LEVI STRAUSS & CO — Interim / Quarterly Report 2008

Oct 2, 2008

10-Q 1 f43975e10vq.htm FORM 10-Q e10vq PAGEBREAK

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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Form 10-Q

(Mark One)
þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
	For the Quarterly Period Ended August 24, 2008
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)

Delaware (State or Other Jurisdiction of Incorporation or Organization) 94-0905160 (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 o No þ

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

Large accelerated filer o Accelerated filer o Non-accelerated filer þ (Do not check if a smaller reporting company) Smaller reporting company o

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 September 30, 2008

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LEVI STRAUSS & CO. AND SUBSIDIARIES

INDEX TO FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED AUGUST 24, 2008

	Number
PART I — FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements (unaudited):
	Consolidated Balance Sheets as of August 24, 2008, and November 25, 2007	3
	Consolidated Statements of Income for the Three and Nine Months Ended August 24, 2008, and August 26, 2007	4
	Consolidated Statements of Cash Flows for the Nine Months Ended August 24, 2008, and August 26, 2007	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition
and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4T.	Controls and Procedures	33
PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3.	Defaults Upon Senior Securities	35
Item 4.	Submission of Matters to a Vote of Security Holders	35
Item 5.	Other Information	35
Item 6.	Exhibits	35
SIGNATURE		36

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PART I — FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

LEVI STRAUSS & CO. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	(Unaudited) — August 24,	November 25,
	2008	2007
	(Dollars in thousands)
ASSETS
Current Assets:
Cash and cash equivalents	$ 124,752	$	155,914
Restricted cash	3,003		1,871
Trade receivables, net of allowance for doubtful accounts of
$19,585 and $14,805	548,308		607,035
Inventories:
Raw materials	21,655		17,784
Work-in-process	15,309		14,815
Finished goods	576,149		483,265
Total inventories	613,113		515,864
Deferred tax assets, net	138,508		133,180
Other current assets	119,467		75,647
Total current assets	1,547,151		1,489,511
Property, plant and equipment, net of accumulated depreciation
of $632,735 and $605,859	434,853		447,340
Goodwill	205,813		206,486
Other intangible assets, net	42,774		42,775
Non-current deferred tax assets, net	550,112		511,128
Other assets	160,681		153,426
Total assets	$ 2,941,384	$	2,850,666
LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS’
DEFICIT
Current Liabilities:
Short-term borrowings	$ 23,589	$	10,339
Current maturities of long-term debt	70,875		70,875
Current maturities of capital leases	1,677		2,701
Accounts payable	254,193		243,630
Restructuring liabilities	5,755		8,783
Other accrued liabilities	259,307		248,159
Accrued salaries, wages and employee benefits	188,334		218,325
Accrued interest payable	34,509		30,023
Accrued income taxes	61,182		9,420
Total current liabilities	899,421		842,255
Long-term debt	1,802,626		1,879,192
Long-term capital leases	7,945		5,476
Postretirement medical benefits	146,024		157,447
Pension liability	148,588		147,417
Long-term employee related benefits	100,460		113,710
Long-term income tax liabilities	57,020		35,122
Other long-term liabilities	68,481		48,123
Minority interest	14,654		15,833
Total liabilities	3,245,219		3,244,575
Commitments and contingencies (Note 6)
Temporary equity	1,492		4,120
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	50,185		92,650
Accumulated deficit	(337,344	)	(499,093	)
Accumulated other comprehensive income (loss)	(18,541	)	8,041
Total stockholders’ deficit	(305,327	)	(398,029	)
Total liabilities, temporary equity and stockholders’
deficit	$ 2,941,384	$	2,850,666

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 — August 24,	August 26,		August 24,		August 26,
	2008	2007		2008		2007
		(Dollars in thousands) (Unaudited)
Net sales	$ 1,088,384	$	1,031,702	$	3,064,394	$	3,045,324
Licensing revenue	22,409		19,466		65,604		59,609
Net revenues	1,110,793		1,051,168		3,129,998		3,104,933
Cost of goods sold	578,294		564,957		1,614,901		1,657,980
Gross profit	532,499		486,211		1,515,097		1,446,953
Selling, general and administrative expenses	385,262		343,389		1,127,177		983,743
Restructuring charges, net	3,344		(579	)	5,722		12,302
Operating income	143,893		143,401		382,198		450,908
Interest expense	37,305		53,142		119,055		166,644
Loss (gain) on early extinguishment of debt	(101	)	35		1,417		14,364
Other (income) expense, net	(14,216	)	172		(10,017	)	(17,722	)
Income before income taxes	120,905		90,052		271,743		287,622
Income tax expense	51,740		29,158		104,770		94,378
Net income	$ 69,165	$	60,894	$	166,973	$	193,244

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

	Nine Months Ended — August 24,	August 26,
	2008	2007
	(Dollars in thousands) (Unaudited)
Cash Flows from Operating Activities:
Net income	$ 166,973	$	193,244
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization	56,925		54,385
Asset impairments	1,840		7,365
Loss on disposal of property, plant and equipment	107		76
Unrealized foreign exchange gains	(9,715	)	(5,763	)
Realized loss on foreign currency contracts not designated for
hedge accounting	5,478		4,106
Employee benefit plans’ amortization from accumulated other
comprehensive income (loss)	(26,195	)	—
Employee benefit plans’ curtailment gain, net	(3,946	)	(39,375	)
Write-off of unamortized costs associated with early
extinguishment of debt	394		6,570
Amortization of deferred debt issuance costs	2,966		4,076
Stock-based compensation	5,219		3,130
Allowance for doubtful accounts	8,879		1,428
Change in operating assets and liabilities:
Trade receivables	55,163		18,448
Inventories	(102,451	)	(38,959	)
Other current assets	(40,635	)	14,018
Other non-current assets	(5,884	)	(14,691	)
Accounts payable and other accrued liabilities	40,712		(29,285	)
Income tax liabilities	54,505		60,743
Restructuring liabilities	(3,936	)	(6,023	)
Accrued salaries, wages and employee benefits	(36,838	)	(84,516	)
Long-term employee related benefits	(18,242	)	(21,622	)
Other long-term liabilities	721		(987	)
Other, net	(1,284	)	782
Net cash provided by operating activities	150,756		127,150
Cash Flows from Investing Activities:
Purchases of property, plant and equipment	(57,415	)	(53,834	)
Proceeds from sale of property, plant and equipment	907		1,035
Foreign currency contracts not designated for hedge accounting	(5,478	)	(4,106	)
Acquisition of retail stores	(649	)	(2,502	)
Net cash used for investing activities	(62,635	)	(59,407	)
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt	—		322,563
Repayments of long-term debt and capital leases	(77,002	)	(381,315	)
Short-term borrowings, net	10,784		(2,560	)
Debt issuance costs	(395	)	(1,219	)
Restricted cash	(1,172	)	(182	)
Dividends to minority interest shareholders of Levi Strauss
Japan K.K.	(1,114	)	(3,141	)
Dividends to stockholders	(49,953	)	—
Net cash used for financing activities	(118,852	)	(65,854	)
Effect of exchange rate changes on cash	(431	)	3,371
Net (decrease) increase in cash and cash equivalents	(31,162	)	5,260
Beginning cash and cash equivalents	155,914		279,501
Ending cash and cash equivalents	$ 124,752	$	284,761
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$ 110,110	$	171,965
Income taxes	45,575		36,325

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 AUGUST 24, 2008

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, casual and dress pants, tops, jackets and related accessories, for men, women and children under the Levi’s ® , Dockers ® and Signature by Levi Strauss & Co. tm brands. The Company markets its products in three geographic regions: Americas, 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 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 25, 2007, included in the Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission on February 12, 2008.

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 and nine months ended August 24, 2008, may not be indicative of the results to be expected for any other interim period or the year ending November 30, 2008.

The Company’s fiscal year consists of 52 or 53 weeks, ending on the last Sunday of November in each year. The 2008 fiscal year consists of 53 weeks ending on November 30, 2008. The 2007 fiscal year consisted of 52 weeks ending on November 25, 2007. Each quarter of both fiscal years 2008 and 2007 consists of 13 weeks, with the exception of the fourth quarter of 2008, which in the United States consists of 14 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 its 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.

Income Tax Assets and Liabilities

The Company is subject to income taxes in both the U.S. and numerous foreign jurisdictions. The Company computes its provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. Significant judgments are required in order to determine the realizability of these deferred tax assets. In assessing the need for a valuation

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FOR THE QUARTERLY PERIOD ENDED AUGUST 24, 2008

allowance, the Company’s management evaluates all significant available positive and negative evidence, including historical operating results, estimates of future taxable income and the existence of prudent and feasible tax planning strategies. Changes in the expectations regarding the realization of deferred tax assets could materially impact income tax expense in future periods.

The Company provides for income taxes with respect to temporary differences between the book and tax bases of foreign investments that are expected to reverse in the foreseeable future. Basis differences, consisting primarily of undistributed foreign earnings related to investments in certain foreign subsidiaries are considered to be permanently reinvested and therefore are not expected to reverse in the foreseeable future, as the Company plans to utilize these earnings to finance the expansion and operating requirements of these subsidiaries.

