LEVI STRAUSS & CO — Interim / Quarterly Report 2011

Jul 12, 2011

10-Q 1 f59546e10vq.htm FORM 10-Q e10vq PAGEBREAK

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

Form 10-Q

(Mark One)
þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
	For the Quarterly Period Ended May 29,
2011
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission file number: 002-90139

LEVI STRAUSS & CO.

(Exact Name of Registrant as Specified in Its Charter)

DELAWARE (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)

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an 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 Smaller reporting company o

(Do not check if a smaller reporting company)

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

The Company is privately held. Nearly all of its common equity is owned by descendants of the family of the Company’s founder, Levi Strauss, and their relatives. There is no trading in the common equity and therefore an aggregate market value based on sales or bid and asked prices is not determinable.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock $.01 par value — 37,324,857 shares outstanding on July 7, 2011

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LEVI STRAUSS & CO. AND SUBSIDIARIES

INDEX TO FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MAY 29, 2011

	Number
PART I — FINANCIAL
INFORMATION
Item 1.	Consolidated Financial Statements (unaudited):
	Consolidated Balance Sheets as of
May 29, 2011, and November 28, 2010	3
	Consolidated Statements of Operations
for the Three and Six Months Ended May 29, 2011, and
May 30, 2010	4
	Consolidated Statements of Cash Flows
for the Six Months Ended May 29, 2011, and May 30,
2010	5
	Notes to Consolidated Financial
Statements	6
Item 2.	Management’s Discussion and Analysis of
Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About
Market Risk	27
Item 4T.	Controls and Procedures	28
PART II — OTHER
INFORMATION
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use
of Proceeds	29
Item 3.	Defaults Upon Senior Securities	29
Item 4.	Removed and Reserved	29
Item 5.	Other Information	29
Item 6.	Exhibits	29
SIGNATURE		30
EX-31.1
EX-31.2
EX-32

/TOC

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PART I — FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

LEVI STRAUSS & CO. AND SUBSIDIARIES

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	(Unaudited) — May 29,	November 28,
	2011	2010
	(Dollars in thousands)
ASSETS
Current Assets:
Cash and cash equivalents	$ 258,491	$	269,726
Restricted cash	3,737		4,028
Trade receivables, net of allowance for doubtful accounts of
$23,401 and $24,617	428,521		553,385
Inventories:
Raw materials	7,358		6,770
Work-in-process	12,231		9,405
Finished goods	618,529		563,728
Total inventories	638,118		579,903
Deferred tax assets, net	141,426		137,892
Other current assets	143,595		106,198
Total current assets	1,613,888		1,651,132
Property, plant and equipment, net of accumulated depreciation
of $722,138 and $683,258	509,757		488,603
Goodwill	243,306		241,472
Other intangible assets, net	78,998		84,652
Non-current deferred tax assets, net	552,727		559,053
Other assets	117,203		110,337
Total assets	$ 3,115,879	$	3,135,249
LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS’
DEFICIT
Current Liabilities:
Short-term borrowings	$ 51,610	$	46,418
Current maturities of long-term debt	—		—
Current maturities of capital leases	1,871		1,777
Accounts payable	233,716		212,935
Other accrued liabilities	229,110		275,443
Accrued salaries, wages and employee benefits	181,740		196,152
Accrued interest payable	9,571		9,685
Accrued income taxes	15,024		17,115
Total current liabilities	722,642		759,525
Long-term debt	1,843,585		1,816,728
Long-term capital leases	2,995		3,578
Postretirement medical benefits	141,253		147,065
Pension liability	332,475		400,584
Long-term employee related benefits	97,957		102,764
Long-term income tax liabilities	47,752		50,552
Other long-term liabilities	54,278		54,281
Total liabilities	3,242,937		3,335,077
Commitments and contingencies
Temporary equity	8,371		8,973
Stockholders’ Deficit:
Levi Strauss & Co. stockholders’ deficit
Common stock — $.01 par value;
270,000,000 shares authorized; 37,324,857 shares and
37,322,358 shares issued and outstanding	373		373
Additional paid-in capital	22,856		18,840
Retained earnings	74,723		33,346
Accumulated other comprehensive loss	(242,513	)	(272,168	)
Total Levi Strauss & Co. stockholders’ deficit	(144,561	)	(219,609	)
Noncontrolling interest	9,132		10,808
Total stockholders’ deficit	(135,429	)	(208,801	)
Total liabilities, temporary equity and stockholders’
deficit	$ 3,115,879	$	3,135,249

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

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LEVI STRAUSS & CO. AND SUBSIDIARIES XBRL,op CONSOLIDATED STATEMENTS OF OPERATIONS

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	Three Months Ended — May 29,	May 30,			Six Months Ended — May 29,	May 30,
	2011	2010			2011	2010
	(Dollars in thousands)
	(Unaudited)
Net sales	$ 1,074,400	$	957,959		$ 2,174,285	$	1,973,966
Licensing revenue	18,522		18,570		39,330		37,769
Net revenues	1,092,922		976,529		2,213,615		2,011,735
Cost of goods sold	552,226		477,108		1,114,952		979,386
Gross profit	540,696		499,421		1,098,663		1,032,349
Selling, general and administrative expenses	475,720		430,199		934,813		855,876
Operating income	64,976		69,222		163,850		176,473
Interest expense	(33,515	)	(34,440	)	(68,381	)	(68,613	)
Loss on early extinguishment of debt	—		(16,587	)	—		(16,587	)
Other income (expense), net	(1,006	)	6,694		(6,965	)	19,157
Income before income taxes	30,455		24,889		88,504		110,430
Income tax expense	9,944		43,279		28,825		72,951
Net income (loss)	20,511		(18,390	)	59,679		37,479
Net loss attributable to noncontrolling interest	460		4,009		1,967		4,494
Net income (loss) attributable to Levi Strauss &
Co.	$ 20,971	$	(14,381	)	$ 61,646	$	41,973

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

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LEVI STRAUSS & CO. AND SUBSIDIARIES XBRL,cf CONSOLIDATED STATEMENTS OF CASH FLOWS

