnings and to expense
upfront cost and fees associated with the item for which the
fair value option is elected. Entities electing the fair value
option are required to distinguish on the face of the statement
of financial position, the fair value of assets and liabilities
for which the fair value option has been elected and similar
assets and liabilities measured using another measurement
attribute. If elected, SFAS 159 is effective as of the
beginning of the first fiscal year that begins after
November 15, 2007, with earlier adoption permitted provided
that the entity also early adopts all of the requirements of
SFAS 159. The Company is currently evaluating whether to
elect the option provided for in this standard. |

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FOR THE QUARTERLY PERIOD ENDED MAY 27, 2007

NOTE 2: INCOME TAXES

Effective Income Tax Rate. The Company’s income tax expense for the three and six months ended May 27, 2007, was approximately $6.8 million and $65.2 million, respectively. The Company’s effective income tax rates for the three and six months ended May 27, 2007, were 12.9% and 33.0%, respectively. The effective tax rate for the three months ended May 27, 2007, was reduced due to a lower residual U.S. tax expected to be imposed upon a repatriation of foreign earnings, and the recognition of a discrete, non-cash tax benefit of approximately $6.3 million due to an election to change the filing methodology of its California state income tax return.

The Company’s income tax (benefit) expense for the three and six months ended May 28, 2006, was approximately ($16.7) million and $35.0 million, respectively. The Company’s effective income tax rates for the three and six months ended May 28, 2006, were (70.8%) and 27.1%, respectively. During the three months ended May 28, 2006, the Company recognized a discrete, non-cash tax benefit resulting from the modification of the ownership structure of certain foreign subsidiaries which reduced by approximately $31.5 million the overall residual U.S. and foreign tax expected to be imposed upon future repatriations of the Company’s unremitted foreign earnings.

Estimated Annual Effective Income Tax Rate. The Company’s estimated annual effective income tax rate for 2007 is 34.8%. This differs from the effective income tax rate of 33.0% for the six months ended May 27, 2007, due primarily to the discrete tax benefit of approximately $6.3 million described above. The estimated annual effective income tax rates for 2007 and 2006 are as follows:

2007 (1)		2006 (2)
Income tax expense at U.S. federal
statutory rate	35.0	%	35.0 %
State income taxes, net of U.S.
federal impact	0.6		0.9
Impact of foreign operations	(2.5	)	5.0
Reassessment of liabilities due to
change in estimates	1.8		0.8
Other	(0.1	)	0.3
	34.8	%	42.0 %

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| (1) | Estimated annual effective income
tax rate for 2007. |
| --- | --- |
| (2) | Projected annual effective income
tax rate used for the six months ended May 28, 2006. |

The “State income taxes, net of U.S. federal impact” item primarily reflects the expected state income tax expense for the year, net of related federal benefit. The impact of this item on the Company’s estimated annual effective tax rate decreased in 2007 from the prior year primarily due to the change in the California tax return filing methodology discussed above.

The “Impact of foreign operations” item above reflects the impact of U.S. and foreign income taxes on profits earned outside the U.S. For 2007, the residual U.S. tax expected to be imposed upon a repatriation of foreign earnings was reduced due to the Company’s expectations regarding its ability to utilize some portion of the available related foreign tax credits.

The “Reassessment of liabilities due to change in estimates” item relates primarily to changes in the Company’s estimate of its contingent tax liabilities. For 2007, the Company’s estimated increase in contingent tax liabilities is approximately $6.5 million, primarily due to additional foreign uncertain tax positions.

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FOR THE QUARTERLY PERIOD ENDED MAY 27, 2007

NOTE 3: GOODWILL AND OTHER INTANGIBLE ASSETS

The changes in the carrying amount of goodwill by business segment for the six months ended May 27, 2007, were as follows:

	North — America	Europe	Asia — Pacific	Total
	(Dollars in thousands)
Balance, November 26, 2006	$ 199,905	$ 3,814	$ 270	$	203,989
Additions (1)	—	—	2,175		2,175
Foreign currency fluctuation	—	103	(40	)	63
Balance, May 27, 2007	$ 199,905	$ 3,917	$ 2,405	$	206,227

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(1) Additional goodwill resulted from the purchase of six retail stores

Other intangible assets were as follows:

	May 27, 2007 — Gross	Accumulated			November 26, 2006 — Gross	Accumulated
	Carrying Value	Amortization		Total	Carrying Value	Amortization		Total
	(Dollars in thousands)
Trademarks and other intangible
assets	$ 43,059	$ (256	)	$ 42,803	$ 43,059	$ (244	)	$ 42,815

Intangible assets are primarily comprised of owned trademarks with indefinite useful lives. Approximately $0.1 million of the intangible assets balance is subject to amortization, for which the annual amortization expense is not material to the consolidated financial statements.

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FOR THE QUARTERLY PERIOD ENDED MAY 27, 2007

NOTE 4: LONG-TERM DEBT

	May 27,	November 26,
	2007	2006
	(Dollars in thousands)
Long-term debt
Secured:
Revolving credit facility	$ —	$ —
Notes payable, at various rates	123	117
Subtotal	123	117
Unsecured:
12.25% senior notes due 2012	522,599	522,453
Floating rate senior notes due 2012	—	380,000
8.625% Euro senior notes due 2013	339,435	330,952
Senior term loan due 2014	322,601	—
9.75% senior notes due 2015	450,000	450,000
8.875% senior notes due 2016	350,000	350,000
4.25% Yen-denominated Eurobonds
due 2016	164,717	172,801
Subtotal	2,149,352	2,206,206
Less: current maturities	—	—
Total long-term debt	$ 2,149,475	$ 2,206,323
Short-term debt
Short-term borrowings	$ 10,536	$ 11,089
Total long-term and short-term debt	$ 2,160,011	$ 2,217,412

Senior Unsecured Term Loan; Redemption of Floating Rate Senior Notes due 2012

On March 27, 2007, the Company entered into a senior unsecured term loan agreement. The term loan consists of a single borrowing of $325.0 million, net of a 0.75% discount to the lenders. On April 4, 2007, the Company borrowed the maximum available $322.6 million under the term loan and used the borrowings plus cash on hand of approximately $66.4 million, to redeem all of its outstanding $380.0 million floating rate senior notes due 2012 and to pay related redemption premiums, transaction fees and expenses of approximately $7.7 million. The term loan matures on April 4, 2014 and bears interest at 2.25% over LIBOR or 1.25% over the base rate. The term loan may not be prepaid during the first year but thereafter may be prepaid without premium or penalty.

Loss on Early Extinguishment of Debt

For the three and six months ended May 27, 2007, the Company recorded a loss of $14.3 million on early extinguishment of debt as a result of its redemption of its floating rate senior notes during the second quarter of 2007. The 2007 loss was comprised of a prepayment premium and other fees of approximately $7.7 million and the write-off of approximately $6.6 million of unamortized debt issuance costs related to the redemption of the floating rate senior notes. During the three and six months ended May 28, 2006, the Company recorded a loss of

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FOR THE QUARTERLY PERIOD ENDED MAY 27, 2007

$33.0 million on early extinguishment of debt in conjunction with the Company’s prepayment in March 2006 of the remaining balance of its prior senior secured term loan of approximately $488.8 million, and the amendment in May 2006 of the Company’s revolving credit facility. The 2006 loss was comprised of a prepayment premium and other fees and expenses of approximately $16.9 million and the write-off of approximately $16.1 million of unamortized capitalized costs.

Short-term Credit Lines and Standby Letters of Credit

Under the senior secured revolving credit facility, the Company is required to maintain certain reserves against availability (or deposit cash or investment securities in secured accounts with the administrative agent) including a $75.0 million reserve at all times. These reserves reduce the availability under the Company’s credit facility.