The Company continuously reviews issues raised in connection with all ongoing examinations and open tax years to evaluate the adequacy of its liabilities. Beginning in the first quarter of 2008, the Company evaluates uncertain tax positions under a two-step approach. The first step is to evaluate the uncertain tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon examination based on its technical merits. The second step, for those positions that meet the recognition criteria, is to measure the tax benefit as the largest amount that is more than fifty percent likely to be realized. The Company believes that its recorded tax liabilities are adequate to cover all open tax years based on its assessment. This assessment relies on estimates and assumptions and involves significant judgments about future events. To the extent that the Company’s view as to the outcome of these matters change, the Company will adjust income tax expense in the period in which such determination is made. The Company classifies interest and penalties related to income taxes as income tax expense.

Fair Value of Financial Instruments

The fair values of the Company’s financial instruments reflect the amounts that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The fair value estimates presented in this report are based on information available to the Company as of August 24, 2008, and November 25, 2007.

The carrying values of cash and cash equivalents, trade receivables and short-term borrowings approximate fair value. The Company has estimated the fair value of its other financial instruments using the market and income approaches. For rabbi trust assets and foreign currency spot and forward contracts, which are carried at their fair values, the Company’s fair value estimate incorporates quoted market prices at the balance sheet date. For notes, loans and borrowings under the Company’s credit facilities, which are carried at historical cost and adjusted for amortization of premiums or discounts, foreign currency fluctuations and principal payments, the Company’s fair value estimate incorporates bid price quotes. For the interest rate swap contract, the Company’s fair value estimate incorporates discounted future cash flows using a forward curve mid-market pricing convention.

Recently Issued Accounting Standards

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

First Quarter of 2009

• In September 2006 the FASB issued SFAS 157, “Fair Value Measurements” and in February 2008, the FASB amended SFAS 157 by issuing FSP FAS 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13,” and FSP FAS 157-2, “Effective Date of FASB Statement No. 157” (collectively “SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. SFAS 157 applies

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FOR THE QUARTERLY PERIOD ENDED AUGUST 24, 2008

under other accounting pronouncements that require or permit fair value measurements, except those relating to lease classification, and accordingly does not require any new fair value measurements. SFAS 157 is effective for financial assets and financial liabilities in fiscal years beginning after November 15, 2007, and for nonfinancial assets and liabilities in fiscal years beginning after November 15, 2008. The Company adopted SFAS 157 for financial assets and liabilities in the first quarter of fiscal 2008 with no material impact to the consolidated financial statements. The Company does not anticipate the application of SFAS 157 for nonfinancial assets and nonfinancial liabilities will have a material impact on its consolidated financial statements.

• In March 2008 the FASB issued SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” (“SFAS 161”). SFAS 161 amends and expands the disclosure requirements of FASB Statement No. 133, requiring enhanced disclosures about the Company’s derivative and hedging activities. The Company is required to provide enhanced disclosures about (a) how and why it uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under FASB Statement No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect the Company’s financial position, results of operations, and cash flows. SFAS No. 161 is effective prospectively, with comparative disclosures of earlier periods encouraged upon initial adoption. The Company does not anticipate that the adoption of this statement will have a material impact on its consolidated financial statements.

First Quarter of 2010

| • | In December 2007 the FASB issued SFAS 141 (revised
2007) “Business Combinations ”
(“SFAS 141R”). SFAS 141R establishes
principles and requirements for how the acquirer of a business
recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree. SFAS 141R also
provides guidance for recognizing and measuring the goodwill
acquired in the business combination and determines what
information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the
business combination. The Company does not anticipate that the
adoption of this statement will have a material impact on its
consolidated financial statements. |
| --- | --- |
| • | In December 2007 the FASB issued SFAS 160, “Noncontrolling Interests in Consolidated Financial
Statements — an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 establishes
accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a
subsidiary is an ownership interest in the consolidated entity
that should be reported as equity in the consolidated financial
statements. SFAS 160 requires retroactive adoption of the
presentation and disclosure requirements for existing minority
interests. All other requirements of SFAS 160 shall be
applied prospectively. The Company does not anticipate that the
adoption of this statement will have a material impact on its
consolidated financial statements. |
| • | In December 2007 the FASB issued EITF 07-1, “Accounting for Collaborative Arrangements” (“EITF 07-1”). EITF 07-1 defines collaborative arrangements and requires that
transactions with third parties that do not participate in the
arrangement be reported in the appropriate income statement line
items pursuant to the guidance in EITF 99-19, “Reporting Revenue Gross as a Principal versus Net as an
Agent.” Income statement classification of payments
made between participants of a collaborative arrangement are to
be based on other applicable authoritative accounting
literature. If the payments are not within the scope or analogy
of other authoritative accounting literature, a reasonable,
rational and consistent accounting policy is to be elected. EITF 07-1 is to be applied retrospectively to all prior periods presented
for all collaborative arrangements existing as of the effective
date. The Company does not anticipate that the adoption of this
statement will have a material impact on its consolidated
financial statements. |

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FOR THE QUARTERLY PERIOD ENDED AUGUST 24, 2008

| • | In April 2008 the FASB issued FASB Staff Position No. FAS 142-3, “Determination of the Useful Life of Intangible
Assets” (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under FASB Statement No.
142, Goodwill and Other Intangible Asset. More
specifically, FSP FAS 142-3 removes the requirement under paragraph 11 of SFAS 142
to consider whether an intangible asset can be renewed without
substantial cost or material modifications to the existing terms
and conditions and instead, requires an entity to consider its
own historical experience in renewing similar arrangements. FSP FAS 142-3 also requires expanded disclosure related to the determination
of intangible asset useful lives. The Company does not
anticipate that the adoption of this statement will have a
material impact on its consolidated financial statements. |
| --- | --- |
| • | In June 2008 the FASB Issued EITF No. 08-3, “Accounting by Lessees for Nonrefundable Maintenance
Deposits” (“EITF 08-3”). EITF 08-3 requires that nonrefundable maintenance deposits paid by a
lessee under an arrangement accounted for as a lease be
accounted for as a deposit asset until the underlying
maintenance is performed. When the underlying maintenance is
performed, the deposit may be expensed or capitalized in
accordance with the lessee’s maintenance accounting policy.
Upon adoption entities must recognize the effect of the change
as a change in accounting principal. The Company does not
anticipate that the adoption of this statement will have a
material impact on its consolidated financial statements. |

NOTE 2: INCOME TAXES

Effective Income Tax Rate. The Company had income tax expense of $51.7 million and $104.8 million for the three- and nine-month periods ended August 24, 2008, respectively, compared to $29.2 million and $94.4 million for the same periods ended August 26, 2007. The increase in tax expense is primarily driven by an increase in the effective income tax rate, as discussed below.

The Company’s effective income tax rate was 42.8% and 38.6% for the three- and nine-month periods ended August 24, 2008, respectively, compared to 32.4% and 32.8% for same periods ended August 26, 2007. The increase in the effective income tax rate was primarily driven by a benefit recorded in 2007 related to a reduction in the residual U.S. tax expected to be imposed upon repatriation of foreign earnings, and a shift in the geographic mix of the Company’s 2008 earnings to the United States, where the Company is subject to a higher tax rate.

Uncertain Income Tax Positions. In June 2006, the FASB issued Interpretation 48, “Accounting for Uncertainty in Income Taxes, an interpretation of SFAS 109” (“FIN 48”). FIN 48 clarifies the accounting and reporting for income taxes where interpretation of the tax law on the Company’s tax positions may be uncertain. FIN 48 also prescribes a comprehensive model for the financial statement recognition, derecognition, measurement, presentation and disclosure of income tax uncertainties with respect to positions taken or expected to be taken in income tax returns. The Company adopted the provisions of FIN 48 on the first day of fiscal 2008 and recognized a cumulative-effect adjustment of $5.2 million, which increased the 2008 beginning balance of accumulated deficit. Also upon the adoption of FIN 48, the Company recognized a $28.3 million increase in non-current deferred tax assets, a $14.5 million increase in long-term income tax liabilities, and a $21.4 million increase in non-current deferred tax liabilities (included in “Other long-term liabilities”).

At the date of adoption, the Company’s total amount of unrecognized tax benefits was $178.4 million, of which $116.5 million would impact the Company’s effective tax rate, if recognized. As of August 24, 2008, the Company’s total amount of unrecognized tax benefits was $179.7 million, of which $116.4 million would impact the Company’s effective tax rate, if recognized. The Company believes that it is reasonably possible that unrecognized tax benefits could decrease by as much as $98.8 million within the next twelve months, due primarily to the potential resolution of a refund claim with the State of California. However, at this point it is not possible to estimate whether this decrease in unrecognized tax benefits will result in a significant reduction in income tax expense to the

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FOR THE QUARTERLY PERIOD ENDED AUGUST 24, 2008

Company. As of the date of adoption and August 24, 2008, accrued interest and penalties were $13.2 million and $15.9 million, respectively.