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	Six Months Ended — May 29,	May 30,
	2011	2010
	(Dollars in thousands)
	(Unaudited)
Cash Flows from Operating Activities:
Net income	$ 59,679	$	37,479
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization	57,495		51,650
Asset impairments	2,382		1,166
(Gain) loss on disposal of property, plant and equipment	(76	)	51
Unrealized foreign exchange losses (gains)	9,300		(19,376	)
Realized loss on settlement of forward foreign exchange
contracts not designated for hedge accounting	4,863		5,340
Employee benefit plans’ amortization from accumulated other
comprehensive loss	(503	)	1,732
Employee benefit plans’ curtailment loss, net	3,055		100
Noncash gain on extinguishment of debt, net of write-off of
unamortized debt issuance costs	—		(13,647	)
Amortization of deferred debt issuance costs	2,138		2,284
Stock-based compensation	3,414		2,875
Allowance for doubtful accounts	1,354		3,564
Change in operating assets and liabilities:
Trade receivables	134,540		129,489
Inventories	(42,491	)	(47,382	)
Other current assets	(38,850	)	(11,301	)
Other non-current assets	1,603		(16,851	)
Accounts payable and other accrued liabilities	(38,238	)	(30,251	)
Income tax liabilities	(4,386	)	56,525
Accrued salaries, wages and employee benefits and long-term
employee related benefits	(69,003	)	(25,379	)
Other long-term liabilities	(1,018	)	18,510
Other, net	171		(159	)
Net cash provided by operating activities	85,429		146,419
Cash Flows from Investing Activities:
Purchases of property, plant and equipment	(75,713	)	(78,187	)
Proceeds from sale of property, plant and equipment	135		1,323
Payments on settlement of forward foreign exchange contracts not
designated for hedge accounting	(4,863	)	(5,340	)
Acquisitions, net of cash acquired	—		(12,242	)
Other	(500	)	(114	)
Net cash used for investing activities	(80,941	)	(94,560	)
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt	—		909,390
Repayments of long-term debt and capital leases	(953	)	(865,076	)
Short-term borrowings, net	527		21,798
Debt issuance costs	—		(16,931	)
Restricted cash	571		(257	)
Repurchase of common stock	(245	)	—
Dividend to stockholders	(20,023	)	(20,013	)
Net cash (used for) provided by financing activities	(20,123	)	28,911
Effect of exchange rate changes on cash and cash equivalents	4,400		1,493
Net (decrease) increase in cash and cash equivalents	(11,235	)	82,263
Beginning cash and cash equivalents	269,726		270,804
Ending cash and cash equivalents	$ 258,491	$	353,067
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$ 64,651	$	82,453
Income taxes	30,467		26,317

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

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE QUARTERLY PERIOD ENDED MAY 29, 2011

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NOTE 1: SIGNIFICANT ACCOUNTING POLICIES

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Nature of Operations

Levi Strauss & Co. (the “Company”) is one of the world’s leading branded apparel companies. The Company designs and markets jeans, casual and dress pants, tops, skirts, jackets, footwear and related accessories, for men, women and children under the Levi’s ® , Dockers ® , Signature by Levi Strauss & Co. tm and Denizen 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 the Company and its wholly-owned and majority-owned foreign and domestic subsidiaries are prepared in conformity with generally accepted accounting principles in the United States (“U.S.”) 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 28, 2010, included in the Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission (“SEC”) on February 8, 2011.

The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions have been eliminated. Management believes the disclosures are adequate to make the information presented herein not misleading. Certain prior-year amounts have been reclassified to conform to the current presentation. The results of operations for the three and six months ended May 29, 2011, may not be indicative of the results to be expected for any other interim period or the year ending November 27, 2011.

The Company’s fiscal year ends on the last Sunday of November in each year, although the fiscal years of certain foreign subsidiaries are fixed at November 30 due to local statutory requirements. Apart from these subsidiaries, each quarter of both fiscal years 2011 and 2010 consists of 13 weeks. All references to years relate to fiscal years rather than calendar years.

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

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

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the related notes to consolidated financial statements. Estimates are based upon historical factors, current circumstances and the experience and judgment of the Company’s management. Management evaluates its 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.

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

FOR THE QUARTERLY PERIOD ENDED MAY 29, 2011

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Pension and Postretirement Benefits

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

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

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

Recently Issued Accounting Standards

There have been no developments to recently issued accounting standards, including the expected dates of adoption and estimated effects on the Company’s consolidated financial statements, from those disclosed in the Company’s 2010 Annual Report on Form 10-K, except for the following, which have been grouped by their required effective dates for the Company:

Second Quarter of 2012

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

First Quarter of 2013

• In June 2011, the FASB issued Accounting Standards Update No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income,” (“ASU 2011-05”). ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in equity. ASU 2011-05 requires that all nonowner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. This new guidance is to be applied retrospectively. The Company anticipates that the adoption of this standard may materially change the presentation of its consolidated financial statements.

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

FOR THE QUARTERLY PERIOD ENDED MAY 29, 2011

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NOTE 2: GOODWILL AND OTHER INTANGIBLE ASSETS

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The changes in the carrying amount of goodwill by business segment for the six months ended May 29, 2011, were as follows:

	Americas	Europe	Asia — Pacific	Total
		(Dollars in thousands)
Balance, November 28, 2010	$ 207,427	$ 31,603	$ 2,442	$ 241,472
Foreign currency fluctuation	4	1,804	26	1,834
Balance, May 29, 2011	$ 207,431	$ 33,407	$ 2,468	$ 243,306

Other intangible assets, net, were as follows:

	May 29, 2011 — Gross	Accumulated			November 28, 2010 — Gross	Accumulated
	Carrying Value	Amortization		Total	Carrying Value	Amortization		Total
		(Dollars in thousands)
Unamortized intangible assets:
Trademarks	$ 42,743	$ —		$ 42,743	$ 42,743	$ —		$ 42,743
Amortized intangible assets:
Acquired contractual rights	41,851	(18,531	)	23,320	45,712	(17,765	)	27,947
Customer lists	21,216	(8,281	)	12,935	20,037	(6,075	)	13,962
Total	$ 105,810	$ (26,812	)	$ 78,998	$ 108,492	$ (23,840	)	$ 84,652

For the three and six months ended May 29, 2011, amortization of these intangible assets was $3.0 million and $6.0 million, respectively, compared to $3.7 million and $7.6 million, respectively, in the same periods of 2010.

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

FOR THE QUARTERLY PERIOD ENDED MAY 29, 2011

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NOTE 3: FAIR VALUE OF FINANCIAL INSTRUMENTS

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

	May 29, 2011			November 28, 2010
		Fair Value Estimated Using			Fair Value Estimated Using
		Level 1	Level 2		Level 1	Level 2
	Fair Value	Inputs (1)	Inputs (2)	Fair Value	Inputs (1)	Inputs (2)
		(Dollars in thousands)
Financial assets carried at fair value
Rabbi trust assets	$ 19,978	$ 19,978	$ —	$ 18,316	$ 18,316	$ —
Forward foreign exchange contracts,
net (3)	7,499	—	7,499	1,385	—	1,385
Total	$ 27,477	$ 19,978	$ 7,499	$ 19,701	$ 18,316	$ 1,385
Financial liabilities carried at fair value
Forward foreign exchange contracts,
net (3)	$ 12,100	$ —	$ 12,100	$ 5,003	$ —	$ 5,003
Total	$ 12,100	$ —	$ 12,100	$ 5,003	$ —	$ 5,003

| (1) | Fair values estimated using
Level 1 inputs are inputs which consist of quoted prices in
active markets for identical assets or liabilities that the
Company has the ability to access at the measurement date. Rabbi
trust assets consist of a diversified portfolio of equity, fixed
income and other securities. |
| --- | --- |
| (2) | Fair values estimated using
Level 2 inputs are inputs, other than quoted prices, that
are observable for the asset or liability, either directly or
indirectly and include among other things, quoted prices for
similar assets or liabilities in markets that are active or
inactive as well as inputs other than quoted prices that are
observable. For forward foreign exchange contracts, inputs
include foreign currency exchange and interest rates and, where
applicable, credit default swap prices. |
| (3) | The Company’s forward foreign
exchange contracts are subject to International Swaps and
Derivatives Association, Inc. master agreements. These
agreements permit the net-settlement of these contracts on a
per-institution basis. |