As of May 27, 2007, the Company’s total availability, net of all applicable reserves, of $333.3 million under its senior secured revolving credit facility was reduced by $88.1 million of letters of credit and other credit usage allocated under the senior secured revolving credit facility, yielding a net availability of $245.2 million. Included in the $88.1 million of letters of credit and other credit usage, which arrangements are with various international banks, were $66.6 million of standby letters of credit (of which $43.4 million serve as guarantees by the creditor banks to cover U.S. workers’ compensation claims and customs bonds), $15.1 million of trade letters of credit and $6.4 million of other credit usage. The Company pays fees on letters of credit and other credit usage, and borrowings against the letters of credit are subject to interest at various rates.

Interest Rates on Borrowings

The Company’s weighted average interest rate on average borrowings outstanding during the three and six months ended May 27, 2007, including the amortization of capitalized bank fees and underwriting fees, was 9.73% and 9.81%, respectively compared to 10.18% and 10.44% in the same periods of 2006. The weighted average interest rate on average borrowings outstanding excludes interest payable to participants under deferred compensation plans and other miscellaneous items.

NOTE 5: COMMITMENTS AND CONTINGENCIES

Foreign Exchange Contracts

The Company uses derivative instruments to manage its exposure to foreign currencies. As of May 27, 2007, the Company had U.S. dollar spot and forward currency contracts to buy $369.7 million and to sell $256.4 million against various foreign currencies. The Company also had Euro forward currency contracts to buy 17.2 million Euros ($23.1 million equivalent) against the Norwegian Krona and Swedish Krona. These contracts are at various exchange rates and expire at various dates through December 2007.

The Company is exposed to credit loss in the event of nonperformance by the counterparties to the foreign exchange contracts. However, the Company believes these counterparties are creditworthy financial institutions and does not anticipate nonperformance.

Other Contingencies

Wrongful Termination Litigation. There have been no material developments in this litigation since the Company filed its 2006 Annual Report on Form 10-K on February 13, 2007. For more information about the litigation, see Note 7 to the consolidated financial statements contained in the Company’s 2006 Annual Report on Form 10-K.

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FOR THE QUARTERLY PERIOD ENDED MAY 27, 2007

Class Actions Securities Litigation. There have been no material developments in this litigation since the Company filed its 2006 Annual Report on Form 10-K on February 13, 2007. For more information about the litigation, see Note 7 to the consolidated financial statements contained in such Form 10-K.

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

NOTE 6: RESTRUCTURING LIABILITIES

The following describes the reorganization initiatives, including facility closures and organizational changes, associated with the Company’s restructuring liabilities as of May 27, 2007. In the table below, “Severance and employee benefits” relate to items such as severance packages, out-placement services and career counseling for employees affected by the closures and other reorganization initiatives. “Asset impairment” relates to the write-down of assets to their estimated fair value. “Other restructuring costs” primarily relate to lease loss liability and facility closure costs. “Charges” represent the initial charge related to the restructuring activity. “Utilization” consists of payments for severance, employee benefits and other restructuring costs, the effect of foreign exchange differences and asset impairments. “Adjustments” include revisions of estimates related to severance, employee benefits and other restructuring costs.

For the three and six months ended May 27, 2007, the Company recognized restructuring charges, net, of $0.1 million and $12.9 million, respectively, which relate primarily to the planned closure of the Company’s distribution center in Heusenstamm, Germany and reorganization of the Company’s Eastern European operations, each described below. For the three and six months ended May 28, 2006, the Company recognized restructuring charges, net, of $7.3 million and $10.4 million, respectively, which relate primarily to the closure of the Company’s distribution center in Little Rock, Arkansas and the reorganization of the Company’s Nordic operations. The long-term portion of restructuring liabilities at May 27, 2007, primarily relates to lease costs, net of estimated sub-lease income, associated with exited facilities, and is included in “Other long-term liabilities” on the Company’s unaudited consolidated balance sheets.

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FOR THE QUARTERLY PERIOD ENDED MAY 27, 2007

The following table summarizes the restructuring activity for the six months ended May 27, 2007, and the related restructuring liabilities balance as of November 26, 2006, and May 27, 2007:

	Restructuring
	Liabilities						Liabilities	Cumulative
	November 26,						May 27,	Charges
	2006	Charges	Utilization		Adjustments		2007	To Date
			(Dollars in thousands)
2007 reorganization
initiatives: (1)
Severance and employee benefits	$ —	$ 5,633	$ 138		$ (153	)	$ 5,618	$ 5,480
Asset impairment	—	7,008	(7,008	)	—		—	7,008
Prior reorganization
initiatives: (2)
Severance and employee benefits	9,001	144	(4,828	)	(230	)	4,087	183,084
Other restructuring costs	11,746	561	(3,075	)	(82	)	9,150	53,963
Total	$ 20,747	$ 13,346	$ (14,773	)	$ (465	)	$ 18,855	$ 249,535
Current portion	$ 13,080						$ 13,125
Long-term portion	7,667						5,730
Total	$ 20,747						$ 18,855

callerid=999 iwidth=455 length=60

| (1) | On March 1, 2007, the Company
announced the reorganization of its Eastern European operations
to reduce complexity and streamline business processes. This
reorganization will result in the elimination of the jobs of
approximately 11 employees through 2007. The Company is
obligated under lease commitments through the third quarter of
2009 and will record a lease loss liability upon ceasing use of
the facility. |
| --- | --- |
| | On March 22, 2007, the Company
announced its intent to close and sell its distribution center
in Heusenstamm, Germany to enhance operational efficiencies in
its European distribution network and concentrate logistics
activities with the Company’s central logistics provider in
Bornem, Belgium. In addition, the offices of the German
business, which are located at the Heusenstamm facility, will
move to a more central location in Frankfurt, Germany. The
Company anticipates that the closure will take place in the
first quarter of 2008. The closure will result in the
elimination of the jobs of approximately 56 employees
throughout 2007 and 2008. |
| | Current year charges include the
estimated severance that will be payable to the terminated
employees in respect of both of these 2007 reorganization
initiatives. Additionally, as a result of the Heusenstamm
facility closure, the Company recorded a $7.0 million
impairment charge in the first quarter of 2007 relating to the
write-down of building, land and some machinery and equipment to
their estimated fair values. The Company estimates that it will
incur additional restructuring charges related to these actions,
principally in the form of additional termination benefits and
facility-related costs, which will be recorded in future periods
as appropriate. |
| (2) | Prior reorganization initiatives
include organizational changes and plant closures in 2002-2006, primarily in North America and Europe. Of the $13.2 million
restructuring liability at May 27, 2007, $2.7 million
resulted from its distribution facility closure in Little Rock,
Arkansas, that commenced in 2006; $0.7 million resulted
from the consolidation of its Nordic operations into its
European headquarters in Brussels in 2006; $0.3 million
resulted from the withdrawal of the Levi Strauss
Signature ® brand in Europe announced in 2006 and $9.5 million resulted
from organizational changes in the United States and Europe that
commenced in 2004. The liability for the 2004 activities
primarily consists of lease loss liabilities. |
| | The Company estimates that it will
incur future additional restructuring charges of approximately
$1.4 million related to these actions. The Company expects
to eliminate the jobs of approximately 10 employees related
to these prior activities by the end of 2007. |

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FOR THE QUARTERLY PERIOD ENDED MAY 27, 2007

NOTE 7: EMPLOYEE BENEFIT PLANS

The following table summarizes the components of net periodic benefit cost (income) for the Company’s defined benefit pension plans and postretirement benefit plans:

	Pension Benefits
	Three Months Ended			Three Months Ended
	May 27,	May 28,		May 27,			May 28,
	2007	2006		2007			2006
		(Dollars in thousands)
Service cost	$ 2,022	$	1,906	$	186		$ 207
Interest cost	14,421		14,073		2,692		3,013
Expected return on plan assets	(15,005	)	(13,124	)	—		—
Amortization of prior service cost
(benefit) (1)	2,977		427		(11,971	)	(14,389	)
Amortization of transition asset	122		152		—		—
Amortization of actuarial loss	1,728		1,995		1,323		1,671
Curtailment
loss (2)	—		1,926		—		—
Special termination
benefit (3)	—		1,027		—		500
Net periodic benefit cost (income)	$ 6,265	$	8,382	$	(7,770	)	$ (8,998	)