The Company’s income tax returns are subject to examination in the U.S. federal and state jurisdictions and numerous foreign jurisdictions. The following table summarizes the tax years that are either currently under audit or remain open and subject to examination by the tax authorities in the major jurisdictions in which the Company operates:

Jurisdiction
U.S. federal	2003-2007
California	1986-2007
Belgium	2005-2007
United Kingdom	2005-2007
Spain	2003-2007
Mexico	2002-2007
Canada	2003-2007
Hong Kong	2002-2007
Turkey	2002-2007
Japan	2002-2007

NOTE 3: GOODWILL AND OTHER INTANGIBLE ASSETS

The changes in the carrying amount of goodwill by business segment for the nine months ended August 24, 2008, were as follows:

	Americas	Europe	Pacific		Total
	(Dollars in thousands)
Balance, November 25, 2007	$ 199,905	$ 4,063	$	2,518	$	206,486
Foreign currency fluctuation	—	(392	)	(281	)	(673	)
Balance, August 24, 2008	$ 199,905	$ 3,671	$	2,237	$	205,813

The Company’s other intangible assets as of August 24, 2008, and November 25, 2007, are primarily comprised of trademarks and are not subject to amortization.

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FOR THE QUARTERLY PERIOD ENDED AUGUST 24, 2008

NOTE 4: DEBT

	August 24, — 2008	2007
	(Dollars in thousands)
Long-term debt
Secured:
Senior revolving credit facility	$ 196,844	$	250,000
Notes payable, at various rates	131		131
Total secured	196,975		250,131
Unsecured:
12.25% senior notes due 2012	—		18,702
8.625% Euro senior notes due 2013	374,141		373,808
Senior term loan due 2014	322,949		322,737
9.75% senior notes due 2015	446,210		450,000
8.875% senior notes due 2016	350,000		350,000
4.25% Yen-denominated Eurobonds due 2016	183,226		184,689
Total unsecured	1,676,526		1,699,936
Less: current maturities	(70,875	)	(70,875	)
Total long-term debt	$ 1,802,626	$	1,879,192
Short-term debt
Short-term borrowings	$ 23,589	$	10,339
Current maturities of long-term debt	70,875		70,875
Total short-term debt	$ 94,464	$	81,214
Total long-term and short-term debt	$ 1,897,090	$	1,960,406

Redemption of Remaining 12.25% Senior Notes due 2012

On March 25, 2008, the Company redeemed its remaining $18.8 million outstanding 12.25% senior notes due 2012 for a total cash consideration of $20.6 million, consisting of accrued and unpaid interest, and other fees and expenses. The total cash consideration was paid using cash on hand.

Loss on Early Extinguishment of Debt

For the nine months ended August 24, 2008, primarily as a result of the above referenced redemption of its remaining 12.25% senior notes due 2012, the Company recorded a loss of $1.4 million on early extinguishment of debt, comprised of fees of approximately $1.2 million and the write-off of approximately $0.4 million of unamortized debt issuance costs and any applicable discount or premiums, offset by a gain of approximately $0.2 million related to the repurchase of $3.8 million of 9.75% senior notes due 2015 on the open market during the quarter. For the nine months ended August 26, 2007, as a result of the Company’s redemption of its floating rate senior notes due 2012 during the second quarter of 2007, the Company recorded a loss of $14.4 million on early extinguishment of debt, comprised of a prepayment premium and other fees of approximately $7.8 million and the write-off of approximately $6.6 million of unamortized debt issuance costs.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FOR THE QUARTERLY PERIOD ENDED AUGUST 24, 2008

Short-term Credit Lines and Standby Letters of Credit

As of August 24, 2008, the Company’s total availability of $390.6 million under its senior secured revolving credit facility was reduced by $88.3 million of letters of credit and other credit usage allocated under the facility, yielding a net availability of $302.3 million. Included in the $88.3 million of letters of credit on August 24, 2008, were $10.9 million of trade letters of credit and bankers’ acceptances, $14.2 million of other credit usage and $63.2 million of stand-by letters of credit with various international banks, of which $36.0 million serve as guarantees by the creditor banks to cover U.S. workers compensation claims and customs bonds. The Company pays fees on the standby letters of credit, 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 nine months ended August 24, 2008 was 7.90% and 8.03%, respectively, compared to 9.58% and 9.74% in the same periods in 2007.

NOTE 5: FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying value — including accrued interest as applicable — and estimated fair value of the Company’s financial instruments for the periods presented are as follows:

	August 24, 2008			November 25, 2007
		Estimated Fair Value
		Measurements Using
			Significant
		Quoted Prices	Other
		in Active	Observable
	Carrying	Markets	Inputs	Carrying	Estimated
	Value	(Level 1)	(Level 2)	Value	Fair Value
	(Dollars in thousands)
Financial Assets
Cash and cash equivalents	$ 124,776	$ 124,776	$ —	$ 156,009	$ 156,009
Rabbi trust assets	17,454	17,454	—	14,588	14,588
Interest rate swap	236	—	236	—	—
Spot and forward currency contracts	7,675	7,675	—	1,027	1,027
Total financial assets	$ 150,141	$ 149,905	$ 236	$ 171,624	$ 171,624
Financial Liabilities
Senior revolving credit facility	$ 197,494	$ —	$ 191,589	$ 251,474	$ 248,974
U.S. dollar notes	813,528	726,994	—	840,445	827,086
Euro notes	387,022	309,388	—	378,705	361,384
Senior term loan	323,545	262,185	—	323,771	297,596
Yen-denominated eurobond notes	185,823	—	132,687	185,258	153,122
Short-term and other borrowings	24,001	24,001	—	10,776	10,776
Interest rate swap	214	—	214	—	—
Spot and forward currency contracts	—	—	—	7,280	7,280
Total financial liabilities	$ 1,931,627	$ 1,322,568	$ 324,490	$ 1,997,709	$ 1,906,218

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FOR THE QUARTERLY PERIOD ENDED AUGUST 24, 2008

NOTE 6: COMMITMENTS AND CONTINGENCIES

Foreign Exchange Contracts

The Company uses derivative instruments to manage its exposure to foreign currencies. As of August 24, 2008, the Company had U.S. dollar spot and forward currency contracts to buy $491.0 million and to sell $164.0 million against various foreign currencies. These contracts are at various exchange rates and expire at various dates through August 2009.

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

Other Contingencies

Wrongful Termination Litigation. On April 11, 2008, the trial date for the plaintiff’s Sarbanes-Oxley Act claim in this matter, which had been set for May 27, 2008, was vacated by the court in order to accommodate plaintiff’s request to seek new counsel. The trial has now been set for January 12, 2009. There have been no other material developments in this litigation since the Company filed its 2007 Annual Report on Form 10-K. For more information about the litigation, see Note 7 to the consolidated financial statements contained in such Form 10-K.

Class Action Securities Litigation. The parties finalized their settlement agreement pertaining to In re Levi Strauss & Co., Securities Litigation , Case No. C-03-05605 RMW (class action) and the court granted preliminary approval of the settlement of this matter on July 21, 2008. A hearing for final approval of the settlement has been scheduled for October 17, 2008. The related wrongful termination claim identified above is unaffected by this settlement. There have been no other material developments in this litigation since the Company filed its 2007 Annual Report on Form 10-K. 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 of these pending legal proceedings that will have a material impact on its financial condition or results of operations or cash flows.

NOTE 7: RESTRUCTURING LIABILITIES

The following describes the reorganization initiatives, including facility closures and organizational changes, associated with the Company’s restructuring liabilities as of August 24, 2008. In the table below, “Severance and employee benefits” relates to items such as severance packages, out-placement services and career counseling for employees affected by the closures and other reorganization initiatives. “Other restructuring costs” primarily relates to lease loss liability and facility closure costs. “Asset impairment” relates to the write-down of assets to their estimated fair value. “Charges” represents 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” includes revisions of estimates related to severance, employee benefits and other restructuring costs.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FOR THE QUARTERLY PERIOD ENDED AUGUST 24, 2008

For the three and nine months ended August 24, 2008, the Company recognized restructuring charges, net, of $3.3 million and $5.7 million, respectively. The following table summarizes the restructuring activity for the nine months ended August 24, 2008, and the related restructuring liabilities balance as of November 25, 2007, and August 24, 2008:

	2008 Restructuring Activities
	Liabilities						Liabilities	Cumulative
	November 25,						August 24,	Charges
	2007	Charges	Utilization		Adjustments		2008	To Date
	(Dollars in thousands)
2008 reorganization
initiatives: (1)
Severance and employee benefits	$ —	$ 3,877	$ (821	)	$ —		$ 3,056	$ 3,877
Other restructuring costs	—	426	(100	)	(136	)	190	290
Prior reorganization
initiatives: (2)
Severance and employee benefits	5,893	436	(4,149	)	(1,189	)	991	115,687
Other restructuring costs	7,512	525	(2,748	)	(57	)	5,232	36,905
Asset impairment	—	1,840	(1,840	)	—		—	10,910
Total	$ 13,405	$ 7,104	$ (9,658	)	$ (1,382	)	$ 9,469	$ 167,669
Current portion	$ 8,783						$ 5,755
Long-term portion	4,622						3,714
Total	$ 13,405						$ 9,469

callerid=999 iwidth=455 length=60

| (1) | In the first quarter of 2008, the
Company decided to close its manufacturing facility in the
Philippines and announced the decision on March 12, 2008.
This closure will result in the elimination of the jobs of
approximately 251 employees; 233 were eliminated as of
August 24, 2008. The Company expects to incur future
additional restructuring charges related to this initiative of
approximately $0.7 million, principally in the form of
additional termination benefits and facility-related costs. The
Company plans to eliminate the remaining jobs by the end of the
fourth quarter of 2008. |
| --- | --- |
| | In the second quarter of 2008, the
Company decided to close its distribution facility in Italy and
announced the decision on April 23, 2008. This closure will
result in the elimination of the jobs of approximately
15 employees through the fourth quarter of 2008. The
Company expects to incur future additional restructuring charges
related to this initiative of approximately $1.8 million,
principally in the form of additional termination benefits and
facility-related costs. |
| (2) | Prior reorganization initiatives
include organizational changes, distribution center closures and
plant closures in 2003-2007, primarily in Europe and the Americas. Current period charges
include an additional impairment charge of $1.8 million
related to the Company’s closure and intent to sell its
distribution center in Heusenstamm, Germany, that commenced in
2007, reflecting the write-down to revised fair value of the
distribution center. Of the $6.2 million restructuring
liability at August 24, 2008, $5.2 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 related to these prior reorganization initiatives of
approximately $0.7 million and plans to eliminate the jobs
of the remaining employees by the end of the fourth quarter of
2008 related to these actions. |