The following table presents the carrying value — including accrued interest — and estimated fair value of the Company’s financial instruments that are carried at adjusted historical cost:

	May 29, 2011 — Carrying	Estimated	November 28, 2010 — Carrying	Estimated
	Value	Fair
Value (1)	Value	Fair
Value (1)
		(Dollars in thousands)
Financial liabilities carried at adjusted historical cost
Senior revolving credit facility	$ 108,486	$ 107,404	$ 108,482	$ 107,129
Senior term loan due 2014	323,920	314,204	324,423	311,476
8.875% senior notes due 2016	355,091	371,278	355,004	373,379
4.25% Yen-denominated Eurobonds due 2016	112,546	110,864	109,429	98,063
7.75% Euro senior notes due 2018	425,710	421,467	401,982	407,993
7.625% senior notes due 2020	526,668	533,231	526,557	542,307
Short-term borrowings	52,076	52,076	46,722	46,722
Total	$ 1,904,497	$ 1,910,524	$ 1,872,599	$ 1,887,069

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

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

FOR THE QUARTERLY PERIOD ENDED MAY 29, 2011

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NOTE 4: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

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As of May 29, 2011, the Company had forward foreign exchange contracts to buy $461.6 million and to sell $622.6 million against various foreign currencies. These contracts are at various exchange rates and expire at various dates through May 2012.

The table below provides data about the carrying values of derivative instruments and non-derivative instruments designated as net investment hedges:

	May 29, 2011
	Assets	(Liabilities)			Assets		(Liabilities)
				Derivative					Derivative
	Carrying	Carrying		Net Carrying	Carrying		Carrying		Net Carrying
	Value	Value		Value	Value		Value		Value
	(Dollars in thousands)
Derivatives not designated as hedging instruments
Forward foreign exchange
contracts (1)	$ 9,666	$ (2,167	)	$ 7,499	$	7,717	$ (6,332	)	$ 1,385
Forward foreign exchange
contracts (2)	10,568	(22,668	)	(12,100	)	4,266	(9,269	)	(5,003	)
Total	$ 20,234	$ (24,835	)		$	11,983	$ (15,601	)
Non-derivatives designated as hedging instruments
4.25% Yen-denominated Eurobonds due 2016	$ —	$ (50,473	)		$	—	$ (61,075	)
7.75% Euro senior notes due 2018	—	(424,320	)			—	(400,740	)
Total	$ —	$ (474,793	)		$	—	$ (461,815	)

| (1) | Included in “Other current
assets” or “Other assets” on the Company’s
consolidated balance sheets. |
| --- | --- |
| (2) | Included in “Other accrued
liabilities” on the Company’s consolidated balance
sheets. |

The table below provides data about the amount of gains and losses related to derivative instruments and non-derivative instruments designated as net investment hedges included in “Accumulated other comprehensive loss” (“AOCI”) on the Company’s consolidated balance sheets, and in “Other income (expense), net” in the Company’s consolidated statements of operations:

	Gain or (Loss)
	Recognized in AOCI			Income (Expense), net (Ineffective
	(Effective Portion)			Portion and Amount Excluded from
	As of		As of	Effectiveness Testing)
	May 29,		November 28,	Three Months Ended				Six Months Ended
	2011		2010	May 29, 2011		May 30, 2010		May 29, 2011	May 30, 2010
	(Dollars in thousands)
Forward foreign exchange contracts	$ 4,637		$ 4,637	$	—	$	—	$ —	$	—
4.25% Yen-denominated Eurobonds due 2016	(25,931	)	(24,377	)	(453	)	825	(1,546	)	5,550
7.75% Euro senior notes due 2018	(47,251	)	(23,671	)	—		—	—		—
Cumulative income taxes	26,696		17,022
Total	$ (41,849	)	$ (26,389	)

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

FOR THE QUARTERLY PERIOD ENDED MAY 29, 2011

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The table below provides data about the amount of gains and losses related to derivatives not designated as hedging instruments included in “Other income (expense), net” in the Company’s consolidated statements of operations:

	Gain or (Loss) During
	Three Months Ended			Six Months Ended
	May 29,	May 30,		May 29,		May 30,
	2011	2010		2011		2010
		(Dollars in thousands)
Forward foreign exchange contracts:
Realized	$ 860	$ (2,976	)	$ (4,863	)	$ (5,340	)
Unrealized	1,405	8,598		(968	)	15,945
Total	$ 2,265	$ 5,622		$ (5,831	)	$ 10,605

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NOTE 5: DEBT

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	May 29,	November 28,
	2011	2010
	(Dollars in thousands)
Long-term debt
Secured:
Senior revolving credit facility	$ 108,250	$ 108,250
Total secured	108,250	108,250
Unsecured:
Senior term loan due 2014	323,853	323,676
8.875% senior notes due 2016	350,000	350,000
4.25% Yen-denominated Eurobonds due 2016	112,162	109,062
7.75% Euro senior notes due 2018	424,320	400,740
7.625% senior notes due 2020	525,000	525,000
Total unsecured	1,735,335	1,708,478
Less: current maturities	—	—
Total long-term debt	$ 1,843,585	$ 1,816,728
Short-term debt
Short-term borrowings	$ 51,610	$ 46,418
Current maturities of long-term debt	—	—
Total short-term debt	$ 51,610	$ 46,418
Total long-term and short-term debt	$ 1,895,195	$ 1,863,146

Short-term Credit Lines and Standby Letters of Credit

As of May 29, 2011, the Company’s total availability of $378.0 million under its senior secured revolving credit facility was reduced by $83.5 million of letters of credit and other credit usage under the facility, yielding a net availability of $294.5 million.

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

FOR THE QUARTERLY PERIOD ENDED MAY 29, 2011

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Interest Rates on Borrowings

The Company’s weighted-average interest rate on average borrowings outstanding was 6.84% during both the three and six months ended May 29, 2011, as compared to 7.40% and 7.33%, respectively, in each of the same periods of 2010.

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NOTE 6: EMPLOYEE BENEFIT PLANS

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

	Pension Benefits
	Three Months Ended			Three Months Ended
	May 29,		May 30,	May 29,		May 30,
	2011		2010	2011		2010
	(Dollars in thousands)
Net periodic benefit cost (income):
Service cost	$ 2,604		$ 1,927	$	119	$	118
Interest cost	15,126		14,888		1,907		2,169
Expected return on plan assets	(13,057	)	(11,522	)	—		—
Amortization of prior service cost
(benefit) (1)	20		111		(7,237	)	(7,391	)
Amortization of actuarial loss	4,304		6,666		1,257		1,402
Curtailment
loss (2)	3,071		—		—		—
Net settlement loss	705		20		—		—
Net periodic benefit cost (income)	12,773		12,090		(3,954	)	(3,702	)
Changes in accumulated other comprehensive loss:
Actuarial (gain)
loss (2)	(32,415	)	179		—		—
Amortization of prior service (cost) benefit	(20	)	(111	)	7,237		7,391
Amortization of actuarial loss	(4,304	)	(6,666	)	(1,257	)	(1,402	)
Curtailment
loss (2)	(3,071	)	—		—		—
Net settlement loss	(360	)	—		—		—
Total recognized in accumulated other comprehensive loss	(40,170	)	(6,598	)	5,980		5,989
Total recognized in net periodic benefit cost (income) and
accumulated other comprehensive loss	$ (27,397	)	$ 5,492	$	2,026	$	2,287