	Pension Benefits
	Six Months Ended			Six Months Ended
	May 27,	May 28,		May 27,			May 28,
	2007	2006		2007			2006
		(Dollars in thousands)
Service cost	$ 4,013	$	3,889	$	372		$ 414
Interest cost	28,805		28,104		5,384		6,026
Expected return on plan assets	(29,979	)	(26,454	)	—		—
Amortization of prior service cost
(benefit) (1)	3,186		819		(23,942	)	(28,778	)
Amortization of transition asset	240		300		—		—
Amortization of actuarial loss	3,453		3,970		2,646		3,342
Curtailment loss
(gain) (2)	—		1,926		(25,321	)	—
Special termination
benefit (3)	—		1,027		—		500
Net settlement
loss (4)	—		2,590		—		—
Net periodic benefit cost (income)	$ 9,718	$	16,171	$	(40,861	)	$ (18,496	)

callerid=999 iwidth=455 length=60

| (1) | Amortization of prior service costs
includes a $2.8 million charge in the second quarter of
2007 for a termination indemnity employee benefit plan. |
| --- | --- |
| (2) | Pension benefit curtailment loss
for the three and six months ended May 28, 2006 consists of
the correction of an error in the actuarial calculation of the
curtailment in the third quarter of 2004 associated with the
2003 closure of three Canadian facilities, and $0.1 million
related to the job eliminations as a result of the facility
closure in Little Rock, Arkansas. Postretirement benefit
curtailment gain for the six months ended May 27, 2007
relates to the impact of job reductions in connection with the
facility closure in Little Rock, Arkansas, attributable to the
accelerated recognition of prior service benefit associated with
prior plan amendments. |
| (3) | For the three and six months ended
May 28, 2006, amounts consist of the additional expenses
associated with special termination benefits offered to certain
qualifying participants affected by the facility closure in
Little Rock, Arkansas. |
| (4) | For the six months ended
May 28, 2006, amount primarily consists of a
$2.6 million net loss resulting from the settlement of
liabilities of certain participants in the Company’s hourly
pension plan in Canada as a result of prior plant closures. |

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FOR THE QUARTERLY PERIOD ENDED MAY 27, 2007

NOTE 8: COMPREHENSIVE INCOME

The following is a summary of the components of total comprehensive income, net of related income taxes:

	Three Months Ended — May 27,	May 28,		May 27,		May 28,
	2007	2006		2007		2006
		(Dollars in thousands)
Net income	$ 45,715	$	40,202	$	132,350	$	94,016
Other comprehensive (loss) income:
Net investment hedge losses	(4,816	)	(14,605	)	(2,956	)	(17,160	)
Foreign currency translation gains	1,778		6,023		394		8,749
Unrealized (loss) gain on
marketable securities	(232	)	(176	)	(1,051	)	238
Decrease in cash flow hedges	103		—		1,008		—
Decrease in additional minimum
pension liability	—		13,734		10		14,522
Total other comprehensive (loss)
income	(3,167	)	4,976		(2,595	)	6,349
Total comprehensive income	$ 42,548	$	45,178	$	129,755	$	100,365

The following is a summary of the components of “Accumulated other comprehensive loss,” net of related income taxes:

	May 27, — 2007		November 26, — 2006
	(Dollars in thousands)
Net investment hedge losses	$ (9,363	)	$ (6,407	)
Foreign currency translation losses	(29,965	)	(30,359	)
Unrealized gain on marketable
securities	481		1,532
Cash flow hedges	(361	)	(1,369	)
Additional minimum pension
liability	(88,166	)	(88,176	)
Accumulated other comprehensive
loss, net of income taxes	$ (127,374	)	$ (124,779	)

NOTE 9: OTHER INCOME, NET

The following table summarizes significant components of “Other income, net”:

	Three Months Ended — May 27,		May 28,		Six Months Ended — May 27,		May 28,
	2007		2006		2007		2006
			(Dollars in thousands)
Foreign exchange management losses	$ 6,195		$ 3,206		$ 4,445		$ 6,735
Foreign currency transaction gains	(7,063	)	(2,775	)	(13,094	)	(4,846	)
Interest income	(3,269	)	(3,886	)	(7,025	)	(7,014	)
Investment income	(921	)	(887	)	(3,377	)	(1,435	)
Minority interest — Levi
Strauss Japan K.K.	522		840		660		1,223
Other	230		73		497		760
Total other income, net	$ (4,306	)	$ (3,429	)	$ (17,894	)	$ (4,577	)

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FOR THE QUARTERLY PERIOD ENDED MAY 27, 2007

NOTE 10: BUSINESS SEGMENT INFORMATION

As a result of establishing a new North America organization in late 2006, the Company changed its reporting segments in 2007 to align with the new operating structure. Results for the Company’s U.S. commercial business units — the U.S. Levi’s ® , Dockers ® and Levi Strauss Signature ® brands — and its operations in Canada and Mexico are now included in a single North America regional segment. The Company’s operations outside North America continue to be organized and managed through its Europe and Asia Pacific regions. The Company’s Europe region includes Eastern and Western Europe; Asia Pacific includes Asia Pacific, the Middle East, Africa and Central and South America.

Under the new structure, each regional segment is managed by a senior executive who reports directly to the chief operating decision maker: the Company’s chief executive officer. The Company’s management, including the chief operating decision maker, manages business operations, evaluates performance and allocates resources based on the regional operating income of the segments.

As a result of these changes in the Company’s reporting structure, the Company reclassified certain U.S. staff costs from “Corporate expense” to the North America segment. Additionally, in 2006 the Company corrected the reporting of net sales relating to certain sales arrangements in its Asia Pacific segment involving the use of a third party. The effect of this correction increased both “Net sales” and “Selling, general and administrative expenses” in the Company’s consolidated statements of income by approximately $7.8 million and $15.5 million for the three and six months ended May 28, 2006. The correction had no impact on the Company’s reported operating income, net income, consolidated balance sheets or consolidated statements of cash flows for any period, and an insignificant impact on gross profit and gross margin in all periods. The Company revised its business segment information for prior periods to conform to the new presentation.

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FOR THE QUARTERLY PERIOD ENDED MAY 27, 2007

Business segment information for the Company is as follows:

	Three Months Ended — May 27,	May 28,		May 27,		May 28,
	2007	2006		2007		2006
	(Dollars in thousands)
Net revenues:
North America	$ 579,316	$	553,899	$	1,163,364	$	1,100,307
Europe	220,385		196,489		485,975		437,359
Asia Pacific	216,476		210,423		404,623		390,786
Corporate (1)	183		—		(197	)	—
Consolidated net revenues	$ 1,016,360	$	960,811	$	2,053,765	$	1,928,452
Operating income:
North America	$ 69,027	$	72,611	$	159,857	$	162,623
Europe	38,146		35,493		117,669		99,809
Asia Pacific	42,367		45,557		78,792		84,603
Regional operating income	149,540		153,661		356,318		347,035
Corporate:
Restructuring charges, net	66		7,262		12,881		10,449
Postretirement benefit plan
curtailment gain	—		—		(25,321	)	—
Other corporate staff costs and
expenses	31,205		31,542		61,251		51,092
Total corporate	31,271		38,804		48,811		61,541
Consolidated operating income	118,269		114,857		307,507		285,494
Interest expense	55,777		61,791		113,502		128,088
Loss on early extinguishment of
debt	14,299		32,951		14,329		32,958
Other income, net	(4,306	)	(3,429	)	(17,894	)	(4,577	)
Income before income taxes	$ 52,499	$	23,544	$	197,570	$	129,025

callerid=999 iwidth=455 length=60

(1) Corporate net revenues reflect the impact of the settlement of the Company’s derivative instruments which hedged the related intercompany royalty flows for the three months and six months ended May 27, 2007.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We design and market jeans and jeans-related pants, casual and dress pants, tops, jackets and related accessories for men, women and children under our Levi’s ® , Dockers ® and Levi Strauss Signature ® brands in established and emerging markets 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, home and other products.