For the three and nine months ended August 26, 2007, the Company recognized restructuring charges, net, of $(0.6) million and $12.3 million, respectively. The following table summarizes the restructuring activity for the nine months ended August 26, 2007, and the related restructuring liabilities balance as of November 26, 2006, and August 26, 2007:

	2007 Restructuring Activities
	Liabilities						Liabilities
	November 26,						August 26,
	2006	Charges	Utilization		Adjustments		2007
	(Dollars in thousands)
2007 and prior reorganization initiatives	$ 20,747	$ 14,272	$ (18,061	)	$ (1,970	)	$ 14,988

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FOR THE QUARTERLY PERIOD ENDED AUGUST 24, 2008

Restructuring charges for the nine months ended August 26, 2007, relate primarily to severance costs and a $7.0 million impairment charge in association with the Company’s closure and intent to sell its distribution center in Heusenstamm, Germany.

NOTE 8: EMPLOYEE BENEFIT PLANS

The following table summarizes the components of net periodic benefit cost (income) and the changes recognized in accumulated other comprehensive income (loss) for the Company’s defined benefit pension plans and postretirement benefit plans:

	Pension Benefits
	Three Months Ended			Three Months Ended
	August 24,	August 26,		August 24,			August 26,
	2008	2007		2008			2007
	(Dollars in thousands)
Net periodic benefit cost (income):
Service cost	$ 1,619	$	1,874	$	144		$ 178
Interest cost	15,223		14,633		2,646		2,709
Expected return on plan assets	(15,461	)	(15,089	)	—		—
Amortization of prior service cost (benefit)	210		208		(10,157	)	(11,432	)
Amortization of transition asset	60		123		—		—
Amortization of actuarial loss	183		1,540		972		1,169
Curtailment (gain)
loss (1)	(121	)	19		—		(14,073	)
Net settlement gain	—		(120	)	—		—
Net periodic benefit cost (income)	1,713	$	3,188		(6,395	)	$ (21,449	)
Changes in accumulated other comprehensive income (loss):
Amortization of prior service (cost) benefit	(210	)			10,157
Amortization of transition asset	(60	)			—
Amortization of actuarial loss	(183	)			(972	)
Curtailment gain	85				—
Total recognized in accumulated other comprehensive income (loss)	(368	)			9,185
Total recognized in net periodic benefit cost (income) and
accumulated other comprehensive income (loss)	$ 1,345			$	2,790

callerid=999 iwidth=455 length=60

(1) The postretirement benefit curtailment gain of $14.1 million for the three months ended August 26, 2007, was related to the impact of voluntary terminations in the period resulting from the Company’s 2007 labor agreement with the union that represented many of its distribution-related employees in North America.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FOR THE QUARTERLY PERIOD ENDED AUGUST 24, 2008

	Pension Benefits
	Nine Months Ended			Nine Months Ended
	August 24,	August 26,		August 24,			August 26,
	2008	2007		2008			2007
	(Dollars in thousands)
Net periodic benefit cost (income):
Service cost	$ 4,998	$	5,887	$	434		$ 550
Interest cost	45,823		43,438		7,936		8,093
Expected return on plan assets	(46,592	)	(45,068	)	—		—
Amortization of prior service cost (benefit)	626		3,394		(30,468	)	(35,374	)
Amortization of transition asset	178		363		—		—
Amortization of actuarial loss	554		4,993		2,914		3,815
Curtailment loss
(gain) (1)	276		19		(4,222	)	(39,394	)
Net settlement gain	(230	)	(120	)	—		—
Net periodic benefit cost (income)	5,633	$	12,906		(23,406	)	$ (62,310	)
Changes in accumulated other comprehensive income (loss):
Actuarial loss	287				—
Amortization of prior service (cost) benefit	(626	)			30,468
Amortization of transition asset	(178	)			—
Amortization of actuarial loss	(554	)			(2,914	)
Curtailment gain	618				4,222
Net settlement gain	230				—
Total recognized in accumulated other comprehensive income (loss)	(223	)			31,776
Total recognized in net periodic benefit cost (income) and
accumulated other comprehensive income (loss)	$ 5,410			$	8,370

callerid=999 iwidth=455 length=60

| (1) |
| --- |
| The postretirement benefit
curtailment gain of $39.4 million for the nine months ended
August 26, 2007, includes $25.3 million related 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 and $14.1 million associated with the voluntary
terminations resulting from the Company’s 2007 labor
agreement noted above. |

NOTE 9: DIVIDEND PAYMENT

In the second quarter of 2008 the Company paid a one-time cash dividend of $50 million. The declaration of cash dividends in the future is subject to determination by the Company’s Board of Directors based on a number of factors, including the Company’s financial condition and compliance with the terms of its debt agreements. The dividend payment resulted in a decrease to “Additional paid-in capital.”

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FOR THE QUARTERLY PERIOD ENDED AUGUST 24, 2008

NOTE 10: COMPREHENSIVE INCOME

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

	Three Months Ended — August 24,	August 26,		August 24,		August 26,
	2008	2007		2008		2007
	(Dollars in thousands)
Net income	$ 69,165	$	60,894	$	166,973	$	193,244
Other comprehensive income (loss):
Net investment hedge gains (losses)	15,438		(4,560	)	(268	)	(7,516	)
Foreign currency translation (losses) gains	(1,434	)	1,629		(2,445	)	2,022
Unrealized loss on marketable securities	(753	)	(267	)	(1,493	)	(1,318	)
Cash flow hedges	—		172		(23	)	1,180
Pension and postretirement benefits	(6,288	)	33,438		(22,353	)	33,448
Total other comprehensive income (loss)	6,963		30,412		(26,582	)	27,816
Total comprehensive income	$ 76,128	$	91,306	$	140,391	$	221,060

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

	August 24, — 2008		November 25, — 2007
	(Dollars in thousands)
Net investment hedge losses	$ (36,102	)	$ (35,834	)
Foreign currency translation losses	(24,118	)	(21,673	)
Unrealized (loss) gain on marketable securities	(1,395	)	98
Cash flow hedges	—		23
Pension and postretirement benefits	43,074		65,427
Accumulated other comprehensive income (loss), net of income
taxes	$ (18,541	)	$ 8,041

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FOR THE QUARTERLY PERIOD ENDED AUGUST 24, 2008

NOTE 11: OTHER (INCOME) EXPENSE, NET

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

	Three Months Ended — August 24,		August 26,	August 24,			August 26,
	2008		2007	2008			2007
	(Dollars in thousands)
Foreign exchange management (gains)
losses (1)	$ (19,678	)	$ 1,673	$	(8,157	)	$ 6,118
Foreign currency transaction losses
(gains) (1)	7,259		2,190		4,736		(10,904	)
Interest
income (2)	(822	)	(3,125	)	(4,432	)	(10,150	)
Investment income	(89	)	(54	)	(1,100	)	(3,431	)
Minority interest — Levi Strauss Japan K.K.	(181	)	141		45		800
Other	(705	)	(653	)	(1,109	)	(155	)
Total other (income) expense, net	$ (14,216	)	$ 172	$	(10,017	)	$ (17,722	)

callerid=999 iwidth=455 length=60

| (1) | The increase in foreign currency
gains for the three-month period ended August 24, 2008,
from the prior year period primarily reflects the impact of
foreign currency fluctuation, primarily the appreciation of the
U.S. Dollar against the Euro. |
| --- | --- |
| (2) | The decrease in interest income for
the three- and nine-month periods ended August 24, 2008,
from the prior year periods resulted from a decrease in interest
rates and lower average investment balances. |

NOTE 12: RELATED PARTIES

Robert D. Haas, a director and Chairman Emeritus of the Company, is the President of the Levi Strauss Foundation, which is not a consolidated entity of the Company. During the nine-month period ended August 24, 2008, the Company donated $7.2 million to the Levi Strauss Foundation, $7.1 of which was donated in the first quarter of 2008. During the three-and nine- month periods ended August 26, 2007, the Company donated $0.7 million to the Levi Strauss Foundation.

Stephen Neal, a director, is chairman of the law firm Cooley Godward Kronish LLP. The firm provided legal services to the Company and to the Human Resources Committee of the Company’s Board of Directors during the nine-month period ended August 24, 2008, for which the Company paid fees of approximately $0.1 million.