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

FOR THE QUARTERLY PERIOD ENDED MAY 29, 2011

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	Pension Benefits
	Six Months Ended			Six Months Ended
	May 29,		May 30,	May 29,		May 30,
	2011		2010	2011		2010
	(Dollars in thousands)
Net periodic benefit cost (income):
Service cost	$ 5,187		$ 3,914	$	239	$	236
Interest cost	30,154		29,877		3,814		4,338
Expected return on plan assets	(25,955	)	(23,090	)	—		—
Amortization of prior service cost
(benefit) (1)	85		229		(14,473	)	(14,783	)
Amortization of actuarial loss	11,034		13,331		2,513		2,804
Curtailment
loss (2)	3,055		100		—		—
Net settlement loss	716		192		—		—
Net periodic benefit cost (income)	24,276		24,553		(7,907	)	(7,405	)
Changes in accumulated other comprehensive loss:
Actuarial (gain)
loss (2)	(32,415	)	303		—		—
Amortization of prior service (cost) benefit	(85	)	(229	)	14,473		14,783
Amortization of actuarial loss	(11,034	)	(13,331	)	(2,513	)	(2,804	)
Curtailment
loss (2)	(3,071	)	(13	)	—		—
Net settlement loss	(338	)	(151	)	—		—
Total recognized in accumulated other comprehensive loss	(46,943	)	(13,421	)	11,960		11,979
Total recognized in net periodic benefit cost (income) and
accumulated other comprehensive loss	$ (22,667	)	$ 11,132	$	4,053	$	4,574

| (1) | Postretirement benefits
amortization of prior service benefit recognized during each
period relates primarily to the favorable impact of the February
2004 and August 2003 plan amendments. |
| --- | --- |
| (2) | On April 15, 2011,
participants in the Company’s U.S. pension plans ceased
earning benefits. This event triggered a remeasurement of the
U.S. pension plans resulting in a $32.0 million change in
the plans’ funded status and a $2.9 million
curtailment loss attributable to the accelerated recognition of
prior service cost. |

The estimated net loss for the Company’s defined benefit pension plans that will be amortized from “Accumulated other comprehensive loss” into net periodic benefit cost in 2011 is expected to be approximately $15.0 million. The assumptions used in the April 2011 remeasurement were not materially different from those disclosed in our 2010 Annual Report on Form 10-K.

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NOTE 7: COMMITMENTS AND CONTINGENCIES

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Forward Foreign Exchange Contracts

The Company uses derivative instruments to manage its exposure to foreign currencies. The Company is exposed to credit loss in the event of nonperformance by the counterparties to the forward foreign exchange contracts. However, the Company believes that its exposures are appropriately diversified across counterparties and that these counterparties are creditworthy financial institutions. Please see Note 4 for additional information.

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

FOR THE QUARTERLY PERIOD ENDED MAY 29, 2011

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Other Contingencies

Litigation. There have been no material developments in the Company’s litigation matters since it filed its 2010 Annual Report on Form 10-K.

In the ordinary course of business, the Company has various 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.

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NOTE 8: DIVIDEND PAYMENT

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The Company paid a cash dividend of $20 million in the first quarter of 2011. The Company does not have an annual dividend policy. The Company will continue to review its ability to pay cash dividends at least annually, and dividends may be declared at the discretion of the Company’s Board of Directors depending upon, among other factors, the tax impact to the dividend recipients, the Company’s financial condition and compliance with the terms of its debt agreements.

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NOTE 9: COMPREHENSIVE INCOME (LOSS)

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

	Three Months Ended — May 29,	May 30,			Six Months Ended — May 29,	May 30,
	2011	2010			2011	2010
	(Dollars in thousands)
Net income (loss)	$ 20,511	$	(18,390	)	$ 59,679	$	37,479
Other comprehensive income (loss):
Pension and postretirement benefits	21,335		3,254		21,850		1,023
Net investment hedge (losses) gains	(6,570	)	22,612		(15,460	)	44,843
Foreign currency translation gains (losses)	14,363		(25,853	)	22,890		(51,608	)
Unrealized gain on marketable securities	93		167		667		184
Total other comprehensive income (loss)	29,221		180		29,947		(5,558	)
Comprehensive income (loss)	49,732		(18,210	)	89,626		31,921
Comprehensive loss attributable to noncontrolling interest	(384	)	(4,370	)	(1,675	)	(5,462	)
Comprehensive income (loss) attributable to Levi
Strauss & Co.	$ 50,116	$	(13,840	)	$ 91,301	$	37,383

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

FOR THE QUARTERLY PERIOD ENDED MAY 29, 2011

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

	May 29, — 2011		November 28, — 2010
	(Dollars in thousands)
Pension and postretirement benefits	$ (176,957	)	$ (198,807	)
Net investment hedge losses	(41,849	)	(26,389	)
Foreign currency translation losses	(14,164	)	(37,054	)
Unrealized gain on marketable securities	824		157
Accumulated other comprehensive loss	(232,146	)	(262,093	)
Accumulated other comprehensive income attributable to
noncontrolling interest	10,367		10,075
Accumulated other comprehensive loss attributable to Levi
Strauss & Co.	$ (242,513	)	$ (272,168	)

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NOTE 10: OTHER INCOME (EXPENSE), NET

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

	Three Months Ended — May 29,		May 30,	May 29,			May 30,
	2011		2010	2011			2010
	(Dollars in thousands)
Foreign exchange management gains
(losses) (1)	$ 2,265		$ 5,622	$	(5,831	)	$ 10,605
Foreign currency transaction (losses)
gains (2)	(4,236	)	1,027		(3,294	)	8,203
Interest income	404		700		819		1,292
Other	561		(655	)	1,341		(943	)
Total other income (expense), net	$ (1,006	)	$ 6,694	$	(6,965	)	$ 19,157

| (1) | In 2011, the Company recorded
losses on its forward foreign exchange contracts in both the
three- and six-month periods, primarily due to the depreciation
of the U.S. Dollar against various foreign currencies, most
notably the Swedish Krona and the Australian Dollar. For the
three- and six-month periods, these losses were offset fully and
partially, respectively, by the correction recorded for embedded
foreign currency derivatives in certain of the Company’s
leases. Please see Note 1 for additional information. Gains
in 2010 were primarily due to the appreciation of the U.S.
Dollar against the Euro, the Japanese Yen and the Australian
Dollar. |
| --- | --- |
| (2) | Foreign currency transaction losses
in 2011 were primarily due to the depreciation of the U.S.
Dollar against the Euro. Foreign currency transaction gains in
2010 were primarily due to the appreciation of the U.S. Dollar
against the Euro and the Japanese Yen. |

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NOTE 11: INCOME TAXES

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The effective income tax rate was 32.6% for the six months ended May 29, 2011, compared to 66.1% for the same period ended May 30, 2010. The reduction in the effective tax rate was primarily driven by two significant discrete income tax charges recognized in the second quarter of 2010, as described below.