Our products are sold through more than 55,000 retail locations in multiple channels of distribution worldwide:

| • | 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 dedicated franchised stores abroad. |
| --- | --- |
| • | We distribute our Levi Strauss
Signature ® products primarily through mass channel retailers in the United
States and mass and other value-oriented retailers and
franchised stores abroad. |

We also distribute our Levi’s ® and Dockers ® products through our online stores, and our Levi’s ® , Dockers ® and Levi Strauss Signature ® products through 170 company-operated stores located in 20 countries, including the United States. These stores generated approximately 6% of our net revenues in the first half of 2007.

We derived 43% of our net revenues and 55% of our regional operating income from our European and Asia Pacific businesses in the first half of 2007. Sales of Levi’s ® brand products represented approximately 71% of our total net sales in the first half of 2007, including a substantial majority of our net sales in our Europe and Asia Pacific regions. Sales of Dockers ® brand products represented approximately 22% of our total net sales in the first half of 2007.

Our Second Quarter 2007 Results

Our second quarter 2007 results reflect continued profitable growth, cash flow generation and debt reduction:

| • | Revenues. Our consolidated net revenues
increased by 6% with net revenues increasing in each of our
North America, Europe and Asia Pacific regions. Net revenue
improvements were driven primarily by our
U.S. Levi’s ® and
U.S. Dockers ® brands and continued strong growth in emerging markets such as
India and China. The increase also reflects favorable foreign
currency exchange rates in our Europe region and incremental
sales from dedicated stores in all three regions. |
| --- | --- |
| • | Operating Income. Our operating income grew 3%
from the prior year, helped by lower restructuring charges in
the 2007 period, which offset a decline in our gross margin
resulting from higher sales allowances and discounts. Our gross
margin and operating margin remained strong at 46% and 12%,
respectively, while we continued to invest in retail expansion
and our SAP implementation. |
| • | Net income. Net income grew 14% to
$46 million as compared to the prior year. We lowered
interest expense as a result of our debt refinancing activities
in 2006 and in April 2007 when we redeemed all of our floating
rate notes through borrowings under a new senior unsecured term
loan and use of cash on hand. Additionally, loss on early
extinguishment of debt was lower than in the prior year as we
completed two debt refinancing actions in the second quarter of
2006. The 123% increase in income before taxes was partially
offset by higher taxes as compared to prior year primarily due
to a discrete, non-cash tax benefit recognized in the second
quarter of 2006. |
| • | Cash flows. Cash flows provided by operating
activities was $126 million in the first half of 2007 as
compared to $201 million in the first half of 2006. The
decrease is primarily due to a net increase in our trade
receivables balance, primarily due to changes in the timing of
and an increase in sales as compared to the prior year period.
We increased total cash and cash equivalents by $28 million
from fiscal year end 2006 even as we used cash on hand to reduce
our debt by $50 million in the second quarter of 2007. |

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Key challenges and risks for us during the remainder of the year include:

| • | our Japanese and Korean affiliates, our two largest businesses
in the Asia Pacific region, whose declining results are
offsetting strong performance in our newer markets in the region; |
| --- | --- |
| • | consumer spending in the United States, where continued housing
market, interest rate and energy price pressures may weigh on
consumers, and the impact of retail consolidation and
acquisition activity, are creating a challenging retail
environment for us and our customers; and |
| • | the performance of our U.S. Levi Strauss
Signature ® brand. |

We expect to achieve modest growth in full-year net revenues and net income as compared with 2006, and continued cash flow generation and debt reduction.

Financial Information Presentation

Fiscal year. Our fiscal year consists of 52 or 53 weeks, ending on the last Sunday of November in each year. Both the 2007 and 2006 fiscal years consist of 52 weeks ending on November 25, 2007, and November 26, 2006, respectively. Each quarter of both fiscal years 2007 and 2006 consists of 13 weeks.

Segments. Our business is currently organized into three geographic regions: North America, Europe and Asia Pacific. As a result of establishing a new North America organization in late 2006, we changed our reporting segments to align with the new operating structure; results for our U.S. Levi’s ® , Dockers ® and Levi Strauss Signature ® brands, and our Canada and Mexico business, are now included in our North America segment. In addition, we began including in the North America segment certain staff costs previously included in corporate expense. Segment disclosures contained in this Form 10-Q conform to the new presentation for all reporting periods.

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

| • | Net sales is primarily comprised of sales of products to retail
customers, including franchised stores, and of direct sales to
consumers at both our company-operated and online stores. It
includes allowances for estimated returns, discounts, and
retailer promotions and incentives. |
| --- | --- |
| • | Licensing revenue consists of royalties earned from the use of
our trademarks in connection with the manufacturing, advertising
and distribution of trademarked products by third-party
licensees. |
| • | Cost of goods sold is primarily comprised of cost of materials,
labor and manufacturing overhead, and also includes the cost of
inbound freight, internal transfers, and receiving and
inspection at manufacturing facilities. |
| • | Selling costs include, among other things, all occupancy costs
associated with company-operated stores. |
| • | We reflect substantially all distribution costs in selling,
general and administrative expenses, including costs related to
receiving and inspection at distribution centers, warehousing,
shipping, handling, and other activities associated with our
distribution network. |

Constant currency. Constant currency comparisons are based on current period local currency amounts, translated at the same foreign exchange rates utilized in the corresponding period in the prior year. We routinely evaluate our constant currency financial performance 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 for Three and Six Months Ended May 27, 2007, as Compared to Same Periods in 2006

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:

	Three Months Ended										Six Months Ended
						May 27,		May 28,								May 27,		May 28,
				%		2007		2006						%		2007		2006
	May 27,	May 28,		Increase		% of Net		% of Net			May 27,	May 28,		Increase		% of Net		% of Net
	2007	2006		(Decrease)		Revenues		Revenues			2007	2006		(Decrease)		Revenues		Revenues
	(Dollars in millions)
Net sales	$ 997.3	$	944.5		5.6	%	98.1	%	98.3	%	$ 2,013.6	$	1,892.3		6.4	%	98.0	%	98.1	%
Licensing revenue	19.1		16.3		16.5	%	1.9	%	1.7	%	40.2		36.1		11.2	%	2.0	%	1.9	%
Net revenues	1,016.4		960.8		5.8	%	100.0	%	100.0	%	2,053.8		1,928.4		6.5	%	100.0	%	100.0	%
Cost of goods sold	553.3		515.1		7.4	%	54.4	%	53.6	%	1,093.1		1,017.6		7.4	%	53.2	%	52.8	%
Gross profit	463.1		445.7		3.9	%	45.6	%	46.4	%	960.7		910.8		5.5	%	46.8	%	47.2	%
Selling, general and administrative
expenses	344.7		323.6		6.5	%	33.9	%	33.7	%	640.3		614.9		4.1	%	31.2	%	31.9	%
Restructuring charges, net	0.1		7.2		(99.1	)%	0.0	%	0.8	%	12.9		10.4		23.3	%	0.6	%	0.5	%
Operating income	118.3		114.9		3.0	%	11.6	%	12.0	%	307.5		285.5		7.7	%	15.0	%	14.8	%
Interest expense	55.8		61.8		(9.7	)%	5.5	%	6.4	%	113.5		128.1		(11.4	)%	5.5	%	6.6	%
Loss on early extinguishment of debt	14.3		33.0		(56.6	)%	1.4	%	3.4	%	14.3		33.0		(56.5	)%	0.7	%	1.7	%
Other income, net	(4.3	)	(3.4	)	25.6	%	(0.4	)%	(0.4	)%	(17.9	)	(4.6	)	291.0	%	(0.9	)%	(0.2	)%
Income before income taxes	52.5		23.5		123.0	%	5.2	%	2.5	%	197.6		129.0		53.1	%	9.6	%	6.7	%
Income tax expense (benefit)	6.8		(16.7	)	(140.7	)%	0.7	%	(1.7	)%	65.2		35.0		86.3	%	3.2	%	1.8	%
Net income	$ 45.7	$	40.2		13.7	%	4.5	%	4.2	%	$ 132.4	$	94.0		40.8	%	6.4	%	4.9	%