Peter A. Georgescu, a director, is Chairman Emeritus of Young & Rubicam Inc. (now WPP Group plc), a global advertising agency. During the three- and nine- month periods ended August 24, 2008, the Company paid $0.1 million to Young & Rubicam for advertising services.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FOR THE QUARTERLY PERIOD ENDED AUGUST 24, 2008

NOTE 13: BUSINESS SEGMENT INFORMATION

Effective as of the beginning of 2008, the Company’s reporting segments were revised as follows: the Company’s Central and South American markets were combined with the Company’s North America region which was renamed the Americas and the Company’s Turkey, Middle East and North Africa markets were combined with the Company’s region in Europe; all of these markets were previously managed by the Company’s Asia Pacific region. Segment disclosures contained in this Form 10-Q have been revised to conform to the new presentation for all reporting periods.

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 segments’ net revenues and operating income. The Company reports net trade receivables and inventories by segment as that information is used by the chief operating decision maker in assessing segment performance.

Business segment information for the Company is as follows:

	Three Months Ended — August 24,	August 26,		August 24,		August 26,
	2008	2007		2008		2007
	(Dollars in thousands)
Net revenues:
Americas	$ 648,915	$	639,874	$	1,705,963	$	1,822,051
Europe	305,905		264,624		902,311		794,593
Asia Pacific	155,973		147,322		521,724		489,138
Corporate (1)	—		(652	)	—		(849	)
Consolidated net revenues	$ 1,110,793	$	1,051,168	$	3,129,998	$	3,104,933
Operating income:
Americas	$ 98,501	$	85,685	$	200,926	$	250,991
Europe	69,652		54,201		212,039		183,857
Asia Pacific	15,460		18,318		75,823		79,673
Regional operating income	183,613		158,204		488,788		514,521
Corporate expenses, net	39,720		14,803		106,590		63,613
Consolidated operating income	143,893		143,401		382,198		450,908
Interest expense	37,305		53,142		119,055		166,644
Loss (gain) on early extinguishment of debt	(101	)	35		1,417		14,364
Other (income) expense, net	(14,216	)	172		(10,017	)	(17,722	)
Income before income taxes	$ 120,905	$	90,052	$	271,743	$	287,622

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 and nine months ended August 26, 2007.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FOR THE QUARTERLY PERIOD ENDED AUGUST 24, 2008

In the table below, “Other” represents the segment asset information not used by the chief operating decision maker in assessing segment performance and all corporate assets.

	August 24, 2008
			Asia
	Americas	Europe	Pacific	Other	Total
	(Dollars in thousands)
Assets:
Trade receivables, net	$ 271,601	$ 178,195	$ 79,774	$ 18,738	$	548,308
Inventories	315,782	196,952	101,075	(696	)	613,113
Other	—	—	—	1,779,963		1,779,963
Total assets					$	2,941,384

	November 25, 2007
			Asia
	Americas	Europe	Pacific	Other	Total
	(Dollars in thousands)
Assets:
Trade receivables, net	$ 375,069	$ 145,497	$ 67,367	$ 19,102	$	607,035
Inventories	244,677	167,922	104,376	(1,111	)	515,864
Other	—	—	—	1,727,767		1,727,767
Total assets					$	2,850,666

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

Overview

We design and market jeans, casual and dress pants, tops, jackets and related accessories for men, women and children under our Levi’s ® , Dockers ® and Signature by Levi Strauss & Co. tm (“Signature”) brands in mature 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 business is operated through three geographic regions: Americas, Europe and Asia Pacific. Our products are sold in over 60,000 retail locations in more than 110 countries. We support our brands through a global infrastructure, as we both source and market our products around the world. We distribute our Levi’s ® and Dockers ® products primarily through chain retailers and department stores in the United States and primarily through department stores, specialty retailers and franchised stores abroad. We distribute products under the Signature brand 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 more than 200 company-operated stores located in 24 countries, including the United States. These stores generated less than 10% of our net revenues in the nine-month period in 2008.

We derived nearly half of our net revenues and more than half of our regional operating income from our Europe and Asia Pacific businesses in the nine-month period in 2008. Sales of Levi’s ® brand products represented approximately 75% of our total net sales in the nine-month period in 2008.

Our Third Quarter 2008 Results

Our third quarter 2008 results reflect net revenue growth in all of our regions. Strong operating cash flow generation in the first nine months of the year enabled us to continue to reduce debt and to continue to invest in systems and in our business.

| • | Net revenues. Our consolidated net revenues
increased by 6% compared to the third quarter of 2007, and
increased 2% on a constant currency basis. The net revenues
increase resulted primarily from increased sales from new and
existing company-operated and franchisee stores, notwithstanding
a challenging economy and a weak retail environment in the
United States as well as certain markets in our Europe and Asia
Pacific regions. |
| --- | --- |
| • | Operating income. Operating income increased
$0.5 million from the prior year as our higher net revenues
and an improvement in the operating margin of our Americas
region were offset by higher corporate expenses as compared to
the prior year, reflecting the impact of a postretirement
benefit plan curtailment gain recorded in the third quarter of
2007. |
| • | Net income. Net income increased to
$69 million in the third quarter of 2008 as compared to
$61 million in the same period of the prior year,
reflecting a reduction in interest expense and a gain on our
foreign currency hedging contracts due to favorable foreign
currency fluctuation, partially offset by an increase in our
income tax rate. |
| • | Cash flows. Cash flows provided by operating
activities were $151 million in the nine-month period of
2008 as compared to $127 million in the same period of
2007. The increase as compared to the prior year was largely due
to lower interest payments. We paid a dividend of
$50 million to our stockholders and reduced our debt by
$77 million in the nine-month period of 2008, while
continuing to invest in systems and retail expansion. |

During the third quarter, we continued our stabilization efforts related to the enterprise resource planning (“ERP”) system we implemented in the United States in the beginning of the second quarter of 2008. Although the related order fulfillment issues and operating expenses were substantially less than in the prior quarter, we expect our stabilization efforts to continue through the balance of the year.

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

| • | the impact to our customers and consumers of the continuing
uncertainty in macroeconomic conditions and a tightening credit
environment worldwide; |
| --- | --- |
| • | the impact to us and our customers of inflation and weak
consumer spending in the United States; |
| • | our ability to revitalize our
U.S. Dockers ® brand; |
| • | the performance of certain of our mature businesses, whose
declining results are offsetting strong performance in emerging
markets; and |
| • | our ability to mitigate the impact of any further ERP-related
issues during the stabilization period, which we expect to
continue through the remainder of the year. |

Financial Information Presentation

Fiscal year. Our fiscal year consists of 52 or 53 weeks, ending on the last Sunday of November in each year. The 2008 fiscal year consists of 53 weeks ending on November 30, 2008. The 2007 fiscal year consisted of 52 weeks ending on November 25, 2007, except for certain foreign subsidiaries which were fixed at November 30 due to local statutory requirements. Each quarter of both fiscal years 2008 and 2007 consists of 13 weeks, with the exception of the fourth quarter of 2008, which in the United States consists of 14 weeks.

Segments. Effective as of the beginning of 2008, our reporting segments were revised as follows: our Central and South American markets were combined with our North America region, which was renamed the Americas as a result of the change, and our Turkey, Middle East and North Africa markets were combined with our region in Europe; all of these markets were previously managed by our Asia Pacific region. Segment disclosures contained in this Form 10-Q were revised to 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
wholesale customers, including franchised stores, and of direct
sales to consumers at our company-operated stores. It includes
allowances for estimated returns, discounts, and 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 translating local currency amounts in both periods at the same foreign exchange rates. 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 Nine Months Ended August 24, 2008, as Compared to Same Periods in 2007

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										Nine Months Ended
						August 24,		August 26,								August 24,		August 26,
				%		2008		2007						%		2008		2007
	August 24,	August 26,		Increase		% of Net		% of Net			August 24,	August 26,		Increase		% of Net		% of Net
	2008	2007		(Decrease)		Revenues		Revenues			2008	2007		(Decrease)		Revenues		Revenues
								(Dollars in millions)
Net sales	$ 1,088.4	$	1,031.7		5.5	%	98.0	%	98.1	%	$ 3,064.4	$	3,045.3		0.6	%	97.9	%	98.1	%
Licensing revenue	22.4		19.5		15.2	%	2.0	%	1.9	%	65.6		59.6		10.1	%	2.1	%	1.9	%
Net revenues	1,110.8		1,051.2		5.7	%	100.0	%	100.0	%	3,130.0		3,104.9		0.8	%	100.0	%	100.0	%
Cost of goods sold	578.3		565.0		2.4	%	52.1	%	53.7	%	1,614.9		1,657.9		(2.6	)%	51.6	%	53.4	%
Gross profit	532.5		486.2		9.5	%	47.9	%	46.3	%	1,515.1		1,447.0		4.7	%	48.4	%	46.6	%
Selling, general and administrative expenses	385.3		343.4		12.2	%	34.7	%	32.7	%	1,127.2		983.8		14.6	%	36.0	%	31.7	%
Restructuring charges, net	3.3		(0.6	)	(677.5	)%	0.3	%	(0.1	)%	5.7		12.3		(53.5	)%	0.2	%	0.4	%
Operating income	143.9		143.4		0.3	%	13.0	%	13.6	%	382.2		450.9		(15.2	)%	12.2	%	14.5	%
Interest expense	37.3		53.1		(29.8	)%	3.4	%	5.1	%	119.0		166.6		(28.6	)%	3.8	%	5.4	%
Loss (gain) on early extinguishment of debt	(0.1	)	—		(388.6	)%	—		—		1.4		14.4		(90.1	)%	—		0.5	%
Other (income) expense, net	(14.2	)	0.2		—		(1.3	)%	—		(10.0	)	(17.7	)	(43.5	)%	(0.3	)%	(0.6	)%
Income before income taxes	120.9		90.1		34.3	%	10.9	%	8.6	%	271.8		287.6		(5.5	)%	8.7	%	9.3	%
Income tax expense	51.7		29.2		77.4	%	4.7	%	2.8	%	104.8		94.4		11.0	%	3.3	%	3.0	%
Net income	$ 69.2	$	60.9		13.6	%	6.2	%	5.8	%	$ 167.0	$	193.2		(13.6	)%	5.3	%	6.2	%