During the second quarter of 2010, the Company recorded a discrete tax expense of $14.2 million to recognize a valuation allowance to fully offset the amount of deferred tax assets in Japan and another discrete tax expense of $14.0 million to recognize the reduction in deferred tax assets as a result of the enactment of the Patient Protection and Affordable Care Act (the “Health Care Act”).

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LEVI STRAUSS & CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

FOR THE QUARTERLY PERIOD ENDED MAY 29, 2011

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As of May 29, 2011, the Company’s total gross amount of unrecognized tax benefits was $147.9 million, of which $89.3 million would impact the effective tax rate, if recognized. As of November 28, 2010, the Company’s total gross amount of unrecognized tax benefits was $150.7 million, of which $87.2 million would have impacted the effective tax rate, if recognized.

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NOTE 12: RELATED PARTIES

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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 three- and six-month periods ended May 29, 2011, the Company donated $0.4 million and $0.7 million, respectively, to the Levi Strauss Foundation as compared to $0.3 million and $0.5 million, respectively, for the same prior-year periods.

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NOTE 13: BUSINESS SEGMENT INFORMATION

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The Company manages its business according to three regional segments: the Americas, Europe and Asia Pacific. 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.

In the first quarter of 2011, accountability for certain information technology, human resources, advertising and promotion, and marketing staff costs of a global nature, that in prior years were captured in the Company’s geographic regions, was centralized under corporate management in conjunction with the Company’s key strategy of driving productivity. Beginning in 2011, these costs have been classified as corporate expenses. These costs were not significant to any of the Company’s regional segments individually in any of the periods presented herein, and accordingly business segment information for prior years has not been revised.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

FOR THE QUARTERLY PERIOD ENDED MAY 29, 2011

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Business segment information for the Company is as follows:

	Three Months Ended — May 29,	May 30,		May 29,		May 30,
	2011	2010		2011		2010
	(Dollars in thousands)
Net revenues:
Americas	$ 599,074	$	557,962	$	1,191,260	$	1,103,211
Europe	281,108		240,130		592,712		546,253
Asia Pacific	212,740		178,437		429,643		362,271
Total net revenues	$ 1,092,922	$	976,529	$	2,213,615	$	2,011,735
Operating income:
Americas	$ 82,600	$	84,917	$	157,633	$	160,980
Europe	37,522		31,598		108,813		97,983
Asia Pacific	25,429		16,896		62,792		47,549
Regional operating income	145,551		133,411		329,238		306,512
Corporate expenses	80,575		64,189		165,388		130,039
Total operating income	64,976		69,222		163,850		176,473
Interest expense	(33,515	)	(34,440	)	(68,381	)	(68,613	)
Loss on early extinguishment of debt	—		(16,587	)	—		(16,587	)
Other income (expense), net	(1,006	)	6,694		(6,965	)	19,157
Income before income taxes	$ 30,455	$	24,889	$	88,504	$	110,430

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NOTE 14: SUBSEQUENT EVENT

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On June 16, 2011, the Company announced that effective September 1, 2011, R. John Anderson will cease to be the Company’s President and Chief Executive Officer and will be succeeded by Charles V. Bergh. Mr. Bergh entered into an employment agreement with the Company on June 9, 2011, and on June 16, 2011, Mr. Anderson entered into a Transition Services, Separation Agreement and Release of All Claims with the Company. Mr. Anderson will continue to serve in his current position until September 1, 2011. Charges associated with the separation agreement will be recorded in the Company’s third quarter financial statements.

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

Our business is operated through three geographic regions: Americas, Europe and Asia Pacific. Our products are sold in approximately 55,000 retail locations in more than 110 countries. We support our brands through a global infrastructure, developing, sourcing and marketing our products around the world. We distribute our Levi’s ® and Dockers ® products primarily through chain retailers and department stores in the United States and primarily through department stores, specialty retailers and nearly 1,800 franchised and other brand-dedicated stores outside of the United States. We also distribute our Levi’s ® and Dockers ® products through our online stores operated by us, and 498 company-operated stores located in 31 countries, including the United States. These stores generated approximately 18% of our net revenues in the first half of 2011, as compared to the first half of 2010, when company-operated stores generated 16% of our net revenues. In addition, we distribute our Levi’s ® and Dockers ® products through online stores operated by certain of our key wholesale customers and other third parties. We distribute products under the Signature brand primarily through mass channel retailers in the United States and Canada and franchised stores in Asia Pacific. We currently distribute our Denizen tm products through franchised stores in Asia Pacific, and starting in the second half of 2011, will distribute them through certain wholesale channels in the United States and Mexico.

Our Europe and Asia Pacific businesses, collectively, contributed approximately 46% of our net revenues and 52% of our regional operating income in the six-month period in 2011. Sales of Levi’s ® brand products represented approximately 83% of our total net sales in the six-month period in 2011.

Trends Affecting Our Business

During the second quarter of 2011, we remained focused on our key long-term strategies: build upon our leadership position in the jean and khaki categories through product and marketing innovation, enhance relationships with wholesale customers and expand our dedicated store network to drive sales growth, capitalize on our global footprint, and increase our productivity.

Most markets around the world continued to feel the lingering impact of the challenged economy during the quarter. We expect that the impact of increasing prices and tightened supply of raw materials, such as cotton, will contribute to ongoing pricing pressure throughout the supply chain during 2011 and thereafter. Our response to these conditions may include additional product price increases or enhanced support of our supply chain partners to maintain a sufficient flow of product. The conditions within our industry and our response to them may impact our margins, working capital, and sales volumes.

Our Second Quarter 2011 Results

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

| • | Net revenues. Our consolidated net revenues
increased by 12% compared to the second quarter of 2010, an
increase of 8% on a constant-currency basis, reflecting growth
in each of our geographic regions. Increased net revenues were
primarily associated with our
Levi’s ® brand, through the expansion and performance of our dedicated
store network globally and growth in wholesale revenues in the
Americas and Europe. |
| --- | --- |
| • | Operating income. Our operating income and
operating margin declined compared to the second quarter of
2010, as the benefits from the increase in our net revenues were
offset primarily by a lower gross margin, reflecting higher
sales discounts and the higher cost of cotton, and our continued
investment in retail expansion. |

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• Cash flows. Cash flows provided by operating activities were $85 million for the six-month period in 2011 as compared to $146 million for the same period in 2010, primarily reflecting our inventory build and a contribution to our pension plans in 2011.

Financial Information Presentation

Fiscal year . Our fiscal year ends on the last Sunday of November in each year, although the fiscal years of certain foreign subsidiaries are fixed at November 30 due to local statutory requirements. Apart from these subsidiaries, each quarter of fiscal years 2011 and 2010 consisted of 13 weeks.

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

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

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

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.