Consolidated net revenues

The following table presents net revenues by segment for the respective periods:

	Three Months Ended				Six Months Ended
			% Increase (Decrease)				% Increase (Decrease)
	May 27,	May 28,	As	Constant	May 27,	May 28,	As	Constant
	2007	2006	Reported	Currency	2007	2006	Reported	Currency
	(Dollars in millions)
Net revenues:
North America	$ 579.3	$ 553.9	4.6 %	4.6 %	$ 1,163.4	$	1,100.3	5.7 %	5.8 %
Europe	220.4	196.5	12.2 %	3.0 %	486.0		437.3	11.1 %	2.0 %
Asia Pacific	216.5	210.4	2.9 %	2.8 %	404.6		390.8	3.5 %	3.6 %
Corporate	0.2	—	—	—	(0.2	)	—	—	—
Total net revenues	$ 1,016.4	$ 960.8	5.8 %	3.9 %	$ 2,053.8	$	1,928.4	6.5 %	4.5 %

Consolidated net revenues increased on both a reported and constant currency basis. Reported amounts for Europe were affected favorably by foreign currency translation. Net revenues increased across all geographic segments with strong growth in North America and the emerging markets in our Asia Pacific region for both periods.

North America. Net revenues in North America increased on both reported and constant currency bases for both periods. Changes in foreign currency exchange rates did not affect net revenues significantly.

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Net revenues for both periods increased due to growth in the U.S. Levi’s ® and U.S. Dockers ® brands, partially offset by a decrease in the U.S. Levi Strauss Signature ® brand. The net sales increase in the U.S. Levi’s ® brand, our largest business, was primarily driven by growth in the men’s category, particularly Red Tab tm products, additional company-operated retail stores and growth in the women’s category. The net sales increase in the U.S. Dockers ® brand was driven by higher sales of both men’s and women’s products. For both periods, net revenue growth was partially offset by higher sales allowances and discounts to clear seasonal inventories and to support our retail customers, including customer marketing and promotional programs. The decrease in the U.S. Levi Strauss Signature ® brand was primarily due to lower sales of men’s and women’s products sold to mass channel retailers.

Europe. Net revenues in Europe increased on both reported and on constant currency bases for both periods. Changes in foreign currency exchange rates affected net revenues favorably by approximately $18 million and $40 million for the three- and six-month periods, respectively.

Net revenues increased on a constant currency basis for both periods led by the Levi’s ® brand, partially offset by the reduction in sales volume related to the withdrawal of Levi Strauss Signature ® brand products in the second quarter of 2007. New company-operated and franchisee stores, a higher proportion of premium-priced products, particularly Levi’s ® Red Tab tm products and the success of our Spring/Summer product offering were key contributors to the net sales increase in both periods.

Asia Pacific. Total net revenues in Asia Pacific increased on both reported and constant currency bases for both periods. Changes in foreign currency exchange rates did not affect net revenues significantly.

Net sales increased for both periods for the Dockers ® and Levi Strauss Signature ® brand products while net sales for the Levi’s ® brand were flat for the three-month period and higher for the six-month period. Dedicated stores continued to drive growth in the region with the addition of company-operated and franchised stores and the updating of existing retail stores. For both periods, strong net sales, particularly in markets such as India and China, offset continuing declines in our more mature markets, predominantly Japan and Korea, our two largest businesses in the region. Our Japanese business continues to work through a management transition and high retail inventory. Korea is also experiencing high retail inventory and is rebalancing its product offering as sales of Levi’s ® Engineered Jeans tm , which had driven growth in recent years, continued to fall as the product nears the end of its life cycle.

Gross profit

The following table shows consolidated gross profit and gross margin for the respective periods:

	Three Months Ended				Six Months Ended
			%				%
	May 27,	May 28,	Increase		May 27,	May 28,	Increase
	2007	2006	(Decrease)		2007	2006	(Decrease)
	(Dollars in millions)
Net revenues	$ 1,016.4	$ 960.8	5.8	%	$ 2,053.8	$ 1,928.4	6.5	%
Cost of goods sold	553.3	515.1	7.4	%	1,093.1	1,017.6	7.4	%
Gross profit	$ 463.1	$ 445.7	3.9	%	$ 960.7	$ 910.8	5.5	%
Gross margin	45.6 %	46.4 %	(0.8	) pp	46.8 %	47.2 %	(0.4	) pp

Our gross margin decreased slightly in both periods. For the three-month period, our gross margins declined in each region. For the six-month period, gross margin declines in North America and Asia Pacific were partially offset by an increase in Europe. For both periods, gross margin declines in North America were primarily due to higher sales allowances and discounts, and net sales growth in lower-margin products. For both periods, declines in Asia Pacific were primarily due to inventory markdowns and higher sales of closeout products in Japan and Korea. The gross margin decreased slightly in Europe for the three-month period due to a charge taken for a termination indemnity employee benefit plan; the gross margin increased for the six-month period primarily due to lower negotiated sourcing costs.

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Our 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.

Selling, general and administrative expenses

The following table shows our selling, general and administrative expenses (“SG&A”) for the respective periods:

	Three Months Ended						Six Months Ended
				May 27,	May 28,					May 27,	May 28,
			%	2007	2006				%	2007	2006
	May 27,	May 28,	Increase	% of Net	% of Net		May 27,	May 28,	Increase	% of Net	% of Net
	2007	2006	(Decrease)	Revenues	Revenues		2007	2006	(Decrease)	Revenues	Revenues
	(Dollars in millions)
Selling	$ 87.5	$ 74.3	17.9	%	8.6 %	7.7 %	$ 173.0	$ 143.7	20.4	%	8.4 %	7.5 %
Advertising and promotion	65.0	65.0	(0.0	)%	6.4 %	6.8 %	110.5	113.2	(2.4	)%	5.4 %	5.9 %
Administration	75.1	73.2	2.7	%	7.4 %	7.6 %	124.2	138.1	(10.0	)%	6.0 %	7.2 %
Other	117.1	111.1	5.3	%	11.5 %	11.6 %	232.6	219.9	5.8	%	11.3 %	11.4 %
Total SG&A	$ 344.7	$ 323.6	6.5	%	33.9 %	33.7 %	$ 640.3	$ 614.9	4.1	%	31.2 %	31.9 %

Total SG&A expenses increased $21.1 million and $25.4 million for the three- and six-month periods, respectively.

Selling. Selling expense increased for both periods across all business segments, primarily reflecting higher selling costs associated with additional company-operated stores.

Advertising and promotion. Advertising and promotion expenses were flat for the three-month period and decreased slightly for the six-month period, primarily due to a reduction in spending in Japan in line with its net sales decline.

Administration. Administration expenses include corporate expenses and other administrative charges. These expenses increased slightly for the three-month period primarily due to higher staff costs associated with the planned SAP implementation in the United States. The decrease in administration expense for the six-month period related primarily to a $25 million postretirement benefit plan curtailment gain recorded in the first quarter of 2007 associated with the closure of our Little Rock, Arkansas, distribution facility, partially offset by net corporate expenses and higher staff costs as explained above.