Consolidated net revenues

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

	Three Months Ended					Nine Months Ended
			% Increase (Decrease)					% Increase (Decrease)
	August 24,	August 26,	As	Constant		August 24,	August 26,	As		Constant
	2008	2007	Reported	Currency		2008	2007	Reported		Currency
				(Dollars in millions)
Net revenues:
Americas	$ 648.9	$ 639.9		1.4 %	0.7 %	$ 1,706.0	$ 1,822.1		(6.4	)%	(7.1	)%
Europe	305.9	264.6		15.6 %	2.9 %	902.3	794.6		13.6	%	0.8	%
Asia Pacific	156.0	147.3		5.9 %	2.8 %	521.7	489.1		6.7	%	1.5	%
Corporate	—	(0.6	)	—	—	—	(0.9	)	—		—
Total net revenues	$ 1,110.8	$ 1,051.2		5.7 %	1.6 %	$ 3,130.0	$ 3,104.9		0.8	%	(3.7	)%

Consolidated net revenues increased on a reported basis for the three- and nine-month periods ended August 24, 2008. Reported amounts were affected favorably by currency, particularly in Europe and Asia Pacific.

Americas. Net revenues in our Americas region increased slightly for the three-month period and decreased for the nine-month period on both reported and constant currency bases. Currency affected net revenues favorably by approximately $4 million and $14 million for the three- and nine-month periods, respectively.

For the three-month period, net sales increased in our U.S. Levi’s ® brand, due to both the addition of new, and continued growth in sales from, existing company-operated retail stores, and in our U.S. Dockers ® brand, due to higher sales of discounted products to clear excess inventory. These increases were substantially offset by declines

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resulting from a customer’s Chapter 11 filing in the period, as well as the continued impact of another customer’s Chapter 11 filing in the second quarter of 2008.

For the nine-month period, the net revenue declines in the region reflect a weakening retail environment and our implementation of an ERP system in the United States in the beginning of the second quarter of 2008. Our ability to fulfill customer orders in the second quarter was impacted by issues encountered during stabilization of the ERP system. These ERP-related issues constitute a substantial portion of the decrease in the region’s net sales in the nine-month period as compared to the prior year. Additionally, net sales in the region decreased due to lower demand and higher sales allowances and discounts for our U.S. Dockers ® brand products, the Chapter 11 filings of two U.S. customers and a decline in sales of our U.S. Signature brand. These decreases were partially offset by increased sales from both the addition of new and continued growth at existing company-operated retail stores.

Europe. Net revenues in Europe increased on both reported and constant currency bases for the three- and nine-month periods. Currency affected net revenues favorably by approximately $33 million and $101 million for the three- and nine-month periods, respectively.

For the three- and nine-month periods, net sales increases, primarily from new company-operated and franchisee stores, partially offset continued declines in our wholesale channels in certain markets. The increases related primarily to increased sales of our Levi’s ® Red Tab tm products.

Asia Pacific. Net revenues in Asia Pacific increased on both reported and constant currency bases for the three- and nine-month periods. Currency affected net revenues favorably by approximately $4 million and $25 million for the three- and nine-month periods, respectively.

Across the region for both periods, we had mixed performance on a constant currency basis. Net sales increased primarily in our emerging markets, particularly China and India, through continued expansion of our company-operated and franchised store network and stronger consumer spending. These net sales increases were offset primarily by continuing weak performance in our mature markets.

Gross profit

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

	Three Months Ended			Nine Months Ended
			%			%
	August 24,	August 26,	Increase	August 24,	August 26,	Increase
	2008	2007	(Decrease)	2008	2007	(Decrease)
			(Dollars in millions)
Net revenues	$ 1,110.8	$ 1,051.2	5.7 %	$ 3,130.0	$ 3,104.9	0.8	%
Cost of goods sold	578.3	565.0	2.4 %	1,614.9	1,657.9	(2.6	)%
Gross profit	$ 532.5	$ 486.2	9.5 %	$ 1,515.1	$ 1,447.0	4.7	%
Gross margin	47.9 %	46.3 %		48.4 %	46.6 %

Gross margin increased in all our regions for the three- and nine-month periods ended August 24, 2008, compared to the same prior-year periods, primarily due to a change in sales mix, the increased contribution of net sales from company-operated stores, and lower sourcing costs. In both periods, the favorable impact of foreign currency also contributed significantly to the increase in consolidated gross profit.

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.

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Selling, general and administrative expenses

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

	Three Months Ended								Nine Months Ended
					August 24,	August 26,								August 24,		August 26,
			%		2008	2007						%		2008		2007
	August 24,	August 26,	Increase		% of Net	% of Net			August 24,	August 26,		Increase		% of Net		% of Net
	2008	2007	(Decrease)		Revenues	Revenues			2008	2007		(Decrease)		Revenues		Revenues
						(Dollars in millions)
Selling	$ 104.9	$ 92.0		14.0	%	9.4 %	8.8	%	$ 310.4	$	265.0		17.1	%	9.9	%	8.5	%
Advertising and promotion	67.6	70.1		(3.6	)%	6.1 %	6.7	%	185.0		180.7		2.4	%	5.9	%	5.8	%
Administration	86.0	70.1		22.7	%	7.7 %	6.7	%	263.4		218.9		20.3	%	8.4	%	7.1	%
Postretirement benefit plan curtailment gain	—	(14.1	)	(100.0	)%	—	(1.3	)%	(4.2	)	(39.4	)	(89.3	)%	(0.1	)%	(1.3	)%
Other	126.8	125.3		1.2	%	11.4 %	11.9	%	372.6		358.6		3.9	%	11.9	%	11.5	%
Total SG&A	$ 385.3	$ 343.4		12.2	%	34.7 %	32.7	%	$ 1,127.2	$	983.8		14.6	%	36.0	%	31.7	%

Total SG&A expenses increased $41.9 million and $143.4 million for the three- and nine-month periods ended August 24, 2008, respectively, compared to the same prior-year periods. Currency contributed approximately $15 million and $49 million, respectively, to the increases in SG&A expenses.

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

Advertising and promotion. On a constant currency basis, advertising and promotion expenses declined in both periods in most markets due to an expected shift in spending to the fourth quarter of 2008 in conjunction with our global Levi’s ® 501 ® campaign.

Administration. Administration expenses include corporate expenses and other administrative charges. Administration expenses for both periods increased primarily due to the incremental resources required for our U.S. ERP implementation and stabilization efforts. These increases were partially offset by a reduction in accruals for our long-term incentive compensation program as compared to the prior year, due to business performance below our internally set objectives.

Postretirement benefit plan curtailment gain. During the first quarter of 2008 and the third quarter of 2007, we recorded a postretirement benefit plan curtailment gain associated with the departure of the remaining employees who elected the voluntary separation and buyout program contained in the new labor agreement we entered into during the third quarter of 2007. During the first quarter of 2007, we recorded a postretirement benefit plan curtailment gain associated with the closure of our Little Rock, Arkansas, distribution facility. For more information, see notes 7 and 8 to our unaudited consolidated financial statements included in this report.

Other. Other SG&A costs include distribution, information resources, and marketing costs , gain or loss on sale of assets and other operating income. For both periods, these costs increased primarily due to the effects of currency.