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

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Results of Operations for Three and Six Months Ended May 29, 2011, as Compared to Same Periods in 2010

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

	Three Months Ended										Six Months Ended
						May 29,		May 30,								May 29,		May 30,
				%		2011		2010						%		2011		2010
	May 29,	May 30,		Increase		% of Net		% of Net			May 29,	May 30,		Increase		% of Net		% of Net
	2011	2010		(Decrease)		Revenues		Revenues			2011	2010		(Decrease)		Revenues		Revenues
								(Dollars in millions)
Net sales	$ 1,074.4	$	958.0		12.2	%	98.3	%	98.1	%	$ 2,174.3	$	1,974.0		10.1	%	98.2	%	98.1	%
Licensing revenue	18.5		18.5		(0.3	)%	1.7	%	1.9	%	39.3		37.7		4.1	%	1.8	%	1.9	%
Net revenues	1,092.9		976.5		11.9	%	100.0	%	100.0	%	2,213.6		2,011.7		10.0	%	100.0	%	100.0	%
Cost of goods sold	552.2		477.1		15.7	%	50.5	%	48.9	%	1,114.9		979.3		13.8	%	50.4	%	48.7	%
Gross profit	540.7		499.4		8.3	%	49.5	%	51.1	%	1,098.7		1,032.4		6.4	%	49.6	%	51.3	%
Selling, general and administrative expenses	475.7		430.2		10.6	%	43.5	%	44.1	%	934.8		855.9		9.2	%	42.2	%	42.5	%
Operating income	65.0		69.2		(6.1	)%	5.9	%	7.1	%	163.9		176.5		(7.2	)%	7.4	%	8.8	%
Interest expense	(33.5	)	(34.4	)	(2.7	)%	(3.1	)%	(3.5	)%	(68.4	)	(68.6	)	(0.3	)%	(3.1	)%	(3.4	)%
Loss on early extinguishment of debt	—		(16.6	)	(100.0	)%	—		(1.7	)%	—		(16.6	)	(100.0	)%	—		(0.8	)%
Other income (expense), net	(1.0	)	6.7		(115.0	)%	(0.1	)%	0.7	%	(7.0	)	19.2		(136.4	)%	(0.3	)%	1.0	%
Income before income taxes	30.5		24.9		22.4	%	2.8	%	2.5	%	88.5		110.5		(19.9	)%	4.0	%	5.5	%
Income tax expense	10.0		43.3		(77.0	)%	0.9	%	4.4	%	28.8		73.0		(60.5	)%	1.3	%	3.6	%
Net income (loss)	20.5		(18.4	)	211.5	%	1.9	%	(1.9	)%	59.7		37.5		59.2	%	2.7	%	1.9	%
Net loss attributable to noncontrolling interest	0.5		4.0		88.5	%	—		0.4	%	1.9		4.5		(56.2	)%	0.1	%	0.2	%
Net income (loss) attributable to Levi Strauss &
Co.	$ 21.0	$	(14.4	)	245.8	%	1.9	%	(1.5	)%	$ 61.6	$	42.0		46.9	%	2.8	%	2.1	%

Net revenues

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

	Three Months Ended				Six Months Ended
			% Increase (Decrease)				% Increase (Decrease)
	May 29,	May 30,	As	Constant	May 29,	May 30,	As	Constant
	2011	2010	Reported	Currency	2011	2010	Reported	Currency
	(Dollars in millions)
Net revenues:
Americas	$ 599.1	$ 558.0	7.4 %	6.6 %	$ 1,191.3	$ 1,103.2	8.0 %	7.3 %
Europe	281.1	240.1	17.1 %	9.4 %	592.7	546.2	8.5 %	7.7 %
Asia Pacific	212.7	178.4	19.2 %	11.9 %	429.6	362.3	18.6 %	12.2 %
Total net revenues	$ 1,092.9	$ 976.5	11.9 %	8.3 %	$ 2,213.6	$ 2,011.7	10.0 %	8.3 %

Total net revenues increased on both reported and constant-currency bases for the three- and six-month periods ended May 29, 2011, as compared to the same prior-year periods. Reported amounts were affected favorably by changes in foreign currency exchange rates across all regions.

Americas . On both reported and constant-currency bases, net revenues in our Americas region increased for the three- and six-month periods, with currency affecting net revenues favorably by approximately $5 million and $8 million, respectively.

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For both periods, the region’s increased net revenues were driven by the Levi’s ® brand, reflecting a higher volume of sales in our retail stores and at wholesale. Higher net revenues in the region also reflected the price increases we have implemented. The improved Levi’s ® brand performance was partially offset by declines in the three-month period of net sales from our U.S. Dockers ® brand.

Europe . Net revenues in Europe increased on both reported and constant-currency bases for the three- and six-month periods, with currency affecting net revenues favorably by approximately $18 million and $5 million, respectively.

The increase in the region’s net revenues was driven by the expansion and improved performance of our company-operated retail network throughout the region and higher sales in our traditional wholesale channels. Growth primarily reflected the success of our Levi’s ® brand women’s products.

Asia Pacific . Net revenues in Asia Pacific increased on both reported and constant-currency bases for the three- and six-month periods, with currency affecting net revenues favorably by approximately $13 million and $22 million, respectively.

The net revenues increase in both periods was primarily from our Levi’s ® brand, driven by the continued expansion of our brand-dedicated retail network in China and India as well as other of our emerging markets, offset by the continued decline of net revenues in Japan. Sales of our Denizen tm brand products were partially offset by corresponding declines in Signature brand sales as we transition the brand in the region.

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			Six Months Ended
			%			%
	May 29,	May 30,	Increase	May 29,	May 30,	Increase
	2011	2010	(Decrease)	2011	2010	(Decrease)
	(Dollars in millions)
Net revenues	$ 1,092.9	$ 976.5	11.9 %	$ 2,213.6	$ 2,011.7	10.0 %
Cost of goods sold	552.2	477.1	15.7 %	1,114.9	979.3	13.8 %
Gross profit	$ 540.7	$ 499.4	8.3 %	$ 1,098.7	$ 1,032.4	6.4 %
Gross margin	49.5 %	51.1 %		49.6 %	51.3 %

As compared to the same prior-year periods, the gross profit increase for the three- and six-month periods ended May 29, 2011, was driven by the increase in our net revenues and favorable currency impact of approximately $20 million and $22 million, respectively, partially offset by a decline in our gross margin. The gross margin decrease was primarily due to an increase in sales discounts, in both our Levi’s ® and Dockers ® brands, to drive sales and manage inventory, and the higher cost of cotton. These factors were partially offset by the increased revenue contribution from our company-operated retail network, which generally has a higher gross margin than our wholesale business, and our price increases.

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Selling, general and administrative expenses

The following table shows our selling, general and administrative (“SG&A”) expenses 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					Six Months Ended
				May 29,	May 30,				May 29,	May 30,
			%	2011	2010			%	2011	2010
	May 29,	May 30,	Increase	% of Net	% of Net	May 29,	May 30,	Increase	% of Net	% of Net
	2011	2010	(Decrease)	Revenues	Revenues	2011	2010	(Decrease)	Revenues	Revenues
	(Dollars in millions)
Selling	$ 174.1	$ 147.7	17.8 %	15.9 %	15.1 %	$ 349.3	$ 304.0	14.9 %	15.8 %	15.1 %
Advertising and promotion	72.2	71.1	1.5 %	6.6 %	7.3 %	134.4	129.6	3.7 %	6.1 %	6.4 %
Administration	103.3	98.6	4.8 %	9.5 %	10.1 %	207.3	193.4	7.2 %	9.4 %	9.6 %
Other	126.1	112.8	11.9 %	11.5 %	11.5 %	243.8	228.9	6.5 %	11.0 %	11.4 %
Total SG&A	$ 475.7	$ 430.2	10.6 %	43.5 %	44.1 %	$ 934.8	$ 855.9	9.2 %	42.2 %	42.5 %

Currency drove approximately $16 million and $15 million of the increase in SG&A expenses for the three- and six-month periods ended May 29, 2011, respectively, as compared to the same prior-year periods.