Other. Other SG&A costs include distribution, information resources, and marketing costs , gain or loss on sale of assets and other operating income. These costs increased in both periods primarily due to higher distribution costs and marketing expenses in line with the net revenue growth in the period.

Restructuring charges

Restructuring charges, net, decreased to $0.1 million for the three-month period in 2007 from $7.2 million for the same period in 2006. Restructuring charges, net, increased to $12.9 million for the six-month period in 2007 from $10.4 million for the same period in 2006. The changes for both periods in 2007 primarily consisted of asset impairment and severance charges recorded in association with the planned closure of our distribution center in Germany. The prior year amounts primarily consisted of severance charges associated with the closure of our Little Rock distribution center, headcount reductions in Europe and additional lease costs associated with exited facilities in the United States.

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Operating income

The following table shows operating income by reporting segment and the significant components of corporate expense for the respective periods:

	Three Months Ended								Six Months Ended
				May 27,		May 28,							May 27,		May 28,
			%	2007		2006					%		2007		2006
	May 27,	May 28,	Increase	% of Net		% of Net			May 27,	May 28,	Increase		% of Net		% of Net
	2007	2006	(Decrease)	Revenues		Revenues			2007	2006	(Decrease)		Revenues		Revenues
	(Dollars in millions)
Operating income:
North America	$ 69.0	$ 72.6	(4.9	)%	11.9	%	13.1	%	$ 159.8	$	162.6	(1.7	)%	13.7	%	14.8	%
Europe	38.1	35.5	7.5	%	17.3	%	18.1	%	117.7		99.8	17.9	%	24.2	%	22.8	%
Asia Pacific	42.4	45.6	(7.0	)%	19.6	%	21.7	%	78.8		84.6	(6.9	)%	19.5	%	21.6	%
Total regional operating income	149.5	153.7	(2.7	)%	14.7	%*	16.0	%*	356.3		347.0	2.7	%	17.3	%*	18.0	%*
Corporate:
Restructuring charges, net	0.1	7.2	(99.1	)%	0.0	%*	0.8	%*	12.9		10.4	23.3	%	0.6	%*	0.5	%*
Postretirement benefit plan
curtailment gain	—	—	—		0.0	%*	0.0	%*	(25.3	)	—	—		(1.2	)%*	0.0	%*
Other corporate staff costs and
expenses	31.1	31.6	(1.3	)%	3.1	%*	3.3	%*	61.2		51.1	19.9	%	3.0	%*	2.6	%*
Total corporate	31.2	38.8	(19.6	)%	3.1	%*	4.0	%*	48.8		61.5	(20.7	)%	2.4	%*	3.2	%*
Total operating income	$ 118.3	$ 114.9	3.0	%	11.6	%*	12.0	%*	$ 307.5	$	285.5	7.7	%	15.0	%*	14.8	%*
Operating margin	11.6 %	12.0 %							15.0	%	14.8 %

callerid=999 iwidth=455 length=60

• Percentage of consolidated net revenues

Regional operating income. The following describes changes in operating income by segment:

| • | North America. Operating income and margin
decreased for both periods primarily due to the region’s
lower gross margin which resulted primarily from higher sales
allowances and discounts to clear seasonal inventories.
SG&A expenses for both periods were in line with sales
performance, and also reflected our investment in retail
expansion and SAP implementation. |
| --- | --- |
| • | Europe. Operating income increased for the
three-month period due to the favorable impact of foreign
currency translation; operating margin decreased for the
three-month period due to the lower gross margin for the period.
For the six-month period operating income increased primarily
due to the favorable impact of foreign currency translation and
the higher gross margin for the period. |
| • | Asia Pacific. Operating income and operating
margin decreased for both periods. Operating income decreased
for both periods primarily due to declines in net sales and
gross margins in Japan and Korea. For the remainder of the
region, operating income increased primarily due to an increase
in net sales, partially offset by continued investment in retail
expansion. |

Corporate. Corporate expense is comprised of restructuring charges, net, and other corporate expenses, including corporate staff costs.

The postretirement benefit plan curtailment gain in the six-month period in 2007 relates to the closure of our Little Rock distribution facility. For more information, see notes 6 and 7 to our unaudited consolidated financial statements included in this report.

Other corporate staff costs and expenses were flat for the three-month period and increased for the six-month period in 2007 as compared to 2006. The increase in the six-month period was primarily due to lower workers’ compensation reversals ($3.6 million in 2007 as compared to $5.6 million in 2006) and lower amortization of postretirement benefit plan prior service benefit ($23.9 million in 2007 as compared to $28.8 million in 2006) related to the closure of our Little Rock distribution facility. Other corporate expenses also increased

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due to higher stock-based compensation expense and severance and transition expenses related to changes in senior management in the first quarter of 2007.

Interest expense

Interest expense decreased to $55.8 million and $113.5 million for the three- and six-month periods in 2007, respectively, from $61.8 million and $128.1 million for the same periods in 2006. Lower debt levels and lower average borrowing rates in the 2007 periods, which resulted primarily from our refinancing and debt reduction activities in 2007 and 2006, caused the decrease.

The weighted average interest rates on average borrowings outstanding for the three- and six-month periods in 2007, including the amortization of capitalized bank fees and underwriting fees, were 9.73% and 9.81%, respectively, as compared to 10.18% and 10.44%, respectively, for the same periods in 2006.

Loss on Early Extinguishment of Debt

For the three- and six-month periods in 2007, we recorded a loss of $14.3 million on early extinguishment of debt as a result of our redemption of our floating rate senior notes during the second quarter of 2007. The 2007 loss was comprised of a prepayment premium and other fees of approximately $7.7 million and the write-off of approximately $6.6 million of unamortized debt issuance costs related to the redemption of the floating rate senior notes. During the three- and six-month periods in 2006, we recorded a loss of $33.0 million on early extinguishment of debt in conjunction with our prepayment in March 2006 of the remaining balance of our prior senior secured term loan of approximately $488.8 million, and the amendment in May 2006 of our revolving credit facility. The 2006 loss was comprised of a prepayment premium and other fees and expenses of approximately $16.9 million and the write-off of approximately $16.1 million of unamortized capitalized costs.

Other income, net

Other income, net, increased to $4.3 million and $17.9 million for the three- and six-month periods in 2007, respectively, from $3.4 million and $4.6 million for the same periods in 2006. The increases were primarily attributable to the net favorable impact of foreign currency fluctuation.

Income tax expense

Income tax expense was $6.8 million and $65.2 million for the three- and six-month periods in 2007, respectively, compared to a benefit of $16.7 million and expense of $35.0 million for the same periods in 2006. The increase in tax expense in 2007 as compared to prior year was primarily driven by a discrete, non-cash benefit recognized in the second quarter of 2006 arising from a change in the ownership structure of certain of our foreign subsidiaries and an increase in our income before taxes offset by a discrete, non-cash tax benefit of approximately $6.3 million recognized in the second quarter of 2007, which resulted from our election to change the filing methodology of our California state income tax return. The change in ownership structure of certain of our foreign subsidiaries in 2006 reduced by approximately $31.5 million the overall residual U.S. and foreign tax we expect to be imposed upon future repatriations of our unremitted foreign earnings.

The effective income tax rate for the six-month period in 2007 of 33.0% is lower than the federal statutory rate primarily due to a discrete, non-cash tax benefit recognized in the second quarter of 2007 as discussed above. The effective income tax rate for the six-month period in 2006 of 27.1% is lower than the federal statutory rate primarily due to the change in our foreign subsidiary ownership structure discussed above.

Net income

Net income for the three- and six-month periods in 2007 was $45.7 million and $132.4 million, compared to net income of $40.2 million and $94.0 million for the respective periods in 2006. The increases resulted from a lower loss on early extinguishment of debt and lower interest expense, and, with respect to the six-month period, higher operating income and higher gains related to foreign currency. For both periods, the increases were partially

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offset by higher taxes as compared to prior year primarily due to the tax benefit recognized in the second quarter of 2006 discussed above.