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Operating income

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

	Three Months Ended									Nine Months Ended
					August 24,		August 26,								August 24,		August 26,
			%		2008		2007						%		2008		2007
	August 24,	August 26,	Increase		% of Net		% of Net			August 24,	August 26,		Increase		% of Net		% of Net
	2008	2007	(Decrease)		Revenues		Revenues			2008	2007		(Decrease)		Revenues		Revenues
							(Dollars in millions)
Operating income:
Americas	$ 98.5	$ 85.7		15.0	%	15.2	%	13.4	%	$ 201.0	$	251.0		(19.9	)%	11.8	%	13.8	%
Europe	69.7	54.2		28.5	%	22.8	%	20.5	%	212.0		183.8		15.3	%	23.5	%	23.1	%
Asia Pacific	15.4	18.3		(15.6	)%	9.9	%	12.4	%	75.8		79.7		(4.8	)%	14.5	%	16.3	%
Total regional operating income	183.6	158.2		16.1	%	16.5	%*	15.1	%*	488.8		514.5		(5.0	)%	15.6	%*	16.6	%*
Corporate:
Restructuring charges, net	3.3	(0.6	)	(677.5	)%	0.3	%*	(0.1	)%*	5.7		12.3		(53.5	)%	0.2	%*	0.4	%*
Postretirement benefit plan curtailment gain	—	(14.1	)	(100.0	)%	—	*	(1.3	)%*	(4.2	)	(39.4	)	(89.3	)%	(0.1	)%*	(1.3	)%*
Other corporate staff costs and expenses	36.4	29.5		23.5	%	3.3	%*	2.8	%*	105.1		90.7		15.9	%	3.4	%*	2.9	%*
Total corporate	39.7	14.8		168.3	%	3.6	%*	1.4	%*	106.6		63.6		67.6	%	3.4	%*	2.0	%*
Total operating income	$ 143.9	$ 143.4		0.3	%	13.0	%*	13.6	%*	$ 382.2	$	450.9		(15.2	)%	12.2	%*	14.5	%*
Operating Margin	13.0 %	13.6	%							12.2	%	14.5	%

callerid=999 iwidth=455 length=60

• Percentage of consolidated net revenues

Regional operating income. The following describes changes in operating income by segment for the three- and nine-month periods ended August 24, 2008, compared to the same prior-year periods:

| • | Americas. For the three-month period,
operating income increased primarily due to an increase in
operating margin, which increased as the region’s gross
margin improvement was partially offset by the increase in
SG&A expenses, reflecting our U.S. ERP stabilization
efforts and our continued investment in retail expansion. For
the nine-month period, operating income decreased primarily due
to a decline in operating margin, as well as the decline in net
revenues. Operating margin for the nine-month period decreased as the region’s gross margin improvement
was fully offset by the increase in SG&A expenses. |
| --- | --- |
| • | Europe. The increase in the region’s
operating income for both periods was primarily due to the
favorable impact of currency. Operating margin for both periods
increased as the region’s gross margin improvements were
partially offset by the increase in SG&A expenses,
primarily reflecting our continued investment in retail
expansion. |
| • | Asia Pacific. For both periods, the favorable
impact of currency to the region’s operating income was
fully offset by the region’s operating margin declines. The
margin declines reflected the region’s continued investment
in retail and infrastructure, particularly within our emerging
markets, and with respect to the three-month period, increased
advertising and promotion expenses related to the launch of our
global
Levi’s ® 501 ® campaign in the region. |

Corporate. Corporate expense is comprised of net restructuring charges, postretirement benefit plan curtailment gains, and other corporate expenses, including corporate staff costs.

Other corporate staff costs and expenses for the three- and nine-month periods increased over the same prior-year periods primarily due to higher staff costs, reflecting our global information technology investment and various

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other corporate initiatives. For the nine-month period, these increases were partially offset by reductions in long-term incentive compensation expense.

Interest expense

Interest expense decreased to $37.3 million and $119.0 million for the three- and nine-month periods ended August 24, 2008, respectively, from $53.1 million and $166.6 million for the same prior-year periods. Lower average borrowing rates and lower debt levels in 2008, resulting primarily from our debt refinancing and reduction activities during 2007, caused the decrease in interest expense.

The weighted-average interest rate on average borrowings outstanding for the three- and nine-month periods ended August 24, 2008, were 7.90% and 8.03%, respectively, as compared to 9.58% and 9.74%, respectively, for the same prior-year periods.

Loss on early extinguishment of debt

The $14.4 million loss on early extinguishment of debt for the nine-month period of 2007 resulted from our redemption of our floating rate senior notes due 2012.

Other (income) expense, net

For the three- and nine-month periods in 2008, we recorded income of $14.2 million and $10.0 million, respectively, as compared to expense of $0.2 million and income of $17.7 million for the same periods in 2007. The increase for the three-month period primarily reflects the impact of foreign currency fluctuation on the fair value of our foreign currency hedging contracts, primarily the appreciation of the U.S. Dollar against the Euro. The decrease for the nine-month period primarily reflects a decrease in interest income resulting from a decrease in interest rates and lower average investment balances.

Income tax expense

Income tax expense was $51.7 million and $104.8 million for the three- and nine-month periods ended August 24, 2008, respectively, compared to $29.2 million and $94.4 million for the same periods ended August 26, 2007. The increase in tax expense was primarily driven by an increase in the effective income tax rate, as discussed below.

The effective income tax rate was 42.8% and 38.6% for the three- and nine-month periods ended August 24, 2008, respectively, compared to 32.4% and 32.8% for same periods ended August 26, 2007. The increase in the effective income tax rate was primarily driven by a benefit recorded in 2007 related to a reduction in the residual U.S. tax expected to be imposed upon repatriation of foreign earnings, and a shift in the geographic mix of our 2008 earnings to the United States, where we are subject to a higher tax rate.

Net income

Net income for the three- and nine-month periods in 2008 was $69.2 million and $167.0 million, respectively, compared to $60.9 million and $193.2 million for the same periods in 2007. The increase for the three-month period was primarily due to lower interest expense and higher other income, partially offset by an increase in income tax expense. The decrease for the nine-month period was primarily driven by our operating income decline, partially offset by lower interest expense.

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.

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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.

In 2007, we amended and restated our senior secured revolving credit facility; the maximum availability is now $750.0 million secured by certain of our domestic assets and certain U.S. trademarks associated with the Levi’s ® brand and other related intellectual property. The amended facility includes a $250.0 million term loan tranche. Upon repayment of this $250.0 million term loan tranche, the secured interest in the U.S. trademarks will be released. As of August 24, 2008, we had borrowings of $196.8 million under the term loan tranche and our total availability, based on other collateral levels as defined by the agreement, was approximately $390.6 million. We had no outstanding borrowings under the revolving tranche of the credit facility, but had utilization of other credit-related instruments such as documentary and standby letters of credit. As a result, unused availability was approximately $302.3 million as of August 24, 2008.

As of August 24, 2008, we had cash and cash equivalents totaling approximately $124.8 million, resulting in a net liquidity position (unused availability and cash and cash equivalents) of $427.1 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 nine months ended August 24, 2008, and the related estimated cash requirements for the remainder of 2008 and the first nine months of 2009:

	Paid in Nine	Estimated for — Remaining Three		Estimated for	Estimated for — Twelve Months
Selected Cash	Months Ended	Months of	Total Estimated	Nine Months Ending	Ending
Requirements	August 24, 2008	Fiscal 2008	for Fiscal 2008	August 30, 2009	August 30, 2009
	(Dollars in millions)
Interest	$ 110	$ 42	$ 152	$ 97	$ 139
Federal, foreign and state taxes (net of refunds)	46	19	65	60	79
Postretirement health benefit plans	18	4	22	20	24
Capital
expenditures (1)	57	34	91	91	125
Pension plans	12	5	17	12	17
Dividend (2)	50	—	50	—	—
Total selected cash requirements	$ 293	$ 104	$ 397	$ 280	$ 384

callerid=999 iwidth=455 length=60

| (1) | Decrease as compared to the
estimate contained in our 2007 Annual Report on Form 10-K is primarily due to deferring global information resource
projects into future years. |
| --- | --- |
| (2) | Dividend paid in the second quarter
of 2008. |

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.

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Contractual and Long-term Liabilities

We do not anticipate a material effect on our liquidity as a result of payments in future periods of liabilities for uncertain tax positions.

Cash Flows

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

	Nine Months Ended — August 24,	August 26,
	2008	2007
	(Dollars in millions)
Cash provided by operating activities	$ 150.8	$	127.2
Cash used for investing activities	(62.6	)	(59.4	)
Cash used for financing activities	(118.9	)	(65.9	)
Cash and cash equivalents	124.8		284.8

Cash flows from operating activities

Cash provided by operating activities was $150.8 million for the nine-month period in 2008, as compared to $127.2 million for same period of 2007. Despite our lower operating income, the increase in cash provided by operating activities was primarily due to lower interest payments; higher cash collections, reflecting later timing of sales in the fourth quarter of 2007 as compared to the fourth quarter of 2006; lower incentive compensation payments; and a reduction in cash used for accounts payable while stabilizing our U.S. ERP system. These factors were partially offset by an increase in cash used for inventory as compared to prior year.

Cash flows from investing activities

Cash used for investing activities was $62.6 million for the nine-month period in 2008 compared to $59.4 million for the same period in 2007. Cash used in both periods primarily related to investments made in our company-operated retail stores and information technology systems associated with our global ERP implementation.

Cash flows from financing activities

Cash used for financing activities was $118.9 million for the nine-month period in 2008 compared to $65.9 million for the same period in 2007. Cash used for financing activities in 2008 primarily reflects $53.2 million of required payments on the term loan tranche of our senior secured revolving credit facility, our redemption in March 2008 of our remaining $18.8 million outstanding 12.25% senior notes due 2012 and our $50.0 million dividend payment to stockholders in the second quarter. 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.

Indebtedness

We had fixed-rate debt of approximately $1.4 billion (73% of total debt) and variable-rate debt of approximately $0.5 billion (27% of total debt) as of August 24, 2008. The borrower of substantially all of our debt is Levi Strauss & Co., the parent and U.S. operating company. Our required aggregate debt principal payments are $17.7 million in the remainder of 2008, $94.5 million in 2009, $108.3 million in 2012, $374.1 million in 2013 and the remaining $1.3 billion in years after 2013.