Selling . In both periods, currency drove approximately $7 million of the increase. Higher selling expenses across all business segments primarily reflected additional costs, such as rents and increased headcount, associated with the continued expansion of our company-operated store network. We had 45 more company-operated stores at the end of the second quarter of 2011 than we did at the end of the second quarter of 2010.

Advertising and promotion . For both periods, the increase in advertising and promotion expenses was attributable to the effects of currency. Expenses in both periods in 2011 and 2010 included campaign spend in support of our U.S. Levi’s ® and U.S. Dockers ® brands and, with respect to expenses in 2011, our recently-launched Denizen tm brand.

Administration . Higher administration expenses in both periods included increased spending on various corporate initiatives, and with respect to the six-month period, an increase in incentive compensation expense related to higher projected funding.

Other . Other SG&A expenses include distribution, information resources, and marketing organization costs. These costs increased primarily due to an increase in severance costs for headcount reductions as well as increased marketing project costs related to our strategic initiatives.

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Operating income

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

	Three Months Ended								Six Months Ended
				May 29,		May 30,						May 29,		May 30,
			%	2011		2010					%	2011		2010
	May 29,	May 30,	Increase	% of Net		% of Net			May 29,	May 30,	Increase	% of Net		% of Net
	2011	2010	(Decrease)	Revenues		Revenues			2011	2010	(Decrease)	Revenues		Revenues
	(Dollars in millions)
Operating income:
Americas	$ 82.6	$ 84.9	(2.7	)%	13.8	%	15.2	%	$ 157.6	$ 161.0	(2.1	)%	13.2	%	14.6	%
Europe	37.5	31.6	18.7	%	13.3	%	13.2	%	108.8	98.0	11.1	%	18.4	%	17.9	%
Asia Pacific	25.5	16.9	50.5	%	12.0	%	9.5	%	62.8	47.5	32.1	%	14.6	%	13.1	%
Total regional operating income	145.6	133.4	9.1	%	13.3	%*	13.7	%*	329.2	306.5	7.4	%	14.9	%*	15.2	%*
Corporate expenses	80.6	64.2	25.5	%	7.4	%*	6.6	%*	165.3	130.0	27.2	%	7.5	%*	6.5	%*
Total operating income	$ 65.0	$ 69.2	(6.1	)%	5.9	%*	7.1	%*	$ 163.9	$ 176.5	(7.2	)%	7.4	%*	8.8	%*
Operating margin	5.9 %	7.1 %							7.4 %	8.8 %

• Percentage of consolidated net revenues

Currency favorably affected total operating income by approximately $4 million and $7 million for the three- and six-month periods, respectively.

Regional operating income .

| • | Americas. For both periods, the decrease in
operating margin and operating income primarily reflected the
region’s decline in gross margin, the effects of which were
partially offset by higher net revenues. |
| --- | --- |
| • | Europe. For both periods, the increase in
operating margin and operating income was primarily due to
higher net revenues and the favorable impact of currency. |
| • | Asia Pacific. For both periods, the increase
in operating margin and operating income primarily reflected the
region’s improved gross margin and higher net revenues as
well as the favorable impact of currency. |

Corporate . Corporate expenses are selling, general and administrative expenses that are not attributed to any of our regional operating segments. Higher corporate expenses in both periods included an increase in severance costs for headcount reductions, increased costs associated with various corporate initiatives and higher marketing project costs, and with respect to the six-month period, increased incentive compensation expense due to higher projected funding.

Interest expense

Interest expense decreased to $33.5 million and $68.4 million for the three- and six-month periods ended May 29, 2011, respectively, from $34.4 million and $68.6 million for the same periods in 2010. A decline in interest expense driven by lower average borrowing rates, resulting from our debt refinancing activity that occurred in the second quarter of 2010, was partially offset by an increase in interest expense on our deferred compensation plans.

The weighted-average interest rate on average borrowings outstanding was 6.84% for both the three- and six-month periods ended May 29, 2011, as compared to 7.40% and 7.33%, respectively, for each of the same periods in 2010.

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Other income (expense), net

Other income (expense), net, primarily consists of foreign exchange management activities and transactions. For the three- and six-month periods ended May 29, 2011, we recorded expense of $1.0 million and $7.0 million, respectively, as compared to income of $6.7 million and $19.2 million for the same prior-year periods.

The net expense in the three-month period in 2011 reflected losses on our foreign currency denominated balances, offset primarily by gains relating to the effect of a correcting entry to record embedded foreign currency derivatives in certain of our leases. The expense in the six-month period in 2011 primarily reflected losses on foreign exchange derivatives which generally economically hedge future cash flow obligations of our foreign operations. The income in 2010 primarily reflected gains on foreign exchange derivatives.

Income tax expense

Our effective income tax rate was 32.6% for the six months ended May 29, 2011, compared to 66.1% for the same period ended May 30, 2010. Twenty-six percentage points of the higher 2010 effective tax rate were driven by two significant discrete income tax charges recognized in the second quarter of 2010, as described below.

During the second quarter of 2010, we recorded a discrete tax expense of $14.2 million to recognize a valuation allowance to fully offset the amount of deferred tax assets in Japan and another discrete tax expense of $14.0 million to recognize the reduction in deferred tax assets as a result of the enactment of the Patient Protection and Affordable Care Act (the “Health Care Act”).

Liquidity and Capital Resources

Liquidity outlook

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

Cash sources

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

We are borrowers under an amended and restated senior secured revolving credit facility. The maximum availability under the facility is $750 million secured by certain of our domestic assets and certain U.S. trademarks associated with the Levi’s ® brand and other related intellectual property. The facility includes a $250 million trademark tranche and a $500 million revolving tranche. The revolving tranche increases as the trademark tranche is repaid, up to a maximum of $750 million when the trademark tranche is repaid in full. Upon repayment of the trademark tranche, the secured interest in the U.S. trademarks will be released. As of May 29, 2011, we had borrowings of $108.3 million under the trademark tranche and no outstanding borrowings under the revolving tranche. Unused availability under the revolving tranche was $294.5 million, as our total availability of $378.0 million, based on collateral levels as defined by the agreement, was reduced by $83.5 million of other credit-related instruments such as documentary and standby letters of credit allocated under the facility.

Under the facility, we are required to meet a fixed charge coverage ratio as defined in the agreement of 1.0:1.0 when unused availability is less than $100 million. This covenant will be discontinued upon the repayment in full and termination of the trademark tranche described above, at which time our availability under the facility will be reduced by a required unfunded availability reserve of $50 million.

As of May 29, 2011, we had cash and cash equivalents totaling approximately $258.5 million, resulting in a total liquidity position (unused availability and cash and cash equivalents) of $553.0 million.