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 flow 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.

The maximum availability under our senior secured revolving credit facility is $550.0 million. As of May 27, 2007, based on collateral levels as defined by the agreement, reduced by amounts reserved in accordance with this facility as described below, our total availability was approximately $333.3 million. We had no outstanding borrowings under this facility, but had utilization of other credit-related instruments such as documentary and standby letters of credit. Unused availability was approximately $245.2 million.

Under our senior secured revolving credit facility, we are required to maintain certain reserves against availability (or deposit cash or investment securities in secured accounts with the administrative agent), including a $75.0 million reserve at all times. These reserves reduce the availability under our credit facility.

As of May 27, 2007, we had cash and cash equivalents totaling $307.2 million, resulting in a net liquidity position (unused availability and cash and cash equivalents) of $552.4 million.

Cash Uses

Our principal cash requirements include working capital, capital expenditures, payments of interest on our debt, payments of taxes, contributions to our pension plans and payments for postretirement health benefit plans. In addition, we regularly explore debt reduction and refinancing alternatives, including tender offers, redemptions, repurchases or otherwise, and we regularly evaluate our ability to pay dividends or repurchase stock, all consistent with the terms of our debt agreements.

The following table presents selected cash uses during the six months ended May 27, 2007, and the related estimated cash requirements for the remainder of 2007 and the first six months of 2008:

	Paid in Six	Estimated for — Remaining Six		Estimated for	Estimated for
Selected Cash	Months Ended	Months of	Total Estimated	Six Months Ending	Twelve Months Ending
Requirements	May 27, 2007	Fiscal 2007	for Fiscal 2007	May 25, 2008	May 25, 2008
	(Dollars in millions)
Interest (1)	$ 108	$ 100	$ 208	$ 100	$ 200
Federal, foreign and state taxes
(net of
refunds) (2)	19	41	60	27	68
Postretirement health benefit plans	12	11	23	12	23
Capital expenditures	30	92	122	41	133
Pension plans	5	9	14	5	14
Total selected cash requirements	$ 174	$ 253	$ 427	$ 185	$ 438

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callerid=999 iwidth=455 length=60

| (1) | Estimates for interest payments in
2007 have decreased as compared to the estimate contained in our
2006 Annual Report on Form 10-K, reflecting the refinancing in April 2007 of our floating rate
senior notes due 2012. |
| --- | --- |
| (2) | Estimates for tax payments in 2007
have decreased as compared to the estimate contained in our 2006
Annual Report on Form 10-K, reflecting a reduction in expected tax payments in foreign
jurisdictions. |

Information in the preceding table reflects our estimates of future cash payments. These estimates 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 reflected in these tables. The inclusion of these estimates should not be regarded as a representation by us that the estimates will prove to be correct.

Cash Flows

As of May 27, 2007, we had total cash and cash equivalents of approximately $307.2 million, a $27.7 million increase from the $279.5 million balance as of November 26, 2006. Working capital as of May 27, 2007, was $818.1 million compared to $806.0 million as of November 26, 2006.

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

	Six Months Ended — May 27,	May 28,
	2007	2006
	(Dollars in millions)
Cash provided by operating
activities	$ 126.4	$	200.6
Cash used for investing activities	(35.2	)	(26.9	)
Cash used for financing activities	(64.5	)	(29.1	)
Cash and cash equivalents	307.2		387.0

Cash flows from operating activities

Cash provided by operating activities was $126.4 million for the six-month period in 2007, as compared to cash provided by operating activities of $200.6 million for the same period in 2006. This $74.2 million decrease in the amount of cash provided by operating activities was primarily driven by:

| • | a decrease in the amount of trade receivables collected during
the period, primarily due to the earlier timing of sales
recorded in the fourth quarter of 2006 and later timing of sales
in the second quarter of 2007, as compared to the corresponding
periods in prior year; and |
| --- | --- |
| • | higher payments for annual and long-term incentive compensation
and executive transitions. |

These factors were partially offset by lower cash paid for income taxes.

Cash flows from investing activities

Cash used for investing activities was $35.2 million for the six-month period in 2007 compared to $26.9 million for the same period in 2006. Cash used in both periods primarily related to investments made in our company-operated retail stores and information technology systems associated with the SAP installation in our Asia Pacific region and, with respect to the 2007 period, the United States.

Cash flows from financing activities

Cash used for financing activities was $64.5 million for the six-month period in 2007 compared to $29.1 million for the same period in 2006. Cash used for financing activities in 2007 primarily reflects our redemption in April 2007 of all of our floating rate notes through borrowings under a new senior unsecured term loan and use of cash on hand. Cash used for financing activities in 2006 primarily reflects repayment of our prior term loan in March 2006 through issuance of our 2016 notes and additional 2013 Euro notes.

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Indebtedness

As of May 27, 2007, we had fixed rate debt of approximately $1.9 billion (85% of total debt) and variable rate debt of approximately $0.3 billion (15% of total debt). The borrower of substantially all of our debt is Levi Strauss & Co., the parent and U.S. operating company. Our required aggregate short-term and long-term debt principal payments are $10.5 million in 2007 and the remaining $2.1 billion in years after 2011.

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 covenants related to our long-term debt.

New Term Loan; Redemption of Floating Rate Notes. On March 27, 2007, we entered into a senior unsecured term loan agreement. The term loan consists of a single borrowing of $325.0 million, net of a 0.75% discount to the lenders. The term loan matures on April 4, 2014 and bears interest at 2.25% over LIBOR or 1.25% over the base rate. On April 5, 2007, we used the borrowings under the term loan, plus cash on hand of approximately $66.4 million, to redeem all of our outstanding $380.0 million floating rate senior notes due 2012 and to pay related redemption premiums, transaction fees and expenses of approximately $7.7 million. We also wrote off approximately $6.6 million of unamortized debt issuance costs related to the redemption of the floating rate senior notes. As a result, we recorded a $14.3 million loss on early extinguishment of debt in the second quarter of 2007.

Off-Balance Sheet Arrangements, Guarantees and Other Contingent Obligations

Off-Balance Sheet Arrangements. We have no material special-purpose entities or 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 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 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. There have been no significant changes to our critical accounting policies as disclosed in our 2006 Annual Report on Form 10-K.

Recently Issued Accounting Standards

The following recently issued accounting standards have been grouped by their required effective dates as they apply to us.

Fourth Quarter of 2007

• In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (“SFAS 158”). SFAS 158 requires employers to (a) recognize in their statement of financial position the funded status of a benefit plan measured as the difference between the fair value of plan assets and the benefit obligation, (b) recognize net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost pursuant to SFAS No. 87,

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“Employer’s Accounting for Pensions” or SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” (c) measure defined benefit plan assets and obligations as of the date of the employer’s statement of financial position and (d) disclose additional information in the notes to the financial statements about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset or obligation. The requirements of SFAS 158 are to be applied prospectively upon adoption, which is fiscal year 2007 for us. We have pension and other postretirement plans which will be affected by the adoption of SFAS 158. Based on third-party actuarial estimates of plan assets and obligations as of November 26, 2006, we estimate that had we been required to adopt the provisions of SFAS 158 at that date, the adoption would have resulted in a net decrease to total liabilities of approximately $172 million, with corresponding decreases to stockholder’s deficit of $106 million and to deferred tax assets of $66 million. The actual impact of the adoption of SFAS 158 will depend on the valuation of plan assets and obligations at November 25, 2007.