Effective May 1, 2008, in order to mitigate a portion of our interest rate risk, we entered into a $100 million interest rate swap agreement to pay a fixed-rate interest of approximately 3.2% and receive 3-month LIBOR variable rate interest payments quarterly over the next two years.

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

Off-Balance Sheet Arrangements, Guarantees and Other Contingent Obligations

Off Balance Sheet Arrangements and Other. There were no substantial changes from our 2007 Annual Report on Form 10-K to our off-balance sheet arrangements or contractual commitments in the third quarter of 2008. We have contractual commitments for non-cancelable operating leases. We have no other material non-cancelable guarantees or commitments.

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.

The amounts we may owe under these agreements 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 2007 Annual Report on Form 10-K except for the following:

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

We provide for income taxes with respect to temporary differences between the book and tax bases of foreign investments that are expected to reverse in the foreseeable future. Basis differences, consisting primarily of undistributed foreign earnings, related to investments in certain foreign subsidiaries are considered to be permanently reinvested and therefore are not expected to reverse in the foreseeable future, as we plan to utilize these earnings to finance the expansion and operating requirements of these subsidiaries.

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

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matters changes, we will adjust income tax expense in the period in which such determination is made. We classify interest and penalties related to income taxes as income tax expense.

Recently Issued Accounting Standards

See Note 1 to our unaudited consolidated financial statements included in this report for recently issued accounting standards, including the expected dates of adoption and estimated effects on our consolidated financial statements.

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:

| • | our ability and that of our wholesale customers to withstand
challenges of the tightening credit environment; |
| --- | --- |
| • | changes in the level of consumer spending for apparel in view of
general economic conditions including interest rates, the
housing market, energy prices and weakening consumer confidence; |
| • | changing U.S. and international retail environments and
fashion trends; |
| • | our ability to sustain improvements in our European business and
to address challenges in certain of our more mature Asian
markets and in our Signature by Levi Strauss &
Co. tm brand in the United States; |
| • | our wholesale 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, and to revitalize, sustain and grow the
Dockers ® brand; |
| • | our ability to stabilize our ERP system implementation in the
United States and throughout our business without further
disruption or to mitigate any existing or new disruptions; |
| • | our effectiveness in increasing efficiencies in our logistics
operations; |
| • | our dependence on key distribution channels, customers and
suppliers; |
| • | our ability to utilize our tax credits and net operating loss
carryforwards; |
| • | ongoing litigation matters and disputes and regulatory
developments; and |
| • | changes in or application of trade and tax laws. |

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. We currently hold an interest rate swap derivative to mitigate a portion of our interest rate risk.

We are exposed to credit loss in the event of nonperformance by the counterparties to the foreign exchange and interest rate swap contracts. However, we believe that our exposures are appropriately diversified across counterparties and that these counterparties are creditworthy financial institutions. Accordingly, 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. Our foreign currency management objective is to mitigate the potential impact of currency fluctuations on the value of our U.S. dollar cash flows and to reduce the variability of certain cash flows at the subsidiary level. We actively manage forecasted exposures.

We use a centralized currency management operation to take advantage of potential opportunities to naturally offset exposures against each other. For any residual exposures under management, we enter into various financial instruments including forward exchange and option contracts to hedge certain forecasted 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 only partially 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. Members of our foreign exchange committee, comprised of a group of our senior financial executives, review our foreign exchange activities to ensure compliance with our policies. The operating policies and guidelines outlined in the foreign exchange risk management policy provide a framework that allows for 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 and related derivatives using different techniques including a review of market value, sensitivity analysis and a value-at-risk model. We use the market approach to estimate the fair value of our foreign exchange derivative contracts.

We use derivative instruments to manage our exposure to foreign currencies. As of August 24, 2008, we had U.S. dollar spot and forward currency contracts to buy $491.0 million and to sell $164.0 million against various foreign currencies. These contracts are at various exchange rates and expire at various dates through August 2009.

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Item 4T. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of August 24, 2008, 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 (“ERP”) system on a staged basis in our subsidiaries around the world. We implemented the ERP system in several subsidiaries in our Asia Pacific region prior to fiscal 2008 and, during our second quarter of 2008, in the United States. Our U.S. implementation resulted in a material update to our system of internal control over financial reporting in the second quarter, and issues encountered subsequent to implementation caused us to further revise our internal control process and procedures in order to correct and supplement our processing capabilities within the new system in that quarter. Throughout the ERP system stabilization period, which we expect to last for the remainder of the year, we will continue to improve and enhance our system of internal control over financial reporting. We plan to implement the ERP system in other subsidiaries in the coming years and we believe that the ERP system will simplify and strengthen our system of 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 have not yet been subject to the disclosure requirements in our Annual Report on Form 10-K. As currently provided in the rules, non-accelerated filers will be required to be compliant with respect to the management report at this fiscal year end and with respect to the independent auditor attestation report at the 2010 fiscal year end. We expect to meet these requirements.

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PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Wrongful Termination Litigation. On April 11, 2008, the trial date for the plaintiff’s Sarbanes-Oxley Act claim in this matter, which had been set for May 27, 2008, was vacated by the court in order to accommodate plaintiff’s request to seek new counsel. The trial has now been set for January 12, 2009. There have been no other material developments in this litigation since we filed our 2007 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.

Class Action Securities Litigation. The parties finalized their settlement agreement pertaining to In re Levi Strauss & Co., Securities Litigation , Case No. C-03-05605 RMW (class action) and the court granted preliminary approval of the settlement of this matter on July 21, 2008. A hearing for final approval of the settlement has been scheduled for October 17, 2008. The related wrongful termination claim identified above is unaffected by this settlement. There have been no other material developments in this litigation since we filed our 2007 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

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

We rely on various information technology systems to manage our operations. We are currently implementing modifications and upgrades to our systems, including replacing legacy systems with successor systems, making changes to legacy systems and acquiring new systems with new functionality. For example, we implemented an enterprise resource planning system in the United States in the second quarter of 2008. This implementation subjects us to inherent costs and risks associated with replacing and changing these systems, including impairment of our ability to fulfill customer orders, potential disruption of our internal control structure, substantial capital expenditures, additional administration expenses, demands on management time and other risks of delays or difficulties in transitioning to new systems or of integrating new systems into our current systems. Our systems implementations may not result in productivity improvements at a level that outweighs the costs of implementation, or at all. In addition, the implementation of new technology systems may cause disruptions in our business operations. For example, we temporarily suspended shipments to our customers in the United States in the beginning of the second quarter of 2008 due to issues encountered during the stabilization period which resulted in, and may continue to result in, decreased revenues and increased administration expenses. This and any other information technology system disruptions and our ability to mitigate existing and future disruptions, if not anticipated and appropriately mitigated, could have a further adverse effect on our business and operations.

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

Net sales to our ten largest customers totaled approximately 42% of total net revenues in both 2007 and 2006. Our largest customer, J.C. Penney Company, Inc., accounted for approximately 9% of net revenues in both fiscal years 2007 and 2006. The retail industry in the United States has experienced substantial consolidation in recent years, such as the merger of Federated Department Stores, Inc. and May Department Stores Co., both of whom were leading department store chains and significant Levi’s ® and Dockers ® brand customers in 2005. This trend in consolidation may continue. Consolidation in the retail industry typically results in store closures, centralized purchasing decisions, increased customer leverage over suppliers, greater exposure for suppliers to credit risk and an increased emphasis by retailers on inventory management and productivity, any of which can, and have, adversely impacted our margins and ability operate efficiently.

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Additionally, we believe that our customers are subject to the fluctuations in general economic cycles that diminish consumer spending, and may also be affected by a tightening credit environment, which may impact their ability to access credit from financial institutions that may be necessary to operate their business. These factors affect their performance and in turn may affect our business and relationship with them.

In addition, while we have long-standing customer relationships, we do not have long-term contracts with any of our customers. As a result, purchases generally occur on an order-by-order basis, and the relationship, as well as particular orders, can generally be terminated by either party at any time.

If any major customer, for the above reasons or any other reason, decreases or ceases its purchases from us, reduces the floor space, assortments, fixtures or advertising for our products or changes its manner of doing business with us, such actions could adversely affect our business and financial condition. For example, several customers in the Americas region filed for bankruptcy in both the second and third quarters of 2008 which has adversely impacted our results. In addition, if we elect to alter our business terms or to cease doing business with any major customer due to concerns regarding their performance, such actions could adversely affect our business and financial condition.

The success of our business depends on our ability to attract and retain qualified and effective executive management and board leadership.

Our performance depends on the service of key management personnel and board members. We have had changes in our senior management team and board composition in 2008. Robert D. Haas stepped down as our Chairman of the Board in February 2008 and board member Gary Rogers took his place in that role. John Goodman resigned from his position as president and commercial general manager of the U.S. Dockers ® Brand in March 2008. Hans Ploos van Amstel, our senior vice president and chief financial officer, stepped down from that role on August 27, 2008. Richard L. Kauffman joined our board effective October 1, 2008. These or other changes in our senior management group and board leadership, as well as our ability to attract and retain key personnel, could have an adverse effect on our ability to determine and implement our strategies, which in turn may adversely affect our business and results of operations.

There have been no other material changes in our risk factors from those disclosed in our 2007 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=200

Heidi L. Manes

Vice President and Controller/ Interim Chief Financial Officer (Principal Accounting Officer)

Date: October 2, 2008

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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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