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Cash uses

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

There have been no material changes to our estimated cash requirements for 2011 from those disclosed in our 2010 Annual Report on Form 10-K, except for our projected pension plan contributions. Based on changes in discount rates and the updated valuation of our pension assets, as well as our current evaluation of alternative methods available to us for measuring our pension funding obligation, we now expect our required contribution amount in 2011 to be approximately $70 million.

Cash flows

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

	Six Months Ended — May 29,	May 30,
	2011	2010
	(Dollars in millions)
Cash provided by operating activities	$ 85.4	$	146.4
Cash used for investing activities	(80.9	)	(94.6	)
Cash (used for) provided by financing activities	(20.1	)	28.9
Cash and cash equivalents	258.5		353.1

Cash flows from operating activities

Cash provided by operating activities was $85.4 million for the six-month period in 2011, as compared to $146.4 million for the same period in 2010. Cash provided by operating activities declined compared to the prior year due to higher cash used for inventory, our pension plan contribution in the first quarter of 2011, and higher payments to vendors, reflecting the increase in our SG&A expenses. This decline was partially offset by an increase in cash collected from customers, reflecting our higher net revenues, and a decrease in cash paid for interest related to our refinancing activities in May 2010.

Cash flows from investing activities

Cash used for investing activities was $80.9 million for the six-month period in 2011, as compared to $94.6 million for the same period in 2010. As compared to the prior year, the decrease in cash used for investing activities primarily reflects the 2010 costs associated with the remodeling of the Company’s headquarters, partially offset by investments made in our information technology systems associated with the installation of our global enterprise resource planning system in 2011. Cash used for investing activities in 2010 also reflected final payment for an acquisition in 2009.

Cash flows from financing activities

Cash used for financing activities was $20.1 million for the six-month period in 2011, compared to cash provided of $28.9 million for the same period in 2010. Cash used in 2011 primarily related to our dividend payment to stockholders of $20.0 million. Net cash provided in 2010 reflected our May 2010 refinancing activities.

Indebtedness

We had fixed-rate debt of approximately $1.5 billion (77% of total debt) and variable-rate debt of approximately $0.4 billion (23% of total debt) as of May 29, 2011. The borrower of substantially all of our debt is Levi Strauss & Co., the parent and U.S. operating company. Our long-term debt agreements contain customary covenants

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restricting our activities as well as those of our subsidiaries. We are in compliance with all of these covenants. There have been no substantial changes to our required aggregate debt principal payments for each of the next five years and thereafter from those disclosed in our 2010 Annual Report on Form 10-K.

Off-Balance Sheet Arrangements, Guarantees and Other Contingent Obligations

There have been no significant changes to our off-balance sheet arrangements or contractual commitments from those disclosed in our 2010 Annual Report on Form 10-K.

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 from those disclosed in our 2010 Annual Report on Form 10-K except for the following:

| • | We no longer consider our accounting policy on derivative and
foreign exchange management activities to be critical; and |
| --- | --- |
| • | We measure changes in the funded status of our pension and
postretirement benefits plans using actuarial models which
utilize an attribution approach that generally spreads
individual events either over the estimated service lives of the
remaining employees in the plan, or, for plans where
participants will not earn additional benefits by rendering
future service, over the plan participants’ estimated
remaining lives. |

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. These risks and uncertainties, including those disclosed under “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended November 28, 2010, and our other filings with the Securities and Exchange Commission, could cause actual results to differ materially from those suggested by the forward-looking statements and include, without limitation:

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

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| • | changes in the level of consumer spending for apparel in view of
general economic and environmental conditions and pricing
trends, and our ability to plan for and respond to the impact of
those changes; |
| --- | --- |
| • | our ability to mitigate costs related to manufacturing,
sourcing, and raw materials supply, such as cotton, and to
manage consumer response to such mitigating actions; |
| • | consequences of the actions we take to support our supply chain
partners as a response to the rising costs of manufacturing,
sourcing, and raw materials supply; |
| • | our ability to mitigate the impact of a slowdown in the Japanese
economy due to the natural disasters and related events in that
country; |
| • | our adjustment to organizational changes including the continued
globalization of our brand management and the introduction of a
new chief executive officer; |
| • | our ability to grow our
Dockers ® brand and to expand our
Denizen tm brand into new markets and channels; |
| • | our and our wholesale customers’ decisions to modify
strategies and adjust product mix, and our ability to manage any
resulting product transition costs; |
| • | our ability to gauge and adapt to changing U.S. and
international retail environments and fashion trends and
changing consumer preferences in product, price-points and
shopping experiences; |
| • | our ability to respond to price, innovation and other
competitive pressures in the apparel industry and on our key
customers; |
| • | our ability to increase the number of dedicated stores for our
products, including through opening and profitably operating
company-operated stores; |
| • | our effectiveness in increasing productivity and efficiency in
our operations; |
| • | our ability to implement, stabilize and optimize our enterprise
resource planning system throughout our business without
disruption or to mitigate such disruptions; |
| • | consequences of foreign currency exchange rate fluctuations; |
| • | the impact of the variables that effect the net periodic benefit
cost and future funding requirements of our postretirement
benefits and pension plans; |
| • | our dependence on key distribution channels, customers and
suppliers; |
| • | our ability to utilize our tax credits and net operating loss
carryforwards; |
| • | ongoing or future litigation matters and disputes and regulatory
developments; |
| • | changes in or application of trade and tax laws; and |
| • | political, social and economic instability in countries where we
do business. |

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in our primary market risk exposures or how those exposures are managed from the information disclosed in our 2010 Annual Report on Form 10-K.

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Item 4T. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of May 29, 2011, 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 concluded that at May 29, 2011, our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) are effective to provide reasonable assurance that information that we are required to disclose in the reports that we file or submit to the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our disclosure controls and procedures are designed to provide reasonable assurance 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.

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PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Litigation. There have been no material developments in our litigation matters since we filed our 2010 Annual Report on Form 10-K.

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

Item 1A. RISK FACTORS

There have been no material changes in our risk factors from those disclosed in our 2010 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. REMOVED AND RESERVED

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

| 10 | .1 | Employment Agreement between the Company and Charles V. Bergh,
dated June 9, 2011. Incorporated by reference to
Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Commission on June 16, 2011. |
| --- | --- | --- |
| 10 | .2 | Transition Services, Separation Agreement and Release of All
Claims between John Anderson and the Company, dated
June 16, 2011. Incorporated by reference to
Exhibit 10.2 to Registrant’s Current Report on Form 8-K filed with the Commission on June 16, 2011. |
| 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.
Furnished 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 & C o . (Registrant)

By: /s/ Heidi L. Manes

Heidi L. Manes

Vice President and Controller

(Principal Accounting Officer)

Date: July 12, 2011

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EXHIBIT INDEX

| 10 | .1 | Employment Agreement between the Company and Charles V. Bergh,
dated June 9, 2011. Incorporated by reference to
Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Commission on June 16, 2011. |
| --- | --- | --- |
| 10 | .2 | Transition Services, Separation Agreement and Release of All
Claims between John Anderson and the Company, dated
June 16, 2011. Incorporated by reference to
Exhibit 10.2 to Registrant’s Current Report on Form 8-K filed with the Commission on June 16, 2011. |
| 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.
Furnished herewith. |

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