First Quarter of 2008

| • | In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), which is an interpretation of
SFAS No. 109, “Accounting for Income
Taxes” (“SFAS 109”). FIN 48
clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in
accordance with SFAS 109 and prescribes a recognition
threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected
to be taken in a tax return. FIN 48 also provides guidance
on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition.
FIN 48 is effective for fiscal years beginning after
December 15, 2006. We are currently in the process of
assessing the impact the adoption of FIN 48 will have on
our financial statements. |
| --- | --- |
| • | In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair
value, establishes a framework for measuring fair value and
expands disclosure of fair value measurements. SFAS 157
applies under other accounting pronouncements that require or
permit fair value measurements and, accordingly, does not
require any new fair value measurements. SFAS 157 is effective
for financial statements issued for fiscal years beginning after
November 15, 2007. We are currently in the process of
assessing the impact the adoption of SFAS 157 will have on
our financial statements. |
| • | In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities” (“SFAS 159”).
SFAS 159 permits entities to choose to measure certain
financial assets and liabilities and other eligible items at
fair value, which are not otherwise currently required to be
measured at fair value. Under SFAS 159, the decision to
measure items at fair value is made at specified election dates
on an irrevocable instrument-by-instrument basis. Entities electing the fair value option would be required
to recognize changes in fair value in earnings and to expense
upfront cost and fees associated with the item for which the
fair value option is elected. Entities electing the fair value
option are required to distinguish on the face of the statement
of financial position, the fair value of assets and liabilities
for which the fair value option has been elected and similar
assets and liabilities measured using another measurement
attribute. If elected, SFAS 159 is effective as of the
beginning of the first fiscal year that begins after
November 15, 2007, with earlier adoption permitted provided
that the entity also early adopts all of the requirements of
SFAS 159. We are currently evaluating whether to elect the
option provided for in this standard. |

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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, 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, including, without limitation:

| • | changing U.S. and international retail environments and
fashion trends; |
| --- | --- |
| • | changes in the level of consumer spending for apparel in view of
general economic conditions including interest rates, the
housing market and energy prices; |
| • | our ability to sustain improvements in our European business and
to address challenges in our Japanese operations and our Levi
Strauss
Signature ® brand in the United States; |
| • | our customers’ continuing focus on private label and
exclusive products in all channels of distribution, including
the mass channel; |
| • | our ability to increase the number of dedicated stores for our
products, including through opening and profitably operating
company-operated stores; |
| • | our ability to effectively shift to a more premium market
position worldwide, grow the
Dockers ® brand outside the United States, and grow our tops business; |
| • | our ability to implement SAP throughout our business without
disruption; |
| • | our effectiveness in increasing efficiencies in our logistics
operations; |
| • | our dependence on key distribution channels, customers and
suppliers; |
| • | mergers and acquisitions involving our top customers and their
consequences; |
| • | price, innovation and other competitive pressures in the apparel
industry and on our key customers; |
| • | our ability to increase our appeal to under-penetrated consumer
segments; |
| • | our ability to utilize our tax credits and net operating loss
carryforwards; |
| • | ongoing litigation matters and disputes and regulatory
developments; |
| • | changes in trade and tax laws; and |
| • | political or financial instability in countries where our
products are manufactured. |

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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Derivative Financial Instruments

We are exposed to market risk primarily related to foreign currencies and interest rates. We actively manage foreign currency risks with the objective of mitigating the potential impact of currency fluctuations while maximizing the U.S. dollar value of cash flows. We hold derivative positions only in currencies to which we have exposure. Although we currently do not hold any interest rate derivatives, we seek to mitigate interest rate risk by optimizing our capital structure using a combination of fixed and variable rate debt across various maturities.

We are exposed to credit loss in the event of nonperformance by the counterparties to the foreign exchange contracts. However, we believe these counterparties are creditworthy financial institutions and we do not anticipate nonperformance. 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, earnings repatriations, net investment in foreign operations and funding activities. We actively manage forecasted exposures.

We operate 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 use a variety of financial instruments including forward exchange and option contracts to hedge certain anticipated transactions as well as certain firm commitments, including third-party and intercompany transactions. We manage the currency risk as of the inception of the exposure. We do not currently manage the timing mismatch between our forecasted exposures and the related financial instruments used to mitigate the currency risk.

Our foreign exchange risk management activities are governed by a foreign exchange risk management policy approved by our board of directors. Our foreign exchange committee, comprised of a group of our senior financial executives, reviews 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 an active 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, interest rate risk and related derivatives using different techniques including a review of market value, sensitivity analysis and a value-at-risk model. We use widely accepted valuation models that incorporate quoted market prices or dealer quotes to determine the estimated fair value of our foreign exchange derivative contracts.

We use derivative instruments to manage our exposure to foreign currencies. As of May 27, 2007, we had U.S. dollar spot and forward currency contracts to buy $369.7 million and to sell $256.4 million against various foreign currencies. We also had Euro forward currency contracts to buy 17.2 million Euros ($23.1 million equivalent) against the Norwegian and Swedish Krona. These contracts are at various exchange rates and expire at various dates through December 2007.

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ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedure

As of May 27, 2007, we updated our evaluation of the effectiveness of the design and operation of our disclosure controls and procedures for purposes of filing reports under the Securities and Exchange Act of 1934 (the “Exchange Act”). This controls evaluation was done under the supervision and with the participation of management, including our chief executive officer and our chief financial officer. Our chief executive officer and our chief financial officer have concluded that our disclosure controls and procedures (as defined in Rule 13(a)-15(e) and 15(d)-15(e) under the Exchange Act) are effective to provide reasonable assurance that information relating to us and our subsidiaries that we are required to disclose in the reports that we file or submit to the SEC is recorded, processed, summarized and reported with the time periods specified in the SEC’s rules and forms. Our disclosure controls and procedures are designed to ensure that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls

We maintain a system of internal control over financial reporting that is designed to provide reasonable assurance that our books and records accurately reflect our transactions and that our established policies and procedures are followed. There were no changes to our internal control over financial reporting during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

We are currently implementing an enterprise resource planning system on a staged basis in our businesses around the world. We began in Asia Pacific (by implementing the system in several affiliates in the region in 2006 and 2007) and will continue implementation in other affiliates and organizations in the coming years. We designed our rollout and transition plan to minimize the risk of disruption to our business and controls. We believe implementation of this system will change, simplify and strengthen our internal control over financial reporting.

As a result of the SEC’s deferral of the deadline for non-accelerated filers’ compliance with the internal control requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as a non-accelerated filer we are not yet subject to the disclosure requirements in our Annual Report on Form 10-K. We will be required to be compliant in 2008 (with respect to the management report) and 2009 (with respect to the independent auditor attestation report). We have planned for and expect to meet these requirements.

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PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Wrongful Termination Litigation. There have been no material developments in this litigation since we filed our 2006 Annual Report on Form 10-K. For more information about the litigation, see Note 7 to the consolidated financial statements contained in our 2006 Annual Report on Form 10-K.

Class Actions Securities Litigation. There have been no material developments in this litigation since we filed our 2006 Annual Report on Form 10-K. For more information about the litigation, see Note 7 to the consolidated financial statements contained in that Form 10-K.

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

Item 1A. RISK FACTORS

There have been no material changes in our risk factors from those disclosed in our 2006 Annual Report on Form 10-K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

| 31 | .1 | Certification of Chief Executive
Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002. Filed herewith. |
| --- | --- | --- |
| 31 | .2 | Certification of Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002. Filed herewith. |
| 32 | | Certification of Chief Executive
Officer and Chief Financial Officer pursuant to
Section 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. Filed
herewith. |

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

LEVI STRAUSS & CO.

(Registrant)

By: /s/ Heidi L. Manes

callerid=999 iwidth=455 length=0

Heidi L. Manes

Vice President and Controller

(Principal Accounting Officer)

Date: July 10, 2007

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EXHIBITS INDEX

| 31 | .1 | Certification of Chief Executive
Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002. Filed herewith. |
| --- | --- | --- |
| 31 | .2 | Certification of Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002. Filed herewith. |
| 32 | | Certification of Chief Executive
Officer and Chief Financial Officer pursuant to
Section 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. Filed
herewith. |

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